For hospitals, health reform starts today

October 1, 2012

(Reuters)

The start of October means, for most Americans, the onset of chilly weather and a chance to start thinking up a new Halloween costume. For budget wonks, it signifies the start of a new fiscal year. 

And for American hospitals, it means something quite different: October 1 is arguably the day that the health reform law changed the way they get paid for providing health care.

There are two big parts of the health reform law going into effect today. One penalizes hospitals if patients are re-admitted to the hospital within one month of a visit for a condition that should have been dealt with on the first trip. The other seeks to redistribute higher Medicare payments to the hospitals that are delivering better care.

Both are part of an effort to fundamentally transform the health-care system in the United States by moving it from a system that pays for value rather than volume. If efforts like these succeed, hospitals will become more concerned with delivering higher quality health care. If they don't, health providers will continue to earn a living the way they have for decades: By earning a fee for every service they deliver.

Let's break down how these two programs work a bit more. The first one cuts payments to hospitals for preventable re-admissions in Medicare. That's when a senior turns up at a hospital within one month of a previous visit with a problem that should have been dealt with on their first visit — or, perhaps, was caused by that first visit.

This happens a lot: The independent Medicare Payment Advisory Commission estimates that 15.3 percent of hospital admissions result in a re-admission. In 2010 alone, this happened 1.9 million times at an estimated cost of $17.5 billion. 

Until now, there weren't much in the way of penalties for a patient landing back in the hospital. There was actually a financial incentive for readmitting a patient, as that would mean delivering more health care that they could bill for.

That calculus changes today. Hospitals now stand to lose as much as 1 percent of their reimbursement rate if their patient lands back in a hospital bed within weeks. All of a sudden, bad care isn't just bad for the patient — it's bad for the hospital's bottom line. To achieve full reimbursement rates, hospitals are going to have to work at keeping patients healthy enough to stay out of their facilities altogether.

That's the first program. The second one, called Value Based Purchasing, also looks to nudge hospitals to delivering higher-quality care.

It begins with the federal government withholding 1 percent of payments to about 3,000 hospitals that deliver acute care. That money goes into a sort of pool, with about $850 million at stake. The hospitals that do well on certain quality metrics will get paid even more out of the pool than they put in — in other words, they get a raise. Those that do poorly on quality may not get anything back out of the pool — they deserve a rate cut, the thinking goes, because they are not delivering high-enough-quality care.

Again, the goal is to create an incentive for hospitals to deliver high-quality care, rather than perform lots and lots of procedures. The program will become more aggressive in 2013, when hospitals will see 2 percent of their reimbursements withheld for these quality bonuses.

There are questions about whether these payment shifts are enough to change hospitals'  behavior. With the re-admissions program, for example, we're only talking about $300 million of the $140 billion spent on Medicare hospital visits annually, or 0.2 percent. Is that enough to catalyze change?

My colleague Lena Sun talked to a number of hospitals in the Washington area and found some pretty strong evidence that, yes, it was indeed strong enough:

In Northern Virginia, the Inova health system has spent $2.4 million to hire eight health coaches and four case managers to coordinate and keep track of patients after discharge, said Vera Dvorak, vice president for transitional care. The company also opened two special clinics where doctors see Inova patients who can’t get appointments with their regular providers within a week after discharge. Inova’s five hospitals will get paid about $250,000 less from Medicare this coming year because of the penalties, officials said.

Even hospitals that were not penalized have taken steps.

Virginia Hospital Center opened a pharmacy on its campus and launched its own home health service. The penalty, said Robin Norman, chief financial officer, “is enough to have every hospital’s attention.”

We're on day one of this program right now, so it's pretty difficult to tell what this will mean for the health-care system — whether hospitals will act like Inova, and retool around the new programs, or decide to take a small hit rather than make a big investment. 

We'll learn more in the coming year about whether the health law can change how care gets delivered — or whether we continue to stick with the status quo.

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Sarah Kliff · October 1, 2012