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IMPACT OF CURRENT DELIVERY SERVICE MODELS

1. Introduction

The U. S. health care system traditionally, and specifically the Medicare program, utilizes a “fee-for-service” (FFS) payment model, in which payors unbundle services and pay for each service separately. FFS incentivizes health care providers to perform more treatments, as they are paid for each service and, therefore, the quantity, rather than the quality of care.”[1] Though providing beneficiaries more flexibility in provider selection, a FFS payment system, without control mechanisms such as caps or other price fixing devices, because of the financial rewards offered, tends to increase health care costs.

While there is no dearth of white papers and commentary identifying FFS’s negative implications, the pathway to a more innovative and cost saving system has achieved little consensus. Efforts have been and are being made to move providers in the direction of service integration. In 2000, an attempt to shift from FFS to capitation failed due to opposition from both providers and patients. Coordinated and integrated care models exist currently, however, in isolated care settings, including the Mayo Clinic, Geisinger Health System, Intermountain Healthcare, Cleveland Clinic and Kaiser Permanente. Massachusetts eliminated its FFS system in 2009 and put in place a global payment system.

The Patient Protection and Affordable Care Act, amended by the Health Care and Education Affordability Reconciliation Act of 2010 (the “Affordable Care Act” or “ACA”),[2] attempts through multiple incentive and penalty options to encourage health care providers to offer higher quality, more efficient and less costly health care. At the start of CY 2014, the jury is still out on the ACA.[3] Either as a result of the ACA or due to other forces, currently the planets seem more aligned for successfully combining FFS and quality/outcome oriented measures in Medicare payment reform with the end result being better care for beneficiaries at a reduced health care spending level.[4]

The goal of this presentation is to describe the current state of hospitals, from the standpoint of their financial condition and of their capabilities to offer integrated care, to discuss CMS reimbursement drivers mandated by the ACA, to describe alternatives for the FFS payment system and to identify the routes that health systems might take to reach the goal of fully integrated, cost effective, and optimal (in term of outcomes) health care services.

2. Status Quo of Current Health Care Systems Under Fee-for-Service Payment Environment

a. 2014 – Four Years into ACA Implementation

In the past four years, health care systems have dealt with myriad federal regulatory changes, statutorily mandated Medicare payment reductions, the rollout of electronic medical records, and ACA insurance reforms’ implications for employee health care costs. On January 1, 2014, several of ACA’s major provisions become effective: the federal exchange and state exchanges, Medicaid expansion, and the individual mandate.

On January 6, 2014, the Centers for Medicare and Medicaid Services (CMS) announced that federal fiscal year (“FY”) 2013 was “another year of slow health spending growth,” stating that the stable growth rate was due to the impact of the recent economic recession.[5] Query if the economic recession should receive all the credit given that since FY 2012, multiple Medicare reductions mandated by the ACA have been implemented with others beginning in FY 2014, including ACA cuts in Medicare and Medicaid disproportionate share payments. As described below, the effects not only of ACA, but also of subsequent Medicare legislation, the baby boom generation’s moving into Medicare, and the continued growth of the uninsured population will impact hospitals through governmental insurance programs’ fee for service payments.

b. Medicare Payment Reductions: ACA, Budget Control Act and the Bipartisan Budget Act

Newspaper headlines abound announcing hospitals’ challenges due to Medicare payment reductions and other funding challenges.[6] In addition to substantially reforming America’s health insurance industry, ACA contains provider payment reductions for both the Medicare and Medicaid programs extending for 10 years. The ACA and subsequent budget acts included reductions in the Medicare hospital market basket update for inpatient hospitals, outpatient hospital, inpatient rehabilitation and psychiatric hospitals and long term care hospitals as well as Medicare coding and documentation adjustments, Medicare value-based purchasing payment implications, Medicare readmission payment reductions, Medicare and Medicaid hospital acquired condition payment reductions and Medicare and Medicaid disproportionate share payment reductions.

The Affordable Care Act, Section 3401, requires reductions in the Medicare annual updates for subsection (d) hospitals, those paid under the inpatient prospective payment system (IPPS)[7]as well a full productivity adjustment that links Medicare payment to measurable productivity gains in the private economy.[8] CBO estimates that reductions will total $156.6 billion between 2010 and 2019.[9]

The Budget Control Act[10] of 2011 included further Medicare payment reductions. As a result of the sequestration that went into effect on October 1, 2013, hospitals’ Medicare payments were cut 2% (in addition to the ACA payment reductions) for FY 2014 through 2021. CBO estimates savings from these cuts at $11.0 billion in 2013 and $11.4 billion in 2014 increasing to $17.3 billion in 2021.[11]

Signed into law by President Obama on December 26, 2013, the Bipartisan Budget Act extended the 2% sequester cut for two additional years (2022 and 2023) and revised the long-term care hospital payments.[12]

c. The Impact of Uncompensated Care on Hospitals

A recent American Hospital Association (AHA) fact sheet announces that “[s]ince 2000, hospitals of all types have provided more than $413 billion in uncompensated care to their patients.”[13] The term “uncompensated care” for AHA purposes is the “overall measure of hospital care provided for which no payment was received from the patient or insurer.”  In other words, “uncompensated care” as defined by AHA includes both bad debt and charity care and is expressed in terms of hospitals’ costs rather than charges.

No small portion of “uncompensated care” is the result of hospitals treating persons who are uninsured. In an October 2013 publication, the Henry J. Kaiser Family Foundation stated that 47 million non-elderly Americans were uninsured in 2012 – more than one in six or 18%.[14] Despite the Affordable Care Act’s intention to provide access to a significant portion of legal residents through the individual mandate (and to some extent the employer mandate), insurance coverage options vary widely depending upon the state in which one lives. Whether a state has expanded Medicaid is extremely relevant in determining whether insurance coverage is an option as is the economic climate in the state. In Medicaid expansion states, legal residents with incomes up to 138% of the federal poverty level would be eligible for Medicaid coverage if other coverage is unavailable. In non-expansion states, while some uninsured legal residents will be eligible for Medicaid or CHIP, many adults will fall into a coverage gap. Those individuals either earn too much to meet Medicaid income eligibility requirements or do not earn enough to be eligible for tax credits toward purchase of insurance benefits. At least two-thirds of uninsured Americans are unaware that they might be eligible for tax credits and fail to inquire or visit online marketplaces.[15]

 The obvious financial impact of these uninsureds on hospitals in terms of uncompensated care for emergency department visits could be significant.  An additional inherent issue due to hospitals’ need to search for insurance eligibility for uninsureds, is that emergency departments become the front lines for enrolling in potential coverage options. Regardless of the potential for reimbursement (given Medicaid’s low reimbursement rates), emergency department staff may soon acquire the task of distributing application forms to new Medicaid and exchange enrollees.[16]

