Toward Accountable Payment

Key Implications of Medicare's Value-Based Purchasing Program

by Rob Lazerow

Read five key implications of Medicare's proposed VBP rule for hospitals and health system leaders.

In January, Medicare released the proposed rule for the upcoming Value-Based Purchasing (VBP) Program, set to launch for FY2013. The VBP program marks the evolution from Medicare's current pay-for-reporting system to a true pay-for-performance structure. In many respects, the program represents the first major regulatory step toward accountable care stemming from the Patient Protection and Affordable Care Act (PPACA). We are currently developing a more thorough analysis of the rule, but in the meantime, I want to begin our discussion of accountable payment by offering five key implications for hospital and health system leaders.

1. Entering an era of peer comparison

In reviewing the program structure outlined in the proposed rule, it is evident that Medicare is preparing to reimburse hospitals based on performance relative to their peers nationwide. The proposed rule states that Medicare will calculate hospitals' Total Performance Score (TPS) and then rank all hospitals according to score. Although incentive payments will be tied to actual scores rather than relative rank, one key program design element drives hospital competition: budget neutrality. Because the total amount of money available for incentive payments is fixed, hospitals hoping to earn back more than their withheld payments will need to outperform their peers to earn a larger share of that pie.

2. Facing payment redistribution based on performance

Medicare will finance the VBP program by withholding a portion of hospitals' inpatient payments, starting with 1% in FY2013 and scaling up to 2% in FY2017. The withheld dollars will fund VBP incentive payments, allocated based on performance scores. There is no way around it: Medicare is entering a world of payment redistribution based on clinical performance. Paired with the budget neutrality requirements, this payment redistribution likely will fuel provider competition around quality.

3. Incentive payment conversion rate unknown at outset

Although we know hospitals' maximum penalty from the VBP program (losing the full payment withhold), we have limited ability to assess hospitals' bonus potential at the outset of the program. According to the proposed rule, Medicare will use a "linear exchange function," meaning a straight line conversion from performance scores to incentive payments. Unfortunately, budget neutrality means the slope of the line must be calibrated against all hospitals' actual performance scores, and therefore will remain unknown until Medicare calculates the final incentive payments for FY2013.

4. Opportunities to win through either absolute performance or meaningful improvement

The TPS formula allows hospitals to earn points either through their absolute scores or by demonstrating meaningful improvement from a baseline level of performance. Medicare will establish the baseline score using historical data from July 1, 2009 through March 31, 2010--meaning hospitals' baseline performance has already been measured. In the next key performance period, from July 1, 2011 through March 31, 2012, Medicare will take the second round of performance measurements. As a result, hospitals will want any and all performance improvement initiatives to be in full effect by July 2011.

5. Offering an early accountable care call to action

For the first year of the VBP program, hospital performance will be evaluated on 17 clinical process of care measures and 8 patient satisfaction measures selected from Medicare's current hospital reporting programs. Success against this diverse set of performance metrics will require the hard work of providers and non-clinical staff across the hospital. For hospital or health system leaders seeking an accountable care call to action - a way to engage frontline staff in the transition to accountable care - the VBP program creates an early and relatively low-impact opportunity.

How will your organization fare under VBP?

To help our members prepare for the VBP program, we recently developed the Customized Medicare Value-Based Purchasing Impact Assessment. This new web-based tool enables hospital leaders to estimate their organizations' Total Performance Score and incentive payments based on the details of the proposed rule and hospital-specific performance data from Hospital Compare.

Questions? Thoughts?

How is your organization preparing for the VBP program? Do you have any questions about the proposed rule? Please feel free to leave comments below or contact me directly.