Issue: May 2006
May 01, 2006
19 min read

Pay-for-performance: What surgeons, hospitals and stakeholders need to know

Pilot P4P plans are growing fast and could soon dramatically alter the way orthopedic surgeons practice medicine.

Issue: May 2006
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While few people were paying attention, pay-for-performance (P4P) rapidly moved from brainstorm to policy. The fallout will likely bring enormous change to the way orthopedic surgeons practice medicine.

To help you keep ahead of all the critical developments, Orthopedics Today offers this two-part, comprehensive series, “Paying for Performance: A Call for Quality Health Care,” reprinted with permission from the Deloitte Center for Health Solutions.

Part 1 covers some technical preparations to consider, and quickly moves on to payers’ concerns, providers’ responses, where Medicare fits in and the role for physicians and hospitals. Part 2, appearing in June in Orthopedics Today, provides predictions on how policies will actually shake out, and the implications for organizations.

Special to Orthopedics Today

Executive summary

Source: Deloitte Services LLP

Pay for performance in the health care arena is intended to improve the management of patient outcomes. It generally is defined as providers’ supplying data on specified quality measures and purchasers’ paying for health services differentially based on the outcomes resulting from those preset measures.

Pilot private and public pay for performance (P4P) programs are proliferating, which are responses, in part, to research indicating major flaws in the quality of health services provided to consumers and the demand by payers for outcomes-based delivery of services.

With Congress requiring and backing moves by the Centers for Medicare and Medicaid Services (CMS) to tie Medicare payment levels to quality measures for hospitals and physicians, P4P seems to be part of a “value-based purchasing” agenda that was promoted in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) and further endorsed during congressional debates in 2005.

In 2006, P4P appears to have significant implications for the various components of the health care industry: payers, providers and life sciences companies. This Point of View from the Deloitte Center for Health Solutions (the “Center”), a part of Deloitte & Touche USA LLP, provides background on the P4P movement, gives a status report, and, most importantly, outlines strategies health care organizations can pursue in preparing to meet the clinical and operational challenges of a trend that has become cutting edge.

The issue of tying provider payments to quality outcomes is no longer a theoretical phenomenon, but a growing and significant aspect of the health care delivery system. Mounting evidence from demonstrations and studies suggests the following:

  • Payment for quality has the same potential to influence the health care industry as Medicare’s diagnosis-related groups (DRGs) and the physician resource-based relative value scale (RBRVS) payment systems.
  • Payment to providers for quality information and data has been shown to significantly improve the health care indicators being measured in well-designed P4P projects.
  • Medicare, as the predominant payer in the health care industry, has taken a major role to promote the P4P movement.
  • Many private sector initiatives continue a strong presence.
  • Hospitals will be the first major provider group seriously affected by payment based on quality outcomes and physicians, and other providers will follow.
  • Most current clinical information systems are not designed to collect clinical quality indicators, do a poor job of collection and, consequently, will need significant upgrading and enhancements.

Many consider the following to be among the more significant implications of the movement toward paying for quality outcomes:

  • Quality and value will become “real” components of contractual reimbursement. Value-based purchasing has the potential to move the health care industry from a system with encounter-based payment incentives — supported by contractual reimbursement — to a system with incentives based on quality outcomes or the value of services received.
  • A true differentiation based on quality outcomes will become evident among provider tiers. Current P4P programs typically impact less than 5% of overall reimbursement “on top” of contractual reimbursement amounts. There will be segmentation involving reward and penalty payments by type of provider.
  • Quality metrics will continue to evolve to outcome-based and chronic disease management. Standardization of quality measures will occur as CMS develops its P4P programs and as other parties become more involved. Progress is already apparent in the CMS demonstration projects and through private sector efforts, such as those being sponsored by Bridges to Excellence, a program created by employers, physicians, health researchers and others in the health care industry, and Integrated Health-care Association of America (IHA), a not-for-profit consortium of California medical groups, health plans and health systems. Many of these programs begin with the concept of paying for reporting, then move to paying for process, and then finally, the ultimate goal: paying for outcomes. Unfortunately, the time lag between intervention and outcomes as well as the lack of sophisticated IT systems makes this last hurdle quite large.

The need to plan for these future requirements is now. Based upon the state of the P4P programs, health care organizations can begin to prepare, and should be preparing, for these outcomes today.

Preparation for change

Although paying for quality outcomes, whether private or public, currently affects a very small proportion of health care services now being delivered in the United States, purchasers, providers and life sciences companies face the challenge of understanding, complying with and adopting the concept’s ongoing requirements, which are still in a formative state.

