Pay for Performance

Richmond Academy of Medicine

October 11, 2005

Rick Mayes, Ph.D.Assistant Professor of Public Policy

2

BACKGROUND

Since 2000 . . .

health insurance premiums have increased 73%

(versus 14% in general inflation and avg. wage growth)

- avg. cost of single coverage ($4,024 annually in 2005)

- avg. cost of family coverage ($10,880 annually in 2005)

The percent of companies offering health insurance to their workers has fallen from 69% in 2000 to 60% in 2005

(5.5 million working Americans have lost their coverage since 2000)

3

Medical Inflation in the U.S. 2000-2004

Increase in Health Insurance Premiums

Increase in Medicare

Part B Premium

Increase in Spending

on Hospital Services

General Economic

Inflation (CPI)2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2000 2001 2002 2003 2004

Data from Census Bureau; Bureau of Labor Statistics; CMS.

4

Source: Kaiser Family Foundation (2005)

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OVERVIEW

This presentation examines:

1. the Definition and Objectives of pay-for-performance

2. the economic & epidemiological Origins of and Momentum behind this new reimbursement system

3. and some of the potentially positive and negative

Implications for hospitals and physicians

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Definition & Objectives“p4p” is basically a new form of reimbursement—developed by

insurers and employers—that attempts to differentiate among doctors and hospitals in order to financially reward those that:

(1.) provide better quality care - fewer complications, quicker recovery times - more successful or better patient outcomes, etc.

and those providers that

(2.) do so with greater efficiency - lower costs

In short, “p4p” is an emerging payment model that tries to link the quality of care to the level of payment for healthcare services.

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Background & Objectives

Insurers and particularly employers are eagerly looking for the next big paradigm(s) that they can turn to.

They are desperate, particularly small business owners!

Unfortunately, the three worst payment systems for rewarding high quality and performance in medicine are:

(a) fee-for-service, (b) capitation, and (c) salary

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Background & ObjectivesPublic Policy 101: Incentives structure modern life as we know it.

e.g., IRS and tax audits, HOV lanes and toll roads, Dean’s List and

academic probation, parenting, teaching, dating, sales, Amway, etc.

Incentives come in 3 basic flavors or varieties (e.g., smoking):

(a.) moral: U.S. gov’t asserts that terrorists raise money from black-market sales of cigarettes

(b.) social: banning of cigarettes in restaurants and bars

(c.) economic: $3-per-pack “sin tax” (… but not in Virginia obviously)

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Moral/Social Incentives and Modern Life

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Economic Incentives and Modern Life- Australian prison ships in the early 1900s

- April 15, 1987 and the disappearance of

of 7 million American children

- frequent flyer miles (“loyalty programs”)

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Origins of and Momentum behind Pay for Performance

(1) Institute of Medicine reports:

- To Err is Human (1999)

- Crossing the Quality Chasm (2001)

(2) John Wennberg & “Small-Area Large-Variation” studies:

- tonsillectomy rates (1977)

- cesarean section rates (1996)

- variation in Medicare spending/per beneficiary

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14Source: Dartmouth Atlas of Virginia

Average Number of Days in Hospital During Medicare Beneficiaries’ Last 6 Months of Life

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Percent of Medicare Beneficiaries Admitted to ICU During the Last 6 Months of Life

Source: Dartmouth Atlas of Virginia

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Percent of Medicare Beneficiaries Admitted to ICU During Terminal Hospitalization

Source: Dartmouth Atlas of Virginia

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Number of Acute Care Hospital Beds/per 1,000 Residents

Source: Dartmouth Atlas of Virginia

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Number of Hospital Discharges for all Medical Conditions (DRGs)

Source: Dartmouth Atlas of Virginia

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10.010.0

20.020.0

30.030.0

40.040.0

50.050.0

60.060.0

70.070.0

80.080.0NYU Medical Center 76.2

UCLA Medical Center 43.9NY Presbyterian Hospitals 40.3

Cedars-Sinai Medical Center 66.2

Mount Sinai Hospital 53.9

UCSF Medical Center 27.2Stanford University Hospital 22.6

Average number of physician visits per patient during last six months of life who received most of their care in one of 77 “best” US hospitals

