Rewarding excellence and efficiency in Medicare payments

Medicare could become an innovative leader in using financial incentives to reward health care providers for providing excellent and efficient care throughout a patient's illness. This article examines the variations in cost and quality in the provision of episodes of care and describes how a pay-for-performance payment system could be designed to narrow those variations and serve as a transition to a new Medicare payment policy that would align physicians' incentives with improvements in both quality and efficiency. In particular, Medicare could stimulate greater efficiency by developing new payment methods that are neither pure fee-for-service nor pure capitation, beginning with a pay-for-performance payment system that rewards quality and efficiency and moving to a blended fee-for-service and case-rate system.     

Measuring quality of care under Medicare and Medicaid

The Health Care Financing Administration's (HCFA) approach to measuring quality of care uses an accepted definition of quality, explicit domains of measurement, and a formal validation procedure that includes face validity, construct validity, reliability, clinical validation, and tests for usefulness. The indicators of quality for Medicare and Medicaid patients span the range of service types, medical conditions, and payment systems and rest on a variety of data systems. Some have already been incorporated into operational systems while others are scheduled for incorporation over the next 3 years.     

Medicare payment changes and nursing home quality: effects on long-stay residents

The Balanced Budget Act of 1997 dramatically changed the way that Medicare pays skilled nursing facilities, providing a natural experiment in nursing home behavior. Medicare payment policy (directed at short-stay residents) may have affected outcomes for long-stay, chronic-care residents if services for these residents were subsidized through cost-shifting prior to implementation of Medicare prospective payment for nursing homes. We link changes in both the form and level of Medicare payment at the facility level with changes in resident-level quality, as represented by pressure sores and urinary tract infections in Minimum Data Set (MDS) assessments. Results show that long-stay residents experienced increased adverse outcomes with the elimination of Medicare cost reimbursement.     

Paying hospital specialists: Experiences and lessons from eight high-income countries

Payment systems for specialists in hospitals can have far reaching consequences for the efficiency and quality of care. This article presents a comparative analysis of payment systems for specialists in hospitals of eight high-income countries (Canada, England, France, Germany, Sweden, Switzerland, the Netherlands, and the USA/Medicare system). A theoretical framework highlighting the incentives of different payment systems is used to identify potentially interesting reform approaches. In five countries,most specialists work as employees − but in Canada, the Netherlands and the USA, a majority of specialists are self-employed. The main findings of our review include: (1) many countries are increasingly shifting towards blended payment systems; (2) bundled payments introduced in the Netherlands and Switzerland as well as systematic bonus schemes for salaried employees (most countries) contribute to broadening the scope of payment; (3) payment adequacy is being improved through regular revisions of fee levels on the basis of more objective data sources (e.g. in the USA) and through individual payment negotiations (e.g. in Sweden and the USA); and (4) specialist payment has so far been adjusted for quality of care only in hospital specific bonus programs. Policy-makers across countries struggle with similar challenges, when aiming to reform payment systems for specialists in hospitals. Examples from our reviewed countries may provide lessons and inspiration for the improvement of payment systems internationally.     

Medicare's next voyage: encouraging physicians to adopt health information technology

Although there is growing consensus that health information technology (HIT) will be critical to improving health care quality and reducing costs, physicians' investments in technology remain limited. As the largest single U.S. purchaser of health care services, Medicare has the power to promote physician adoption of HIT. The Centers for Medicare and Medicaid Services should clarify its technology objectives, engage the physician community, shape the development of standards and technology certification criteria, and adopt concrete payment systems to promote adoption of meaningful technology that furthers the interests of Medicare beneficiaries.     

The Lessons Of Medicare's Prospective Payment System Show That The Bundled Payment Program Faces Challenges

Policy makers have been trying to replace Medicare's fee-for-service payment system for years with approaches that pay one price for an aggregation of services. The intent is to reward providers for offering needed care in the most appropriate and cost-effective manner. Medicare's first payment change designed to accomplish such a change was the hospital prospective payment system, introduced during 1983-84. But because it focused only on hospital care, its impact on total Medicare spending was limited. In 2011 Medicare began a new initiative to expand the "bundled payment" concept to link payments for multiple services that patients receive during an episode of care. The goal of Medicare's current bundled payment initiative is to provide incentives to deliver health care more efficiently while maintaining or improving quality. This article provides a detailed analysis of how Medicare implemented the hospital prospective payment system, how hospitals responded to the new incentives, and lessons learned that are applicable to the bundled payment initiative. The lessons include that any Medicare payment reform needs to continuously respond to the many different components of the health system and that payment reform should be coupled with analogous reforms in private insurance payment, so that providers receive consistent signals to alter their behavior.     

