CRITICAL ANALYSIS REPORT for 2 Articles
SPECIAL SECTION: HEALTHCARE REFORM
Chad Mulvany
healthcare reform the good, the bad, and the transformational With the passage of landmark healthcare reform, a hospital financial leader's number one challenge is to become knowledgeable about the legislation and its likely impact on a hospital's bottom line.
AT A GLANCE
> Aspects of the recent landmark healthcare reform
legislation likely to prove beneficial to hospitals
include changes to insurance markets, malpractice
reform démonstrations, and funding to help hospitals
with high volumes of preventable readmissions.
> Hospitals are likely to be adversely affected by
scheduled payment cuts and the employer "free
rider" penalty.
> The legislation also poses transformational opportu-
nities and challenges for hospitals, stemming from
measures designed to change the care delivery system
and provisions regarding hospitals' tax-exempt status
and pricing transparency.
No one knows what the long-term impact of reform on hospitals will be. What is clear is that some provisions in the legislation will be good for providers, other will have a negative impact—and many will be transforma- tional for the industry. Now that the legislation has become law. providers need to understand how the two hills that make up healthcare reform will impact their facilities.
Ratings agencies believe the long-term impact of reform will he neutral to negative for the industry over the long term. Increased coverage will reduce the cost of uncompensated care by an estimated $184.5 ̂ iH îoi over 10 years, according to Bank of America Merrill Lynch (Managed Care. Health Care Facilities Overview, April 31. 3010). This effect, along with the effects of other provisions, will be good for the industry. However, there are a number of payment cuts to help pay for the expansion of coverage—the hospital share alone is an estimated $149 billion—and other provisions that will put significant pressure on hospitals.
The legislation also includes measures that will provide transformational opportunities to hospitals that can respond to the challenges of a shifting reimbursement system. Many of those transformations to the payment sys- tem have been issues that finance professionals have desired for some time. Finance professionals need to understand how the legislation is likely to impact their organizations specifically. From this knowledge, they can then develop and execute strategies to enhance the good, mitigate the had, and take advantage of transformational opportunities.
52 JUNE 2010 healthcare financial management
The Good
There are a numher of reforms that will be good for hospitals. Provisions such as changes to insurance markets, malpractice reform demon- strations, and funding to help hospitals with high volumes of preventable readmissions will increase revenue while reducing cost.
Insurance reform. Changes to the insurance market will expand coverage to 32 million people by increasing regulatory oversight of commercial insurers, using the tax code and subsidies to mandate coverage, and creating state-based exchanges to improve the accessibility, trans- parency, and efficiency of insurance markets.
Coverage expansion begins modestly on June ai. 2O1O, with the establishment of temporary state- based high- risk pools for individuals who have been uninsured for at least the previous six months. The program runs until 2014 and sets premiums at a standard rate that can vary by no more than a 4:1 ratio by age.
Six months after the passage of the law (Sept. 23, 2010). anumber of measures impacting all
The full impact of insurance reform will not be realized until Jan. l, 3014, when the major coverage provisions begin.
insurance plans (including currently existing or "grandfathered" plans) go into effect. With these reforms, the plans will be probibited from imposing lifetime benefit limits and unreason- able annual limits on coverage, and dependent children will be allowed to remain on their par- ents' policies until age 26.
The full impact of insurance reform will not be realized until Jan. 1. 2014, when the major cover- age provisions begin. Insurers will be required to accept and renew every individual or employer applying for coverage regardless of health status or utilization, and to limit variance among premiums to a ratio of 3:1 based on family size, geography, actuarial value of policy, tobacco use, and age.
ANNUAL INCREASE IN INSURANCE COVERAGE UNDER HEALTHCARE REFORM LEGISLATION
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
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SPECIAL SECTION: HEALTHCARE REFORM
For insurance markets to continue functioning in the absence of experience rating, eveiyone must have insurance. To achieve this end, the legisla- tion establishes an individiiai mandate, using the tax code to require that all legal residents enroll in qualified health plans CQHPs). Startingjan. l. 2014, those who don't—with limited exceptions- will face a penalty that increases over time.
To provide a marketplace for individuals and small businesses to purchase insurance, states will be required to establish health benefit exchanges as either government or not-for-profit entities using federal start-up funding. This pro- vision will give states significant influence on the overall impact of healthcare reform.
