The 12 “Biggest” Hospital Stories of 2012

2012 has been quite a year for healthcare and for hospitals. During the last 12 months, the Supreme Court upheld President Obama’s signature healthcare reform legislation and several of its provisions that most impact hospitals went into effect. These changes, as well as a host of other forces, including reimbursement pressures and growing demands upon providers, have caused providers to take a hard look at our country’s healthcare delivery system and begin to take steps toward some sort of change. While there is no crystal ball that allows us to see what healthcare delivery will look like 20 years down the road, one thing is for certain: 2012 was certainly a year that will be remembered as a year of significant change. Here is a look back at the biggest hospital-industry stories this year.

1. Supreme Court upholds healthcare reform. In what was perhaps the biggest story in healthcare this year, the Supreme Court upheld the Patient Protection and Affordable Care Act as constitutional in a 5-4 vote in June. Chief Justice John Roberts joined with Justices Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor in the majority.

The most controversial part of the PPACA, the individual mandate, was upheld in the decision, under Congress’ power to lay and collect taxes, Chief Justice Robert explained in the decision.

The Medicaid expansion provision was limited, but not invalidated, by the decision. The majority stated that Congress cannot penalize states that choose to not participate in Medicaid expansion, therefore making it optional for states to participate.

Because the PPACA was upheld by the Supreme Court, the bill’s provisions continued to go into effect in 2012. Eleven provisions of the PPACA went into effect this year, most of which directly affect hospital and healthcare providers.

Six provisions of the act went into effect Jan. 1, several of which apply to hospitals and healthcare providers. Medicare launched three separate programs for accountable care organizations, and there are now more than 160 Medicare ACOs. Medicare advantage plan payments that provide bonus payments to high-quality plans also began. Procedures for screening, oversight and reporting for providers that participate in Medicare, Medicaid and CHIP were established under the fraud and abuse prevention provision. The Medicare Independence at Home demonstration and Medicaid payment demonstration projects also started at the beginning of the year, as did annual fees on the pharmaceutical industry.

In March, data collection to reduce healthcare disparities went into effect. This provision requires providers to enhance collection and reporting of data on race, ethnicity, sex, primary language, disability status and underserved rural populations.

Two provisions took effect in October. Medicare value-based purchasing began, which established a value-based purchasing program to pay hospitals based on performance on quality measures, and requires plans to be developed to implement value-based purchasing programs for skilled nursing facilities, home health agencies and ambulatory surgery centers. Also in October, reduced Medicare payments for excessive hospital readmissions began.

During 2013, 15 more provisions of the PPACA are set to go into effect.

2. 2012 presidential election puts Medicare, healthcare in spotlight. This past year has been rife with partisan battles over healthcare, especially battles centered on President Barack Obama’s sweeping healthcare reform legislation, the Patient Protection and Affordable Care Act. This comes as no surprise since 2012 is a presidential election year — and a year full of healthcare reform that included more work toward accountable care organizations, health insurance exchanges, Medicare readmissions programs and more.

At the Republican National Convention in Tampa, Fla., in late August, the Republican Party adopted its official platform, and it included several main points related to healthcare. The drumbeat sounded by Mitt Romney, Paul Ryan and other GOP leaders was that if the GOP took the White House in November, it would repeal the PPACA. Republican leaders also said they would transition Medicare to a premium-support model, increase the Medicare eligibility age, institute block grants for Medicaid and more.

At the Democratic National Convention, President Obama, Vice President Joe Biden, former President Bill Clinton and others touted the PPACA and the successful reforms it has brought and will bring. Democratic leaders said they will continue to solidify the Medicare and Medicaid programs through provider-based reforms and expansion of health coverage. Democrats also lauded President Obama for leading the “most successful crackdown on healthcare fraud ever,” as $100 billion from fraudulent healthcare schemes has been recovered under his administration, and for continuing to put women’s health at the forefront.

When it comes to healthcare, though, the 2012 election cycle focused on Medicare more than any other program. As the single-largest payor in the United States, and one that many hospitals rely on, both sides of the aisle have vowed to keep the best interests of Medicare beneficiaries in mind while making the program more “solvent” for future generations. As of press time, the results of the election had not been finalized, but this upcoming year will be telling if the nation’s political leaders follow through on Medicare reforms — ranging from shared savings programs to lowering the cost of Medicare cases — both for beneficiaries and healthcare providers.

