discus 5, resp, lesson

CHAPTER

41

VALUE AND PAYMENT REFORM

Learning Objectives

Upon completion of this chapter, you should be able to

• understand the need for payment reform as part of the effort to increase value in healthcare delivery;

• discuss pay-for-performance reforms that can drive value in healthcare; • discuss the risk-based contracting reforms that can enhance value

in healthcare (e.g., accountable care organizations, shared savings, capitation);

• examine the rationale for why these reforms are likely to enhance value; • review the results of such reforms that have sought to deliver lower cost

and better outcomes; • propose methodologies to effectively incorporate payment for

performance in contracts; and • devise strategies whereby payment reform can improve operations

geared toward value-based care.

A lthough the argument for value in healthcare is strong and several clinical initiatives are driving meaningful changes, impediments to the move- ment remain. One key issue is revenue loss for stakeholders. Hospitals

stand to lose significant revenue from readmission prevention initiatives, and physicians whose income is based on the number of services provided will lose revenue if the volume of services decreases. Payers stand to gain from value- based initiatives if their costs go down while revenue stays stable; however, providers drive the utilization. Thus, payers have limited ability to increase value without more systematic changes in the manner that healthcare delivery is structured and incentivized.

For value to permanently become a part of the healthcare equation, all stakeholders must be able to benefit from the new paradigm. At the same time, stakeholders must face consequences if value erodes or does not increase. Changes in the rules guiding healthcare should be geared toward enhanc- ing the value proposition, and incentives must make value-focused arrange- ments economically viable for payers and providers. Penalties should motivate

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C o p y r i g h t 2 0 1 8 . H e a l t h A d m i n i s t r a t i o n P r e s s .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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stakeholders to avoid value-eroding activities, and regulations should allow stakeholders to enter into contracts in which responsibility for delivering value is shared. When providers hold financial risk for outcomes as well as for quality and financial metrics, the incentive to shift costs to others is reduced, which serves to enhance value. This chapter will explore these issues in greater detail.

Pay for Performance

For many years, people within healthcare have been concerned that evidence- based medicine is not reaching patients quickly and that the application of research findings was often taking longer than a decade (Haynes and Haines 1998). For instance, even though patients presenting with a myocardial infarc- tion have been known to benefit from aspirin, a large number of patients were not receiving aspirin when they were in the throes of such an event (Benin- casa and Brooks 2006). Similarly, many patients with congestive heart failure (CHF) were not receiving drugs that had been proven to benefit CHF patients (Philbin 1998).

These and other concerns about quality led to the development of pay for performance (P4P). Under a P4P approach, adjustments are made to a provider’s reimbursement based on the provider’s performance on predeter- mined quality and operational metrics, which are assigned varying weights. Although the adjustments may affect a relatively small portion of the pay- ment—such as 2 percent of a hospital’s medical revenue—a P4P arrangement with measures linked to value-enhancing activities can incentivize providers to deliver higher-value care.

The inherent assumption is that improved processes should lead to bet- ter outcomes. However, the effectiveness of P4P contracts can be limited for a variety of reasons. For instance, the P4P measures may affect only a small share of the revenue; the measures may be difficult to quantify and track, making contracts unwieldy; and, typically, a lag exists between payment and performance (Hoo and Lansky 2016).

Emphasis on Safe and Effective Care The Institute of Medicine’s 2001 report Crossing the Quality Chasm: A New Health System for the 21st Century galvanized the healthcare field around the issue of quality. Stakeholders began paying closer attention to issues of prevent- able harm, and the significant costs related to such harm have been made more transparent. As a result, greater emphasis is now placed on processes to ensure safe and effective care. Ultimately, gains from fewer hospitalizations, increased use of evidence-based medicine, improved access to care, fewer readmissions, and lower variability are expected to reduce the overall cost of care.

evidence-based medicine A movement in medicine practice whereby practitioners are encouraged to use the latest evidence and clinical guidelines to ensure the most appropriate and effective care.

pay for performance (P4P) An approach to payment in which adjustments are made to a provider’s reimbursement based on the provider’s performance on predetermined quality and operational metrics.