Source: John Wennberg (2005)

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Origins of and Momentum behind Pay for Performance

Researchers’ and Insurers’ Conclusions:

(1.) Physician practice styles vary considerably, especially regarding diagnoses for which treatment decisions are not driven by consensus on appropriate care and it is not possible to obtain evidence-based guidelines from reading journals or consulting textbooks.

e.g., back surgery rates (the #/per 1,000 Medicare beneficiaries):

- 7/per 1,000 in Naples, FL

- 2/per 1,000 in Hanover, NH

- 4.5/per 1,000 national average

(2.) In medicine, supply generally creates its own demand (e.g., # of hospital beds/per capita, technology available, # of specialists/per capita).

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Rates of Surgery for Back Pain/per 1,000 Medicare Enrollees

Source: Dartmouth Atlas of Virginia

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Rates of four orthopedic procedures among Medicare enrollees in 306 Hospital Referral Regions (2000-01)

0.2

1.0

4.0

HipHipFractureFracture

KneeKneeReplacementReplacement

HipHipReplacementReplacement

BackBackSurgerySurgery

Stan

dard

ized

rat

io (

log

scal

e)

Source: John Wennberg (2005)

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R2 = 0.49Vis

its

to C

ard

iolo

gist

s p

er e

nro

llee

Vis

its

to C

ard

iolo

gist

s p

er e

nro

llee

0.00.0

0.50.5

1.01.0

1.51.5

2.02.0

2.52.5

0.00.0 2.52.5 5.05.0 7.57.5 10.010.0 12.512.5 15.015.0

Number of Cardiologists per 100,000 residentsNumber of Cardiologists per 100,000 residents

Association between cardiologists and visits per person to cardiologists among Medicare enrollees (1996): 306 HRRs

Source: John Wennberg (2005)

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The Association between Hospital Beds and Hospitalization for Hip Fracture and Congestive Heart Failure

Source: Dartmouth Atlas of Virginia

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Interview w/Tom Scully, former CMS Administrator (2002)Mayes: Others I’ve interviewed have said that hospitals will cry, cry, cry [about their

finances and level of Medicare reimbursement], but that sometimes you have take it with a grain of salt.

Scully: Oh, they’re doing great!  I’ll tell you, go find me a hospital that hasn’t built a giant new bed-tower in the last few years.  They’ve actually slowed down, because the government has phased out Medicare capital (reimbursement)… We used to pay for capital in Medicare; it was a DRG add-on for capital expenditures.  Well, if you’re getting 40 percent of your revenues from Medicare and you want to build a new building and Medicare will pay for 40 percent of it, right?  Then why not? 

So what you were getting all through the 1980s was a massive building spree up into the early 1990s and even through the ‘90s, because it was a 10-year phase out [of the DRG add-on for capital].  If you wanted to build a new hospital wing in 1990—even if you didn’t have any patients for it—if you budgeted $100 million, Medicare would write you a check for $40 million!  So what do you get?  You got a hell of a lot of big new hospital wings, need them or not. This is one of the reasons we’ve had such massive over-capacity…

You’d have to be an idiot not to put up a new building every couple of years, because Medicare paid for such a big part of it.  That is slowing down now and you’re starting to see the demand catch up on capacity in a lot of markets.

