Running Head: VALUE BASED PURCHASING 1

A Critical Analysis of Value-Based Purchasing

Michelle Kardohely

University of Saint Mary

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A Critical Analysis of Value-Based Purchasing

Value-based purchasing (VBP) refers to a broad set of performance-based payment

strategies that link financial incentives to providers performance on a set of defined measures

(Damberg, et al., 2014, p.1). The Institute of Medicine (IOM) recognized six aims of health care

system improvement, that health care is safe, effective, patient-centered, timely, efficient, and

equitable. The Institute for Healthcare Improvement (IHI) proposed the Triple Aim of better care,

better health, and reduced costs through improvement. The ACA established the Center for

Medicare and Medicaid Innovation to develop and examine health care delivery and financing

models to achieve the Triple Aim, as well as modifying current Medicare provider payment

systems from volume-based (fee-for-service) toward value-based (rewarding clinical quality,

patient experience, and efficiency) (MacKinney et al., 2012). Under the 2010 Patient Protection

and Affordable Care Act (ACA), the U.S. Department of Health and Human Services (HHS) and

the Centers for Medicare and Medicaid Services (CMS) became the driving force to link

Medicare payments to a value based system.

Under a VBP program, performance is measured by quality and cost-criteria and reward

systems are implemented. Healthcare delivery systems that perform well in these metrics are

rewarded with bonuses and those that do not are penalized. Incentive payments are calculated

relative to withhold, meaning a certain percentage of inpatient payments are withheld from each

hospital to fund the program. Healthcare organizations that perform well will earn back the

percentage of withholding and poor performers do not earn back any of the withhold percentage

(Gilman et al., 2015). CMS provides health coverage for over 100 million Americans (CMS,

2015); the overall goal of VBP is to hold providers accountable for improving clinical quality
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and to decrease the unnecessary care and subsequent waste in health care spending (Kominski,

2014).

Pay-for-performance (P4P), accountable care organizations (ACO) and bundled

payments are three broad types of VBP. The P4P payment system uses financial incentives to

change the behavior of healthcare providers. Bonuses or payment reductions are based on the

providers ability to meet pre-established targets/benchmarks for measures of quality or

efficiency. Early models included the Premier Hospital Quality Incentive Demonstration (HQID)

and the Physician Group Practice (PGP) demonstration, which focused on quality and cost

metrics, have now evolved into broader measures of quality and incentives (Damberg et al.,

2014).

In a bundled payment system, expected costs for a clinically defined episode or bundle of

related health care services determine reimbursement payments. Providers receive payments

based on these defined costs; financial and quality performance accountability is factored in

(Damberg et al., 2014).

An ACO is a healthcare organization comprised of doctors, hospitals and other

healthcare providers that provide coordinated care for an assigned population of patients. Pre-

negotiated quality and cost targets between the ACO and payer determine reimbursements,

which are based on the ACOs performance in quality measures and reductions in the total cost

of care. However, all members of the ACO are accountable for meeting the targets; therefore, a

financial risk is assumed (Damberg et al., 2014). The HHS intends to have 30% of Medicare

payments by end of 2016 and 50% by end of 2018 tied to quality or value for ACOs and bundled

payments. (Brook & Vaiana, 2015).

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In order to promote quality clinical outcomes and improve hospital stay experience for all

patients, CMS designed the Hospital Value-Based Purchasing (HVBP) program to encourage

hospitals to actively eliminate or reduce adverse events, implement evidence-based care

standards and protocols, and re-examine hospital processes that affect care experience (Tourison

& Im, 2015). Hospitals that utilize an inpatient prospective payment system (IPPS) are required

to participate in HVBP. The HVBP program reduces the base operating diagnosis-related group

(DRG) payments by a set percentage that incrementally increases each year. In the first year of

HVBP program, FY 2013, the Medicare bonus or penalty was 1% and will cap at 2% in FY

2017. This money is placed into an incentive fund that CMS will then pay hospitals based on

their performance scores in the defined quality measures. Reimbursement or penalty is equal to

the base operating DRG and VBP percentage. The performance metrics are weighted and each

year, new metrics are added and the applied weights change (Gilman et al., 2015; StuderGroup,

2013). Table 1 in the appendix demonstrates the penalty percentage, performance metrics, and

applied weights.

Initial performance of the P4P indicated improved performance; hence, there has been an

expansion outside of hospitals into rural areas, skilled nursing facilities, and physician offices, in

addition to many other settings. The HVBP and the Physician Quality Reporting System (PQRS)

are two examples (Damberg et al., 2014). However, VBP has the potential to affect any

healthcare organizations financial health negatively; there is a concern that a disproportionate

penalization of organizations that serve low-income, indigent, or uninsured individuals can occur

(Gilman et al., 2015)

Rural hospitals that utilize a prospective payment system (PPS) and move to a VBP

program have the potential to experience financial risk. Rural hospitals are small, have low
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patient volumes and low-profit margins, thus, reimbursement losses can create a financial strain.