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The creation of organizations such as the Leapfrog Group, founded in 2000, sought to spur employer groups into action (Galvin et al. 2005). Seek- ing to promote hospital safety and quality, the Leapfrog Group established a voluntary survey to evaluate hospitals’ compliance with key safety initiatives, such as adoption of computerized physician order entry (CPOE) and adher- ence to staffing requirements in intensive care units. However, the voluntary nature of the program and its lack of financial incentives and penalties limited the program’s success. A study by Moran and Scanlon (2013) reported that, from 2002 to 2007, reporting rates were unchanged, while CPOE usage increased from 2.94 percent to 8.13 percent and intensivist staffing increased from 14.74 percent to 21.4 percent. The authors concluded that, in the absence of mandatory reporting, such programs have limited chances for success.

Value-Based Purchasing The Affordable Care Act (ACA) calls for payment to be linked with quality, and its emphasis on value requires that providers be rewarded for delivering the right treatment the first time, avoiding complications, and achieving the best outcomes. The law introduced a mandatory P4P program for Medicare payments known as value-based purchasing (VBP), administered by the Centers for Medicare & Medicaid Services (CMS).

Initially, Medicare withheld up to 1 percent of hospital reimbursements under the VBP program, and that number later increased to 2 percent. The program is structured to be budget neutral, with the money withheld being used to fund value-based incentive payments (CMS 2017f ). After a 12-month period of evaluation, hospitals are ranked according to their performance on selected clinical guidelines as well as on patient experience surveys (Chee et al. 2016). At first, 70 percent of the weighting was on performance according to clinical guidelines—known as Core Measures—and 30 percent was on the patient experi- ence, as measured via a validated tool called the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS). The program has since placed a heavier emphasis on outcomes and efficiency. The weighting changes every year and typically aligns with the goals of a value-driven program (Whitman 2016).

The VBP methodology involves the measurement of a baseline perfor- mance for each hospital, and each hospital is subsequently measured for its improvement in all metrics. Each hospital is also ranked in relation to other US hospitals. Mathematical weighting is assigned to each performance metric, and a composite VBP score is calculated for each hospital. A curvilinear func- tion determines the hospital’s share of the withheld revenue, and the revenues are distributed accordingly (Federal Register 2011b). Various aspects of the methodology are demonstrated in the case example later in this chapter.

In the first year of the VBP program, Medicare rewarded 1,557 hospitals with extra funds and reduced reimbursement to 1,427 hospitals. For almost

value-based purchasing (VBP) A pay-for- performance program that rewards hospitals with incentive payments based on the quality of care delivered.

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two-thirds of the hospitals, the changes amounted to less than 0.25 percent (Rau 2012b). The funds available for incentive payments have steadily increased and are now approaching $2 billion (Whitman 2016). The amount is expected to stabilize as the gains from the program become stable.

One question concerning the VBP program has been whether the penal- ties are significant enough, given that the cost of compliance may exceed any monetary gain or penalty imposed on the affected hospitals. However, the branding opportunity provided to hospitals that do well in VBP seems to have incentivized most hospitals to become fully engaged with the program (Rau 2012a). Another issue concerning the program has been that hospitals scor- ing poorly on the measures are often those in economically challenged areas, and such hospitals serve an important role despite their lower-than-average performance (Ubel 2015). An additional concern is the fact that the program can be cumbersome to implement (Damberg et al. 2014).

The hospital VBP program is required by Congress under Section 1886(o) of the Social Security Act. CMS considers VBP an important driver in revamping the manner in which care and services are reimbursed and moving toward a system that rewards better quality, value, outcomes, and innovations instead of volume. Whereas the first iteration of the VBP program looked at clinical processes and the patient experience, subsequent phases incorporated outcomes such as risk-adjusted mortality. Going forward, the program will evaluate death rates of patients with cardiac issues or pneumonia. Furthermore, the revenue withheld has increased to 2 percent of all Medicare payments. Ultimately, the program will be expanded to include physician groups.

The VBP program incorporates more than 24 measures and represents four domains, as shown in exhibit 3.1. These domains and the weights assigned to them can change from year to year.1

In the Federal Register (2011b) preamble enumerating the final rule regarding the VBP program, CMS states: “We have worked with stakeholders to define measures of quality in almost every setting. These measures assess

Domain Approximate Weighting

Patient experience of care (HCAHPS composites) 20–25%

Outcome/safety 25–40%

Process of care 20–40%

Efficiency and cost reduction 25%

Source: Medicare Learning Network (2015).

