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Physician Reimbursement Models

Is pay for performance the best replacement for fee for service?

By Mirza Baig

No physician is immune to declining payment from government and third-party payers and high overhead costs and the required purchase of expensive EHR systems. When these factors are combined, the impact on profit can be significant, especially for private practice physicians. To keep up, physicians need to understand different reimbursement methods, beginning with the current fee for service (FFS) model, which pays physicians for each service after it has been delivered.

FFS is notorious for encouraging overuse and thus conflicts of interest. Generally speaking, the more procedures a physician performs, the heftier the paycheck. But a focus on restraint, or quality of care, reduces physician income. Where FFS rewards productivity, maximizing patient visits, it also encourages unnecessary care and discourages efficient care. Though most physicians still operate under FFS, the model is being rapidly replaced with a mindset that emphasizes value over volume.

Health care reform’s new mantra is value-based reimbursement (VBR), a model that incentivizes physicians to provide quality care rather than high quantity care. VBR rewards providers for good outcomes, for sticking to protocols, and lowers reimbursement for undesirable events.

Among the various VBR models are pay-for-performance (P4P), which rewards physicians for meeting performance measures related to quality and efficiency. The patient-centered medical home (PCMH) consists of a group of providers managing the care of a defined population. The bundled payment approach reimburses providers according to a pre-determined price to handle certain episodes of care.

A Perfect Panacea?

P4P is increasingly viewed as the FFS replacement. The Affordable Care Act (ACA) encourages P4P, especially in Medicare, and allows for experimentation to identify designs and programs that are effective and efficient. P4P measures outcomes like reduced blood pressure, smoking cessation, fewer hospital readmissions, or avoiding a bad outcome. When physicians reach these goals, they earn bonuses.

Savings achieved through lower health care costs can go toward future gainsharing. Under P4P, savings accrue when providers focus on the clinical need for procedures, follow evidence-based clinical guidelines, and concentrate on population health rather than the individual. P4P aims to improve quality by rewarding good outcomes, following established protocols, and reducing reimbursement for adverse events.

The typical P4P model can involve performance thresholds, improvement thresholds, or relative performance cut-offs. When a certain threshold is satisfied, providers receive a bonus. P4P penalizes health care providers for poor outcomes, medical errors or increased costs. For example, Medicare would no longer pay providers to treat patients who develop bed sores during their hospital stay.

A selling point for P4P is that very little IT infrastructure and integration is needed compared to other payment models. For this reason, P4P is ideal for new or up-and-coming practices or relatively small practices or hospitals.

For P4P to be effective, health care providers need motivation to follow the guidelines. Several factors can affect the model’s success, such as the incentive amount and public reporting of quality data. Many studies evaluating the size of incentives on behavior report mixed results. Incentives as low as a few dollars per patient have dramatically impacted patient care, while incentives as high as thousands of dollars have had little to no effect on patient care.

More than 40 private sector P4P programs are currently underway. California’s P4P program is the largest and longest running program, focusing on improved quality performance by physician groups.

Judging Performance

Despite their popularity among legislators and the Centers for Medicare and Medicaid Services, there is little to no evidence that P4P actually improves quality of care. A study reported in Health Affairs evaluated 1,040 hospitals from 2004 to 2008. Comparing 260 pay for performance hospitals with 780 control group hospitals, researchers found no detectable differences. When the study began, P4P hospitals had better overall performance; however, by 2007, the control hospitals had caught up.

Another investigation, conducted by the Harvard School of Public Health, compared 30-day mortality rates for patients with acute myocardial infarction, pneumonia, congestive heart failure, or coronary artery bypass graft surgery, between 2004 and 2009. Researchers found no difference in mortality between P4P hospitals and nonparticipating hospitals. A Cornell University study of a participating P4P Massachusetts Medicaid hospital also found no boost in quality, even after providers were offered financial incentives to improve care for patients with pneumonia and prevent surgical infections.

P4P may or may not be the answer to the nation’s health care woes. More research or perhaps a new reimbursement model could help point the way to lower costs and higher quality.

Mirza Baig is a student at John Marshall Law School who holds an MBA with a concentration in health care administration.

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