N720- Final Project - Healthcare Finance

1. Running head: PAY FOR PERFORMANCE: INCENTIVE FOR INTEGRATING 1
Pay for Performance: Incentive for Integrating Quality, Cost and Finance
Josephine Villanueva
American Sentinel University

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Pay for Performance: Incentive for Integrating Quality, Cost and Finance
Synopsis of the paper for your Board of Trustees (Executive Summary): The
relationship between quality of care, cost and health financing is complex. Incentives within the
financing system support quality and set forth motivations to change the way health care is
delivered, improve current practices in caring certain types of patient and change ways health
care is financed. It is important for nurse manager and executives to be aware of these issues and
to decrease the impact of impediments on quality care. Nursing has moral and ethical
responsibility to provide the highest care for patients however nurse managers are face of budget
constraints and shortages of staff. The cost of nursing maybe minor compared to the decline in
reimbursement for adverse event and hospital acquired conditions. Attaining quality in
healthcare organizations requires investment and it is important this capital in quality will pay
off. Variations in care may affect patient outcomes and to address the issue, nurse managers need
to advocate the use of current research and evidence base practice ensuring nursing practice is
based on outstanding available information and study. Pay-for-performance (P4P) has specific
importance to nursing cost and reimbursement issues.
Background of the Issue: The issue was Quality and safety is critical action in health
care today to patient care and for the survival of the healthcare system. The bigger concern is
how healthcare providers will best accomplish quality efficiently and effectively. Avedis
Donabedian was a pioneer in the field of health-care quality who established a basic framework
about quality-improvement efforts. Donabedian defined the health-care triad of structure, process
and outcome. Donabedian believed strongly in the significance of health-care structure, viewing
it as a driving force for later care processes and eventually for health outcomes. Although there is
now a forceful evidence-base in the quality-improvement literature on process and outcomes,

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structure has received considerably less attention (Glickman, Baggett, Krubert, et.al,
2007).Continuous quality improvement (CQI) is fundamental for creating institutional culture
that analyzes process and systems of care to guarantee quality of care delivery that comes hand
in hand with safety. The notion is echoed by the Institute of Medicine (IOM) who has better
information of how financial and other incentives relating to quality also known as pay for
performance or value-based purchasing. The economic rationale of quality issue is that IOM has
launched an intensive effort to advance quality of medical care, which they defined as ‘the
degree to which health services for individuals and populations increase the likelihood of desired
health outcomes and are consistent with current professional knowledge’. However, recent
studies have showed widespread deficiencies in the quality of health care, and society is now
confronted by the task of effectively implementing quality-improvement programs (Marshall,
2011).
Current status of issue with regards to legislation, regulation and operation aspect:
The incentive for the current focus on quality comes from both private and public sources. The
federal government had been an active player in quality debate in health care. The IOM, a
nonprofit organization and subsidiary of the National Academy of Sciences serves as an advisor
to the nation to improve health and provides independent, objective, evidence-based advice to
policy makers, health professionals both private and public sector. IOM 1996 reports pertain to
improving quality care in the U.S. relevant for nursing staffing in hospital and nursing homes.
This report had served as foundation for IOM 2004 report linking nursing work environment
with patient safety and outlined a numerous recommendations for improving work environment.
The Advisory Commission on Consumer Protection and Quality in the Health Care Industry
(Quality Commission) established by Executive Order in 1996, delivered “A Consumer Bill of