EXHIBIT 3.1 Domains for

Evaluation of a Value-Based

Program

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structural aspects of care, clinical processes, patient experiences with care, and, increasingly, outcomes.” The rule clarifies that CMS will seek nationally endorsed, multiple-stakeholder measures that are aligned with best practices. The rule also explicitly states that methodologies are weighted heavily toward outcomes, patient experience, and functional status measures. In its listing of quality measures, CMS seems to have adopted most of the standards set forth by the National Quality Forum, which incorporates the input of consumers, purchasers, providers, academics, clinicians, and other healthcare stakehold- ers. The final rule also refers to section 1886(b)(3)(B)(viii)(VI) of the Deficit Reduction Act of 2005, which gives the secretary of health and human services the authority to replace any quality measures when appropriate. Replacement may occur if all hospitals are compliant with a particular measure or if the clinical evidence no longer supports a measure.

Pay-for-performance initiatives are somewhat prescriptive in nature. They seek to achieve the goal of value by prospectively identifying metrics that will be measured and incentivized. The hope is that, as the healthcare field becomes increasingly comfortable with value delivery, all activity will be geared toward optimizing value and outcomes. Although the details and metrics in P4P initiatives may vary from year to year, the overall concept remains the same: to promote value-enhancing activity.

The VBP program has been structured and adjusted from year to year in a manner that allows hospitals to gradually adapt to value-based competi- tion (see appendix 1 for more details). Ultimately, outcomes adjusted for cost and risk are the metric that matters (Porter and Teisberg 2006; Porter 2010). The Specifications Manual for National Hospital Inpatient Quality Measures, available via www.qualitynet.org, outlines a uniform set of quality measures. Measures that are reported into the Inpatient Quality Reporting system are publicly reported at https://data.medicare.gov/data/hospital-compare.

The moral imperative to do no harm should drive hospitals to participate in these initiatives, but the economic imperative is also increasingly compelling. Performance in a VBP program has direct implications on an organization’s profitability, and as the amount of revenue at stake increases, institutions will be compelled to pay attention.

Exhibit 3.2 provides an example of how value-based activity can be translated to a performance dashboard. The dashboard displays actual perfor- mance on the VBP metrics and shows the entity’s improvement in particular measures. Even if an organization’s performance is below a benchmark, it will receive some credit if it demonstrates improvement. This arrangement reflects the idea that value-based healthcare is a journey.

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Value-Based Dashboard

Period: May 1, 2014–April 30, 2015

Value-Based Score 55.8 Financial

Score

Patient satisfaction (30% weight) 52 Amount

Withheld

Amount Earned

Back Net (Loss)

Clinical outcomes (20% weight) 51 $567,996 $529,065 ($38,931)

Clinical processes (50% weight) 60

Clinical Measures Baseline

Score Performance Withheld Amount

Earned Amount Net

Acute myocardial infarction (MI) 0.69 0.71 $23,711 $25,981 $ 2,270

Congestive heart failure 0.73 0.7 $23,711 $22,009 ($ 1,702)

Pneumonia 0.81 0.78 $23,711 $21,341 ($ 2,370)

Influenza vaccine 0.56 0.78 $23,711 $31,009 $ 7,298

Venous thromboembolism prevention 0.43 0.8 $23,711 $34,002 $10,291

Patient Satisfaction Scores

Nurse communication 0.65 0.7 $37,877 $41,032 $ 3,155

Physician communication 0.64 0.69 $37,877 $42,001 $ 4,124

Quietness/cleanliness of facility 0.66 0.68 $37,877 $39,541 $ 1,664

Pain control 0.70 0.71 $37,877 $38,001 $ 124

Responsiveness 0.65 0.77 $37,877 $41,003 $ 3,126

Discharge communication 0.60 0.75 $37,877 $43,001 $ 5,124

Hospital score 0.60 0.73 $37,877 $45,281 $ 7,404

Outcome Scores

Acute MI survival 0.89 0.75 $61,434 $20,191 ($41,243)

Heart failure survival 0.88 0.78 $61,434 $22,331 ($39,103)

Pneumonia survival 0.84 0.89 $61,434 $62,341 $ 907

Note: This exhibit demonstrates process measures as well as outcomes measures. Based on perfor- mance against the benchmark, the system is eligible for a bonus or a penalty.