3. Key Current Health System Reimbursement Drivers Mandated by ACA

a. Medicare

(1) DRG Reduction Factors

(a) Value-Based Purchasing Program

(i) Value-Based Purchasing - Hospital Inpatient Quality Reporting Program

Hospital Quality Reporting was statutorily mandated by the Medicare Prescription Drug, Improvement, Modernization Act (MMA) 2003, the Hospital Inpatient Quality Reporting Program (Hospital IQR).[17] Under Hospital IQR, CMS paid hospitals that reported the required quality measures an increased annual update to Medicare payment rates. Initially, hospitals that failed to provide the quality reporting received a 0.4 percentage point reduction in the annual Medicare market basket. The Hospital IQR reduction was increased to 2.0 percentage points by the Deficit Reduction Act of 2005.[18]

In the 2014 inpatient prospective payment system (IPPS) final rule, CMS adjusts the Hospital IQR during FY 2016 to coincide reporting with the Electronic Health Records (EHR) Incentive Program submission guidelines.[19] As a result of the coordination, hospitals participating in the IQR program may electronically submit one quarter’s worth of data for measures sets (Q1, Q2 or Q3 2014). Should a hospital not submit electronically, it will be required to submit a full year’s worth of data via chart abstraction. Measures that are reported electronically under the hospital IQR program will also be considered in determining whether the hospital has satisfied the Medicare EHR program clinical quality measure reporting requirements.[20]

(ii) ACA Value-Based Purchasing Program

Expanding upon the Hospital IQR concepts, the Affordable Care Act (Section 3001) enhanced the Hospital IQR Program with the Value-Based Purchasing Program (VBP).[21] VBP, effective in October 2012, reflected a significant move by CMS to reimburse subsection (d) hospitals for quality versus payment for meeting certain performance measures during a specific “performance period”. Under the VBP program, providers receive “incentive payments” for high performance on certain quality measures. The pool of VBP payments is a reduction from all participating subsection (d) hospitals for each discharge beginning in FY 2013. The reduction for FY 2013 was one percent (1%); reductions increase a quarter percent per federal fiscal year until the total reduction is two percent (2%) for discharges on or after October 1, 2016.[22] This pool of savings is distributed in a budget neutral manner as “incentive” payments to hospitals that either perform well under quality measures or show improvement over previous performance in these quality measures. Consequently, while high performing hospitals will receive increased reimbursement, low performing hospitals will be penalized even if they meet minimum quality thresholds.

Certain VBP program requirements are statutorily mandated. For example, in order for a quality measure to be used in the VBP program, it must have been part of the Hospital IQR program and listed on the HospitalCompare website at least one year prior to its being used in the VBP program. Also, measures to be used in the VBP program must be announced 60 days prior to the performance period for that measure. Quality measures used in the VBP program must include acute myocardial infarction, heart failure, pneumonia, surgeries (as measured by the Surgical Care Improvement Project), and healthcare-associated infections (as measured by the Prevention Metrics and Targets established in the HHS Action Plan to Prevent Healthcare-Associated Infections).

Hospitals may be excluded from the VBP program if they have an insufficient number of qualifying cases or if they have been cited for deficiencies that pose immediate jeopardy to the health and safety of patients.[23] For FY 2013, 10 qualifying cases are required for clinical process of care measures and 100 Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) surveys.[24] In FY 2014, at least 10 cases each will be required for the outcomes measures.[25]

The VBP program statute also sets requirements for scoring, payment, notice of the performance results, corrections in the results and appeals of the performance assessment. The methodology used to determine the amount of the VBP incentive payments and the setting of the performance standards and the performance are exempted from judicial review.[26]

CMS periodically sets out through its rule making process the specific quality measures, divided into “domains.” The FY 2013 program included two domains including clinical process of care measures and patient satisfaction measures.[27] The measures were weighted at seventy percent (70%) of the total score for clinical process of care measures and thirty percent (30%) of the total score for patient satisfaction measures. In the FY 2014 VBP program, CMS has added a third domain measuring patient outcomes while in the FY 2015 program, CMS will add a new “efficiency” domain.[28] CMS attempts to maintain the relevance of the measures by eliminating those measures that are “topped-out,” meaning that the majority of hospitals receive extremely high compliance rates consistently. Also, measures that are due to be retired from the IQR program are eliminated.

In scoring whether a hospital will receive an incentive payment, CMS bases incentive awards on a hospital’s results during a “performance period” as compared to data from an earlier “baseline period”.  Hospitals receive an “achievement” score and an “improvement” score (the higher of which will generate the total performance score).  “Achievement” is judged on whether the hospital’s performance falls between a “achievement threshold” and a “benchmark” during the baseline period.  The “improvement” score is based on where the hospital’s own performance falls during the baseline period and the same benchmark used to calculate the achievement score.  The aggregate score of all the “domains” (weighted)  is the total performance score.[29] CMS has reported the various baseline and performance periods in IPPS final rules for FYs 2013 through 2016.[30]

Approximately half of participating hospitals (approximately 1,300) are anticipated to break even on the VBP program over the course of FY 2014. According to CMS Chief Medical Officer and Director of the Center for Clinical Standards and Quality, Dr. Patrick Conway, these hospitals will “essentially recoup the initial DRG payment cut.” Approximately 778 hospitals “will see an overall decrease in their Medicare payments” and “630 will receive a true bonus above what they paid in” according to Conway.[31]

(b) ACA Hospital-Acquired Conditions Reduction Program

(i) Early HAC Program

An early quality adjustment for IPPS hospitals came in the Deficit Reduction Act of 2005, an adjustment in Medicare Severity Diagnostic Related Group (MS-DRG) payments for certain hospital/acquired conditions (HAC) and Present On Admission Indicated Reporting (POA).[32] Through the HAC program, CMS identified conditions that (i) are high cost and/or high volume; (ii) result in the diagnosis of a case to DRG that has a higher payment when present is a secondary diagnosis; and (iii) could reasonably have been prevented through the application of evidence-based guidelines. IPPS hospitals must use a POA indicator in each claim form for primary and secondary diagnoses for inpatient admissions. Should a condition develop during an outpatient encounter, including in the emergency department, observation or outpatient surgery, such conditions would be considered POA. Using the POA indicator, CMS then can identify whether a patient had a HAC. As of the fourth quarter of FY 2008, hospitals would not be assigned a higher DRG as a result of the HAC alone, and the other diagnoses would determine the payment for the inpatient stay. While originally twelve diagnoses were listed as HACs, commencing in October 1, 2012, new HACs were added by CHS.[33]

As the HAC adjustment is applicable only to IPPS hospitals, critical access hospitals, long term care hospitals, cancer hospitals, children’s inpatient facilities, inpatient psychiatric hospitals, inpatient rehabilitation facilities, Veteran’s Administration/Department of Defense hospitals, rural health clinics, federally qualified health centers, and Maryland waiver hospitals are exempt from the HAC provision.

Although CMS’s early estimates for savings from the HAC program totaled $20 million annually, a 2012 report in the New England Journal of Medicine indicated otherwise. According to the study, the HAC program did not appear to offer a “measurable impact on [the measures studied].” Mentioning measures involving blood stream and urinary tract infections related to catheters, the study opined that these infections were already on a downward path and the increases could not be attributed to the HAC program.[34]

(ii) ACA HAC – Reduction Program – FY 2014

Mandated by Section 3008 of the Affordable Care Act and beginning FY 2015, CMS has instituted a HAC reduction program applicable to HACS subject to IPPS payment and other HACs specified by the Secretary of the Department of Health and Human Services.[35] Through this program, IPPS hospitals ranking in the lowest-performing quartile of measured hospital-acquired conditions (top quartile as compared to national rates of HACs) will see Medicare payments for all discharges reduced by one percent (1%). In the FY 2014 IPPS final rule, CMS finalized quality measures, scoring methodology and a process for hospitals to review and correct data.

