The Department of Health and Human Services (HHS) announced last week that, over the next four years, it plans to shift half of its traditional fee-for-service Medicare payments to those that create value through better coordinated care. The idea of value-based purchasing is not a new one. Approximately 3,500 hospitals have been receiving bonuses or penalties as part of Medicare’s 10-year effort to link payments to improved quality in the inpatient setting.

Congress authorized value-based purchasing for hospital inpatient stays as part of the Affordable Care Act, though quality data reporting requirements were developed as a result of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Nursing homes will transition to their own value-based purchasing program by FY 2019, courtesy of legislation passed last year to patch the flawed Medicare Sustainable Growth Rate (SGR) and preserve Medicare payments to physicians.

Record of Success

There is no doubt that HHS Secretary Sylvia M. Burwell has a great story to tell. Medicare payment and service delivery demonstrations are starting to show some success at controlling costs. In 2014, 20 percent of Medicare spending — about $72 billion — were made through new payment models.

More than 360 accountable care organizations (ACO) serving more than 5.6 million Medicare beneficiaries in hospitals, physician offices, and skilled nursing facilities promise better coordination of fee-for-service payments and improved care delivery. Many of these ACOs are showing early success for which they are awarded shared savings.

Bundled payment models that link payments for multiple services received during an episode of care are targeting inpatient and post acute care services. The Centers for Medicare and Medicaid Services (CMS) has entered into payment arrangements with hospitals, skilled nursing facilities, rehabilitation facilities, and home health care providers to improve financial and performance measures on up to 48 different clinical conditions.

Primary care medical homes act as a key point of contact for patients’ health care needs, utilizing a team approach to emphasize prevention, care coordination, and shared decision making. Nearly 500 primary care practices are coordinating with commercial and state health plans to improve access and care management and increase patient engagement in the process.

The CMS Innovation Center is experimenting with ways to better align care delivery and lower costs for dually eligible Medicare and Medicaid patients, and continues to award grants to state and locally driven “best practice” initiatives. It may be a while yet before the public has a better understanding of whether the federal government’s investment in these provider initiatives has merit.

Political Work Ahead

The Agency’s quickening pace signals its desire to end fee-for-service payments, which it believes has led to overprescribing of services without consideration of costs; however, to meet its target, HHS will need a little bipartisan magic on Capitol Hill. The most likely scenario is a permanent SGR fix, though it is unlikely anything permanent will come together until the end of the year. Republican leadership is looking to budget reconciliation as a vehicle for passage, though first it must come up with ways to pay for replacing the current payment formula.

With the likelihood of additional ACA funding unlikely, CMS will be under increased pressure to save money with its Medicare payment and delivery demonstrations. And since it cannot force providers to participate in ACOs, fee-for-service will not be disappearing entirely.

What to Expect for the Future

Medicare is in its third year of value-based payments and, this year, hospitals will be evaluated on 12 clinical process measures; eight patient experience criteria (taken from discharge surveys); three mortality measures that target people who die from acute myocardial infarction, heart failure, and pneumonia in hospital or within 30 days of discharge; a patient safety indicator; a health care associated infection measurement; and an “efficiency measure” to calculate Medicare’s per beneficiary spend. Hospital administrators who adapt to changes will have less chance of losing a percentage of their hospitals’ Medicare payments and, depending on how they compare to their peers, as well as their own incremental improvements, may be eligible for value-based incentive payments.

And while CMS will look to Congress for support, the Agency received a boost from several of the nation’s largest health systems, health plans, and employers who joined Secretary Burwell in pledging to put 75 percent of their business into value-based payment arrangements by 2020.

To read a summary of HHS’ recent announcement of its goals and timelines for moving Medicare towards quality-based payments, click here.