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Rights and Responsibilities” with a final report “Quality First: Better Health Care for All
Americans” with recommendations to improve quality of Healthcare bringing quality issues to
the forefront and informed quality initiatives followed (Finkler, Jones, & Kovner, 2013).
Federal initiatives include application of the Centers for Medicare and Medicaid Services
(CMS) pay-for- performance system and the Hospital Quality Initiative. These measures are key
steps towards arranging payment with quality incentive. These initiatives bundle fees for
hospitals and their physician associates if they meet certain quality standards in the provision of
services for specific complex procedure such as surgery and hip and knee surgery (Finkler,
Jones, & Kovner, 2013). Improving the flow of patients and dollars through the hospital is
strongly linked with better bedsides changes in insurance coverage and payment rates.
Handling the flow of patient revenue also involves dealing patient accounts receivable.
Under the current third-party payer system, hospitals generally do not collect revenue at the point
of service but rather bill the patient's third-party payer after services have been rendered. As a
result, a significant portion of a hospital's revenue is outstanding at any point in time. Along with
cash and inventories, accounts receivable represent a large share of a hospital's current assets. In
times of increasingly constrained reimbursement, hospitals are challenged to provide high-
quality care profitably (Finkler, Jones, & Kovner, 2013).
Another initiative had been influenced by the Joint Commission, an independent, not for
profit organization that accredits U.S. hospitals, long term care facilities and other healthcare
organizations (HCO) with its mission to continuously improve healthcare for public in
collaboration with stakeholders, evaluate HCOs and inspire them to excel in providing safe and
effective care of the highest quality and value. In 2002, the Joint Commission introduced its first
set of National Patient Safety Goals. These goals and requirements are extremely influential in

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shaping quality and patient safety initiatives nationwide. Another influential step by the Joint
Commission was the establishment of the Nursing Advisory Council in May 2003 that addressed
specific financial incentives that are needed to promote quality, improve nursing work
environment and change nursing education to those federal government and organizations that
employ nurses (Finkler, Jones, & Kovner, 2013).
The U.S. health care reform legislation, the Patient Protection and Affordable Care Act
henceforth the Affordable Care Act (ACA) were passed by Congress in March 2010. The
legislation is a major step toward that every American should be entitled to affordable health
insurance coverage regardless of income or health status. Between 2000 and 2010, the number of
uninsured Americans increased by 36 percent. As the costs of health coverage increase, fewer
Americans are offered or accept health insurance through their employers (Son field, Pollack,
2013). The legislation goal was to reduce number of uninsured and underinsured Americans, and
at the same time reducing health care cost. Participants may benefit under the legislation
(example: patients, nurses, primary care physicians and general surgeons) others (example:
individual consumers, employers, health plans, hospitals) will be penalized if they fail to comply
with certain parts of the legislation. More comprehensive aspect of the law include expanding
health coverage to about 32 million people and providing incentives for employers to provide
health insurance and for individuals without coverage through employer to get health insurance;
potentially reducing waste, fraud, abuse and addressing poor quality and systems inefficiencies;
the legislation mandates providing more preventive care and promotes research to compare
treatment options (Finkler, Kovner, & Jones, 2013). The Affordable Care Act assist our most
vulnerable citizens by making sure health insurance plans care for people with higher health
costs, making it illegal for a plan to deny someone coverage because they’re sick, and lowering

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the amount people pay for prescription drugs (Beaussier, 2012). The legislation included several
provisions to support improving coverage problems in the short term, before these major
expansions can be implemented. For reproductive-age women and men, the law requires private
health plans that cover dependent children to now extend that coverage to adult children younger
than age twenty-six. About half the states had passed similar laws in recent years. The law
intended to require every state to extend Medicaid eligibility to all citizens in families with
incomes at or below 138 percent of the federal poverty level—an attempt to close the current
gaps in the safety net insurance system (Sonfield, & Pollack, 2013). This legislation will reduce
payments to hospital for preventable readmissions and for hospital-acquired conditions.
Impact to the current health system’s finances: P4P is a method whereby payers
compensate providers for services delivered based on definite quality of care outcome measures.
P4P has the ability to change the way in which care is delivered, the incentives essential in our
system of financing health care providers and the way in which care is paid for. Imminently, the
provider payments maybe distinguished solely on performance (Dunham-Taylor, & Pinczuk,
2010).
CMS is committed in transforming health care delivery systems and helping to ensure a
healthy future for all Americans. There is a remarkable pressure to contain the growth in health
care cost. Care is paid in complex manner under a set of changing rules by diverse group of
payers. Insurance system was developed that uses pooled resources with individuals contributing
some money so the remarkable costs of sickness can be paid with those pooled resources. The
federal government runs the Medicare and Medicaid programs. Hospitals these days are part of
integrated systems to deliver continuum of care. Hospital that receive Medicare Disproportionate
share Hospital payments (ex. Payments for providing uncompensated care) will be lessen

