There is much buzz in the health care field about moving to a value-based purchasing/pay-for-performance system rather than a fee-for-service system. In other words, providers would be rewarded for how well they provide services and obtain better patient outcomes, not by how many services are provided, as is the current usual payment structure. This basic premise drove many of the provisions of the Patient Protection and Affordable Care Act (PPACA). It is this premise that is the root of the accountable care organization (ACO) idea, about which we have written several times.

While the federal government (and, more recently, some commercial payors) has pushed this idea of payment for performance, creating a lot of industry chatter, such a system is not meant to go in place all at one time or completely replace in the foreseeable future the current fee-for-service system. However, the federal government has now begun to take the first steps toward implementing payment for performance.

The U.S. government recently established several initiatives designed to improve hospital performance through the Medicare program and to reward hospitals that provide quality care. While these programs do not totally supplant the fee-for-service system, they do introduce the idea of payment for quality of service. One main reason the Medicare program looked to hospitals is that they account for the largest share of Medicare spending, and Medicare is the largest single payor of hospital services. This October, two of these hospital initiatives went into effect. In some aspects of these programs, well-performing hospitals are rewarded. In other aspects, poor-performing institutions are penalized. This article summarizes two of those quality initiative programs applicable to hospitals.

Hospital Readmissions Reduction Program

Section 3025 of the PPACA mandated the creation of the Hospital Readmissions Reduction program. It required reductions in base operating diagnosis-related group (DRG) payments to hospitals for excessive readmissions for select conditions starting on or after October 1. The final rule for the HRRP was published in the August 31 edition of the Federal Register as part of the 2013 medical inpatient prospective payment system final rule. This has been codified at 42 C.F.R. §§412.150-154. The HRRP commences with discharges beginning October 1.

The PPACA left the conditions to which the HRRP would apply up to the U.S. Department of Health and Human Services secretary. The final rule stated that the conditions to which the HRRP applies are heart failure, acute myocardial infarction and pneumonia. Under the HRRP, a calculation is performed to determine whether a hospital has an "excess readmission ratio" for these conditions. Essentially, the Centers for Medicare and Medicaid Services (CMS) will establish a national average performance for acute-care hospitals for patients with these conditions. Each hospital will have its performance compared to this national average.

A patient is considered to be readmitted if he or she presents to an acute-care hospital within 30 days of being discharged from the same or another acute-care hospital.

The hospital will experience up to a maximum of a 1 percent reduction in its payments in fiscal year 2013 based on the determined performance. This maximum will increase to up to 2 percent in fiscal year 2014.

It is anticipated that the number of conditions to which the HRRP applies will be expanded by Health and Human Services in future years.

Value-Based Purchasing Rule

The Hospital Inpatient Value-Based Purchasing program was likewise mandated by the PPACA, Section 3001(a), which added Section 1886(o) to the Social Security Act. Its final rule was published in the Federal Register on May 6, 2011. It seeks to reward hospitals for meeting specified performance goals. The law mandated that the secretary of the HHS begin making the value-based incentive payment pursuant to the purchasing program for discharges occurring on or after October 1. At the time of the release of the final rule, the CMS estimated distributing $850 million in incentive payments in fiscal year 2013 pursuant to the purchasing program.

The purchasing program is based on the premise of awarding a hospital a score and calculating an incentive payment based upon that score. Under the purchasing program, the CMS calculates a score for a hospital based on the higher of a hospital’s achievement score (based on national hospital standards) or an improvement score (based on the hospital’s own baseline performance). A hospital will only receive an achievement score if it scores above the 50th percentile of hospital scores. For fiscal year 2013, a hospital receives its total score based on two domains: clinical process of care (70 percent of the total score) and patient experiences of care (30 percent of the total score). An outcomes domain is slated to be added in fiscal year 2014. The score is then utilized for the CMS to determine an appropriate incentive payment.

On the clinical process of care domain side, the CMS selected the following five broad categories of clinical measures: acute myocardial infarction, heart failure, pneumonia, health care-associated infections and surgical care improvement. Within the five broad categories are 12 specific clinical measures.

The patient experiences of care domain is composed of a Hospital Consumer Assessment of Healthcare Providers and Systems survey measure. The HCAHPS is a national, standardized survey of patient experience of care at a hospital that was already in existence. The purchasing program utilized this existing survey, which was slightly adapted for its purposes. The eight categories of measures evaluated by the HCAHPS are: communication with nurses, communication with doctors, responsiveness of hospital staff, pain management, communication about medicines, cleanliness and quietness of hospital environment, discharge information and overall rating of hospital. More about the HCAHPS use in the purchasing program may be found at Fact Sheet May 2012.pdf.

The incentive payments made under the purchasing program are funded in fiscal year 2013 by a 1 percent reduction in base operation DRG payments for each discharge. This reduction will increase annually up to 2 percent in fiscal year 2017.

moving forward

The government has made it apparent that the payment-for-performance system is the model system toward which it would like to move. In addition to these programs, Medicare also previously introduced the Medicare Shared Savings program, which was Medicare’s plan for development of ACOs, which is a pay-for-performance-based concept. Whether this model will ever completely usurp the fee-for-service system is unclear. However, it may be expected for health care providers of all types to see more such programs like the Shared Savings program, HRRP and purchasing program from the federal government, and providers should plan accordingly so they do not find themselves penalized. Another such program set to begin in fiscal year 2015 pursuant to the PPACA is a reduction in hospital DRG payments for those hospitals in the top quarter of all hospitals for their rate of hospital-acquired infections.

In addition to the federal government activity, some commercial payors have already started their own ACO programs. Commercial payors will undoubtedly develop other pay-for-performance programs. •

Vasilios J. Kalogredis is the president and founder of Kalogredis, Sansweet, Dearden and Burke, a health care law firm, and Professional Practice Consulting Inc., a health care consulting firm, in Wayne, Pa. He can be contacted at 800-688-8314 or at

Karilynn Bayus is an associate at the firm. Her practice involves litigation of health care-related matters. She may be reached at