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Incentive Payments Reshape Health Care

August 26, 2008
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The health care payment system in the U.S. is undergoing a gradual transformation fostered by the proliferation of physician and hospital pay-for-performance initiatives led and financed by payers nationwide.

Nationally, the number of active pay-for-performance programs has grown from just 39 in 2003 to nearly 150 today, according to the Washington-based Leapfrog Group, which tracks the programs’ progress.

Payers—including insurers, employers and even the federal government—see pay for performance as a potential solution to today’s health care crisis, which many believe was created by an unfettered fee-for-service payment system that rewards quantity rather than quality.

And although pay for performance does require an initial investment by program sponsors, the programs so far are yielding both savings in health care costs and improvements in patient outcomes, the programs report. "Pay for performance compensates for deficiencies in the payment system," says Francois de Brantes, CEO of Newtown, Connecticut-based Bridges to Excellence, an employer-led pay-for-performance program founded five years ago.

"We have to fundamentally change the incentives in the system because they do not reward the right things," says Andrew Webber, president and CEO of the National Business Coalition on Health, a consortium of employer coalitions based in Washington. "The system is so focused on paying for downstream acute-care illness that we don’t pay for prevention, for disease management, for wellness."

Although the idea of paying health care providers based on performance has been around for decades—some say it resembles capitation payment arrangements—it was not until recently that it gained enough momentum to be considered a change agent.

In fact, Prometheus Payment Inc., a Washington-based nonprofit corporation, developed a payment model created by a group of experts in health care economics and policy, law, health plan operations and performance measurement that is essentially a product of the current pay-for-performance movement, says de Brantes, who was a member of the design team. Its goal is to pay providers based on what it costs to deliver only the care that science has proved to be appropriate for specified conditions, he says. Minneapolis and Rockford, Illinois, have been chosen as test sites for the program, which is scheduled to begin in January 2009.

And Bridges to Excellence’s success in Minnesota made it the model for the health care payment reform legislation the state enacted this year.

Pay for performance "is creating a demand for more fundamental payment reform because the amounts tied to results are still small, and providers are recognizing that they need a different way of being paid if results are going to matter most," de Brantes says.
 

Leading Pay-for-Performance Programs

SponsorParticipantsDate StartedIncentives paid
CMS/MedicarePhysicians2008$1.35 billion*
Integrated Healthcare Assn.Physician Groups2003$210 million
Horizon BCBS of New JerseyHospitals2006$12.2 million
Bridges to ExcellencePhysicians2003 $12 million
*Budgeted but not yet paid
Source: BI

Indeed, "the days of making payments without a link to some measure of results are gone," says Steve Raetzman, senior health care consultant at Watson Wyatt Worldwide in Arlington, Virginia.

Pay-for-performance programs also provide the framework necessary to promote health care consumerism, he says.

"If you’re going to have transparency for consumers to make informed decisions, they need the same information that’s being used to gauge pay for performance," Raetzman says. "It’s the next obligation that payers and providers have to consumers."

Although pay for performance might be a panacea for what ails America’s health care system, it does have its critics, foremost of which are the potential beneficiaries of its rewards: providers.

"The goal has to be quality; it can’t be all about costs," says Dr. Nancy Nielson, president of the Chicago-based American Medical Association.

Among other things, she says, pay for performance should take into account potential barriers to physician performance such as patient noncompliance, and that incentive payments should always be new money coming into the health care system, not just a redistribution of payments already being made.

But the proponents of pay-for-performance programs insist that the incentive payments are, in fact, on top of the fees already being paid to providers.

"This is out of our pocket," says Bill Finck, director of network initiatives at Horizon Blue Cross Blue Shield of New Jersey, which launched a pay-for-performance program involving hospitals in 2006. "This is additional dollars for the hospital. It is not related to their reimbursement. It’s recognition of the quality of care they provide and the patient safety measures they adhere to."

However, the source of funding is intangible, Finck says, since it is derived from anticipated reductions in future medical costs as a result of better patient outcomes.

The program, which uses criteria established by the Leapfrog Group, so far has paid a total of $12.2 million in incentives to more than 60 hospitals operating in New Jersey.

Another criticism often leveled against pay for performance is the fact that the initiatives are mostly regional, and therefore aren’t on a large enough scale to affect the health care payment system nationally.

But all that could change with this year’s launch of a nationwide pay-for-performance program by the Centers for Medicare and Medicaid Services. Authorized to create the initiative as part of the 2006 Tax Relief and Health Care Act, the centers have set aside $1.35 billion to pay incentives to physicians who treat Medicare patients.

"When CMS does something, that generally changes the marketplace," says Dr. Michael Cryer, senior medical officer at Hewitt Associates in Woodlands, Texas.

But even without a push from the federal government, the employers and insurers whose initiatives encompass only a few thousand to several hundred thousand people in communities across the country are having an impact, says Leapfrog Group CEO Leah Binder.

"They’re having more of an influence on payment reform than we anticipated," she says. The idea of pay for performance "has been such a powerful notion in the health care system that we see resonance all over the place," including the Centers for Medicare and Medicaid Services, she says.

    "But it isn’t the dollars that’s creating the impact," Binder says. "It’s the common-sense truth behind the [pay-for-performance] … movement: that we ought to pay for the best, and we should pay less when it’s not the best. These are fundamental concepts of business, so it’s no wonder it’s the business community that’s driving this."

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