Six months after tussling bitterly over reimbursement rates, Blue Cross and Blue Shield of Illinois is slowly mending its relationship with Advocate Health Care under a novel, two-year contract that rewards the hospital system for meeting specific performance goals in lieu of the 15% rate increase it originally had demanded.
As part of the deal, signed in November 2002, Advocate's eight Chicago-area hospitals will receive bonuses for meeting key milestones in the implementation of an electronic intensive-care unit that provides 24-hour patient monitoring via audio and video technology. The deal was designed to help Advocate pay for its new $10 million ICU system while saving the Blues money by improving patient outcomes and reducing costly medical errors.
"Paying reimbursement increases `just because' isn't something we're willing to do anymore," says Yasmine Winkler, the Illinois Blues' executive director of quality improvement and health analysis reporting, adding that the insurer is writing similar incentives into its other provider contracts. "There needs to be more give and take."
That sentiment is being echoed nationwide by payers and purchasers working to tie provider compensation more closely to performance. Several major insurers have launched their own quality-based bonus programs during the past several months. And a number of large employer coalitions have vowed to pay hundreds of millions of dollars to doctors who meet key performance measures. Even the Centers for Medicare and Medicaid Services has launched a pilot program linking hospitals' Medicare reimbursement rates to quality of care.
The concept of rewarding providers for improving quality has gained momentum in the wake of several reports showing a startling rise in medical errors at the same time patients are paying more for care. Because hospital and physician services are among the top drivers of healthcare costs, insurers increasingly are asking those who provide the care to "justify" their demands for higher rates. And employers are expecting greater accountability, arguing that providers should strive for defect-free processes just like other industries do.
"Purchasers want to get more for their money," says Beau Carter, executive director of the Integrated Healthcare Association, a Walnut Creek, Calif.-based managed-care policy development group. "They're saying, `If I'm paying 10%, 12% or 15% more each year on healthcare, I expect better value for my premium dollar.' "
Not everyone, however, has embraced the concept. Some providers question whether payers are measuring quality accurately and whether the bonuses will be large enough to make it worth their while. Others worry that the programs are simply repackaging money that otherwise would have gone toward basic payment increases.
"Conceptually, the idea of rewarding providers for improving performance is very appealing, but the devil is going to be in the details as to how that's actually done," says Carmela Coyle, senior vice president of policy at the American Hospital Association. "Pay for performance is still in its infancy, and a lot of policy issues will need to be hammered out before the concept really gets off the ground."
Even Oak Brook, Ill.-based Advocate has reserved judgment until the trend's true effects become clearer. "There's real concern that it could be a ruse to avoid baseline reimbursement increases," says Lee Sacks, Advocate's chief medical officer.
The pay-for-performance movement was thrust into high gear in April when an employer coalition including Ford Motor Co., General Electric Co., Procter & Gamble Co., United Parcel Service and Verizon Communications launched a pilot program that will pay up to $100 million in annual bonuses to doctors who improve quality in three areas: diabetes care, heart-disease treatment and medical office modernization.
In one part of the so-called Bridge to Excellence program, doctors in Boston, Cincinnati and Louisville, Ky., will receive a yearly bonus of $100 for each patient covered by a participating employer if the doctors are recognized by the American Diabetes Association as meeting national care standards. To be recognized, physicians must submit audited records showing their patients are getting annual blood sugar tests, eye exams, kidney-function checks and other key services. For a doctor treating 100 covered diabetic patients, the bonus could reach $10,000 per year.
"Incremental change is no longer acceptable," says Francois de Brantes, GE's program leader of healthcare initiatives and president of the Bridges program. "We're trying to encourage leaps in quality, not baby steps."
The program comes on the heels of another ambitious pay-for-performance initiative, formally launched in January by the Integrated Healthcare Association and California's six largest health plans--Aetna, Blue Cross of California, Blue Shield of California, Cigna Corp., Health Net and PacifiCare Health Systems. Those companies' HMOs will pay up to $150 million per year to medical groups based on their treatment of chronic conditions, childhood-immunization and cancer-screening rates, use of information systems and scores on a patient-satisfaction survey. A standardized score card will be published next year, comparing how the medical groups stacked up in 2003.
The bonus programs are a response to the alarming rates of medical errors and quality problems in U.S. healthcare, participants say. Recent studies, for example, show 70% of diabetics aren't getting care that meets the ADA's standards, opening the door to serious and costly complications.
