Two key pay-for-performance programs created by the Patient Protection and Affordable Care Act—the Hospital Value-Based Purchasing Program and Hospital Re-Admissions Penalties—went into effect this month.  This newsletter provides an overview of these programs, including recent developments.


The Hospital Value-based Purchasing Program and Hospital Readmission Reduction Program, two key pay-for-performance programs created by the Patient Protection and Affordable Care Act (PPACA), went into effect this month.  Below is an overview of these programs and recent developments.

Hospital Value-based Purchasing Program

The Hospital Value-based Purchasing (VBP) Program was created by section 3001(a)(1) of the PPACA and provides for the payment of value-based incentive payments to hospitals that meet performance standards.  The program began with legislation enacted in 2005 that initially rewarded or penalized hospitals for reporting quality data.  Effective October 1, 2012, Medicare will now use that data to measure hospital performance and will for the first time begin rewarding or penalizing hospitals based on that performance.

VBP payments are funded through reductions to base operating diagnosis-related group (DRG) amounts: 1 percent in fiscal year (FY) 2013, 1.25 percent in FY 2014, 1.75 percent in FY 2016 and 2 percent in FY 2017 and each subsequent year, which hospitals can then earn back by reaching performance benchmarks against various measures.  Although the program is effective beginning with discharges on or after October 1, 2012, payment adjustments will not begin until January 2013, at which time hospitals will begin receiving base operating DRG payment amounts for each discharge that are the net result of the 1 percent reduction and the hospital’s incentive payment adjustment.  The Centers for Medicare & Medicaid Services (CMS) will then reprocess claims from October 2012 to December 2012. 

To evaluate performance, CMS will define a threshold and a benchmark level for each measure.  The threshold is the median of hospital performance (i.e.,50th percentile) and the benchmark is the mean of the top decile of hospital performance during the baseline period.  Hospitals can achieve points for both achievement and improvement against the hospital’s own baseline—10 points for meeting or exceeding the benchmark and a linear scale of 1–9 points for scores between the threshold (or baseline) and the benchmark.  No points are earned when a hospital performs below the threshold (or baseline).  The higher of the achievement score or the improvement score is used the calculate the total performance score.

CMS has finalized measures for FYs 2013, 2014 and 2015.  Of note, in the FY 2013 Inpatient Prospective Payment System final rule, CMS finalized the inclusion of an efficiency domain for FY 2015, for which there is one Medicare spending per beneficiary measure.  While many stakeholders support the inclusion of the Medicare spending per beneficiary measure, others have noted that the measure is relatively new and should be evaluated further before linking it to hospital payment. 

The performance benchmarks and thresholds have also raised concerns regarding a “cliff effect” on payment for very small differences in performance.  For measures that have a benchmark score of 1.0, 100 percent compliance is required to receive the full 10 points, resulting in a loss of points for missing just one or two cases.  Similarly, for several measures the distance between the threshold and the benchmark is less than 0.1.  For these measures, very small differences in performance from hospital to hospital will result in large differences in scoring and, as a result, payment.

Hospital Readmission Reduction Program

The Hospital Readmission Reduction Program (HRRP) was created by section 3025 of the PPACA, and also went into effect October 1.  Under the HRRP, hospitals with higher than expected readmissions rates will have their Medicare inpatient payments reduced.  Readmissions occur when a discharged patient is readmitted to the same or another acute care hospital within 30 days. 

CMS selected acute myocardial infarction (AMI), heart failure and pneumonia as the applicable conditions for the HRRP in FY 2013.  To measure hospital readmissions, CMS adopted the three National Quality Forum-endorsed, hospital risk-standardized readmission measures that are currently included in the Hospital Inpatient Quality Reporting Program:

  • AMI 30-day Risk Standardized Readmission Measure

  • Heart Failure 30-day Risk Standardized Readmission Measure

  • Pneumonia 30-day Risk Standardized Readmission Measure

For each hospital, CMS calculates an “excess readmission ratio” for each condition that compares the total adjusted actual readmissions at the hospital to the number that would be expected for an average hospital with similar patients.  This ratio is used to calculate an adjustment factor by applying the ratio to the hospital’s aggregate payments for all claims that list the condition and comparing these payments to total payments for all discharges.  The adjustment factor is then applied against the wage-adjusted DRG operating payment, subject to an annual cap of 1 percent in FY 2013, 2 percent in FY 2014 and 3 percent thereafter.

The excess readmission ratio used to calculate the payment adjustment factor is adjusted for certain patient demographics, co-existing medical conditions and indicators of patient frailty.  There is no adjustment, however, for race, language, life circumstances, environmental factors and socioeconomic factors.  Stakeholders continue to press CMS on the appropriateness of incorporating an adjustment for socioeconomic factors, and the Medicare Payment Advisory Commission has indicated that it believes an adjustment for socioeconomic status would be appropriate.