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Management Challenge 2:
Transitioning to Value-Based Payments for Health Care

Why This Is a Challenge

To secure the future of the public health care programs, the Department must be vigilant in reducing waste and increasing value in health care. The Institute of Medicine (IOM) estimated that 20-30% of U.S. Health Spending (public and private) in 2009-roughly $750 billion - was wasted. Other estimates suggest similar levels of waste. Waste in health care programs is a multi-dimensional problem. The IOM report identified six major areas of waste: unnecessary services, inefficient delivery of care, excess administrative costs, inflated prices, prevention failures, and fraud. OIG work has identified waste in these areas; see also Management Challenges 3, 4, 5, 6, and 7 for more discussion on issues specific to prescription drugs, Medicaid, Medicare Parts A & B, Medicare Advantage (MA) and quality of care.

There is widespread agreement among experts that the incentives created by paying for health care based on the volume of items or services furnished, generally known as a fee-for-service system, contributes to waste in health care by encouraging unnecessary utilization and fragmented, poor quality care. Moreover, poor quality care harms beneficiaries and can result in additional costs; for example, OIG found that adverse events (i.e., patient harm caused by care) for hospitalized Medicare beneficiaries cost over $4 billion in one year. For these and other reasons, the Department is transitioning to value-based payments in Medicare and Medicaid intended to produce higher quality care at lower costs, in part by rewarding high-quality care, penalizing low -quality care, or enhancing care coordination. These models include, for example, value-based payments for hospitals, penalties for hospital readmissions, pay-for-performance systems, shared savings programs, gainsharing, care coordination payments, and bundled payments. These new models hold promise for improving health care delivery and efficiency; at the same time, they present long-standing and new program-integrity challenges.

Aligning Incentives. In a complex health care system, designing payment mechanisms that encourage desired goals (e.g., quality outcomes and cost efficiencies) while avoiding incentives that lead to unintended and undesirable outcomes (e.g., overutilization or stinting on care) is a key challenge. This is a particular challenge for models that use the traditional fee-for-service payment structure alongside, or in addition to, value-based payments, such as the Medicare Shared Savings Program, which includes both fee-for-service payments and shared savings payments. When considering such hybrid payment methodologies, it is important to carefully assess: (1) the financial incentives that arise from each payment component, (2) new or different financial incentives that might arise from their combination, and (3) the potential fraud, waste, and abuse risk areas corresponding to the multiple types of payment. Longstanding program and enforcement experience illustrates that how Medicare and Medicaid pay for services influences the types of misconduct that arise. For example, fee-for-service payments raise the risk of overutilization and payment for unnecessary services; some risk-based or bundled payments may reduce overutilization risks, but increase risks of underutilization or stinting on care. For models that are untested for the Department and for providers under Medicare and Medicaid, it can be challenging to anticipate and account for all of the potential impacts - both benefits and risks - of significant changes in payment methodology.

An additional challenge arises because certain initiatives could raise costs in one part of a program but lead to greater savings elsewhere. For example, greater investments in chronic disease management could improve patients' overall health and reduce the need for expensive emergency care. Similarly, effective care coordination across multiple programs - such as for individuals eligible for both Medicare and Medicaid -- is important not only because of the potential for better patient care, but also because costs may increase for one program but decrease under another. For example, increased use of personal care services (covered by Medicaid) may increase Medicaid and therefore States' costs while saving money for Medicare and the Federal Government by reducing or avoiding hospitalizations. The Department needs to be mindful of these incentives when structuring cross-cutting care coordination initiatives.

Program Design and Integrity. Designing, implementing, and overseeing many new and sometimes complex payment models and demonstrations, combined with the complexity and scope of the Medicare and Medicaid programs and evolving healthcare landscape, poses significant management and program integrity challenges. Designing payments and programs with incentives in mind is essential, but it is only one facet. The Department must track and coordinate new models to ensure effective administration and must be alert to issues that impact more than one program, such as provider participation and beneficiary alignment. The Department must continually review the underlying market and provider practice assumptions, including those related to quality, on which payment structures and the resulting payments are based. The Department must be alert to new program integrity risks that may emerge as a result of changing financial incentives and deploy appropriate program integrity tools to prevent and detect fraud, waste, and abuse.

Getting value-based payment structures and rates right can be difficult. OIG work has illustrated the challenges in structuring accurate bundled payments, which cover related services and/or products or an episode of care. For example, OIG found that Medicare's bundled payment for global surgery fees, which provides one fee for the surgery and related pre- and post-surgical care, has not been adjusted to reflect evolving physician practices. As a result, the payment model assumes more services than are typically provided, resulting in inflated payments. Examples of other design and rate setting challenges include ensuring that payment bundles avoid creating incentives and opportunities to furnish and bill for services outside the bundle to increase payments, that providers participating in multiple incentive payment programs are not receiving duplicative incentive payments, and that payment mechanisms encompassing services furnished across multiple provider settings work properly and reimburse correctly.

