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Hospital Payment for Performance: Driven by Physician’s Quality

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As the fate of the Affordable Care Act is being determined by a divisive Supreme Court, the health care industry is being led or possibly dragged by the Department of Health and Human Services (HHS) and the Center for Medicare and Medicaid Services (CMS) into new payment systems that focus on quality of care, outcomes, and individual provider performance rather than the traditional fee for service payment model. Even if the Supreme Court finds the Affordable Care Act to be unconstitutional, the change from a payment system focused upon individual services to payment focused upon the quality of the care and patient outcomes are being woven into the fabric of the Medicare reimbursement system. While change in the system is assured, whether the new models will actually bring about better and more efficient care or just reduce available reimbursement is unknown. Despite the unknown effect of paying for performance based upon quality, CMS is marching on with new programs and payment penalties. Physicians, whether employed by a hospital or in a private practice, should be aware of how quality is beginning to drive hospital reimbursement as well as the importance of the physician’s role in determining the quality of care provided by hospitals. By 2017, 6% of all DRG payments will be subject to quality measures through new CMS payment programs for hospital readmissions, value based purchasing, and hospital acquired conditions. With these new programs determining a significant amount of payment, physicians must understand the programs and direct their services accordingly. Likewise, hospitals must develop ways to compensate physicians for providing high quality care in a manner that allows hospitals to earn performance payments.

Hospital Readmissions

Effective October 1, 2012, Medicare payments to hospitals with readmission rates exceeding established levels will be reduced based upon a formula that compares each hospital’s payments for actual risk-adjusted readmissions to payments based on an estimate of that hospital’s expected risk-adjusted readmissions. For FY 2013 and 2014, the payment reduction cannot exceed 1% and 2% respectively, but is increased to 3% for 2015. Readmission occurs if a patient is admitted with one of the specified conditions within 30 days of the initial hospitalization. The readmission can be to the original hospital or to another hospital and is counted as a readmission regardless of the cause of the readmission (unless the admission is for a scheduled PTCA or CABG) and irrespective of the payor. For FY 2013, the specified conditions include heart attack, heart failure, and pneumonia and will most likely be expanded to COPD, CABG, PTCA, and other vascular conditions by 2015. While CMS acknowledges that hospitals have little to no way of knowing whether a patient has been readmitted when the readmission is to another hospital or for an unrelated problem, CMS wants hospitals to reduce admissions for all causes. As the gatekeeper for hospital admissions, physicians play an important role by being involved in determining when and whether a patient is readmitted. Hospitals must work with physicians to improve communication about admissions. By becoming more involved in a patient’s transition from the inpatient unit to home, physicians can assure more successful transition by ordering the necessary services and communicating with patients and their families on a regular basis after discharge to assure that medications are being taken and orders followed. Likewise, hospitals must find ways to reward physicians for taking more responsibility for prevention of readmissions through payments for high quality care.

Value Based Purchasing Program for Hospitals

The goal of the CMS Value Based Purchasing program (VBP) for hospitals is to reward hospitals financially for providing a higher quality of care. To accomplish this, CMS is reducing DRG payments to hospitals that meet the criteria for the program by withholding 1% (which will grow to 2% over five years) to fund a pool that will be used to make payments to hospitals that demonstrate high or improving quality of care. To determine a hospital’s quality of care, CMS has developed a scoring system based upon three aspects of care that are called “Domains” to measure hospital performance with selected specific measures. CMS has established a performance standard and benchmark for each measure. To determine a hospital’s score on each individual measurement, both the hospital’s achievement and its improvement will be calculated and the highest score will be used. This reflects CMS’ intention to reward not just high quality but also improvement. For FY 2013, CMS has adopted 12 process of clinical care measures that focus on acute myocardial infarction, heart failure, pneumonia, healthcare associated infections, and surgical care. An experience of care measure has also been developed that includes patient satisfaction. In FY 2014, an outcome or mortality measure will be included. Based upon these measures, scores are calculated that determine whether a hospital will receive a payment and the amount of the payment. The domains and measures will change from year to year so that hospitals will continually have to improve quality to maximize their VBP payment. Because the statute requires that the program be budget neutral and for the best performing hospitals to be paid more than other hospitals, it follows that the worst performing hospitals will be paid less, which means that even though a hospital may meet the benchmarks, its score may be low by comparison and the hospital may not be paid.

Physicians play crucial roles that influence a hospital’s performance as measured under both the readmission payment reduction and the VBP program. To a significant extent, the ability of a hospital to avoid adverse payment consequences depends upon garnering the support, understanding, and cooperation of its medical staff. With the readmission reduction, even a simple scheduling mistake for a patient’s surgical procedure has the potential to influence a reduction by being counted in the pool. Likewise, a physician’s early discharge of patient into a setting where compliance with discharge plans is unlikely may precipitate a readmission. With the VBP program, direct measures of performance often turn upon physician compliance with protocols for treatment and good communication with patients. A physician’s poor communication with his or her patient stands to influence the perception of the patient’s entire hospital admission. This, in turn, has the potential to affect the patient’s satisfaction scoring for his or her hospital stay. While gamesmanship will be involved in a hospital’s scoring for the VBO, physicians and their treatment of patients will significantly impact a hospital’s score.

Hospital-Acquired Conditions

Effective in FY 2015, hospitals in the top quartile with respect to national rates of hospital-acquired conditions (HAC) will have their Medicare payments for all discharges reduced by 1%. A HAC is defined as a condition that an individual acquires during a hospital stay which the Secretary designates as subject to the restriction. Information about HAC’s will also be published on the Hospital Compare website. While physicians are not able to control whether a patient experiences a HAC, physicians can be instrumental in influencing such things as a hospital’s infection control policies as well as personally using best practices. Hospitals should compensate physicians with good track records.


Because physicians will significantly affect a hospital’s payments based upon quality of care, hospitals must find new ways to reward physicians for maintaining high quality of care. While payments to physicians raise issues under both the Stark and Anti-Kickback statutes, these statutes have important exceptions that should be used to reward physicians who provide high quality care that positively impacts a hospital’s performance. These arrangements can include personal services contracts, full and parttime employment, consulting agreements, gain-sharing, agreements, among others. Without the understanding and cooperation of physicians, hospitals will experience significant decreases in their Medicare reimbursement for inpatient services.

Physicians play crucial roles that influence a hospital’s performance as measured under both the readmission payment reduction and the VBP program.

Lisa English Hinkle is a Partner of McBrayer, McGinnis, Leslie & Kirkland, PLLC. Ms. Hinkle concentrates her practice area in healthcare law and is located in the firm’s Lexington office. She can be reached at or at (859) 231-8780.

Molly Nicol Lewis is an Associate of McBrayer, McGinnis, Leslie & Kirkland, PLLC. Ms. Lewis concentrates her practice in healthcare law and is located in the firm’s Lexington office. She can be reached at or at (859) 231-8780.

This article is intended as a summary of newly enacted federal law and does not constitute legal advice.