Long‐term care and pay‐for‐performance programs

• Date: 01 August 2018
• DOI: http://doi.org/10.1111/rode.12359
• Published date: 01 August 2018
• Author: Edward C. Norton

SPECIAL ISSUE ARTICLE

Long-term care and pay-for-performance programs

Edward C. Norton

University of Michigan, Ann Arbor, MI

and National Bureau of Economic

Research, Cambridge, MA

Correspondence

Edward C. Norton, Department of Health

Management and Policy and Department

of Economics, University of Michigan,

M3108 SPH II, 1415 Washington

Heights, Ann Arbor, MI 48109-2029.

Email: ecnorton@umich.edu

Funding information

Michigan Value Collaborative; Blue

Cross Blue Shield of Michigan

Abstract

Pay-for-performance programs are gradually spreading

across Asia. This paper builds on the longer experience in

the United States to offer lessons for Asia. The Center for

Medicare and Medicaid Services has introduced several

pay-for-performance programs since 2012 to encourage

hospitals to improve quality of care and reduce costs. Some

state Medicaid pro grams have also int roduced pay-for-per -

formance for nursing homes. Long-term care providers play

an important role in hospital pay-for-performance programs

because they can affect the readmission rate and also total

episode payments. A good pay-for-performance program

will focus on improving quality of care that affects health

outcomes. In addition, that quality must vary across provi-

ders and be measurable. Furthermore, it is important that

the measures be reported in a timely way, that both demand

and supply respond to the measures, and that the measures

be risk adjusted. Empirical data from Medicare beneficia-

ries in the state of Michigan show that mean episode pay-

ments and readmission rates in skilled nursing facilities

vary widely and are sensitive to the number of observa-

tions. These practical matters create challenges for imple-

menting pay-for-performance in practice. There is an

extensive literature review of pay-for-performance in long-

term care in the United States and in Asia.

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INTRODUCTION

Pay-for-performance programs, which explicitly create financial incentives for health care providers

based on measured outcomes, are gradually spreading across Asia. Pay-for-performance programs

DOI: 10.1111/rode.12359

Rev Dev Econ. 2018;22:1005–1021. wileyonlinelibrary.com/journal/rode ©2017 John Wiley & Sons Ltd

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have the promise of improving quality of care, lowering total episode expenditures, and providing

information to providers for continual quality improvement. They are also typically structured to

be budget neutral, making them popular among policymakers. Furthermore, pay-for-performance

programs are spreading into long-term care, which has special challenges when compared with

acute care because long-term care patients typically have chronic conditions and worse prognosis.

Although pay-for-performance in long-term care is starting to become important in Asia, there is

not yet a lot of evidence to assess the experience there. This paper therefore builds on the longer

experience in the United States to offer lessons for successful pay-for-performance programs in

Asia, while also reviewing the extant literature in Asia.

The Medicare insurance program, which covers elderly persons and some nonelderly disab led

in the United States, is undergoing a profound change in how it pays for health care. Traditionally,

Medicare has paid for most health care based on quantity of services performed. More services—

visits, tests, days, drugs, and consults—means more reimbursement. Under this syst em, the incen-

tives for providers are to provide more services. Quality of care is not rewarded directly. Keeping

costs down, on a per-visit or per-episode basis, is not rewarded directly. Without global budgets or

caps, and with managed care playing only a modest role in the entire system, the overall health

care system rewards greater quantity, not greater quality of care. It is perhaps not surprising

that the United States health care system is by far the most expensive in the world and, by many

measures, has poor health outcomes relative to other developed nations. Nor is it surpr ising

that policymakers have sought ways to change this system to reward quality of care and cost

control.

Since 2012, hospitals in the United States have seen several new initiatives to reward both high

quality and low episode payments. These programs are generally known as pay-for-performance

programs, or P4P. The Center for Medicare and Medicaid Services (CMS) now has five main pay-

for-performance programs for the Medicare program. The Hospital Readmission Reduction Pro-

gram (HRRP) aims to reduce the number of readmissions, which are costly and often indicate poor

quality of care. The Hospital Value-Based Purchasing (HVBP) program encourages both higher

quality of care and lower episode payments, where episodes of care include 30 days post discharge

(Norton, Kim, Das, & Chen, in press). The Comprehensive Care for Joint Replacem ent (CRJ)

model provides bundled payments to hospitals, physicians, and post-acute care providers for treat-

ment of hip and knee replacement, one of the most common surgical procedures among elderly

patients. The Hospital-Acquired Condition Reduction (HAC) program penalizes the lowest per-

forming quartile of hospitals 1 percent of their Medicare revenue. The Bundled Payments for Care

Improvement Initiative (BPCI) encourages care coordination by paying a fixed amount for a col-

lection of services to treat an episode of illness.

These programs all share three important features. First, they take a more comprehensive view

of treatment, encompassing not only the index hospital admission, but also the period (usually 30

days) post discharge. This creates incentives to improve coordination of care among different pro-

viders, traditionally a weakness of the United States health care system. Second, they reward better

quality of care. Quality can be measured in different ways, including lower mortality, fewer read-

missions, and better patient satisfaction, but the important thing is that hospitals have financial

incentives to improve quality of care and outcomes. Third, they reward lower episode payments.

The financial incentives for lower episode payments are different (financial penalties for readmis-

sions in HRRP, percentage bonus for lower episode payments in HVBP, and capitation in CJR),

but all in some way reward lower Medicare payments and penalize higher Medicare payments.

Taken together, these pay-for-performance programs represent a sea change in how Medicare

pays for major health care episodes. No longer will providers be able to earn more money through

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