Healthcare Reform Will Require Collaboration Between Hospitals and Physicians: New Payment Methodologies and Challenges
Movie buffs will recall the 1942 classic, Casablanca, and Humphrey Bogart’s memorable line at the end of the movie: “Louie, I think this is the beginning of a beautiful friendship.” This same line might apply to the relationship that now exists between hospitals and physicians under the new Healthcare Reform Law. New payment methodologies will require hospitals and physicians to work collaboratively to meet the competing goals of better care and lower costs. Only by working together to deliver quality care more efficiently will hospitals, physicians and other providers achieve financial success under the new law.
1. More Patients; Lower Payments
The Healthcare Reform Law will add 30 million new patients to the U.S. healthcare system. The new law will expand healthcare coverage to nearly 95% of all Americans and will generate more than $40 billion in new revenues for hospitals and providers. However, because this growth comes largely from the expansion of Medicaid and other government programs, providers can expect to receive lower payments in exchange for treating more patients.
Indeed, the success of Healthcare Reform depends upon significant reductions in Medicare and Medicaid payments to hospitals and other providers. By 2014, Medicare Disproportionate Share Hospital (“DSH”) payments will be reduced by 75%. Medicaid DSH spending also will be reduced. The Congressional Budget Office (“CBO”) projects that Medicare will save more than $40 billion by reducing payments to hospitals, as well as to home health, nursing and rehab facilities. Another $200 billion in savings is expected to come from cuts in the fees paid to physicians.
2. Value-Based Purchasing
The Healthcare Reform Law introduces value-based purchasing (“VBP”) to the Medicare program. VBP provides incentive payments for providers that meet certain quality and efficiency standards, and punishes poor performance. VBP builds upon Medicare’s existing quality reporting measures for hospitals and other providers. Currently, hospitals receive a higher payment under Medicare if they agree to publicly report their performance based upon these quality measures. Beginning 2013, Medicare will make value-based incentive payments to hospitals that meet or exceed these measures. In 2014, these measures will be expanded to include “efficiency measures” that measure Medicare spending per beneficiary, taking into account patient demographics, health status, etc. If a hospital meets or exceeds its performance measures, Medicare will increase the base diagnosis related group (“DRG”) payment for the hospital, while reducing the base DRG payment for any hospital that fails to perform as expected.
At the same time, Medicare payments will be reduced for hospitals with high rates of preventable readmissions. Initially, payments will be adjusted for three conditions: acute myocardial infarction, heart failure and pneumonia. In addition, the law continues the Medicare’s policy of denying payments for medical treatment resulting from hospital-acquired conditions (“Never Events”) and extends this policy from Medicare to Medicaid. The CBC expects these initiatives to yield more than $1 billion in cost savings.
The new law also authorizes the Centers for Medicare and Medicaid Services (“CMS”) to extend value-based purchasing to physicians and other providers. Like hospitals, physicians already receive incentive payments for quality reporting. The new law expands “pay for reporting” to other providers, including: long term care hospitals, inpatient rehabilitation facilities, cancer hospitals and hospices. Eventually, value-based purchasing also will include skilled nursing facilities, home health agencies and ambulatory surgical centers.
In addition, the law requires public reporting of performance data on “hospital-compare” and “physician-compare” websites. Therefore, the need for clinical integration between hospitals, physicians and other providers will be crucial, as well as shared access to electronic medical records. The proven success of electronic medical records in improving patient care underscores the need for hospitals to accelerate their community EMR initiatives.
3. Bundled Payments
The Healthcare Reform Law authorizes CMS to begin testing bundled payment methodologies in 2013. Reimbursement will be bundled for medical services related to an “episode of care,” defined as 3 days pre-hospitalization to 30 days post-discharge. Participating hospitals will be responsible for allocating this bundled payment among all providers, including the hospital, physician and post-acute care providers.
Currently, Medicare makes separate payments to the facility and the physician for services related to a hospital stay. Because physicians are paid separately, there is no financial incentive to control inpatient costs. Post-acute providers also receive separate Medicare payments. A bundled payment would create a single DRG (or acute care payment unit) that covers the hospital stay and all outpatient and post-acute services.
4. More Efficient Delivery Models
The Healthcare Reform Law establishes a new Center for Medicare and Medicaid Innovation (“CMI”) within CMS, beginning in 2011. The purpose of CMI is to propose new delivery models that will reduce the costs of treating the beneficiaries of Medicare, Medicaid and other government programs, while maintaining quality of care. At least $25 million of CMI’s funds are committed to implementing specific delivery models proposed under the new law. Three examples include:
(a) Accountable Care Organizations
Beginning in 2012, hospitals, physicians and providers can form Accountable Care Organizations (“ACOs”). This delivery model allows hospitals and providers to share in the cost savings they achieve collectively in treating selected groups of Medicare beneficiaries. Although similar to Provider Service Organizations (“PSOs”) of the past, ACOs receive incentives without taking on financial risk for patient care. Providers are reimbursed on a Fee-For-Service (“FFS”) basis but share any cost savings achieved above a certain threshold.
