A Primer on Hospital Value-Based Purchasing

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Value-based care is designed to curb fast-rising healthcare costs. Here's an outline of what it will mean for hospitals.

As the cost of healthcare in the US reached astronomical heights—and rising (it’s predicted to reach $4.8 trillion by 2021)—the transformation of our health services was an unavoidable necessity and Hospital Value based purchasing is here.

These figures, coupled with another prediction that the Medicare Trust Fund (MTF) would be at a deficit by the year 2017, bring us to implementation of value-based purchasing.

The Medicare Trust Fund is comprised of funding from the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Trust Fund.

These funds are provided from payroll taxes and other sources, such as social security benefits, and funneled into the Hospital Insurance Trust Fund. In addition, funds authorized for allocation by Congress as well as other sources such as interest earned on investments are funneled into the Supplementary Medical Insurance Trust Fund. Together, these funds make up the MTF.

Hospital Value-Based Purchasing:

Hospital value-based purchasing aims to improve quality by linking financial incentives to defined measures and categories of care. There are 24 measures outlined for fiscal year 2016. A prior requirement to selection of a measure is that it has to have been part of the Inpatient Hospital Quality Reporting Program and made available to the public through the Hospital Compare website for at least a year.

The goals remain to improve quality and decrease the cost of care.

This program is connected with the largest portion of Medicare spending that includes and will affect inpatient hospitalizations for approximately 3,500 hospitals in the US. Alignment of payment with the chosen measures is aimed at quality as the predominant driver, and not merely quantity.

In their participation, Medicare-eligible hospitals are those:


• "Subsection (d) hospitals" in the 50 states or DC that are paid under the Inpatient Prospective Payment System (IPPS)

• Critical Access Hospitals (CAHs)

• Medicare Advantage (MA-Affiliated) Hospitals

Participating hospitals fund the program by contributing to a pool from 1.75% reduction of the respective hospital's base diagnostic-related group (DRG) payments for 2016 and 2017. The pool, in turn will be used to provide the payments for the hospitals that exceed the quality measures. This will be determined by their Total Performance Scores.

To see more on how the calculations of final scores is done, take a look at Quality Improvement Organizations report on hospital value based purchasing.

The potential loss is realized when hospitals that did not perform well are redistributed funds that are lower than the initial deposit into the pool.

There have been signs of progress on certain metrics in care as evidenced by the decrease in readmission rates, however, there are still about 1 in 5 discharged patients that are being readmitted within 30 days.

To Review the Frequently Asked Questions: Hospital Value Based Purchasing and Here.

Sources:RandJournal of Health Care ManagementCMSAHRQ