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Medicare s Hospital Value-Based Purchasing Program, a New Era in Medicare Reimbursement by Daniel J. Hettich


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Medicare’s Hospital Value-Based Purchasing Program, a New Era in Medicare Reimbursement

by Daniel J. Hettich

Medicare’s new hospital inpatient value-based purchasing (“VBP”) program, mandated by the Affordable Care Act (“ACA”) (Pub. L. No. 111-148), is arguably the cornerstone program in a new phase in Medicare's history as a payer for healthcare services which has evolved from reimbursing providers based on their “reasonable costs,” to a prospective payment system, and now to a payment system that will vary based on the quality of the care provided. Through a close look at the inaugural 2013 VBP program, this article will explain the essential elements of Medicare’s VBP program, including the quality measures used, the performance standards and periods employed, and the scoring and payment methodologies. With the framework of the program established, the article will discuss the changes and additions made for the 2014 and 2015 programs. Finally, the article will conclude with a few practical considerations for hospitals.


Once Medicare instituted the inpatient quality reporting (“IQR”) program in which hospitals received their full payment update factor for simply reporting on certain quality performance indicators, it clearly was only a matter of time before Medicare would make


By way of overview, under the VBP program, the base operating DRG payment amount is reduced for all participating subsection (d) hospitals for each discharge beginning on October 1, 2012.1 The reduction starts at 1% for FFY 2013, and increases a quarter of a percent per federal fiscal year until it reaches the maximum reduction of 2% for discharges on or after October 1, 2016.2 The savings from these across-the-board reductions in payment

(approximately $917 million in 2013) are then used, in a budget neutral manner, to make

“incentive” payments to hospitals that perform well on, or show improvement in, certain quality measures. Starting July 1, 2011, therefore, a hospital’s quality performance began having a direct affect on its payment.

Because the statute requires that the VBP program be budget neutral, and also requires that the best performing hospitals be paid more than other hospitals, it follows that the worst performing hospitals will necessarily be penalized, whether or not they meet minimum quality thresholds.3 In other words, the VBP program should create a “race to the top” where there necessarily will be winners and losers and where even a 96% compliance rate with a measure may be insufficient to receive any points for that measure if the average hospital’s compliance rate is 97%. More fundamentally, however, this “race to the top” will only further the quest for better health care to the extent that a high VBP score actually corresponds to high quality care.

1 Social Security Act (“Act”) § 1886(o)(7)(B)-(C). 2 See id.


The Affordable Care Act’s Statutory Requirements for the VBP Program

To be engaged in the formation of the VBP program, which the Centers for Medicare and Medicaid Services (“CMS”) has acknowledged is a work-in-progress, it is helpful to know what elements of the VBP program are established by statute and what elements are instead subject to agency discretion. Accordingly, this article begins with a description of the relatively detailed statutory requirements, which provide a framework for the VBP program, before proceeding to a discussion of the essential details added by agency rulemakings.

1. Statutory Requirements Regarding the Measures Used In the VBP Program The statute requires that quality measure included in the VBP program must have been part of the IQR program, and listed on the HospitalCompare website, for at least one year prior be used in the VBP program.4 Measures must also be announced at least 60 days prior to the beginning of the VBP performance period. The statute directs the Secretary to include quality measures for at least each of the following categories:

 acute myocardial infarction (AMI);

 heart failure;

 pneumonia;

 surgeries, as measured by the Surgical Care Improvement Project; and

 healthcare-associated infections, as measured by the prevention metrics and targets established in the HHS Action Plan to Prevent Healthcare-Associated Infections5.

The statute also directs the Secretary to consider the following criteria in establishing the relevant measures:

4 Act § 1886(o)(2)(C)(i).


 practical experience with the measures involved, including whether a significant proportion of hospitals failed to meet the performance standard during previous performance periods;

 historical performance standards;

 improvement rates; and

 the opportunity for continued improvement.6

Aside from the fact that the performance period must end with enough time to announce the performance results 60 days before payment will be affected,7 the statute is silent regarding how long a performance period must be (indeed, as discussed below, CMS has adopted

performance periods of varying lengths).