Testing a diagnosis-related group index for skilled nursing facilities.

Interest in case-mix measures for use in nursing home payment systems has been stimulated by the Medicare prospective payment system (PPS) for short-term acute-care hospitals. Appropriately matching payment with care needs is important to equitably compensate providers and to encourage them to admit patients who are most in need of nursing home care. The skilled nursing facility (SNF) Medicare benefit covers skilled convalescent or rehabilitative care following a hospital stay. Therefore, it might appear that diagnosis-related groups (DRG's), the basis for patient classification in PPS, could also be used for the Medicare SNF program. In this study, a DRG-based case-mix index (CMI) was developed and tested to determine how well it explains cost differences among SNF's. The results suggest that a DRG-based SNF payment system would be highly problematic. Incentives of this system would appear to discourage placement of patients who require relatively expensive care.     

Assessing Medicare reimbursement options for skilled nursing facility care.

In this article, a broad array of Medicare payment options for skilled nursing home care are examined, ranging from cost-based retrospective systems to various prospective arrangements. Each system contains different incentives to meet four policy goals: provide access for Medicare patients; increase access for patients requiring resource-intensive care; contain growth in program costs; and assure the delivery of high-quality care. The financial impacts of alternative policy options on nursing homes are presented through the use of a simulation model. Facility-specific payment systems are shown to most effectively incorporate incentives to contain costs and promote beneficiary access to care.     

Do financial incentives matter? Effects of Medicare price shocks on skilled nursing facility care

Skilled nursing facility (SNF) spending has been one of the fastest growing categories of Medicare spending over the past few decades, and reductions in SNF payments are often recommended as part of Medicare cost containment efforts. Using a quasi‐experiment resulting from a policy‐driven and facility‐specific Medicare payment change, we provide new evidence on how Medicare payment changes affect the amount of SNF care provided to Medicare patients. Specifically, we examine a one‐time, plausibly exogenous change in the hospital wage index, an area‐level adjustment to SNF payments that affected the majority of SNFs nationwide. Using a panel dataset of SNFs, we model the effects of these payment changes on more than 12,000 SNFs across the United States. We find that increases in Medicare payment rates to SNFs increased the total number of Medicare resident days at SNFs. Specifically, a 5% payment increase raised Medicare resident days by 2.33% at facilities with a 10% Medicare share relative to 0%. Further, the effects were asymmetric: Although Medicare payment increases affected Medicare days, payment decreases did not. Our results have important implications for policies that alter the Medicare base payment rates to SNFs and other health care providers.     

CAN DATA ENVELOPMENT ANALYSIS PROVIDE A SCALAR INDEX OF ‘VALUE’?

The concept of ‘value’ typically includes a combination of cost and quality measures. Some approaches to incorporating value into payment systems treat cost and quality as separate dimensions, but policymakers have expressed interest in a single scalar index that combines cost and quality. Treating risk‐adjusted cost as an input and multiple measures of quality as outputs, we examine whether data envelopment analysis input efficiency is associated with higher quality and lower cost in a sample of physician practices using 2008 US Medicare claims data from Colorado. The findings suggest that input efficiency might provide a useful scalar measure of value for a value‐based payment system for physician services. Copyright © 2013 John Wiley & Sons, Ltd.     

Medicare Advisory Commission focuses on quality of care, patient safety

The issue of quality of care dominated the new report on Medicare payment policy of the Medicare Payment Advisory Commission, submitted to Congress last month. The report notes that Medicare beneficiaries--mirroring trends in care for the rest of the population--face "significant gaps between care known to be effective and the care delivered"--especially where patient safety issues are concerned.     

