Whereas most Medicare pays most hospitals through the inpatient prospective payment system (IPPS), it pays certain rural hospitals based on their reported costs.  Medicare pays Critical Access Hospitals (CAH), for instance, 101 percent of its report cost for inpatient, outpatient, laboratory, and therapy services.  It also pays this providers 101 percent of their cost for post-acute care for CAH beds are “swing beds” (which are beds that can be used for either acute or post-acute care).

However, how should Medicare define ‘critical’? The simplest definition is just whether a hospital is in a rural (i.e., non-metropolitan) area. However, there are various gradations of ‘rural’. A rural hospital on the outskirts of a big city would be far less ‘critical’ then one very far from distant areas. One could define ‘critical’ based on facility volume. If the low volume is due to poor quality, however, defining these hospitals as critical could just reward poor hospitals. Third, could define a hospital as isolated based on its distance from other facilities who could provide comparable care. Alternatively, one could identify critical hospitals based on demographic factors such as population density in the surrounding areas.

Below, I provide more information on other types of types of rural hospital designations in Medicare.

Not all rural hospitals are CAH’s however.  CAHs are limited to 25 beds and primarily operate in rural areas. Medicare also can designate a hospital as a sole community hospital (SCH) or a Medicare-dependent hospitals (MDHs). According to MedPAC, “SCHs receive the higher of either (a) standard inpatient prospective payment rates or (b) payments based on the hospital’s costs in a base year updated to the current year and adjusted for changes in their case mix. MDHs are similar to SCHs, but they
are eligible for a prospective payment rate based on a blend of current PPS rates (25 percent) and their historical costs (75 percent).”

Below is a breakdown by the number of rural hospitals.

Some provisions in health reform which affect rural hospitals include:

• A low-volume adjustment for hospitals with under 1,600 discharges
• A wage index floor of 1.0 for certain frontier states
• $400 in funding for hospitals in low-spending urban and rural areas

Source: MedPAC Payment Basics, Critical Access Hospitals.

• Centered on short-term acute care
• Focused on specialist alignment
• Driven by a volume-based service-line strategy
• Using expensive medical equipment purchases to encourage physician referrals
• Attracting patients with new construction in support of market share growth
• Short-term acute hospitals focus on profitable service lines such as oncology, cardiology, neurology, and orthopedics.

Specific examples of this growth are abundant.  In Indianapolis, all four of their hospital systems built coronary surgery centers at a combined cost of $210 million.  A community hospital 15 miles north of the city opened a smaller, open-heart surgery program.  In Cincinnati, nine hospitals performed open heart surgery. Eight Boston Hospitals Have da Vinci System, which may indicate that robotic surgery may be used for marketing purposes.

However,  health reform has started to change these trends.  Medicare is instituting more bundled payment (e.g., dialysis payments)  rather than pure fee-for-service.  Further, Medicare’s Shared Savings Program (MSSP)  aims to use Accountable Care Organizations (ACOs) to coordinate patient care improve quality and reduce the rate of growth in health care spending.

How will hospitals respond to the changing market landscape?  One way hospitals can improve their margins is to only treat healthier patients to improve their performance in the case where risk adjustment methods are imprecise.  Also, provider mergers may be a trend. Access larger populations will lessen risk providers must bear under new payment models.  Larger size also means that hospitals can negotiate better rates with suppliers.  Hospitals will likely sell redundant or non-core assets.

Hospitals will also adopt new technology to better manage care. For instance, Henry Ford Health System in Detroit uses an embedded specialized software called RadPort in its electronic physician order entry system that prompts physicians to enter specific information when ordering radiology tests.  The pilot, funded with a CMS grant, will see whether these prompts will reduce utilization levels.

• Source: Avalere Health Webinar, “Increasing Capital Productivity in a Value-Based World“, October 26, 2011.

It is important to note that these quality initiatives are not voluntary and affect hospital payments through adjustments to the base DRG rate. Broadly, measures fall into three categories: i) claims-based, chart-abstracted, and patient satisfaction (i.e., HCAHPS).  Many of these quality measures will be part of the Inpatient Quality Reporting (IQR) program and will included in the Hospital Compare website.