The legislation also provides for foxu* benefit cat - egories for health insurance plan design—bronze, silver, gold, and platinum—based on the actuarial value of the plan. Under the minimum require- ments of the individual mandate, insurers will be required to meet QHP certification criteria by offering a full range of services and charging the same premium for policies offered in and out of the state's exchange, and by providing at least one plan in the silver (reference package) and gold benefit tier.
The services that an insurer must offer to qualify as a QHP are:
> Acute services (inpatient, outpatient, and emergency)
> Rehabilitation services and devices > Mental health and substance abuse services
> Prescription drug coverage
> Maternity and newborn services > Pédiatrie services > Preventive and Wellness services
Given the cost of insurance, the individual man- date isn't feasible without some individuals receiving financial assistance. The legislation therefore provides for individuals with incomes between i33 and 400 percent of the federal poverty level to receive such assistance in the form of refundable tax credits. These "affordabil- ity credits" are designed to help low- and mid- dle-income individuals purchase insurance by limiting the cost to a percentage of income.
Subsidies also will be available for small busi- nesses—defined as organizations with fewer than 25 FTEs with average wages of less than $50,000— in two phases. In phase one (2010-13), employers can receive up to 35 percent of their contribution as a tax credit toward tbe purchase of health insur- ance premiums. The credit is based on a sliding scale, with firms having fewer than 11 FTEs and average wages of $25,000 receiving the full credit. Phase two begins in 2014. Employers that pur- chase coverage through the state exchanges can receive a tax credit of up to 50 percent of their contribution for two years. The same sliding scale used in phase one will apply in phase two.
Malpractice demonstrations. Although most believe
that sweeping malpractice reform could lead to substantial cost reductions, such an overhaul was not included in the reform package for a variety of political reasons. In a first step toward broader reform, however, the law provides the HHS
PENALTIES FOR FAILURE TO COMPLY
WITH THE INDIVIDUAL MANDATE' AFFORDABILITY CREDITS
Year
2014
2015
2016
2017 and Beyond
Flat Penalty
$95
$325
$695
Indexed toCPI
Income
1%
2%
3%
3%
Federal Poverty Level
Up to 133%
133 to 149%
150 to 199%
200 to 249%
250 to 299%
300 to 400%
% of Income
2.00%
3.00 to 4.00%
4.00 to 6.30%
6.30 to 8.05%
8.05 to 9.50%
9.50% * Penally is the greater oi the flat fee or percentage of income.
54 JUNE 2010 healthcare financial management
SPECIAL SECTION: HEALTHCARE REFORM
secretary witb $50 million over five years to fund demonstration projects. Tbe funding will be used to explore alternative metbods io resolve medical liability claims, such as health courts and early offer programs.
Funding for reducing preventable readmissions.
Facilities witb the highest readmission rates will be able to participate in a five-year Medicare pilot program designed to reduce réadmissions. Tbe pilot begins in 2011 and gives priority to small community bospitals. rural bospitals. and facilities caring for medically underserved popu- lations. Participating facilities must target Medicare patients who are at high risk for read- mission, using at least one evidence-based eare transitional intervention, such as comprebensive medication reconciliation at discharge.
The Bad
The legislation also includes items that are unfavorable for hospitals. Payment cuts and the employer "free rider" penalty will place significant downward pressure on bospital bottom lines.
Payment cuts. Approximately one-balf of tbe leg- islation's estimated $938 billion cost is financed through savings generated from the healthcare system. Of the cuts, hospitals shoulder $149 bil- lon of the burden through reductions to market basket updates (MBUs) and Medicare and Medicaid payments to disproportionate sbare bospitals CDSH payments), Hospitals also will likely feel tbe effect of significant payment cuts targeted at other industry participants tbat play key roles in hospital value chains, including insurers, pharmaceutical manufacturers, and device companies.
Tbe legislation places a downward adjustment for productivity tbat reduces bospital reimbursement by $112.6 billion over the next 10 years. Tbere are two components to tbe reduction. The first is a "flat" reduction that began on Jan. 1. 2010. for outpatient prospective payment system (PPS) payments and on April 1.2010, for inpatient PPS payments and con- tinues until Dec. 3i. 2019. The actual productivity- based adjustment, which is based on a 10-year moving average of changes in annual economywide. nonfarm.multifactor productivity, begins in 2012- Similar adjustments are made to the MBUs for PPS payments to rehabilitation, long-term care, psychi- atric, and skilled nursing facilities.
