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Rewarding Provider Performance: Aligning Incentives in Medicare
age points of payments year after year. Substantial uncertainty exists as to whether a pool created by a one-time shaving of the update or a single reduction in the base payment of such a small magnitude would be sufficient to motivate the desired behavioral changes among all types of providers. While institutional providers, such as hospitals, might be motivated by relatively small bonuses, it is doubtful that rewards of one or two percentage points of base payments would be sufficient to motivate physicians to adopt the infrastructure supports, such as data registries, needed to track and monitor patients with chronic conditions so as to ensure that evidence-based care is being delivered.
Initial experience in the private sector suggests that reward thresholds are within the range of 5–15 percent of earnings for physicians and 1–2 percent of gross revenues for hospitals (Personal communication, F. de Brantes and R. Galvin, General Electric, January 30, 2006) (Baker and Carter, 2005; Nussbaum, 2005). Box 3-1, presented earlier, describes how Bridges to Excellence determined an adequate funding pool.
To provide a rough estimate of what this would mean in the Medicare setting, the committee consulted with MedPAC to perform data runs on the total payments that are associated with the three conditions for which a majority of Medicare payments are made—chronic heart failure, coronary artery disease, and diabetes (see Appendix D). To determine the average reward per unique physician identification number (UPIN), the committee made the following assumptions: (1) one-quarter of physicians would not be eligible based on the lack of available adequate measures, (2) only half of physicians would achieve the level of performance required to receive rewards, and (3) 2 percent would be taken from base payments. This results in a denominator of 75,000 physicians receiving rewards. To calculate the numerator, the committee took 2 percent of the total physician fee schedule payments made by Medicare for services associated with treatment of the above-named conditions, or about $6.61 million. Dividing numerator by denominator results in rewards approximating $88 per physician per year (see Table 3-2). While there are other important variables to consider, and this example only uses three conditions, the committee used this calculation to demonstrate that either adding new money or putting a larger proportion of the base payment at risk may be necessary to motivate providers adequately.
The updates or base payments could be reduced by an additional 1 or 2 percentage points in each of the first few years. If this were repeated for each of the first 5 years, the pool available for bonuses would grow gradually, reaching between 5 and 10 percent of baseline base payments by year 5. This pool would support bonuses of 10 to 20 percent of base payments for the top-performing half of physicians.