Payment reform based on the Affordable Care Act (ACA) involves a series of reforms expected to slow growth in Medicare spending while strengthening care provided to beneficiaries.

These reforms build upon the existing value-based purchasing efforts currently underway with the Centers for Medicaid and Medicare Services (CMS), designed to better coordinate patient care, reduce unnecessary services and lower Medicare spending, while inspiring quality of care through an integrated delivery system.

The current Medicare payment system focuses on volume-based and productivity streams of revenue. Payment reform intends to transition from this system to a payment system of value-based, patient-centered payment models with a focus on limiting cost and improving care. This type of transition to patient-centered care will involve Accountable Care Organizations (ACOs), bundled payments and value-based purchasing efforts.

Accountable Care Organizations
The ACO program was implemented on January 1, 2012. This organization consists of healthcare providers who agree to be accountable for the quality, cost and overall care of Medicare beneficiaries enrolled in a traditional fee-for-service program. Under this program, it will no longer be enough to deliver better care—the organization will have to deliver better care at a lower cost.

Under this program, organizations will have the opportunity to choose two different payment tracks. One track will provide a lower sharing rate with no shares in losses, while the second will provide a higher sharing rate for ACOs willing to share in losses.

Hospital Readmissions
As mandated by the ACA, beginning in FY 2013, inpatient hospitals with higher than expected rates of readmission will experience decreased payments for all Medicare discharges. Medicare diagnosis-related group (DRG) payments will decrease by up to one percent in 2013, up to two percent in 2014 and up to three percent in 2015.

For 2013, readmissions (for any reason) up to 30 days from the original discharge for acute myocardial infection, heart failure and pneumonia will be used to determine a hospital’s excess readmit ratio. In 2015, more conditions will be added with appropriate exclusions for planned readmissions and those not related to original discharge and transfers to other hospitals.

Value-Based Purchasing
Value-based purchasing links payments directly to quality of care provided, and it is a strategy to transform the current payment system by rewarding the delivery of high-quality care. This program will reward hospitals with high performance based on quality by redistributing Medicare payments. The program will be effective for discharges on or after October 1, 2012.

Incentive payments for this program will be funded through DRG reductions as follows: 1 percent in 2013, 1.25 percent in 2014, 1.5 percent in 2015; 1.75 percent in 2016 and 2 percent in 2017. Hospitals will be rewarded for quality improvement or quality attainment, whichever score is higher. Those that exceed performance standards will be eligible to earn back the money initially withheld.

Bundled Payments
Beginning January 1, 2013, a national voluntary pilot program on payment bundling will be established to provide integrated care for improved coordination, quality and efficiency of care, during an episode of care.

An episode of care is defined as three days before admission for applicable condition, the length of stay in the hospital and 30 days following discharge. Providers will have great flexibility in selecting conditions to bundle under the 10 bundling conditions set forth in the regulations.

The hospital will be able to choose from four broadly defined payment models. Three of these models involve a retrospective payment and one model would provide payment prospectively. Application dates for each model are set forth in 76 FR 53137, dated August 25, 2011.

Weathering the Transition
By 2018, Medicare reimbursement will cover approximately 30 percent less of actual costs than under current levels. Medicaid enrollment will expand by an estimated 16 million beneficiaries, driving further cuts in Medicaid payments. Healthcare exchanges are projected to pay at Medicaid levels, and other payers will most likely follow suit in payment reductions and reforms similar to Medicare.

Hospital operating margins will start to get smaller based on these projections. It is of the utmost importance for hospitals to perform a financial baseline assessment for all payers to determine current margins and then to model the effects of payment reform through 2018 to understand how these reforms will affect operating margins.

Based on the results of this modeling, organizations will have to make strategic decisions on how to improve revenue streams by looking at their revenue cycle process, charge capture and coding compliance procedures, their managed care contracting negotiation process and strategic pricing procedures. In addition to looking at ways to improve revenue streams, hospitals must also look at ways to reduce costs by targeting waste, improving processes, becoming more efficient and implementing possible operation considerations.

By understanding the various payment reform models and how they affect operating margins, and by addressing revenue performance and cost reductions, healthcare organizations will weather the transition from utilization payment models to value-based patient-centered payment models. iBi