Additionally, lower operating costs and a small infrastructure affect adequate measurement and

reporting of quality measures (MacKinney et al., 2012).

Critical access hospitals (CAH), similar to PPSs, can experience low patient volumes,

low-profit margins, and limited resources. However, CAHs rely on cost-based reimbursement

and transitioning to VBP programs is challenging. These facilities require financial assistance to

developing quality initiatives, performance monitoring and reporting due to their limited

resources. Additionally, it is difficult for small CAHs to establish a defined quality metric

improvement system required in hospital value-based incentive payments. If a facility budgets

for losses expected with VBP, rather than in developing quality measures, both high quality and

low-quality care reported. The viability of CAHs is at greater risk for closing when financially

poor, as they tend to produce poor quality (MacKinney et al., 2012).

Home health agencies (HHA) currently use a varietal PPS; payment factors are based on

a 60-day episode, case mix, outliers, and budget neutrality. Upon moving to a P4P, seven quality

performance and improvement measures are assessed individually and the total calculated

Medicare cost savings are based on the formula as shown in Table 2 of appendix. Cost savings

are pooled and incentive payments are rewarded from that pool. Payments can be rewarded for

measures that have high performance, in addition to high improvement in other measures. For

example, an HHA scoring in the highest 20% of an individual measure is considered a high

performer and is eligible for an incentive and if an HHA demonstrates improvement percentages

in the highest 20% for a single measure, an incentive is given (CMS & Abt, 2007; MacKinney et

al., 2012). Challenges inherent for rural HHAs in P4P implementation include low financial
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resources, affecting collection and reporting of quality measures and greater driving distance and

times compared to urban HHAs, impacting cost efficiency (MacKinney et al., 2012).

The payment system for skilled nursing facilities (SNF) uses a per diem rate based on

historic costs adjusted for case mix, geography, and market basket index. Under CMS, SNFs will

transition to the Nursing Home Value-Based Purchasing Program (NHVBP). SNFs will be

eligible for financial awards based on overall attainment and improvement of four quality

performance measures as shown in Table 3 of the appendix, rather than individual areas.

Performance in the 80th percentile and above is considered a high performer and will receive a

reward; a SNF in the top 10% for either performance or improvement will receive the greatest

P4P payment. SNFs demonstrating a 20% improvement falling in the 40th percentile or above are

also rewarded (CMS ORDI, 2009; MacKinney et al., 2012).

Rural SNFs may experience several potential disadvantages. The main source of funding

is received from Medicaid; therefore, Medicare VBP must align with Medicaid reform. SNFs

that align with a coordinated local or integrated system may do well with VBP, but many rural

areas are not. Additionally, VBP urban health systems may discharge to urban SNF, rather than

rural SNF, thereby reducing utilization of rural SNF, causing fragmented care and furthering

financial losses. Lastly, SNF has smaller infrastructures and experience in performance and

quality improvement reporting (MacKinney et al., 2012).

In 2015, the Physician Value-Based Payment Modifier (PVBPM) was introduced, a 1%

adjustment using PQRS data to modify Medicare part B payments to physician practices. The

payment adjustment for defined performance measures (Table 4 in appendix) is based on

revenue, total per capita costs and costs for specific chronic disease (Ryan & Press, 2015). The

PVBM is intended to be budget neutral, but the quality and cost data details are yet to be
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identified that determine best-value specialists and hospitals; primary care practices will be

responsible for costs acquired from outside specialists, hospitals, and long-term care

(MacKinney et al., 2012; Ryan & Press, 2015). Due to low financial resources, physician

practices may have trouble in improving documentation, coding, and quality initiatives for

reporting. Furthermore, patient attributes may not align with the quality and cost determinants

for PVBPM, especially for rural physicians, creating potential withhold based on an inaccurate

reflection of the practice (MacKinney et al., 2012).

According to an advisory board under Medicare, 12% of readmissions are avoidable and

decreasing even 10% of the readmissions can potentially save Medicare $1 billion. In response,

the Hospital Readmissions Reduction Program (HRRP) was established in 2012 under the ACA,

to reduce payments to Inpatient Prospective Payment System (IPPS) hospitals with excess

readmissions (McIlvennan et al., 2015). The HRRP, using performance measures (Table 5 of

appendix), aims to improve the quality of care and reduce costs for all hospitals, hence, reducing

performance variation and the gap between good and poor performers (Tourison & Im, 2015).

