Industry Overview
A 30-year examination of a dynamic industry must begin with reviewing the past trends that initiated healthcare’s drastic changes. As a highly regulated industry that involves trillions in revenue, the federal government’s eye is fixed on ensuring that physicians, hospitals, and vendors walk a tight line in matters of reimbursement and the distribution of services among the recipients, particularly in Medicare and Medicaid matters. Strict scrutiny is top of mind to government entities. This premise has increased in significance over time and in recent years.
Historical Transactions (1980s – 2000s)
The principle is that we learn from history. History gives us a background for where we have been and a foundation for new places to go – and pitfalls to avoid. The following brief descriptions are overviews of healthcare dealings by decade.
1980s
The nation's Gross National Product (GNP) grew substantially during the 1980s; from 1982 to 1987, the U.S. economy created more than 13 million new jobs.[1] Based on the strong economy, the characteristics of healthcare throughout the 1980s can be described as mostly independent. While larger groups existed, most physicians were engaged in private practice and maintained autonomy from hospitals, using the facilities as their “workshops” in mutually beneficial arrangements with no formal financial ties.[2] In the latter years of the 1980s and with the rise of health maintenance organizations (HMOs), some areas of the country, especially California, introduced risk-based contracts tied mostly to capitated models. Capitation as designed in California should be understood not simply as a payment mechanism but also as a catalyst for the reorganization of physicians from solo and small group practices into larger groups. It was considered a new type of organization with new tools available. Many states continued using the fee-for-service (FFS) reimbursement model and did not go forward with capitation. Overall, health systems were smaller, less consolidated, and more independent, as were their medical staffs. Most were highly profitable, and economic opportunity abounded.
During this decade, government initiatives included the enactment of the following statutes that are particularly relevant to the relationship between hospitals and physicians:
Emergency Medical Treatment and Labor Act (EMTALA)
In 1986, Congress enacted EMTALA to ensure public access to emergency services regardless of ability to pay. Found at Section 1867 of the Social Security Act, it imposes specific obligations on Medicare-participating hospitals that offer emergency services to provide a medical screening examination (MSE) when a request is made for examination or treatment for an emergency medical condition (EMC), including active labor, regardless of an individual's ability to pay. Hospitals are then required to provide stabilizing treatment for patients with EMCs. If a hospital is unable to stabilize a patient within its capability, or if the patient requests, an appropriate transfer should be implemented.[3] Hospitals are expected to adopt formal standards for maintaining an on-call list of physician specialists that meets the needs of the hospital’s patients receiving emergency care. An on-call specialist who fails or refuses to respond to a request for assistance with an emergency case is subject to sanctions.[4]
The Ethics in Patient Referrals Act of 1989
Section 1877 of the Social Security Act (42 U.S.C. 1395nn), also known as the physician self-referral law and commonly referred to as the “Stark Law”:[5]
o Prohibits a physician from making referrals for certain designated health services (DHS) payable by Medicare to an entity, such as a hospital, with which he or she (or an immediate family member) has a financial relationship (ownership, investment, or compensation), unless an exception applies.
o Prohibits the entity from presenting or causing to be presented claims to Medicare (or billing another individual, entity, or third-party payor) for those referred services.
o Establishes a number of specific exceptions and grants the Secretary of Health and Human Services (HHS) the authority to create regulatory exceptions for financial relationships that do not pose a risk of program or patient abuse.
