High-risk proposition: Part 1

This cover story on Medicare’s proposed pay-for-performance reimbursement program for hospitals is the first of a three-part series examining the connection between finance and patient care. The series will continue in upcoming issues, with the second part a report on hospitals forgoing payment for certain adverse patient events. The third part of the series will analyze the economics of patients with infections.

Despite its relatively small size and challenged balance sheet, Rush North Shore Medical Center has enthusiastically boarded the quality improvement train with some impressive results.

Last March, the 224-bed hospital in Skokie, Ill., a Chicago suburb, won a quality award focused on surgical care presented jointly by the CMS and regional quality improvement organizations. Most recently, Rush North Shore was one of 25 hospitals nationwide competitively chosen to participate in a Joint Commission Resources/Robert Wood Johnson Foundation program focused on communication skills to improve patient safety.

Still, Greg Pagliuzza worries. As the CMS takes another step closer toward a fundamental shift in policy that will inextricably tie payment to results, Pagliuzza, Rush’s vice president of finance and chief financial officer, has deep concerns that there will be a “downside” that will be difficult for financially struggling hospitals such as Rush North Shore to scale.

In the fiscal year ended June 30, Rush North Shore lost $2.1 million on revenue of $178.7 million—a negative 1.2% margin. The information technology necessary to develop an electronic health record would go a long way toward extracting data to enhance quality-reporting capabilities, but the $12 million to $15 million price tag is cost prohibitive, he said.

“We talk about quality as an ongoing way in which we do business,” Pagliuzza said. “I think we’re all on this journey as an industry and providers of care. We know that the ultimate thing is to provide better care for patients, and I think we agree it is the right thing to do, but we need to make sure that at the end of the day, we are incentivizing the right thing.”

Late last month, the CMS put squarely into Congress’ court its painstakingly wrought-out proposal for restructuring Medicare’s payment system from one based entirely on the volume of services provided by hospitals to one based at least in part on results (July 2/9, p. 6). Addressing a concept widely known as pay-for-performance—but what the CMS now calls “value-based purchasing”—the 104-page report focused on a few more details but continued to leave open-ended some troubling questions for hospitals. The end result after Congress has its way with the plan could literally mean life, death or independence for countless hospitals across the country whose struggles to stay financially viable depend on the largesse of the nation’s biggest payer.

One worrisome detail that has become abundantly clearer with the final report is that incentive payments might be more aptly named status quo payments. Directed to design a budget-neutral plan that does not increase Medicare spending, the CMS is suggesting that Congress consider to put in play—in actuality at risk—a range of 2% to 5% of a hospital’s base operating DRG payments for treating inpatients. Based on their performance, hospitals would receive a portion or all of the incentive payment, but the plan takes no position as to what Congress should do with unspent money that hospitals fail to earn back, and that raises questions as to whether the surplus would be rolled into the following year’s pool of inpatient reimbursements or handed back to the federal government as a Medicare cost savings.

“We fear their pool may not be paid back and may result in a significant budget cut,” said Tom Nickels, senior vice president of federal relations at the American Hospital Association.

Depending on the size of the incentive payment that Congress chooses, anywhere from $2 billion to $5 billion of current Medicare reimbursements to hospitals would be affected annually, according to Nickels. “It’s a significant amount of money being withdrawn from the system,” he said. “Hospitals are already losing money on Medicare.”

For Rush North Shore, where Medicare patients staying overnight in the hospital account for about $55 million annually, or 31% of its revenue stream, that would put as little as $1.1 million and as much as $2.75 million in play for incentive payments—more than last year’s bottom line loss, Pagliuzza said.

In addition, there will be another financial impact associated with revamping Rush North Shore’s infrastructure to meet new data-collection demands in order to determine what the incentive payment will be, said Michael Raymond, the hospital’s chief medical officer. Under the existing pay-for-reporting program, which provides differential payments to hospitals that publicly report their performance on certain inpatient-care measures, hospitals have more than four months to extract data from medical charts, Raymond said. Under the new proposal, it will be only 60 days. “That involves a lot of extra time and personnel,” Raymond said, nearly tripling the amount of information that will be needed to score hospitals on their performance so that they can earn back the differential payments.

The proposed plan now in Congress’ hands builds on the pay-for-reporting initiative that started in 2004, proposing to phase in hospitals to pay-for-performance over three years. In the first year, hospitals would continue to be paid 100% on their public reporting. In year two, the incentive payment would be split 50-50 between public reporting and performance. By the third year, Medicare’s Reporting Hospital Quality Data for Annual Payment Update program “would be basically subsumed by value-base purchasing,” said Thomas Valuck, director of the CMS’ Special Program Office for Value-Based Purchasing.

