As reported by Kaiser Health News and noted here this past Thursday, U.S. hospitals have hit a new high now—in terms of the payment penalties being levied against them for rehospitalizations that officials at the Centers for Medicare & Medicaid Services (CMS) are judging to be avoidable.
As Managing Editor Rajiv Leventhal noted in a news report yesterday, “The federal government’s penalties on hospitals for failing to lower their rehospitalization rates will hit a new high as Medicare will withhold approximately $528 million—about $108 million more than last year—according to an August 2 Kaiser Health News report.”
That report, based on a Kaiser Health News analysis, found that “The government will punish more than half of the nation’s hospitals — a total of 2,597 — having more patients than expected return within a month. While that is about the same number penalized last year, the average penalty will increase by a fifth.”
Under the provisions of the Affordable Care Act (ACA), the Hospital Readmissions Reduction Program was designed to make hospitals pay closer attention to what happens to their patients after they get discharged. The fines for failure to meet CMS’s avoidable readmissions reduction criteria focus on six conditions: heart attack, congestive heart failure, pneumonia, chronic obstructive pulmonary disease (COPD), elective hip and knee replacements, and for the first time this year—coronary artery bypass graft surgery—and are based on readmissions between July 2012 through June 2015. The fines this year will be levied in October.
As the Kaiser Health News report noted, “The payment cuts apply to all Medicare patients, not just those with one of the six conditions Medicare measured. The maximum reduction for any hospital is 3 percent, and it does not affect special Medicare payments for hospitals that treat large numbers of low-income patients or train residents. Forty-nine hospitals received the maximum fine. The average penalty was 0.73 percent of each Medicare payment, up from 0.61 percent last year and higher than in any other year, according to the KHN analysis. Under the Affordable Care Act, which created the penalties, a variety of hospitals are excluded, including those serving veterans, children and psychiatric patients. Maryland hospitals are exempted as well because Congress has given that state extra leeway in how it distributes Medicare money. Critical access hospitals, which Medicare also pays differently because they are the only hospitals in their areas, are also exempt. As a result, more than 1,400 hospitals were automatically exempt from the penalties. Other hospitals did not have enough cases for Medicare to evaluate accurately and were not penalized. Of the hospitals that Medicare did evaluate, four out of five were penalized. The KHN analysis found that 1,621 hospitals have been penalized in each of the five years of the program.”
The key significance of all this is not only the number of hospitals being penalized for avoidable readmissions, but the fact that a total of $528 million in Medicare reimbursement, $108 million more than last year, is being withheld. Why is that important?
It is important in itself, and also as part of a bigger whole. First, it is important because of its scale. $528 million is now a significant percentage of reimbursement being held from Medicare-participating hospitals nationwide. Not only is the number of hospitals involved—2,597—more than half of all Medicare-participating hospitals; the highest level of penalty is 3 percent, which is quite high. The average penalty this year was 0.73 percent, up from 0.61 percent last year, and higher than in any previous year, according to the Kaiser Health news analysis.
Also, it’s important to consider this: more than 1,400 hospitals were automatically exempted from readmission reduction program penalties. Given that there are 3,414 hospitals covered by the readmissions reduction mandate, 2,597 hospitals being penalized this year actually represents fully 76 percent—more than three-quarters of hospitals—seeing pay cuts as a result of readmissions deemed avoidable by CMS officials.
