Payment Incentives: Decreasing Hospital Complications
The Policy
Medicaid policies that adjust payment to health care providers for potentially avoidable conditionsbeyond those conditions included in the floor set by the Affordable Care Act.
Introduction
Potentially avoidable conditions (PACs) include but are not limited to "never events" which are serious medical errors that are particularly shocking and typically preventable, such as wrong-side surgery, wrong procedure, or death or disability because of medication errors. PACs also include those conditions that occur after admission to the hospital which are not the result of a natural progression of the illness with which the patient was admitted. These include conditions such as infections, collapsed lungs and patient falls.
These kinds of problems have a real and serious impact on patients' health. A 2010 study indicated that 99,000 patients die each year as a result of a healthcare associated infection, most of which are preventable. They also have a clear impact on public programs' bottom lines. In Maryland, for example, during fiscal year 2008, hospital-based preventable complications were present in over 6 percent of inpatient cases and represented $522 million in potentially preventable hospital payments.
In 2008, Medicare stopped paying providers for the added costs of eight PACs chosen from the 28 events listed by the National Quality Forum. Subsequently, Medicare added another three never events to the list. Although they weren't required to, approximately 17 states followed suit by passing nonpayment laws for their Medicaid programs that mirrored or were close variations on the Medicare never events. Medicare's nonpayment policy is estimated to reduce payments by only .001 percent.
Under the Affordable Care Act (ACA), the federal government will withhold federal Medicaid payment to states for the costs associated with certain PACs beginning July 1, 2012. The regulations associated with this provision, released in June 2011, would deny payment for the same list of PACs as Medicare uses in its nonpayment policy. However, this list of events is considered only a "floor" for state payment policies; the rule allows states to go further on their own if they want to deny or adjust payment to a broader set of PACs, including those conditions that are frequently - but not always - preventable, such as surgical site infections.
Evidence of Quality Improvements
In the second year of Maryland's initiative, the State experienced an 11.9 percent drop in the frequency of PACs (after adjusting for difference in patient mix from year to year).
Evidence of Savings
Because the health care needed to treat these types of preventable complications is extremely costly, as complication rates drop, so do states' health care costs. For example, Maryland's payment reform initiative was designed to be "revenue-neutral" - that is, payment cuts to some hospitals with high rates of complications were offset by additional payments to hospitals with low rates of complications. However, the reduction in PACs resulting from these new incentives translated to approximately $62.5 million in savings in the second year of the initiative.
States can save even more money if the don't design "revenue-neutral" reforms - that is, they reduce payments to hospitals with high rates of complications without increasing payments to hospitals with low rates. Community Catalyst has estimated that, before accounting for reduced complication rates, states could save over $679 million annually through Medicaid payment reforms for PACs - click here for state-by-state estimates.
Key Considerations
Managed Care: States can adjust payments to hospitals directly in their Fee for Service product.They can reap even larger savings by modifying their managed care contracts to require MCOs to adjust payments to hospitals based on PACs, and reducing the capitation payments they pay to MCOs to reflect this payment adjustment.
Data Collection: In order to distinguish problems patients have when they enter the hospital from those acquired at the hospital that could have been prevented, states will need to collect data on conditions present at the time of admission to the hospital. While some states already collect this data, many do not.
Number of conditions: A more comprehensive approach will have a larger impact on quality of care since it looks at a broader and more frequently occurring list of events, and could result in larger savings for states. Maryland, for example, ties payments to hospitals' rates of 49 PACs.
Scope of providers affected: Most state laws on PACs apply only to hospitals. However, targeting PACs from other healthcare providers is likely to produce additional savings for states. For example, some states have applied their PAC payment policies to ambulatory surgical centers (e.g. Massachusetts, Missouri) or, more broadly, health care providers and facilities (Pennsylvania).
Risk adjustment: To put in place a successful payment reform strategy, states will need the ability to risk-adjust hospitals' rates of PACs to take into account the unique health status and social risk factors of the patients each hospital cares for. This is essential to prevent penalizing facilities that treat patients who are sicker and harder to care for, since patients with more severe diseases or social risk factors are more prone to PACs. Risk adjusting hospitals' rates of complications allows the state to see how their rates would compare if they all saw the same patient-mix.
Performance Benchmark: The potential for savings from payment reform varies from state to state and depends in part on how aggressive a state is willing or able to be. States have a number of choices that will determine the size and speed at which they realize savings. These include:
- Whether to measure - and base payments on - hospitals' performance against the average for all facilities or against some stricter benchmark such as the rate of PACs at the best performing hospitals
- Whether to base payment adjustments only on those conditions for which a facility does worse than the benchmark, or to look at their average rate across readmissions for all conditions (in other words, does a hospital get "credit" for those areas where its rate of PACs is better than the benchmark level?)
Further Resources
Community Catalyst's Payment Reform Toolkit, which includes model legislations, state savings estimates, and talking points to help respond to hospital concerns
Smart Payment Reforms Can Reduce Costs and Improve Quality: A Short Primer, by Community Catalyst
Nonpayment for Preventable Events and Conditions: Aligning State and Federal Policies to Drive Health System Improvement, by the National Academy for State Health Policy
Made the Grade
Room to Improve 
Miss the Mark