The following items or services are DHS:
o Clinical laboratory services
o Physical therapy services
o Occupational therapy services
o Outpatient speech-language pathology services
o Radiology and certain other imaging services
o Radiation therapy services and supplies
o Durable medical equipment and supplies
o Parenteral and enteral nutrients, equipment, and supplies
o Prosthetics, orthotics, and prosthetic devices and supplies
o Home health services
o Outpatient prescription drugs
o Inpatient and outpatient hospital services
National Practitioner Data Bank (NPDB)
In 1986, Congress enacted the Health Care Quality Improvement Act, which established the NPDB. The NPDB is a web-based repository of reports containing information on medical malpractice payments and certain adverse actions related to healthcare practitioners, providers, and suppliers. It is a workforce tool that prevents practitioners from moving state to state without disclosure or discovery of previous damaging performance. Federal regulations authorize eligible entities, including hospitals, to report to and/or query the NPDB. Individuals and organizations that are subjects of these reports have access to their own information. The reports are confidential and not available to the public. The NPDB assists in promoting quality healthcare and deterring fraud and abuse within healthcare delivery systems.[6]
1990s
The 1990s launched the most significant paradigm shift in physician practice structures to date. The federal government’s influence in healthcare became more prevalent. Large numbers of physicians began to seek employment, and hospitals considered the formation of integrated delivery systems in response to government pressures and insurers’ attempts to alter the reimbursement structures. When hospitals began a phase of gobbling up private practices, many hospitals did so believing that managed care would be easier to handle with a large network of physicians. In many of these employment contracts, doctors were guaranteed salaries. By selling their practices to hospitals, physicians felt relieved of the burdens and expenses in managing their own practices, where the doctor’s salary was predicated on productivity and/or expense management.[7]
The managed care initiative spawned the introduction of primary care physicians (PCPs) as gatekeepers. A gatekeeper is defined as “the person who coordinates care in a managed care plan. In an HMO, the gatekeepers are the first persons of contact for questions about healthcare needs. A gatekeeper also approves referrals to specialists, hospitals, laboratories, and other medical services.”[8]
Not surprisingly, regulations tightened with the implementation of the federal Anti-Kickback Statute (AKS)[9] and Stark Law during this decade in response to the new affiliations. This scrutiny was driven mainly by the significant amounts hospitals were paying to acquire physicians’ practices and the lucrative post-transaction compensation. Examples of prohibited kickbacks include receiving financial incentives for referrals, free or very low rent for office space, or excessive compensation for medical directorships. Other kickbacks include waiving copayments, either routinely or on a selective case-by-case basis. Kickbacks led to overutilization and increased costs of healthcare services, corruption of medical decision-making, the steering of patients away from valid services or therapies, and unfair, non-competitive service delivery.[10] In 1994, National Medical Enterprises agreed to pay more than $300 million to settle federal and state investigations into allegations of widespread fraud and other misconduct at some of its hospitals.[11] In response, the large payments by hospitals for medical groups had an ongoing impact on physicians and providers. By the end of the decade, the capitation model and HMOs waned, and FFS returned as the primary reimbursement model.
Many practice acquisitions fell short of expectations, both economically and for physician-hospital relationships. Hospitals paid too much for too little work with few incentives for physician productivity after the deal. Further, hospitals typically managed practices poorly. Numerous health systems concluded that the employment of physicians was unnecessary and impractical. Thus, they divested their employed practices, leaving them to return to privatization.
This move opened the door for the development of physician practice management companies (PPMCs). In this model, PCPs would sell their practices to the PPMC in exchange for management contracts and strength in numbers in negotiating managed care contracts. A portion of the sale was attributable to and applied to stock rights or direct equity in the PPMC. Generally, PPMCs were effective at managing practices. However, because the industry did not shift to engage in the proposed management arrangements and the profit left was insufficient for both parties, the PPMCs of this period were unsuccessful in the marketplace, and the affiliated medical groups went bankrupt. By the end of the next decade, PPMCs were given a second look based on lessons learned from the first attempts.[12]
Also relevant to the relationship between hospitals and physicians was enactment of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA led to, in particular, HIPAA’s Standards for Privacy of Individually Identifiable Health Information (Privacy Rule) which established, for the first time, a set of national standards for the protection of certain health information. The Privacy Rule allows those doctors, nurses, hospitals, laboratory technicians, and other healthcare providers that are covered entities to use or disclose protected health information, such as X-rays, laboratory and pathology reports, diagnoses, and other medical information for treatment and certain other purposes without the patient’s authorization. This includes sharing the information to consult with other providers, including providers who are not covered entities, to treat a different patient, or to refer the patient.[13]
2000s
During the 2000s, new transactions and extensions of existing ones were limited. Physician private practice remained strong despite shifts toward hospital employment. American Hospital Association data showed the number of physicians employed by community hospitals increased by 32 percent between 2000 and 2010, from 160,000 to 212,000. By the end of this decade, certain specialties were compelled to align (e.g., cardiology), largely driven by stagnant reimbursement rates and a desire for better work-life balance on the physician side, and desire to expand market share on the hospital side. Meanwhile, new models arose, such as professional service agreements (PSAs) and clinical co-management agreements (CCMAs), described later in this article.
