In November 2007, the Centers for Medicare & Medicaid Services (CMS) issued a report to Congress proposing a Medicare hospital value-based purchasing (VBP) program. In its proposal, which would require congressional approval, CMS would convert the current hospital inpatient pay for quality reporting system to a pay for performance model, which it refers to as VBP. In the CMS proposal, hospitals would fund a VBP performance pool by withholding some portion of the diagnosis related group (DRG) payment. Hospitals’ performance versus established inpatient quality measure would then be measured against that of their peers, and based on their performance relative to that of their peers, they would be able to earn back their full DRG amount. CMS’ proposed VBP structure would, through its design structure, leave unspent funds in the performance pool; CMS does not indicate whether these funds would be returned to hospitals in the form of additional payments to high performing hospitals or some other mechanism, or whether they would be withheld as savings to the Medicare program.

In order to implement VBP, CMS would require Congressional authorization. However, CMS’ VBP plan is consistent with recommendations made by the Medicare Payment Advisory Commission (MedPAC), an influential advisory board to Congress, and has attracted considerable congressional attention, from influential members of both parties.