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Pay For Performance: From Quality To Value

May 29th, 2008

Editor’s Note: Today, The Health Affairs Blog begins a series of four posts on trends in performance measurement and performance-based payment in health care. The series focuses particularly on the increasing emphasis being placed on measuring and rewarding cost-efficiency. Today, James Robinson (below) and Tom Williams contribute posts. On Monday, Arnold Milstein and Howard Beckman weigh in.

The U.S. health care system is in such desperate shape that every initiative, be it in policy or management, risks going through the cycle of illusion and disillusion, the inadvertent creation of excessive expectations and the inevitable failure to achieve the unachievable. (We tend to expect, for example, that initiatives simultaneously increase quality, reduce costs, avoid restrictions on consumer choice, and enhance pay levels to providers). The pay-for-performance (P4P) initiative faces just this risk as it moves from its hopeful birth as a bright shining idea (that America should pay for performance and not, say, for nonperformance) and begins to toddle out into the real world of health care, where unlimited expectations collide with limited resources. Skeptics have discovered that P4P has put a few dollars on the table and prompted modest improvements in information technology (IT) adoption and some even more modest improvements in preventive measures, but it has not cured diabetes or led to universal health insurance. Surprise.

The most important challenge facing the pay-for-performance movement is that the health polity has rediscovered the virtues of cost control (as a component of sustainable insurance expansion). P4P was born during the nation’s backlash against the cost control emphasis of managed care, and hence restricted its focus to quality, patient satisfaction, and, in some instances, adoption of IT. Today the talk is all about “value,” a felicitous term that means many different things to many different people but that, for present purposes, suggests that cost moderation is a virtue in addition to quality enhancement and that payment methods should encourage the former as well as the latter. The “old wine in new bottles” dimension of this is so obvious as to be beneath comment. In any case, P4P now is challenged to offer an alternative to the cost-increasing incentives in fee-for-service and not simply an alternative to the quality-endangering incentives in capitation (not that fee-for-service doesn’t endanger quality as well; type “anemia drug” or “spine surgery” or “radiation risk in radiology” into your favorite search engine).

The P4P Movement: Keeping The Focus On Payment Amidst “Binge Drinking At The Well Of Consumer-Driven Care” 

The best part of the pay-for-performance phenomenon, in my opinion, has never been its (modest) potential to directly influence quality or satisfaction or anything else but, rather, its ability to keep alive the debate over appropriate methods of payment during a decade of binge drinking at the well of consumer-driven health care. We are now almost at the decade mark of this mindless moment in which the pundits somehow convinced a large swath of policymakers and private payers that managing the health care muddle demanded only consumer cost-sharing incentives, without attention to how providers are paid and how they respond to payment incentives. Pay-for-performance kept the light trained on the physicians and the hospitals and, through its progeny “value-based purchasing,” on some elements of the drug, device, and ancillary sectors as well.

Having said these nice things about pay-for-performance, it’s time to say, Let’s move on to version 2.0 and not just celebrate (or castigate) the original template. I will leave the quality focus to the quality experts, but I have a few words to say about the cost or efficiency side of the value equation.

Most obviously — and I think that Sutton’s Law applies here — if you want to save money, you have to follow the money. P4P 1.0, bless its heart, was much about primary care. Version 2.0 needs to look at specialty physicians and hospitals and, alongside those categories, at the drugs, devices, imaging, and other technologies that drive most of the cost growth as well as some of the quality improvement in health care. Here, of course, P4P merges into the old-wine-in-new-bottles debate over the virtues of “episode pricing” as a payment method that bundles the physician, facility, and technology components of each course of clinical treatment without shifting to providers the epidemiologic risk inherent in capitation. It would also prompt a review of the historical split between physician payment and hospital payment for Medicare, a split that the managed care plans sought to overcome through capitation but to which they have defaulted after the successful provider counterattack.

