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Ways to Change How Medicare Pays for Hospital Care

By Mary Agnes Carey, CQ HealthBeat Associate Editor

November 26, 2007 -- The Centers for Medicare and Medicaid Services (CMS) on Monday sent a series of options to Capitol Hill to change Medicare hospital payment so that it is based on the quality of care a facility delivers.

The report, mandated by the budget-savings law (PL 109-171) signed last year by President Bush, would build upon an ongoing program that pays hospitals more Medicare money if they report data on various performance measures designed to assess quality. As part of a Medicare "Value-Based Purchasing Program," a percentage of the hospital's base operating payment for each discharge—its "diagnosis related group" or DRG payment—would depend on its quality performance.

"That's the heart of pay-for-performance. If you don't perform, you don't get paid as much," said Kerry Weems, CMS acting administrator.

Scenarios in the report would take between 2 and 5 percent from a hospital's DRG payment, with the money returned depending on how the hospital performed. Information on the quality of care a hospital provided would be posted on Medicare's Hospital Compare Web site, and the shift to a complete value-based purchasing system would take three years.

The report calls for giving hospitals a "Total Performance Score" in deciding payment amounts. The score would be based on the medical outcome of the treatment given as well as whether the facility followed certain clinical practices in treating various conditions. In addition, patient ratings of satisfaction with care delivered would be used to calculate the total score. Facilities would be rewarded for both improvement and for meeting national thresholds of care.

Congressional action would be needed before any changes could be made in how Medicare pays hospitals. The Senate Finance Committee, now developing legislation to stop a scheduled 10 percent cut in Medicare physician reimbursements, is considering cuts in payments to private Medicare plans run by insurers, called Medicare Advantage plans, and cuts to other Medicare providers as well.

"If the Senate is going to take action this year, they probably have time to include this if it's their wish," Weems said in a telephone news conference with reporters. "Could this be used as a savings tool? The answer is yes, it could be, if that the way that Congress implemented it."

Hospital groups on Monday said while they share the goal of improving hospital quality, they did not want to see Medicare payments reduced as a way to accomplish that goal. The CMS report states that any pay-for-performance plan with Medicare and hospitals should be executed in a way that does not increase Medicare spending.

"The Federation really believes there needs to be a new pool of money for the incentive payments, and that the funds not come out of the base DRG rate because you're injuring the hospitals that need the funds to do the improvement," said Jayne Hart Chambers, senior vice president with the Federation of American Hospitals.

In a statement, Blair Childs, senior vice president, public affairs, at Premier Inc., a hospital consortium that has conducted a CMS pilot project on quality based payment, said the agency's plan "provides an excellent starting point for Congress" but added that such a program should "reward hospitals for quality gains and not be used as a cost-cutting program." Any savings from a value-based purchasing program should be used to help reward hospitals for improving the quality of care delivered, Childs said.

The American Hospital Association had no immediate comment on the CMS report.

Sen. Charles E. Grassley, R-Iowa, the ranking Republican on the Senate Finance Committee, said that value-based purchasing "is the kind of reform that every branch of our government ought to go after with full force ... Now that the plan is set, Congress needs to get the job done and pass additional legislation to start implementing value-based purchasing."

The powerful senior lobby AARP said linking payments to a hospital's performance may also help control health care costs, avoid unnecessary procedures, and decrease improper utilization. "We are pleased that Medicare is now taking concrete steps to begin tying a portion of hospital payments to their actual performance, rewarding both those that provide high quality and those that demonstrate meaningful improvement," said AARP Director of Public Policy John Rother.

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