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initially and subsequently adjusted to unpaid care delivered to uninsured individuals. Medicare
payments to individual hospital s will be reduced to account for the occurrence of preventable
hospital readmission in 2015, Medicare payments to the hospital will be reduced by 1% for
hospital acquired conditions (HACs) which is a challenge for Accountable Care Organizations
(ACO) (Finkler, Kovner, & Jones, 2013).
Several quality initiatives are in progress at the Centers for Medicare and Medicaid
Services (CMS) to develop the care of Medicare patients, including the Nursing Home Quality
Initiative effective 2002, Home Health Quality Initiative and Hospital Quality Initiative effective
2003, Physician Focused Quality Initiative effective 2004, End Stage Renal Disease Quality
Initiative in 2004 and Physician Voluntary Reporting Program in 2006 (Finkler, Jones, &
Kovner, 2013).
Hospitals and other healthcare organizations budget will be affected if reflecting a
negative outcome from certain standard of quality and recommended process or treatments
carried out because P4P measures are tied to payment and thereby increasing pressure on the
organization to be efficient and effective in patient care to maximize revenues and consider how
cash allocated internally. These quality initiatives make health care organizations reconsider and
restructure internal health care delivery. As hospital and healthcare organizations face decrease
reimbursement and increase performance measures, nursing will also be under pressure to
improve performance and productivity. Hospitals will reconsider reducing nurse staffing as it
could adversely affect patient outcomes. It is important to recognize nurses’ role in the
prevention of hospital acquired conditions, and the impact of nursing in financial success of
health care organizations thus P4P providing opportunities for nursing. The corporate business
side shows reduction in net cost with certain increased RN staffing resulting from improvements

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in quality as decrease length of hospital stay, adverse events, in-hospital deaths and hospital
readmissions. Cost savings can result from nurses increased job satisfaction, decreasing nursing
turnover therefore decreasing turnover cost.
Benchmarking is a technique aimed at finding the best practices of other organizations
and incorporating them into an organization. Benchmarking is linked closely with a variety of
process improvement and quality management techniques such as total quality management
(TQM) and continuous quality improvement (CQI) (Finkler, Jones, & Kovner, 2013).
Benchmarking can be tied to staffing demands as many organizations are concerned about
productivity. True productivity improvement refer to those that allow the organization to use
less resources for each unit of service provided without lowering the quality of the services
provided. Recent productivity trend focus on nursing productivity measurement from hours per
day (HPPD) or full time equivalents (FTEs) per adjusted occupied bed toward the cost per unit of
service provided. The essence of unit costing is that the dollar cost can be lowered with the unit
service provided, without worrying about things such as the number of care hours used to
provide the service. Length of stay (LOS) (number of days a patient is inpatient) as a benchmark
indicator is important and allows the organization to leapfrog over competing organizations.
Increase LOS can be costly decreasing productivity. Benchmarking is beneficial giving
clinicians, managers and policymakers a tool to make advantage of evidence based approaches to
improve care (Finkler, Jones, & Kovner, 2013). The decrease in length of stay, readmission rate,
and direct cost translates into a decrease in cost per case. A prolonged hospital stay results in
functional decline, making hospitalization a crucial event that often results in a downward spiral
of decline productivity (Ahmed, Taylor, McDaniel, et.al, 2012).

