Health Care Incentive Model Offers Collaborative Approach

August 17, 2007

A major focus in the search for accountability in the U.S. health care system is new reimbursement and benefit models that provide incentives better linked to positive health outcomes. A recent study found some valuable lessons from a model in Maine that tied some degree of risk and reward for both health care providers and employer/purchasers.

“The call of accountability in the U.S. health care system has spun off hospital report cards, reimbursement reforms and heightened expectations about the roles of patients and health care providers, in an attempt to address problems of healthcare access, quality and costs,” said co-author Dennis Scanlon, associate professor of health policy and administration at Penn State.

“While financial incentives seem obvious and techniques such as commissions and bonuses are used in other industries, the health care arena is really in the infancy of testing models of more rational payment,” Scanlon adds.

Several high-profile programs include the CMS Premier Hospital pay-for-performance (P4P) demonstration, the IHA P4P initiative in California, the Bridges to Excellence program and the New York State Medicaid Health Plan incentive program. But like all efforts, each has advantages and disadvantages that are worth considering, says the Penn State researcher.

“Many efforts have been developed by large insurance companies and have focused on performance measures based on various factors ranging from clinical and financial statistics to patient input,” notes Scanlon.

Typical pay-for-performance (P4P) programs pay health care providers for meeting certain performance standards as an incentive reward. But a key question is the source of the reward dollars. Some analysts believe that health care providers also should put some of their compensation dollars at risk if they achieve low levels of performance on quality and efficiency measures.

The Maine Health Management Coalition comprises public and private employers who purchase health care from insurance companies that ultimately pay doctors, hospitals and physicians, and other health care providers. It established the Pathways to Excellence program, which developed an initiative for measuring, identifying and rewarding high-value hospitals in the state.

The goal was to develop and test a shared incentive model where both healthcare providers and payers would each face risk and reward.

The six-month, pilot program involved several hospitals and employers in the Coalition. They identified and adopted 22 measures in four categories: patient satisfaction, patient safety, clinical effectiveness, and efficiency.

The participating hospitals and employers set aside a small percentage of the money paid in routine health care payments and reimbursements for employee care, in a special fund.

Each employer paid half of one percent what it paid to the hospital in employee health care last year, into a Bonus fund. Each hospital set aside half of one percent of the health care payments from participating employers into a Guarantee fund.

Two performance criteria were set up: Guarantee and Bonus Levels assigned to certain activities.

A hospital would earn points if meeting or exceeding Guarantee and Bonus levels for each activity in the four categories. It would earn no points for failing to meet those same levels. The final scores for Guarantee and Bonus levels would determine how much a hospital would receive or refund money to the special fund.

In the study, six of the 10 participating hospitals received additional payments exceeding their Guarantee funds, averaging $14,941 per hospital. The additional money came from a portion of the Bonus funds and a refund from those hospitals whose combined scores failed to return all their Guarantee funds.

The remaining four hospitals received an average payment of $3,629 in Guarantee funds and no Bonus funds, according to the study.

Employers as a group paid a total Bonus amount of $75,129 to the six qualifying hospitals. The average was $8,348 per employer.

“While the dollar amount is modest, the redistribution of payments engaged both groups in a key collaboration,” Scanlon says. “This initiative was an attempt to bring together hospitals and employers and see if they can come to an agreement on a program that benefits both parties by creating an incentive for improvement.”

“Hospitals were seeking recognition for their current investments in quality improvement and believed that additional resources would be needed to achieve superior improvement,” he added. “Employers felt that higher quality care should reduce health care costs, and additional payments should go only to superior performance.”

In post-study interviews, both groups felt the main benefit was sending a signal to large health plans about their desire for standardized and understandable performance factors and uniform rewards based on those factors, according to the Penn State researcher.

While the pilot study involved a small amount of money in reality, the program if applied to the billions of dollars spent in Medicare and Medicaid services could impact millions of dollars in hospital funding and employere reimbursements.

“One goal of the study was to see if a different approach to health care funding was even possible,” Scanlon says. “Such a collaboration could pave the way for changes in how employers pay for health care and how hospitals are reimbursed, with stronger incentives and risk for both sides.”

He and his colleagues, Gino Nalli, assistant professor, University of Southern Maine, and Douglas Libby, executive director, Maine Health Management Coalition, published their findings in "The Development of a Performance Incentive Program for Hospitals: A Case Study of a Statewide Pay-for-Performance Program in Maine" recently in the journal Health Affairs.

The research received support from The Leapfrog Group, U.S Agency for Healthcare Research and Quality (AHRQ) and The Robert Wood Johnson Foundation.

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Editors: Dr. Scanlon is at: 814-865-1925 or at DScanlon@psu.edu. Dr. Gino Nalli is 207-780-4237 or at gnalli@usm.maine.edu by email; and Dr. Libby is by email.

Contact: Vicki Fong (814) 865-9481 vfong@psu.edu

A'ndrea Elyse Messer Sr. Science & Research Information Officer Penn State Public Information 1 College Avenue Annex University Park, Pa 16802 814-865-9481 814-865-9421 aem1@psu.edu