EXHIBIT 3.2 Sample

Dashboard for Tracking

Performance on Various Metrics

in a Value- Based Program

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Risk-Based Contracting

Risk-based contracting is a model of payment reform that incorporates a negotiated price point at which a certain episode of care will be delivered. The price is agreed upon by the payers and providers, and the parties share the risks associated with the care. Risk-based contracting can also incorporate shared savings. The contracts allow for a bonus to be paid to the provider if care is provided in a way that is more economically efficient than what was negotiated. Typically, the contracts also include a quality baseline that must be achieved before the payout will be made; this requirement aims to ensure that the provider does not compromise care to meet a financial goal.

The risk-sharing algorithm is computed retrospectively, and the shared savings are paid out once the care has been delivered and all costs associated with the care have been adjudicated. The risk sharing can be one-sided or two- sided. In a one-sided arrangement, the provider shares in the upside of any savings; however, the provider does not get a bonus if there are no savings. In the two-sided model, the provider assumes both upside and downside risk. If there are savings, the provider shares in them; if there is a loss, the provider reimburses the payer (Hoo and Lansky 2016). Both Medicare and private payers have been moving toward risk-based arrangements (Evans and Herman 2015).

Risk-based arrangements and the sharing of savings help to align the incentives of payers and providers, thus turning a potentially adversarial rela- tionship into a more constructive one. Theoretically, such initiatives should enhance value in healthcare, given that providers have an incentive to deliver clinically effective care while eliminating wasteful behavior (Draper and Gold 2003). However, experience with these arrangements is still limited. Because adjudication is retrospective, providers may not have a great incentive to pay attention to the contract’s requirements. Regulatory guidelines related to inure- ment may also introduce complications, particularly with regard to situations where providers may have an economic incentive to withhold care. Risk-sharing arrangements need to be structured carefully to ensure regulatory compliance (Pear 2011). Bundled payments, discussed in chapter 2, provide an example of shared savings in a risk-based contract. Accountable care organizations (ACOs) are another example. Given the unique nature of ACOs, they will be addressed separately in chapter 4.

The management of the health status of an entire population cohort lends itself well to risk-based contracting. In such a situation, the provider and payer must share information about the population regarding resource utiliza- tions, health status, claims data, medical records data, hospitalization records, and pharmacy usage (Rappleye 2015). This sharing of information allows for appropriate risk stratification of the population. Thereafter, the payer and

risk-based contracting A model of payment reform that incorporates a negotiated price point at which a certain episode of care will be delivered; payers and providers then share the risks associated with the care.

shared savings A feature of risk- based contracting in which the payer and the provider can share in the savings that result from economically efficient delivery of care.

risk stratification The assignment of patients to categories based on their risk of progressing to clinical deterioration.

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provider can negotiate an agreement for reimbursement based on the delivery of care to that population cohort. The payer agrees to a fixed amount, and if the cost is less than the benchmark, the provider shares in the savings. Data, analytics, care coordination, and multidisciplinary teams become important in managing such care (Rappleye 2015).

Capitated contracts represent another form of risk-based contracting. Under capitation, the provider contracts with the payer to assume the risk for a set of defined services. Providers then receive a fixed premium per member per month, regardless of whether the member seeks care. If there are savings, the provider keeps them. If there are overruns, the provider assumes the risk (Totten and Pizzo 2014).

Success in risk-based contracting will require several skill sets, including clinical alignment and integration, care coordination, effective use of informa- tion technology platforms and connectivity, contract planning, and a strong knowledge of the cost structure needed to deliver care. These capabilities will be discussed in greater detail in subsequent chapters.

The case example that accompanies this section demonstrates how pay- ers and providers can effectively use risk-based arrangements to improve care. If the contracts accurately reflect the cost of care, then efficiency and clinically effective and coordinated care should lead to an overall reduction in cost. Risk- sharing contracts can help align all participants in delivering high-quality care at a low cost, a key step in the journey to value-driven care.

capitation A form of payment in which a fixed amount is provided to a payer or provider to deliver or finance care, with the risk shifted to the party accepting the contract; payment is typically measured and reported in terms of the amount per member per month (PMPM).