Further, the Medicare Improvements for Patients and Providers Act (MIPPA), enacted in 2008, was multi-faceted legislation to make Medicare affordable for older Americans. MIPPA grantees help low-income Medicare beneficiaries save money on Medicare costs.[14]
2010s
The single most significant change in the past 30 years was the enactment of the Patient Protection and Affordable Care Act (PPACA) of 2010, with major implementations beginning in 2014. Often just called Obamacare, the law includes a list of healthcare policies intended to extend health insurance coverage to millions of uninsured Americans. Healthcare for all meant a widening of eligibility at greater expense to the consumer. Although PPACA emphasized value, it created uncertainty among providers and confusion among the public for over 10 years due to questions about the constitutionality of the individual mandate and whether it would be upheld or repealed. PPACA has seen a lot of change since it was first signed into law in 2010 and seen as unconstitutional by Congress two separate times.[15]
PPACA has not been fully implemented. For example, not all states have implemented PPACA’s provision expanding Medicaid. As of April 13, 2021, 39 jurisdictions (including Washington D.C.) have adopted the Medicaid expansion, and 12 states have not, an example of disjointed PPACA implementation.[16]
Legal developments of this decade encompass some changes to PPACA, though it remained mostly untouched. The non-comprehensive list below includes notable and significant changes made to PPACA through legislation, administrative action, and Supreme Court rulings:
- Extensions of grandmothered health plans – Many of PPACA’s major provisions went into effect in January 2014. Health plans created between 2010 – 2014 and not compliant with PPACA’s requirements, called “grandmothered” plans, were originally supposed to come into compliance with the law at the beginning of 2014.[17] The administration first delayed this requirement in November 2013 and again in March 2014. It has since been extended several more times; the latest extension allows these plans to remain in force in 2022.
- Employer mandate delays – PPACA stipulates that employers with 50 or more full-time employees must provide affordable health coverage to full-time employees beginning January 1, 2014.[18] The administration delayed enforcement of this requirement for the first time in July 2013. The announcement from the Department of the Treasury stated that such employers would have until 2015 to provide coverage to their employees. The administration delayed enforcement of this requirement for a second time in February 2014. The announcement stated that midsize employers with 50-99 full-time employees would have until January 1, 2016, to offer health coverage. For large employers with 100 or more full-time employees (95 percent), the requirements would be phased in until January 1, 2016.
- Supreme Court ruling on Medicaid expansion – PPACA required states to expand eligibility for their Medicaid programs to all individuals with incomes up to 138 percent of the federal poverty level. If the state refused to expand, the law said that the federal government could withhold all of its portion of Medicaid funding from the state. Twenty-six states sued the federal government to challenge the requirement to expand Medicaid. The U.S. Supreme Court ruled on June 28, 2012 that the provision was unconstitutionally coercive. The decision effectively made expanding Medicaid voluntary on the part of the states.
- Cadillac tax delay – PPACA established a 40 percent excise tax on high-cost health plans, known as the “Cadillac tax.” It applied to health plans valued at over $10,200 for single coverage and $27,500 for family coverage and would only tax the amount that passes the threshold. For example, a family with a plan valued at $30,000 would owe 40 percent of the $2,500 that is above the threshold. Though the tax was slated to go into effect in 2018, on January 22, 2018 Congress passed and the President signed a two-year delay of the 40 percent excise tax on high-cost employer-sponsored health plans.[19] This delay was part of a short-term federal spending bill and changed the effective date from 2020 to 2022.[20] The tax was intended to be one of the major sources of revenue that would offset the costs of PPACA.