Whether preparing for the inevitable or seeking to shape the form such payment will take, there are significant questions to be answered. Successful organizations cannot sit back and wait for P4P systems to become final. They need to evaluate change now.

Assessments need to be made with respect to the following:

  • Are operations capable of supporting value-based reimbursement?
  • Are analytic capabilities to renegotiate contracts in place? Traditional claims payment analyses need to be expanded to include estimates of outcomes and efficiency — measures that may not be estimated easily based on current data collection requirements. Many P4P metrics are not tied to outcomes or efficiency measures now, so it will take time to plan for and gather the information.
  • Are solid payer-provider relationships developed? The ability to work in partnership during a significant change in contractual payment terms is critical to retaining key providers in the network. Payers also will need to plan for lead time to “test the waters” with certain key provider groups and facilities to ensure that data elements required for payment are able to be captured and reported at the time of claims submission.
  • Are information systems capable of supporting value-based purchasing? The concept of an interoperable communications system through an electronic health record (EHR) is crucial to having standardized outcomes measures and data.

Until then, health plans, providers and life sciences companies will have to pull data from multiple systems, massage the information, rely on some manual data and respond the best way they can to data demands.

Strategies for capturing and reporting on quality and outcomes data need to be discussed. Methods for tying reimbursement back to these indicators also will require significant advance planning. Clinical practice guidelines will eventually need to be more fully embedded in EHRs via their decision support capabilities. Key data fields need to be identified and standardized so information can be extracted and analyzed for quality scores.

For quality control purposes, physicians will need to standardize how they capture and enter information into these systems so appropriate comparisons can be made.

For example, some doctors enter data in free text fields. Some enter data with units of measure; some only enter the numeric data. For something as simple as a blood pressure reading, the data point could be from the right arm or the left, or whether the patient is sitting or lying down.

  • How will funding such programs be accomplished? The concept of value-based purchasing provides both up side and down-side risks for providers and health plans, and serious consideration needs to be given as to how the “upside” money is funded. Additional costs, such as those related to provider data capture and collection, as well as the operating funds necessary to make potentially significant information technology (IT) related investments, need to be determined well in advance.
  • What are the legal barriers? Organizations need to be aware of various legal concerns associated with value-based purchasing, such as contractual obligations, integrity of data, referral patterns and malpractice issues. On the contractual side, most of the P4P pilots “are not contractually based; in other words, there is no contract establishing an obligation on the part of the payer to actually pay money” to the provider. Moreover, “because P4P programs are add-ons to existing contracts, there is little attention to the intersection with contract obligations that are in place.”2

Payer concerns

Payer worries, which are exacerbated by a steady rise in health costs, are in part responses to health sciences research indicating that significant numbers of privately and publicly insured patients are receiving health services that are inadequate, inappropriate or erroneous. Numerous recent studies illustrate both errors in care and lack of adherence to evidence-based protocols. For example, according to a study reported in the New England Journal of Medicine in 2003, patients receive only 55% of recommended care, with the level of performance similar for preventive, chronic, and acute care.3 Between 30% and 40% of Medicare expenditures are “wasted on inappropriate or unnecessary care,” according to another study.4 Moreover, “at least 44,000 people, and perhaps as many as 98,000 people, die in hospitals each year, according to estimates from two major studies cited in the Institute of Medicine’s (IOM’s) 1999 landmark report, “To err is human: Building a safer health system.”5

Payers must be aware of physicians’ and other providers’ concerns about the development and employment of risk adjustment factors. P4P combined with consumer directed health care opens up several key issues:

  • creation of publicly available scorecards, and
  • potential conflict between physicians and their patients. Payers do not want to be seen as conflicted parties with their own interests.

Also, doctors may not be comfortable that the extracted data are accurate and that the data have been adequately quality-checked. To have something that will influence referral patterns that is based on improper data is very critical to physicians. On the second point, P4P doctor reimbursements will be partly dependent on patient outcomes and it is widely assumed that a doctor can only do so much.

“Payers believe that they are spending too much, given the current quality level of health services,” said Cindy Czikra, director of the Deloitte Consulting LLP.

Providers’ responses

Providers — whether hospitals, physicians, or other facilities and practitioners — maintain that they are providing and want to continue delivering high-quality health care services but complain that payment systems create barriers to the provision of such care.

