Linking Reimbursement to Performance in Acute Care Hospitals: Lessons from Maryland’s Implementation Experience

Abstract

Background: In 2009, Maryland introduced two pay-for-performance (P4P) initiatives in its unique all-payer rate setting system; one using hospital acquired conditions (MHAC) and the other clinical process of care and HCAHPS measures (QBR).

Purpose: This study summarizes interviews with Maryland hospital managers and payers about their early program implementation experiences and implications for Medicare Value Based Purchasing.

Methodology/Approach: Rigorous qualitative analysis sampling, data collection, and analysis.

Results: The design of the QBR program—withholding a small percentage of each Diagnosis-Related Group  payment and redistributing the pool based on performance—presented little threat to the hospitals, because the amount at risk is small and predictable. However, the initially proposed design on the MHAC program—refusal to pay for the marginal cost of 11 hospital acquired conditions—was extremely threatening, because the amount of revenue at risk would have been unpredictable and large. As implemented, though, the MHAC program used a withholding pool approach similar to the QBR and was much more acceptable to hospitals, even though the number of hospital acquired conditions subject to risk-based incentives was much larger—49, which increases the chances of incurring a penalty.

Conclusion: Hospitals were comfortable with the withholding pool approach because it is predictable, the amounts at risk were relatively low, and there is a potential benefit. However, refusal to reimburse for any costs associated with a single admission was threatening because of greater financial uncertainty and the focus on penalty without benefit, even when the trade-off means increasing the likelihood that a penalty might be incurred.

Practice Implications: The more acceptable withholding-pool incentive structure actually exposes hospitals to increased likelihood that a penalty will be incurred, but the alternative is much more threatening because it is less predictable, potential losses are high, and it offers no benefit for good performance.