ABA Health eSource
August 2010 PPACA Special Edition

Significant Changes in Medicare Payment Methodology Made by Health Care Reform Legislation

By Chris E. Rossman, Foley & Lardner LLP, Detroit, MI and
Jeffrey R. Bates, Foley & Lardner LLP, Los Angeles, CA 1

AuthorAuthorThe federal health reform law will significantly revise the way the Medicare program reimburses providers. The Secretary of Health and Human Services (Secretary) is required to promulgate over 1,000 different regulations to implement the law. In some cases, the provisions will not become effective until 2011 or several years later. 2

Linking Medicare Payment to Quality of Care and Patient Outcomes

A most important change made by the health reform law is to increase the link between Medicare payments to the quality of the services furnished and patient outcomes by basing Medicare payment in part on achievement of quality goals. This is referred to as the value-based purchasing program (Program). The Program will require the Secretary to implement payment adjustments that take into account quality measures and patient outcomes. The Secretary will be required to analyze (i) ways to improve the Program and address any unintended consequences, (ii) whether the Program reduced Medicare costs or produced financial savings to hospitals. The Secretary is required to submit reports to Congress regarding the Program that could be implemented in the future. The collection of quality data is the first step on the path to the development of the Program. Information regarding the performance of individual providers on the quality measures will be made available to the public. The new law will establish payment changes related to quality in the following ten areas:

1. Acute Care Hospitals. Medicare will move beyond simply requiring the reporting of quality data and will tie the amount of Medicare payment made to each acute care hospital to the hospital’s performance on certain quality standards. The law requires the Secretary to develop value-based incentive payments for common and high-cost conditions and to begin applying such incentive payments for hospital discharges occurring on or after October 1, 2012. For discharges on or after October 1, 2013, the measures also must include efficiency measures, including the amount of Medicare spending per beneficiary. This program will be budget neutral. CMS is required to promulgate regulations to implement this program. Information regarding the performance of individual hospitals (and other providers) on quality measures will be made available to the public on the Department of Health & Human Services’ Hospital Compare Web site. 3 The website is found at: http://www.hospitalcompare.hhs.gov/.

2. Physicians. Incentive payments for physicians who report quality data to Medicare are extended through 2014. Beginning in 2015, Medicare payments for physician services will be reduced if the physician does not satisfactorily submit quality data. For 2015, the reduction will be 1.5 percent. This will increase to two percent in 2016 and subsequent years. 4 The Secretary must implement a budget-neutral payment system that will adjust Medicare physician payments based on the quality and cost of care that the physician delivers. The new payment system will be phased in over a two-year period beginning in 2015. 5

3. Long-Term Care Hospitals, Inpatient Rehabilitation Facilities, Inpatient Psychiatric Hospitals, Hospice Programs. The Secretary must implement quality reporting measures for long-term care hospitals, inpatient rehabilitation facilities, inpatient psychiatric hospitals and hospital units, and hospice programs. Providers that fail to submit data on quality measures will be subject to a two percent reduction in their Medicare payment updates. 6

4. Prospective Payment System ( PPS)-Exempt Cancer Hospitals. The Secretary must implement quality reporting measures for PPS-exempt cancer hospitals beginning October 1, 2013. 5. Skilled Nursing Facilities, Home Health Agencies, Ambulatory Surgery Centers. The Secretary must submit a report to Congress by September 30, 2012 that outlines plans, developed in consultation with affected parties, to implement value-based purchasing programs for skilled nursing facilities and home health agencies. The Secretary also is required to develop a plan to pay ambulatory surgery centers based on the quality and efficiency of care they deliver. 7

6. Payment Adjustment for Conditions Acquired in Hospitals. Payment reductions will be applied to hospitals whose number of hospital-acquired conditions (HACs) are in the top quartile of all hospitals, relative to the national average, for certain high-cost and common conditions. 8

7. Payment Adjustments for Conditions Acquired in Other Providers. The Secretary must submit a report to Congress by January 1, 2012 regarding the appropriateness of establishing healthcare acquired condition policies for non-hospital providers participating in Medicare. 9

8. Hospital Readmissions Reduction Program. Beginning on October 1, 2012, hospitals that have a high rate of potentially preventable Medicare readmissions will be subject to Medicare payment reductions. 10

