American Journal of Law & Medicine

Value purchasing in Medicare law: precursor to health reform. (Quality of Care and Health Reform: Complementary or Conflicting)


Since the advent of Medicare in 1966, a major focus of federal policy and legislation has revolved around the purchase of health care.(1) Although initial programmatic content demonstrated some concern for both cost containment and basic quality assurance,(2) by the late 1970's congressional cost control anxiety had reached a fever pitch, culminating in a completely revamped Medicare hospital reimbursement methodology enacted in 1982,(3) combined with a retooled utilization control mechanism in the form of the Peer Review Organization ("PRO") program.(4)

At the same time, in the private sector, as the cost of health care increased, major corporate purchasers of health care services became increasingly concerned about the "value" of the health care benefits they were making available to their employees. In response to perceived consumer demand, these same corporations eventually, for reasons unrelated to health care, began to incorporate quality improvement into their core manufacturing and service missions. Contemporaneously, as buyers themselves, these corporate purchasers introduced the same demand for quality and value into their own health care purchasing decisions. Managed care began with rhetoric about preventive healthcare, and health maintenance services intended to improve the value of services overall. Quite naturally, the corporate purchasers who were focussing on their own quality initiatives, responded to the advent of managed care initiatives, typified by altered financial incentives through capitation.

Through these developments an implicit definition of "value" in health care can be seen: controlled costs associated with high quality processes, producing positive patient outcomes, as demonstrated in data. Increasingly, buyers are choosing their health care vendors and payors based on this paradigm. Today, on the verge of national health reform, much national policy debate is focused upon issues such as accessibility of care, scope of coverage, and techniques and impacts of financing. But these issues are meaningless without attention to the value of the services to be provided, which implicates the actual delivery of care to patients -- the ultimate goal of the entire exercise. Value purchasing focuses not only on the cost of care but on the clinical content of what is bought; therefore it is inextricably linked to quality of care.

Reflecting this premise, the Clinton Plan,(5) as originally announced, is replete with references to (1) quality emanating from principles of continuous quality improvement and total quality management,(6) (2) development and implementation of clinical practice guidelines to foster more uniform standards of behavior across the country in delivering care,(7) and (3) data dissemination to allow informed purchasing judgments, rigorous selection and monitoring of providers and practitioners, and competition among and between plans and providers.(8) Although unquestionably intensified in the current federal debate, these concerns are not new to federal policy. In fact, recent trends in federal Medicare policy manifest significantly increased attention to "value" in similar terms.

Current value purchasing efforts at the federal level should be understood as separate from purely quality-oriented programs alone.(9) The distinguishing characteristic of value purchasing is the combined demand for cost containment with quality assurance, or cost control efforts which incorporate issues which pertain to safeguarding the clinical content of care. In addition, value purchasing is concerned with effectiveness and appropriateness -- whether health care services and procedures work for what they are intended, whether they are relevant to the problem to which they will be applied, and whether they are worth the cost associated with their use. These principles shift the basic debate away from a singular emphasis on cost control to heightened consciousness about what happens to patients both in the course of and as a result of care. Proof of actual impact demonstrated in data to be shared for a variety of purposes is also a hallmark of the value purchasing context.

The development of value purchasing in Medicare has come slowly, and policy, legislation and implementation typically have followed a specific pattern: fueled by fierce budgetary constraints, the primary thrust of initial policy has been cost control. After implementation, however, policy shifts to focus on the potential for adverse impacts on patients from the need to temper expenditures, a necessary shift since the least expensive care is no care at all. For example, the first focus of the PRO program from 1984-86 examined the extent to which hospitals would churn utilization to realize increased reimbursement.(10) Over time, as explained more fully below, the entire orientation of the PRO program changed to one more concerned with value and quality issues. Initial efforts at Medicare managed care focused primarily on cost savings to be achieved, but later legislation addressed the need to safeguard patients from the impact of financial incentives in prepaid programs.(11)

Most recently the government has begun experimenting with more direct value purchasing efforts. In one effort the government has attempted to preselect and restrict which facilities will be approved to perform certain expensive high technology procedures.(12) Many of these new efforts, however, are conducted informally and in the absence of explicit legislative mandate easily susceptible to analysis. Since the law is the primary vehicle through which public policy finds its expression, however, this article examines five major value purchasing initiatives in current public law and places them in context with the changing private health care system which is evolving even without an enacted national health reform program. These initiatives are seen in (1) the changing PRO program, (2) the development of Medicare's resource based relative value system of physician payment, (3) federal information, collection, data sharing and dissemination programs, (4) federal anti-fraud and abuse laws, and (5) the activities of the Agency for Health Care Policy and Research.


The PRO program began with the 1982 repeal of the Professional Standards Review Organization (PSRO) program.(13) Before a word of regulation could be issued under the revamped PSRO system, the new Diagnosis-Related Groups (DRG) -based reimbursement system for hospitals was adopted. With it, Congress imposed new responsibilities on the physician controlled entities which would perform cost and quality review, determining whether services were medically necessary and appropriate.(14)

The law would have imposed strict penalties for failure to meet relevant standards expressed in "professionally developed norms of care, diagnosis and treatment, based upon typical patterns of practice within the geographic area.... taking into consideration national norms...."(15) Each PRO was required to use national or, where appropriate, regional norms in conducting reviews and to establish written criteria and standards for quality review.(16) Primary enforcement techniques included not only denial of payment for unnecessary care,(17) and intensified review for those not meeting a threshold of compliance, but also potential exclusion from Medicare and civil money penalties for failure to meet professionally recognized standards of care, with the relevant sanction recommended by the PRO to the Secretary.(18)

The PRO program has now been through four incarnations. From 1984-86 the primary thrust of the PRO review process was to control hospital "gaming" of the DRG system.(19) It was in 1985 that the first mention of "quality" appeared in regulatory issuances dealing with the potential for premature discharge.(20) Prior to that time all focus had been on cost control. From 1986-88 there was a lessening of the volume of case-by-case review for utilization control and a greater concern for premature discharge. At the same time, however, the sanction authority of PROs came under scrutiny, and allegations were rampant that, taken together, the fifty-four national PROs were wildly disparate in their activities to police providers' compliance with statutory obligations.(21)

Beginning in 1988, with publication of the "Third Scope of Work,"(22) the Health Care Financing Administration (HCFA) explicitly directed PROs as to how to identify and punish inappropriate behavior which compromises quality.(23) Under the Third Scope of Work, Medicare cases might be selected for review for any of approximately twelve reasons, including review triggered by: the length of stay; the DRG assignment; the delivery site for care; whether additional payment was sought as outlier cases, based on the length of time between an admission and readmission; or beneficiary complaints.(24) The list of reasons has been extensive and modified repeatedly. Every case reviewed, regardless of reason, was to be subjected to screening in accordance with generic quality screens. In this way, case reviews based on cost concerns were reviewed for easily identifiable occurrences affecting quality. Quality problems were to be categorized with respect to severity ranging from Level I -- a confirmed quality problem without the potential to harm a patient, assigned a score of one, to a Level III -- a confirmed quality problem with significant adverse effects on the patient(25) assigned a score of twenty-five. A graduated corrective action process was directed by HCFA based on quarterly accumulated scores with specified trigger points ranging in score from five through twenty-five. Required interventions graduated from mere notification to the physician for the lowest trigger, to educational efforts and prepayment review, and to consideration of an outright sanction -- exclusion or suspension from the program -- for a score of twenty-five. …

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