ASSESSMENT OF THE HOSPITAL VALUE-BASED PURCHASING PROGRAM:

ASSESSMENT OF THE HOSPITAL VALUE-BASED PURCHASING PROGRAM: CURRENT RESULTS AND OPPORTUNITIES FOR IMPROVEMENT November 2015 David Muhlestein, PhD, JD

INTRODUCTION The Hospital Value-Based Purchasing (HVBP) program 1, originally implemented by the Centers for Medicare and Medicaid Services (CMS) in 2013, is designed to financially incent hospitals to provide better services to Medicare beneficiaries. The HVBP is one of three CMS valuebased programs for hospitals along with the Hospital Readmission Reduction Program (HRRP) 2 and the Hospital Acquired Conditions Reduction Program (HAC). 3 However, the HVBP is unique in two ways. First, it is structured 4 to be revenue neutral so that some hospitals will receive bonus payments while others will receive penalties for inpatient payments. Second, it evaluates performance across four diverse weighted domains including clinical process of care (weighted at 10%), patient experience of care (25%), clinical outcomes (40%), and efficiency (25%). Recently, final hospital payment adjustments for fiscal year 2016 were released which offer an opportunity to evaluate how hospitals are performing and provide some assessment of the broader program. RESULTS The HVBP is designed to financially incent hospitals to provide better services to Medicare beneficiaries Hospital Differences. For fiscal year 2016, which began October 1, 3,041 hospitals received payment adjustments based on performance in 2014. 5 Penalties for 2016 will be limited to a maximum of 1.75% of Medicare payments and bonuses will be limited to a maximum of approximately 3%. Table 1 contains some general characteristics of the hospitals broken down by whether they received a bonus or a penalty. Hospital data was acquired from Medicare Cost Reports and a commercial database of hospitals. Hospitals that received a bonus tended to be smaller, saw fewer Medicaid patients, were more likely to be located in rural areas, less likely to be an academic medical center, and less likely to be part of a network. Table 1: Characteristics of Hospitals for Value-Based Purchasing 2016 Characteristic Number of Hospitals Average Bed Size Average Number of Discharges Average Net Operating Margin* Percent of Hospital Days Paid by Medicaid Percent of Hospitals that are For Profit Percent of Hospitals in Rural Location Percent of Hospitals that are Academic Medical Centers Percent of Hospitals Part of a Network Received Bonus 1,806 155 7,539-0.1% 10.8% 24.1% 10.9% 6.9% 74.0% Received Penalty 1,235 256 12,910-0.8% 12.6% 26.6% 4.0% 17.9% 82.1% P-Value for Difference *Excludes outliers Regional Differences. Hospital performance on the HVBP also varied across the country. We estimated average state scores by averaging hospital performance in each state, weighting by hospital size. Figure 1 shows a map of the better and worse performing regions of the country with average state HVBP scores. The scores represent the average Medicare bonus or penalty as a percent of Medicare revenue. The highest performing states tended to be in the Upper Midwest and Pacific Northwest while the worst-performing states were scattered throughout the country. FIGURE 1: Average Hospital Value-Based Purchasing Adjustment for Medicare by State Source: Leavitt Partners Research - 0.055 0.123 % Change in Payments 0.21 to 0.52 0.10 to 0.19 0.06 to 0.09-0.03 to 0.05-0.06 to -0.04-0.11 to -0.07-0.45 to -0.12 No Data ASSESSMENT OF THE HOSPITAL VALUE-BASED PURCHASING PROGRAM: CURRENT RESULTS AND OPPORTUNITIES FOR IMPROVEMENT 1

