As evidenced by recent testimony from both the US Office of Budget and Management Director Peter Orszag (2009) and the American Hospital Association (2008), the imperative of value improvement in Medicare has become an established dictum in US health policy. In addition to 'comparative effectiveness' research, intended to increase our knowledge of the benefits and costs of alternative medical treatments, pay-for-performance (P4P) will likely be a key part of the value reform toolkit of the Obama administration (Orszag, 2009). Although P4P in the United States began in earnest under the Bush administration, the Obama administration appears ready to ramp up these efforts as part of the strategy to reduce Medicare cost growth while improving the value of care.
The Medicare programme, a national programme providing health insurance primarily to seniors over the age of 65, is likely to be the focus of payment reform efforts in coming years for at least three reasons: First it is a massive entitlement programme with expected spending of $484 billion in 2009, approximately 3.6% of GDP, (Kaiser Family Foundation, 2009) and is projected to increase rapidly in the short term. Second, it has well-documented value problems, with strong evidence that much of Medicare's spending yields little benefit for patients (Fisher et al., 2003). Third, Medicare payment is controlled entirely by the federal government, as opposed to Medicaid and private health insurance, allowing for relative ease in the implementation of reform efforts. Further, because inpatient hospital care accounts for approximately 30% of Medicare spending (Kaiser Family Foundation, 2009) and because much of the presumed unnecessary spending in Medicare spending occurs in inpatient settings, the inpatient sector will likely be at the center of payment reform in Medicare. Planning for such inpatient payment reform by Medicare, generally termed hospital Value-Based Purchasing (VBP), is already well underway.
Unfortunately, while the desire to implement hospital-based P4P in Medicare is strong, the evidence of its effectiveness remains weak. As described in a recent systematic review of the hospital P4P evidence literature (Mehrotra et al., 2009), only three hospital-based P4P programmes that implemented explicit financial incentives for improved quality of care have been evaluated in a total of eight published articles. Three of these articles evaluated the Premier Hospital Quality Incentive Demonstration (PHQID). The PHQID is a collaboration between the Centers for Medicare and Medicaid Services (CMS) and Premier Inc. The first phase of the demonstration took place from October 1, 2003 to September 30, 2006 and an extension of the PHQID began in October 2006 and is planned to continue until September 2009. In the first phase, Medicare paid a 2% bonus on payment rates to