Case Example: Shared Savings Riverside Health Plan contracts with Medicare to provide care to Medicare beneficiaries in Riverside County, California. The county has several remote, rural areas, and beneficiaries in those areas have often foregone preventive care because providers have not been easily accessible.

One city in Riverside County is 120 miles away from the nearest full- service hospital. The people there are impoverished and have traditionally been troubled by a lack of access to good specialty care, transportation, and health education. Diabetes and hypertension have been highly preva- lent. Riverside Health Plan serves nearly a thousand beneficiaries in this area, but providing care for them has been a challenge. The few contracted providers have been overwhelmed by the volume of patients and unable to deliver coordinated care. As the providers have described the situation, they have been “putting out fires” and caring for patients day-to-day instead of using long-term care plans.

To address these issues, Riverside Health Plan entered into a capi- tated arrangement with Seaside Medical Group, an independent physician

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association with deep relationships with the area’s provider community. Seaside assumed financial risk for delivering care to patients by entering shared-savings agreements with primary care providers and specialists. Seaside also assumed responsibility of coordinating care for these patients to reduce hospitalizations. It entered a contract with the hospital 120 miles away to admit patients at a preferred rate, so that the patients could be admitted, treated, and discharged expeditiously.

Seaside also shared savings from reduced hospitalizations with the providers, which gave the providers a greater incentive to expand office hours. With office hours expanded and accessibility improved, people’s health issues could be addressed earlier in the clinical course, helping pre- vent avoidable admissions. Admissions to the hospital then occurred mostly when outpatient care would have been inadequate to treat the patient effec- tively. Seaside also entered a risk-sharing arrangement with the hospital, whereby a certain amount of money was placed into a risk pool. If the risk pool had any savings, they were split between Seaside and the hospital. Seaside’s share of the savings was further distributed among the providers.

Within the duration of the contract, Seaside learned that many patients were having trouble keeping specialist appointments because they lacked transportation. Seaside contacted Riverside Health Plan, which agreed to provide capitated funds for transportation. Seaside then con- tracted with a local cab company to provide service for patients. Soon, the percentage of patients keeping their appointments increased dramatically— from less than 50 percent before taxi service was provided to more than 94 percent after. Hospital admissions for chest pain, dizziness, abdominal pain, and back pain became less frequent because these symptoms could be promptly addressed in clinical settings by providers.

Looking to build on its initial successes, Riverside Health Plan next launched a disease management program. In collaboration with Seaside, Riverside sought to proactively address chronic conditions through the use of health coaches who visited patients at home. By shopping for groceries with their coaches and attending health education classes, patients started appreciating the lifestyle changes that could help control their diabetes and hypertension.

The plan provided wireless-enabled glucometers and free glucose strips, helping field nurses obtain real-time data to help patients work with their physicians to adjust their glucose control medications. Home health aides visited frail patients to measure their vital signs and to communicate the information to the providers in the Seaside group. The providers could then adjust the patients’ blood pressure medications. As a result of these efforts,

(continued)

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Summary

The goal of increasing value in healthcare cannot be achieved simply by decreas- ing unit prices for services, because providers could simply increase the volume of services to make up for the lower unit prices. Thus, the movement toward value-based healthcare must include payment reform that rewards efficiency of resource utilization and care delivery. It must also shift financial risks to providers to hold them accountable for outcomes. The extent of this shift will drive clinical integration between physicians, other providers, hospitals, and post-acute care facilities. This integration, in turn, will lead to coordinated care and motivate providers to adopt some of the skill sets of payers.

Payment reforms incorporating pay for performance, shared risk, penal- ties for avoidable complications, and capitation give hospitals the economic impetus to adopt clinical innovations that enhance value. Ongoing reforms are pushing organizations to increase efficiency, prevent readmissions, improve care coordination, navigate transitions in care, and create medical homes. They are also motivating payers to establish narrow, high-functioning networks and to contract with centers of excellence. As payment reforms are being implemented, all stakeholders in the healthcare system are aligning their activities not to increase volume and revenue but rather to deliver effective, value-based care.

