Healthcare Reform Article to the HFMA

By W. Karl Baker

By now you are aware of the “Patient Protection and Affordable Care Act”, which was signed into law on March 23, 2010.  As you know, this law is an incredibly complex piece of legislation that impacts nearly all Americans.  In fact, for many people it impacts them from multiple perspectives, as employees or as leaders of companies.  So who does this legislation impact?  Generally it impacts the following populations:

• Citizens – this legislation impacts us as citizens, meaning it impacts us as individual and / or corporate tax payers.  There are numerous provisions that will impact this population.  These provisions will impact the way taxes are due and benefits to be received or provided.  Generally, this population is beyond the scope of this article.

• Insurance companies – this legislation is going to drastically impact plans available, provisions and benefits available, insurance plans and other key components of the insurance industry.

• Healthcare organizations – healthcare providers of all types will obviously be impacted by this legislation. 

The scope of this article will address several key components that will impact you as a healthcare provider.  You’ve probably already begun to study the legislation and how it will impact the organization.  I suggest the following general action plan for studying and implementing the healthcare reform laws:

• Understand how the legislation impacts you.

• Understand the timelines.  This legislation had several components that were effective immediately, along with several components that were effective with staggered deadlines, including provisions that were effective 90 days after enactment, 60 months after enactment and then beginning each January for the next several years, including 2011, 2012, 2014, 2017 and 2018.

• Perform a needs assessment as to what major topics need to be address by the organization. 

• Establish priorities.

• Establish an action plan.

In brief, the healthcare reform legislation will have a positive and negative financial impact to hospitals and healthcare providers.  Currently, hospitals provide a significant amount of charity care to the large uninsured population.  The healthcare legislation will reduce the number of uninsured people due to the fact that more people will have access to insurance benefits or Medicaid coverage.  This increased Medicaid coverage is going to cost the state and federal government a significant amount of money.  Given the fact that the Congressional Budgetary Office has scored this legislation as being a net reduction in the federal deficit of $143 billion over the first decade, the authors of the legislation had to come up with ways to pay for those additional costs.  One of the ways is through decreased Medicare reimbursement to hospitals and other healthcare organizations.  Therefore hospitals will see a reduction in Medicare revenues that will offset the increase in Medicare revenues and private insurance revenues.

Given these goals, I’ve tried to identify the top provisions of the legislation that would be of interest to most hospitals.  Although it would be impossible to include a comprehensive list, the following topics cover several of the key components of the Act:

Converting People from Being Uninsured To Insured

The act will require US citizens and legal residents to purchase qualifying healthcare coverage.  More specifically, citizens are incentivized to acquire this coverage by incurring tax penalties for not purchasing the coverage.  Employers offering coverage are split into two categories.  Certain small businesses will qualify for tax credits for buying group health coverage, and for mid-size and large businesses the Act imposes tax penalties on certain employers that don’t provide healthcare coverage.  The tax credits for small businesses begin in 2010 and are phased in over the next few years.  Tax penalties begin to be assessed in 2014. 

Medicaid

The Act expands Medicaid benefits to all non-Medicare individuals under 65 with incomes up to 133% of the federal poverty level (FPL).  To finance this additional coverage, states will receive 100% federal funding for 2014 – 1016 and this coverage is reduced in graduated levels down to 90% beginning in 2020 and subsequent years.  Provisions are made to states that have already expanded eligibility requirements.  Additionally, there are Medicaid payment increases for fee-for-service and managed care for primary care services provided by primary care doctors.

Medicare Payment Reductions

As indicated earlier, increased costs to the government for coverage to newly eligible populations of people are expected to be paid for through cost containment measures.  One of the primary ways is through reductions in Medicare payments to hospitals and other providers.  Some of these reductions are through cost savings programs, via accountable care organizations and other measures that will be covered later in this article.  However, there are other specific ways that Medicare rates will be explicitly reduced. 

• The annual market basket updates for hospitals, home care agencies, skilled nursing facilities, hospices and other Medicare providers will be reduced over the next several years.
• Medicare disproportionate share hospital (DSH) payments are initially reduced by 75% effective in Federal fiscal year 2014 with subsequent increase payments based on the percent of the population uninsured and the amount of uncompensated care provided.  Overall, it’s expected that DSH payments will be reduced as the level of uninsured population is reduced.  The Act indicates that total Medicaid DSH allotments will be reduced in the aggregate by $500 million in 2014, $600 million in 2015, $600 million in 2016, $1.8 billion in 2017, $5 billion in 2018, $5.6 billion in 2019 and $4 billion in 2020.
• The Medicare Advantage program will also have spending and coverage cuts. One key factor is an 85% medical loss ratio benchmark is established and potential suspension and even termination of contracts could be levied if the 85% benchmark is not achieved for a number of consecutive years.
• An independent payment advisory board is to be established to offer recommendations to reduce the per capital rate of growth and Medicare spending if spending exceeds a target growth rate.  These targets and recommendations begin to be established in 2013.

Accountable Care Organizations (ACOs)

In order to achieve further cost savings, the Act incentivizes healthcare providers to set up ACOs that will allow them to share in the cost savings they achieve for the Medicare program.  These ACOs are designed to better coordinate care as patients move through the continuum of care from primary care physicians, hospitals and post acute care such as skilled nursing facilities, home health or hospices.  These ACOs would have a bundled payment strain as a patient moves through this continuum.  The organizations would need to document improvement and quality in cost savings.  The shared savings program begins in January 1, 2012. 

