Medicare Payment Policy

eadmissions (from 12.3 percent to 9.8 percent) would
reduce readmission spending by more than $2.5 billion.
While readmission rates have improved, research suggests
further progress can be made. For example, Silow-Carroll
and colleagues cited improving the process within the
hospital to reduce complications in order to indirectly
prevent readmissions (Silow-Carroll et al. 2011). Other
strategies include scheduling follow-up visits, reconciling
medications before discharge, and using case managers
for complex cases (Jack et al. 2009, Kanaan 2009). Better
transition planning and execution reduce readmissions
by encouraging and facilitating communication among
providers, as well as encouraging patient education and
self-management (Naylor et al. 2011). In patients with low
cognitive function or poor health literacy, these efforts are
bolstered by a postdischarge plan that is comprehensible
to both patient and caregiver, in addition to the guidance
of a health coach (Chugh et al. 2009, Parry and Coleman
2010). Efforts in the hospital setting can be made in
conjunction with coordination across the post-acute
care sector. Interventions by pharmacists, home health
nurses, and skilled nursing facilities may prevent further
hospitalizations after the patient has been discharged
(Bellone et al. 2012, Kanaan 2009).
While the current financial incentive to reduce
readmissions is a clear improvement over the past when
hospitals had a financial disincentive to take action to
reduce readmission rates, refinements to the readmission
policy will eventually be needed as the program matures.
Future revisions to the policy should be designed to
maintain or increase the average hospital’s incentive to
reduce readmissions, increase the share of hospitals that
have an incentive to reduce readmissions, make penalties
a constant multiple of the costs of readmissions, and
continue to generate savings that are at least equal (budget
neutral) to current policy (Medicare Payment Advisory
Commission 2012a). The Commission plans to discuss
issues with the current readmission policy in future
analyses.
Value-based incentive payments
In an effort to move from purely paying for volume
toward paying for value, Medicare has begun to publicly
report quality metrics and (starting in 2013) to adjust
hospital payments based on a series of quality metrics. As
mandated by PPACA, the value-based purchasing (VBP)
program started in fiscal year 2013. For the first year of
the VBP program, CMS will reduce all DRG payments
to about 3,100 participating PPS hospitals by 1 percent of
base inpatient payments. The funds will be used to create a
pool of funds from which value-based (i.e., performancebased)
incentive payments will be made. CMS estimates
that this payment redistribution will total $850 million in
fiscal year 2013. As required by law, the VBP program
must be budget neutral, meaning that the total amount
of withheld payments must be redistributed to hospitals
participating in the VBP program.
In 2013, each hospital’s performance score will be based
on 12 process measures and 1 patient experience measure;
in fiscal year 2014, CMS will add one clinical process
measure and three outcome measures (condition-specific
mortality rates) to the VBP program. The Commission
has expressed concern regarding the relatively low weight
(25 percent) assigned to outcomes (Medicare Payment
Advisory Commission 2012a). Given some of the
concerns regarding coding and process measures as well
as the importance of outcomes, a stronger emphasis on
outcomes may be warranted.
While quality as measured by process, patient safety, and
outcomes has been improving, some have questioned
whether financial incentives affect quality any more than
public reporting alone. For example, the 260 hospitals that
participated in the CMS/Premier pay-for-performance
demonstration improved their performance by an amount
equal to the 780 control hospitals that were involved
only in CMS’s public reporting (Werner et al. 2011). In
addition, other work shows that the downward trajectory in
central catheter-associated bloodstream infections was not
affected by a 2008 change in Medicare policy that stopped
allowing these cases to count as a complication that
would increase DRG rates (Lee et al. 2012). However, in
this case, because other comorbidities and complications
almost always exist, the magnitude of this penalty was
minimal. It may take several years of observation to
determine if the financial incentives in the current VBP
program generate greater improvements than were
observed when these quality metrics were subject only to
public reporting. It is also possible that greater incentives
are needed for certain changes (such as reducing
readmissions that generate revenue for hospitals) than are
needed for other changes (such as reducing central-line
infections that generate additional costs for hospitals).
Medicare payments and providers’ costs
In assessing payment adequacy, the Commission also
considers the estimated relationship between Medicare
Report to the Congress: Medicare Payment Policy | March 2013
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