During the first year of the program, CMS will measure HACs using claims data or will use measures that are part the Inpatient Quality Reporting program and include two domains of measure sets. One domain includes a composite patient safety indicator measure set while the second domain includes two healthcare-associated infection measures developed by the Center for Disease Control and Prevention’s National Safety Network. The measures will be weighted at thirty-five percent (35%) for domain one and sixty-five percent (65%) for domain two. Hospital’s total HAC score will determine the quartile of applicable hospitals subject to the payment adjustment beginning with discharges on or after October 1, 2014.[36]

(c) ACA Hospital Readmissions Reduction Program

The Hospital Readmissions Reduction Program (HRRP), established by Section 3025 of the Accordable Care Act,[37] requires a reduction in inpatient hospital payment by CMS for hospitals having excess readmissions beginning on or after October 1, 2012. For purposes of HRRP, “readmission” means an admission to a subsection (d) hospital within 30 days of discharge from the same or another subsection (d) hospital. The HRRP is not budget neutral. The initial conditions on which the readmission penalty were based included acute myocardial infarction, heart failure and pneumonia (all endorsed by the National Quality Forum (NQF)). In order to calculate the “excess readmission ratio” for these measures, CMS determined the hospitals’ readmission performance and compared that to the national average for the hospitals’ patients with that applicable condition. Twenty-five cases minimum per measure are required and evaluated against an applicable period of three years’ discharge data. For example for FY 2013, the first year of the HRRP, the excess readmission ratios were based on discharge occurring during the three year period from July 1, 2008 to June 30, 2011.[38] For FY 2015, CMS will expand the measures to include four additional conditions identified in the June 2007 MedPAC report (CoPD, CABG, PTCA, other vascular) plus high volume, high cost procedures that the Secretary of the Department of Health and Human Services identifies.[39]

The purpose of the HRRP is to encourage hospitals to take necessary steps to avoid readmissions of patients within a relatively short period of time. The results of the HRRP appear to be that safety net hospitals treating large number of low income patients tend to have higher readmission rates and, therefore, are the hospitals being penalized most significantly.[40]

The HRRP penalizes hospitals one percent (1%) of their base Medicare reimbursement (DRG payment only and not IME, DSH or other payments) for FY 2013. The maximum penalty will increase in 2014 to two percent (2%) of DRG payments and in FY 2015 three percent (3%) of DRG payments.[41]

(2) ACA Medicare DSH Reductions

The Affordable Care Act’s Section 3133 required CMS to reduce Disproportionate Share Hospital (DSH) payments beginning in FY 2014. DSH hospitals will receive twenty-five percent (25%) of the amount that would be received under the existing statutory formula with the remaining amount (seventy-five percent (75%) of what otherwise would have been paid) being distributed as additional payment based upon changes in the percentage of uninsured individuals (the uncompensated care payment).[42] In FY 2014, the amount that each DSH hospital will receive in uncompensated care payment amounts will be based upon its share of the total amount of uncompensated care for all Medicare DSH hospitals for the given time period.[43]

Of the two buckets, the uncompensated care pool bucket will be approximately three times the size of the traditional DSH pool, impacted as previously by Medicaid and SSI days. During FY 2014, the uncompensated care payment pool amount will be set at $9.033 billion.[44]

The general trend as to disproportionate share funds payments is that large regional hospitals will see sizable reductions in Medicare DSH funds while their smaller counterparts will actually see a relatively neutral to sizeable increase in DSH funds. The primary factor contributing to the increase for the smaller hospitals is that the current twelve percent (12%) DSH cap does not apply to the uncompensated care pools distribution, which results in higher Medicare DSH payouts under the FY 2014 methodology. [45]

b. Medicaid

(1) Medicaid DSH

The Affordable Care Act also included reductions in payments for Medicaid DSH hospitals.[46] During FY 2014 and 2015, Medicaid DSH payments will be allocated to hospitals based upon data that predates state’s Medicaid expansion decisions. CMS indicated that approximately 10.8 million Americans reside in states not currently planning to expand Medicaid and that by 2014 Medicaid will include 8.7 million new beneficiaries. As to the impact of the Medicaid DSH provisions, the reductions will fall more heavily on those states that do not direct DSH payments based upon hospital’s high Medicaid payment volumes and high uncompensated care volumes. States with the lowest percentages of uninsured will receive reduced Medicaid DSH funds.

Annual state allotments for federal funding of Medicaid DSH payments be reduced in accordance with the Affordable Care Act’s Section 2551, resulting in accompanying reductions in payments to each state. Federal funding will include only each state’s annual state DSH allotment. The DSH Health Reform Methodology (DHRM), which determines each state’s annual state DSH allotment reduction, was formulated to: (i) impose a smaller percentage reduction on low DSH states; (ii) impose a larger percentage reduction on states with the lowest percentages of uninsured individuals during the year for which data would be available; (iii) impose a larger percentage of reductions on states whose DSH payments are not targeted to hospitals with high volume of Medicaid inpatients; (iv) impose larger percentage reductions on DSH payments to states that do not target hospitals with high levels of uncompensated care; (v) take into account the extent that the DSH allotment for a state was included in the state’s budget neutrality calculation for expanding Medicaid prior to July 31, 2009.

The Affordable Care Act Medicaid DSH reductions were estimated to save approximately $18.1 billion from FY 2014 to 2020, the rationale being that DSH payments would be unnecessary as more low income patients would be covered by Medicaid.[47] The savings from Medicaid DSH reductions would be used to offset the cost of the Medicaid expansion to adults with incomes up to one hundred thirty-eight percent (138%) of the federal poverty level. Unfortunately, the U.S. Supreme Court’s June 2012 decision allowing states to opt out of Medicaid expansion significantly impacted hospitals in nonexpansion states. The consequence for Medicaid expansion states is that DSH funding may be greater in states that do not expand Medicaid.

The Bipartisan Budget Act of 2013[48] provided relief to hospitals, delaying reductions in Medicaid DSH payments to FY 2016 (October 1, 2015). The shift in these cuts means that hospitals will incur Medicaid DSH reductions double the Affordable Care Act requirements, totaling 1.2 billion cumulatively, during FY 2015 and 2016.

(2) Medicaid Health Care-Acquired Condition Payment Provision

Section 2702 of the Affordable Care Act[49] includes requirements that would incorporate the Medicare HAC provisions into state payment methodology.  Specifically, the Secretary of the Department of Health and Human Services was directed to issue regulations that would require identification of state practices prohibiting payment for HCACs, requiring states to incorporate those provisions in their state health plans and protecting beneficiary access to care. 