- Reporting requirement delays – PPACA required large employers to provide their employees each year by January 31 a tax-related form that reports information on health coverage offered by the employer over the previous tax year; this information is intended to be used by employees to determine their eligibility for advanced premium tax credits. While the law set the provision to go into effect in 2014, the Internal Revenue Service (IRS) delayed the mandate until 2016. Additionally, the IRS delayed the January 31 deadline to March 31. PPACA also required insurers to report coverage information to the IRS beginning in 2014. The IRS delayed the effective date until 2016.
- Elimination of the individual mandate – a requirement under PPACA that people lacking health insurance coverage from their employers or some other source and people who did not qualify for Medicare or Medicare needed to obtain coverage, usually through the PPACA Exchanges. Those who failed to do so would have faced a penalty on their taxes. On December 22, 2017, then President Donald Trump signed the Tax Cuts and Jobs Act of 2017, which eliminated the federal tax penalty for violating the individual mandate, starting in 2019.[21]
- States allowed to add a work requirement to Medicaid – PPACA permitted states to expand their Medicaid programs to include all low-income adults. Additionally, through the PPACA Medicaid expansion, the income threshold was increased, increasing the number of people eligible for Medicaid via PPACA. The Trump Administration altered PPACA to permit states the ability to require people eligible for expanded Medicaid to demonstrate that they are working or attending school.[22]
- Termination of PPACA cost-sharing subsidies – Originally, the federal government provided insurance companies that participated in the PPACA Exchanges to assist them in keeping premiums costs lower and entice them to participate. These payments ceased in 2017 without warning.
- Return of “skinny” insurance plans – PPACA mandated that insurance policies have minimum levels of coverage. These minimal plans offer lower premiums, making them an attractive alternative over those offered by PPACA’s Exchange Markets for young, healthy buyers. Short-term policies with less coverage could only be for three months. The availability of these “skinny” policies to consumers is now 364 days (about 12 months) and is renewable for up to three more years.[23]
The principal intent of PPACA was to improve health insurance markets for individuals and small businesses, lower health costs, and increase the number of people with insurance. Instead, health insurance markets are only afloat due to massive federal subsidies and premiums, and out-of-pocket obligations significantly increased for families. While PPACA has led to about 13 million more people with Medicaid, others have been harmed. Middle-income families without employer-provided coverage and small businesses and their workers have largely fared worse from higher healthcare costs, as did the nation’s taxpayers, who are responsible for funding the law’s new spending.
Before PPACA, the individual health insurance market — where self-employed people and those without employer-provided coverage shop for coverage — had around 12 million enrollees. PPACA’s authors expected they were creating a market in which more insurers offered plans and coverage would be affordable. Unfortunately, the reality has been the opposite. Choices plummeted. Premiums and deductibles spiked for plans that covered fewer hospitals and other providers. Enrollees complain of a “two-tiered system” given that many doctors refuse to take PPACA plans because of their low payment rates.
The Congressional Budget Office (CBO) expected that insurers selling plans in the exchanges — PPACA’s main health insurance hubs — would enroll 25 million enrollees by now. Yet, average enrollment has been stuck at only 10 million people since 2015 — 60 percent below expectations. Overall, individual market enrollment is roughly 18 million people below what the CBO expected.
Physician-Hospital Transactions During 2010-2019
A summary of the movement in physician-hospital transactions in healthcare from 2010 to the present can be described as a wide variety of affiliation structures that continued to evolve. The first half of the decade brought forth significant alignment activity, such as employment, as providers responded to increasing reimbursement and lifestyle balance pressures. Much of the second half of the decade focused on renewals of original models such as physician to physician, private group to private group, mergers, joint ventures, and private group to hospital-health system. These were followed by “second generation” models.[24] As contracts expired, new agreements were designed based on lessons learned during the initial arrangement and to comply with an ever-evolving marketplace. Examples are PSAs, equity-type structures, private equity transactions with outside investors, private equity-like transactions, and clinically integrated networks (CINs).
