"Pay for Performance: Can it Work?"

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"Pay for Performance: Can it Work?"

Some see it as the future of physician compensation.

Gil Weber, MBA
Consulting Editor

Adapted with permission from Ophthalmology Management
© Copyright, 2005. All rights reserved.
February 2005


Quality, quality, quality.

For more than a decade these have been the hottest buzzwords in health care, particularly in the world of managed care. Clinicians, industry think-tank experts, academicians, health plan bean counters and others have produced numerous studies and reports, each with its own definition of quality and how to measure it.

Yet until recently, the medical community and those who administer the healthcare delivery systems have never been all that close to agreement on what constitutes quality. And at the heart of it all is a significant problem – practice variation.

Doctors don't all treat patients in the same way. The availability of resources varies, as do techniques and skills. And so across the nation the cost to deliver similar care to a patient differs greatly.

For example, Medicare data tell us that per-capita spending in the Miami area is approximately two-and-a-half times that in Minneapolis even after the data have been "massaged" to account for age, sex, and racial factors. Why is that, and does the variation tell us anything about the quality of care in Miami vs. that provided in Minneapolis? Most physicians likely would say "no," while many non-clinicians likely would say "yes.

One concept that will be getting more attention in the coming years is Pay for Performance (P4P) – third-party plans basing reimbursement on individual performance. With more dollars spent each year to pay for increasing numbers of ever more expensive services, it's clear that many payers are investing in creating compensation systems that will move toward this standard over the next few years.

In this article, I'll review some of the key questions that have been raised regarding P4P and explain how these questions may eventually be answered.

Avoiding Past Mistakes -- Hopefully

Pay for Performance is a topic that's been kicked around for more than 10 years. But just as in the days before the industry accepted HEDIS (health plan employer data information set) as a set of nationally recognized measurements and standards, P4P has until recently been very much a loose collection of potentially good proposals and standards that hadn't come together into a widely accepted, workable plan.

Before HEDIS, every payer was creating its own measuring instrument and standards so that it could self-report self-serving data that made the plan look better than its competition. And, of course, every health plan said that its measuring instrument was valid, but that nobody else's was as good. That resulted in much confusion and little valid data upon which to make informed healthcare purchasing or access decisions.

And with each plan trying to implement its own measurement and reporting systems, physicians were caught in no-man's land, having to report data in different formats to different entities. It took many years and many dollars poured down numerous rat holes until the industry came together, under a watchful government eye, to create a set of accepted measurement and reporting standards – today's HEDIS. These standards, flawed though some may find them, are at least a uniform measuring stick by which one can compare health plan to health plan, hospital to hospital, physician group to physician group.

The idea behind Pay for Performance is that if physician performance can be accurately measured, categorized, and reported, then health plans will have an objective means by which to pay more to better-performing physicians and hospitals, and patients will have an objective means by which to select their providers. As always, the devil is in the details.

Perhaps the greatest fear for physicians looking at participation in P4P systems is that they'll have to spend big dollars to integrate their practice management software with different payer systems to meet each plan's particular standards for performance. To many, this is looking like another series of forced, unrecoverable expenses – more rat holes just over the horizon. And that concern is compounded by a fear that many of the most critical decisions will be driven by non-physicians who, when it comes to the realities of running a medical practice, just don't "get it."

And so, while P4P has promise, it obviously also has the potential to be a huge boondoggle if health plans are left to individually define quality performance and then to set the rules for rewarding it. If P4P really does have the potential to be adopted on a national scale, the following questions must be addressed.

1. What Constitutes Better Care?

If P4P is to be successful it must work with HEDIS. Yet by nature there's a fundamental disconnect between HEDIS and Pay for Performance. Certainly, as far as the payers are concerned, more care equals, or clearly infers, better care for HEDIS reporting purposes: for example, getting as many known or suspected diabetics as possible in for annual dilated fundus exams. But the opposite applies to P4P. The basic premise of P4P is to reward physicians for providing better care rather than more care.

Dartmouth Medical School recently published the results of several studies. The school's report directly contradicted the not-uncommon perception that the quality of care rises with the dollars spent and amount of care delivered. John Wennberg, the lead researcher and director of the Center for Evaluative Clinical Sciences at Dartmouth, said: "It is clear that quality is inversely correlated with the intensity of care and that the better hospitals are using fewer resources and providing fewer hospitalizations and physician visits." (modernhealthcare.com October 11, 2004)

Payers are on board with the idea of giving incentives to physicians but, at the same time, they want to reduce practice variations. The thinking is that if physicians can be encouraged to follow a set of uniform treatment guidelines, which also include such elements as prescribing patterns and test orders, then the resulting happier, healthier patients will demonstrate which physicians are providing the best and most cost-effective care and, therefore, which deserve to receive additional payments based on the clinical outcomes. Again, the devil is in the details.

