Statement by
Herb Kuhn, Director
Center for Medicare Management
Centers for Medicare and Medicaid Services
U.S. Department of Health and Human Services

Pay for Performance Initiatives
Subcommittee on Health of the Committee on Ways and Means

March 15, 2005

Chairman Johnson, Congressman Stark, thank you for inviting me to testify on the Centers for Medicare & Medicaid Services' (CMS) initiatives to provide financial incentives for health care providers to improve the quality of care they provide to seniors and people with disabilities. The Administration is exploring innovative approaches to achieve better patient outcomes at lower costs, and the initiatives we are setting could help CMS realize this goal. The Administration also recognizes that pay-for-performance is in the early stages of development, and a great deal of work still must be done to develop a full set of widely applicable quality performance measures. Supporting efforts by health professionals to improve the quality and efficiency of care for Medicare beneficiaries is the motivation behind CMS' various efforts to develop pay-for-performance models, as inefficient health care is costly to the patient and to the government. Despite innovations in medical science, limited advancements have been made to integrate advanced capabilities with high quality medical practice.

Financial incentives such as pay-for-performance, however, are only one part of CMS' efforts to support high-quality efficient care. For example, CMS is helping to support the development of valid quality measures and quality improvement efforts in a variety of care settings, including long-term care facilities. When clear, valid, and widely accepted quality measures are in place, pay-for-performance is a tool that could provide additional support. Furthermore, as demonstrated by our Hospital Quality Initiative, small percentages in financial incentives can encourage provider interest in quality, while keeping the payment system predictable for health care providers.

In this context, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) recognizes additional opportunities for CMS to encourage and support high quality care. For example, the Chronic Care Improvement Program (CCIP) will test a population-based model of disease management. In addition, this program will generate data on performance measures that will be useful as we examine ways to improve the Medicare program as a whole. The program will use pay-for-performance to provide beneficiaries with better outcomes, and we expect, at a lower cost. Madam Chairman, I would like to take this opportunity to thank your for your work on this program, which will help to make a real difference in improving the lives of beneficiaries. I also would like to note that CMS is supporting quality initiatives for chronic illnesses in Medicare Advantage plans through payments based on risk adjustment. Using risk adjusted payments ensures plans are paid more accurately for the health status of their members. As a result, plans with sicker beneficiaries are paid more than plans with healthier patients.

Government policies should support a health care system that provides doctors and patients with the ability to make effective decisions on the basis of the best scientific evidence about benefits and costs. In cases where there are clear opportunities to pay for better results rather than simply for more services, performance-based payments may be an important element in our efforts to support the right services and higher quality for our beneficiaries. The current Medicare payment system pays physicians and other health care providers based on the number and complexity of the services provided to patients. We are examining our current system to better anticipate patient needs, especially for those with chronic diseases, and how the incentives can be better aligned with the kind of care we want, expensive procedures and hospitalizations can be reduced, which benefits both patients and taxpayers.

Developing Standardized Quality Measures

We are working toward improving quality in every setting in which Medicare pays for care. Based on collaborative work by a broad range of stakeholders, combined with experience in the private sector, there is a growing view that recognizing providers who furnish effective care can lead to better quality care. Valid consensus-based quality measures are critical to any system based on quality. This prevents providers from receiving conflicting directions and gives them meaningful support in providing better care.

The ability to evaluate and measure quality is an important component to delivering high quality care. To do so, CMS is collaborating with a variety of stakeholders to develop and implement uniform, standardized sets of performance measures for various health care settings. For example, CMS is working in collaboration with hospital associations, the Joint Commission on the Accreditation of Healthcare Organizations (JCAHO), the Agency for Healthcare Research and Quality (AHRQ), consumer groups, major payers including the AFL-CIO, representatives of health care purchasers, health professionals, and the National Quality Forum to refine and standardize hospital data, data transmission, and performance measures. Ambulatory care measures have also been developed by CMS working in an extensive process with the American Medical Association's Physician Consortium for Performance Improvement and the National Committee for Quality Assurance to measure improvements in care. The measures from this process were submitted late last year for review and comment to the National Quality Forum, a non-profit organization that represents a broad range of health care stakeholders and provides endorsement of consensus-based national standards for measurement and public reporting of healthcare performance data.

These efforts build upon the success of CMS' other quality initiatives - Nursing Home Compare, Home Health Compare, and Hospital Compare - which provide quality information to consumers and others to help guide choices and drive improvements in the quality of care delivered in these settings.