* Roemer’s Law: “A hospital bed built is a hospital bed filled.” (behavior is unconscious)

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Discharges forHip Fracture

R2 = 0.06

Discharges forall MedicalConditionsR2 = 0.54

00

5050

100100

150150

200200

250250

300300

350350

400400

1.01.0 2.02.0 3.03.0 4.04.0 5.05.0# of Hospital Beds/per 1,000 Residents# of Hospital Beds/per 1,000 Residents

Dis

char

ge R

ate

Dis

char

ge R

ate

Association between # of hospital beds per 1,000 residents (1996) and discharges per 1,000 (1995-96) among Medicare enrollees in 306 HRRs

Source: John Wennberg (2005)

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Origins of and Momentum behind Pay for Performance

Health Care Policy Increasingly Being Driven by Empiricism:

e.g., DSM-III for mental health (1980)

DRGs for hospitals (1983)

RBRVS/fee schedule for physicians (1992)

pay-for-performance (growing rapidly)

Health Care Quality:

old assumption: shark finemerging view: bell curve

www.hospitalcompare.hhs.gov ->

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Hospital Compare - A quality tool for adults, including people with

Medicare

Percent of Heart Attack Patients Given Aspirin at Arrival AVERAGE FOR ALL REPORTING HOSPITALS IN THE UNITED STATES 91% 

AVERAGE FOR ALL REPORTING HOSPITALS IN THE STATE OF VIRGINIA 93% 

VIRGINIA COMMONWEALTH UNIVERSITY HEALTH SYSTEM (VCU/MCV) 96% 

Percent of Heart Attack Patients Given Beta Blocker at DischargeAVERAGE FOR ALL REPORTING HOSPITALS IN THE UNITED STATES 85% 

AVERAGE FOR ALL REPORTING HOSPITALS IN THE STATE OF VIRGINIA 88% 

VIRGINIA COMMONWEALTH UNIVERSITY HEALTH SYSTEM (VCU/MCV) 98%

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Origins of and Momentum behind Pay for PerformanceGrowing ability to measure “quality” and “performance”—and the

subsequent discovery that they vary more than previously assumed—is contributing to the popularity of “p4p,” because it would allow health plans and employers to do 3 things:

(1) pay more to medical providers with the best scores/outcomes

(2) encourage the majority of medical providers to improve

(3) perhaps pay less to providers with poor scores/outcomes

Question: If publishing S.O.L. test scores and “on-time” arrival statistics is considered a good idea for encouraging behavioral change and improvements on the part of schools and airlines to improve their performance, the argument goes, how bad of an idea could it be for medical providers?

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Potential Negative ImplicationsDepending on how “p4p” is structurally designed, it could be

problematic (translation “negative”) for several reasons:

(1) Some “waste” that it targets is necessary defensive medicine.

(2) It could encourage “gaming” on the part of medical providers.

(3) Not all clinical practice guidelines (CPGs) are perfect, particularly for older Medicare beneficiaries with multiple chronic conditions; and for some chronic conditions—specific cancers, chronic lung disease, and heart failure—they hardly exist at all.

(4) In Medicare, as in many private health plans, patients receive their care in an a la carte fashion, which makes it hard to assign responsibility for performance our outcomes to any one specific provider.

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Potential Positive ImplicationsFortunately, existing “p4p” plans tend to only pay more to the best providers.

In addition:

(1) Providers that already meet a performance standard (e.g., an 80% childhood immunization rate, 100% administration of aspirin to patients who present with cardiac arrest) need only maintain their status quo for bonus payments.

(2) The percentage of a physician’s overall revenue at stake is rarely more than

5%-10%.

(3) So far, “p4p” plans primarily target the underuse of preventive care, so

spending generally increases after implementation.

(4) Which can provide hospitals and physicians with additional capital to invest in electronic medical records and other practice improvements.

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Conclusion“p4p” is growing rapidly

(2003) – roughly 35 health plans covering approx. 40 million members

(2006) – roughly 80 health plans covering approx. 60 million members

“p4p” can generally help to improve the quality of primary care, as well as the care of patients with chronic conditions

Medicare…the “800-pound” gorilla of American medicine- “It’s hard to convey how big this is going to be, but it’s going

to be big,” says Dr. Mark McClellan, CMS Administrator.

- 80% of beneficiaries have 1 chronic condition; 30% have 4+

(this latter group drives almost 80% of Medicare’s total spending)

35Iglehart, J. K. N Engl J Med 2005;353:870-872

Changes in Medicare Payments to Physicians