2. How Much Paperwork?

One obvious issue is that participation in P4P programs will require physicians to negotiate additional administrative hurdles. That is, there will be more reporting and more paperwork to substantiate that a physician has met the higher performance levels and is eligible for the payment differentials. So in addition to the standards defining exemplary performance, the reporting mechanism(s) will be crucial to the success of any P4P program.

3. Will Physicians Change?

Another issue sure to stir up discussion and controversy is the whole concept of trying to modify physician habit and style. Clearly, every physician wants to improve quality. But traditionally, many physicians have been reluctant to participate in quality improvement programs because the programs require the practitioner to modify behavior in ways that haven't benefited them personally. In simplest terms, quality improvement programs of the past haven't answered that very basic physician question "What's in it for me?"

4. Are Tiered Networks Coming?

Yet another concern is that some payers have announced intentions to create tiered networks – multiple provider panels that would reward patients for using practitioners deemed more cost-effective and clinically superior. Aetna's version, Aexcel, was launched in 2004, with plans to expand it in 2005.

Aetna states it will utilize claims data and a proprietary database to establish this network-within-a-network comprised of those physicians the payer deems the best of the best. According to www.amednews.com (July 26, 2004), Aexcel will start out including cardiologists and cardio-thoracic surgeons, gastroenterologists, general surgeons, OB-GYNs, orthopedists, otolaryngologists, neurologists, plastic surgeons, vascular surgeons, and urologists. Principal measurements will include hospital admission rates, total cost of in- and outpatient care, and rates of unexpected, adverse events.

Does this mean that ophthalmologists are exempt from P4P in the Aexcel system? Initially, perhaps, and that's most likely because ophthalmology isn't inpatient-oriented. But if P4P proves successful there's no reason to doubt that Aetna would try to find a way to apply Aexcel to a specialty that's more typically focused on outpatient care.

The little twist in Aexcel for physicians is that they wouldn't be paid any more for jumping through all the hoops and being named "superior." Rather, patients would get incentives such as lower deductibles to use Aetna's Aexcel physicians rather than the non-Aexcel physicians. That, in theory, would drive more business to the better performers and, thereby, benefit them financially.

However, for those not deemed superior, the issue becomes one of suddenly being on the outside looking in – a physician excluded from this specially promoted subset of "elite" practitioners. And that certainly could have a negative affect on patient volume and cash flow.

5. Who'll Set P4P Standards?

The call for uniform P4P standards is starting to resonate loudly across the country. And keenly aware of the mess that had to be cleaned up before HEDIS came to fruition, some in the healthcare industry are looking to Congress to come up with those standards.

For many, that's a frightening thought given Congress' inability to get much done right and in a timely manner vis-à-vis healthcare. But it's also clear to many that this is a big and complicated project, even on a local basis, and Congress may prove to be the only body capable of pulling something together on a nationwide basis.

Absent a powerful, unifying or coercing force to convince the various players to participate under one set of rules, physicians would face impossible administrative burdens and associated costs if they were required to comply with a multitude of different programs and reporting standards developed by individual payers and other involved parties. Karen Ignagni, the president and CEO of America's Health Insurance Plans (formerly AAHP), expressed concern about P4P going off in all sorts of directions, stating "We have all these silos going up – Leapfrog, individual consulting companies, government agencies, employer groups – all are starting down different paths." (Modern Healthcare June 29, 2004)

6. Would Reporting Make a Difference?

If, as part of a P4P program, physicians and other healthcare providers were required to report publicly the results of their performance, and if reimbursement were tied to those results, would that dramatically reduce deaths and costs attributable to lower quality care? Yes, says the National Committee for Quality Assurance (NCQA).

In its 2004 annual report, NCQA noted that in 2003, 79,000 avoidable deaths and $1.8 billion of medical costs were attributable to practice variations. And with premiums rising in excess of 10% for each of the past 4 years, purchasers are paying attention.

Peter Lee, president and CEO of the Pacific Business Group on Health, commented on the NCQA's numbers: "This report underscores that all too often we are not getting good value for that (premium) money" (AP News/excite.com, September 23, 2004). In fact, only about 25% of the population is enrolled in a health plan that reports publicly. The NCQA report also noted that plans that do report performance publicly demonstrate significant improvement in such areas as diabetes care and management, breast cancer screening, and cholesterol management.