Value-based payment bonuses and penalties are intended to be revenue neutral across the country, but will significantly affect individual hospitals. We estimated the dollar effect by multiplying the percent bonus or penalty by the hospital s net inpatient revenue and the percent of hospital discharges that were paid for by Medicare. At the extremes, individual hospitals are expected to lose as much as $8 million or gain over $6 million. Impact on Total Financial Performance. For the hospitals subject to the HVBP modifier, an average of 35.4% of discharges are paid for by Medicare and 46.1% of revenue is from inpatient care. Since the modifier only affects Medicare inpatient care, on average the modifier will only affect approximately one-sixth of their revenue. For 2016 we estimate that the net effect on a hospital s income will be affected by the HVBP modifier from a maximum of a 0.35% decrease in total revenue to a maximum increase of 0.8% in total revenue with a median effect of a 0.02% bonus payment. Only 4.9% of hospitals, though, are expected to see a penalty or bonus payment that exceeds 0.25% of their net revenue, and of those hospitals, only 8.3% will be penalized. Figure 2 contains a histogram of the estimated effect of the HVBP modifier on total patient revenue. Number of Hospitals 200 400 600 0 FIGURE 2: Histogram of Value-Based Modifier s Estimated Effect on Total Patient Revenue -.5 0.5 1 Estimated % Effect on Total Patient Revenue Performance over Time. Payment modifiers for the HVBP program are calculated annually giving hospitals an opportunity to improve their performance. Table 2 contains a count of the number of hospitals that received penalties or bonuses in 2015 and 2016. Approximately 45% of hospitals received a bonus in both 2015 and 2016 while another 30% were penalized in both years. Approximately 25% of hospitals made a change between the two categories, either moving from bonus to penalty (11%) or penalty to bonus (14%). Table 2: Hospital Performance in Value-Based Purchasing Program between 2015 and 2016 Penalty in 2016 Bonus in 2016 Penalty in 2015 Bonus in 2015 899 317 Changes were also substantial for hospitals with their various levels of performance. We classified hospitals into quintiles based on their 2015 and 2016 HVBP modifiers and calculated the amount of movement between categories. 308 hospitals were in the lowest quintile for both years and 370 were in the highest quintile for both years. However, there is a surprising amount of movement between the quintiles. 1,193 hospitals (40%) moved up or down one quintile, 398 (13%) moved two quintiles, 119 (4%) moved three quintiles, and 22 (1%) moved four quintiles, meaning they either went from the highest quintile in 2015 to the lowest in 2016 (six hospitals) or went from the lowest in 2015 to the highest in 2016 (16 hospitals). 425 1,331 In past years the HVBP program made significant changes to the scoring methodology, such as newly adding the efficiency metric for 2015, but only very modest scoring changes were made between 2015 and 2016. 1 Since the observed differences cannot be attributed exclusively to changes in methodology, this means that hospitals have significantly improved or 1 The weighting for clinical processes of care decreased from 20% in 2015 to 10% in 2016 while the weighting for clinical outcomes increased from 30% to 40%. ASSESSMENT OF THE HOSPITAL VALUE-BASED PURCHASING PROGRAM: CURRENT RESULTS AND OPPORTUNITIES FOR IMPROVEMENT 2

worsened their performance over the course of just one year. Table 3 contains a breakdown of hospital performance by quintile in 2015 and 2016. Value-Based Purchasing Quintile 2015 Table 3: Hospital Value-Based Purchasing Performance by Quintile for 2015 and 2016 Lowest 2 3 4 Highest Value-Based Purchasing Quintile 2016 Lowest 2 3 4 Highest 308 171 76 32 6 146 199 158 81 20 Comparison to Other Programs. In addition to the HVBP Program, CMS has also initiated the Hospital Readmission Reduction Program (HRRP) and the Hospital-Acquired Condition (HAC) Reduction Program. While all three programs are intended to improve hospital performance, they focus on different areas. 2016 HRRP data was released earlier this year while 2016 HAC data has not yet been released. High performance on one program is only mildly associated with high performance on another. HVBP scores are modestly correlated with HAC scores (corr=0.24) and much less correlated with HRRP scores (corr=0.06). Only 28 hospitals scored in the highest quintile for all three measures. POLICY IMPLICATIONS AND RECOMMENDATIONS FOR VALUE-BASED PURCHASING Value-Based Purchasing s Ability to Change Behavior. The stated goal of the HVBP program is to improve patient outcomes, safety, and patients care experience. An important question, though, is whether the program 81 128 174 175 38 42 74 140 189 151 16 25 48 124 370 will provide enough of an incentive to hospitals to make changes to improve their delivery. The theory is that the threat of a penalty or possibility of a bonus will incent hospitals to improve their performance across the four measured domains. Improvement in any one of the domains will require significant investments of time, and potentially money, for hospitals. In many cases, the return on that investment is unknown. In total the HVBP includes 24 different measures 6 which means improvement on a single measure is unlikely to lead to a substantive change in the overall score, and simultaneously addressing many measures may prove to be overly difficult. As seen in Figure 2, the high majority of hospitals are either penalized or receive bonuses for a small percentage of their total revenue. With relatively small bonuses or penalties and a high investment in implementing changes required for an unknown potential return, the financial incentives may not be sufficient to justify significant changes for many hospitals. One approach to directly incent action is to move toward measures that have clear pathways for improvement. For example, there is no clearly defined route to improve physician-patient communication scores, making the decision to invest in improvements difficult for management. But, there is a much clearer approach to improve how many patients are provided appropriate discharge information measures with clearer pathways to improvement could be weighted higher than those with a more nebulous pathway forward. Important additional work needs to be done to assess whether hospitals that have higher penalties improved more than those that had smaller penalties or bonuses. Hospitals that are subject to higher penalties have a larger financial incentive to decide that they need to make significant changes to reduce those penalties than those that have marginal penalties or bonuses. Whether this plays out in practice still needs to be studied empirically; it needs to be clearly established whether the HVBP has sufficient power to influence broad changes. If providers with larger penalties do indeed tend to improve more, the program could modify its ASSESSMENT OF THE HOSPITAL VALUE-BASED PURCHASING PROGRAM: CURRENT RESULTS AND OPPORTUNITIES FOR IMPROVEMENT 3