Version 2.0 of pay-for-performance also merges into the debate over appropriate incentives for physicians in their role as choosing particular drugs and devices for their patients. This new-again debate encompasses Medicare’s “gainsharing” ban for physician-hospital partnerships, the “buy and bill” payment method for cancer drugs, the proposed two-part physician payment method for the “medical home,” the annual congressional override of the cost-controlling dimensions of Medicare’s “SGR” (sustainable growth rate) controls on the physician fee schedule, and the other peculiar fauna of the health care payment ecosystem.

P4P Version 2.0: Balancing Quality, Affordability, Consumer Choice, & Innovation

What is the long-term agenda for pay-for-performance, and for payment design more generally? Let’s start with the obvious. The goal of P4P is not to improve quality (only). It is not to improve patient satisfaction or IT adoption (only). It certainly is not to moderate cost growth (only). The desired structure of provider payment is that which best helps us balance the competing virtues of quality improvement, economic affordability, respect for consumer choice and values, and biomedical innovation. Provider payment is not our only tool for that job, so another desired element is its compatibility with consumer incentives, regulatory mandates, tort law, subsidies for capacity expansion and scientific research, and all of the other factors that influence health care performance. And did I say simplicity? The desired method of provider payment is one that providers can understand and that payers can administer at something less than the contemporary horrific administrative cost of health care.

And if we are allowed to dream, I would add that a well-designed, performance-based payment system could exert positive effects on the long-term dynamics of the health care system by creating a business case for innovations that reduce, rather than increase, the cost of care. Current reimbursement incentives reward new drugs, devices, and procedures that improve quality, but, with some limited exceptions (Medicare’s diagnosis-related group, or DRG system being one) do not reward innovations that reduce costs. Fee-for-service, in particular, imposes a 100% tax on innovations in physician practice style that reduce the need for visits, tests, and procedures. And don’t get me started on how hospitals pay for surgical implants.

America will always be willing to pay high (shall I say “value-based”?) prices for breakthrough innovations that raise the costs of care, even substantially, while creating dramatic improvements in life expectancy or functional ability for patients. But these desirable expenditure increases need to be offset, at least partially, by cost reductions elsewhere in the system. Pay-for-performance is based on the premise that incentives matter. I long to see a system in which entrepreneurs and providers can get rich by making the American health care system more affordable and hence more accessible to all. And even if incentives don’t matter, I would prefer a payment method that gave more to efficient, high-quality providers than to inefficient, low-quality providers. Imagine.

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1 Trackback for “Pay For Performance: From Quality To Value”

  1. Pay For Performance: From Quality To Value ·
    May 29th, 2008 at 12:41 pm

7 Responses to “Pay For Performance: From Quality To Value”

  1. mmaglothin Says:

    OIG Approves Gainsharing Program for Ortho and Spine
    AUGUST 14, 2008

    The OIG has approved the first orthopedic and spine gainsharing project.

    No details have been released on the participating hospitals or the particular procedures and technologies that will be covered in the project. Additionally, no financial terms have been publicized, though the Goodroe press release says that most arrangements allow participating physicians to be paid as much as 50% of the savings generated under the program. According to Goodroe, up to $75 million in potential savings has been identified in the existing programs, so these benefits could be significant. A 2006 survey found that most physicians felt that gainsharing was an effective way to align financial incentives for hospitals and physicians, though they were divided on what constitutes gainsharing and whether it should be disclosed to patients.

    In her guest blog for HealthpointCapital, Goodroe Healthcare Solutions founder Joane Goodroe commented, “Gainsharing is first about assuring quality of care for patients and secondly about increasing efficiency.” Industry groups such as MDMA and AdvaMed have taken issue with these objectives, suggesting that gainsharing may reduce the quality of patient care, slow development of new technology and discriminate against smaller manufacturers.

    I’ve present Gainsharing to MGMA Annual, BONES, MGMA FMS and MSO Societies.

    The docs have to approach the hospital – the hospital is not going to be very aggressive about sharing their savings.