3. U.S. healthcare costs continue to rise, while Medicare funding hits brick wall. If there was one certainty for hospitals and healthcare organizations in 2012, it was that the cost of healthcare continued to rise. In June, CMS released its report on national healthcare expenditures, and the report noted that national healthcare expenditures grew 3.9 percent in 2011, a relatively modest growth rate amidst a sluggish economy. The total NHE figure was $2.7 trillion, which was roughly 18 percent of gross domestic product.

In 2011, Congress and President Barack Obama also tried to finalize a deal on how to reduce the nation’s mounting debt, but the so-called “supercommittee” failed to reach a bipartisan consensus on a deficit deal. The result of those failed negotiations was the Budget Control Act of 2011, which essentially said all government agencies — including Medicare — would be subjected to sequestration starting in 2013 unless Congress can figure out a new deal. In September, the White House’s Office of Management and Budget unveiled how those sequestration cuts would impact healthcare providers. Starting January 2013, hospitals and other providers would lose roughly $11.1 billion in Medicare payments due to sequestration, and the National Institutes of Health would have to “halt or curtail” most of its major scientific research projects. This came amidst the annual report from the Medicare Board of Trustees, which estimated the hospital trust fund — or Medicare Part A — has an insolvency date of 2024.

Sequestration was not the only damper on Medicare rates for healthcare providers. The sustainable growth rate, which is the formula used to determine Medicare physician payments, also caused a stir at the beginning of the year after Congress couldn’t agree to a permanent fix. In February, President Obama finally signed the Middle Class Tax Relief and Job Creation Act of 2012, which kept Medicare physician payment rates at their current rate through Dec. 31, 2012. Physicians would’ve incurred payment cuts of 27.4 percent without the temporary fix, which will cost roughly $18 billion over 10 years. To account for those costs, Congress created several other provisions in the Middle Class Tax Relief and Job Creation Act of 2012. For example, hospitals’ and skilled nursing facilities’ bad debt reimbursement rates from Medicare were reduced from 70 percent to 65 percent, starting in FY 2013, and starting in FY 2021, Medicaid disproportionate share hospital payments will be rebased, which will cut funds by $4.1 billion. A permanent SGR fix will now cost roughly $245 billion, according to the Congressional Budget Office.

Medicare and Medicaid funding will always be a major issue for hospitals and healthcare providers, and 2012 proved to be an especially hectic year. As healthcare reform and other healthcare issues continue to rise to the top of the national dialogue, providers are increasingly monitoring the situation as new reimbursement and funding initiatives are directly impacting their bottom lines and financial livelihoods.

4. Readmissions and “value” now impact reimbursement. Under the Patient Protection and Affordable Care Act’s Readmissions Reduction Program, which began Oct. 1, hospitals are penalized for high readmission rates for heart attack, heart failure and pneumonia. The first year’s penalties will range from 0.01 percent to 1 percent of base Medicare reimbursements. Beginning in October 2013, the maximum penalty will increase to 2 percent.

A report released in September by the Medicare Payment Advisory Commission found that 67 percent of hospitals will be penalized for high readmission rates, 9 percent of which will face the maximum 1 percent penalty. Analysis by Kaiser Health News found the penalties will cost hospitals a total of $280 million in Medicare funds. Shortly after this rule took effect, CMS issued a notice admitting to a technical error that will cause an average 0.02 percent change in readmission penalties. Due to the error, 1,422 hospitals will lose more money than previously expected and 55 hospitals will lose less money, according to a Kaiser Health News analysis.

To avoid Medicare cuts and improve the health of their communities, hospitals are scrambling to develop strategies to prevent readmissions. Hospitals are leveraging health IT, partnering with post-acute care providers and educating patients more thoroughly at discharge.

In addition to readmissions, hospitals are also focusing more on the patient experience and patient satisfaction, as scores on the Hospital Consumer Assessment of Healthcare Providers and Systems survey will be one of the contributing factors to value-based purchasing payments, which took effect Oct. 1. Under VBP, hospitals’ diagnosis-related group payments from Medicare will be reduced 1 percent to create a pool of incentive payments. Hospitals that meet clinical and HCAHPS measures will receive a portion of the incentive payments.

5. Hospitals take on more financial risk. The shift from a fee-for-service payment model to pay-for-performance is leading hospitals to take on increasing amounts of risk. In the future, it’s expected that payments will not be tied to volume, but rather to outcomes and value. In an effort to prepare for this, many hospitals are beginning to take on some level of risk and hope to profit financially from doing so. Generally, the higher percentage of payment hospitals risk on performance scores, the greater the potential reward.