distribution of payments so that more hospitals have larger penalties or bonuses and fewer have modest changes. Some sample distributions for bonuses and penalties are in Figure 3. We reiterate, though, that meaningful additional analysis is needed in this area. -2.0% -2.0% -2.0% FIGURE 3: Current and Alternative Distributions of Value-Based Purchasing Bonuses and Penalties -1.6% -1.6% -1.6% -1.2% -0.8% -0.4% -0.0% 0.4% 0.8% 1.2% Approximate Current Distribution -1.2% -0.8% -0.4% -0.0% 0.4% 0.8% 1.2% Alternative Bimodal Distribution -1.2% -0.8% -0.4% -0.0% 0.4% 0.8% 1.2% Alternative Uniform Distribution 1.6% 1.6% 1.6% 2.0% 2.0% 2.0% Meaningful Differences in Performance Translate to Meaningful Differences in Payment. One of the major aims of the HVBP program is to be revenue neutral where bonus payments are offset by penalties and a certain percentage of hospital payments are withheld to be reapportioned. From a federal financing perspective this is desirable as the program can provide financial incentives to hospitals to improve while not increasing the cost of the Medicare program. The disadvantage of this approach is that it does not establish clear benchmarks that hospitals can try to achieve as their performance is annually compared to all other hospitals with a mandate to select high- and low-performing hospitals; there may reach a point where the practical difference between hospitals is not meaningful. For example, the patient experience of care domain includes a number of subdomains 7 such as the percentage of patients who reported that their doctors always communicated well. For 2015 (the most recently available data), the percent of patients at a hospital that said that their doctor always communicated well ranged from 70% to 96%, but the difference between the 50 th percentile and the 25 th percentile is only three percentage points (81 compared to 78). Given the sample sizes of respondents from some of the hospitals, this difference will often not be statistically significant but the absolute difference will lead to meaningful differences in performance scores for the HVBP program. The ultimate result may be that hospitals bonus payments or penalties are meaningfully affected by non-meaningful differences in performance that are attributable to chance. Patient experience is an important goal of CMS and so the need to measure and incent this must be weighed against the methodological limitations. To address this concern, CMS could limit the measures used in the HVBP program to those where there is a meaningful distribution of performance and within each category limit the number of potential scores to those that are substantially different. This may require moving from continuous scales to more categorical scales with clear cutoffs where meaningful differences exist between groups. It needs to be noted that these methodological concerns are not new and much has been done to improve CMS s measurements over the years, but more work is still needed. ASSESSMENT OF THE HOSPITAL VALUE-BASED PURCHASING PROGRAM: CURRENT RESULTS AND OPPORTUNITIES FOR IMPROVEMENT 4

