Hospital Payments Linked to Quality of Outcomes

It has long been recognized that the incentives in the healthcare system are perverse in the sense that hospitals receive compensation for what is essentially rework. For example, a patient might be admitted and treated for an ailment, released, then subsequently readmitted for the same ailment. Another common occurrence is that patients acquire a problem due to their stay, such as an infection. In the past these events have substantially increased the revenues received by hospitals. However, this is in the process of changing.  According to Becker’s Hospital Review, Hawaii hospitals are partnering with the Hawaii Medical Service Association, the state’s largest payer, in the nation’s first statewide value-based initiative to raise quality of care and reduce costs. The program represents the nation’s first statewide partnership between a commercial health plan and its hospital network to measure hospital quality. During the first year of the program, HMSA will tie between 5 and 7 percent of hospital payments directly to achieving quality standards. After three years, approximately 15 percent of HMSA payments will be based on quality and patient safety goals, HMSA said.

Normally insurers develop their own quality measures for hospitals to meet, but measures for the new program, called Advanced Hospital Care, were “designed by hospitals, for hospitals,” says Kevin A. Roberts, president and CEO of Castle Medical Center, a participant in the program. He says the program will also help Hawaii hospitals achieve value-based purchasing mandates planned by CMS.

The four-year program will cover all 1.3 million residents of Hawaii receiving hospital care. It sets targets and helps hospitals measure and reach performance improvements. The hospitals can earn incentives by meeting the goals of the program, which include reducing mortality, readmissions and the cost of care, as well as improving patient satisfaction, safety and adherence to clinical evidence.

While I applaud this effort to mend a system that is obviously broken, I am wary of any program that focuses on outcome metrics. Lean Six Sigma professionals know that such metrics represent the end result of a value stream. Unless the value stream is examined for waste using process excellence tools such as Lean, and for variation and errors using tools such as Six Sigma, there is the very real possibility that the metrics will drive the wrong behavior. By wrong behavior I mean that mindless cost-cutting will remove value and lead to additional problems. The key to effective improvement will be to identify waste and to discover and remove the causes of errors and variation, thereby eliminating non-value-added cost from the system. At the moment, Lean Six Sigma represents the best known way of accomplishing this.

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Author: Thomas Pyzdek

Consultant, author, owner of The Pyzdek Institute