Purchasers believe that by making investments in improving the way care is delivered, they not only will save lives but ultimately money by keeping patients healthier and out of the hospital. The Bridges program, for instance, is expected to save $350 per diabetic patient annually, while costing employers just $175 per patient.
"There is a tremendous amount of wasted resources in the system due to the overuse, underuse and misuse of medical services ... which together account for a sizable percentage of our total healthcare spending," de Brantes says. "If we eliminate these inefficiencies, we'll reduce costs to the entire system."
Achieving these improvements, however, will require a tectonic shift in the way healthcare is delivered and paid for, industry experts say. By and large, the nation's current payment system makes it more lucrative for doctors and hospitals to provide substandard care, because they get rewarded for high volume--or brief and frequent patient visits--rather than for the long-term management of care between visits.
"You get what you pay for, and our country has been paying for quantity," says Steve McDermott, chief executive officer of Hill Physicians Medical Group, a 2,000-physician independent practice association in San Ramon, Calif. Correcting the problem "is going to require a major shift in perspective and behavior."
McDermott says bonus programs give providers the impetus they need to make those changes. Hill Physicians has stepped up the preventive-care and data-tracking practices it long has had in place to help maximize its payout under the Integrated Healthcare Association initiative. The medical group, McDermott says, stands to receive a $6 million bonus this year, equal to roughly 2% of its $300 million in annual revenue.
"Eventually, we want to grow that to at least 10%," he says.
Some providers, however, remain cautious, arguing that while quality measures make sense in theory, choosing ones that are not only valid and reliable but also comparable remains tricky. For instance, a program that emphasizes heart-attack prevention by measuring how often aspirin is given to patients would be largely irrelevant to children's hospitals, which see few heart-attack cases, Coyle says.
Others caution that many bonus initiatives fail to factor in the diverse populations that providers treat. For instance, a doctor serving a more educated group may achieve greater patient compliance than one serving a less educated group; likewise, a hospital treating a greater percentage of severely ill patients may have lower outcome scores than another that caters to more healthy patients.
"The trick is developing a set of measures that are equally applicable to a large urban teaching facility and a small rural hospital," Coyle says. "The programs should be designed so that all hospitals can qualify for rewards."
And then there's the challenge of tracking the data. For instance, while large physician groups that already have information systems in place can readily quantify their efforts, small groups fear they won't have the resources to collect, analyze and report detailed statistics on the wide range of measures dictated by most bonus programs.
"Small groups are at a definite disadvantage because they can't spread the administrative costs over as many people," says R. Adams Dudley, assistant professor of medicine and health policy at the University of California, San Francisco.
The Integrated Healthcare Association's Carter, though, says he has taken a "hard-nosed" stance. The California initiative, he says, is designed to widen the gap between the best- and worst-performing physician groups, accelerating consolidation of the market.
In its first year, the initiative requires that groups be able to report an average of 2.7 patient encounters per member per year in order to qualify but will quickly toughen that requirement in subsequent years. Given that most groups already average three patient encounters, Carter says, those that don't meet the 2.7 requirement may be skimping on necessary care or simply are being lazy about reporting data.
"If you can't collect and report data, how are you going to properly manage patient care?" Carter says. "And if you can't properly manage care, I say you should get left behind. It's sort of like Darwin's survival of the fittest."
A new direction
Fueling the pay-for-performance movement is a growing realization by insurers that traditional methods of controlling healthcare costs, largely by limiting the use of services, aren't as effective as they used to be.
In the late 1990s, droves of HMO enrollees began fleeing to less-restrictive plans, fed up with managed care's strict referral and preauthorization requirements--key cost-containment tactics that helped slow premium increases to 1% by 1996. Meanwhile, several of the nation's largest HMOs were hit with class-action suits alleging they had violated federal law by failing to disclose to patients that physicians were paid to restrict utilization. Plaintiffs claimed those bonuses compromised patient care by discouraging doctors from providing necessary treatment.
HMOs since have steadily expanded their networks and scrapped controversial "gatekeeping" tactics, eager to mend their images and lure back members (April 15, 2002, p. 30). But with premium increases once again rising at double-digit rates, most have begun looking for new--and more publicly palatable--ways to cut costs.
Blue Cross of California, based in Woodland Hills, garnered a great deal of good will in July 2001 when in a very public move it scrapped its utilization-based incentives and began rewarding medical groups in its HMO based on patient satisfaction. Last year, it launched a broader bonus program for individual doctors in its PPO.