7. What's the Best Case for P4P

Given that employers are feeling the squeeze of double-digit premium increases, it's no surprise that they're keenly interested in the possibility of P4P as a means to help manage costs. In addition, major purchaser coalitions such as CALPERS (California Public Employees Retirement System) and the Pacific Business Group on Health have become influential forces in its evolution.

Recently, the consulting firm Med Vantage asked employers what they expected to realize from the P4P programs that were being introduced to their workers and dependents. Med Vantage's report1 categorized the responses into seven specific expectations:

  • reducing clinical practice variation,
  • encouraging application and use of reminder and care-alert systems that improve compliance with evidence-based medical guidelines at the point of care,
  • reducing errors,
  • reducing acute exacerbations,
  • increasing transparency of provider performance for price- and quality-sensitive consumers,
  • ensuring health plan competition on and investment in quality initiatives,
  • motivating employees to take better care of themselves.
8. Can One Standard Work?

If practice variation is a significant, contributing factor to runaway costs, then appropriate means need to be found to reduce it. And if one is to be able to compare apples to apples and appropriately determine that certain providers are entitled to more pay based on better performance, then a uniform set of rules and measurement standards must be put in place to make valid comparisons and rate the winners.

One large coalition of California health plans is involved in a sophisticated effort to find that "Holy Grail." The Integrated Healthcare Association (IHA) brings together six of the state's largest payers – Aetna, Blue Cross, Blue Shield, CIGNA, HealthNet, and PacifiCare – plus physician groups and representatives from academia, corporate purchasers, pharmaceutical companies, and the public. IHA's efforts began in 2000 with the goal of creating a statewide system for rewarding physician groups based on their demonstrated performance.

According to a report published on IHA's Web site (www.iha.org), there are three fundamental reasons why P4P can be the right answer for today's pressing problems of quality and reimbursement:

  • Today's compensation systems reward neither quality nor performance.
  • The majority of performance systems and report cards in place today are focused on health plans, not on the providers of care.
  • Because each health plan issues its own report card, the confusing results available to the public are based on non-comparable data. IHA refers to this as "dueling scorecards."

Why does IHA believe that current compensation systems aren't the answer? It's a complicated problem tied to numerous issues certainly, but IHA cites James Robinson, Ph.D., an economist from the University of California with a succinct answer that gets right to the core. He notes that today's three worst systems for rewarding quality and performance are:

  • A fee-for-service,
  • A capitation,
  • A salary.

Robinson says that fee-for-service rewards time and activity. In doing this, it automatically penalizes any effort to reduce length, intensity, or frequency of services. (Strike one.)

He also notes that capitation does reward efficiency but doesn't provide any incentive for improved quality. (Strike two.)

Finally, Robinson states that salaried systems reward stability and maintain existing bureaucracy, but do nothing to address either over- or under-utilization, nor do they promote innovation. (Strike three.)

In fact except for a few, cutting-edge capitation experiments, none of the three traditional compensation systems make much, if any, allowance for the importance of innovation. The IHA also cites a quotation from a 2001 Institute of Medicine report that uses innovation as an intriguing example of why P4P compensation systems face significant resistance from physicians who, for years, have grown used to and comfortable with the traditional fee-for-service system that rewards those who see more patients and, thereby, generate more RVUs and charges.

The Institute of Medicine notes that "Redesigning care processes to improve follow-up for chronically ill patients through electronic communication may reduce office visits and decrease revenues for a medical group…"2

Just think about that for a moment. Why would any physicians or other provider entities working in a traditional fee-for-service scenario want to invest in IT infrastructure improvements if the end result meant fewer patient visits, fewer RVUs, and fewer charges, all of which would mean decreased income for them?

Obviously for P4P to work there has to be some incentive for innovation, and in particular for innovation in areas outside patient care that can bring down the cost of the care.

California Tries P4P

The six California health plans that came together in an attempt to kick-start Pay for Performance agreed on some basic principles to drive its development and implementation. First, they agreed to a common set of metrics to measure physician group performance. Second, they agreed to significant funding as a reward for exceptional performance.

Further, they also agreed to use a balanced scorecard incorporating both clinical performance measures and patient satisfaction surveys. This allows for modification/evolution of the performance metrics, with clinical measures weighted 50%, patient satisfaction 40%, and IT/infrastructure investment 10%). And they agreed to public disclosure/reporting of the results.