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Being cost competitive has never mattered before, but with underlying financial
pressures, all organizations will need to continually reduce costs for the foreseeable future by
about 3-5% annually (Zukerman, 2014). Competition for patients will also increasingly be based
on ability to provide value which is quality plus service and healthcare cost. Demonstrating
quality is part of the value challenge, and it is increasing importance with reimbursement impacts
from the federal government and the initiation of quality incentive-based contracts with certain
payers. As quality measurement increases; the focus will shift to outcomes and away from the
current structure and process measures. Focus on exceptional service is also a challenge for all
organization. Since healthcare is fundamentally a service business, consistency in this area will
continue to be a key aspect of competitive success in the future. Real integration refers to success
in dealing with cost competitiveness, quality, and service challenges in particular will necessitate
not just having all the players or parts of a system of care but uniting them together in a truly
integrated manner across the continuum. As healthcare organizations move toward population
health approaches and are called on to take financial risk for the populations covered, the ability
to provide an integrated, patient-focused product will be critical (Zukerman, 2014).
Impact of the structure of health systems and organizational dynamics: Legal and
ethical considerations associated with concern express for the organization incentives tied in to
improve performance towards the group (work unit) or individual nurses in their performance
evaluation. Just like the CMS associate payment to hospital and HCOs by their performance,
nurse’s payment would also be link to their performance on patient satisfaction or staff turnover.
Potential legal and ethical issues can be associated with this practice.
Risk management consideration is involved since some initiatives are still not captured
putting some patient at risk. Although the present P4P initiatives address important process of

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health care quality, some core processes of nurse’s work that are critical to patient care such as
diabetes and pain management are overlooked and not included to current performance
improvement. Health care organizations are not obligated to invest in these performance
improvements, track outcomes and put efforts towards improving quality in these areas.
Identifying evidence based measures that reflect nurse’s work is difficult. Even the National
Quality Forum evidence based nursing performance measures does not show the reality of nurses
work which is a challenge for hospital and their improvement depends on nurses until evidence
based measures are available (Finkler, Jones, & Kovner, 2013).
Potential impact on nursing organizationally and professionally: Nurses have an
increased responsibility to the organization, most especially nurse managers and executives in
understanding the majority of the hospital revenue depends on following the cost finding
requirements of external payers and providing them the external reports. Nursing profession
needs to develop better approaches for costing out nursing services. It is important to recognize
the organization cost finding and rate setting and identify if accounting data insufficient for the
unit needs. Improving cost of nursing services is key step in providing accurate cost for the
organization product line. Improve cost information can be used to better understand the
contribution nursing provide the organization, help managers and executive make decisions and
control cost of provided nursing services, understand nursing resources needed by patients and
useful for evaluating changes nursing care provided. Nursing needs to understand the financial
implication of errors, adverse events and hospital acquired conditions. Nursing documentation
are critical to better capture patient episodes of care and measure nursing productivity. Many
organizations integrating information system to incorporate both clinical and financial system
going by the saying “if it is not documented, it is not done”. Costing out nursing services is an

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exceptionally useful tool for product line costing and budgeting which can show management
where profits are made versus losses accrued (Finkler, Jones, & Kovner, 2013).
Emphasis on the quality of nursing care is vital for the continued improvement of
nursing. The term “Metrics “are used to refer to a set of measurements to quantity results or
outcomes. Nursing metrics are techniques of measuring the quality of nursing care. They include
the use of indicators to measure nurse-delivered outcomes and patient experiences (Wilson,
2011).The most important metrics in an organization are the Nursing hours per patient, staffing
levels, patient turnover and skill mix, Patient falls (with and without injury), Hospital-acquired
infections, Pressure ulcer rate, Pain assessment, Nurse satisfaction and education, customer
satisfaction. Nursing metrics should show how successful nursing care is in a specific area and
could allow nurses to regain control of nursing quality (Foulkes, 2011). Part of the challenge in
developing meaningful nursing metrics is how to incorporate patient feedback and views into the
system. The use of patient experience questionnaires could provide a more straightforward
metric. In the US, patient satisfaction and experience surveys are used routinely and hospitals are
required to participate in national schemes. Reported on a US survey of healthcare providers
capturing the patient experience through surveys was important for the long-term success of their
healthcare programs (Foulkes, 2011).
Managers of not-for-profit hospitals have to focus their efforts to build equity on their
organizations' internal operations and supplement these efforts with profitable non-operating
activities, including raising capital through donations and gifts and managing their financial
investments. In the current business environment, however, many hospitals have experienced
investment losses and shrinking donations and gift receipts, and the importance of boosting the
profitability' of operating activities has increased (Zismer, 2013).

