Your Path to Program Success: Expert Advice

Regulatory Update: An Overview of the Latest Changes

Catherine DiNardo,
Lead Business Consultant,
Corazon, Inc.,
Pittsburgh, Pennsylvania

Catherine DiNardo,
Lead Business Consultant,
Corazon, Inc.,
Pittsburgh, Pennsylvania

The Patient Protection and Affordable Care Act (PPACA), also known as the healthcare reform law, was enacted in March of 2010. Most of the initiatives contained in the Act were not fully defined, and most were scheduled to start two to four years in the future. With this timeframe now upon us, is your organization prepared for the latest wave of changes related to these healthcare regulations?

Over the last year, there has been a lot of work done to flesh out the details of the initiatives included in regulations. Much of the recent activity relates to The Bundled Payments for Care Improvement initiative and the final rule for Accountable Care Organizations. Both programs require operational, financial, and clinical collaboration among physicians, hospital leaders, and other healthcare providers. Such changes will no doubt impact both big picture strategy and day-to-day operations in the coming years, beginning now, as most hospitals plan for the coming year. Corazon believes that understanding what the regulations mean on every level will be critically important, especially as hospitals strive to provide the highest level quality care to patients at the lowest cost.

Accountable Care Organizations

On October 20, 2011, The Centers for Medicare and Medicaid Services (CMS) released the final rule for the Medicare Shared Savings Program for Accountable Care Organizations. The final rule for ACOs is less stringent than the rule proposed in March 2011, and greater revenue potential exists. The new rules establish a voluntary program that helps physicians, hospitals, and other providers improve their ability to coordinate care across all healthcare settings. Providers who meet certain quality standards can share in any resulting savings. As an incentive to ACOs that successfully meet quality and savings targets, the Medicare Program can share a percentage of the achieved savings with the ACO. ACOs will only share in savings if they meet both the quality performance standards and generate shareable savings. In order to fulfill the intent of the Shared Savings Program as established by the Affordable Care Act, the program must result in better care and better health for beneficiaries and lower growth in Medicare expenditures. The minimum agreement period is for three years. ACOs that start during CY2012 will have longer agreement periods, since the first evaluation period will end in December 2013.

ACO Eligibility

All ACOs must still include primary care physicians, whether through group practices, networks of group practices, joint ventures with practices and hospitals, or hospitals with employed physicians. Certain critical access hospitals are also eligible to participate. The final rule also deemed federally qualified health centers and rural health clinics as eligible to participate in an ACO.

Quality Measures

CMS reduced the number of quality metrics in the final rule, from 65 measures to 33. The ACO must achieve the quality performance standard on at least 70% of the measures in each of the four domains in order to qualify for shared savings. The higher the quality of care providers deliver, the more shared savings they may keep. Also, participating providers no longer are required to use electronic health records (EHR); however, EHR is one of the 33 quality measures, and is weighted higher than any other for quality scoring purposes.

Earning Sharing Savings

To receive the financial rewards of an ACO program, CMS sets a benchmark expenditure target for each ACO based upon the expected Medicare expenditures per beneficiary. The benchmark is adjusted for inflation and updated each contract year. CMS calculates the actual Medicare expenditures for the beneficiaries treated by the ACO at the end of each year. Actual expenditures are then compared to the benchmark: if actuals are below the benchmark, ACOs have the opportunity to share those savings with CMS — but ONLY if quality performance standards are met.

ACOs have two options for sharing savings. In the first option, the ACO shares only in savings (up to 50%) once the minimum rate has been achieved for the year. With this option, if there are losses, the ACO does not have to pay for exceeding the expense benchmark. In the second option, the ACO shares in both the savings and the losses for each year, up to 60%. The losses are capped at 5% of the ACO benchmark expenditure target for the first year, 7.5% in the second year, and 10% in the third year.

Advance Payment Model

The Advance Payment Model is designed to provide support for organizations whose ability to meet the goals of an ACO would be improved with access to additional capital. The advance payments would be recovered from any future shared savings achieved by the ACO. The Advance Payment model is open only to two types of organizations:

  • ACOs that do not include any inpatient facilities with less than $50 million in total annual revenue.
  • ACOs in which the only inpatient facilities consist of critical access hospitals and/or Medicare low-volume rural hospitals with less than $80 million in total annual revenue.

Bundled Payment Initiative

The Bundled Payment for Care Improvement Initiative was released by the CMS on August 23, 2011. This voluntary initiative packages all payments for services delivered across an episode of care, such as heart bypass or pacemaker implant, rather than paying for services separately. Corazon believes that bundled payments give doctors and hospitals viable incentives to coordinate care, reduce costs, and improve clinical quality. This initiative considers all the services patients receive for a specific condition, during a single hospital stay, and/or recovery from that stay as one “bundle” or one “episode of care.” Since one payment will be made for the “episode,” providers will have a greater incentive to coordinate care, which can reduce unnecessary duplication of services, decrease the incidence of preventable medical errors, and lower costs.

