Of all the transformations reshaping our healthcare system – the shift from a volume-based to a value-based healthcare payment system is perhaps the most profound. Public and private payers are moving to payment systems that reward or penalize hospitals based on performance. Private insurers are introducing value-driven benefit plans that channel volume to higher-performing providers through incentives for their enrolled population.

The Centers for Medicare & Medicaid Services (CMS) is taking the lead with the introduction of pay for performance (P4P) programs that have been formalized and defined in both the American Recovery and Reinvestment Act and the Affordable Care Act passed over the last 2.5 years. As mandated by this recent legislation, CMS has introduced three significant P4P programs designed to reward higher-performing hospitals and penalize poorer-performing hospitals through reimbursement practices.

Hospitals generally performing at or below the 50th percentile rank nationally on hospital quality and patient experience metrics can expect to see a significant reduction in payment from CMS starting as early as 2012. This shift to a P4P methodology will significantly challenge the financial viability for many hospitals nationwide.

Meaningful Use

Hospitals must now demonstrate compliance with a set of standards indicating meaningful use of health information technology. There are five categories of standards – one of those categories includes a set of standards focused on patient and family engagement. Today, those hospitals that consistently demonstrate compliance with these standards receive incentive payments. By October 2014, non-compliant hospitals will be assessed penalties through an increasing reduction in their annual Medicare market basket over time. Meaningful Use standards will be put into effect in three stages (Stage 1 is already in effect). The standards, which include hospital quality performance, will become more stringent over time.

Value-based Purchasing

In October 2012, CMS will launch its Value-based Purchasing program that will determine hospital payment based on its hospital's ranking on Process of Care Measures and HCAHPS (composites) performance relative to others nationwide. For the first time, hospital payment will be based on the hospital's quality and patient satisfaction performance.

National Patient Safety Initiative

In January 2011, CMS also introduced the National Patient Safety Initiative (NPSI). Also taking effect in October 2012, NPSI will penalize hospitals with "excessive" readmission rates and hospital acquired conditions (HACs). This program, designed to improve hospital safety, will impact hospital payment beyond existing P4P programs such as bundled payments (designed to reduce readmissions) and 'never events' (for example, falls). The NPSI is structured to assess a penalty of six percent of Medicare revenues beginning in October 2012, increasing to nine percent in FY 2015, for hospitals with readmission rates and HACs above national averages.

It is relevant to note and no surprise that these programs specifically target those performance areas that hospitals struggle with the most such as HCAHPS, readmissions, HACs, and meaningful use of patient care technology.

Magnitude of Impact

For some hospitals, the combined impact of these P4P programs could equal their total annual net income, leaving the hospital with no surplus to reinvest back into facility or operating needs. To demonstrate the impact, consider a 200-bed community hospital with the following performance assumptions:

• Total Admissions of 14,500 per year and 50,750 patient days per year
• Average DRG Payment/Discharge: $12,500
• Annual Medicare Revenues equaling $72 million with market basket increases averaging 2.5 % annually
  • Overall Value-based Purchasing Performance Score of 24.5% based on:
  • Relatively strong process of care measures performance with all but heart failure discharge instruction ranking in mid 90% range
  • HCAHPS ranking on 7 of the 8 composites are all at or below 50th percentile national rank
• 3.16 falls/1,000 patient days
• Heart Failure readmission rate = 25.7% on 455 discharges
• Poor compliance with the Patient/Family Engagement standards of meaningful use

Considering the timelines for implementation of the various P4P programs, this 200-bed hospital could expect an estimated impact of nearly $6 million per year in lost reimbursement or assuming no change in performance, a total impact of $40 million over five years.