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Management of the flow of patients through the hospital and the associated revenues has
significant implications for a hospital's financial performance. Generating higher amounts of
patient revenue is directly linked with value-added profitability and equity growth. As part of
their management of the revenue cycle, hospital managers may pursue more aggressive pricing
and attempt to reduce revenue deductions, in particular contractual allowances granted to third-
party payers and charity care, resulting in higher net patient revenues. More effective revenue
cycle management may decrease the number of uninsured and self-pay patients a hospital serves
through improved financial counseling, and it may consequently lower the hospital's bad debt
and operating expenses. Higher net patient revenue and lower operating expenses result in higher
operating and total margins, thus improving a hospital's profitability and allowing it to build
equity capital. The greater patient revenues in relation to a hospital's assets will be associated
with higher hospital profits and equity values (Sigh, 2012).
Overall potential to improve the health of the community/ how will this be
quantified: The Institute for Healthcare Improvement (IHI) a non- profit organization is another
influential organization in health care quality founded in 1991 with goal of improving patient
lives, health communities and workforce. Their “100,000 lives campaign” in January 2005, goals
of saving 100,000 lives in US hospitals over 18 month period implemented six initiatives. By
June 2006, more than 3,000 organizations are voluntarily participating and investing in the
initiatives (Finkler, Jones, & Kovner, 2013). Two other groups with quality influence are the
National Quality Forum (NQF) and Leap frog Group. NQF endorsed a set performance measures
in nursing in 2004 that developed standards to guide hospitals and other HCOs to set common
measures in assessing and improving nursing and patient care quality. The Leapfrog Group is
composed of 500 large Fortune corporations and public agencies. Leapfrog determines that if all

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hospital implemented three of four leaps, it would save up to $12 billion and more than 57, 000
lives per year. The four leaps are computerized physician order entry (CPOE), evidence based
hospital referrals, intensive care unit (ICU) staffing by experienced physicians and organization
progress in attaining safe practice (Leapfrog safe practice score). The Leapfrog Group Hospital
Recognition Program, pay –for- performance, value based purchasing program rewards hospital
based on quality, resource use and value in caring for patients with certain acute conditions
(acute myocardial infarction, pneumonia, etc.), certain healthcare acquired conditions (pressure
ulcer, central line association bloodstream infection,etc). Hospital participates in annual survey
to report performance using benchmarking. Recognition on hospital value score on performance
quality measure (65 % of value score) and resource use (35%of value score). Hospital that excels
in these areas maybe recognize by receipt of bonuses, increased reimbursement and public
recognition and market share. Leapfrog also included Magnet recognition in annual survey
representing of growing importance of this award in the market (Finkler, Jones, & Kovner,
2013). The Baldridge National Quality Program in 1987 was a national award that recognizes
quality and superiority in business recognized by the President of U.S. to HCOs with established
criteria in leadership, strategic planning, customer focus, measurement, analysis and knowledge
management, workforce focus, operation focus, and results. Active involvement of senior
administrative leadership, including hospital management and boards, as well as physician
clinical leadership, promoted clinical involvement in quality improvement. The choice to invest
in pursuing Magnet designation or the Baldridge awards depends on the facility goals (Glickman,
Baggett, Krubert, et.al, 2007).
Conclusion: The transformation to P4P system is shifting the dynamics of care delivery,
reimbursement and resource allocation in the healthcare organizations. Nursing leadership needs

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to make HCOs understand the importance measuring and capturing nurses work and to work
with researchers to develop such measures. Until nursing evidence base practice is established,
the health care industry might miss important opportunities to improve certain internal process in
quality improvement in care delivery. Hospitals and other providers have been more willing to
embrace quality improvement reporting efforts because they are linked to reimbursement.
Strategic planning or strategic management is increasingly important in today's rapidly changing
healthcare environment. Addressing the challenges of healthcare reform is vital, and the interplay
of other market dynamics poses additional complications. Strategic management allows leaders
to work a greater degree of control or influence over these external forces and steer their
organizations toward a new future, even though it may have many uncertainties and estimate of
its current position, in the leadership team's view of the desired future position, and in the key
strategies to accomplish these priorities: standardized care, physician support and engagement,
culture change, board support of initiatives and decisions, and focused execution (Dunham-
Taylor, & Pinczuk, 2010).

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