Healthcare Reform and Opportunities for Performance Improvement: How to Use Data to Incent Physicians, Change Behavior

The Congressional Budget Office in June 2010 stated, "slowing the growth rate of outlays for Medicare and Medicaid is the central long-term challenge for federal fiscal policy." This imperative is driving healthcare policy and will affect every hospital's strategy concerning Medicare patients and the hospital's relations with their physicians. As the federal agencies introduce programs aimed at reducing cost while maintain or improving quality, health systems must respond intelligently and adapt their strategy and business plans to fit within new healthcare delivery models.

The federal government, through the Patient Protection and Affordable Care Act, has designed three specific initiatives to improve quality and control costs: the Medicare Shared Savings Program, which establishes Medicare accountable care organizations; the Bundled Payments for Care Initiative, which expands CMS' Acute Care Episodes; and Consumer Operated and Oriented Plans. ACOs and bundled payments are oriented primarily at the Medicare population, but CO-OPS extend beyond that. They are defined by the PPACA as non-profit insurance companies that would allow "consumers" — which include providers — to compete directly with traditional medical insurance companies.

While not all health systems may choose to develop ACOs or CO-OPs, it is our belief that all hospitals that treat Medicare patients will ultimately be required to accept bundled payments. Under the Bundled Payments for Care Initiative, hospitals must apply to participate, receiving global or bundled payments — one payment to be shared between the hospital and physicians for a specific episode of care or predetermined period of time — from CMS if accepted. For the purposes of this article, we'll refer to these payments as global budgeting efforts. However, if the initiative is successful at lowering costs while maintaining quality, we expect bundled payments to eventually become par for the course for Medicare providers.   

As hospitals are contemplating their responses to global budgeting or these other risk-sharing initiatives, the questions that need to be answered are similar. Based on the physicians' and hospitals' quality outcomes, what percentage of the reimbursements should be shared with the medical staff? How can hospital administrators help physicians improve clinical outcomes to maximize the enterprises' collective reimbursements? What percentage of dollars should be allocated for each of the clinical services based on their group's outcomes? Which outcomes should be measured to determine quality improvements?

Providers must prepare themselves to thrive on fewer dollars as global budgeting in all of its forms is implemented by CMS and other fiscal intermediaries. For provider enterprises that are prepared, this represents an opportunity that is long overdue — financially incenting physicians on the basis of clinical quality and cost efficiencies outcomes. If providers take advantage of the recently enacted federal initiatives and specific provisions of the PPACA, physicians will retain control of their clinical decision-making prerogatives and prosper financially along with their hospitals.

Opportunities for performance improvement
Success under global budgeting will require hospitals to be armed with data to drive performance improvement and track physician performance on quality and cost indicators, which then can be used to determine payments. Even if a hospital is not yet accepting bundled payments, access to this data can be used to improve quality and reduce costs in preparation for new healthcare delivery models, which will be based on value.

Hospitals will need to analyze medical records data to create severity-adjust patient-level data and implement physicians-directed, best practice improvements. The process should involve aggregating at least three years of a hospital's all-payor data and using the risk-adjusted information in order to compare providers' practices and patient outcomes whose severity levels are relatively the same. Key metrics for hospitals to derive from this claims data include mortality and morbidity rates, average charges and length of stay norms for the hospital overall as well as by service line and by diagnosis-related group. These norms should then be shared with each physician, along with data on his or her outcomes. The process should be entirely educational and non-threatening. Physicians are seldom aware of the significant variations that are present in their practice patterns, and these techniques represent the opportunity to identify those patients with the highest quality, most cost-efficient outcomes. The clinical and operational processes that produced these superior outcomes can then be replicated as templates for future continuous improvements.

Next, physicians guided either by an internal or external facilitator should review the care with the best outcomes to identify best practices to include in clinical pathways. For those patients with less effective care, hospitals should work with the patients' physicians to determine if there were clinical and/or organizational issues that could have created the observed inefficiencies or quality problems. We recommend engaging each physician on a one-to-one basis to discuss his/her variations in practice, their consultants or other issues that might be contributing to any observed inefficiencies. A plan should then be developed to make changes that the physicians determine to be appropriate. Here, it is important to allow the physician to lead the charge (hence the name of physician-directed best practice improvements) rather than to dictate changes to the physician. The best demonstrated clinical and operational processes are then incorporated into clinical pathways to be used for future patient care and computerized physician order entry implementation to continuously improve clinical and operational outcomes.

Transparent metrics of quality for all stakeholders
In order to keep providers engaged in quality improvement efforts, data shared with physicians must be transparent and easily comprehended. This can be challenging as there are many performance metrics that must be tracked. We recommend hospitals share and track at least six of the most clinically and fiscally relevant quality indicators (as identified below) over a three-year period to better track trends and improvements. Verras recently developed the Index of Quality Improvement to do just that. The IQI uses an 800-point scale that is analogous to the Dow Jones or other financial indices.

The six indicators of quality that comprise the IQI are:

1. Resource Consumption, measured by the inflation rates of hospital charges over a three-year period (charges as a surrogate for resources consumed).
2. Morbidity Rates, measured by excessive lengths of patients' stay and averaged over three years.
3. Mortality Rates, for the top 10 major diagnostic categories over three years.
4. Reductions in Variation, for the top 10 DRGs, which constitute the majority of a hospital's patients.
5. Patient Satisfaction, as reported to the federal government.
6. National Hospital Quality Measures, as reported to the federal government.

Hospitals may also opt to include a seventh indicator for accountable care organization measures, which encompasses the 65 quality metrics that ACOs must report. If a hospitals selects to include this indicator, the total IQI point scale is then increased to 1000 points.

By tracking performance improvement indicators and presenting them in a straightforward manner, hospital leaders can more easily determine hospital and physician financial, gain-sharing rewards as well as demonstrate to their local employers and patients the quality and cost efficiencies they are delivering to their communities.


Using a data-driven, change management approach to implement physician-directed best practices is an extremely effective means of improving providers' clinical quality and cost efficiencies. When these proven techniques are augmented with physicians' financial incentives within global budgeting or other at risk-bearing structures, hospitals and physicians will thrive even in an environment of ever diminishing Medicare and Medicaid reimbursements. Basic methods of quality improvement as described here will be the optimal means of implementing healthcare reform, far outstripping top-down mandates by governments, institutions or cross-industry consortiums. 

By reducing variations through statistical analysis, continuous quality improvements can be implemented that reduce resource utilization, increase throughput, lower costs, minimize errors and improve patient outcomes. Moreover, when physicians are reimbursed on the basis of verifiable, superior outcomes, hospital enterprises will move healthcare reform forward and benefit all stakeholders.

More Articles Featuring Verras:

Strategies to Remove Hidden Costs in Your Hospital
Is Your Organization Ready For Accountable Care? How to Implement a Readiness Assessment and Establish Priorities

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