Although the insurer has yet to complete its first annual payout, it's already seeing significant results, including fewer coverage appeals from members and a greater emphasis on preventive care. "It's like night and day," says Michael Belman, Blue Cross' medical director of quality management. "(The medical groups) are actively making a greater effort to improve their scores."
Anthem, Indianapolis, also has several pay-for-performance initiatives under way in various regions, including one it designed jointly with MaternOhio Management Services, which manages the practices of 33 obstetrician/gynecologists in Columbus, Ohio. Under the program, launched in 1999, doctors can earn up to 5% more reimbursement for scoring 90% or better on a number of measures, including doing regular mammograms and Pap smears, meeting national standards for hysterectomies and using generic drugs instead of brand-name drugs.
In the first two years, Matern-Ohio's patient-satisfaction scores climbed to 98% from 82%. Postpartum-care visits were attended and recorded 100% of the time, up from 73.3%. Hysterectomy standards were met in 90% of instances, up from 54%. And drug spending slowed to an annual rate of 4.2% from 13.2% (See chart).
Since then, several other insurers have begun rolling out pay-for- performance programs, each with their own twist. In January, for example, Blue Cross and Blue Shield of Massachusetts, Boston, began awarding medical groups annual bonuses of 5% to 10% of their total reimbursement if they improve quality while meeting short-term cost-containment goals.
Physician groups that participate in the insurer's HMO Blue plan are evaluated on several quality and patient-satisfaction measures, including whether they provide proper preventive care and take time with patients to discuss treatment options. The insurer then tallies how much each group spent to treat patients, including money for prescription drugs and laboratory tests. Groups with costs that rise less than the network average qualify for a bonus. Those that also do better than average on the quality measures will earn even more.
Unlike traditional utilization-based bonus programs, "We're not trying to be prescriptive," says James Fanale, the Massachusetts Blues' chief medical officer. Rather than telling doctors where or how to restrict services, the company simply provides them with data on how their use of services compares with the network average in a number of areas. Doctors then can use the information to determine if and how they want to improve.
The Massachusetts Blues plans to fund the initiative largely through the savings its doctors generate through more efficient care, says Deborah Devaux, the insurer's vice president of provider contracting. But the company also may clamp down on future rate increases to save money for the bonuses, she says.
"It's too early to tell (how rates will be affected)," Devaux says "But ultimately we need to focus more on performance-based incentives ... so they become a larger part of how we reimburse providers."
Doctors and hospitals, however, have objected to insurers' attempts to "repackage old money," or fund new quality-based programs with dollars that were previously earmarked for utilization bonuses or future rate increases. That's because providers who meet the new quality goals often end up receiving no more than what they would have earned anyway. And if they don't meet the new criteria, they could receive less.
"Pay for performance should be a concept of rewards, not of taking away from some organizations to give to others," the AHA's Coyle says. "That means incentives need to be paid with new money. Otherwise it becomes a penalty system, and that's certainly not where we want to go."
Others argue that the bonuses often aren't large enough to make it worthwhile for providers. California Medical Association spokesman Peter Warren, for example, calls Blue Cross of California's latest bonus program for PPO physicians a "publicity stunt" designed more to attract new members than reward doctors.
The program has pledged to pay $1.1 million in bonuses over three years, a sum that Warren points out is less than 0.2% of the $703 million in profits that Blue Cross' parent, WellPoint Health Networks, posted in 2002. If that money were divided among 5,000 eligible physicians, it would amount to $73 per doctor per year, he says. If the insurer's entire network of 43,000 physicians were included, it would come to just $8.53 per doctor per year.
"If you're a physician running a busy practice, are you really going to change the way you do business for an annual bonus that doesn't even cover the cost of parking your car?" Warren asks, adding that Blue Cross announced the program during re-enrollment season. "This is a marketing ploy, pure and simple."
Likewise, hospitals in New York largely shrugged at the first annual bonuses they received under a three-year incentive program launched in January 2002 by Empire Blue Cross and Blue Shield, New York, and four of its largest clients, including IBM Corp., Pepsico Inc., Verizon and Xerox. In April, the program paid a total of $195,000 to 29 hospitals that had met at least one of two patient-safety standards promoted by the Washington-based Leapfrog Group: implementation of a computerized order-entry system and use of board-certified specialists in ICUs.
Montefiore Medical Center, one of New York's largest hospitals, received a bonus of roughly $50,000 for having fully implemented both criteria. But Steven Safyer, chief medical officer of the 1,119-bed medical center, points out that the money was negligible compared with Montefiore's $1.6 billion in annual revenue.