The regulations, issued June 6, 2011,[50] define the term “health care acquired condition” in a similar fashion as Medicare’s provisions for HACs, thereby setting Medicare policy as the floor but giving states flexibility as to making payment adjustments.  CMS must, however, approve the payment reduction methodology.  The regulations also require reporting of HCACs and contain a minimum set of conditions (including events and infections) that states must use to identify bases for non-payment.[51] While the regulations were effective July 1, 2011, as statutorily required, CMS delayed compliance on the regulations until July 1, 2012.

4. Flattening of the Revenue Curve

a. Overview

Revenue for hospitals and other health care organizations in the U. S. has reached a plateau. Spending per capita now exceeds $8,000, far above that of U. S. counterparts by a large margin. The disparity between revenues and costs is not readily explained by outcomes, since the average life expectancy for most of the Organization for Economic Co-operation and Development countries is greater than life expectancy in the U.S.[52]

In its most recent attempt to address the escalation of health care costs, Congress enacted the Affordable Care Act, signature legislation refocusing providers away from the traditional fee for service environment toward approaches recognizing outcomes, efficiencies and qualities. This portion of the paper will discuss several initiatives in the public and private sectors whose goals mirror ACA goals and summarize steps that will facilitate providers’ successful re-engineering to achieve the Triple Aim: better care access, better health outcomes and lower costs of care.

b. Incremental Transition toward Accountable Care: Medicare Bundled Payments for Care Improvement Initiative

One of the models piloted by CMS in its Medicare program is that of bundled payments. This payment system has different players depending upon one of four payment models.[53] On August 23, 2011, CMS announced the Bundled Payments for Care Improvement Initiative (Bundling Initiative), administered by the Center for Medicare and Medicaid Innovation Center, Initiative, through one of four models, various categories of “providers,” including hospitals, physicians, and other providers, may enter into agreements with Medicare and receive for services provided during each episode of care a single negotiated payment. CMS’s lump sum payment for discrete services furnished during the episode exemplifies the Bundling Initiative’s attempt to align the participants’ incentives, thereby improving patients’ quality of care and providers’ efficiency in care-giving.[54] Importantly, CMS Innovation Center requested wide scope arrangements, designed to be scalable, implemented quickly and potentially having payor involvement.

(1) Description of Bundling Models

Models 1, 2, and 3 involve a “retrospective” bundled payment arrangement, while Model 4 is premised on a “prospective” bundled payment arrangement. In retrospective arrangements, traditional Medicare fee-for-service payment is discounted through negotiation, followed by a reconciliation of the total payment for a particular episode of care against a predetermined target price. In a prospective arrangement, a single negotiated payment is paid as a lump sum in lieu of traditional FFS payment.

The Bundling Initiative’s Model 1 defines an episode of care that bundles payments for an inpatient stay in a general acute care hospital. Hospitals will receive discounted (based on agreement) IPPS rates. Physicians will receive separate FFS payments using the Medicare Physician Fee Schedule. Cost savings below the negotiated discount may be shared by providers. Payments in excess of aggregated historical payment beyond an established risk threshold must be repaid by the provider.

In Model 2, “episode of care” includes inpatient and post-acute care delivered after discharge, plus either a minimum of thirty or ninety days after discharge, as preferred by the applicant. Model 3 involves only post-acute care provided after discharge starting on the discharge date and extending at least thirty days after discharge. In both Models 2 and 3, the episode of care’s target price is discounted based on the provider’s historical FFS payments for the episode. Medicare will pay FFS rates. Following reconciliation, the excess of the target price over the aggregated FFS payments will be paid to the provider. Any FFS payment amounts that exceed the target price must be repaid by the provider.

The Model 4 episode of care includes only inpatient services, but features a prospectively determined bundled payment to the hospital for both inpatient hospital and physician services. Medicare requires participating practitioners to submit “no-pay” claims for episode of care services. Practitioners will be paid by the hospital out of the bundled payment.

Consideration of a bundled payment model is a good place for providers to test integration techniques since these models meet the key objectives of payment reform and are an intermediate step toward global payments or capitation. Episode payments offer an avenue to control unnecessary utilization, encourage high quality, promote provider integration and are operationally feasible.[55]

(2) Stumbling Blocks in Earlier Episode Payment Programs

Earlier “episode payment” programs have had a difficult time getting traction in the provider community due to challenges that inevitably arise in execution of the program. Single Payer initiatives, for example, can create first mover disadvantages for the leading payers if others don’t follow through.[56] While innovation has its advantages, the risk of being left alone as a payer is great if the bundled payment is not properly deployed. A recent bundle initiative combined public and private payers together in order to minimize the risk of failure due to being a first mover.

Most “episode payment” programs never reach the “tipping point” necessary for providers to change the in practice patterns. Culture is an important driver when formulating bundles. For example, consider the standard treatment pattern for controlled diabetes. In the South, a patient’s controlled diabetes is reviewed by the physician on a quarterly basis. In the Northeast, the same patient would be treated on a yearly basis. In the United Kingdom, the same patient would be treated only when issues arise and the diabetes is no longer in a controlled state. Which outcome is the best for the patient with controlled diabetes? If the patient is in a controlled state, is it necessary to see the patient? Since the culture varies from country to region to physician, standardizing practice patterns on a national basis requires considerable effort. Culture is difficult to affect unless evidence-based medicine can be proven to clinicians.

Another reason that “episode payment” programs have incurred difficulties is that overly heterogeneous episode definitions were very burdensome. Too many services do not allow for the focus necessary to affect change in culture or treatment pattern behavior. Insufficient volume in the bundles did not allow the products to gain traction. Critical mass is a component that must be present in order to have successful innovation in payment strategies. Such was not the case in most of the prior attempts.

c. Managed Population Model - The Arkansas Health Care Payment Improvement Initiative

In 2011, making one of his administration’s priorities a bundled care project for Arkansas, then Governor Mike Beebe proposed a bundled payment program that would improve coordination and effectiveness of care delivery “by moving away from a fragmented volume-driven, fee-fie-service system to one that pays teams of providers for episodes or bundles of care.”[57] “Arkansas is the only example of a state-initiated wide scale adoption of bundled payment, but similar efforts may follow.”[58]

(1) Multi-Payer/Multi-Stakeholder Bundle Program

In the Arkansas Health Care Payment Improvement Initiative (AHCPII), Arkansas Medicaid partnered with two insurors, Arkansas Blue Cross and Blue Shield and QualChoice, agreeing on common bundle definitions and quality measures, with AHCPII’s first payment performance period beginning in October 2012. Initially, AHCPII offered six bundles: attention deficit hyperactivity disorder (ADHD), congestive heart failure (CHF)(hospitalization only), joint replacement (total hip and knee), perinatal care; upper respiratory infection and developmental disorder.[59]

Currently, not all insurance carriers are participating in all five bundles.  For example, initially, Medicaid did not participate in the total hips/knees or CHF bundles and Arkansas Blue Cross Blue Shield did not participate in the ADHD bundle.  Although AHCPII has been a community effort and all parties have participated to some degree in establishing all of the bundles, some insurance carriers have predominantly led some of the bundles (e.g., Arkansas Blue Cross Blue Shield lead the total hips/knees bundle and Medicaid lead the ADHD bundle). The rationale is that the respective carriers had only so much bandwidth, so each one established those bundles which had the most dollars at risk for each carrier respectively.[60]