The statute requires the Secretary to “conduct an independent analysis” to determine how many measures, and cases within a measure, are necessary to make a meaningful performance determination for a hospital.8 If a particular subsection (d) hospital does not have a sufficient number of measures present, the hospital is exempted from the program (and from the across the board DRG decrease). As we will see below, CMS has required a different minimum number of cases for different quality measures but has consistently favored keeping the case minimums low so that the greatest number of hospitals are included in the VBP program.

In addition to being excluded from the VBP for having insufficient cases in a particular measure or domain, a hospital will also be excluded from the VBP program (and the across the board DRG reduction) if “the Secretary has cited for deficiencies that pose immediate jeopardy to the health or safety of patients.” For purposes of this statutory exclusion for immediate jeopardy citations, CMS finalized a policy to use the general definition of immediate jeopardy

6 See Act § 1886(o)(3)(D). 7 Act § 1886(o)(3)(C).

8Act § 1886(o)(1)(C)(iii). Although CMS has commissioned independent studies, such as one conducted by


found in 42 C.F.R. § 489.3: “A situation in which the provider's noncompliance with one or more requirements of participation has caused, or is likely to cause, serious injury, harm,

impairment, or death to a resident.” Presumably, the rationale for this statutory exclusion is that hospitals that are putting their patients in immediate jeopardy of life or limb should not be participating in a quality incentive program where they can receive incentive payments for doing well on certain narrowly defined quality measures. CMS defined “citation” as the identification of an immediate jeopardy noted on the Form CMS-2567 issued to the hospital after a survey. Since the statute uses the plural word “deficiencies,” under CMS’s policy a hospital has to have at least two surveys for which it was cited for an immediate jeopardy on Form CMS-2567 during the applicable performance period to be excluded from the VBP program.9

2. Statutory Requirements Regarding Scoring and Payment

Basic parameters governing how the performance score is calculated are set by statute.10 In particular, the statute requires that the Secretary “ensure that the application of the

methodology developed . . . results in an appropriate distribution of value-based incentive payments . . . among hospitals achieving different levels of hospital performance scores, with hospitals achieving the highest hospital performance scores receiving the largest value-based incentive payments.”11 The statute also requires that the performance standards adopted by the Secretary include both levels of achievement and improvement,12 and directs the Secretary to use the “higher of [a hospital’s] achievement or improvement score for each measure,” in

9 See 77 Fed. Reg. at 28091.

10 See Act § 1886(o)(5)(A) (“the Secretary shall develop a methodology for assessing the total performance of each

hospital based on performance standards with respect to the measures selected . . . for a performance period . . . . Using such methodology, the Secretary shall provide for an assessment . . . for each hospital for each performance period.”).


determining a particular hospital’s performance score.13 Finally, the statute specifically authorizes the Secretary to assign different weights to particular measures or domains in determining a hospital’s overall performance score.14

If a hospital meets or exceeds the performance standards established by the Secretary for a particular fiscal year, the Secretary must “increase the base operating DRG payment amount” (which was previously reduced for all participating hospitals) by the “value-based incentive payment amount,” which is percentage add-on to each DRG weight.15 Any increase (or decrease) is limited to the specific fiscal year at issue.16

3. Statutory Requirements Regarding Notice, Corrections, and Appeals

The Secretary must announce the performance results of the VBP program at least 60 days before the beginning of the fiscal year for which payment will be affected.17 The statute requires that a hospital have the opportunity to review its performance data and submit corrections before it is made public by the Secretary on the Hospital Compare website.18 The Secretary is also required to establish an appeal procedure limited to the review of “the

calculation of a hospital’s performance assessment with respect to the performance standards.”19 Most other elements of the VBP program, however, such as the methodology used to determine the amount of the value-based incentive payment and the establishment of the “performance standards . . . and the performance period,” are specifically exempted from judicial review.20

