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August 2004


Legislative Watch

By George G. Olsen, JD, and Rebecca A. Reisinger
A new phrase is finding its way into the lexicon of Medicare: "pay for performance." The idea here is that the amount Medicare will pay to a health care plan or provider is contingent upon the plan or provider's compliance with specified performance standards. Entities that meet or exceed the standards would be paid an amount in excess of that paid to plans or providers that fail to meet the criteria.

One of the first legislative manifestations of the principle was in the Voluntary Chronic Care Improvement Program (CCI) established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). As described in previous columns, the CCI is designed to encourage better coordination of health care for persons with multiple chronic illnesses including congestive heart failure, complex diabetes, and chronic obstructive pulmonary disease. CCI programs may be operated by disease management organizations, health insurers, integrated delivery systems, and various other entities. CCI plans will be paid a monthly fee for each participant in the program. However, the MMA requires the sponsoring entity to establish performance standards (which must be approved by the Secretary of Health and Human Services [HHS]) for clinical quality, beneficiary and provider satisfaction, and cost savings. If the CCI plan does not meet the performance goals, the HHS Secretary may make an adjustment in the payment amount to the organization. Furthermore, the Secretary may terminate a plan if it does not demonstrate significant progress in improving clinical quality and beneficiary satisfaction. Although the regulations governing the first phase of the CCI have been promulgated, the program is not yet up and running. On June 23, 2004, Senator Max Baucus (D-Mont) introduced legislation that would dramatically expand the use of "pay for performance" in Medicare. His bill, S2562, the "Medicare Quality Improvement Act of 2004," is designed to improve the quality of health care, reduce medical areas, and make Medicare payments contingent upon the achievement of those objectives. It establishes a new payment incentive structure for the Medicare Advantage (MA) program (formerly Medicare+Choice) and the Medicare End Stage Renal Disease (ESRD) program.

THE BAUCUS PROPOSAL
The bill provides for two new types of payments for MA plans beginning in 2007: National Performance Quality Payments that would reward top-rated plans, and National Quality Improvement Payments that would reward those plans demonstrating the greatest rating improvement over baseline year ratings. The HHS Secretary is to implement national improvement standards that MA plans and cost reimbursement contracts must meet in order to be eligible for Quality Improvement payments.

In order to qualify for the enhanced payments, plans must collect and submit specified data to the Secretary. Incentive payments are made on a "per beneficiary" basis, multiplying the number of enrollees in a plan by a dollar amount established by the Secretary. While the dollar amount must be the same for all beneficiaries enrolled under the particular plan or contract, the dollar amount will vary based on the plan's performance with the highest performing plans being provided the greatest amount of incentive payments. Performance Quality payment amounts must be greater than Quality Improvement payments. Incentive payments must be used for one of the following purposes: reducing cost-sharing or premiums, enhancing quality programs, or improving the benefit package. Plans receiving incentive payments must report their use of the payments to the Secretary.

The Secretary must develop scoring and ranking systems to be used in determining the appropriate recipients of Performance Quality and Quality Improvement payments. The scoring and ranking systems must be risk-adjusted and will be updated annually. Incentive payments are funded through a 2% reduction in area-specific, nondrug benchmark payments to MA coordinated care plans and MA private fee-for-service plans. Reasonable cost contract payments and Comparative Cost Adjustment Program payments will also be reduced by 2%. The proposal establishes an incentive payment program for ESRD providers that is almost identical to the program established for MA plans and reasonable cost reimbursement contracts. Pediatric renal dialysis facilities are not included in the incentive payment program. Renal dialysis providers and facilities must use the incentive payments for one of the following purposes: to invest in information technology systems that improve the quality of care, to enhance health care quality programs for ESRD patients, or any other purpose deemed appropriate by the Secretary. ESRD incentive payments will be funded through a 2% reduction in the new case-mix adjusted prospective payment system and a 2% reduction in payments for separately billable drugs and biologicals.

For 3 years beginning in 2006, the Secretary shall award bonus payments to Medicare providers who demonstrate innovative practices, structural improvements, or capacity enhancements that improve the quality of health care. A minimum of 10 awards shall be given for each year. Providers (either entities or individuals) must apply for the awards. The proposal appropriates $30 million out of any funds not otherwise appropriated; $10 million will be available in each of the 3 years of the program's existence. The bill also provides for a 3-year demonstration program to encourage pediatric dialysis facilities to provide superior quality health care for their ESRD patients. The programs shall be funded through the Medicare Part B trust fund in a budget-neutral manner. The Secretary must report to Congress on results along with recommendations concerning the appropriateness of including pediatric renal dialysis facilities in the performance payment program.

The proposal establishes a Medicare Quality Advisory Board to advise the Secretary on the development, implementation, and updating of the scoring and ranking systems; the applicable percent for Performance Quality payments; the selection of recipients of the innovative quality practice awards; and the selection of demonstration project sites and quality measures. The Board will submit an annual report on the incentive payment programs, develop national priorities and an agenda for improving health care quality in the Medicare program, and perform any requested additional duties.

Two studies are called for in the legislation. The Institute of Medicine must study how payment mechanisms for items and services affect their quality. The Secretary shall study the actions necessary to establish a payment system under original Medicare fee-for-service Parts A and B that aligns the quality of services provided with the reimbursement provided.The Medicare Payment Advisory Commission ("MedPAC") must study the appropriateness of incorporating geographic and risk adjusters into the quality performance incentive payment programs established in the legislation. A report is due to Congress no later than January 1, 2006.

The Secretary must conduct a 3-year demonstration program to examine the development and use of quality measures, pay-for-performance programs, and other strategies to encourage providers to furnish superior quality health care to children enrolled in Medicaid and SCHIP. The Secretary may waive program requirements in order to carry out the purposes of the demonstration. Funding will be treated as medical assistance and child health assistance and shall be provided in a budget-neutral manner.

The proposal provides for three studies concerning the coordination between Medicare and Medicaid and those beneficiaries who are eligible for both programs. The Centers for Medicare and Medicaid Services (CMS) Study & Report must identify the following: efforts to coordinate and integrate data from the Medicare and Medicaid programs; barriers to data coordination; the potential benefits of data integration; and the steps necessary to coordinate and integrate beneficiary data from both programs. A report is due to Congress by December 31, 2004. MedPAC must study the characteristics of individuals eligible for both Medicare and Medicaid (dual-eligibles), identify the costliest groups of dual-eligibles, identify services used by those individuals, and develop recommendations on how services might be better coordinated. MedPAC must also study the care coordination programs available to dual-eligibles, the impact of care coordination on program costs, and whether any savings from care coordination are being counted as a benefit to Medicare or Medicaid. The bill also establishes a 5-year demonstration program that will award grants to entities exploring the development and use of Medicare Smart Cards and the impact of such use on health care costs, quality, and patient safety.

In this election year, there is little chance that Senator Baucus' proposal will receive significant attention in Congress. However, the ideas of the legislation could provide the basis for similar legislation in the 109th Congress. In short, "pay for performance" is a concept that may well become deeply ingrained in Medicare payment processes.

George G. Olsen, JD, is a partner of the firm Williams & Jensen, PC, Washington, DC. He is also legal counsel for the National Association of Rehabilitation Agencies and Providers.
Rebecca A. Reisinger is an associate at Williams & Jensen, PC.

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