Things That Don't Make Sense #1: The Dark Underbelly of Some Financial Incentive Programs

NOTE:  There is a lot about the healthcare system that doesn’t make sense.  From time to time, I will share thoughts on some of them.

The most effective way to get doctors and hospitals to change their behavior is to change how you pay them, an approach CMS has been using for years.  Given budget constraints, some of these programs are designed to be budget-neutral.   CMS decides on an outcome designed to either improve patient care or save money and then changes incentives to encourage the desired end.  This typically results in additional payment to those who successfully respond to the new incentives, but in order to keep the program budget-neutral, CMS penalizes others who are less compliant.

One recent CMS initiative – the Medicare Hospital Acquired Condition (HAC) program designed to reduce infections – is even worse than budget-neutral.  It enforces a penalty for poor results without offering a reward for superior performance.   Hospitals in the bottom quartile are penalized 1% on ALL their Medicare discharges.  During the program’s first year, hospital payments were projected to decline by over $300M.  Performance is evaluated each year, and new penalties are imposed every year.  

On the surface, this seems like a reasonable way to get hospitals to improve. 

Except for two things:

1.      This approach would be valid if every hospital were starting from the same point.  If everyone had an identical chance to be a top performer, it would be a fair horse race.  However this is not the case.  For a variety of reasons – including geography, strength of medical staff, level of resources, payer mix, and other factors –  some hospitals start with a distinct disadvantage.  This is like lining a dozen runners up at the start of a 5k race and placing ankle weights of various sizes (some very considerable) on some of the participants.  Starting conditions are not equal for all.

2.      The second issue relates to the ongoing nature of the program.  By definition, 25% of hospitals HAVE to end up in the lowest quartile every year, thereby being penalized.  If objection #1 stated above is valid, at least some of the penalized hospitals may end up there due, at least in part, to factors beyond their control.  The good news is that each year offers a new opportunity to improve.

However, if EVERY hospital is improving, bottom tier providers are at a continued disadvantage.  Even if a bottom tier hospital reduces its HAC rate, so does everyone else.  If everyone (including this year’s bottom hospitals) improves by, say, 1 percentage point, this year’s bottom tier hospitals will still be there next year, despite their improvement.  The only way out is to leapfrog hospitals in the next category up, improving MORE than they do.  But how likely is that?  Some of them are already disadvantaged, and now the program further reduces their payments.  Despite their improvement, they will continue to be penalized.

So even though the theory of financial penalty seems sensible, it can contribute to a long, slow death spiral for some of our most vulnerable hospitals.  Is this what we really want?