What’s more, though a 0.73-percent pay cut (the average) may not sound like a lot on its own, that payment cut level must be understood in a broader context. All of the hospitals subject to the avoidable readmissions reduction mandate are also being required to participate in the value-based purchasing program and the healthcare-acquired conditions program as well, under the ACA. In those programs, hospitals in the bottom quartile-performing group, also are receiving large payment penalties. Now, according to one recent analysis, only 38 hospitals this year have actually received the full 3-percent maximum reimbursement penalty under the readmissions reduction program; but let’s note that 721 hospitals were penalized an estimated $373 million in fiscal year 2015 for healthcare-acquired conditions. And, in 2016, the total potential maximum penalties incurred under all three programs—readmissions reduction, value-based purchasing, and healthcare-acquired conditions—rose to about 5.5 percent of total Medicare reimbursement in 2016, and will rise to nearly 6 percent in 2017. Given that the average U.S. hospital received 40.9 percent of its reimbursement from Medicare in 2013, and given that the average U.S. community hospital runs on revenue margins in the single digits, for a hospital to find itself in the lowest-performing category in all three programs could be devastating. An analysis by Becker’s Hospital Review back in 2013 noted that “The financial impact of these value-based reforms is expected to have a significant impact on low-performing hospitals. For example, a 300-bed hospital with poor quality metrics would be penalized approximately $1.3 million a year, beginning in 2015, under CMS value-based reform.”
Now, let’s add in two recent additions to this landscape: the mandates for bundled payments for total hip and knee replacements, begun a year ago; and for heart attack care and cardiac artery bypass graft (CABG) surgery, announced just last month. As I noted in a blog that I had posted just a week ago, those bundled-payment mandates are hitting hospitals in 67 (total joint replacement) and 98 (cardiac care) markets, respectively; and there is no doubt that CMS officials will be expanding dramatically the number of markets falling under those mandates in the next couple of years. And total joint and cardiac care and procedures have until recently been ports in the storm of straitened Medicare reimbursement.
Taken all together at once, the potential is clear: the worst-performing Medicare-participating hospitals could see their Medicare reimbursement cut by nearly 6 percent in 2017. With a national average of nearly 41 percent of their revenues coming from the Medicare program, and overall revenue margins in the 1, 2, 3, and 4 percent range for most hospitals, a 6-percent pay cut from Medicare could cause some hospitals to close entirely. And if those poorly performing hospitals also happen to be in one of the 67 or 98 healthcare markets designated as mandated to participate in the total joint replacement and cardiac care bundled-payment programs as well, well then—as the older folks might put it, Katie bar the door.
What’s more, on top of everything else, as we all know, CMS officials are plowing ahead with the full implementation of the MIPS (Merit-based Incentive Payment System) program under the MACRA (Medicare Access and CHIP Reauthorization Act of 2015), forcing all Medicare-participating physicians to either enter the MIPS program next year or begin participating in one of the alternative payment models (APMs) available to them, including accountable care organization (ACO) participation or participation in enhanced primary care models. And physicians in practice who are already being shaken by developments in the meaningful use program and around mandatory recertification issues, are going to be fleeing into the arms of hospital administrators to help them fix their business/reimbursement woes.
The bottom line, then, is simple: all the federal policy and payment trends are converging now, and this readmissions reduction program announcement this past week needs to be taken as confirmatory evidence of that fact. There is simply no longer any place to hide, for hospitals that have been under-performing in terms of core clinical and operational performance. Hospital and health systems leaders are going to need to begin—if they haven’t already done so, which they really should already have been doing—to leverage data and information technology in pursuit of the “blessed cycle” of continuous clinical performance improvement, most often using formal performance improvement methodologies like Lean management, Six Sigma, and the Toyota Production System for healthcare.
Pioneering patient care organizations, including the Geisinger Health System, the Cleveland Clinic, Intermountain Healthcare, Group Health, and of course, Kaiser Permanente, have long been doing so. Their leaders have seen the future and are steadily moving into it.
And so must everyone else. Because, honestly, continuous performance improvement is no longer an option for hospital and health system leaders. And last week’s news only confirms that. And healthcare IT leaders are clearly going to find themselves in the middle of all the activity needed to continuously improve clinical and operational performance, as data collection, data analytics, and the leveraging of data (through dashboards, continuous reporting, etc.) will help to drive continuous performance improvement.
So anyone who’s been wondering when the future might come can stop wondering now. At least as far as value-based federal reimbursement is considered, the future is here right now.