13 Act § 1886(o)(5)(B)(i).


CMS’s Implementation of the VBP Program

1. Initial Quality Measures Adopted by CMS

A primary question, or course, is “what is being measured?” Each program year, CMS has divided the quality measures into different buckets, or “domains,” and assigned each “domain” a specific weight or percentage of the total score. The 2013 program, e.g., had just two domains, a domain including clinical process of care measures, weighted at 70% of the total score, and a domain including patient satisfaction measures, weighted at 30% of the total score. As stated above, the statute requires that for a measure to be included in the VBP program, it must have been listed on the HospitalCompare website for at least a year.21 For 2013, therefore, CMS began with all the IQR clinical process of care measures, such as whether a prophylactic antibiotic was administered an hour before or surgery, that met this statutory requirement and made several further reductions to this list, for example, eliminating measures that were “topped-out.” A “topped-out” measure is a measure that the majority of hospitals consistently achieve extremely high compliance rates so that the measure does not allow for drawing valid

distinctions between hospitals. CMS also eliminated measures that were due to be retired from the IQR program. 22 Ultimately, CMS finalized a clinical process of care domain that included

12 clinical process of care measures and a patient experience of care domain including the results of eight Hospital Consumer Assessment of Healthcare Providers and Systems Survey

(“HCAHP”) questions, such as how well doctors and nurses communicate.

21 Act § 1886(o)(2)(C)(i). CMS at first adopted a very broad reading of this requirement such that if a measure, such

as Medicare spending per beneficiary, was simply mentioned in the glossary of the Hospital Compare website for at least a year, it was eligible for inclusion in the VBP program. CMS, however, changed that policy and now requires that performance results for a measure must have been posted on Hospital Compare for at least a year before the measure is eligible for inclusion in the VBP program.


For the adoption of additional quality measures going forward, CMS recognized “that notice-and-comment rulemaking is important to ensure that hospitals are aware of the applicable measures”23 and stated that it will simultaneously adopt measures for both the IQR program, using notice and comment rulemaking, and the VBP program.24

2. CMS’s Scoring Methodology

CMS’s method for assessing a hospital’s score on a particular measure is based on where a hospital’s results during a “performance” period falls between a “threshold” and a

“benchmark” for both achievement and improvement. The achievement threshold is the median score on a measure of all participating hospitals nationally during the performance period. Hospitals that score below the threshold (i.e., score in the bottom half of hospitals nationally), receive no achievement points for that measure. The achievement “benchmark” is the top half of the top decile score (i.e., 95%) of all participating hospitals nationally during the performance period. Hospitals that achieve that “benchmark” receive 10 points for that measure, the maximum number of points available for any measure. Hospitals scoring between the 50% threshold and 95% benchmark are allotted between 1-9 points depending on where its score falls between the threshold and benchmark. For purposes of illustration, the benchmark and threshold scores for the 12 measures included in the 2013 clinical process of care domain are listed in the chart below.

23 76 Fed. Reg. at 26508.


Measure ID Measure Description Threshold Benchmark

AMI-7a Fibrinolytic Therapy Received Within 30

Minutes of Hospital Arrival 0.6548 0.9191 AMI-8a Primary PCI Received Within 90 Minutes

of Hospital Arrival 0.9186 1.00

HF-l Discharge Instructions 0.9077 1.00


Blood Cultures Performed in the Emergency Department Prior· to Initial Antibiotic Received in Hospital

0.9643 1.00

PN-6 Initial Antibiotic Selection for CAP in

Immunocompetent Patient 0.9277 0.9958 SCIP-Inf-l Prophylactic Antibiotic Received Within

One Hour Prior to Surgical Incision 0.9735 0.9998 SCIP-Inf-2 Prophylactic Antibiotic Selection for

Surgical Patients 0.9766 1.00

SCIP-Inf-3 Prophylactic Antibiotics Discontinued

Within 24 Hours After Surgery End Time 0.9507 0.9968

SCIP-Inf-4 Cardiac Surgery Patients with Controlled

6AM Postoperative Serum Glucose 0.9428 0.9963


Surgery Patients with Recommended Venous Thromboembolism Prophylaxis Ordered

0.95 1.00


Surgery Patients Who Received Appropriate Venous Thromboembolism Prophylaxis Within 24 Hours Prior to Surgery to 24 Hours After Surgery

0.9307 0.9985

Clinical Process of Care Measures 2013

SCIP- Card-2

Surgery Patients on a Beta Blocker Prior to Arrival That Received a Beta Blocker During the Perioperative Period

0.9399 1.00

Similarly, CMS determines the number of “improvement” points earned by a hospital on a particular measure by comparing the hospital’s performance on that measure during the


performance benchmark will receive between 1-9 points based on where in that continuum its performance period score falls. A hospital will be awarded the greater of its achievement points or improvement points on a measure. In this way, as long as a hospital performs better on a measure than it did during the base period, it will receive at least some points for improvement even if its performance period score is still well below the top half of hospitals nationally.