9. Community-Based Care Transitions Program. Funding is provided for a five year program for eligible entities that furnish improved care transition services to high-risk Medicare beneficiaries. Eligible entities include hospitals and qualifying community-based organizations that provide care transition services. The program is intended to improve the care of Medicare beneficiaries at high risk for readmission. 11

10. Extension of “Gainsharing” Demonstration. Funding is increased, and the end date is extended, for gainsharing demonstration projects to evaluate arrangements between hospitals and physicians designed to improve the quality and efficiency of care provided to beneficiaries. 12

Medicare Disproportionate Share Hospital Payments. Beginning on October 1, 2013, Medicare Disproportionate Share Hospital (DSH) payments 13 will be reduced by 75 percent, subject to certain adjustment factors. 14 The expectation is that there will be fewer uninsured patients, and that hospitals will have lower uncompensated care costs. Many hospitals receive substantial Medicare DSH payments, and it remains to be seen whether the increase in reimbursement as a result of additional persons being covered by insurance and Medicaid will offset the large reduction in Medicare DSH payments.

Medical Education Payment Provisions. Changes are described in the following three paragraphs:

1. Medical Education Payments for Residents Training in Jointly Operated Residency Programs. All the time spent by a resident in patient care activities in a nonprovider setting as part of an approved training program will be counted towards the determination of the number of full-time equivalent residents, if the hospital incurs the costs of the stipends and fringe benefits of the resident during the time the resident spends in that setting. If more than one hospital incurs the costs of training residents in nonprovider settings, either directly or through a third party, such hospitals will be entitled to count a proportional share of the time, as determined by written agreement between the hospitals, that a resident spends training in that setting. This provision is effective for cost reporting periods beginning on or after July 1, 2010. 15

2. Redistribution of Unused Medical Education Residency Positions. The Secretary will reduce the medical education residency limits for certain hospitals and redistribute such positions. The Secretary must compare the otherwise applicable resident limit to the highest resident level for any of the three most recent cost reporting periods for which a cost report has been submitted. If the hospital had fewer residents than its resident limit, its resident limit will be reduced by 65 percent of the unused resident slots. This reduction will be effective for portions of cost reporting periods occurring on or after July 1, 2011. The Secretary is directed to redistribute the positions resulting from such reductions to qualifying hospitals that submit applications for an increase to their resident limits. This provision does not apply to rural hospitals. This provision also requires 75 percent of reallocated residency slots to be allocated for primary care or general surgery residencies. 16

3. Resident Time Spent on Didactic and Training Activities. For direct graduate medical education (GME) purposes, all time spent by an intern or resident in a nonprovider setting in non-patient care activities such as didactic conferences and seminars, but not including research not associated with the treatment or diagnosis of a particular patient, shall be counted toward the determination of full-time equivalency. 17 This provision also applies to indirect medical education (IME), except that time spent by an intern or resident in an approved medical residency training program in research activities that are not associated with the treatment or diagnosis of a particular patient, in either an inpatient or outpatient setting, shall not be counted toward the determination of full-time equivalency for IME purposes.

Medicare Prescription Drug Program — Closing the “Donut Hole.” The so-called donut hole will be gradually eliminated in the Medicare prescription drug program under Medicare Part D. Every senior who participates in the Medicare Part D prescription drug program and who enters the donut hole in 2010 will receive a $250 rebate to begin to offset each beneficiary’s prescription drug costs in the donut hole. In 2011, beneficiaries will also receive a 50 percent discount on brand name drugs and the size of the donut hole will begin to shrink. The goal is to have the donut hole completely eliminated by 2020 . 18

Accountable Care Organizations. The Secretary must establish by January 1, 2012 a Shared Savings Program to (1) promote accountability for a patient population, (2) coordinate services and items under Medicare Parts A and B, and (3) encourage investment in infrastructure and redesigned care processes for high quality service delivery. Accountable Care Organizations (ACOs) are the vehicle through which the Medicare Shared Savings Program will be implemented. 19 To qualify as an ACO, a group of eligible providers of items and services covered by Medicare Parts A and B must:

  • Agree to participate in the program for at least three years.
  • Agree to be accountable for the overall care provided to at least 5,000 Medicare fee-for-service beneficiaries assigned to the ACO.
  • Establish a formal legal structure that allows the ACO to receive and distribute Shared Savings payments to its participating providers and suppliers.
  • Include enough primary care physicians to care for the Medicare fee-for-service population assigned to the ACO.
  • Have in place a leadership and management structure that includes clinical and administrative services.