Medicare Mental Health Parity: A High Potential Change that is Long Overdue

Recent changes in legislation regarding mental health parity in Medicare will revolutionize payment for mental health care and delivery systems. This commentary discusses why this policy change was essential to promote adequate care for populations served by Medicare and to address expected changes in beneficiary, provider, and plan behavior as more equitable payments by Medicare are implemented.     

Medicare's Payment Strategy For End-Stage Renal Disease Now Embraces Bundled Payment And Pay-For-Performance To Cut Costs

Since 1973 Medicare has provided health insurance coverage to all people who have been diagnosed with end-stage renal disease, or kidney failure. In this article we trace the history of payment policies in Medicare's dialysis program from 1973 to 2011, while also providing some insight into the rationale for changes made over time. Initially, Medicare adopted a fee-for-service payment policy for dialysis care, using the same reimbursement standards employed in the broader Medicare program. However, driven by rapid spending growth in this population, the dialysis program has implemented innovative payment reforms, such as prospective bundled payments and pay-for-performance incentives. It is uncertain whether these strategies can stem the increase in the total cost of dialysis to Medicare, or whether they can do so without adversely affecting the quality of care. Future research on the intended and unintended consequences of payment reform will be critical.     

PRICING DISTORTIONS IN MEDICARE'S PHYSICIAN FEE SCHEDULE AND PATIENT SATISFACTION WITH CARE QUALITY AND ACCESS

Medicare adjusts its payments to physicians for geographic differences in the cost of operating a medical practice, but the method it uses is imprecise. We measure the inaccuracy in its geographic adjustment factors and categorize beneficiaries by whether they live where Medicare's formula is favorable or unfavorable to physicians. Then, using the 2001–2003 Medicare Current Beneficiary Survey, we examine whether differences in physician payment generosity, that is, whether favorable or unfavorable, influence the satisfaction ratings Medicare seniors assign to their quality of care and access to services. We find strong evidence that they do. Many beneficiaries live in payment‐unfavorable areas and receive a less satisfying quality of care and less satisfying access to services than beneficiaries who live where payments are favorable to physicians. Copyright © 2013 John Wiley & Sons, Ltd.     

Policy issues related to prospective payment for pediatric hospitalization.

Children's hospitals have been excluded from the Medicare prospective payment system (PPS) because of concerns over the applicability of the DRG case-mix system and PPS payment weights to pediatric hospitalization. Nevertheless, DRG-based payment systems are being adopted by State Medicaid agencies and private third-party payers, and the Health Care Financing Administration has been mandated to report to Congress on the feasibility of including children's hospitals in the Federal PPS. This article summarizes policy research on this issue and discusses options in the design of prospective payment systems for pediatric hospitalization.     

The Payment Error Prevention Program (PEPP): reducing Medicare payment errors in prospective payment system hospitals

Peer Review Organizations (PROs) are charged by the Health Care Financing Administration (HCFA) to assist in protecting the integrity and solvency of the Medicare program. Recent audits of the Medicare program from the Office of Inspector General (OIG) revealed that more than $12 billion Medicare dollars in 1998 were spent in improper payments, with more than 25% attributed to prospective payment system (PPS) hospitals. The Payment Error Prevention Program (PEPP) is an initiative designed by HCFA in 1999 to assist PROs in meeting the goal of reducing payment errors in PPS hospitals. PEPP is implemented through the development of quality improvement (QI) methodologies. These projects are designed to achieve measurable improvements in processes and outcomes of payment errors. PEPP works to reduce payment errors at PPS hospitals through cooperative efforts with Ohio agencies and licensing boards, federal law enforcement organizations, HCFA contractors, hospital medical staffs, and medical and osteopathic associations.     

The impact of DRGs on the cost and quality of health care in the United States.