Also, Medicare is implementing these three programs on top of similar programs which include:

• Non-payment for care to treat specific HACs (see here)
• A Medicaid program which also will not pay for care to treat HACs (see here)
• Mandated review by QIOs of hospital readmissions within 31 days to assess standards of care and potentially recommend denial of payment (see here)

Value-Based Purchasing (VBP) Program

Beginning in October 2012 (FY 2013 rates), Medicare will begin reducing base operating DRG payments to all subsection (d) hospitals in annual increments. The first year (FY 2012) the rate will fall by 1 percent, decreasing further each year until FY 2017, when the total reduction will be 2 percent. Hospitals may be able to recoup some of the lost revenue by qualifying for incentive payments under the VBP Program. Under the program, hospitals will qualify for value-based incentive payments based either on performance on certain quality measures (if performance meets thresholds) or improvement during established baseline and performance periods. Because the formulae for scoring and calculating adjustments incorporate a sliding scale based on relative performance, many hospitals will end up with negligible adjustments for VBP (an overall net loss in DRG payment rates). CMS calculates the range in performance-based adjustments between the lowest and highest performing hospitals to be 0.0236-1.817 percent. Net adjustments in Year 1 are expected to be no greater than ±1 percent.

Excessive Hospital Readmissions Penalty

During the same year that VBP is launched, the hospital readmission reduction program will take effect. Beginning in October 2012 (FY 2013 rates), CMS will reduce reimbursement for hospitals with excess readmission rates by 1 percent. Hospitals will initially be evaluated based on the percentage of discharged Medicare patients with pneumonia, heart failure and acute myocardial infarction who are readmitted to a hospital for any cause within 30 days of discharge. Hospitals with an excess readmission ratio relative to that of other hospitals stand to lose 1 percent of base DRG payments, an adjustment amount that will increase further each year until it reaches 3 percent in 2014 (FY 2015 rates). Additional conditions are set to be added to the program in 2014 (FY 2015), including chronic obstructive pulmonary disease, coronary artery bypass graft, percutaneous transluminal coronary angioplasty and “other vascular conditions” as required by the ACA.

Hospital Acquired Condition Payment Limitation

Beginning in October 2014 (FY 2015 rates), CMS will penalize hospitals in the highest quartile of national, risk-adjusted Hospital Acquired Condition (HAC) rates (i.e., those with the worst performance). Hospitals face a 1 percent reduction in payment that would otherwise apply. This penalty comes on top of the existing policy of case-by-case non-payment for the treatment of HACs or conditions that were not present on admission. CMS currently recognizes 10 HACs for non-payment. (Fewer specifics have been released concerning this program, including the formulae to be used for calculating performance and adjustments. A proposed rule is expected shortly to provide more information.)

Source

Jane Metzger, Caitlin Lorincz and Marta Arthur “The Hospital Agenda for Accountability” CSC.

• HVBP Open Door Forum Presentation.
• Healthcare.gov information.
• HHS News Release.

One component of the HVBP is patient satisfaction.  Some policy experts believe that patient satisfaction is of the utmost importance.  If Medicare evaluates hospitals based on patient satisfaction, then hospitals will compete to improve how well patients are satisfied. A New York Times article already mentions some of the efforts hospitals are undertaking to improve patient satisfaction.  For example,

• Improving the quality of food
• Renovating units
• Creating more single units (compared to shared units)
• Having nurses visit rooms hourly
• Creating scripts for doctor-patient and nurse-patient interactions
• Quicker response time ["Jefferson Regional Medical Center in Pittsburgh expects all employees, from maintenance workers to doctors, to respond to a patient’s call light or find someone to offer assistance."]
• Building more elevators.

Elevators!?!?!  It turns out that “NYU found that long waits at its elevators drove down its scores, so now it is building a new bank of elevators.”

Hospitals complain, however, that they may only have a limited ability to influence ratings.  This is certainly true in some cases. For instance, patient expectations of the standard of care they receive may vary regionally.  For example,

“…some of the nation’s most prestigious hospitals, including Cedars-Sinai Medical Center in Los Angeles and the University of Chicago Medical Center, get lower marks from patients on most areas of patient experiences, according to the government’s Hospital Compare Web site.

So do many of New York City’s elite institutions…Some hospitals, like NYU, get bad patient reviews even as they score average or superior in measures of clinical care from the government and accreditation groups.

