Pay-for-Performance Models Hurt Safety-Net Hospital Finances

October 25, 2017 - Medicare pay-for-performance models may disproportionately penalize safety-net hospitals and other organizations that serve the most vulnerable patient populations, a new study in Medical Care found.

Hospitals in one of the most socioeconomically disadvantaged regions in the nation, the Mississippi Delta, faced growing financial performance gaps compared to their peers after Medicare implemented the Hospital Readmissions Reduction Program (HRRP) and Hospital Value-Based Purchasing Program (HVBP).

“The growing gap in financial performance between the two hospital groups is likely a result of both the amount of penalties incurred from HRRP and HVBP, and the expenditure from increased investments in infrastructure for reducing readmissions and improving quality of care and the patient experience,” wrote researchers from the University of Arkansas for Medical Sciences, Little Rock.

The analysis of hospital finances between 2008 and 2014 revealed that operating margins were significantly lower at Delta hospitals compared to their peers outside of the 252 counties throughout the period. But the margins significantly fell after Medicare implemented the two pay-for-performance programs.

Delta hospital operating margins dropped from -2.4 percent, -1.85 percent, and -2.59 percent in 2008, 2009, and 2010, respectively, to -6.9 percent in 2012. Margins continued to decrease to -10.39 percent in 2014.

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Operating margins in non-Delta hospitals also fell after HRRP and HVBP implementation. However, operating margins from 2008 to 2011 ranged from -0.61 percent to 0.14 percent and decreased to just -0.79 percent, -1.78 percent, and -1.47 percent in 2012, 2013, and 2014, respectively.

Total margins followed a similar pattern. Total margins at Delta hospitals dropped from a high of 3.6 percent in 2012 to 0.2 percent in 2014.

Conversely, total margins at non-Delta hospitals remained relatively consistent at an average of 5.3 percent.

After adjusting margins for hospital and community characteristics, researchers reported that non-Delta hospitals experienced an average 1 percent boost in operating margins and a 2.3 percent boost in total margins after HRRP and HVBP implementation.

On the other hand, Delta hospitals saw a decrease of 4.24 percent in operating margins and 0.30 percent in total margin after the programs launched.

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The study’s results showed that the pay-for-performance programs may disproportionately penalize hospitals that serve vulnerable, low-income communities.

The Delta region is a primarily rural area that spans eight states. The region contains a substantial proportion of minority and underserved individuals who have high rates of poverty, unemployment, chronic diseases, obesity, physical inactivity, food insecurity, mortality, and low-birth weights.

Individuals in the Delta region also face a significant physician shortage and care access barriers.

Despite managing some of the most vulnerable patient populations, the two Medicare pay-for-performance programs adjusted Delta hospital reimbursements because of how they fared compared to a national average.

Under the HRRP, CMS penalizes hospitals up to 3 percent of their Medicare reimbursement if readmission rates for six conditions are higher than the national average.

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The HVBP adjusts Medicare reimbursement upward or downwards based on hospital performance on quality measures in four categories: clinical process of care, patient experience, outcomes, and efficiency and cost reduction. CMS calculates a hospital’s score based on their performance compared to the national score and improvement on past performance.

Upward and downward payment adjustments under the HVBP started at 1 percent in 2013 and increased to 1.75 percent by 2016. CMS plans to adjust hospital Medicare reimbursement by up to 2 percent upward or downward starting in 2017.

National comparisons put Delta hospital revenue at increased risk compared to their peers. Delta hospitals earned little to no profit overall in 2014, while non-Delta hospitals had an average 5.3 percent profit margin that year.

With additional financial resources, non-Delta hospitals could invest in capabilities and care models that aligned with the two pay-for-performance models, causing the national average to potentially increase.

“However, with weak financial performance, Delta hospitals have fewer resources to improve quality of care, and their quality performance is likely to fall further below the national average,” researchers wrote. “By continuing to impose financial penalties disproportionally on Delta hospitals, HRRP and HVBP are likely to depress the already weak financial performance of these hospitals.”

To ensure safety-net hospitals improve financial performance and stay open, researchers advised policymakers to revise the pay-for-performance models. They called on CMS to calculate penalties and rewards based on comparisons of peers.

Healthcare officials should also offer a financial relief plan to Delta and non-Delta hospitals that primarily serve economically disadvantaged populations. CMS could invest the penalties paid back to the federal agency from the programs into quality improvement initiatives for hospitals falling behind.

Researchers concluded that Medicare value-based reimbursement programs are driving providers to deliver higher quality, cost-efficient care. But changes must be made to ensure safety net hospitals remain open.

“Although HRRP and HVBP are based on this concept, they use a one-size-fits-all approach without considering the uniqueness of the communities that hospitals serve,” they wrote. “The weak financial performance of Delta hospitals and widening disparity in financial performance between Delta and non-Delta hospitals under HRRP and HVBP indicate that altering these two programs is necessary and urgent to ensure that we do not remove the resources from the communities that need them most.”