Regardless of one’s political allegiances, it is no surprise that the American health care system is in trouble. The US has a world ranking of 20^th or worse in life expectancy, and 15^th or worse in infant mortality. The fastest growing segment of our population is aged 65 and older who face a financially strained Medicare program for which insolvency is projected in the 2020’s with  PPACA and by 2016 without. Sadly, our health care system is not a panacea. The latest curative efforts will take the form of financial incentives for quality care and financial penalties for medical errors and complications. Given that our health care system and its funding involves, in the absence of new taxation, essentially a zero sum analysis (i.e., extra monies paid to well performing providers will come from reduced payments to poor performing providers), these quality initiatives and associated financial gains or penalties will force providers into competing in a game of survival of the fittest. For managed care plans and hospitals that cannot meet and exceed (or, perhaps more importantly, that do not have the capacity to track and report) new quality initiatives, margins that are already paper thin may be exceeded. Anticipate new rounds of acquisitions and closures when these quality initiatives are fully implemented.

The concepts of “pay-for-performance” or PFP payments and other implications of financial benefits and losses based on quality have been knocking around for a few years.  However, only recently have dollar figures become associated with these quality measures.   Among the new quality initiatives are the following:

Medicare Advantage Plan Star Ratings and Bonus Payments. Based on statutory provisions contained in PPACA and the three year demonstration project announced on November 7, 2010 for Medicare Advantage Plans, the Centers for Medicare and Medicaid Services (“CMS”) has recently begun to pay bonuses to those Medicare Advantage plans that are able to document superior and, in some cases, just average quality ratings. This new bonus system utilizes the “Star Rating” system of 1-5 that are derived from (a) CMS administrative data on plan quality and member satisfaction, (b) the Consumer Assessment of Healthcare Providers and Systems (“CAHPS”), (c) the Healthcare Effectiveness Data and Information Set (“HEDIS”) and (d) the Health Outcomes Survey (“HOS”) that addresses issues such as the management of chronic conditions, health plan member complaints and appeals, and drug plan customer service. According to the November, 2011 Data Brief released by the Kaiser Family Foundation, “. . . Medicare Advantage plans are projected to receive approximately $3.1 billion in bonus payments. Of this amount, about 4 percent was authorized under [PPACA], with the majority of these bonus payments (90%) attributable to the CMS demonstration.” See http://www.kff.org/medicare/upload/8257.pdf. 

Hospital Based Value Purchasing Programs

Effective for the federal fiscal year commencing October 1, 2012 but also emanating from PPACA (Section 3001), CMS has now implemented a program that permits CMS to reduce or increase DRG payments based on the success or failure of five  initial categories of treatment: acute myocardial infarctions, heart failure, pneumonia, surgeries as measured by the Surgical Care Improvement Project addressing surgical infections and healthcare-associated infections as measured by the HHS Action Plan to Prevent Healthcare-Associated Infections, as amended.  While this provision of PPACA does include appeal rights and protections for rural hospitals, sole community hospitals and disproportionate share hospitals among others, CMS will now place one percent of DRG payments into play as a reduction in payment or a bonus payment, all dependent on performance. This figure will increase annually by a quarter percent until it caps out at two percent (2%) of DRG payments in 2017.  Again, this is a direct zero sum analysis, rewarding well performing hospitals and penalizing under-performing facilities. 

 

Penalties for Readmissions

Also effective for the federal fiscal year commencing October 1, 2012 under PPACA (Section 3025), CMS will begin penalizing hospitals that experience readmissions within thirty (30) days of patients recovering from heart failure, heart attacks or pneumonia. While the initial penalties are tied to these three medical conditions, there are no limits as to how expansive this review process may become in the future. Initially, up to one percent of a hospital’s Medicare or DRG reimbursement will be in jeopardy. It is estimated that, based on last year’s readmission data, these penalties will affect 2,200 hospitals nationwide and will result in the recoupment to Medicare of approximately $290 million for this fiscal year. Notably, these provisions are a further extension of the reductions to payments for hospitals having to treat preventable hospital-acquired conditions initially enacted in Section 5001(c) of the Deficit Reduction Act. These reductions essentially exclude reimbursement for any care or treatment associated with these conditions if they are the result of a failure by the facility to adhere to “evidence based” protocols and are described in more detail in the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2009 Rates Final Rule (73 FR 48434), published on August 19, 2008.

What price quality? The numbers are becoming more and more concrete with each passing year. For those hospitals that cannot document and ensure compliance with evidence based protocols, diligently avoid hospital acquired infections and diligently document a satisfied patient population, anticipate reductions in reimbursement approaching nearly five percent of their annual Medicare reimbursement.

 

Philip M. Sprinkle II is a partner with Balch & Bingham, serving in the Atlanta office.