An ACO will be responsible for defining processes to promote evidence-based medicine and to coordinate care through the use of tele-health, remote patient monitoring, and other enabling technologies. The Secretary is required to establish appropriate measures to assess the quality of care furnished by the ACO, including regularly updated performance standards.

Establishment of Center for Medicare and Medicaid Innovation. A Center for Medicare and Medicaid Innovation (CMI) is created within CMS. The purpose of CMI is to test innovative payment and service delivery models to reduce costs and to improve the quality of care and submit periodic reports to Congress. CMI is to be functioning by January 1, 2011. Payment reform models for CMI to consider include rural tele-health expansions and the development of a rapid learning framework. 20

National Pilot Program on Payment Bundling. The Secretary must develop a voluntary pilot program for hospitals, doctors, and post-acute care providers to improve patient care and achieve savings for the Medicare program through bundled payment modes. The program is required to be established by January 1, 2013 and is to run for a period of five years. Before January 1, 2016, the Secretary must submit a plan to Congress to expand the program if that would improve patient care and reduce spending. The Secretary is authorized to expand the pilot if it is found to improve quality and reduce costs. 21

Revision of Certain Market Basket Updates; Productivity Improvements Included in Market Basket Updates. Many changes (mostly reductions) will be made to the Medicare Market Basket updates for inpatient hospital services, home health providers, nursing homes, hospice providers, inpatient psychiatric facilities, long-term care hospitals, and inpatient rehabilitation facilities. Various effective dates are specified. A productivity adjustment also is incorporated into payment updates for Part B providers who do not already have such an adjustment. There are also other modifications to the Medicare Market Basket updates for various providers are contained in this section. 22

Independent Payment Advisory Board. A 15-person Independent Payment Advisory Board is created that will be responsible for presenting annual recommendations to the President, Congress, and private entities on actions they can take to improve quality and constrain the rate of health care cost growth in the private sector. The Board must make non-binding Medicare recommendations to Congress in years where Medicare growth is below the targeted growth rate. Very significantly, in years when Medicare costs are projected to be unsustainable, the Board’s proposals will take effect unless Congress passes an alternative measure that achieves the same level of savings. Beginning in 2020, the Board may make binding recommendations to Congress only every other year if the growth in overall health spending exceeds growth in Medicare spending. 23

Conclusion. The above discussion summarizes the most significant changes in the health reform law that will affect Medicare payment policy. Many additional provisions that are in the law are beyond the scope of this article, and the details of the provisions described herein are only summarized in the briefest manner. The already complex Medicare payment system will become much more complex in the next few years. A vast number of regulations and demonstration and pilot projects are required to be promulgated and implemented by the new law, and there certainly will be future statutory changes. There will be an increasingly greater need for providers to plan in advance their response to Medicare payment policies.


1 Chris E. Rossman is a partner, and Jeffrey R. Bates is a special counsel, in the law firm of Foley & Lardner LLP. Chris is in the firm’s Detroit office. Jeffrey is in the firm’s Los Angeles office.
2 The footnotes use the term PPACA to refer to the Patient Protection and Affordable Care Act, P.L. 111-148, as amended by the Health Care and Education Reconciliation Act, P.L. 111-152 (the reconciliation amendments).
3 PPACA Section 3001.
4 PPACA Section 3002.
5 PPACA Section 3007.
6 PPACA Sections 3004 and 10322.
7 PPACA Section 3006.
8 PPACA Section 3008.
9

PPACA Section 3008.

10 PPACA Section 3025.
11 PPACA Section 3026.
12 PPACA Section 3027.
13 A DSH payment is an add-on to a hospital’s DRG payment which provides estra payment to hospitals who treat significant populations of indigent patients. A hospital must have a DSH adjuster over a certain threshold to be eligible for any DSH payment.
14 PPACA Section 3133.
15 PPACA Section 5504.
16 PPACA Section 5503.
17 PPACA Section 5505.
18 PPACA Section 1101.
19 PPACA Section 3022.
20 PPACA Section 3021.
21 PPACA Section 3023.
22 PPACA Section 3401.
23 PPACA Section 3403.

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