ACOs may consist of hospitals, physicians, and other providers. However, ACOs must include enough primary care physicians to serve at least 5,000 patients. ACOs are eligible for incentives only if they meet certain quality benchmarks. If CMS determines that an ACO has taken steps to avoid high risk patients to avoid medical costs, it may terminate the ACO’s participation in the program.
Although no particular legal structure is required for ACOs, examples include:
• Partnerships or joint ventures between hospitals and physicians.
• Hospitals employing/contracting physicians or providers.
• Networks of hospitals/providers organized by insurers, network administrators or other third parties.
The Medicare program expects to save $4.9 billion as a result of ACOs, but as in the past, the level of physician/provider enthusiasm for participating in such a program is difficult to predict.
(b) Independence At Home Medical Practice
The Healthcare Reform Law authorizes another shared savings model, the “Independence At Home Medical Practice.” This practice consists of physician/practitioner teams that coordinate primary care to chronically ill beneficiaries in their homes. The teams must design and implement individual care plans that reduce overall costs while improving medical outcomes.
Each Independence-At-Home Medical Practice must provide services to at least 200 beneficiaries. The Practice must arrange for regular home visits and be available 24 hours per day, 7 days per week. The incentive payments will be paid if actual expenditures are at least 5% less than the estimated annual spending target. However, if a practice fails to meet certain quality standards, or if CMS determines that a practice will not receive an incentive payment for the second of two consecutive years, it may terminate the practice’s participation in the program. This program begins in 2012.
(c) Extension of Gainsharing Demonstration
The Healthcare Reform Law also extends the three-year gainsharing demonstration program until September 2011. This demonstration project allows hospitals to provide payments to physicians for cost savings achieved through collaborative efforts to improve overall quality and efficiency.
5. Recovering Fraudulent Payments
The Healthcare Reform Law provides for increased enforcement activities to combat fraud and abuse, and the spiraling costs of the Medicare and Medicaid programs. The law also includes mandatory compliance program requirements for all Medicare/Medicaid providers. Combined with the law’s new payment methodologies, these new regulatory requirements will necessitate greater cooperation between hospitals, physicians and other providers to avoid government sanctions and liability.
The new law expands the Recovery Audit Contractor (“RAC”) program by requiring all state Medicaid programs to contract with RACs by December 2010, as well as expanding the RAC program to the Medicare Advantage program. Providers now should expect RAC reviews of any Medicare or Medicaid claim they submit, even if submitted to a private Medicare HMO. Recent amendments to the False Claims Law extend false claims liability to private HMO claims. Because approximately half of all RAC findings relate to medical necessity, hospitals and physicians will need to work together to ensure that inpatient stays, tests and other services are medically necessary.
The new law also includes changes to the Stark and Anti-Kickback Laws, and other new program integrity measures. These include new disclosure requirements relating to the financial relationships between hospitals, physicians and other providers. Therefore, while the new law encourages collaboration between hospitals and physicians, it requires greater scrutiny of these relationships as well.
The Healthcare Reform Law builds upon, and in some cases modifies, current payment methodologies that encourage collaboration between hospitals, physicians and other providers. Theses methodologies are designed to control costs while maintaining quality of care. This is consistent with prior efforts by Medicare to limit unnecessary inpatient stays (e.g. changing patient status from inpatient to observational status), where cooperation between the hospital and physician is needed to ensure that all parties are reimbursed appropriately. The new law also builds upon prior alternate delivery models (e.g. PSOs), although the new models attempt to create incentives for cost savings rather than require providers to accept the financial risk of patient care. (However, CMS is authorized under the new law to test “at risk” models that rely upon capitation or partial capitation.)
Together, these new or modified payment methodologies, and alternate delivery models, will require providers to work collaboratively together to maximize their reimbursement under Medicare, Medicaid and other government programs. Providers will need to think outside the box, and work with their outside consultants and advisors, to structure new entities and business models to maximum financial success under the new law. Further consolidation of physician practices within hospital systems also can be expected. Although these changes will be implemented over time, hospitals and providers must begin now to align their financial interests and recommit their joint efforts to quality of care. As in Casablanca, making friends now may be the only way to ensure a happy ending.