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Value Based Purchasing: What Providers Should Expect

In keeping with Centers for Medicare & Medicaid Services' continued efforts to overhaul the Medicare program delivery systems, the Secretary of Health and Human Services will create a Value-Based Purchasing (VBP) program to provide incentives for hospitals to focus on high quality, cost-effective care.  Pursuant to the Patient Protection and Affordable Care Act, Inpatient Prospective Payment System (IPPS) hospitals will have the opportunity to receive value-based incentive payments based on their actual performance on quality measures for discharges occurring on or after October 1, 2012.

Implementation of the program will include measuring efficiency for the five following conditions or procedures:

1. Acute myocardial infarction
2. Heart failure
3. Pneumonia
4. Surgeries
5. Healthcare-associated infections

In order to fund the incentive payments awarded to hospitals, CMS will use a budget-neutral approach and phase in reductions to Medicare inpatient payments.  In essence, hospitals will see their Diagnosis Related Group (DRG) payments reduced, but will have the opportunity to recoup the reduction and perhaps more based on a performance scorecard.

The guidelines set forth for the Secretary in creating the value-based incentive payment amount includes two components:  the (1) base operating DRG payment amount, increased by a (2) value-based percentage which will be developed based on the hospital's quality score.  The quality score will be driven by such factors as efficiency, Medicare spending per beneficiary, age, sex, race, severity of illness, and others.  A hospital that achieves an average quality score equating to a VBP add-on greater than 1% during FFY 2013 will have a positive margin.  However, this may prove difficult to estimate until more instructions are available that provide guidance in calculating the value-based incentive payment percentage.  It is also pertinent to note that there will not be a minimum performance standard for hospitals.

The calculation for incentive payments is based on a methodology that is not finalized, but a blueprint for base operating DRG rate reductions for each federal fiscal year has been established, as follows:

• Fiscal year 2013, 1.0%
• Fiscal year 2014, 1.25%
• Fiscal year 2015, 1.5%
• Fiscal year 2016, 1.75%
• Fiscal year 2017 and after, 2.0%

To illustrate a DRG reduction scenario, consider a 250-bed hospital with $20.5 million in operating DRG payments:

Please note that payments such as outliers, Disproportionate Share Hospital payments, and Indirect Medical Education payments will not be affected by the VBP DRG reduction.

Although many of the details and calculations for the Value-Based Purchasing program are yet to be developed, it is clear that CMS intends to implement these measures.  Providers who take the initiative to develop quality performance standards and improve patient outcomes should be more likely to receive a favorable VBP distribution in the future.