The excess readmission ratio is the total predicted readmissions compared to total expected

readmissions of similar hospitals; a ratio >1.0 generates a penalty. The maximum penalty was set

at 1% in 2013, 2% in 2014, and 3% in 2015 (McIlvennan et al., 2015). There are significant

financial implications of the HRRP since the adjusted payment applies not only to readmissions

but also to all Medicare discharges for that year (Tourison & Im, 2015).

There are several, validated concerns regarding HRRP. Complications of care,

socioeconomic status, gender, race, ethnicity, hospital characteristics, and admission source are

not considered in the current 30-day risk-adjustment (Tourison & Im, 2015). Hospitals located

in impoverished areas or have a high proportion of low-income patients, such as safety-net

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hospitals, risk higher penalties (Gilman et al., 2015). Given the 30-day readmission window,

there is a lower threshold to readmit patients, however, an increase in mortality has been

attributed to heart failure patients. Subsequently, although there is not an increased mortality in

the other HRRP measure, complications related to disease progression or compliance increase

readmissions. Debates on inclusion, exclusion, and root cause attributes are ongoing

(McIlvennan et al., 2015).

The HRRP has produced several notable outcomes. Collaborative relationships to

coordinate care have formed to focus beyond discharge and prevent readmissions. Measures to

treat comorbidities, social and environmental factors during hospitalization, at discharge, and as

an outpatient creates a more balanced length of stay and readmission risk relationship

(McIlvennan et al., 2015). The underlying premise of ACOs reflects the collaboration and

continuum of care; they have the potential to enhance the HRRP program.

Safety-net hospitals characteristically provide a significant level of care to low income,

uninsured, and vulnerable individuals, in addition to operating on low or negative operating

margins. Disproportionate-share-hospital (DSH) payments benefit safety-net hospitals by

providing revenue for uncompensated care. As health care coverage increases under the ACA,

there will be a reduction of DSH payments. Safety-net hospitals tend to have higher readmission

rates and poor VBP metrics, increasing the likelihood of penalties under the HRRP and HVBP.

(Gilman et al., 2015).

The RAND Corporation completed a comprehensive examination of the performance of

VBP in meeting intended goals. There was only a small margin of improvement in clinical

quality and the results were inconsistent among the three type of VBPs. As for cost reduction,

only in bundled payments was a significant reduction of 10% observed. There was no reduction
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on the effect on decreasing disparities, despite redistribution of incentives to areas of low

socioeconomic status. Only P4P programs had data for disparity effects. Some lower performing

providers were able to perform well under P4P programs; however, they tended to be more

financially stable, in a less competitive area and received high DSH payments. High performing

providers characteristically were large organizations with strong infrastructures, strong finances,

established nursing quality and performance indicators, and reputable (Damberg et al., 2014).

The overall effectiveness of VBP in all areas remains inconsistent with only minimal

improvement documented.

Successful achievement of health care quality and cost reduction goals under the ACA as

defined by CMS has not been fully realized. The effort of demanding quality and cost reduction

has the potential to transform care across a continuum of health care providers, therefore, several

factors should be considered in the continued expansion of VBP. The population of a rural area

characteristically consists of a large number of elderly and near poverty or poverty level

individuals who rely on Medicare and Medicaid, respectively. Disparities in health coverage and

care are relevant in creating care coordination and addressing access challenges experienced by

this population. Federal support is necessary for safety-net organizations, rural programs, and

physician practices to assist in producing quality outcomes in care and cost efficiency. In re-

evaluating performance measures used in defining metrics for VBP incentives, performance

measures specific to rural needs (risk adjustment strategies) and continued health services

research is needed. Critical evaluation of successes and failures of VBP programs is imperative.
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References

Centers for Medicare and Medicaid Services (2015). Retrieved from http://www.cms.gov/

Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/CMS-Fast-

Facts/index.html

Centers for Medicare and Medicaid Services and Abt Associates Incorporated. (2007). The home

health pay-for-performance demonstration. Retrieved from the Centers for Medicare and

Medicaid Services website: http://www.cms.gov/Medicare/Demonstration-

Projects/DemoProjectsEvalRpts/Downloads/HHPP-General-Information.pdf

Centers for Medicare and Medicaid Services Office of Research, Development, and

Information. (2009) Nursing home value-based purchasing demonstration. Retrieved

from the Centers for Medicare and Medicaid Services website: https://www.cms.gov/

Medicare/ Demonstration-Projects/DemoProjectsEvalRpts/ downloads/ NHP4P_

FactSheet.pdf

Damberg, C.L., Sorbero, M., Lovejoy, S.L., Martsolf, G.R., Raaen, L., & Mandel. D. (2014).

Measuring Success in Health Care Value-Based Purchasing Programs: Findings from an

Environmental Scan, Literature Review, and Expert Panel Discussions. Santa Monica,

CA: RAND Corporation. Retrieved from: http://www.rand.org/pubs/research_reports/

RR306

Gilman, M., Adams, E. K., Hockenberry, J. M., Milstein, A. S., Wilson, I. B., & Becker, E. R.