Volatility. The objective of the HVBP is for hospitals to improve their performance by making important changes in how they deliver care. High levels of volatility hospitals showing high increases or decreases in performance year over year may indicate that the program is not adequately measuring true underlying quality. For example, one hospital was in the lowest quintile in 2013, the highest quintile in 2014, back to the lowest quintile in 2015 and is now in the middle quintile in 2016. 224 hospitals have seen at least a two quintile decline and two quintile improvement between different years. Such movement suggests that the program measures may be susceptible to random variation as opposed to a hospital actually alternating between worsening and improving every year. While some larger hospitals had high levels of volatility, the most volatile hospitals tended to be smaller facilities (116 beds compared to 206 beds; p). Smaller facilities have smaller patient populations with fewer cases being used to estimate population-level outcomes, leading to potential volatility with year over year estimates. A hospital, for example, that annually treats only a few dozen heart failure patients is much more likely to see yearly performance scores that vary much more than a hospital that treats many times that number simply due to clinical variation. A uniform program that is applicable to all hospitals is a laudable goal, but this may underestimate the substantive differences between organizations. High volatility, in particular, indicates a need to revisit whether there are sufficient cases to generate accurate measurements of performance. The efficiency domain, for example, only requires 25 cases 5 which will likely lead to significant variation year over year in measured performance, even if actual performance is relatively constant. Reduction in volatility due to random changes over time can be limited with a higher threshold of minimum cases which would lead to smaller hospitals being excluded from the HVBP program. CMS could recognize this and devise an alternative, low-case volume HVBP program which crafts measures that would be more appropriate for those facilities. This would allow CMS greater flexibility to customize measures that will influence different types of hospitals to improve in ways that are appropriate for the facility. Overlap with other Medicare Initiatives. In conjunction with the HRRP and HAC programs, the HVBP program is one prong of the approach that CMS is managing to try to improve hospital outcomes. Collectively the three programs will lead to hospitals being subject to a potential 6% reduction in Medicare payments (2% from HVBP beginning in 2017, 3% from HRRP and 1% for HAC). Measures are not fully coordinated between the programs. For example, the Agency for Healthcare Research and Quality Patient Safety 90 indicator is used for both the HVBP program and the HAC program. Rather than continuing to administer separate programs, the three could be combined into one program, similar to the Merit-based Incentive Payment System (MIPS) 8 that combines a variety of other initiatives for physicians. Due to the enabling legislation of these programs, such a change would most likely need to be enacted by Congress. This would allow CMS to better align all the quality and performance measures across programs so that hospitals are better-positioned to prioritize their efforts. CONCLUSION The HVBP program is an important effort by CMS to provide tangible incentives to hospitals to improve the quality of care that they are delivering. Current results show uneven performance both geographically and by different types of hospitals. To improve the program CMS should address four concerns. First, CMS should empirically evaluate whether the HVBP penalties are large enough that they lead to providers making changes across any of the four domains. Second, CMS should structure quality measures so that only meaningful differences in performance lead to meaningful differences in payments. Third, to decrease measurement volatility, CMS should increase the minimum number of cases for each of the metrics and could create an alternative HVBP program for low-case volume hospitals. Finally, Congress should consider combining the HVBP program with the readmission and hospital-acquired condition reduction programs so that CMS can better align measures across the programs. ASSESSMENT OF THE HOSPITAL VALUE-BASED PURCHASING PROGRAM: CURRENT RESULTS AND OPPORTUNITIES FOR IMPROVEMENT 5

1. Centers for Medicare & Medicaid Services. Hospital Value-Based Purchasing Program Overview. 2015 [cited 2015 Nov 12]. Available from: https://www.cms.gov/medicare/quality-initiatives-patient-assessment-instruments/hospital-value-basedpurchasing/index.html?redirect=/hospital-value-based-purchasing/ 2. Centers for Medicare & Medicaid Services. Readmissions-Reduction-Program. 2015 [cited 2015 Nov 12]. Available from: https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps/readmissions-reduction-program.html 3. Centers for Medicare & Medicaid Services C for. Hospital-Acquired Condition (HAC) Reduction Program. 2014 [cited 2015 Nov 12]. Available from: https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps/hac- Reduction-Program.html 4. Centers for Medicare & Medicaid Services. Fiscal Year (FY) 2016 Results for the CMS Hospital Value-Based Purchasing Program. 2015 [cited 2015 Nov 12]. Available from: https://www.cms.gov/newsroom/mediareleasedatabase/factsheets/2015-fact-sheets-items/2015-10-26.html 5. Tourison C. National Provider Call: Hospital Value-Based Purchasing (VBP) Program. 2014 Apr 29 [cited 2015 Nov 12]. Available from: http://www.fmqai.com/library/attachment-library/cms_edu_webcast_hvbpfy2016baselinereport_042914_508.pdf 6. QualityNet. Scoring: Hospital Value-Based Purchasing (HVBP). [cited 2015 Nov 12]. Available from: https://www.qualitynet.org/ dcs/contentserver?c=page&pagename=qnetpublic%2fpage%2fqnettier3&cid=1228772237147 7. Centers for Medicare & Medicaid Services. Patient Experience of Care domain. [cited 2015 Nov 12]. Available from: https:// www.medicare.gov/hospitalcompare/data/patient-experience-domain.html 8. Conway PH, Gronniger T, Pham H, Goodrich K, Bassano A, Sharp J, et al. MACRA: New Opportunities For Medicare Providers Through Innovative Payment Systems (Updated). Health Affairs. 2015 [cited 2015 Nov 12]. Available from: http://healthaffairs. org/blog/2015/09/28/macra-new-opportunities-for-medicare-providers-through-innovative-payment-systems-3/ ASSESSMENT OF THE HOSPITAL VALUE-BASED PURCHASING PROGRAM: CURRENT RESULTS AND OPPORTUNITIES FOR IMPROVEMENT 6

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