One of the ways hospitals are beginning to test the waters of risk is through accountable care organizations. The Medicare accountable care organization model has two tracks, each with different levels of risk. Medicare ACOs in the shared savings only track have the potential to earn up to 50 percent of the amount saved by reducing its Medicare expenditures. In contrast, Medicare ACOs in the shared savings/losses track can receive up to 60 percent of the savings. Medicare ACOs only involve some risk, however, as providers will continue to be paid under the fee-for-service system. Commercial ACOs function similarly, but can use a different non-incentive-based payment system besides the fee-for-service system to complement the incentive payments.

Another model of risk is bundled payments, which give a lump sum payment for an episode of care, and the payments are then distributed to the providers who were involved in the episode of care. Under this model, hospitals can standardize protocols to drive higher quality and lower cost to net a greater amount of the bundled payment. While the model presents an opportunity to lower costs, it also puts the hospital at risk for other providers’ actions. If one member of the team does not follow through and payments are reduced, everyone, including the hospital, suffers.

Hospitals are also taking on risk by offering health insurance products. More hospitals are exploring offering their own insurance, and others are entering into agreements with traditional insurers to offer some variety of value-based insurance product. For example, in September, California-based Sutter Health applied for a license to form a health maintenance organization catering to small and midsize employers.

One option for hospitals interested in taking on risk as a health insurer is participating in a consumer-operated and oriented plan program, or COOP, a program under the PPACA. A CO-OP is a consumer-governed, non-profit health insurer that is designed to align physicians and hospitals under the same health plan. Recently, Boston-based Tufts Medical Center, its physician network called the New England Quality Care Alliance and Nashville, Tenn.-based Vanguard Health Systems partnered to create a CO-OP called the Minuteman Health Initiative. They received an $88.5 million CO-OP loan from CMS to fund this initiative.

6. Accountable care organizations continue to grow. In 2011, many organizations began laying the groundwork to supply populations with accountable care. In 2012, accountable care organizations grew in number and popularity through the three core Medicare ACO models and commercial ACOs.

In December 2011, 32 organizations were accepted into the Pioneer ACO Model with their performance period beginning in January. The Pioneer program was designed for organizations already experienced in coordinating care across settings. In April, CMS named the first Medicare Shared Savings Program ACOs. Twenty-seven ACOs were accepted into the program, and their first performance period began April 1. CMS added 88 more Shared Savings ACOs in July, and that group’s performance period started July 1.

The first group of 20 Advanced Payment ACOs was also announced in April. The Advanced Payment Model is designed specifically for physicianbased and rural providers that are participating in the Shared Savings Program. Under this model, participants receive upfront and monthly payments to use as investments in their care coordination infrastructure.

CMS also announced that applications for organizations to become Medicare ACOs would be accepted every year moving forward. The 2013 applications were accepted through September.

Major commercial payors, such as Blue Cross Blue Shield, Cigna and Aetna, have formed commercial ACOs this year as well. In fact, Cigna has announced that the company is on pace to create 100 ACOs by 2014 and bring accountable care to 1 million customers.

Because ACOs are so new, it is not yet clear if this model of care will be successful in the long run. But for now, many hospitals, health systems and payors are embracing the change.

7. The government continues its focus on fraud-fighting efforts. The Obama administration’s concentrated focus on healthcare fraud prevention spurred some milestones in the past year. In April, the administration announced that HHS and the Department of Justice recovered more than $4 billion in healthcare fraud judgments in fiscal year 2011 — an all-time high. In May, federal authorities charged 107 people nationwide for their alleged participation in a $452 million Medicare fraud scheme. The takedown marked the highest amount of false Medicare billings in a single fraud bust in the three-year history of the multi-agency Medicare Fraud Strike Force. In July, the administration announced an innovative partnership with private insurance companies, including Humana, UnitedHealth Group and WellPoint, to track medical claims in real time and better identify suspicious billing patterns.

Although fraud prevention is an inarguably important pursuit that garners support on both sides of the political spectrum, some healthcare providers have found certain fraud-fighting tactics burdensome. For instance, the PPACA includes a provision called “Credible Allegation of Fraud,” which authorizes states to halt Medicaid payments if fraud allegations have a reasonable sign of reliability. By July, the Office of Inspector General had placed payment holds on 88 providers from the beginning of the year. Physicians affected by the hold said the Medicaid freeze brought their practices to a sudden halt, and the strategy allowed them too little due process.