Moreover, they contend that measuring quality will add to their cost of providing care. Traditionally, payment systems have rewarded providers for the quantity, rather than the quality, of health care services, with fee for service (paying on a piecemeal basis) generally encouraging over-utilization of services and some managed care arrangements (paying on a pricing basis) promoting under-utilization of certain others. For example, industry estimates show that only 50% of provider-developed care plans adhere to best practices.

Additionally, a study done in Colorado reported that clinical information, such as lab and radiology results, letters, and medical history, were missed during 14% of patient visits. In 44% of those cases, physicians felt that the missing information had the potential to adversely impact a patient’s well being. P4P, if taken in the wrong direction, could imply population medicine — treating the mean while ignoring the individual. Moreover, for P4P providers paid on a capitated basis, there may be the risk of adverse selection as high-risk patients move to those demonstrating higher quality of services.

Companies’ perspective

Life sciences organizations are already having to adjust to more restricted formularies and pricing pressures as the health care industry tries to control rapidly rising pharmaceutical costs and CMS implements its new Medicare outpatient prescription drug benefit, which features various restrictions. Value-based purchasing will add to the pressures on life sciences companies by increasing the use and number of measures to track and market the efficiencies and effectiveness of drugs, with the goals of improving health outcomes and upgrading patient safety.

Further, measures of efficacy, safety, and cost effectiveness are going to be more critical to decisions about which drugs should be taken to the marketplace. Increasingly, the incentives may shift toward more specialized products which have narrower markets and thus less pres-sure to compete solely on price.

Congressional Mandates

CMS, through its P4P pilots in Medicare, is acknowledged within the health care industry as a lead agent in setting new standards, including those used as models to set various payment arrangements by many private purchasers. CMS appears to be taking the lead in effecting P4P change.

As the agency responsible for administering Medicare, CMS has responded enthusiastically to congressional authorization of a series of demonstration projects to inject quality incentives and payment rewards into services for Medicare beneficiaries, culminating in so-called P4P demonstrations, most of which are mandated by the MMA. CMS has used the P4P label for a variety of hospital and physician quality improvement initiatives designed to tie specified Medicare services to agreed-upon measures.7

The quality movement further gained momentum when the 109th Congress discussed many provisions to expand the MMA quality requirements in legislation, through The Deficit Reduction Act of 2005 (DRA). Although most provisions were removed in the final version, primarily because of objections from House of Representatives members urging a slower pace, the final legislation included a provision to increase the financial penalty for hospitals not reporting quality data. Beginning in Fiscal Year (FY) 2007, the legislation also requires the Secretary of HHS to add more quality measures for hospitals. Many in Washington predict that additional changes are likely to come in the years ahead.

As a national payer system, Medicare has strongly influenced private-sector provider contracting and reimbursement through implementation of prospective payment systems for inpatient and outpatient hospital services, as well as for other health care services, and through implementation of an RBRVS for physician services. DRG-based payment for inpatient hospital services and RBRVS fee schedules for physicians are now considered to be baseline standards in provider contracting. Given this precedent, the latest push from CMS tying reimbursement to quality and outcomes measures is sure to have an impact on existing private-sector reimbursement programs. It is very likely that nominally named P4P programs in the private sector could shift their focus to a tightly defined “pay-for-quality” platform.

Hospitals and physicians

CMS is pursuing numerous initiatives involving hospitals and physicians, the most prominent of which are the following:

  • Reporting Hospital Quality Data: Part of Medicare’s overall Hospital Quality Initiative, as authorized by MMA, this protocol requires hospitals to report on 10 quality measures (see Visual 2) to receive a full “market basket update” during FYs 2005, 2006, and 2007.8 Nearly 98.3% of hospitals that are participating in the program are currently receiving a full payment update, while non-reporting hospitals are subject to a penalty, currently set at 0.4% below the annual Medicare prospective payment update, but due to increase to 2.0% for FY 2007 hospital reporting years as mandated by the new DRA.9 10 The program, based (as already indicated) upon an initial starter set of 10 hospital quality indicators, has now grown to 21 indicators.
  • Premier Hospital Quality Incentive Demonstration: Conducted in partnership with Premier, Inc., a nationwide alliance of not-for-profit hospitals, this three-year initiative, which began in October 2003, awards bonus payments to hospitals achieving high-quality outcomes in several clinical areas: acute myocardial infarction (AMI), heart failure (HF), community-acquired pneumonia (CAP), coronary artery bypass graft (CABG), and hip and knee replacements.

