Your Hospital's New Incentives to do Better

Buried amid the better-known and more controversial mandates of health care reform lies an unassuming little change to Medicare billing that may have a greater impact on the medical care you receive than any other aspect of the Affordable Care Act.

The initiative, known as value-based purchasing, marks a historic shift from volume to value, from quantity to quality. It means that Medicare, the nation's largest health care payer, is switching from passively paying standard amounts per each medical service to actively rewarding hospitals for offering better care.

Changes likely to move beyond Medicare

Historically, where Medicare goes, the private insurance market follows.

"Our system to date has been volume-based: the more X-rays, lab tests and office visits, the more you get paid," explains Dr. Glen Stream, chair of the board of directors for the American Academy of Family Physicians. "There is a recognition across the political spectrum, public and private both, that we need to move to a model that doesn't just incent people to do more because that just inflates the global expense for health care."

So, Medicare reimbursements to hospitals will now be based, in part, on how well the facilities perform on a list of 25 quality measures, including eight that directly involve patient satisfaction. That's under a provision in President Barack Obama's health care reform law that also is rating the performance of individual doctors in a similar fashion.

Consumers can now see how their local hospital measures up at Medicare's Hospital Compare website and shop for the best Medicare-enrolled physicians and health care providers at its Physician Compare site.

How value-based purchasing works

In October, Medicare began withholding $850 million, roughly 1% of its base reimbursements, from 3,500 hospitals to create a value-based purchasing fund to be used for incentive payments. Each hospital can then earn its share of that money back based on how well it performs.

In the coming year, the initiative will reward hospitals that have relatively few heart attack, heart failure and pneumonia patients who need to be readmitted within 30 days of being sent home. By 2015, hospitals will be required to use information technology more effectively to follow up with patients after they've been discharged.

The annual amount withheld by Medicare will increase by 0.25% each year until it reaches a cap of 2% in 2017.

Value-based purchasing is one component of the broader Partnership for Patients, a public-private initiative launched by Obama that aims to improve care and lower costs by combating such issues as high Medicare readmission rates and infections resulting from health care.

The Centers for Medicare & Medicaid Services has committed to spend $1 billion on the partnership, which it estimates could save Medicare up to $10 billion and cut overall U.S. health care costs, estimated at $2.6 trillion in 2010, by $35 billion.

A carrot-and-stick redistribution

Dr. Patrick Torcson, chairman of performance and standards for the Society of Hospital Medicine, notes that value-based purchasing doesn't require any additional funding.

"This is basically a zero-sum game that's going to have winners and losers with the same amount of money being spent. Poorly performing hospitals receive less, highly performing hospitals receive more," he says.

The value-based purchasing program grew out of a 2003 Medicare initiative called pay-for-reporting, in which Medicare offered bonuses to hospitals that voluntarily turned in report cards on quality measures, regardless of how they actually performed. The widespread industry assumption was that Medicare, the federal health care safety net for seniors and the disabled, would one day use those measures to cut costs and improve quality.

That prompted many hospitals and private physician groups to proactively initiate their own quality improvement programs, according to Robert Zirkelbach, spokesman for America's Health Insurance Plans, an industry trade group.

"There is significant waste in the system. Studies have shown that people can pay dramatically different payments for the exact same treatment, not just state to state or town to town but literally one hospital to another," Zirkelbach says.

"By improving best practices and disseminating information, we're trying to shrink that variation while keeping quality high. If people are getting the right health care at the right place at the right time, that avoids complications and higher costs down the road."

'A great thing for consumers'

Torcson predicts that Medicare's switch to value-based purchasing as part of health care reform will soon transform the entire medical culture. He says it provides the financial incentive for all providers to work together to coordinate care, both within the hospital and after a patient returns home. And, consumers can make more informed health care choices by having access to hospital and physician performance data online.

"It's a great thing for consumers as patients. You're going to see the quality of care improve and better outcomes for patients. Long term, there's going to be a societal benefit because the spending we cut on health care can be used to support other systems," Torcson says.