The breadth and financial gains of Medicare recovery audits grew this past year, as well. In the first quarter of fiscal year 2012, Medicare Recovery Audit Contractors took back $397.8 million in overpayments. That is roughly half the amount RACs collected in all of fiscal year 2011 ($797.4 million). Hospitals also reported greater scope and frequency of Medicare RACs in 2012: About 87 percent of hospitals experienced RAC activity in the first quarter of 2012 alone. Hospitals also reported an increase in the number of medical record requests from Medicare RACs — an increase from roughly 306,350 in third quarter 2011 to 447,520 in first quarter 2012.

States were also required to contract with one or more Medicaid RACs to review Medicaid claims by the beginning of 2012. There have not been substantial progress reports from the program given its relative youth, but the government expects Medicaid RACs to save $2.1 billion over five years.

8. More scrutiny — both federal and public — about the necessity of care. In September, the Department of Justice and CMS sent notices to hospitals across the country, encouraging them to self-audit and determine if they had improperly billed Medicare for implantable cardioverter defibrillators that did not meet medical coverage standards. The devices, which regulate irregular heart rhythms, cost approximately $40,000 each.

The agencies shared the ICD Investigation Medical Review Guidelines/Resolution Model, which contains six categories of circumstances under which ICDs can be implanted in Medicare patients and receive reimbursement. The DOJ will evaluate each hospital’s situation individually to determine damage multipliers and penalties, which are influenced by the existence or level of patient harm, the hospital’s patterns of billing, compliance efforts and evidence of hospital knowledge. Hospitals and physicians may face significant penalties under the investigation: Under the False Claims Act, the DOJ can collect triple the amount of monetary damages for unnecessary surgeries.

Aside from the federal agencies’ call for self-audits, the press played a role in discussions about necessity of care in 2012. The New York Times made waves with two lengthy investigative reports in August 2012, both focused on Nashville, Tenn.-based Hospital Corporation of America. The first report questioned the for-profit hospital chain’s cardiac care while the second scrutinized its emergency departments. For the former, the Times obtained an internal HCA memo regarding results of the company’s 2010 internal investigation, which found roughly half of 1,200 cardiac procedures performed were on patients without significant heart disease.

9. Merger and acquisition activity among hospitals and health systems remains very active. Lower reimbursement rates, increasing operating costs related to compliance, technology, physician employment and movement toward accountable care models acted as drivers for continued consolidation in 2012. A variety of deals were announced and finalized, ranging from full-ownership acquisitions to joint ventures and affiliations with little ownership change for the participating hospitals. Some of the most notable deals involved large health systems and multiple hospitals.

In January, Jewish Hospital & St. Mary’s HealthCare in Louisville, Ky., and Saint Joseph Health System in Lexington, Ky. — which is owned by Englewood, Colo.-based Catholic Health Initiatives — announced a merger to form KentuckyOne Health. The merger originally included University Hospital in Louisville, but Kentucky Governor Steve Beshear rejected the proposed three-way deal because it would have combined a public safetynet hospital with a Catholic healthcare company.

In early June, NYU Langone Medical Center and Continuum Health Partners, both based in New York City, announced a potential merger. However, talks broke down abruptly when New York City-based Mount Sinai Medical Center offered Continuum Health a competing offer a few weeks later. No matter which organization Continuum Health chooses to partner with, it will form one of the largest healthcare organizations in New York City.

In August, Milwaukee-based Aurora Health Care and Franklin, Tenn.- based IASIS Healthcare announced a partnership, which includes clinical affiliations and the formation of a joint venture — Aurora IASIS Health Partners. Englewood, Colo.-based Catholic Health Initiatives and Vancouver, Wash.-based PeaceHealth signed a nonbinding letter of intent to create a regional healthcare system in August as well.

In September, Yale-New Haven (Conn.) Hospital acquired the assets of Hospital of Saint Raphael in New Haven, which culminated more than a year of planning and regulatory approvals, and Boston-based Steward Health Care System completed the acquisition of New England Sinai Hospital in Stoughton, Mass.