The prospective Payment System (PPS) represents a fundamental change in the way the United States government reimburses hospitals for medical services covered under Medicare, a federal health care insurance program for the elderly and disabled. PPS replaced the retrospective cost-based system of payment for Medicare services with a prospective payment system. Under PPS, a predetermined specific rate for each discharge dictates payment according to the diagnosis related group (DRG) in which the discharge is classified. The PPS was intended to create financial incentives that encourage hospitals to restrain the use of resources while providing high-quality inpatient care. Both objectives appear to have been met under PPS. Hospital utilization has declined, average length of stay has fallen, and the locus of care has shifted from the inpatient setting to less costly outpatient settings. The growth in inpatient hospital benefits has slowed and the impending insolvency of the Medicare trust fund has been forestalled. Studies have found no deterioration in the quality of care rendered to Medicare beneficiaries. Neither the mortality rate nor the rate of re-admission (presumably related to premature discharge) increased under PPS. Indeed, PPS appears to have enhanced the quality of inpatient care by discouraging unnecessary and potentially harmful procedures, and by encouraging the concentration of complex procedures in facilities in which the high frequency of these procedures promotes efficiency. Incentive-based reimbursement also appears to have contributed to the growth in alternative delivery systems, such as HMOs and PPOs, which contain costs by maintaining a high volume of a limited range of services. The success of the PPS/DRG system in controlling costs and promoting quality in this country suggests its application in other countries, either as a method of reimbursement or as a product line management tool.     

Medicare Part A utilization and expenditures for psychiatric services: 1995

This study provides an overview of Medicare's current coverage and payment policies regarding hospitalization for psychiatric disorders, and presents new information on demographic, diagnostic, utilization, and expenditure characteristics associated with inpatient psychiatric care among 1995 Medicare beneficiaries. Results suggest that utilization and expenditure patterns for Medicare beneficiaries hospitalized for psychiatric illness in 1995 differ across demographic (e.g., age, sex, race) and diagnostic categories. The implications of these findings for current management of the Medicare program as well as the evolution of Medicare managed care systems for behavioral health services are discussed.     

The costs of decedents in the Medicare program: implications for payments to Medicare + Choice plans

OBJECTIVE: To discuss and quantify the incentives that Medicare managed care plans have to avoid (through selective enrollment or disenrollment) people who are at risk for very high costs, focusing on Medicare beneficiaries in the last year of life-a group that accounts for more than one-quarter of Medicare's annual expenditures. DATA SOURCE: Medicare administrative claims for 1994 and 1995. STUDY DESIGN: We calculated the payment a plan would have received under three risk-adjustment systems for each beneficiary in our 1995 sample based on his or her age, gender, county of residence, original reason for Medicare entitlement, and principal inpatient diagnoses received during any hospital stays in 1994. We compared these amounts to the actual costs incurred by those beneficiaries. We then looked for clinical categories that were predictive of costs, including costs in a beneficiary's last year of life, not accounted for by the risk adjusters. DATA EXTRACTION METHODS: The analyses were conducted using claims for a 5 percent random sample of Medicare beneficiaries who died in 1995 and a matched group of survivors. PRINCIPAL FINDINGS: Medicare is currently implementing the Principal Inpatient Diagnostic Cost Groups (PIP-DCG) risk adjustment payment system to address the problem of risk selection in the Medicare+Choice program. We quantify the strong financial disincentives to enroll terminally ill beneficiaries that plans still have under this risk adjustment system. We also show that up to one-third of the selection observed between Medicare HMOs and the traditional fee-for-service system could be due to differential enrollment of decedents. A risk adjustment system that incorporated more of the available diagnostic information would attenuate this disincentive; however, plans could still use clinical information (not included in the risk adjustment scheme) to identify beneficiaries whose expected costs exceed expected payments. CONCLUSIONS: More disaggregated prospective risk adjustment methods and alternative payment systems that compensate plans for delivering care to certain classes of patients should be considered to ensure access to high-quality managed care for all beneficiaries.     

The dynamic of the outpatient prospective payment system within the hospital setting

Medicare payment has always been based largely on reasonable cost-based related for outpatient services except for certain other services that are paid according to a fee schedule developed by Medicare. August 1, 2000, marked the end of an era. Hospital providers will no longer be reimbursed based on reasonable cost but payment will be based on ambulatory payment classification (APC). APC is really a type of fee schedule following the diagnosis-related group concept but limits payment for hospital outpatient services for Medicare recipients. The complexities of this new payment methodology and the potential shortfall require an integrated disciplinary approach.