The table above listing the 12 clinical process of care measures for 2013 shows both the specific achievement “threshold” score (i.e., minimum score necessary to receive any points for a measure) and “benchmark” score (i.e., the scores necessary to receive the full 10 points) for each clinical process of care measures used for 2013. As seen in that table, the spread between the threshold score and benchmark score in the measure used in CMS’s example (i.e., fibrnolytic therapy) is not representative of the rest of the quality measures since all of the remaining 12 clinical process of care measures have very little spread between their threshold and benchmark scores. The thresholds for these remaining eleven measures are all above 90% and the


situation,”25 requiring 100% compliance with a measure was not equitable. CMS did not disagree with this point but responded that “all measures have limitations” and that instances of unjust penalties should be rare.26 In addition, even if there were unjust penalties for providing medically indicated care, CMS stated that its “analysis indicates that small differences in points on a single measure caused by missing the benchmark have little impact on the distribution of incentive payments and rank correlation of hospitals.”27

The contention that missing a case or two will not have a large impact on a hospital’s score is belied by the “clustering” problem discussed above where small differences in performance can have a significant affect on scoring. Take, as an example, the SCIP-Inf-2 measure (prophylactic antibiotic selection for surgical patients). The threshold score, i.e., minimum score needed to receive any achievement points, for that measure is 0.9766, while its benchmark score is 1.0. Missing three cases out of a hundred, therefore, means that a hospital will drop from 10 points to 0 points on that measure. In addition, since eleven of the twelve measures have thresholds above 90%, a hospital with only ten cases in any of those measures will receive zero points for missing a single case. This clustering problem exists despite CMS’s policy of excluding “topped out” measures and exists in the 2014 and 2015 programs. In fact, as hospitals continue to focus on these quality measures, there is reason to believe that the clustering problem may get worse.

25 Id.


3. Patient Experience of Care Domain

CMS has adopted a similar scoring methodology for scoring the eight HCAHP survey response measures encompassed by the patient experience of care domain. As previously mentioned, a hospital must report a minimum of 100 surveys to participate in the VBP program. CMS calculates the percentage of “top-box” responses a hospital receives during the


For the patient experience of care domain, CMS also allocates up to 20 “consistency” points. A hospital’s consistency score is “based on how many of [its] dimension scores meet or exceed the achievement threshold.”28 A hospital whose performance on all eight HCAHP dimensions was “at or above the achievement threshold (50% of hospital performance during the baseline period)” receives all 20 points. 29 If one or more of the hospital’s HCAHP dimensions are below the national threshold, however, CMS takes the hospital’s lowest performing HCAHP response and allocates between 1-19 consistency points depending on where on the continuum between the floor, i.e., the score attributable to the worse performing hospitals in the nation, and the threshold the hospital’s lowest score falls. A hospital receives 0 consistency points if its performance on any HCAHP dimension during the performance period “was at or below the worst-performing hospital’s performance on that dimension during the baseline period.”30 In this

way, CMS is providing an extra incentive for hospitals to maintain at least minimum quality standards on all survey measures. The overall patient experience of care domain score is calculated by adding the HCAHPS base score (up to 80 points) and the consistency score (up to 20 points).

28 76 Fed. Reg. at 2472.


As already mentioned, CMS has weighted the patient satisfaction domain at 30% of a hospital’s VBP score for all the finalized program years. CMS was undeterred by commenters who argued that, because studies have suggested that the HCAHP survey results are subjective with sicker patients and patients in certain geographic regions consistently responding with lower survey results, 30% was too high of a weighting for the HCHAP survey results. Since smaller hospitals, such as rural hospitals, consistently achieve better HCAHP scores than large hospitals, this relatively heavy weighting of the HCAHP domain is a boon for them and is perhaps

designed to ameliorate the fact that rural hospitals were generally expected to perform worse than the average hospital under the VBP program.

