Federal health care reforms are trying to cut costs and improve quality—two objectives that are often at odds. Policy makers hope that strategies like changing how providers are paid can balance cost and quality. But studies of current programs like pay-for-performance initiatives show mixed results in cutting costs and improving quality.

Providers say the incentive amounts are not enough to cover the cost of change.

“It’s an awful lot of sticks and not a lot of carrot,” said G. Scott Smith, medical director of St. Joseph Heritage Medical Group in Orange County.

Our current system pays health-care providers per service, not for outcome. The more tests and procedures they perform, and the more complicated they are, the more providers get paid. Many say this leads to wasteful spending on unnecessary services.

Pay-for-performance initiatives pay for improved health outcomes rather than specific services.

For the past decade, pay-for-performance programs have mainly been theoretical, tried out in voluntary programs throughout the country. The largest public experiment happened between 2003 and 2009, when the administrators of Medicare teamed up with Premier Hospitals nationwide to see if financial incentives would improve the quality of care for Medicare patients with certain ailments.

Studies of the program have shown mixed results.

Participating hospitals initially improved, but after five years there was no significant difference between them and the hospitals without the incentive, according to a University of Pennsylvania study.

A separate study from the Harvard School of Public Health found that there was no significant difference in the mortality rate for heart attacks, heart failure, bypass surgery or pneumonia between patients treated at hospitals participating in the program and those that were not.

The largest and longest-running voluntary non-governmental initiative, called the California Pay for Performance Program, rewards providers for improved clinical results, patient scores and increased use of technology. In the first decade of the program, stakeholders focused on measuring and improving quality, and costs rose dramatically. In response, Integrated Healthcare Association, which administers the program, is trying out a value-based pay for performance program from 2011-2015 to reign in spending.

Penalizing poor hospitals

Pay for performance initiatives could actually harm health-care providers working in low-income areas, according a study of The California Pay for Performance Program conducted by Dr. Alyna Chien of Children’s Hospital Boston and Harvard Medical School.

Hospitals in low-income areas may struggle to meet the standards because of fewer specialists and resources, and because their patients can’t afford to pay. The initiative rewards providers for overall outcomes. If they rewarded individual patient outcomes, Chien said, it could level the playing field.

“If you want pay for performance to reward improvement and achievement then you would design the program different,” Chien said.

One controversial solution to the disparity would be to factor the socioeconomic status of the area the hospital serves into their measurements – something Medicare administrators have said they won’t do.

“We believe how we measure quality of care should be the same regardless of socioeconomic status, and many hospitals that treat low-income patients have performed well on these measures in the past,” Centers for Medicare and Medicaid Services spokeswoman Kathryn Ceja wrote in an email.

Chien doesn’t advocate for that solution, but she does think something needs to be done to take into account the needs of providers in low-income areas.

“You don’t want to credit people for bad care,” Chien said. “But you also don’t want to not give people the resources they need.”

Finding the sweet spot

Pay-for-performance initiatives went from voluntary to mandatory with the passage of the Affordable Care Act. Beginning in October, Medicare withheld one percent of their funding and reissued it to the hospitals that did well on certain quality measures.

They also withheld an additional one percent of funding from hospitals with high readmissions rates for avoidable conditions like heart attacks, heart failure or pneumonia. Six of those hospitals were in California, half of them in Los Angeles. Others in the state were partially penalized.

Critics of the program have said that using readmissions rates is problematic because some readmissions are necessary.

About one quarter of readmissions are preventable, according to Robert Wachter, professor and physician at UC San Francisco. As a result of the incentive programs, they’ve changed the way they discharge patients at his hospital. They are clearer with discharge instructions and they call to follow up with the patient.

“We should have been doing it all along, but we probably wouldn’t have minus a penalty,” Wachter said.

St. Joseph Heritage Medical Group has invested in a transition clinic for patients who are most likely to be readmitted. They also schedule follow up appointments with their primary care doctor as patients are checked in.

The reward for these improvements doesn’t cover the cost of the new infrastructure, said Smith, St. Joseph’s medical director.

In the past 10 to 15 years, hospitals have primarily focused on improving quality, Smith said.

“Now all the conferences are about developing transition of care systems to prevent unnecessary readmissions,” Smith said.

The Medicare incentive program is starting out slow. Each year, the potential reward or punishment increases, until eventually about seven percent of their Medicare funding is at stake.

Studies of pay-for-performance initiatives in England showed that a three percent initiative brought about significant change.

Wachter thinks that given time, these initiatives can work, because of all the wasteful spending he sees at his hospital.

“There’s a sweet spot there that will both improve quality and efficiency,” Wachter said.

He knows that there is the perception that the medical system is bankrupting the country. But he worries that as providers try to improve their image they won’t actually change the system.

At his hospital, for instance, they are paying more attention to coding correctly to improve their performances.

They are also training doctors in new ways of communicating with patients, “partly because it’s the right thing to do, and partly because of patient scores,” Wachter said.

Finding that balance between the right thing to do and doing what pays more is of particular concern to Wachter. He points out that many doctors got into medicine out of a desire to help people. Some argue that this new pay structure can diminish that altruistic motivation if doctors are only motivated by the most profitable outcome.

“The right answer is going to take advantage of both types of motivation,” Wachter said.
In the end, advocates, policy makers and many doctors still think pay-for- performance is a promising idea.

“We certainly want to move from a world where we are paying providers per patient or per procedure to one where we are paying for prevention and equality,” said Anthony Wright of the statewide advocacy group Health Access.

Smith thinks it will take at least 5 years to figure out a program that suits their patient population and community.

“We have no idea if what we’re doing is going to work,” Smith said.

“What I want is a series of incentives that drive us to produce the best value in care,” Wachter said.

And he is willing to give the program time to work.