Healthcare Policy Changes and Value-Based Programs
Value-based care (VBC) is a form of reimbursement that ties payments for care delivery to the quality of care provided and rewards providers for efficiency and effectiveness. Typically these programs require hospitals and physicians to work together to achieve these care and quality goals. Value-based programs reward healthcare providers with incentive payments for the quality of care they give to Medicare beneficiaries.[25] These programs are part of the Centers for Medicare & Medicaid’s (CMS) larger quality strategy to reform how healthcare is delivered and compensated. Value-based programs also support CMS’ three-part aim: better care for individuals, better health for populations, and lower cost.
PPACA implemented several value-based programs. Examples include:
Hospital Value-Based Purchasing Program (HVBP) in 2012.[26] The HVBP measures the value of care provided by participating Medicare hospitals, creates financial incentives for quality improvement, and fosters increased transparency. Limited information is available comparing hospital performance across healthcare business models. This program adjusts payments to hospitals under the Inpatient Prospective Payment System (IPPS) based on the quality of care they deliver. It is designed to make the quality of care better for hospital patients and hospital stays a better experience for patients.[27] The HVBP revealed superior hospital performance associated with this business model.[28] Closer inspection of high-value hospitals can guide value improvement and policy-making decisions for all Medicare value-based purchasing program hospitals.
Hospital Readmissions Reduction Program (HRRP) in 2012. HRRP is a Medicare value-based purchasing program that encourages hospitals to improve communication and care coordination to better engage patients and caregivers in discharge plans and, in turn, reduce avoidable readmissions.[29] The program supports the national goal of improving healthcare for Americans by linking payment to the quality of hospital care.
Hospital-Acquired Condition (HAC) Reduction Program in 2014. The HAC Reduction Program is a value-based purchasing program for Medicare that supports CMS’ long-standing effort to link Medicare payments to healthcare quality in the inpatient hospital setting.[30] Section 1886(p)(6)(B) of the Social Security Act sets forth the statutory requirements for the HAC Reduction Program. Under the Program, CMS reduces overall Medicare payments for hospitals that rank in the worst-performing quartile of all hospitals on measures of hospital-acquired conditions. On an annual basis, CMS evaluates overall hospital performance by calculating Total HAC Scores as the equally weighted average of scores on measures included in the Program. Hospitals with a Total HAC Score greater than the 75th percentile of all Total HAC Scores will receive a one-percent payment reduction. This payment adjustment applies to all Medicare discharges for the applicable fiscal Program year when CMS pays hospital claims. A recent report found that “penalization was not associated with significant changes in rates of hospital-acquired conditions, 30-day readmission, or 30-day mortality, and does not appear to drive meaningful clinical improvements. By disproportionately penalizing hospitals caring for more disadvantaged patients, the [Program] could exacerbate inequities in care.”[31]
Value Modifier (VM) or Physician Value-based Modifier (PVBM) Program in 2015. PPACA mandated that the value modifier be applied to physicians and physician groups.[32] The Merit-based Incentive Payment System (MIPS) under the Quality Payment Program replaced the Physician Feedback/Value-Based Payment Modifier Program on January 1, 2019. Calendar Year 2018 was the final payment adjustment period under the VM Program based on performance in Calendar Year 2016. CMS distributes Quality and Resource Use Reports (QRURs) to all groups and solo practitioners. These, and future reports, are important to review since they provide a preview of how group practices will fare under the VM Program. The effect is integral to developing compensation plans for hospital-owned practices.
In January 2015, HHS Secretary Sylvia Burwell announced the setting of new targets for the government’s value-based payment program.[33] The initiative’s intent was to replace the fee-for-service reimbursement model, which pays providers retrospectively for services delivered based on billed charges or annual fee schedules, with a risk-based plan to share risk, improve quality, and deliver more value. Burwell’s goals for value-based payment were as follows: 85 percent of all payments in the traditional Medicare program would be tied to quality or value; 30 percent would be value-based by 2016’s end and 50 percent by 2018. To meet these goals, HHS introduced initiatives for shifting Medicare and Medicaid reimbursement to providers toward fee-for-value. The 50 percent goal is yet to be reached, although progress is occurring.