4. Calculating a Hospital’s Total Score and Payment

Using the higher of a hospital’s achievement score or improvement score for each measure in a domain, CMS sums the points earned within each domain, divides that sum by the total possible points within that domain available to the particular hospital, and then multiplies by 100%. This represents the hospital’s domain score. CMS then apportions each domain score according to its assigned weighting. Finally, CMS calculates the hospital’s “Total Performance Score” (“TPS”) by summing the weighted domain scores.

The payment incentive amount is then extrapolated from that “total performance score” using a “linear exchange function” where each incremental an increase in the TPS will lead to a proportional increase in the incentive payment percentage. The linear exchange function is intended to “provide[] all hospitals the same marginal incentive to continually improve” and provide “the same marginal incentives to both lower- and higher-performing hospitals.”31 As a

rule of thumb, payments for the best and worse performing hospitals will vary by a bit more than


the amount of the across the board “hair-cut.” For example, the worse performing hospitals in the 2013 program are paid about 1% less than the best performing hospitals.

Under the statute, the reduction and incentive payments are both made to the “base operating DRG payment amount.” CMS has defined the “base operating DRG payment amount” as the wage and transfer adjusted DRG operating payment plus any applicable new technology add-on payment but excluding outlier, IME, DSH, and low-volume payment adjustments.

5. Corrections and Appeals

As stated above, the statute specifically exempts most aspects of the VBP program from administrative or judicial review but it does allow for review of “the calculation of a hospital’s performance assessment with respect to the performance standards.”32 Hospitals have 30-days to review their confidential claims based reports and their TPS Reports available on their

QualityNet accounts and submit corrections via QualityNet. A hospital that is dissatisfied with the results of its correction request may file an appeal. CMS’s final rule provides detailed technical appeal requirements (e.g., no P.O. Boxes) and limits appealable issues to technical errors, e.g., ● whether CMS properly used the higher of the achievement/improvement points; ● whether each domain was weighted properly in calculating the TPS (i.e., 70%, 30%) and

properly summed; and ● whether the hospital’s open/closed status (including mergers and acquisitions) is properly specified in CMS’ systems. Hospitals also have an opportunity to review and submit corrections related to the information to be made public on the

HospitalCompare website through the usual IQR process.

Other elements of the VBP program, such as the methodology used to determine the amount of the value-based incentive payment and the establishment of the “performance


standards . . . and the performance period,” are specifically exempted from appeal or judicial review.33

The 2014 VBP Program

CMS made several additions to the 2014 program, the performance period for which ended on December 31, 2012. Although CMS kept the two previous domains largely untouched, it added a third domain measuring patient outcomes. This outcome domain contains just three measures for 2014, namely, the 30-day mortality rates for acute myocardial infarction (“AMI”), heart failure (“HF”), and pneumonia (“PN”) patients. These three measures, which are risk adjusted based on the severity of illness, ask what percentage of a hospital’s AMI, HF, and PN patients are still alive 30-days after admission and include mortalities regardless of cause (e.g., a death of a PN patient in a car accident within 30-days of admission would be included in a hospital’s PN 30-day mortality score). The threshold and benchmark scores for the mortality measures are listed in the chart below and suffer from a similar clustering problem, though on a slightly lower end of the spectrum.34

33 Id.


To participate in the 2014 program, a hospital must have at least 10 cases in each of the mortality measures (HF, AMI, and PN), in addition to the 100 HCAHP survey responses and 10 cases in four of the clinical process measures. The 2014 domains are weighted as follows: clinical process of care domain (45%), patient experience of care domain (HCAHP) (30%), and the outcome domain (mortality measures) (25%). Although the outcome domain is weighted at only 25% in 2014, CMS has been clear that it intends to significantly increase the weighting of the outcome domain as more measures are added to it.

The dates the FY 2014 baseline and performance periods for the three domains are listed in the chart below.35

The 2015 VBP Program

For the 2015 program, the performance period for which began as early as October 1, 2012 for some measures, CMS again made only minor changes to the clinical process of care domain measures and no changes to the patient experience of care (HCAHP) measures. CMS did, however, add two additional measures to the outcome domain and added an entirely new “efficiency” domain.

