Safety-net hospitals are inappropriately penalized by P4P programs

The Financial Effect of Value-Based Purchasing and the Hospital Readmissions Reduction Program on Safety-Net Hospitals in 2014

By Matlin Gilman, BA; Jason M. Hockenberry, PhD; E. Kathleen Adams, PhD; Arnold S. Milstein, MD; Ira B. Wilson, MD, MSc; and Edmund R. Becker, PhD
Annals of Internal Medicine, September 7, 2015


Medicare's value-based purchasing (VBP) and the Hospital Readmissions Reduction Program (HRRP) could disproportionately affect safety-net hospitals.


Safety-net hospitals were defined as being in the top quartile of the Medicare disproportionate share hospital (DSH) patient percentage and Medicare uncompensated care (UCC) payments per bed. The differences in penalties in both total dollars and dollars per bed between safety-net hospitals and other hospitals were estimated with the use of bivariate and graphical regression methods.


Safety-net hospitals in the top quartile of each measure were more likely to be penalized under VBP than other hospitals (62.9% vs. 51.0% under the DSH definition and 60.3% vs. 51.5% under the UCC per-bed definition). This was also the case under the HRRP (80.8% vs. 69.0% and 81.9% vs. 68.7%, respectively). Safety-net hospitals also had larger payment penalties ($115 900 vs. $66 600 and $150 100 vs. $54 900, respectively). On a per-bed basis, this translated to $436 versus $332 and $491 versus $314, respectively. Sensitivity analysis setting the cutoff at the top decile rather than the top quartile decile led to similar conclusions with somewhat larger differences between safety-net and other hospitals. The quadratic fit of the data indicated that the larger effect of these penalties is in the middle of the distribution of the DSH and UCC measures.

From the Discussion

Although the payment penalties that safety-net hospitals are receiving under VBP and the HRRP were usually small, supplemental analysis reveals that approximately 1 in every 10 safety-net hospitals in the top quartile of DSH definition are receiving payment rate reductions totaling 1.0% or greater in 2014. Because safety-net hospitals are known to have had historically low margins even before the 2008 economic recession, losing 1.0% or more of Medicare inpatient payments could have a significant effect on these hospitals' financial conditions for 2 reasons. First, if they were to receive persistent annual reductions in payment rate despite quality improvement efforts, the accumulation of these small penalties on overall financial position would further disadvantage these hospitals. Second, the transition from DSH to the Medicare UCC payments mandated under the ACA will mean less revenue as the proportion of uninsured patients decreases and mandated reduction in the total pool of funds increases. As such, it is not clear that these reductions will be fully offset from revenue by newly insured patients covered by the ACA's insurance expansion, given earlier evidence from insurance expansions in Massachusetts. When safety-net hospitals close, patients in these communities are negatively affected, and close monitoring of the financial condition of these institutions is warranted as the stakes in VBP and the HRRP increase.


Collateral Damage: Pay-for-Performance Initiatives and Safety-Net Hospitals

By Steffie Woolhandler, MD, MPH and David U. Himmelstein, MD
Annals of Internal Medicine, September 7, 2015

In this issue, Gilman and colleagues document a side effect of Medicare's pay-for-performance (P4P) initiatives: They divert money from underresourced safety-net hospitals that are mainstays of care in many minority communities to hospitals serving more affluent patients.

Medicare's P4P program, which does not adjust for patients' socioeconomic status, assumes that bonuses and penalties will prod substandard providers to improve or see their patients migrate to higher-quality options. However, when quality problems are due to a hospital's financial distress and patients cannot go elsewhere, penalizing low scorers may well punish patients and exacerbate quality disparities. Prescribing a starvation diet for safety-net hospitals that are strapped for cash and are quality challenged makes no sense unless the goal is to close them.

Are P4P's benefits worth the risk? The evidence is surprisingly slim. A few small, randomized, controlled trials in outpatient settings have shown improvement on surrogate measures, but most have found no improvement, and none have demonstrated reductions in death or disability rates.

Safety-net providers spend less on administration and may lack the administrative resources to keep up in the gaming arms race — the health care equivalent of teaching to the test. Expensive computer systems and consultants facilitate aggressive upcoding and meticulous documentation of comorbid conditions that can exaggerate patients' severity of illness and inflate risk-adjusted quality scores. Costly administrative efforts can also ferret out exceptions and ensure that boxes are checked (for example, “Yes, we counseled against smoking”), increasing process-of-care scores, regardless of whether they improve care.

Tethering physicians' rewards to box checking and redundant documentation risks both substituting insurers' priorities for patients' goals and demoralizing physicians. Pay for performance can crowd out intrinsic motivation that keeps us doing good work even when no one is looking.

Paying for quality has strong intuitive appeal. However, as with other medical interventions, intuition may mislead, and adopting everywhere policies that have been proven nowhere puts millions at risk for unintended side effects.



By Don McCanne, MD

Now that the Affordable Care Act has withstood constitutional challenges and five years of implementation, attention has turned to efforts to improve quality while controlling costs - paying for quality rather than volume through various pay-for-performance schemes (P4P) including Medicare's value-based purchasing (VBP) and the Hospital Readmissions Reduction Program (HRRP). Those closely following the reform process realize that such efforts to date have provided only negligible, if any, improvements in quality and cost containment.

Today’s report shows that these programs also can have adverse consequences. Because of factors such as chronic underfunding, high pressures placed on clinical and administrative staff, and patient populations that are less capable of interacting efficiently with the health care system, safety-net hospitals do not and are not expected to perform well on these measures. As a result, these underfunded institutions suffer further financial penalties which can only compound their difficulties in trying to meet the needs of the vulnerable populations they serve.

The lesson here is that we are diverting our resources and talent to efforts that will fall far short of our goals on quality and affordability, primarily because we passively accept the fact that our dysfunctional system under the Affordable Care Act is here to stay. Instead we should be working on introducing a system that actually will meet our goals, not only for quality and affordability, but also for universality, efficiency, comprehensiveness, accessibility, and, especially, equity - a single payer national health program.