"We're appreciative. Any extra revenue in this tough climate is a good thing. But (the bonus) didn't mean a lot," Safyer says, adding that Montefiore joined the program more for the recognition than for the money. "We certainly didn't invest in a $100 million system for $50,000. We did it because it was the right thing to do."
Safyer says that the bonuses will remain limited because they are paid only for the treatment of members covered by the four participating employers, which account for just 5% of New York hospitals' total revenue. By contrast, government programs account for about 65% of the market's revenue. "If the rewards were tied to Medicare, then it would be a big deal," he says.
Seeking an alternative
Some insurers have sidestepped bonus programs altogether, choosing instead to tie quality-improvement goals directly to providers' annual reimbursement rates--a movement known as "alternative contracting."
In January, the Chicago-based Illinois Blues began developing detailed profiles of every hospital in its network, outlining how each one is performing on several quality indicators, including compliance with Leapfrog's standards, frequency of medical complications, patient satisfaction and provider certification. The insurer plans to use the profiles during contract renewal time to negotiate specific quality-based incentive programs for each provider.
"It will vary from hospital to hospital depending on where each one has the most room for improvement," Winkler says. "Rather than taking a cookie-cutter approach by mandating that all hospitals meet the same criteria, we want to create a real dialogue about these issues."
Meanwhile, Anthem, which has been promoting the concept in Virginia for a number of years, already has 50 hospitals under contracts that link up to half of their annual reimbursements to meeting key performance goals. Similar programs for doctors were launched more recently on a pilot basis.
"We're building more and more into our contracting models elements that enhance patient care," says Sam Nussbaum, Anthem's chief medical officer. "It has fundamentally changed the structure of contracting. When you remove the financial-only purview of the process, it becomes an entirely new negotiating table."
Industry observers, however, emphasize that the future of the pay-for-performance movement will hinge on the industry's ability to develop a single, standardized set of quality-improvement guidelines.
"We need coordination, not 20 different quality programs from 20 different health plans," says the CMA's Warren. Otherwise, "What's a doctor to do-check the insurance card of each patient before treatment so that he can follow that particular insurance company's (quality) dictates?"
Progress is being made. Last year, the AHA and the Federation of American Hospitals joined forces with the CMS, the Agency for Healthcare Research and Quality, the Joint Commission on Accreditation of Healthcare Organizations, the National Quality Forum and several other groups to develop a standardized set of hospital quality measures. And last month, the AHRQ and the NQF released a report endorsing 30 patient-safety practices they say should be used universally in the healthcare industry to reduce medical errors.
Meanwhile, experts caution, insurers that do "go it alone" must work collaboratively with hospitals and doctors in designing their programs. Otherwise, they risk confusing or angering providers.
Some hospitals in Illinois, for example, were left perplexed by the "black box methodology" that the Illinois Blues used in compiling its new score cards, says Pat Merryweather, vice president of the Illinois Hospital Association. While much of the score card reflects national quality standards defined by groups such as the AHRQ, certain measures, including a patient-satisfaction survey, are proprietary. "Some hospitals aren't quite sure how (the Blues) arrived at their scores," Merryweather says. "That's a little worrying."
Regardless, the pay-for-performance movement seems to be steamrolling ahead.
Even the CMS recently launched a three-year pilot project in which hospitals that score the highest on eight quality measures--including the treatment of heart attack, heart failure, hip surgery, pneumonia and stroke--will get a 1% to 2% bonus added to their regular Medicare payments (Sept. 16, 2002, p. 9). While the lowest performers won't be affected under the initial pilot, the CMS is considering docking a portion of their payments in the future--in effect, making performance a key determinant of their total annual reimbursement. Experts estimate the program potentially could save $5 million per year.
Indeed, some industry observers worry that pay-for-performance programs ultimately may become "too successful." Through a phenomenon known as adverse risk selection, providers that score the highest on performance measures stand to attract an inordinately large percentage of the sickest and costliest patients. Consequently, these providers would incur far higher treatment and prescription drug costs, often well in excess of the flat, per-patient rates that HMOs typically pay them.
"If you're known for doing a great job, you could get killed financially," says Dudley of the University of California. "When you're at risk of seeing a 40% increase in your treatment costs, a bonus of even 10% isn't going to help much."
The Integrated Healthcare Association already is looking into ways to pay providers on a risk-adjusted basis for treating sicker patients so that adverse selection doesn't become a problem down the road.
"We don't want it to be a disincentive to be the best," Carter says.
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