There are several VBC-related laws worth noting. For instance, the Medicare Access and CHIP Reauthorization Act (MACRA),[34] enacted in 2015,[35] moves provider reimbursement from quantity of care to quality of care. It initiated the Alternative Payment Models and the Merit-based Incentive Payment System (MIPS), both implemented in 2019. Improving quality measures is more difficult for solo and small provider practices.[36] To improve reimbursement under MACRA, providers are increasingly joining large group and hospital-owned practices. The recent and ongoing COVID-19-generated financial pressures are forcing many hospitals to merge. Believing that merging can achieve efficiencies, scale, and purchasing power, many providers may have been collaborating in some way with a potential partner. A merger of companies producing services that are the same or close substitutes is a horizontal consolidation. Vertical consolidation, in contrast, refers to mergers of companies that produce upstream or downstream services within a production process — for example, a manufacturer’s acquisition of one of its suppliers or of a financial company that funds buyers of its products. However, even when they find an attractive merger partner in their geographic areas, the parties may feel increased regulatory scrutiny over a new transaction.
Additional VBC-related legislation includes MIPPA, which instituted the End-Stage Renal Disease Quality Incentive Program (ESRD-QIP) [37] in 2012, the Protecting Access to Medicare Act (PAMA), which became law on April 1, 2014, and the Skilled Nursing Facility Value-Based Purchasing Program (SNF-VBP)[38] which became effective under PAMA in 2018. At the end of 2020, Congress passed, and the President signed, a large omnibus spending package that included a three-year extension of MIPPA through 2024.
Other VBC Models
Accountable Care Organizations (ACOs) and the ACO Era
ACOs are groups of doctors, hospitals, and other healthcare providers who come together voluntarily to give coordinated high-quality care to their Medicare patients. The goal of coordinated care is to ensure that patients get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors. When an ACO succeeds both in delivering high-quality care and spending healthcare dollars more wisely, the ACO will share in the savings it achieves for the Medicare program. ACOs are discussed later in this article.
PPACA gave Medicare providers, including physician groups and hospitals, the option to form ACOs to improve quality and efficiency, in a season known as the Accountable Care Era.[39] ACO participants may share financial gains generated from improved clinical and economic performance, provided quality goals and patient safeguards are met. CMS was obligated to implement the ACO option no later than January 1, 2012.
Providers would be paid for the results they produce, not simply for the care they provide. Over the years, these coordinating groups of practices have gone by many names, but it was not until the reforms of PPACA that ACOs began to take their present form, focusing on meeting new patient satisfaction benchmarks and reducing the financial burden caused by patients receiving unnecessary services. While the hype for ACOs promised better care quality and increased revenue, the reality of ACO launches has seen mixed results.
Patient-Centered Medical Homes (PCMHs)
As a component of PPACA, the PCMH model holds promise as a way to improve healthcare in the United States by transforming how primary care is organized and delivered. The Agency for Healthcare Research and Quality (AHRQ) defines a medical home as a model of the organization of primary care that delivers the core functions of primary healthcare: (1) comprehensive care, (2) patient-centered, (3) coordinated care, (4) accessible services, and (5) quality and safety.[40]
Care Redesign Programs (e.g., Maryland All-Payer and Total Cost of Care Models)
CMS and the state of Maryland are partnering to test the Maryland Total Cost of Care (TCOC) Model, which sets a per capita limit on Medicare total cost of care in Maryland. The TCOC Model is the first Center for Medicare and Medicaid Innovation (Innovation Center) model to hold a state fully at risk for the total cost of care for Medicare beneficiaries. The TCOC Model builds upon the Innovation Center’s current Maryland All-Payer Model, which had set a limit on per capita hospital expenditures in the state. The Maryland TCOC Model sets the state of Maryland on course to save Medicare over $1 billion by the end of 2023, and the Model creates new opportunities for a range of non-hospital healthcare providers to participate in this test to limit Medicare spending across an entire state.[41]
Vermont All-Payer ACO
The Vermont All-Payer ACO Model is CMS’ new test of an alternative payment model in which the most significant payors throughout the entire state – Medicare, Medicaid, and commercial healthcare payors – incentivize healthcare value and quality, with a focus on health outcomes, under the same payment structure for the majority of providers throughout the state’s care delivery system and transform healthcare for the entire state and its population.[42]