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The impact of hospital pay-for-performance on hospital and Medicare costs

Kruse G, Werner RM, Polsky D, Stuart E. The impact of hospital pay-for-performance on hospital and Medicare costs. Paper presented at: AcademyHealth Annual Research Meeting; 2012 Jun 25; Orlando, FL.


Research Objective: Pay-for-performance (P4P) has been commonly implemented in health care settings to improve quality of care. As P4P becomes more widespread, including its national adoption in the Affordable Care Act, creating a business case for P4P is essential to its adoption, sustainability, and success. Our objective is to evaluate the effects of a CMS P4P demonstration project in hospitals on total costs for hospitals and for Medicare. Study Design: CMS launched a hospital P4P demonstration project in 260 hospitals in October 2003. We use a difference-in-differences with hospital fixedeffects approach to evaluate changes in costs from 2002 to 2005 at P4P hospitals and a group of 780 propensitymatched control hospitals among patients with acute myocardial infarction (AMI). Using data from MedPAR for hospital revenues (Medicare payment) and from the Medicare Cost Reports' cost-to-charge ratios for hospital costs, we examined changes in costs from a hospital's perspective: hospital's total costs, total revenues, and margins per AMI patient. Using data from Medicare claims for total inpatient costs and 1-year posthospitalization costs, we examined changes in costs from Medicare's perspective: Medicare's total payment for care in the one year after admission to the hospital. All costs were adjusted to 2007 dollars. Population Studied: We included all fee-for-service Medicare beneficiaries hospitalized for acute myocardial infarction (ICD-9-CM code 410.x1) in one of the 1,140 hospitals in the match sample from fiscal years 2002- 2005. The sample included 420,211 admissions in these 1,140 hospitals. Principal Findings: The effects of P4P on costs of care were small. Hospital revenues increased by $281.80 in the first post-P4P year and $20.09 in the two years after P4P was implemented at P4P hospitals compared to non-P4P hospitals (on a base revenue of just over $16,000). Medicare payment for the index hospitalization to P4P hospitals was $285.30 higher than it was to control hospitals in the first post-P4P year and declined to $18.58 over the two years after P4P was implemented (on a base payment of over $17,000). Overall, we found no significant effect of P4P on hospital financials (revenues, costs, margins) or Medicare payments (index hospitalization and one year after discharge) for AMI patients. Conclusions: Pay-for-performance in the CMS hospital demonstration project had minimal impact on the hospital financials and Medicare payments to hospitals. Implications for Policy, Delivery or Practice: As P4P extends to all hospitals under the Affordable Care Act, these results provide some estimates of the impact of P4P and emphasize our need for a better understanding of not just the quality implications, but also of the financial implications of P4P on providers and payers if we want to create sustainable and effective programs to improve health care value.

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