In addition, CMS recognizes the potential for information technology to improve the quality, safety and efficiency of health care services provided to all Americans. Through the Doctors' Office Quality - Information Technology (DOQ-IT) pilot project, CMS is exploring the adoption and effective use of information technology by physicians' offices to improve quality and safety for Medicare beneficiaries and all Americans. The pilot project promotes greater availability of affordable and effective health information technology by providing assistance to physician offices in adopting and using such technology.

CMS also is working with Quality Improvement Organizations (QIOs) to improve the quality of care delivered to beneficiaries. In addition to CMS' various quality initiatives, CMS is supporting the development of more evidence-based care. For example, CMS recently launched the "Fistula First" initiative, which is designed to give patients with end stage renal disease the ability to receive life-sustaining dialysis through a method that performs better than other procedures while requiring less maintenance. By funding and overseeing this initiative, CMS is using its leadership position to partner with the medical community and improve the lives of patients. Pay-for-performance has the potential to promote payment incentives that do not hamper, but rather encourage health care professionals to use the most clinically appropriate procedures.

Supporting Quality Through Pay-for-Performance

Measuring quality and providing support for quality improvement is only the first step. The MMA provides CMS with the authority to conduct pay-for-performance initiatives and demonstrations, which will allow us to consider ways payment systems might provide appropriate incentives to providers. We expect these pay-for-performance initiatives will support quality improvement in the care of Medicare beneficiaries and make the Medicare program a more cost-efficient purchaser of health care services. Even small financial incentives can spur provider interest in quality of care projects, as evidenced by the high percentage of hospitals participating in the Hospital Quality Initiative.

Pay-for-performance initiatives are currently underway in a variety of health care settings where Medicare beneficiaries receive services, including physicians' offices and hospitals (described below). Because patients with chronic conditions often require care across several settings of care, CMS is pursuing pay-for-performance initiatives to support improved coordination of care. CMS will seek input concerning actions we can take administratively to best implement a pay-for-performance system to achieve our goals of promoting better quality and reducing program costs. We want to provide the public with an opportunity to present ideas and suggestions about how pay-for-performance payment mechanisms should be structured, including a public dialogue on key technical and statutory issues.

Improving Inpatient Care through Hospital Initiative and Demonstration Programs

Since 2003, CMS has operated the Hospital Quality Initiative, which is designed to stimulate improvements in hospital care by standardizing hospital data, data transmission, and performance measures to ensure that all payers, providers, oversight and accrediting entities use the same measures when publicly reporting hospital activities. Under the MMA, an initial set of 10 quality measures will be linked to Medicare hospitals payments. Hospitals that submit the required data will receive a market basket increase of 0.4 percentage points higher than facilities that do not. For FY 2005, virtually every hospital in the country that is eligible to participate (98.3 percent) has submitted the required data and received the higher payment.

CMS also has partnered with Premier Inc., a nationwide alliance of not-for-profit hospitals, to conduct a demonstration program that is designed to improve the quality of inpatient care for Medicare beneficiaries by providing financial incentives. Under the Premier Hospital Quality Incentive Demonstration, about 300 hospitals are voluntarily providing data on 34 quality measures related to five clinical conditions: heart attack, heart failure, pneumonia, coronary artery bypass graft, and hip and knee replacements. Using the quality measures, CMS will identify hospitals in the demonstration with the highest clinical quality performance for each of the five clinical areas. Hospitals scoring in the top 10 percent for a given set of quality measures will receive a 2 percent bonus payment in addition to the normal payment for the service provided for Medicare discharges in the corresponding Diagnosis Related Groups (DRGs). Hospitals in the next highest 10 percent will receive a 1 percent bonus payment. In the third year of the demonstration project, hospitals that do not achieve absolute improvements above the demonstration baseline will be subject to reductions in payments.

Encouraging Physicians to Improve Patient Outcomes

CMS recently announced a demonstration project to test pay-for-performance in Medicare's fee-for-service payment system for physicians. The Physician Group Practice demonstration will access large physician groups' ability to improve care that could result in better patient outcomes and efficiencies. Ten large (200+ physicians), multi-specialty physician groups in various communities across the nation will participate in the demonstration, which will begin operations in April 2005. Participating physician groups will continue to be paid on a fee-for-service basis, but they will be able to earn performance-based payments for implementing care management strategies that anticipate patients' needs, prevent chronic disease complications, avoid hospitalizations, and improve the quality of care. The performance payment will be derived from savings achieved by the physician group and paid out in part based on the quality results, which CMS will assess. Providing performance-based payments to physicians has great potential to improve beneficiary care and strengthen the Medicare program.