Hospitals that are interested in the program can apply for one of the four models that CMS is currently testing. Providers have the flexibility to determine which episodes of care and which services will be bundled together in order to allow providers of different sizes and readiness to participate in this initiative. Hospitals that sign up for the program must commit for three years. Furthermore, as a condition of participation in any of the models, hospitals must plan and implement quality assurance and improvement activities, and report all CMS quality measures. As of the publication date of this article, the deadline is past for submitting the letter of intent to participate in the program for 2012; however, we have outlined the models here for hospitals that may have the opportunity to participate in future bundled payment programs.

Model 1 – Inpatient Stay Only

CMS pays the hospital a discounted rate based on their current Medicare MS-DRG payment rates (for all MS-DRGs). Physicians are paid their traditional fee schedule. The hospital must propose a discount of at least 0.5% in the second six months of the first year and of at least 2% by Year 3. In return for the payment reduction, the hospital is permitted to engage in limited gainsharing of any operational savings with participating physicians. Since this model includes all MS-DRGs, it is not very attractive to either hospitals or physicians, because it necessitates a focus on cost savings across an entire organization, versus a focus on select service lines. Hospitals risk losing money under this initiative if the physicians do not generate enough hospital savings to cover both the decrease in the Medicare payment and the gainsharing payouts.

Model 2 – Inpatient Stay Plus Post-Discharge Services

Under this model, the hospital proposes one or more MS-DRGs for which they would accept a consolidated bundled payment as coverage for all services for the episode of care, from admission to a minimum of 30 days post discharge. There is the option to define the length of the post-discharge period, though Medicare expects at least a 3% discount for 30- to 89-day post-discharge episodes, and at least a 2% discount for 90+day episodes.

Corazon believes this is a viable option for hospitals with a significant number of cath lab patients. There may be opportunities for device and supply cost savings, which makes gainsharing attractive as a means for generating revenue. The aspect posing the most significant risk is the hospital’s responsibility to cover the costs of any readmissions for a related condition during the post-discharge period, which could be significant in some cases.

Model 3 – Post-Discharge Services Only

This option would likely be of interest to hospital systems that include skilled nursing facilities, long-term care hospitals, or home health organizations. Applicants propose the discount and the criteria for the episode of care.

Model 4 – Inpatient Stay Only

This model bundles the inpatient hospital and physician services with any related readmissions. This model enables the participating hospital and its physicians to select the MS-DRGs they wish to focus on. CMS expects a discount of at least 3% of the expected payment for hospital and physician services. Like Model 2, the most significant cost savings will be for those MS-DRGs that can lead to significant savings in device, drug, ancillary testing, and post acute care costs. You must also have a manageable number of physicians across the continuum of care who are willing to share a bundled payment. This is the only model that truly makes one payment for the episode of care. Physicians and other health professionals would submit “no-pay” claims to Medicare, and the hospital would be responsible to distributing a portion of the bundled payment to physicians and other health professionals. 

Indeed, the key to making any bundled payment model successful is efficient operations. Although clinicians practicing on the frontlines of cardiology may not see the direct impact of these changes on a day-to-day level, the implications will touch programs both operationally and financially on many levels. As a clinician, it is important to understand that the decisions made during a cardiology procedure, such as which medical device or pharmaceutical to choose, no doubt impacts the hospital’s financial performance. Corazon always advocates such awareness at all program levels.

Participating in an ACO or bundled payment program may provide some opportunities for financial benefit to the hospital. But only with diligent focus and clear understanding of the options and what they mean. Corazon believes that taking time and effort to study the legislation and evaluate the financial implications will be instrumental to developing strategies that help hospitals avoid fiscal penalties while taking advantage of potential revenue opportunities. Of course, as the hospital benefits, more resources will be available for the cath lab and other departments.

One benefit of participating in these programs is the opportunity for greater hospital-physician collaboration. Participating hospitals gain the ability to develop gainsharing models that reward physicians for improving quality and reducing costs. Since bundled payments come through CMS, it will use its authority to waive most of the regulations that typically obstruct gainsharing programs, including Stark and Anti-Kickback regulations.

As a consequence of participating in program incentives, performance improvement will be seen in areas outside of the cases defined in the program. Once physicians standardize care processes for the bundled payment program (like device selection), they will begin to apply those standards to all cases in other areas. As a result, hospitals will see improvement across many service lines, especially if standards are eventually followed by physicians across various specialties and across multiple program areas.

For hospitals considering various methods of aligning with independent physicians around quality and efficiency improvement, a bundled payment program may be a profitable option, especially when compared to other alignment models, such as joint ventures, co-management, or physician employment.

In summary, participating in an ACO or a bundled payment program will no doubt impact the financial performance of the hospital. Whether this impact is positive or negative is up to you! By understanding the rules and taking the appropriate actions, hospitals can flourish in the new healthcare legislative environment.

Catherine is a Lead Business Consultant at Corazon, offering consulting, recruitment, and interim management for the heart, vascular, and neuro specialties. Visit for more information. To reach Catherine, call (412) 364-8200 or email