(2) Principal Accountable Providers (PAP)

In order to effectively complete an episode of care, a bundle must have a principal accountable provider or “quarterback” for the episode. In the Bundling Initiative, Arkansas identified a principal accountable provider (PAP) for each of the six episodes of care. Each PAP is a single provider, a physician or a hospital, who is responsible for the majority of the care and for all costs and quality for the episode. For example, in the hip/knee replacement episode whose time period runs from thirty days prior to the surgery and an additional ninety days after the surgical procedure, the PAP is the orthopedic surgeon.[61]

(3) Performance Periods and Payment

During the “transition period,” the first three to six months of the Bundling Initiative’s operations, providers will have website access to a limited amount of clinical data uploaded by providers to a web portal. Availability to such data gave providers information as to others practice patterns as well as to financial and quality outcomes. No reimbursement changes will be implemented during the transition period, but access to the data will enable development of a reimbursement methodology that will be implemented in the Bundling Initiative in future periods of its operations and phased in on a payer-by-payer basis. Both PAPs and non-PAP providers will be paid FFS payments during the transition period and following implementation of the new payment model, but only the PAP will have performance risk.

(4) Retrospective Reconciliation

Although prospective reconciliation is an option in bundling projects, Arkansas’ Bundling Initiative chose retrospective reconciliation in order to closely monitor the financial risk, both for the payors and for the PAPs. The Arkansas Bundling Initiative differs from Medicare’s Bundled Payment Initiative, that allows multiple entities such as hospitals, conveners, and physician groups to assume the financial risk. The Bundling Initiative’s payment mechanism is a shared risk model. The PAP will not share performance risk with other providers in the bundle. As the risk recipient, the PAP will receive incentive payment should it/he/she exceed the target metrics for the episode while performance shortfall amounts below the target metrics will be withheld from future PAP payments.[62] Non-PAPs are not directly financially at risk.

The Bundling Initiative’s gain or risk-sharing will fall into one of four categories depending on the provider’s average cost per episode:

• Sub-par performance: Providers whose costs exceed the acceptable threshold will be held responsible for a share of costs above this threshold.

• Acceptable performance: The provider neither gains nor loses because costs are neither above the acceptable threshold nor below the commendable threshold.

• Commendable performance: Savings below the commendable threshold are shared between provider and payer until the gain sharing limit is reached.

• Beyond commendable performance: The provider will receive a share of savings up to a gainsharing limit, but not beyond.

Each participating payer in the Bundling Initiative will determine the level of upside or downside sharing for each episode. During the transition period, higher acceptable threshold providers will be exposed to downside risk and providers begin implementing practice changes to meet outlined post-transition thresholds. During the post transition period, acceptable thresholds will be brought closer to the commendable threshold and commendable thresholds will be brought to post-transition level.[63]

5. Necessary Steps toward Clinical Integration (or How Do I Get from Point A to Point B)

Moving from Point A (FFS payment and cultural model) to Point B (clinically and culturally integrated model) necessarily requires intentional focus on the institutions themselves, their structures, their missions, their costs (or wastes), their data, and work/practice patterns. Several incremental steps described below can better position the hospital and/or system to manage successfully the system transformation necessary to achieve the Triple Aim as described by former CMS Administrator, Donald Berwick.

a. Review and Re-Define Mission

Traditionally, hospitals’ and health systems’ missions were guided by their communities and tradition (also known as convenience). Hospitals were purposed to meet the health care needs of the community, to provide access to all as a “safety net” and to improve the overall health status of the community served. More frequently than not, hospitals and health systems have also served as an economic driver in their communities. In many communities, the health system is the single largest employer, second only to governmental entities. Health system team members range from skilled clinical personnel to support service individuals. And, health systems have created a menu of services designed to improve outcomes, but also as a matter of convenience for patients (despite the potential lack of need for the service – e.g., two hospitals in a community of 30,000 both offering da Vinci robot services).

b. Review System Designs and Services

Hospital and health system leaders must prepare to guide their facilities in meeting key future objectives (providing excellence in health care in an efficient and effective manner). Identification of health needs and evaluation of the effectiveness of those services being provided is critical. Maintaining the status quo is not a strategy.

In reviewing system design, consideration should be focused on the following:

1. Identification of signs that the community has health and wellness issues. Are those issues being met effectively by the health system? An exercise helpful in this process is determining whether provider health care offerings match demographics of the community served.

2. Prioritization of identified community health needs for the most impact. Have outmigration patterns, economic factors or technological considerations been considered when evaluating the needs?

3. Review existing hospital programs with an eye towards re-focusing those needs on most critical or highest priority.

4. Review available resources or assets and the manner in which health care services are offered. Critically review marginal areas and eliminate duplication or inefficient use of resources.

Regardless of the health care organization’s success, status quo is not a strategy.

c. Reduce Waste

Reduction of waste in health care constitutes the key to affordable, high quality health care. An estimated thirty-four percent (34%) of the consumed resources in the American medical system represent potentially recoverable waste.[64] A frequent misconception is that high cost equals high quality. In reality, to improve quality, health care organizations must eliminate inappropriate variation in the clinical enterprise through process steps. Information on variations should be captured for continuous improvement to occur and to affect outcomes.

Students of clinical integration have identified two types of waste.[65] As organizations initiate steps to implement payment and service delivery reforms, they must have a basic understanding of waste in tracking health care costs.

(1) Inefficiency waste

Inefficiency waste results from the use of resources for no or little patient benefit or failure to use resources on clearly beneficial activities. Inefficiency waste can be categorized as resulting from technical and economic inefficiencies. Waste results from technical inefficiencies when more inputs are used than required. An example would be a patient who has a CT scan of the heart with no indication of any blockage and then a heart catheterization for verification purposes. Economic inefficiencies result from using a mix of inputs other than a cost minimizing mix. For example, a hospital might order customized sutures, kits, and other OR supplies based upon physician preference while failing to consider whether outcomes would vary if more economical supplies were used.

(2) Allocative or Care Design waste

Allocative waste means that waste that results from providing care with the wrong bundle of goods and services. Identifying waste of this nature requires that an organization understand the clinical aspects of finance and will likely require a leadership team to evaluate processes.

Quality waste is indicative of Allocative or Care Design waste. Quality waste occurs when a step in a clinical process fails and some portion of the process failures lead to a bad outcome. The process failure frequently will require reworking or scrapping the process.

d. Re-define Clinical Integration

Since the status quo is not a strategy for health care organizations of the future, leadership teams may required a redesign to a combined financial/clinical process model. Clinical integration as re-defined in this context represents “Clinicians and hospitals working together to improve quality and reduce costs.”[66]

The leadership team’s goal will target recoverable waste, particularly inefficiency waste related to process variation. An effective leadership team requires in the organization a shared vision and culture, key process analysis, an integrated electronic data warehouse, integrated clinical/operations structure and aligned incentives.

e. Consider the Importance of Data

A common element of leadership teams seeking to achieve effective clinical integration involves data, data stored in electronic data warehouses (EDW) and reviewed in key process analysis. EDWs in most organizations are disparate and rarely communicate with each other. Spreadsheets and special developed reports often are necessary to glean the smallest amount of clinical/financial relationships. Key process analysis is often times consuming. The importance of key process analyses cannot be excessively stressed as these analyses identify the waste that a clinically integrated team must address – waste from process variation. Health organizations must seek a trusted business partner to provide clinical decision support not only to identify process variation but also to offer guidance on minimizing or reducing waste.

f. Consider Variation and Its Implications

“Variation”, as defined by Merriam-Webster, is “a change in the form, position, condition, or amount of something or something that is similar to something else but different in some way.”[67] This definition encapsulates the heart of the problem with process variation in health care. A frequent statement is individuals are different and, therefore, treatment necessarily must be different.