CMS also will test a pay-for-performance system to promote the adoption and use of health information technology to improve the quality and efficiency of care for chronically ill Medicare beneficiaries treated in small- and medium-sized physician practices. The Medicare Care Management Performance Demonstration will provide performance payments for physicians who meet or exceed performance standards in clinical delivery systems and patient outcomes, and will reflect the special circumstances of smaller practices. This demonstration currently is under development and will be implemented in Arkansas, California, Massachusetts, and Utah. Participating practices will receive technical assistance from the Quality Improvement Organizations in their areas, as well as bonus payments for achieving the project's objectives.

CMS also is investigating how to enhance quality and safety in the Medicare Health Care Quality Demonstration. This demonstration program, which was mandated by the MMA, is a five-year program designed to reduce the variation in utilization of heath care services by encouraging the use of evidence-based care and best practice guidelines. CMS will soon seek public comment on the parameters for this initiative, and it will be open to physician groups and integrated health systems.

Promoting Coordinated Care and Disease Management

CMS recognizes that many patients require care in a variety of settings. Therefore, CMS has projects in operation or in the planning stages that will use pay-for-performance systems to support better care coordination for beneficiaries with chronic illnesses.

  • Chronic Care Improvement Program - This pilot program will test a population-based model of disease management. Under the program, participating organizations will be paid a monthly per beneficiary fee for managing a population of beneficiaries with advanced congestive heart failure and/or complex diabetes. These organizations must guarantee CMS a savings of at least 5 percent plus the cost of the monthly fees compared to a similar population of beneficiaries. Payment also is contingent upon performance on quality measures and beneficiaries and provider satisfaction. The program will generate data on performance measures that will be useful in improving the Medicare program as a whole.

  • Disease Management Demonstration for Severely Chronically Ill Medicare Beneficiaries - This demonstration, which began enrollment in February 2004, is designed to test whether applying disease management and prescription drug coverage in a fee-for-service environment for beneficiaries with illnesses such as congestive heart failure, diabetes, or coronary artery disease can improve health outcomes and reduce costs. Participating disease management organizations receive a monthly payment for every beneficiary they enroll to provide disease management services and a comprehensive drug benefit, and must guarantee that there will be a net reduction in Medicare expenditures as a result of their services. To measure quality, the organizations must submit data on a number of relevant clinical measures.

  • Disease Management Demonstration for Chronically Ill Dual-Eligible Beneficiaries - Under this demonstration, disease management services are being provided to full-benefit dual eligible beneficiaries in Florida who suffer from advanced-stage congestive heart failure, diabetes, or coronary heart disease. The demonstration provides the opportunity to combine the resources of the state's Medicaid pharmacy benefit with a disease management activity funded by Medicare to coordinate the services of both programs and achieve improved quality with lower total program costs. The demonstration organization is being paid a fixed monthly amount per beneficiary and is at risk for 100 percent of its fees if performance targets are not met. Savings above the targeted amount will be shared equally between CMS and the demonstration organization. Submission of data on a variety of relevant clinical measures is required to permit evaluation of the demonstration's impact on quality.

  • Care Management For High Cost Beneficiaries - This pilot program will test models of care management in a Medicare fee-for-service population. The project will target beneficiaries who are both high-cost and high-risk. The announcement for this demonstration was published in the Federal Register on October 6, 2004 and CMS accepted applications through January 2005. The payment methodology will be similar to that implemented in the Chronic Care Improvement Program, with participating providers required to meet relevant clinical quality standards as well as guarantee savings to the Medicare program.


Chairman Johnson, Congressman Stark, thank you again for the opportunity to testify today about CMS' ongoing pay-for-performance initiatives and demonstrations. CMS is examining performance-based payments in its overall efforts to help health care professionals improve the quality and efficiency of care beneficiaries receive. By working with providers, payers, and other stakeholders, CMS believes pay-for-performance mechanisms have the potential to improve the quality of care delivered to beneficiaries, while at the same time improving the efficiency of the Medicare program. Thank you again for this opportunity and I would be happy to answer any questions you might have.

Last Revised: March 16, 2005