Hospitals that join the pay-for-quality experiment launched last week by HHS and the Premier hospital alliance could be penalized with a reduction in Medicare payments if they do not improve performance, a feature of the demonstration project that some said could spell trouble for participation.
Jointly run by Premier and the Centers for Medicare and Medicaid Services, the demo project is designed to test an entirely new, performance-based payment system that will "improve the quality of care at all participating hospitals," HHS Secretary Tommy Thompson said last week in Washington.
"Think of it as a bonus system for hospitals," Thompson said.
But the penalty provisions of that system were somewhat unexpected. Premier hospitals that were considering participating had been assured that the project would carry no risk of squeezing their already-tight Medicare margins. Some policy leaders have said the risk of penalty would seriously flaw the experiment (June 30, p. 6).
If the project is successful, CMS Administrator Tom Scully would like to implement performance-based incentives across the Medicare program, which would require an act of Congress.
Under the project, which was given a budgetary green light late last month, hospitals that demonstrate they are in the top 10% of quality in five clinical areas-coronary artery bypass surgery, heart attack, heart failure, hip and knee replacements and pneumonia-will receive a 2% bonus on their Medicare payments. Hospitals in the second 10% will receive a 1% bonus.
The CMS will pay out $21 million in bonuses over the three-year project, which will employ Premier's "Perspective" clinical repository that houses performance data from 550 hospitals. Premier's database is "the best existing data collection" available to the industry, Scully said last week.
To help offset the cost of the performance bonuses, the CMS plans in the third year of the demonstration to cut Medicare payments 2% for the poorest performing 10% of hospitals that show no improvement. Those in the next 10% of poorest performers that don't improve will see their payments decline 1%.
Officials at the American Hospital Association "want to be certain that this doesn't become a tool to squeeze down payments," AHA spokesman Richard Wade said. It was not a mistake to include the penalties, Wade said, but it's important to strike the right balance between boosting quality and further "ratcheting down payments."
That may be a moot point, however, if all participating hospitals show they've made strides in boosting quality. As long as hospitals show improvement over their performance in the first year of the program, Scully and others said, they will not have to pay a penalty.
"Our hope is that all ships will rise together," Scully said. It's possible, CMS sources said, that no hospitals would have to pay the penalty. Officials expect improvements in quality-such as fewer readmissions-to produce the savings necessary to fund the bonuses.
"This will save money for the Medicare system without any doubt whatsoever," Thompson said.
Some industry officials wondered if the threat of penalties would impede hospital participation or the overall success of the venture.
"Private payers that are testing this concept are not penalizing providers," said Daniel Bourque, group senior vice president at VHA, an Irving, Texas-based healthcare cooperative. "If the government wanted to follow the private-sector model, it wouldn't propose penalties."
Added Mary Grealy, president of the Healthcare Leadership Council: "If you want to convince hospitals (to participate), then you use incentive payments rather than penalties."
G. Edwin Howe, president and CEO of Aurora Health Care, Milwaukee, said the project represented "the most significant change in Medicare reimbursement since the DRG system." Howe, a Premier board member, said he has "been pushing for this project for two years" and plans to volunteer his hospitals to participate.
Until last week's announcement, Howe was under the impression that the pilot would be all carrot with no stick. The penalties "would be a really bad public policy move because it's a demonstration project," Howe said last week.
The move toward "transparency in outcomes" will drive hospitals to participate, said Richard Norling, Premier's CEO. Hospitals can opt out of the project in the second year if they no longer wish to participate, he added. [[[[
-With Cinda Becker