A financial incentive of 1% to 2% can be gained by those facilities performing in the top 20% within any of the five clinical categories. The quality data are reported on the CMS website.12

Results from the demonstration’s first year were released in November 2005, and produced definite proof that financial incentives can improve the quality of inpatient care. Overall, improvement was seen across all five clinical areas during each quarter reporting, with an overall increase of 6.6% in mean composite scores.

Source: Deloitte Services LLP


  • Physician Group Practice Demonstration: Authorized by the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), this initiative is the first P4P program for physicians under the Medicare program. Conducted in partnership with 10 physician groups in various communities across the country, it focuses on common chronic illnesses that occur among Medicare beneficiaries: congestive heart failure, coronary artery disease, diabetes mellitus, and hypertension, as well as preventive services, such as vaccination for influenza and pneumococcal pneumonia and screening for breast and colorectal cancer. Physicians are eligible for performance payments based on assessment of quality improvement.16

This initiative focuses on enabling physicians to demonstrate that proactive care and disease management strategies save health care dollars in the long run by avoiding unnecessary hospitalizations and preventing costly complications within the Medicare population.

No results have been reported to date on this demonstration program, which began in mid-2005; however, it seems likely that Medicare beneficiaries, as a result, will reap large benefits through coordination of care and strong disease management programs and that the overall Medicare program will be strengthened.

  • Physician Voluntary Reporting Program: started on Jan. 1, focuses on chronic disease management and the avoidance of preventable hospitalizations and emergency department admissions in the Medicare population. Under the program, participating physicians are required to submit additional Healthcare Common Procedural Coding System codes — called G-codes — at the time of billing. As with the other quality initiatives, the program focuses on high-volume, high-dollar conditions. In this case, the conditions include AMI, pneumonia, diabetes mellitus, left ventricular systolic dysfunction, coronary artery disease, chronic obstructive pulmonary disease, osteoporosis and osteoarthritis, and depression, with other components consisting of pneumoccocal and influenza vaccinations, mammography screening, use of proper prophylaxis in surgical patients, CABG, and recognition of problems (falls, lack of hearing acuity, and urinary incontinence) specifically for persons aged 75 and older. The purpose of the program is for CMS to gather data that the agency can use in developing additional quality measures (see visual 5 for a sample of the G-code data elements).18
  • Hospital Consumer Assessment of Health Plans Survey: Developed in tandem by CMS and the Agency for Healthcare Research and Quality (AHRQ), this survey tool is designed to measure consumer satisfaction on a variety of standard measures and infuse transparency into provider performance. While many hospitals have developed their own consumer surveys, this program is designed around a common standard and data collection methodology so that consumers can make meaningful comparisons among hospitals. It will also enable hospitals to see how they measure up against the competition so that steps can be taken to enhance the patient experience through quality care. The program is expected to commence shortly.

At this time, participation in the survey is voluntary and there is no financial incentive attached, even if a facility is a top performer. However, results of the participating hospitals will be published by CMS.

Activities in the private sector

The most prominent quality improvement initiatives in the private sector include the Health Plan Employer and Data Information Set (HEDIS), developed by the National Committee for Quality Assurance (NCQA); an influential set of reports by the Institute of Medicine (IOM); and the IHA consortium initiative (see visual 6).

Although established before the term “pay for performance” was coined, one of the most significant initiatives to come out of the private sector in the 1990s was NCQA’s HEDIS. HEDIS consists of a set of performance measures for comparing health plans and certain other entities. HEDIS is now used by 90% of the country’s managed care plans: health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service providers (POSs). NCQA also has “report cards” for managed behavioral health care and disease management organizations.20 The HEDIS 2006 measures, applicable to private and public insurers, cover effectiveness of care, access to and availability of care, satisfaction with the experience of care, health plan stability, and use of services, as well as some descriptive categories. While NCQA has focused on evaluating quality rather than on tying quality to payment, it has endorsed the CMS P4P efforts as well as recent Senate proposals that would have adopted value-based purchasing initiatives.

Institute of Medicare's reports

The 1999 IOM report, “To Err Is Human: Building a Safer Health System,” brought to light the significant number of injuries and deaths caused by medical errors and served as a catalyst for ways to improve patient safety.21 In 2001, the IOM followed-up on the report by providing a conceptual framework for tying pay to performance, although it avoided the P4P term.