Medicare DSH payments will be reduced by $22.1 billion over the next 10 years. Asa result of recent findings of the Medicare Payment Advisory Commission (MedPAC) tbat only 25 percent of Medicare DSH payments are economically justi- fied by the cost of providing indigent care, tbe legislation reduces DSH funding by 75 percent over current levels starting in 2014. Some of tbe savings will be used to create a new payment system to reimburse bospitals' indigent care cost. Payments will be allocated based on tbe bospitals percentage of tbe total uncompensated care delivered by all DSH hospitals.
Medicaid DSH allotments will also be reduced by $14 billion over 10 years starting in 2014. Tbe reductions will be based on the number of unin- sured in eacb state and how states allocate tbeir DSH funding.
Much of the remaining savings used to fund reform will come from commercial insurers. pharmaceutical manufacturers, and device companies.
MARKET BASKET UPDATE PRODUCTIVITY REDUCTION FACTORS
Flat Reduction
Estimated Productivity Adjustment*
Source: IHS Global Insight Inc. (IGI), 1st Otr, 2009 Historicai Data through 4th Olr, 2008.
2010
0,25%
10.30%
2011
0.25%
1.00%
2012
0.10%
0.80%
2013
0.10%
0.80%
2014
0.30%
1.10%
2015
0.20%
1.20%
2016
0.20%
1.10%
2017
0.75%
1,00%
2018
0.75%
0.90%
2019
0.75%
1.00%
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SPECIAL SECTION: HEALTHCARE REFORM
COMBINED MEDICARE AND MEDICAID DSH REDUCTIONS BY FFY
2014 2015 2016 2017 2018 2019
-11
-13 Medicaid Medicare
Insurers will see payments cut for their Medicare Advantage product lines by an estimated $i36 billion over lo years. This payment reduction combined with guaranteed issue—which will significantly reduce insurers' ability to manage claims expense—will put significant pressure on insur- ers' bottom lines. The result is likely to be a more difficult contract negotiation environment as pay- ers attempt to hold the line on rate increases to improve their financial performance.
Pharmaceutical and device manufacturers will be subject to industry fees of approximately $8o billion and $20 billion, respectively, over 10 years. Supporters of this tax claim the cost will not be passed on to patients and hospitals. However, it is unlikely that pharmaceutical and device manufacturer shareholders will bear tbe brunt of this.
Employer provisions. Although employers won't he required to offer insurance to their employees, they will be subject to a free-rider penally. Companies with 50 or more FTEs will face a penalty for employees receiving affordahility credits. An employee may be eligible for credits if bis or ber income is less than 400 percent of the FPL and if the employer doesn't pay at least 60 percent of tbe actuarial value of a QHPor the
offered QHP is unaffordable, exceeding 9.5 per- cent of the employee's income.
Employers that offer a QHP and contribute to any portion of the premium also must provide a free- choice voucher equal lo the employers' premium contribution. An employee is eligible to receive a voucher, wbicb can be used to purchase insurance in the state exchange, if the employer-provided coverage is hetween 8 and 9.8 percent of tbe employee's income.
Most hospitals provide their employees with insur- ance. However, they need to determine if coverage meets the benefit package requirements and whether it is affordable—as defined in the law—for all employees. It is important that hospitals understand the financial impact on the organization from not satisfying either of these requirements. Hospitals also will need to consider the impact of the free- rider penalty on nonaffiliated postacute care providers in the community, such as freestanding skilled nursing facilities and home health agencies, which will likely experience significant financial dif- ficulties as a result of the free-rider provision.
The Transformational
Reform poses a number of transformational opportunities and challenges for providers.
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SPECIAL SECTION: HEALTHCARE REFORM
CALCULATION OF EMPLOYER PENALTY
"Minimum essential ;overage" oHered to
Is any FTE receiving a subsidy?
Is any employee , receiving a subsidy?
Notes: Assessments determined month-by-month. Seasonal employees excluded (rom the assessment.