Variation does exist in clinicians’ treatment patterns. Regardless of this truism, forward-thinking delivery system architects developed Care Process Models (CPM) based on evidence produced in studies, essentially evidenced based medical guidelines. CPMs are narrative documents aimed at representing state-of-the-art medical knowledge and can include all representations of health care knowledge in health information systems. CPMs can also be utilized to identify practice variation in a health care organization. The key to process improvement is to comprehend the available “information” and act appropriately.

Utilizing CPMs an organization can seek to improve the speed and efficiency of processes by understanding how they are controlled:

• Process Centered – the way work/services are organized in a system

• Staff Person Centered – meaning the efficiency of individuals carrying out their role

• Rework – defects that require extra processing

A case example of applying key process analysis is shown in the Women & Children’s C-Section study, attached as Attachment B. As indicated on the graphic, the physician’s practice processes are captured using information from an EDW. Each bubble represents the costs and volume of patients. The purpose of this analysis was to enable the hospital’s clinical integration team to work with physicians attempting to eliminate process variation and seeking opportunities to improve speed and efficiency. The goals of identifying the practice variations is not only to reduce outlier cost over $25,000, but also to reduce cost below $25,000 thereby capturing continuous improvement.

g. Seek the Triple Aim

Why should health care organizations seek to eliminate variation? The answer relates to the triple aim of the Affordable Care Act:

1. Better care access – minimization or elimination of rework and provision of additional resources for patients.

2. Better health outcomes – the efficiency of individuals carrying out their roles using evidence-based protocols with state-of-the-art medical knowledge

3. Lower costs of care – the way work/services are organized in a system. Are the appropriate resources being deployed in the appropriate setting?

6. Conclusion

As the fee-for-service environment is moving to a different platform, traditional payment methodologies are being impacted by both governmental and other third party payers. Maintaining the status quo is not a strategy (at least not a recommended strategy). Organizations that were successful in the past may not be successful in the future unless they prepare now for an outcomes based continuum of care. Data analytics and clinical integration are a must. Obtaining data is good, but understanding how to eliminate variation and improve outcomes is great!

ATTACHMENT A

| | |

| Calculation of DSH Estimate under ACA | |

| | |

|Estimated total 2014 Medicare DSH payments all U.S. hospitals | 13,402,077,151 |

|Reduction of 75% assuming 10% decrease in uninsured and |67.4% |

|required .1% reduction in 2014 (75% X 90% = 67.5% - .1% = 67.4%) | |

|Estimated additional DSH payments to be allocated based on | 9,033,000,000 |

|uncompensated care C= AXB | |

|Hospital's uncompensated care cost (estimated based on worksheet S-10) | 10,229,457 |

|All hospital's uncompensated care cost (estimate based on Dobson DaVanzo | 54,000,000,000 |

|Hospital as a % of all Hospitals F=D÷E |0.0189% |

|DSH payment from uncompensated care pool: CXF | |

|25% of original DSH payment assuming 10% increase to Medicaid days: |1,711,161 |

|J X 25% X 1.0825 (10% after super-DSH factor reduction of 82.5%) | |

| |2,028,279 |

|Total new DSH payment G+H | |

| |3,739,439 |

|Original DSH payment for 2014, as detailed in 2014 cost report | |

| |7,494,794 |

|Change in DSH payment I-J | |

| |(3,755,355) |

| | |

| | |

|Calculation based upon Final rule published in August 2013 | |

| | |

|25% of original DSH payment assuming 10% increase to Medicaid days: | |

|J X 25% X 1.0825 (10% after super-DSH factor reduction of 82.5%) | |

| |2,028,279 |

|Empirical DSH based on Medicaid day utilization of total pool | |

| |4,751,457 |

|Total New DSH payment | |

| |6,779,736 |

| | |

|Original DSH payment for 2014, as detailed in 2014 cost report | |

| |7,494,794 |

| | |

|Change in DSH payment | |

| |(715,058) |

| | |

| | |

ATTACHMENT B

[pic]

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*The authors recognize and appreciate the assistance of Sarah Baker, Esq., Bradley Arant Boult Cummings LLP, and Tami Davis, Horne LLP, with this presentation.

[1] Private Medicare Fee-for-Service (PFFS) Plans, , (last visited Jan. 15, 2014). See also Delivery Systems, , (last visited Jan. 14, 2014).

[2] Patient Protection and Affordable Care Act (ACA), Pub. L. 111-148, 124 Stat. 119 (2010)(ACA).

[3] See section 3 supra.

[4] Health Affairs, Health Care Reform: Views from the Hospital Executive Suite (December 18, 2013).

[5] BNA Health Care Daily Report, “Another Year of Slow Health Spending Growth, CMS Says” (Jan. 6, 2014).

6 McPherson Sentinel, “Medicare cuts, funding changes challenge hospitals” found at .

[6] ACA § 3401; Social Security Act (SSA) § 1886(d)(1)(B); 42 U.S.C. § 1395 ww(d)(1)(B) (definition of what subsection (d) hospital is not).

[7] ACA, § 3401(a)(4)(xi)(II); SSA § 1886(b)(3)(B); 42 U.S.C. § 1395(b)(3)(B).

[8] Letter from Douglas W. Elmendorf, Director, Congressional Budget Office, Letter to Nancy Pelosi, Speaker, U.S. House of Representatives (March 18, 2010).

[9] Budget Control Act of 2011, Pub. L. 112-25, 125 Stat. 240 (2011). The 2% cut in Medicare payments to hospitals means that although hospitals bill the Medicare program as usual, payments will be reduced by 2% (98 cents on the dollar).

[10] Congressional Budget Office, “Estimated Impact of Automatic Budget Enforcement Procedures Specified in Budget Control Act”, Table 3 (September 12, 2011).

[11] Bipartisan Budget Act of 2013, (H.J. 5 Res. 59) Pub. L.113-67 § 1205, 1206 (2013) SSA § 1886(m)/42 U.S.C. § 1395 ww(m). Impacting health systems with physician employees or physician organization subsidiaries, the Bipartisan Budget Act importantly blocked the 20.1% reduction in the physician fee schedule (finalized in the Medicare Physician Fee Schedule Final rule on December 10, 2013 (78 Fed. Reg. 74230) and replaced the reduction with a 0.5% increase temporarily – through March 31, 2014. The purpose of the temporary fix is to allow Congress sufficient time to repeal the Sustainable Growth Rate policy and substitute for that policy a payment methodology linked to quality of care.