(2015). Safety-net hospitals more likely than other hospitals to fare poorly under

Medicares value-based purchasing. Health Affairs, 34(3), 398405.

http://doi.org/10.1377/hlthaff.2014.1059

Kominski, G. (2014). Changing the U.S. Health Care System. San Francisco, CA: Jossey-Bass
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MacKinney, A.C., Mueller, K.J., Lillios, N.P., Coburn, A.F., Lundblad, J.P., McBride, T.D., &

Watson, J.D. (2012, April). Anticipating the Rural Impact of Medicare Value-Based

Purchasing. Columbia, MO: RUPRI Rural Health Panel. Retrieved from:

http://dx.doi.org/10.7326/M13-1715

McIlvennan, C.K., Eapen, Z.J., Allen, L.A. (2015). Hospital readmission reduction program.

Circulation, 131, 1796-1803. doi: 10.1161/CIRCULATIONAHA.114.010270

Ryan, A. M., & Press, M. J. (2014). Value-based payment for physicians in Medicare: small step

or giant leap? Value-based payment for physicians in Medicare. Annals of Internal

Medicine, 160(8), 565566. Retrieved from: http://doi.org/10.7326/M13-1715

Tourison, C., Im, G. (2015). CMS acute care and quality reporting programs. Retrieved from the

Centers for Medicare and Medicaid Services website: http://www.cms.gov/Outreach-and-

Education/Outreach/NPC/Downloads/Acute-Care-Quality-MLN.pdf

Value-Based Purchasing | Studer Group. (n.d.). Retrieved June 13, 2015, from

https://www.studergroup.com/our-impact/value-based-purchasing
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Appendix

Table 1.
Hospital Value Based Purchasing
FY FY FY FY FY
Performance Measure 2013 2014 2015 2016 2017

Incentive 1% 1.25% 1.5% 1.75% 2%

(% of base operating DRG payment)
weight weight weight weight weight
Process of Care 70% 45% 20% 10% TBD

Patient Experience (HCAHPS) 30% 30% 30% 25% TBD

Outcomes 25% 30% 40% TBD

Mortality* TBD

Patient Safety Indicator#

TBD
Central Line Bloodstream Infections
TBD
Catheter Associated Urinary Tract
Infections
TBD
Surgical Site Infection
TBD

Cost Efficiency 20% 25% TBD

*30-day mortality rate for Acute Myocardial Infarction, Heart Failure, and Pneumonia
#Agency for Healthcare Research and Quality Patient Safety Indicators
Adapted from: Studer Group (n.d.) Value-Based Purchasing. Retrieved June 13, 2015, from
https://www.studergroup.com/our-impact/value-based-purchasing
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Appendix
Table 2.
Allocation of Medicare Savings for a State Home Health Agencies

Payment Type

Performance Improvement
Quality Measure Pool Total
Pool Pool
Incidence of Acute Care Hospitalization 22.5% 7.5% 30%

Incidence of Any Emergent Care 15% 5% 20%

Improvement in Ambulation / Locomotion 7.5% 2.5% 10%

Improvement in Bathing 7.5% 2.5% 10%

Improvement in Management of Oral
7.5% 2.5% 10%
Medications
Improvement in Status of Surgical Wounds 7.5% 2.5% 10%

Improvement in Transferring 7.5% 2.5% 10%

Total 75% 25% 100%

Retrieved from www.cms.gov/Medicare/...Projects/.../HHPP-General-Information.pdf

Table 3.
Quality Performance of Skilled Nursing Facilities
Performance Measure % of Quality Score
Staffing 30%

Appropriate hospitalizations 30%

Outcome measures ( from minimum data set) 20%

Survey deficiencies 20%

Retrieved from https://www.cms.gov/Medicare/...Projects/.../NHP4P_FactSheet.pdf

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Appendix

Table 4.
Payment Adjusted Measures for Physician Value Based Payment Modifier System
Clinical process measures

30-day readmission rates

Acute prevention indicators

Hospital admissions for bacterial pneumonia, urinary tract infection, and dehydration

Chronic indicators

Hospital admissions and complications related to diabetes, chronic obstructive pulmonary

disease, and heart failure

(Ryan & Press, 2015)

Table 5.
Hospital Readmission Reduction Program Measures:
Readmission Measures 2013 2014 2015 2016 2017

Acute Myocardial Infarction * * * * *

Heart Failure * * * * *
Pneumonia * * * * *
Acute COPD exacerbation * * *
Elective Surgery: Total Hip/Total Knee * * *
Coronary Artery Bypass Graft Surgery *
Retrieved from http://www.cms.gov/Outreach-and-Education/Outreach/NPC/Downloads/Acute-
Care-Quality-MLN.pdf