Pay the lesser of: All FTEs receiving credits X $ 3 , 0 0 0
All FTEs X $ 2 , 0 0 0
No penalty
Pay (All F T E s - 3 0 ) X $ 2 , 0 0 0
L No penalty
Although the majority of the transformational measures are designed to change the care deliv- ery system, there are also provisions concerning
tax-exempt status and pricing transparency.
Delivery system reforms. A frequent criticism of the U.S. healthcare system is that most payment sys- tems reward volume with only minimal concern for outcomes. As a result, U.S. heahhcare costs skyrocket while quality lags that in other devel- oped countries. To correct this prohlem, the leg- islation has both short- and long-term measures designed to shift incentives in the payment sys- tem from volume- to value-hased for Medicare and Medicaid.
In the near-term, the Centers for Medicare & Medicaid Services (CMS) will implement a value- based reimhursement mechanism and reduce Medicare payments to hospitals with high vol - umes of preventable réadmissions and hospital- acquired conditions (HACs).
Hospital value-based purchasing goes into effect in FYi3 and applies to all acute care inpatient PPS hospitals. The program would pay hospitals based on their performance on measures currently
collected in the Medicare pay-for-reporting. The program is budget neutral and funded by
reducing payments for all Medicare severity- adjusted diagnosis-related groups (MS-DRGS).
The secretary of the Department of Health and Human Services (HHS) will develop a method for assessing hospital performance. A facility that meets or exceeds the standard will be eligihle to earn back tbe initially withheld funds. The pay- ment will be based on either quality improvement relative to the prior year's results or attainment of a defined quality henchmark, whichever results in a higher payout. The payment adjust- ment will apply only to the relevant fiscal year and not impact DSH. independent medical edu- cation (IME). outlier, or low-volume adjustment payments.
BeginninginFYi3, hospitals with higher-than- expected risk-adjusted 3o-day readmission rates forheaii attack, heart failure, and pneumonia will have all of their inpatient PPS payments reduced, resulting in an estimated payment reduction of $7.1 billion over 10 years. The list of conditions will be expanded in 2015 to include coronary obstructive pulmonary disease and several cardiac and vascular surgical procedures. CMS also will calculate and post all-payer readmissions rates for the selected conditions, hut the legislation does not provide a timeline for this effort.
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SPECIAL SECTION: HEALTHCARE REFORM
VALUE-BASED PURCHASING INPATIENT PPS
WITHHOLDING
FFY
2013
2014
2015
2016
2017 and Beyond
% Inpatient PPS Payments
1.00%
1.25%
1.50%
1.75%
2.00%
MAXIMUM INPATIENT PPS PAYMENT REDUCTION
AMOUNT FOR EXCESSIVE READMISSIONS
FFY
2013
2014
2015 and Beyond
% Inpatient PPS Payments
1.00%
2.00%
3.00%
Similarly, in FY15, the legislation applies a finan- cial penalty to hospitals with higher-than- expected risk-adjusted rates of HACs. Providers in the highest quartile will have all of their inpa- tient PPS payments reduced by 1 percent, saving Medicare an estimated $1.4 hillion over 10 years. The program will use the conditions currently included in GMS's HAC inpatient PPS payment policy.
Over the longer term, the legislation has the potential to radically reshape the care delivery system. Pilots that test bundled payments and accountable care organizations (ACOs) can offer significant financial rewards to hospitals that can collaborate with physicians and postacute care providers to improve quality and lower cost.
A five-year national voluntary Medicare bundled payment pilot will begin in 2oi3. The bundled payment would cover services provided from three days prior to admission to 3o days post dis- charge for inpatient and outpatient care, physi- cian services, post-acute care, and any other services deemed appropriate by the HHS secretaiy. An entity, comprised of a hospital, physician group, skilled nursing facility, and home health agency can apply to participate in the pilot.
Initially, the pilot will focus on 10 conditions, to be selected by the HHS secretaiy. These will include a mix of chronic and acute conditions, medical and surgical cases, and conditions where there is a significant opportunity to improve the quality of care while reducing spending and variation in readmissions and postacute care
utilization. After Jan. 1, 2016, tbe HHS secretary will be able to expand the duration and scope of the pilot if it is determined that it decreases costs without reducing tjuality.