10. Heightened antitrust regulation and interference. As more hospitals and health systems continued to affiliate or merge in 2012, the Federal Trade Commission dug in its heels and kept close watch for potential antitrust concerns. In March, FTC Chairman Jon Leibowitz said challenging hospital mergers was one way for the agency to control healthcare costs by preventing oversaturated markets and higher prices. However, the FTC’s aggressive and pronounced stance toward hospital mergers and acquisitions has befuddled some healthcare providers. Many say the healthcare reform law promotes collaboration and consolidation, as these relationships can lead to better cost efficiency, and the FTC is working against the law.

The past year brought two major antitrust cases between hospitals and the FTC, both of which serve as interesting case studies for future hospital consolidation in a highly regulated environment. In April, the FTC ordered Toledo, Ohio-based ProMedica Health System to divest St. Luke’s Hospital in Maumee, Ohio, ruling that the merger would lessen competition in the area and would likely result in higher prices. ProMedica and St. Luke’s announced in April that they plan to appeal the FTC’s decision.

The second major dispute involves Phoebe Putney Health System’s acquisition of Palmyra Medical Center, both located in Albany, Ga. The FTC filed suit in April 2011 to block Phoebe Putney’s acquisition, which was structured through an arranged $1-per-year lease with the system’s owner, Hospital Authority of Albany-Dougherty County. The FTC claimed the transaction would create a monopoly in the region, raising prices for healthcare services while reducing competition. A federal judge sided with Phoebe Putney in June 2011, and an appeals court upheld that decision in December. The case is now headed for the Supreme Court.

11. Stage 2 final rule for meaningful use released. At the end of August, CMS released the final rule for stage 2 of the Medicare and Medicaid Electronic Health Record Incentive Programs. Starting in 2014, hospitals and healthcare providers must attest to the requirements to qualify for incentive payments under the program.

The structure of the core and menu objectives for stage 2 is similar to stage 1. The biggest difference is the focus. Stage 1 set basic functionalities hospital EHRs must have, such as capturing data electronically and providing patients with electronic copies of health information. Stage 2 emphasizes health information exchange between providers and promotes patient engagement by requiring providers to give patients secure online access to their health information. According to HHS Secretary Kathleen Sebelius, these changes intend to lead the healthcare industry to more coordinated patient care, reduced medical errors and greater patient engagement.

In stage 2, hospitals and providers must provide 5 percent of patients with online access to health information as well as secure messaging between patients and providers. CMS hopes these new objectives will encourage patient engagement. Hospitals and providers must also send a summary of care record for 50 percent of transitions of care and referrals to another provider, as well as electronically submit a summary of care for more than 10 percent of transitions of care and referrals. This summary of care must be sent to a provider with EHR technology designed by a different EHR vendor. These requirements intend to spur commitment to electronic exchange.

Other differences in stage 2 compared to stage 1 include a process by which providers may submit clinical quality measures electronically, reducing the associated burden of reporting on quality measures. A payment adjustment exception was also added for specialty physicians in anesthesiology, radiology and pathology.

Overall, response to the final rule has generally been positive, but some of the organizations that submitted comments on the proposed requirements, such as the American Hospital Association, are still concerned. The AHA believes the final rule has set an unrealistic date — Oct. 1, 2014 — by which hospitals must achieve initial meaningful use requirements or incur a 1 percent penalty. The AHA also contends that CMS has complicated the reporting of clinical quality measures, creating new burdens for healthcare providers.

12. The beginning of meaningful use and HIPAA audits. In July, CMS announced it hired the accounting firm Figliozzi & Company of Garden City, N.Y., to audit Medicare providers and dual-eligible participants in Medicare and Medicaid that had received federal incentive payments for electronic health records. Those providers who will be audited will receive a letter and have two weeks to provide the proper documentation.

If audited, physicians and hospitals must provide four types of documentation to support meaningful use attestation: documentation from the Office of the National Coordinator for Health IT that shows the provider used a certified EHR system for MU attestation; information about the method used to report emergency department admissions; documentation that the provider has completed attestation for the core set of MU criteria; and documentation that the provider has completed attestation for the required number of MU objectives.

In June, HHS selected KPMG to conduct HIPAA audits on 150 covered entities before the end of 2012 as part of a pilot program. These audits will require a site visit, which will involve interviews with hospital leadership, an examination of hospital operations and observations of compliance with regulatory requirements. If a hospital is not selected for an audit under the pilot program before the end of December, they may still be subject to future HIPAA audits under the expanded program, making it a matter of when not if hospitals may be selected for an audit. While HIT-related audits are just beginning to impact hospitals, they are yet another sign of the government’s increased regulatory interest in hospitals and health systems across the nation.

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