[12] American Hospital Association, “Uncompensated Hospital Care Cost Fact Sheet”, January 2014 found at content/14/14uncompensatedcare.pdf.  The 2012 uncompensated care costs exceeded 2011’s costs by 11.7%, accounted for 6.1 percent of hospitals’ total expenses and was the highest percentage in more than a decade.

[13] Henry J. Kaiser Family Foundation, “The Uninsured: A Primer-Key Facts About Health Insurance on the Eve of Coverage Expansion” (October 23, 2013) found at .

[14] McClatchey DC, “Most Uninsured Unaware of Tax Credits, Survey Finds”, January 10, 2014 found at .  According to a survey by Enroll  America, a national coalition involved on behalf of health reform, “69 percent of uninsured Americans don’t know about the tax credits and other assistance that will make coverage more affordable.”

[15] Kaiser Health News, “Emergency Rooms Are Front Line For Enrolling New Obamacare Customers,” January 14, 2010.

[16] Medicare Prescription Drug, Improvement, Modernization Act, Pub, L. 108-173, 117 Stat. 2066 (2003). SSA 1860 D-1/U.S.C. § 1395 w-101.

[17] Deficit Reduction Act of 2005 Pub. L. 109-171, 120 Stat. 4, SSA § 1886 (b)(3)(B); 42 U.S.C. § 1395ww (b)(3)(B). Mandated by the Tax Relief and Healthcare Act of 2006 (see Pub. L. 109-432; SSA §  1848; 42 U.S.C. §  1395w-4), the hospital Outpatient Quality Reporting Program (OQRP) was implemented by CMS as a pay-for-quality data reporting program for outpatient hospital services. Under the Program, hospitals are required to meet administrative, data collection and submission, validation and publication requirements or are penalized by a 2% point reduction in their annual payment update under the outpatient prospective payment system. Results of the program, including results on emergency department and outpatient surgical quality measures, are reported on the HospitalCompare website. Program measures are updated and revised through the CMS’s notice and rule making process. CMS finalized the OQRP in the calendar year (CY) 2014 rule-making (See 78 Fed. Reg. 74826 (December 10, 2013)), eliminated two measures from the program for CY 2015 and included four new measures for CY 2016. Data collection on the new measures will begin during CY 2014 and include chart-abstracted measures encouraging coordination of care across healthcare settings, providers and suppliers. CMS is considering measures within the domains of clinical quality of care, care coordination, patient safety, patient and caregiver experience of care, population/community health and efficiency.

[18] Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Fiscal Year 2014 Rates; Quality Reporting Requirements for Specific Providers; Hospital Conditions of Participation; Payment Policies Related to Patient Status (2014 IPPS Final Rule), 78 Fed. Reg. 50775-50779 (2013).

[19] CMS periodically removes measures from the Hospital IQR program and adopts new measures that CMS believes will promote better, safer and more efficient care. For FY 2016 CMS removed six chart abstracted measure and one structural measure and suspended one chart abstracted measure while adopting two new mortality measure, two readmission measures and one new cost efficiency measure. 2014 IPPS Final Rule at 50508.

[20] ACA § 3001; Medicare Program; Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital Prospective Payment System and Fiscal Year 2013 Rates; Hospitals’ Resident Caps for Graduate Medical Education Payment Purposes; Quality Reporting Requirements for Specific Providers and for  Ambulatory Surgical Centers; Final Rule, 77 Fed. Reg. 53258 (August 31, 2012)(2013 IPPS Final Rule); 42 C.F.R. §§ 412.160-167.

[21] For FY 2014, CMS has increased the applicable percent reduction to the base operating DRG payment amount to total 1.25%. The total estimated amount available for VBP incentive payments will total approximately $1.1 billion. See 2014 IPPS Final Rule at 50678.

[22] SSA § 1886(o)(C)(iv); 42 U.S.C. §. 1395ww(o)()C(iv); 42 C.F.R. §412.160 (definition of “immediate jeopardy”); see also 2013 IPPS Final Rule at 56610.

[23] 2013 IPPS Final Rule at 53513.

[24] Id. at 53340.

[25] SSA § 1886(o)(5)(A)(”the Secretary shall develop a methodology for assessing the total performance of each hospital based on performance standards with respect to the measures selected…for a performance period….  Using such methodology, the Secretary shall provide for an assessment…for each hospital for each performance period.”); 42 C.F.R. §412.165.

[26] See 2013 IPPS Final Rule at 53569.

[27] In the FY 2014 IPPS Rule, CMS readopted all finalized FY 2015 clinical process of care measures for the FY 2016 measure set with the exception of three and adopted three new measure that include a new clinical process measure and two new healthcare-associated infection measures. The FY 2014 IPPS rule also outlines performance and baseline periods for the FY 2016 program and coordination of the hospital VBP program domains to more closely align with the National Quality Strategy in FY 2017. See FY 2014 IPPS Rule for further modifications for FY 2016 through 2019.

[28] Commentators have advised hospitals to be informed of their performance on each measure during the baseline and performance periods, to determine which measures have the best rate of return for a hospital and to understand how the volume of cases in a measure affects a VBP score. The VBP program may provide a “perverse incentive for hospitals to focus on improving their compliance on measures on which they have very few cases (thereby benefiting very few patients) at the expense of measures which they have very many cases”. See Hettich, Daniel J., Medicare Value-Based Purchasing for Hospitals, AHLA Hospitals & Health Systems Law Institute (February 8-10, 2012) available at .

[29] See 2013 IPPS Final Rule and 2014 IPPS Final Rule. 

[30] Modern Healthcare, “Medicare Payments out for more than 1,400 hospitals under value-based purchasing program,” November 15, 2013.

[31] Deficit Reduction Act of 2005, Pub. L. 109-171, 120 Stat. 4 (2006).

[32] The new HACs added in the FY 2013 IPPS final rule were Surgical Site Infection following Cardiac Implantable Electronic Device (CIED); and the Iatrogenic Pneumothorax with Venous Catheterization. 2013 IPPS Final Rule at 53266. The original HACs effective beginning October 1, 2008 include Foreign Object Retained After Surgery, Air Embolism, Blood Incompatibility, Pressure Ulcer Stages III and IV, certain Falls and Trauma, Catheter-Associated Urinary Tract Infection, Vascular Catheter-Associated Infection, Manifestations of Poor Glycemic Control, Surgical Site Infections/Mediastinitis following Coronary Artery Bypass, Surgical Site Infection following certain Orthopedic procedures, Surgical Site Infection following Bariatric Surgery for Obesity, Deep Vein Thrombosis and Pulmonary Embolism following certain orthopedic procedures.

[33] Kaiser Health News, “Medicare Penalties for Hospital-Acquired Infections Didn’t Cut Infection Rate, Study Finds” (October 11, 2012).

[34] ACA § 3008; 2014 IPPS Final Rule at 50504-05506. See also, Bollinger, Jolee, “HACs, Readmissions and VBP: Hospital Strategies for Turning Lemons into Lemonade”, AHLA Institute on Medicare and Medicaid Payment Issues, March 28-30, 2012.

[35] 2014 IPPS Final Rule at 50722.

[36] SSA § 1886 (q); 42 U.S.C. § 1395 ww(g); 42 .CF.R §§ 412.150 – 412.154.

