A financial incentive program works best when there is a strong relationship between effort, performance and reward, said Andrew Ryan, an associate professor of health management and policy at the University of Michigan. “When you look at the incentive programs out there, so many of them fail this basic idea,” Ryan said. Incentives also must be large enough to make people take notice, but not so big that incentives overshadow other priorities. In addition, programs must measure the quality and outcome factors that matter most.
In the case of the nursing home demonstration, the relationship between effort, results and reward was too tenuous, Grabowski said.
The design flaws in the Medicare incentive programs aren't entirely the CMS' fault. Ryan said the flaws can be attributed in part to the legal requirement that CMS demonstrations either reduce federal costs or at least curb spending growth. The link between effort and reward is weakened because rewards and penalties must be budget-neutral. Thus, participants don't know until all results are in what their performance will be worth financially.
Now, the CMS is preparing to implement new Medicare financial incentives for skilled-nursing facilities nationally. That program will take effect in 2019. The proposal for value-based purchasing at nursing homes is different from Medicare's prior nursing home initiative in key ways. Medicare will withhold a percentage of payments from SNFs that can be earned back based on each facility's performance relative to other facilities' scores. The program will put 2% of payment on the line.
But some experts say that initiative has a potentially fatal design flaw—the financial incentive may be too small. How much of an incentive to offer has proven tricky for Medicare's recent efforts. Too little and no one pays attention. Too much and the potential for unintended consequences increases. “Nobody knows where that sweet spot is,” said Dr. Rachel Werner, an investigator for the Veterans Health Administration's Center for Health Equity Research and Promotion who studies incentives and provider behavior.
The amount Medicare has relied on for various incentives probably isn't right, Werner said. “Two percent is probably too low,” she said. “We have lots of experience with 2% and it doesn't work.”
Dr. David Gifford, senior vice president of quality and regulatory affairs for the American Health Care Association, a trade group for post-acute providers, agreed that 2% might not be enough to get nursing homes' attention.
The size of the financial incentive was an issue in Medicare's Premier Hospital Quality Incentive Demonstration, which ran from 2003 to 2009. Hospitals in the Premier test were eligible for incentives of 1% to 2%. Quality improved at first when compared with hospitals not eligible for incentives. But after five years, the two groups' scores were virtually identical, according to Werner and her colleagues who studied the program.
Medicare's subsequent mandatory effort, the hospital value-based purchasing program that's been underway since 2012, gradually increases the incentive from 1% to 2% by 2017. One study found no change in quality or patient experience in the early months of the incentives compared with the five years earlier. Treasure Valley Hospital in Boise, Idaho, received the largest award measured by percentage in 2013—a total of $6,424, amounting to 0.8% of its Medicare revenue.
The designers of the hospital value-based purchasing program have faced another tough challenge—how to select the best measures for performance. Too often, incentives for quality are tied to performance on irrelevant measures. The measures selected often are those that are easiest to compile, said Dr. Ashish Jha, a Harvard University health policy professor who studies quality improvement. “We often don't pay attention to quality,” he said. “And when we do, we don't measure the right thing.”
Jha's research measured mortality rates for hospitals inside and outside the Premier test of quality incentives and found no difference among patients hospitalized for pneumonia, congestive heart failure, heart bypass surgery or acute myocardial infarction. Nevertheless, the CMS expanded the effort nationally.
Similarly, Jha said Medicare's test of accountable care does not measure the results that matter most to patients, such as how well patients function in their daily lives after treatment. That's also true for the CMS incentive effort using bundled payments for hip and knee surgery. “They want to be able to return to the things they used to do,” he said. “We shouldn't have a bundled payment program unless we measure what matters.”
In the past, Medicare has had more potent and successful programs changing financial incentives. Until the early 1980s, Medicare paid hospitals based on their costs, giving providers little incentive to improve efficiency. In 1983, Medicare shifted to paying hospitals fixed prices through diagnosis-related groups, which later were adjusted for patients' severity of illness.
Hospitals responded. The length of hospital visits dropped. “The decision of how we treat people is incredibly responsive to price,” said David Cutler, a Harvard University economics professor and health policy expert.