The legislation includes a similar Medicaid pilot that will involve up to eight states hy Jan. 1, 2012.
Another long-term pilot tests the ability of ACOs to improve the quality of care hy tying reimburse - ment to quality and cost measures. Groups of qualifying providers—including various configu- rations of physician practice groups, hospital- physician jointventures, and hospitals employing physicians—will have the opportunity to form ACOs and share in any cost savings they achieve for Medicare.
To be eligible to participate, providers must agree to: > Become accountable for the overall care of their
Medicare FFS beneficiaries > Participate for a minimum of three years
> Have a legal structure enabling receipt and dis-
tribution of bonuses
> Provide information on physicians practicing in
theACO > Have a management and leadership infrastruc-
ture in place > Define processes to promote evidenced-based
medicine and patient engagement
> Meet patient-centeredness criteria determined
by the HHS secretaiy
The HHS secretary will set a minimum threshold of savings that an ACO must achieve to be eligible to earn incentive payments. Providers also must
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SPECIAL SECTION: HEALTHCARE REFORM
meet predefined quality thresholds for clinical processes and outcomes, patient and caregiver perspectives on care, and utilization and costs.
Tax-exempt status. For several years hospital tax - exempt status has been a hot-hutton issue on Capitol Hill. Beginningwith tax years starting after March 23, 2010, the law requires hospitals to conduct a community health needs assess- ment, report annually to the 1RS on how they're meeting identified community needs, create a financial assistance policy, and use "reasonable" efforts to determine if a patient qualifies for charity care.
Hospitals must conduct a community health needs assessment at least once every three years and adopt an implementation strategy to meet the identified needs. Tbe assessment should include input from stakeholders who represent the hroad interests of the community. Hospitals have until the end of their tax years tbat start after March 2.3, 2012, to complete the assessment; otherwise, tbey face a $50,000 fine.
Annually, bospitals must report to tbe 1RS on how they're meeting identified community needs. This report must include a description of needs not heing addressed and the reasons why. along with audited financial statements. Tbe 1RS will review information about a hospital's community benefit activities at least once every tbree years. The sec - retaiy of the Department of the Treasury will report annually to Congress on the levels of char- ity care, bad debt, and cost of community benefit activities undertaken by tax-exempt bospitals.
Eacb hospital is required to adopt, implement, and publicize a financial assistance policy. Tbe policy must include eligibility criteria, tbe basis for determining amounts cbarged to patients receiving charity care, instructions for applying for assistance, and any actions tbat may be taken for nonpayment. Hospitals may not use gross charges when billing individuals who qualify for assistance but, instead, must bill "no more than the amounts billed to individuals wbo bave cover- age forsuch care."
Hospitals may not undertake extraordinary col- lections actions to collect from a patient without first making a "reasonable'" effort to determine whether the individual is eligible for cbarity care. The Treasury secretary is authorized to provide guidance on what constitutes a reasonable effort.
Pricing transparency. Beginning in FFYii, hospi- tals must annually make puhlic a list of hospital charges for all items and services, including charges for each Medicare MS-DRG. Tbe HHS secretary is cbarged with developing guidelines for reporting.
Fortune Favors the Prepared
Louis Pasteur probably couldn't bave imagined our current bealtbcare system, let alone sweeping reform, wben he said, "Fortune favors the pre- pared mind." However, rarely has a quote been more apt for bospitals if tbey are going to mitigate the downside of reform while taking advantage of opportunities.
First, bospitals will need to understand the legis- lation. Given that tbe phrase "the Secretary sball" appears 1,045 times, it is crucial to follow CMS's proposed and final rulemaking process closely, because how tbe legislation is implemented will bave a significant effect on its impact. Witb tbis understanding, bospitals will need to model botb revenue and cost impacts on tbeir bottom lines. As more becomes known througb tbe rulemaking process, bospitals should revisit their assump- tions and revise tbemto fine tune results.
Finally, bospitals should identify both areas of exposure and opportunity, For eacb area, tbe appropriate senior executive sbô l̂d be assigned to develop and execute a strategy tbat will mitigate negative impacts and leverage opportunities. •
About the author
Chad Mulvany is o technical manager in HFMA's
Washington, D.C., office and 3 member
of HFMA's Virginia Chapter.
hlma.org JUNE 2010 59
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