IHA notes that the six health plans believe the strength of their model lies in what's termed the "power of multiples." Because all the major California health plans contract with the same networks of provider groups, the common metrics should make for easier reporting and comparison group-to-group. This means that quality improvements should be seen across all health plans, and also should be quantifiable across all provider groups.

Finally, and perhaps most significant to any hoped-for success, because each of the provider groups contracts with the same health plans, quality improvement and financial rewards earned based on one set of metrics should result in higher payment from all of the payers, and that should mean significant reward to those physicians. At least that's the theory behind "power of multiples."

And the Winners Are....

IHA says that there are no losers with a properly designed and implemented P4P program – everyone wins. Specifically, consumers win by getting publicly reported information that allows for informed choices when making healthcare purchasing decisions. And they win by receiving better quality care.

Physician groups win according to IHA through rewards for investments in quality improvement, investments in IT/infrastructure, and increased enrollment as the result of higher marks on uniform scorecards.

Each physician wins through individualized feedback, benchmarking, personal recognition, and financial incentives.

Purchasers win by receiving valid measures to differentiate providers, improved quality as quid-pro-quo for higher premiums, and healthier employees resulting in fewer workdays lost.

Finally, health plans win though system improvements at the physician level, friendlier negotiations vis-à-vis premiums, better public image, improved health for Members, and an answer to the question "What is quality?"

If You're Not "Superior"

A number of health policy analysts and consultants voice concern that P4P, while admirable in its intent, may inadvertently create some significant problems on implementation. For example, Lucy Johns, MPH, wrote in the May 2004 issue of Managed Care Magazine that P4P could create a two-tiered healthcare delivery system in which patients would have to pay more to access the superior physicians and hospitals. Would that cause the elite providers and facilities to be available only to those who could afford the added costs of seeing practitioners receiving financial incentives from payers?

Johns wrote: "Incentives are a form of bribery. That's what health plans have come to because credentialing hasn't worked to ensure quality. Licensure of providers is totally inadequate to guarantee safety or quality care. But bribery is an inflationary agent. Will incentives create a new monopoly of high-quality providers who can then charge what they want? Will they contribute to a two-class system of health care? The next step after incentives is exclusion, and how would that work? What do we do with the ‘bad' actors?"

What to do, indeed. And maybe that's the key question for those physicians who could conceivably find themselves negatively categorized based on standards developed and decisions made by non-physicians. Based on the past history of decision-making in third party care, this could all come down to the bean counters. And that's a scary thought.

Get in on the Ground Floor

If physicians have learned nothing else about managed care over the past 20 years, they know for certain that one can't leave things to the bean counters. To do so is to court headache and heartbreak, not to mention ever- thinner operating margins.

Depending on how it's put into action and how it then evolves and adjusts with time and data, P4P has the potential to dramatically change for the better how physicians are compensated, and legitimately reward those who can demonstrate better outcomes, happier patients, and more efficient use of resources. On the other hand, P4P could fall flat on its face if not embraced by the physician community.

At this early stage, physicians still have the opportunity to get in on the ground floor and become involved in the development of P4P programs -- before things are rammed down their throats. For ophthalmologists this will likely mean becoming more closely aligned with their non-eyecare colleagues who are affiliated with hospitals, multispecialty medical groups, IPAs, and other provider entities of some significant size.

One-on-one ophthalmologists are unlikely to be able to exercise much influence on the development of P4P programs, particularly since these programs are certain to be developed first with an inpatient focus. To have some eyecare-specific input, it's essential that ophthalmologists not sit back and assume that P4P is a problem for other physicians but not for them.

Get in touch with the medical director and the director of provider relations at a local health plan, with the chief of services at your hospital, and with the CEO of your IPA. Find out what's in the wind vis-à-vis any Pay for Performance compensation system that may be under consideration by local, regional, or national payers. Volunteer to sit on a committee that may be working with payers to develop the measurement, reporting, and analysis standards by which physicians will be rewarded or left out in the cold.

Get involved, raise your voice, and contribute expertise so that you're not steamrollered by the bean counters.

1 Baker G, Haughton J, Mongroo P. Pay for Performance Incentive Programs in Healthcare: Market Dynamics and Business Process, a research report sponsored by ViPSSM, Inc. in partnership with Med-Vantage® (White Paper, 2003)

2 Crossing the Quality Chasm: a New Health System for the 21st Century, Committee on Healthcare in America, Institute of Medicine, pg. 181.


Gil Weber, Ophthalmology Management's Consulting Editor, is a nationally recognized author, lecturer and practice management consultant to physicians and the managed care industry, and has served as Director of Managed Care for the American Academy of Ophthalmology.

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