Right on the money.

The CMS will write out bonus checks for a total of $8.85 million to 123 top-performing hospitals in a groundbreaking pay-for-performance demonstration project that is being coordinated by hospital alliance Premier.

The results from the first year of the three-year project, which were expected to be officially released by the CMS on Nov. 14, resoundingly validate the premise that paying for quality is the elusive catalyst needed to spur significant quality improvement, according to Richard Norling, Premier's president and chief executive officer. Hospital performance in each of five clinical areas included in the project improved significantly, while variation in performance between the highest and lowest performers increasingly narrows as the project continues with its second year already completed.

Improvements in composite quality scores between the first and last quarters of the first year ended September 2004 ranged from 87% to 91% for heart attack patients and 69% to 79% for community-acquired pneumonia.

"From Premier's point of view, the real power in this is that we have been able to go to the data and isolate the people performing at the top levels and find out how they do what they do," Norling said.

The results, released exclusively to Modern Healthcare by Premier, arrive at a tenuous moment for the mushrooming pay-for-performance movement. Although various initiatives that financially reward stellar care are proliferating in all areas of healthcare, the most comprehensive study of one such project at a large health plan found mixed results (Oct. 31, p. 7).

The hospital industry also is grappling with the very real possibility that the movement will evolve from a carrot to a stick approach in which rather than rewarding the high performers, payers will eventually penalize low performers for poor outcomes.

"I think that's a reality, unfortunately," said Doug Hawthorne, president and CEO of Texas Health Resources in Arlington, Texas, and Premier's board chairman. "The key will be whether (payers) just take the money and redistribute it vs. adding dollars. That's my concern: that there will be no difference in the money being spent, it will just be a redistribution."

The Premier demonstration, which was launched October 2003 and includes 268 hospital participants, is designed to reward with cash payments the top 20% performers in each of five clinical areas: heart failure, pneumonia, bypass surgery, heart attack and hip and knee replacement. The participating hospitals were graded by how often they followed a batch of quality measures for each clinical area, earning a composite quality score for all the measures in any given focus area.

The performers in the top 10% of each group will receive a 2% bonus for patients treated in that area, and those in the second 10% will receive a 1% bonus. With the end of the first year--Oct. 1, 2003 to Sept. 30, 2004--baselines were set for the bottom two deciles. Any hospitals below those two thresholds in the third year of the demonstration will be penalized a 1% and 2% reduction in Medicare payments, respectively; however, officials said most likely few if any hospitals will realize a payment reduction.

For this demonstration project at least, the bonus pool will be fed from the cash savings gained from improved outcomes such as shorter length of stays and fewer readmissions. Norling noted, however, that some spending reduction proposals in Congress would supply the bonus pool from across-the-board cuts in DRG payments, which would ultimately penalize low performers rather than reward high performers. "We can't and won't be associated with a policy that … is funded with reductions in payments," Norling said.

But the project is really more about publicly revealing hospital outcomes than money. In addition to the cash bonuses for the highest performers, the CMS will publicize the names of those hospitals falling in the top five deciles of each category. As part of the original agreement between the CMS and the hospitals, the CMS will not publicly reveal the names of the approximately 130 low-performing hospitals that fell into the bottom 20% of each of the five categories, although it would not be hard for a motivated consumer to figure out, considering the names of all the hospital participants are a matter of public record.

"CMS probably looks at this as much as a transparency demonstration as pay-for-performance" Norling said. "The dollars are not going to make a year's bottom line for hospitals, but I think hospitals are in it because they see more of it coming down the line and they see it as a focal point for improvement efforts."

Michael Dowling, president and CEO of North Shore-Long Island Jewish Health System in Great Neck, N.Y., said all 15 hospitals affiliated with or owned by the system are participating in the demonstration. Monthly meetings of all the CEOs, medical directors, quality officers and heads of nursing bring as many as 60 people into a conference room where data and practices are shared among all the hospitals, he said.

"I am not looking at this from a cost issue. I just think it's a good way to practice medicine," Dowling said. "I think it's a matter of time before there is complete transparency on all of this. People are going to take notice."

North Shore-affiliated Staten Island University Hospital has been a standout for the system, scoring in the top 10% in four of the five categories. President and CEO Anthony Ferreri said the 686-bed hospital is expecting to receive as much as $750,000 in bonus payments. That is a significant amount, considering in 2004, the hospital's profit margin was $1.5 million on $500 million in gross revenue, he said.

The hospital did not fare as well in the hip and knee replacement area. Ferreri guessed with the final calculation, Staten Island will fall into the third decile in that category because of its score on readmissions. But the hospital has already turned that around by working closely with orthopedic surgeons to implement changes in the second year, Ferreri said.

"It's been marvelous," Ferreri said about the experience. "We find ourselves in a situation where the staff has become highly competitive. It's important to them how it turns out, what the numbers show." The demonstration project also is a topic of discussion at board meetings and is talked about in the community. Once the data is released, Staten Island will use it in marketing, Ferreri said.

Hackensack (N.J.) University Medical Center and McLeod Regional Medical Center, Florence, S.C., scored in the top 20% for all five clinical conditions. The demonstration project's largest cash award of $326,000 will go to Hackensack for bypass care. Combined with the other four categories, the CMS will be sending Hackensack a check for $848,000. With revenue of $1.1 billion and operating income of $25 million, the cash is significant in two ways, said John Ferguson, Hackensack's president and CEO. "Number one, the money and number two, it's a morale booster to all the physicians and staff working hard to get this accomplishment," he said.

St. Mary's Hospital and Medical Center in Grand Junction, Colo. is expecting to receive a bonus of approximately $200,000 for scoring in the first decile in four of five categories, said Robert Ladenburger, St. Mary's president and CEO. The 318-bed hospital earned net income of approximately $25 million on net revenue of $250 million, he said.

In the second year of the project, everybody is improving so it is getting "harder and harder to stay in the top decile," Ladenburger said. "All boats rise with the tide."

Hawthorne of Texas Health Resources said the 13-hospital system will receive about $700,000 in bonuses because of four hospitals that scored in the top 10% for heart failure, one hospital in the top 10% for heart attack, and one hospital in the top 10% for pneumonia.

The project "helped create a synergy for us as a system," Hawthorne said. "One of the outcomes is that instead of doing it 13 different ways, we started doing it one way … Money was certainly a factor, but not to me the driver."