    Marshall Maglothin MHA MBA
    President, Blue Oak Consulting, LLC
    COO, Inpatient Specialists, P.A.
    Fairfax, VA / Rockville, MD

  2. jimdunn Says:

    i do agree with James C. Robinson that the meaures that have been used in P4P programs are extremely deficient. the main party who is to enjoy all that is the consumer.


    jim dunn
    Alabama Treatment Centers

  3. drogersmd Says:

    I beg Professor Robinson’s pardon. If you look at data from the Medical Group Management Association (MGMA) over the last several years, you will see that the average cost/RVU for most multi-specialty groups is actually greater than the Medicare RVU conversion factor (reimbursement $/RVU), which means that what we really have here, in the case of Medicare, is NON-PAY for PERFORMANCE for several years now. And the private payers are following closely behind.

    Physicians who understand this are dropping Medicare in increasing numbers. What does this do to the “value” or “quality” or whatever you wish to call it, of the care everyone receives?

  4. James C. Robinson Says:

    I agree that the data and measures used in P4P programs are deficient in the extreme. One wonders who to blame: Medicare, the penultimate responsible for long term outcomes, who pays resolutely on a FFS basis? The consumer, the ultmate responsible and beneficiary, who might want to invest in prevention and quality-tracking and price-conscious demand even if not subsidized by insurance? And of course the American Question: what’s the alternative? We tried P4NP (pay for non-performance) for many years, with modest results, and seem to be heading towards NP4NP (non-pay for non-performance).

  5. Ted Sekscenski Says:

    I am not sure what Jamie Robinson meant by “value” being a “felicitous” term to apply to health care. The best “definition” I have heard of the term regarding health services was by Denis Cortese, M.D., CEO of the Mayo Clinic, in a presentation made at the National Press Club. He noted he was in the habit of buying a brand of shoes that although more expensive than others on the market, lasted much longer, were more comfortable, and more suitable, at least to his tastes. To translate this into health care terms, value he said is something that is better measured in the longer term, as opposed to performance, that is measured largely in terms of episodic care delivery. This definition is helpful when considering what is paid for in health care. While it “does not pay” for a provider to cover the costs of some care that may have a benefit years from when it is provided, and the consumer has moved on to another provider; it does “pay” from the perspective of the health care system and the consumer to have this care delivered when it will offer the most long term benefit. Our delivery systems, payment systems, and measurement systems should take this longer term perspective into account when estimating the “value” of health care. Most systems today pay and measure care performance on an episodic basis. I think a change to a value-based system of care would be most felicitous (appropos) indeed.

  6. richard smith Says:

    A requirement to be a card carrying memberof the heathcare consulting industrial complex: spend a 48 hour period at the elbow of an intern or residient physician at any sizeable city/county hospital. Blood. Broken bones. Vomiting. Vomiting blood. Raging anger. Violence. Wild on crack, etc. Unregulated. Designer letterhead. Little more.

  7. drogersmd Says:

    Professor Robinson writes elegantly about P4P from the perspective of health economics academia but I am not sure he really understands the real, ugly truth about current P4P programs. As currently used in virtually every P4P program, performance is based on cost data which is obtained through claims processing and billing information. This would be like judging the quality of the produce at the supermarket by looking at the price at the register. While it is intuitive that a 10 cent banana might actually taste like one, somehow we seem to accept the premise, promoted by CMS and commercial payers alike, that lower cost means higher quality. And it would be easy to write elegantly about the economics of the cost of produce, looking at the cash register receipts; but would one really be able to understand the variables related to quality without actually visiting the produce department? I don’t think so.

    Another common mistake is to imply that “sustainable insurance expansion” is the same as expanded healthcare. Health insurance does not ensure health care. In fact, the astounding rate of rising health insurance premiums in the private world continues, while the actual rate of rise in medical care costs has declined for the last one or two years.

    If every healthcare economics professor would spend a day or two in the billing office of one of their own personal physicians, he or she would have a new perspective on what it takes to render quality medical care to real patients in real time. I know they can understand the concept of “lowest common denominator,” which is where we are all headed in terms of health care quality, especially if we embrace P4P programs based solely on billing data.

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