‘People in New York have very high expectations about what it means to be taken care of,’ said Dr. Katherine Hochman, an NYU physician. ‘When they don’t get their food on time and have to spend eight hours in the emergency department, well, that’s just not their image of what a world-class institution is.’”

Further, many providers believe that indigent patients give physicians lower quality scores even though these patients receive the same care as do richer patients.  Hospitals with more Medicaid-eligible patients could receive lower patient satisfaction scores due to case mix alone rather than due to actual quality.

To account for these confounding factors, Medicare can institute a risk adjustment mechanism.  By including patient income (or Medicaid) status in their model, however, Medicare would implicitly be allowing hospitals to provide a lower standard of care to the poor. Alternatively, if the poor do in fact give lower satisfaction scores, than hospitals may have an incentive to avoid these patients.

Similarly, including regional indicators in the risk adjustment model can also be problematic.  If New Yorkers have higher standards than individuals from Iowa, then one may want to normalize performance regional.  If CMS adopts this specifications, hospitals in essence would only be compared against their local peers.  Areas which have consistently below average care–in terms of patient satisfaction–may not be punished if they are the ‘best of the worst’ in their area.

Although patient satisfaction is not always correlated with high quality medical care, paying hospitals more for care that meets their patients’ needs does seem to be a sensible solution.

MassHealth P4P Background

The MassHealth pay-for-perfrmance P4P program was implemented in 2008.  At first the program was implmented using a P4P structure for pneumonia and pay-for-reporting for surgical infection prevention (SIP) and transitioning to P4P for both conditions in 2009. The program measures and incentivizes hospital quality for a subset of MassHealth [Massachusetts Medicaid program] patients who are enrolled in plans that directly bill MassHealth.

The Measures

For pneumonia:

• oxygenation assessment,
• blood culture performed in emergency department before first antibiotic received in hospital,
• adult smoking cessation advice and counseling, initial antibiotic received within 6 hours of arrival, and
• appropriate antibiotic selection in immunocompetent patients.

For Surgical Infection Prevention (SIP):

• prophylactic antibiotic within 1 hour of surgical incision,
• appropriate antibioticselection for surgical prophylaxis, and
• prophylactic antibiotic discontinuedwithin 24 hours after surgery end time.

Evaluating Hospital Performance

The MassHealth P4P followed the Hospital VBP Report to Congress. Hospital performance on individual measures is aggregated to create a composite score; this composite score then is used to indicate the share of the bonus paymen that each hospital receives. More information on the Hospital VBP Report to Congress can be found here.

Identification Strategy

“We do not observe the quality of care provided to Medicaid patients in Massachusetts and other states, and instead we observe the quality provided to patients from all payers. Our identification strategy assumes that the financial incentives of the MassHealth program, which are based on quality performance
for only a subset of MassHealth patients, are reflected in the quality of care received by all patients.”

The authors control for:

• Observed and unobserved hospital characteristics which remain fixed over time (i.e., fixed effects)
• A secular trend in quality for each hospital (i.e., using a hospital-specific time trend)
• Hospital case mix measured by a “difficulty index” to identify cases where hospitals choose patients selectively after P4P was implemented
• In one sensitivity analysis, the authors use propensity scoring, nearest neighbor, one-to-one matching without replacement to create a sample of non-Massachusetts hospitals similar to those in Massachusetts. Hospitals were matched based on ownership, nuber of beds, urban/rural status, share of Medicare patients, and share of Medicaid patients.
• The authors also test if hospitals with more Medicaid patients are more likely to have a larger increase in quality.

Evaluating Hospital Performance

The authors find that the MassHealth P4P has little effect on quality. “Estimates from our preferred specification, including hospital fixed effects, trends, and the control for measure completeness, indicate small and nonsignificant program effects for pneumonia (−0.67 percentage points, p>.10) and SIP (−0.12 percentage points, p>.10). ” The result could be due to the fact that P4P has, in actuality, no effect on quality. On the other hand, by using hospital-specific time trends, there may be little variation in quality over time to capture quality improvements after the P4P implementation.

