Pay-for-performance incentives: Are you missing out on revenue?

New trend in reimbursement may benefit quality professionals

One thing quality professionals can agree on is that in health care today, every dollar counts. That’s why pay-for-performance programs potentially can have a dramatic impact on your organization — by getting the attention of hospital administrators and opening the floodgates to needed quality resources.

Pay-for-performance programs increasingly are linking quality to reimbursement, and the Centers for Medicare & Medicaid Services (CMS) is exploring pay for performance with various demonstration projects.

Recently, CMS issued its final rule for FY 2006 rate increases for inpatient stays in acute care hospitals. The rule includes an extra increase for hospitals participating in Medicare’s quality reporting initiative.

Even minor reimbursement changes can have an alarming impact on the organization, says Judy B. Courtemanche, president and CEO of Courtemanche & Associates, a Charlotte, NC-based consulting firm specializing in regulatory compliance and outcome management.

"Let’s say an organization does not catch up with the change and continues to bill as it was," she says. "Then months down the road, it catches up with them and they now are in a payback position or must settle with the reimburser for compounded reductions in reimbursement to make up the difference. With the volume that organizations deal with, changes compound rapidly."

In addition, results show that pay for performance can have a dramatic impact on quality. The CMS/Premier Hospital Quality Incentive Demonstration Project, which involves more than 270 hospitals using Premier’s Perspective database, tracks hospital performance on a set of 34 quality indicators and pays annual incentives to top performers. Data from the project’s first year show a trend toward significantly improved quality among the participating hospitals, with the median performance composite score for all hospitals going up 7.5%.

More leverage for quality

With increased pressure to improve core measure data, it may be an opportune time to lobby for additional resources, such as extra staff so that records can be abstracted sooner, advises Susan Mellott, PhD, RN, CPHQ, FNAHQ, CEO of Houston-based Mellott & Associates.

"Or quality leaders may be able to request software programs to display data in a more meaningful manner or request that an extra person be allowed to attend a conference or workshop pertaining to data use," she says.

Quality managers often are in the difficult position of guiding quality decisions for their organizations, while having little or no authority over the performance of clinicians, Courtemanche notes. "Physicians and other health care professionals are not accountable to the quality managers and sometimes view them as regulatory thorns in their sides," she says.

Pay for performance presents a unique opportunity to redirect the organization into focused areas of performance, Courtemanche argues.

"Managers should become familiar with pay-for-performance expectations for their areas of responsibility," she says. "They should identify their current performance and work with finance to identify potential gain or loss with redirected payment systems."

As a quality professional, you’re in a key position to assist leadership in identifying potential shortfalls in physician and organizational practice that could lead to reduced reimbursement, Courtemanche says.(For strategies for improved reimbursement, see checklist.)

Once you know where your organization stands with reimbursement, you can take the next step: developing action plans to assess and address areas of concern.

"Quality managers need to be proactive in understanding these new requirements and foster appropriate action within their organizations," she stresses.

Changing clinical practice is key

In its Aug. 12 final rule, CMS announced that by reporting selected quality data, acute care hospitals will receive a 3.7% increase in payment rates for inpatient services. Hospitals that do not submit quality information will receive an increase of only 3.3%.

The Joint Commission has worked with CMS to align quality indicators so data will be collected only once, Mellott explains. "For those hospitals that are not JCAHO-accredited, I expect that the extra 0.4% increase would be beneficial to them, so they may consider participating if they are not already."

In addition to Medicare’s efforts, increasing numbers of private insurers are linking outcomes to reimbursement.

There is no question that the trend toward pay for performance will help quality leaders get the attention of administrators, but unless there is a good relationship between administration and the medical staff, there may not be much improvement in terms of better outcomes for patients.

"Many medical staff are still reluctant to change their practice patterns simply because administration asks them to do so," says Mellott. "Many hospitals are still struggling to get physicians to administer all of the medications that these guidelines require in a timely manner."

On the other hand, medical staff members at some organizations take the guidelines very seriously and have impressive success stories to report.

"The hospitals that have lower scores in these areas will have a hard job in convincing the medical staff to move forward if they have already educated the physicians and have gotten resistance," says Mellott. "The administration will have to increase their efforts to encourage the physicians to change their practice patterns."

Pay for performance demands that physicians practice evidence-based medicine and eliminate the potential for bad outcomes and poor performance, says Courtemanche.

