Medicare Experiments with Pay for Performance

Published January 1, 2006

On November 14, 2005, the U.S. Centers for Medicare and Medicaid Services (CMS) released the findings of its Premier Hospital Quality Incentive demonstration, in which hospitals were paid for measurable improvements in care, rather than simply reimbursed for the number and complexity of services provided.

“We are seeing that pay-for-performance works,” said CMS Administrator Mark B. McClellan in a statement. “We are seeing increased quality of care for patients, which will mean fewer costly complications–exactly what we should be paying for in Medicare.”

Hospitals Receive Cash Awards

Medicare will award $8.85 million to hospitals that showed measurable improvements in care during the first year of the program. Improvement in evidence-based quality measures is expected to provide long-term savings because of their demonstrated relationship to improved patient health, fewer complications, and fewer hospital readmissions.

Medicare has never before awarded monetary bonuses to health care providers in a pay-for-performance demonstration. The demonstration began in October 2003, with more than 260 hospitals voluntarily participating. It is scheduled to end in September 2006.

Quality of care improved in all of the five clinical areas for which quality was measured: heart attacks, heart failure, pneumonia, coronary artery bypass graft, and hip and knee replacement.

Bonuses Awarded, Penalties Allotted

Top-performing hospitals received bonuses in their Medicare payments based on how well they met the quality measures related to each condition.

Hospitals in the top 10 percent for a given condition were given a 2 percent bonus on their Medicare payments for that condition. Hospitals in the second 10 percent were given a 1 percent bonus. Hospitals in the remainder of the top 50 percent received recognition for their quality but no bonus.

Poorly performing hospitals will be given more time to improve, but will be penalized if they don’t. According to CMS, “At the end of the first year, baselines were set for the bottom 20 and bottom 10 percent. If any hospitals are below the 10 percent baseline in the third year of the demonstration, they will get a 2 percent reduction in Medicare payments for the clinical area involved. And those between 20 and 10 percent will get a 1 percent reduction.”

Plan Is Working, CMS Says

“We are examining the first-year data and working with our partners in the quality improvement community to share and apply the lessons learned,” McClellan said. “But the major early finding is that the project did substantially improve important areas of health care quality at the participating hospitals.”

CMS is currently conducting a similar demonstration with large physician group practices.

— Susan Konig