Note

1. The weightings of the domains add up to 100 percent every year. The ranges reflect variance depending on the fiscal year.

the HbA1c, which is a measure of glucose control in people with diabetes, started improving measurably across this cohort of the population. Admissions for hypertension, chest pain, and heart attacks started decreasing significantly.

According to evaluations of the project, for every $1,000 that Riverside Health Plan received, it reimbursed Seaside Medical Group $800. Riverside invested $50 in the infrastructure, as did Seaside. This additional $100 invest- ment, however, reduced the cost of medical complications and hospitalizations by $200—a two-to-one return on the investment. The hospital gained as well. Although the total number of admissions for this cohort of patients decreased, the hospital benefited from being the preferred hospital: It now received more than 90 percent of the admissions from this cohort, as opposed to 60 percent before. In light of the improved clinical outcomes, Riverside Health Plan and Seaside Medical Group renewed their contract at a cost-effective price point.

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Discussion Questions

1. Discuss what shape payment reform should take in the movement to increase value in healthcare. Your answer should consider how the reform will lead to value-enhancing activity.

2. Why is payment reform necessary to increase value in healthcare? 3. Identify two instances in the current literature where an organization

has taken advantage of payment reform to increase value in the healthcare it delivers. Discuss the nature of the payment reform, explain how value was enhanced, and quantify the value that was delivered. The two instances should relate to the following concepts: a. Pay for performance b. Risk-based contracting c. Value-based purchasing

4. As the CEO of an integrated health system, you are trying to convince your board of the need to enter a risk-sharing agreement with a large health plan in your region. The board is concerned that your health system is ill-equipped to service this contract effectively. It is also concerned that most of the benefits of the contract will accrue to the payer. Write a three-page memo to your board identifying the risks and opportunities of this contract. Address the expected impact of the contract on your organization over the next five years.

5. You are the CEO of a national health plan. Tabulate six initiatives that your organization should undertake in entering contracts with providers and suppliers to enhance value in the healthcare delivered to patients enrolled in your plan.

6. Consider the following case: Pine Health is a managed care health plan that spans 32 counties across 4 states in the southeastern United States. It is active in three lines of health insurance: Medicare, Medicaid, and commercial. The organization is also affiliated with several medical groups, acute care hospitals, nursing facilities, and a home health agency. Pine Health beneficiary membership is 50,000. The membership breakdown is as follows:

Line of Business Membership Revenue Cost

Medicare 30,000 $300 million $302 million

Medicaid 10,000 $10 million $11 million

Commercial 10,000 $50 million $45 million

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A recent analysis of Pine Health reveals the following utilization management metrics:

Line of Business Length of Stay

Benchmark Length of Stay Readmissions

Benchmark Readmissions Complications

Medicare 6 4 14% 12% 3%

Medicaid 3 2 18% 13% 1%

Commercial 2 2 3% 3% 1%

Under its contracts with Medicare and Medicaid, Pine Health is penalized for readmissions above the benchmark. Each percentage point above the benchmark contributes to a 2 percent reduction in revenue. Each percentage of increase in complication leads to 1 percent of revenue being penalized. Each day of hospitalization costs the hospitals $2,000. Each day of a nursing facility stay costs $800.

a. Calculate the overall profitability of Pine Health. b. Calculate the profitability of Pine Health by each line of business. c. Estimate the effect of readmissions by line of business on Pine

Health’s profitability. Complete a similar analysis for complications. d. There are 10,000 admissions of Medicare beneficiaries annually.

Compute the number of these admissions that are readmissions. e. For the Medicare beneficiaries, calculate the penalty applied to the

readmissions. Complete a similar analysis for the Medicaid and commercial lines of business.

f. As the CEO of Pine Health, you are exploring ways to reduce your costs. Based on the information provided, enumerate strategies available to achieve this goal.

g. What payment arrangements can you enter with your medical groups to reduce length of stay, readmissions, and complications? You should consider risk-based arrangements and performance- based metrics.

h. Develop a framework for a contract that you can negotiate with post-acute entities such as nursing homes, rehabilitation centers, and home health agencies to facilitate improved performance in clinical activities.

i. Compose a five-page memo to your board that tabulates the activities related to payment reform that Pine Health will pursue to improve profitability and quality.

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