"To perform at the top of the pack, physicians must achieve better outcomes than others in their area of expertise. To consistently perform at top levels, they need to eliminate undesirable performance within their practice settings," she says.

However, this places both organizations and physicians in an ethical dilemma, Courtemanche adds.

"If they accept patients who may not respond well to care interventions, they may see poor performance and loss of revenue," she explains.

Although the American Medical Association’s February 2005 guidelines for pay-for-performance programs expressly state that "programs must not directly or indirectly disadvantage patients from ethnic, cultural, and socioeconomic groups, as well as those with specific medical conditions or the physicians who serve these patients," the risk does exist, Courtemanche says.

System changes may be needed to comply with core measure requirements, such as having required medications readily available in the emergency department or accessible through the pharmacy.

"The smoking cessation scores have been typically low," Mellott notes. "The cause of low scores is either because the organization is not addressing the issue or the patients are receiving the information but it is not documented well in the medical record. These are areas where the leadership of the hospital has more control over the outcome scores."

To ensure clinicians document procedures performed or medications given, consider switching to computerized charting. "I’ve had a great deal of success standardizing charting practices to capture and document essential information for core measures, such as vaccination status and smoking cessation instructions," reports Diane Richey, RN, BSN, CIC, CPHQ, director of quality/risk/case management at North Hills Hospital in North Richland Hills, TX. "We can input nonbypassed scripts to prompt the nurse to obtain answers to vital questions." A copy of the smoking cessation information is automatically printed out when the patient answers "yes" to being a smoker.

Sharing outcomes information directly with physicians, both during staff meetings and privately, has been an effective motivator for behavior change with some physicians, adds Richey. The physicians’ individual core measure rates are confidentially fed back to them in a graph format comparing their compliance with the measures to those of their peers. "It is really an eye-opener for some of them who think their documentation is perfect," she says.

Long-term impact of P4P

Pay for performance is an important step toward creating a safer health care system, as opposed to fee-for-service, which pays all providers equally regardless of whether the service actually is needed and regardless of the quality of the service, says Martin D. Merry, MD, adjunct clinical professor of health management and policy at the University of New Hampshire in Durham, and a health care quality consultant.

"The fee-for-service system regards the entire quality spectrum equally, from worst to best, perhaps even awarding poor quality "bonuses" in the form of paying for excess services and potentially preventable complications," he says. "A major reason why this problem has persisted, of course, is that health care quality has been so opaque that consumers and purchasers have had no effective way of distinguishing good vs. poor performance."

Among other benefits, pay for performance forces a greater transparency on providers, which is a cornerstone of the recommendations in the Institute of Medicine’s 2001 report Crossing the Quality Chasm: A New Health System for the 21st Century.

Pay for performance should "greatly enhance the importance of quality professionals," Merry adds. "It will rescue them from what I experience as an inordinate preoccupation with compliance-related activities and steer them more toward building quality system infrastructures that can finally generate the levels of safety and quality of world-class manufacturing and service industries such as Toyota and Ritz-Carlton," he says.

Pay for performance may mean that leaders finally will view quality not as a compliance or risk management issue, but as a genuine strategic imperative in maximizing reimbursement, Merry continues.

"Properly prioritized as a strategic imperative, these leaders might then finally begin making the necessary quality infrastructure investments so that their performance may begin to approach that of the Toyotas of the world," he adds. "Once this reality sinks in at higher levels of management, quality managers should begin to see the resources they need to pursue the organizational transformation to the information age that is so sorely needed in health care."

[For more information, contact:

  • Judy Courtemanche, Courtemanche & Associates, P.O. Box 17127, Charlotte, NC 28227. Phone: (704) 814-0685. Web:
  • Susan Mellott, PhD, RN, CPHQ, FNAHQ, CEO, Mellott & Associates, 5322 W. Bellfort, Suite 208, Houston, TX 77035. Phone: (713) 726-9919. Fax: (713) 726-9964. E-mail:
  • Martin D. Merry, MD, 232 Tower Hill Road, P.O. Box 15, Sanbornton, NH 03269. Phone: (603) 286-7579. E-mail:
  • Diane Richey, RN, BSN, CIC, CPHQ, Director, Quality/Risk/Case Management, North Hills Hospital, 4401 Booth Calloway Road, N. Richland Hills, TX 76180. Phone: (817) 255-1901. Fax: (817) 255-1992. E-mail:]