In Crossing the Quality Chasm: A New Health System for the United States, the IOM noted, “Even among health professionals motivated to provide the best care possible, the structure of payment incentives may not facilitate the actions needed to systematically improve the quality of care, and may even prevent such actions.” Saying that, “it is critical that payment policies be aligned to encourage and support quality improvement,” the IOM acknowledged that “financial barriers embodied in current payment methods can create significant obstacles to higher-quality health care.”22

It urged that both private and public payers change their payment methods to “recognize quality, reward quality, and support quality improvement.” Indicating that the three major quality problems are overuse, underuse and misuse, it said that all three have an impact on provider revenues.23

Whether through fee-for-service payment or managed care arrangements, the IOM urged that mechanisms be developed to compensate providers, through direct payment or patient steerage, for the costs of creating and implementing quality improvement programs.24 This is the framework for private and public P4P/value-purchasing initiatives that are now under way.

As gleaned from various sources, there seems to be general agreement that the initiatives’ goals are:

  • improvement in the quality of care;
  • changes in provider behavior;
  • promotion of patient-centric care;
  • increased cost-effectiveness for payers, providers, and consumers in the delivery of health care services;
  • encouragement of the adoption of IT, enabling a more integrated approach to quality patient care; and
  • ultimately, transformation of the health care system so that it provides the best possible outcomes as efficiently and effectively as possible.

Source: Deloitte Services LLP

IHA of America’s initiative

One of the largest and most influential P4P private payer initiatives is sponsored by IHA, a not-for-profit consortium of California medical groups, health plans and health systems. It involves seven major payers: Aetna, Blue Shield of California, Blue Cross of California, CIGNA, PacifiCare, Healthnet and Western Health Advantage. It is the largest program in the United States to provide medical groups with incentive payments (estimated at up to $50 million) based upon quality performance. In 2005, IHA-reported data were collected and analyzed by NCQA on 35,000 physicians in 225 California medical groups.25 Most of the medical groups are organized as independent practice associations (IPAs), a prevailing model in the state.26

IHA uses a common set of quality measurements developed through collaboration among participating payers. Payment is not consistent across the medical groups, however, because each plan defines its own bonus program and scoring and some plans have additional incentive programs. Clinical quality measures — 14 in all — cover both chronic care (for asthma, diabetes, heart disease and upper respiratory tract infections) and preventive services (childhood immunization, breast and cervical cancer screening and testing for chlamydia).

Patient satisfaction measures cover physician communication, specialty care received, timely care and service, overall rating of care, and coordination of care. 27 IT infrastructure involves the ability to integrate data at the group level or provide physicians with data at the point of care.

The 225 medical groups participating in the P4P program posted improvement across all 14 measures of clinical quality. Of the medical groups, “119 (53%) met some or all of the program’s IT criteria, a marked increase from the 74 groups that met IT standards in 2003.” The medical groups also improved on the patient satisfaction measures.28

Private and public organizations conducted 84 P4P programs in 2004, according to a survey by Med-Vantage, Inc., and this number increased to 115 programs at the end of 2005. Of the 84 programs in 2004, 57 were sponsored by commercial insurers, 12 by Medicaid plans, 6 by employer groups, 5 Medicare initiatives by CMS, and 4 by other organizations. Most — 88 percent — involved HMOs, while 50% also included PPOs and 20% a consumer-directed health plan design.

Nearly all (94%) targeted primary-care physicians, with 42 percent also involving specialists and 27 percent including hospitals. “The vast majority (86%) pay out the P4P reward as a bonus, although Med-Vantage believes an emerging trend is use of tiered-fee schedules as sponsors target specialists, including self-funded accounts, and seek continuous reinforcement of the reward.”29 (see visual 7 for a Med-Vantage assessment of the evolution of P4P program features and benefits.)

End of Part I — Next month, Part 2 provides predictions on how policies will actually shake out, and the implications for organizations.

About the author: Larry Goldberg, Deloitte Services LP

Larry Goldberg has served as Director of Deloitte’s Washington National Affairs for Health Care office for more than 20 years. He serves as the Firm’s “listening post” on federal health care financial issues and assists practice offices of affiliates on health care issues. Mr. Goldberg is a recognized speaker and writer on health care financing.

Also contributing their insights and support to this project.
Cynthia Patterson, Deloitte Consulting LLP
Cindy Czikra, Deloitte Consulting LLP
Randy Gordon, M.D., Deloitte Consulting LLP
Larisa Layug, Deloitte Consulting LLP
Jennifer McCartney, Deloitte Consulting LLP

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 150 countries. Deloitte serves more than half of the world’s largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies.

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