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Hospital Value-Based Purchasing


Like all healthcare payors, Medicare has for some time tried to change from being a passive payor of services to a purchaser of value. There might be a lot of ways to do that, but one easy to conceptualize method is for Medicare to pay different amounts for a given service (i.e. a hospital stay for congestive heart failure) based on the quality of that service. Of course, the details of how to measure quality and implement such a program become terribly complex in a hurry.

Hospital value-based purchasing (HVBP), one of the provisions health reform, is one of the Centers for Medicare & Medicaid Services’ (CMS) first large-scale attempts to do just that.

CMS’ goals for this program include improving clinical quality, encouraging more patient-centered care, encouraging hospitals and clinicians to work together to improve quality of care, and empowering consumers to make value-based decisions about their healthcare (see “Value-Based Purchasing Raises the Stakes,” May 2011).

You already were aware that baseline measurements of quality performance for your hospital were collected from July 2009 through March 2010, right? And data collected from July 2010 through March 2011 serves as the first “Performance Period” to determine payment that will begin in October 2012. (If you are not aware, visit to see the performance your hospital is currently reporting. All the providers in your hospitalist group should be familiar with the data; another good site is But keep in mind there is a significant delay in getting the data to display on these sites. In many cases, the data they display today is from nearly a year prior.)

Some Generalizations

HVBP has a number of features that are typical of new reimbursement programs:

  • It is budget-neutral for Medicare. In other words, some hospitals will perform well and realize reimbursement increases; some hospitals will not perform well and will see reduced reimbursement.
  • It builds on previous programs. HVBP essentially moves performance on core measures and HCAHPS surveys, all of which have been in place several years, from being publically reported to serving as metrics that influence reimbursement.
  • The dollar amounts involved grow each year.
  • Expect the program to evolve continuously. For example, the number and type of quality metrics on which the program is based will increase each year.

How It Works

Medicare will start withholding a portion of diagnosis-related group (DRG) payments to hospitals, starting with 1% initially and increasing by 0.25% annually, so that 2% is withheld in 2017. Keep in mind that amount is withheld from all DRG payments to a hospital, not just those related to the diagnoses that are part of the HVBP program.

Based on performance on core measures and patient satisfaction, hospitals have a chance to earn additional compensation that could be more or less than the initial 2% withholding. Additional performance measures will be added every year or so.

There are two ways a hospital can earn some of this performance-based compensation based on its “Total Performance Score.” Expressed in the language of Little League baseball, a hospital needs to be either a most valuable player—an MVP—or a most improved player.

The MVP pathway, known as “achievement,” is to grade hospitals on a curve established from the data collected for all hospitals the prior year. Those at the high end of the curve are paid more than the amount that was withheld from them (so they are “net winners”); those at the bottom of the curve are paid nothing (“net losers,” as they lost the chance to earn back any of the amount withheld).

The most improved pathway, cleverly called “improvement,” is for a hospital to improve its performance over its previous baseline, even if it fails to attain a high score relative to others. Measurement of the first baseline year ran from July 2010 through March 2011, and will be used as the reference point for performance from July 2011 through March 2012.

The precise amount of the payment for either of the two methods above is based on a sliding scale rather than an all-or-none threshold. SHM’s website ( has an example of this calculation. A simple way to think of it is that a hospital won’t have to do a lot to earn back some portion of the amount withheld, but it has to hit a home run to earn back more than that.

There are two ways a hospital can earn some of this performance-based compensation based on its “Total Performance Score.” Expressed in the language of Little League baseball, a hospital needs to be either a most valuable player—an MVP—or a most improved player.

The Dollars at Risk

It is worth thinking about the most a hospital could lose or gain under HVBP. Let’s take an example of a hospital that is paid $50 million annually by Medicare across all DRGs (this would be a pretty small hospital). In 2013, Medicare will pay that hospital only $49.5 million; that is, it will withhold 1% ($500,000) as part of the HVBP program. After the hospital’s Total Performance Score is computed, Medicare might pay more to the hospital in the form of an “add on” to the hospital’s typical DRG payments. If performance stinks or is worse than most hospitals and does not improve significantly over its own baseline, Medicare might not pay a nickel more. But for respectable performance, it might be paid 80% of the amount withheld—$400,000, in this example. So this hypothetical hospital would end up being a “net loser” of $100,000. By 2017, when 2% is withheld, the dollars at risk would be double.

From a practical perspective, the amount by which reimbursement will go up or down for most hospitals will be significantly less than the total withhold amount for most hospitals, so it probably won’t be enough to result in financial disaster or great profits. (Your hospital CFO may dispute this conclusion and you should listen to them.) But because a new “grading curve” is established each year, a score that puts a hospital in a financially attractive category one year might not look so good the next year. Therefore, a hospital whose performance stands still will likely become a net loser within a year or two.

Even if you were to conclude that the potential financial upside isn’t compelling enough to devote a lot of energy to perform well, the fact that most of the measures really do matter to our patients, and that this information is publicly reported, means every hospital should do whatever it takes to perform well. I suspect that patients and employers, as well as all types of payors, will pay more and more attention to your hospital’s performance and overall hospital volume affected in locales where patients have a choice of more than one hospital.

Learn More

I’ve provided only a very general HVBP overview here. Most hospitalist groups should identify at least one person who develops meaningful expertise in this program and other components of healthcare reform (i.e. bundled payments, penalties for excess readmissions, and penalties for hospital-acquired conditions). SHM is a terrific educational resource for these things and has a very informative HVBP toolkit available via its website.

Thanks to Drs. Win Whitcomb and Pat Torcson for helping to explain all this stuff to me. They and others at SHM do a great job of staying on top of things like healthcare reform.

Dr. Nelson has been a practicing hospitalist since 1988 and is co-founder and past president of SHM. He is a principal in Nelson Flores Hospital Medicine Consultants, a national hospitalist practice management consulting firm ( He is course co-director and faculty for SHM’s “Best Practices in Managing a Hospital Medicine Program” course. This column represents his views and is not intended to reflect an official position of SHM.

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