Source

• Ryan, A. M. and Blustein, J. (2011), The Effect of the MassHealth Hospital Pay-for-Performance Program on Quality. Health Services Research, 46: 712–728. doi: 10.1111/j.1475-6773.2010.01224.

LTCHs furnish care to patients with clinically complex problems—such as multiple acute and chronic conditions—who need hospital-level care for relatively extended periods. These facilities can be freestanding or colocated with other hospitals as hospitals within hospitals (HWHs) or satellites. To qualify as an LTCH for Medicare payment, a facility must meet Medicare’s conditions of participation for acute care hospitals and have an average length of stay of greater than 25 days for its Medicare patients. Medicare is the predominant payer for most LTCHs, accounting for about two-thirds of LTCH discharges. In 2009, Medicare spent $4.9 billion on care furnished to roughly 400 LTCHs nationwide. About 116,000 beneficiaries had almost 131,500 LTCH stays.

Nationwide there has been marked growth in both the number and the share of critically ill patients transferred from acute care hospitals to LTCHs. Kahn and colleagues found that, though the overall number of Medicare admissions to acute care hospital ICUs fell 14 percent between 1997 and 2006, the number of Medicare ICU patients discharged to LTCHs almost tripled.

Since October 2002, Medicare has paid LTCHs prospective per discharge rates based primarily on the patient’s diagnosis and the facility’s wage index. Under this prospective payment system (PPS), LTCH payment rates are based on the Medicare severity long-term care diagnosis related group (MS–LTC–DRG) patient classification system, which groups patients based primarily on diagnoses and procedures. MS–LTC–DRGs are the same groups used in the acute inpatient PPS but have relative weights specific to LTCH patients, reflecting the average relative costliness of cases in the group compared with that for the average LTCH case.

Beginning in July 2007, CMS extended the 25 percent rule to apply to all LTCHs. The 25 percent rule limits the percentage of patients who could be admitted to an LTCH from any one referring acute care hospital during a cost-reporting period without being subject to a payment adjustment.

The number of LTCHs increased 6.6 percent between 2008 and 2009, despite a limited moratorium on new LTCHs and new beds in existing LTCHs from July 2007 until December 28, 2012. New LTCHs were able to enter the Medicare program because they met specific exceptions to the moratorium.

Unlike most other health care facilities, LTCHs do not submit quality data to CMS. The Patient Protection and Affordable Care Act of 2010 mandates that CMS implement a pay-for-reporting program for LTCHs by 2014. A panel convened by the Commission to provide input into the development of LTCH quality measures suggested that CMS begin with a starter set of 10 to 12 measures based on those that most LTCHs already use for internal quality monitoring.

• CMS completed its implementation of Medicare severity–diagnosis related groups (MS–DRGs) and cost-based relative weights in FY 2009.
• TMA, Abstinence Education, and QI Programs Extension Act of 2007 (TMA), the Congress mandated payment reductions of 0.6 percent in 2008 and an additional 0.9 percent in 2009 to offset the effects of documentation and coding improvements (DCI) projected by the CMS Office of the Actuary (actual hospitals’ DCI increased payments by 2.5 percent in 2008 and by a cumulative 5.4 percent by 2009)

PPACA (i.e., Health Reform) changes to Medicare’s inpatient prospective payment system (IPPS) for hospitals

Below are six key changes that the PPACA legislation made to hospital payments in the current and future fiscal years.

• PPACA1: Congress mandated a 0.25 percentage point reduction in the payment update for the second half of FY 2010 and for all of FY 2011.
• PPACA2: Congress temporarily expanded (through 2012) the policy providing additional payments to hospitals that have a low volume of Medicare (not all payers) inpatient discharges and are 15 miles or more from the nearest PPS hospital.
• PPACA3: Instituted a new two-year program to provide additional payments to hospitals located in counties with relatively low levels of Medicare spending (age, sex, and gender adjusted, but not health status adjusted)
• PPACA4: PPACA extended for all of FY 2010 the provision in Section 508 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which gave eligible hospitals an opportunity for a one-time reclassification to a different labor market and allowed this change to increase their payments.
• PPACA5: The frontier wage index floor will guarentee that hospitals in Montana, North Dakota, Nevada, South Dakota, and Wyoming will maintain a wage index equal to no less than 1.0.
• PPACA6: Beginning in FY 2011 a rural-floor budget-neutrality adjustment will be applied on a national level, rather than on a state level. CMS estimated that this policy change will increase payments for urban hospitals whose wage index is raised up to the state’s rural level and will decrease payments for other hospitals (including all rural hospitals), which pay for the floor through a budgetneutrality adjustment.