[37] For 2014, the HRRP’s proposed excess readmission ratios are based on discharges during the period of July 1, 2009 to June 30, 2012. (See 2014 IPPS Final Rule at 50669). Research by KNG Consulting found that readmissions were 20% more likely for hospitals having dual-eligible patients. FierceHealthcare, “Hospitals with more elderly, poor patients likely to face readmission penalties” (FierceHealthcare Readmissions Article) (January 8, 2014) found at . KNG researchers also identified that excessive readmissions could not be linked to poor quality, but rather to geographic location of hospitals in regions with fewer or low quality primary care resources. Such hospitals were also financially struggling with more than half having negative total profit margins in FY 2008 and 2009. The study recommends that CMS “alter quality measures so hospitals can separately report different dual-eligibility readmission rates.” KNG Health Consulting, LLC, “The Medicare Hospital Readmissions Reduction Program: Potential Unintended Consequences for Hospitals Serving Vulnerable Populations” (2013), mentioned in FierceHealthcare Readmissions Article).

[38] See 2014 IPPS Final Rule at 27596.

[39] See Fierce Healthcare Article at 1.

[40] See 42 C.F.R. § 412.154. In FY 2013, 2,217 hospitals were penalized for excessive readmissions and in FY 2014, 2,225 hospitals will see Medicare reimbursements reduced. For example, in FY 2014, 4 out of 5 hospitals in Alabama, Arkansas, Florida, Kentucky, Illinois, Massachusetts, New York, New Jersey, Tennessee, West Virginia and the District of Columbia will receive penalties. According to commentators, determining how to reduce a hospitals readmission rate is extremely complex and will take creativity and innovation to accomplish. The reasons for an increased number of readmissions, according to Kaiser Health News, is that lower income patients lack funds to purchase medicine, discharge instructions are more difficult to follow and the low salt diet to correct congestive heart failure can be expensive. Hospital follow up on patients has proven to be resource intensive. Following research indicating the severe impact on Hospital serving lower income patients, the Medicare Payment Advisory Committee (MedPAC) in 2013 recommended that the readmission penalties take into account the socioeconomic status of patients. Kaiser Health News, “Medicare to Penalize 2,217 Hospitals for Excess Readmissions (August 13, 2012) found at .

[41] ACA § 3133; SSA §1886(r); 42 U.S.C. § 1395ww(r).

[42] Id.

[43] The possibility exists that the entire pool amount will not be paid out to providers. One reason that the total pool amount may not be paid out is that inpatient discharges are falling due to CMS’s readmission scrutiny. Another result of the distribution method for the uncompensated care pool is that hospitals located in states that expand Medicaid will receive increased payments since their pro rata share of Medicaid days will increase in comparison to hospitals in states that did not expand. See Exhibit A to this paper.

[44] David Williams, “ACA’s Impact on Reimbursement, LHA’s – The Affordable Care Act Symposium” (December 4, 2013).

[45] ACA § 2551; SSA § 1923 (f)(7)(vii)(A)(i); 42 U.S.C. 1396r-4.

[46] ACA § 2551; SSA § 1923(f)(7)(A)(ii); 42 U.S.C. § 1396r-4(f)(7)(A)(ii).

[47] Bipartisan Budget Act of 2013, H.J.RES. 59 (2013), Pub. L. 113-67.

[48] ACA §  2702.

[49] Medicaid Program; Payment Adjustment for Provider-Preventable Conditions Including Health Care-Acquired Conditions; Final Rule, 76 Fed. Reg. 32816 (June 6,  2011); 42 C.F.R. §  447.26.

[50] Provider Preventable Conditions at (linking to helpful FAQs).

[51] Meeker, M., “Mary Meeker Presents 2012 USA Inc. Key Points” available at .

[52] See Centers for Medicare & Medicaid Services, Bundled Payments for Care Improvement Initiative available at (last visited Jan. 6, 2014);see also the Request for Application (RFA) available at

Request_for_Application_v4.pdf. See also Murray, Andy and Lloyd, Travis, “The Incremental Transition to Accountable Care: The Bundled Payment Initiative,” AHLA Hospitals & Health Systems Rx (December 2011).

[53] While the Bundling Initiative represents an entirely new effort to improve care through bundled payment, it draws on the experience gained in prior Medicare demonstration projects. Specifically, the Initiative is informed by three bundled payment demonstrations: the Medicare Participating Heart Bypass Center demonstration, Medicare Cataract Surgery Alternate Payment demonstration, and the Medicare Acute Care Episode (ACE) demonstration. See RFA at 4.

[54] Dredge, C., Bundled Payment: Insights from the Front Lines, Presentation, Ridgeland, MS (Nov. 14, 2013).

[55] Id. “First mover disadvantage” means that in most instances the first mover (or initial market entrant with a product) return on investment is less than those that enter the market later.

[56] August 10, 2011 letter from Governor Beebe to Secretary Kathleen Sebelius as reported in “Ark. Gov. zeroes in on areas for Medicaid reform”, Associated Press, August 22, 2011.

[57] See Bailit, Michael et al, “Bundled Payments One Year Later: An Update on the Status of Implementations and operational Findings – May 30, 2013, pg. 11-12 (Bailit Issue Brief).

[58] MMCS Update, “Medicaid, other payers announce new payment initiative (Summer 2012)(MMCS Update). Medicaid will monitor four of the episodes: URI, ADHD, perinatal care and developmental disabilities. Medicare. BCBS and QualChoice will monitor kip/knee replacements and CHF. See also Bailit Issue Brief at 11-12 (other bundles approved are developmental disabilities (all services for waiver and facility-based beneficiaries, including health home supplemental payments), tonsillectomy, cholecystectomy, colonoscopy, oppositional defiant disorder, inpatient chronic obstructive pulmonary disorder (COPD), inpatient asthma, CABG, percutaneous coronary interventions (PCI) and neonatal intensive care).

[59] Carter Dredge, email dated January 17, 2014.

[60] See AHCPII Cross-Episode Update – March 28, 2012 available at .

[61] See MCCS Update at 7 and Bailit at 11.

[62] Dredge at 34. During a recent presentation, Carter Dredge, Director of Healthcare Transformation for Intermountain Healthcare and advisor to the Bundling Initiative, advised that the program continues to evolve such that as it matures more modifications should be expected. He emphasizes the importance of retrospective reconciliation to affect the culture and behavior changes necessary for an effective bundle program.

[63] Berwick, D. M. Eliminating Waste in U.S. Healthcare. The Journal of the American Medical Association, 1513-1516 (2012).

[64] Brent James et al, Cost of Poor Quality or Waste in Integrated Delivery System Settings” submitted to Agency for Healthcare Research and Quality (September 2006) At Intermountain Healthcare, Mr. James oversaw extensive studies to identify and affect waste in an innovative fashion. This understanding must address both administrative and clinical waste. Lean, Six Sigma, Kaizen, and other systems address process improvement in administrative areas, but lack additional processes necessary to impact clinical protocols.

[65] Prewitt, T. H., Principles of Improvement: The Improvement Guide, Health Delivery Institute, Ridgeland, MS (Oct. 15, 2013).

[66] Merriam-Webster Online Edition, available at .

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