Integrity of Information. When payments are linked to quality, outcomes, or performance, the Department must ensure the reliability of underlying data. Many value-based payment mechanisms rely on complex data, electronic health information, and sophisticated quality and performance measures. To ensure reliable results, data must be accurate, complete, and timely. Measures must be appropriate and meaningful. Outcomes must be correctly assessed to ensure correct payment. When quality or performance is determined on the basis of Medicare or Medicaid claims billed, ensuring accurate and reliable claims information - and detecting improper claims -- is also critical.

In addition, the data CMS provides to the industry must be accurate. For example, programs such as the Pioneer Accountable Care Organization (ACO) Model, the Medicare Shared Savings Program (MSSP), and the Medicare fee for service (FFS) Physician Feedback Program call for CMS to provide performance or clinical data to providers so they can use it to improve the care they furnish. To be effective, the data must be correct, the metrics meaningful, and the information usable.

In sum, the linkage between quality, performance, and payment presents new challenges for administering Medicare and Medicaid payment systems.

Progress in Addressing the Challenge

The Department is continuing to implement value-based payment programs and develop new demonstration programs. CMS recently reported positive initial results from the first year of the Pioneer ACO program - all ACOs achieved quality goals, and 13 ACOs generated a total savings of $87.6 million, of which $33 million was returned to the Medicare Trust Fund. In 2013, CMS began implementing the Bundled Payment for Care Improvement (BPCI) Initiative, which includes four models testing different payment mechanisms that include quality and accountability measurements. CMS continues to develop, implement, and test new value-based payment structures.

The Department has taken steps to foster integrity in these new programs, as illustrated by the regulations for the MSSP and Participation Agreements for the BPCI Initiative, which incorporate various safeguards intended to mitigate potential vulnerabilities. It is too early to assess the outcomes of these program integrity efforts, but CMS's attention to, and integration of, safeguards into the design of the MSSP and BPCI Initiative demonstrate a focus on program integrity that should be replicated in all programs.

CMS has reported that it is developing management and tracking systems and procedures to support new value-based payment structures and other new models. CMS also reports that it has established internal review processes to promote the use of effective measurement strategies, to coordinate across components regarding quality measurement, and to identify areas where beneficiaries are impacted by more than one value-based payment initiative. CMS also provides technical assistance to participants in new models.

What Needs To Be Done

The Department should continue to prioritize the effective transition to value-based payment mechanisms and the development and refinement of quality, outcomes, and performance metrics. Data systems supporting programs that link payment to quality and value must be scrutinized for timeliness, accuracy, and completeness. The Department should continue to develop and maintain internal controls to ensure effective coordination among value-based payment programs and to avoid duplicative payments and operational inefficiencies. The Department must scrutinize bundled payments, shared savings programs, and other value-based payments to ensure that payment methodologies are appropriate, payments are calculated accurately, and that performance-based incentives are aligned with beneficial outcomes for Medicare, Medicaid, and patients. CMS should also continue its efforts to provide technical assistance to participants in its demonstration and other value-based programs.

CMS should continue to strengthen its program integrity tools and apply them as needed to ensure integrity in new models. In overseeing new models, the Department should monitor financial incentives to ensure that they achieve quality and efficiency goals and do not result in undesirable outcomes. The Department's oversight is critical and must consider the full range of potential risks. For example, shared savings or bundled payments may pose a heightened risk of stinting or underutilization compared to traditional fee-for-service payments, for which the larger risk may be provision of unnecessary care or overly expensive care. Models that incorporate both types of payments may raise both types of risks or different risks. CMS must continue to assess emerging fraud, waste, and abuse risks in new models and, as necessary, develop and implement new tools to detect and prevent them. Moreover, the Department should continue to monitor cost, quality, utilization, outcomes, and experience of care and to disseminate lessons learned to improve new programs.

As demonstration programs continue to unfold, the Department should carefully monitor for successes and benefits that can be scaled and replicated, as well as for potential problems -- including inefficiencies, misaligned incentives, or abuses. The Department must rigorously evaluate results of demonstration programs and other new value-based purchasing payment mechanisms. As with any innovation and experimentation, missteps may occur; it is critical that the Department address missteps effectively and take appropriate actions to prevent their recurrence.

Management Challenge 3: Ensuring Appropriate Use of Prescription Drugs in Medicare and Medicaid

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