Outpatient

• Rural hospitals with 100 or fewer beds receive hold-harmless outpatient payments through 2011.  Thus, the switch from a cost-based to OPPS payment system will not effect reimbursement negatively for these providers.  In January 2012, the OPPS system is set to be instituted for these providers.

Source: MedPAC’s March 2011 Report to Congress.

Will this trend save or cost Medicare money?

According to MedPAC’s March 2011 report, there are two key reasons for this. The first is a shift in the site of service from inpatient to outpatient units. For instance, many routine surgical procedures can now be conducted in the outpatient setting. This development likely reduces cost per treatment, but may increase costs if individuals are more likely to receive invasive treatments. Alternatively, if physicians are more likely to have an ownership stake in the outpatient facility, surgery rates per diagnosis may increase.

Another reason for the rise in outpatient costs is hospital acquisition of physician practices. Hospitals want to acquire physician practices for two reasons: first, it makes their patients more likely to use their hospital, and second, fees for visits to physicians in hospital-based facilities (consider outpatient) are more lucrative to visits in free-standing facilities. Specifically, “When patients visit a physician office that is part of a hospital’s outpatient department, Medicare pays a facility fee to the hospital and a reduced fee for the physician’s services. The combined fees paid for visits to hospital-based practices are often more than 50 percent greater than rates paid to freestanding practices.”

Thus net effect of the shift to outpatient services, thus, has an ambiguous effect on total Medicare payments.

• Source: MedPAC March 2011 Report to Congress.

To reduce end-of-life tranfers to hospitals from nursing homes, 3 Sacramento-area hospital systems and 18 nursing homes instuted the Preparing Residents for End-of-Life Plans and Respecting Endof-Life Decisions (PREPARED) project.  In the project, the hospital systems provided clinician educators with expertise in end-of-life care to work part of their time each week in nursing homes. The PREPARED intervention included provided advance care planning (ACP) education to patients as well as nursing home staff and administrators.

The study found that the initiative decreased hospitalization rates, increased nursing home as the the site of death, and improved perceptions of quality of care by family members.

How do family members perceive quality of care? The study shows that family members prefer the more intimate setting of a nursing home to a hospital, but this preference is likely conditional on a fixed death date.  By this I mean that if a family knew there loved one would die with certainty on a given date, the nursing home would be the preferred setting. If hospital care could extend the patient’s life, however, (i.e., more realistically not conditioning on death date) then family members may prefer to send their loved one to the hospital even though it is a less intimate setting.  A lot of these preferences may have to do with provider education. Providers who tell family members that their loved one has a chance (albiet small) of recover may be more likely to go the hospital route than those whose providers tell them there is basically no chance of recovery.

Further, most people would rather commit an error of commission than omission.  For instance, by not sending a loved one to the hospital, family members may feel guilt that they didn’t do all they could to save the patient.  However, sending the loved one to the hospital has its own risks (hospital acquired infections, complications, medical errors), but it seems that generally family members feel less guilty about death due hospital-related care.

Thus, although the study shows that family members are more satisfied when their loved one dies in a nursing home compared to a hospital, I do not believe that this is strong evidence of a long-term trend towards less hospitalization of terminally ill patients.

Source: Kathy Glasmire and Kathleen Kerr. Be Prepared: Reducing Nursing Home Transfers Near End of Life. CHCF, March 2011.

1. A failure of employers to agree to “narrow networks” of providers and thus be able to drive down prices
2. The end of the oversupply of hospital beds
3. Provider clout due to name recognition (only for the “have” hospitals, not the have nots.

Further industry consolidation has taken three main forms over the last few years:

1. Multi-hospital chains are buying more hospitals,
2. Hospitals are employing more physicians directly, and
3. Physicians are consolidating into groups.

Physician consolidation is particularly interesting.  Physicians consolidate not only to gain negotiating leverage, but a larger practice allows for physicians to start performing ancillary services such as labs and imaging.