The pay-for-reporting initiative has so far been successful. In fiscal 2008, 3,270 eligible hospitals met the requirements and received the 2% annual payment update tied to it, according to the CMS. A total of 201 eligible hospitals did not meet at least one of the requirements, receiving no payment update, nor did another 35 hospitals that chose not to participate.

Under the plan, hospitals will be scored in three broad areas: clinical quality or process-of-care measures; outcome measures such as mortality rates; and patient-centered care measures. For the latter, the CMS proposed using the so-called HCAHPS, or Hospital Consumer Assessment of Healthcare Providers & Systems, survey—a collection of 27 items for measuring patients’ perspectives on hospital care that was recently folded into hospital reporting requirements. Valuck noted that the proposal sent to Congress includes a scoring model for HCAHPS that measures hospitals along eight dimensions, including pain management, doctor and nurse communication, and cleanliness and quiet.

“People need to recall the context of this and understand it is a way of transforming Medicare from a passive payer of claims to an active purchaser of higher quality, more-efficient services,” Valuck said. Along those same lines, Medicare will soon stop reimbursing for certain hospital-acquired conditions, but that has not been formally included in the value-based purchasing plan. Rather, they are two separate tracks that may merge at some point in the future, Valuck said.

Nine-hospital Alegent Health in Omaha, Neb., a top performer already in the Premier Hospital Quality Incentive Demonstration, which is now in its fourth year, has little concern that it won’t measure up when value-based purchasing becomes universal for hospitals, said Scott Wooten, Alegent’s senior vice president and chief financial officer. Nevertheless, it does feel the pain of hospitals “at break-even cash flow positions in smaller communities or communities primarily serving the poor and uninsured,” he added.

For Alegent, a 2% to 5% incentive payment would translate to between $2.5 million and $7 million a year, which represents as much as 7% of its operating budget and could have “a devastating impact,” he said. “We’ll be just fine, but I think the issue will be that this has all the potential in the world … at the macro level to reward performance and create a competitive disadvantage for those who are not able to perform favorably to these processes and outcome measures.”

The program as outlined would also add “new costs in people, processes and systems to improve these metrics,” Wooten said. “From a policy perspective, we need to ensure that the incentives from higher outcomes and performance offset the investment over time. Otherwise, it has the potential to be an unfunded mandate.”

Mark Kestner, Alegent’s vice president and chief quality officer, said he is concerned that the top performers now are in some ways the hospitals with the resources and wherewithal “to tell their story better. How well you can tell that story—that’s where the costs are.”

Alegent Health invests roughly $27 million in quality initiatives and information technology each year, about $16.8 million of that in both people and system operating expenses, according to an Alegent spokeswoman. “That’s where the huge investments are—in reporting the story. So many hospitals are delivering the care but they are unable to extract the story well and in that scenario, because they are behind in electronic medical-record implementation, they will be disadvantaged,” Kestner said.

Costs for implementing quality improvements were necessary for the approximately 250 hospitals participating in the Premier demonstration project, but they were “not overwhelmingly large,” said Blair Childs, a Premier spokesman. “We actually found the IT component was not a critical success factor,” Childs said. “The most important thing was alignment in the hospital so that there was a clear focus on quality from the boardroom right down to the nurse where care is delivered. … It’s really a management process improvement.”

For 661-bed Hackensack (N.J.) University Medical Center, which has topped the list of performers in the Premier demonstration project, CMS’ shift in payment policy “is a nonevent,” said Robert Glenning, the hospital’s executive vice president and CFO. Medicare represents about 40% of Hackensack’s volume, he said. The hospital earned about $30 million in net income on approximately $1.1 billion in revenue, a 3% margin. But money wasn’t Hackensack’s motivation for improving quality, he said.

Value-based purchasing “is not going to give us more money and it is not going to take money away. It doesn’t change what we’re doing,” Glenning said. “The problem I’m seeing is that this is going to be seen as a budget-cutting initiative. There is no upside. Half will (win) and half won’t.”

Still up in the air is what Congress will do with the plan during an all-around suspenseful year for the hospital industry. The AHA’s Nickels said that Congress would have to move on it before year-end—an unlikely prospect—in order for the program to be implemented in time for the fiscal 2009 deadline under the Deficit Reduction Act of 2005.

But Premier spokesman Childs said considering the first year of the program calls for a continuation of the pay-for-reporting plan already in place, Congress could possibly take more time. He noted that influential Sen. Chuck Grassley (R-Iowa), ranking member of the Senate Finance Committee, already urged in a written statement for Congress “to get the job done.”

“If you look across the policy community, (everybody) has said that this makes a lot of sense,” Childs said. “It’s not only that pay-for-performance makes sense, it’s that the current system is dysfunctional because it rewards volume of care, not outcomes.”

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