In particular, to the three mortality measures included in the outcome domain, CMS


added a Central Line-Associated Blood Stream Infection (“CLABSI”) measure, which is a hospital acquired infection measure that assesses the rate of bloodstream infection or clinical sepsis among ICU patients, and a AHRQ PSI composite measure (PSI-90), which is a composite measure of patient safety indicators developed and maintained by AHRQ. A hospital will receive a score on the CLABSI measure if it has 1 predicted infection during the applicable period. A hospital will receive a score on the AHRQ PSI-90 measure if it has three cases for any of the underlying indicators. With the addition of these measures to the existing three mortality measures, CMS increased the weighting for the outcome domain from 25% to 30%.

CMS also added an entirely new domain to the 2015 program, namely, an efficiency domain. For 2015, that domain contains just a single measure: the Medicare Spending per Beneficiary (MSB). The MSB measure, which CMS has submitted for NQF endorsement, will include all Part A and Part B payments made on behalf of a Medicare patient from 3 days prior to admission through 30 days after admission, with certain exclusions such as exclusions for hospice patients. The measure is risk adjusted for age and severity of illness, excludes high-cost outliers, and standardizes payment to remove differences attributable to geographic payment adjustments and other payment factors (e.g., DSH).


get no points on this measure and, since it is the only measure in the efficiency domain, thereby automatically suffer a 20% reduction to its total program score, while a hospital whose MSB was at $14,495 or below would receive the full 10 points for the MSB measure.

Because CMS did not post hospital performance on the MSB measure on the

HospitalCompare website until April 19, 2012 (and even then the information was limited to whether the hospital was at, above, or below the average MSB), the 2015 performance period for this measure will begin May 1, 2013 and run for just eight months. Perhaps because of this truncated performance period, CMS adopted a low 25 case minimum for the MSB measure even though the statistical validity for that small of a sample is questionable. That is, with a minimum of just 25 cases, a hospital with an average underlying efficiency level (that is, 1.0) would

receive a MSB score between 0.81 and 1.23. A range of 0.42 on a scale of 1.0 is substantial. In other contexts, however, commenters also raised concerns regarding whether a small sample of measures reliably reflected quality of care. Indeed, a report commissioned by CMS and prepared by Mathematica suggested that the samples sizes used by CMS for several measures were significantly too small to provide an accurate assessment of quality. CMS, however, responded as follows: “We do not believe that focusing on the individual measure’s reliability, to the exclusion of its contribution to the reliability of the TPS, is the sole criterion for assessing the appropriateness of adopting measures to the Hospital VBP Program.”


mortality measures to receive an outcome domain score and also needed sufficient measures to receive domain scores in every domain to participate in the program. Starting with 2015, however, a hospital will receive a score for the outcome domain if it has enough cases for just two out of the five outcome measures. In addition, a hospital need only receive scores in two of the four domains to participate in the 2015 VBP program. If a hospital does not have sufficient cases to receive a score in a particular domain, CMS will reapportion the remaining domain weights so that they still total 100%. The weighting of the four 2015 domains is as follows: clinical process of care domain (20%), patient experience of care domain (HCHAP) (30%), outcome domain (30%), and the efficiency domain (MSB) (20%).

In order to adhere to the statutory requirement that a measure be posted on


Practical Advice To Hospitals

In light of VBP program’s scoring methodology discussed above, there are a few strategies a hospital can adopt to improve its performance in the program. First, a hospital should know where it stands on each measure during the baseline period and identify which measures have the best rate of return. For example, if a hospital was at the benchmark for a compressed measure in its baseline period, then a slight decrease in score on that measure for the performance period could cause the hospital to lose 10 points (if it drops below the compressed threshold). On the other hand, it could take a very large percentage improvement to pick up less than 9 improvement point on a measure where the hospital was well below the threshold during for the benchmark period. In a scenario like this, it may make sense to play defense first and maintain the first measure’s high score, before devoting resources to improvement on the latter measure.

Hospitals should also understand how the volume of cases in a measure affects the VBP score, namely, not at all. Each measure within a domain has an equal weight no matter how many cases the hospital reports for the measure. Missing a case in a measure with few cases will have a proportionally bigger impact than missing a case in a measure with many cases. For example, if an orthopedic hospital has only 10 heart failure patients and fails to give discharge instructions to just one of those patients, it will get 0 points for that measure. Presuming that same hospital has 1,000 surgery cases, the hospital would have to fail almost 50 times in



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