The Act establishes a national Medicare pilot program to establish a bundled payment program for services that begin three days prior to a hospitalization through 30 days following hospital discharge.  This program would cover acute, inpatient hospital services, physician services, outpatient hospital services and post-acute services.  This pilot program is targeted to begin January 1, 2013.

The report is due to Congress on January 1, 2011 to summarize plans to implement a value based purchasing program for skilled nursing facilities, home health agencies and ambulatory surgical centers.  A report is due October 1, 2012 summarizing plans to establish a hospital value based purchasing program to pay hospitals based on performance on quality measures and to extend an existing physician quality reporting initiative.

Quality Measures

There are a few specific initiatives that are launch  to incentivize hospitals to focus on quality measures by tagging these measures to Medicare payments.  The first has to do with hospital readmission.  Payments will be reduced by specified percentages to account for excess deemed preventable hospital readmissions beginning October 1, 2012.  These reductions begin at 1% and increase over a 2 year period to 3%.  Rules are not established yet to measure how these readmission rates will be quantified.  Hospitals will receive a 1% cut in Medicare payment if they are in the upper category of hospitals with high hospital acquired condition rates effective in 2015. 

By January 1, 2011, a report is due to Congress to develop a national quality improvement strategy to improve delivery of healthcare, outcomes and overall population health. 

Primary Care Physicians

Primary care physicians will receive increased Medicaid payments in for fee-for-service and managed care relationships to be equal to 100% of the Medicare payment rates for 2013 and 2014. States are required to receive 100% federal financing for these increases.  Primary care physicians will also receive a 10% bonus payment in Medicare rates from 2011 through 2015.

Long Term Care

The Act establishes a national insurance program called CLASS, the Community Living Assistance Services and Sports program.  After a 5 year vesting period, individuals with limited functional limitations can receive benefits of at least $50 per day to purchase certain community assistance services.  The Act also includes several initiatives to try to increase coverage for community and home based programs that will be paying for with state Medicaid programs.

Requirements for Non-Profit Hospitals

It’s no secret that the government has been placing additional scrutiny on tax exempt organizations, particularly hospitals, as it pertains to their tax exempt status and financial reporting.  We have all been navigating through the new IRS Form 990 filing and disclosure requirements, which was revamped in response to this crusade.  Taxing authorities across the nation have been scrutinizing hospital tax exempt status and challenging whether hospitals are achieving their mission and community needs requirements.  This Act imposes additional requirements on non-profit hospitals.  Hospitals will be required to conduct a community needs assessment every 3 years and adopt an implementation strategy to respond to the assessment.  Hospitals will be required to adopt and publicize its financial assistance policy that lists qualifications for free or discounted care. The Act also requires hospitals to limit charges to patients who qualify for this assistance to the amount billed to insured patients.  The Act also requires hospitals to make attempts to self-assess eligibility for its patient’s financial assistance prior to undertaking collection actions.  Significant penalties are involved for not meeting these requirements.

Insurance

I’ve previously detailed in the article certain measures that will increase access to insurance for individuals.  In addition, health insurance exchanges are being created to improve insurance plans and to make insurance coverage more affordable for individuals.  Also there are several changes that are being imposed on insurance companies that will increase their costs. 

• Effective June 21, 2010 through 2014, a national high risk pool has been established to provide healthcare coverage to individuals with pre-existing medical conditions.  This is estimated to cost the federal government $5 billion during this time period. 

• Rebates will be in play to insurance companies that do not achieve 80% - 85% medical loss ratio, depending on the size of the group plan.  These rebates will become effective in 2011. 

• Certain states have already implemented this but the Act is requiring a review process to justify rate increases on health plan premiums effective in 2010. 

• Effective in September 2010, dependent coverage for children up to age 26 will be required with individual and group policies. 

• Insurance companies will be prohibited from placing lifetime limits on coverage beginning in September 2010.  Beginning in January 2014, insurance providers will be prohibited from placing annual limits on the dollar value of coverage. 

• Deductibles for health plans in a small group market will be limited to $2,000 effective 2014 and $4,000 for families with certain exceptions. 

• Effective in January 2014, any waiting periods will be limited to 90 days. 

• A temporary reinsurance program is to be set up effective January 2014 through 2016 funded by all health insurers in the individual and group markets to pay for plans in the individual market that cover high risk individuals.  $25 billion is expected to be contributed to this reinsurance program over those 3 years. 

• The Act imposes an excise tax on employer sponsored health plans with aggregate values that exceed $27,500 for family coverage with certain exceptions for high risk professions.  This tax is effective in January 2018.

Malpractice

Tort reform was not a significant component of the Act.  However, funding has been appropriated for 5 years beginning in 2011 to set up demonstration grants to states to develop, implement and evaluate alternatives to current tort litigation.

Conclusion

In summary, the Act’s main goal is to expand coverage to the uninsured and the impoverished and to pay for this expansion through other cost containment measures.  Much of the regulation writing to implement this Act will be carried out over the next several years, therefore, it’s obviously too early to project all the pros and cons of this Act.  One thing is for sure, it will be a significant effort to monitor and respond to all of the changes.  We, as healthcare leaders in the community, have an opportunity to set the tone and to lead the charge in the coming years to improve the provision of healthcare and to improve the business of healthcare in this country.

Find out how our healthcare accounting consultants can add value to your business. Email us or call us at 1 (888) 875-9770.

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