Top 10 Hospital Stories of 2010

1. Healthcare reform. A pitched political battle over passage of healthcare reform dominated the first quarter of 2010. Even after passage, Barack Obama and Democratic leaders have had to keep struggling for public acceptance. Rather than boosting Democrats' prospects in the November elections, the new law seems more likely to be a burden. Americans are still confused about what this sprawling legislation means for them and the law's individual mandate to buy health insurance is being met with stiff opposition.

A stunning upset. The Democrats' reform process began 2010 with good chances for success. The House and Senate had passed differing reform measures and just needed to hash out a compromise. But in January, the supposedly safe seat of the late Massachusetts Democratic Sen. Edward Kennedy, a staunch reform warhorse, went to Republican Scott Brown — an opponent of reform. Stripped of their 60-vote Senate majority against a Republican-led filibuster, Democrats had to push their reforms through using the controversial legislative tactic of reconciliation.

Public distaste for insurers. In the final month of debate, public distaste of the insurance industry was a key factor in winning over moderates. When Anthem Blue Cross proposed California rate increase in February of as much as 39 percent, President Obama used it to rally support for the beleaguered bill. Polls show the public roundly dislikes insurance practices such as denial of coverage due to preexisting conditions, which the reforms stop.

Passage doesn’t stop opposition.
When President Obama signed the Patient Protection and Affordable Care Act into law on March 23, opposition to the reforms did not fade away, as Democrats had predicted. About 20 states have filed lawsuits against the individual mandate and seven states are also suing to overturn the whole law as unconstitutional. Six months after passage, almost half of the public still has reservations about healthcare reform. The Kaiser Health Tracking Poll released in late August showed support for the new law dropped seven percentage points during that month to 43 percent, while opposition rose 10 points to 45 percent. It was the weakest showing for the law in Kaiser polls since May.

The drive for repeal. A big defeat for Democrats in the November elections would weaken President Obama's reform package. While President Obama would likely veto any attempt to repeal the law, if he were voted out of office in 2012, key pieces of the bill could be repealed before even being implemented. The individual mandate, the ban on denial of insurance due to preexisting conditions and expansion of coverage to 32 million more Americans are due to take effect in 2014.

2. Integrating healthcare delivery. Even if the healthcare reform law should fade away, its call for integrated healthcare would probably continue to be a powerful draw. It's worth noting that managed care rose out of the ashes of the failed Clinton healthcare reform bill in 1993 and revolutionized the industry. Even before the new reform law unveiled accountable care organizations, hospitals were moving toward something like it. Everyone has been looking for a way to achieve the efficiencies of HMOs in their 1990s heyday while still preserving quality and choice.

Preparing for ACOs. HHS' proposed rules on ACOs are due at the end of the year, and payments to ACOs will start Jan. 1, 2012. Meanwhile, private insurers such as Blue Cross Blue Shield of Massachusetts are implementing similar payment strategies in small programs or pilots. The private-based groundswell for ACOs suggests this approach will rise even if the healthcare reform law is repealed. The hope is that coordination of care can slow down double-digit yearly rises in healthcare costs. Those who don’t join ACOs will face other forces pushing them in the same direction, such as disincentives for readmissions, use of bundled payments and medical homes and reduced hospital reimbursements.

Learning from HMOs' mistakes.
ACOs are said to be the next step in managed care, minus all the problems that brought down capitated arrangements in the late 1990s. Like HMOs, ACOs still focus on primary care but they have gotten rid of the bossy "gatekeeper," whose approval was needed to see a specialist. And while capitation ended up bankrupting many providers, ACOs offer a financial safety net by paying providers fee-for-service payments plus bonus payments for savings they realize. Also, ACOs place a greater emphasis on quality than capitation ever did and, to boost effectiveness, rely heavily on healthcare IT, which was still in its infancy in the 1990s.

Hospitals buy up practices. In preparation for ACOs and other integrated approaches, hospitals have been eagerly buying up physician practices. The medical profession has been glad to help. A new generation of physicians prefers employment status and lots of their older colleagues are running to hospitals for cover from falling reimbursements and the bad economy. Cardiology groups in particular are moving fast to employed status. In the past, hospitals focused on buying primary care physicians, but now they are also particularly interested in cardiac surgeons, orthopedic surgeons, general surgeons and neurosurgeons.

3. RACS get rolling. Medicare's four regional recovery audit contractors started their work in 2009 with automated reviews not requiring hospitals to submit medical records. In the first quarter of 2010, RACs denied a total of $2.47 million in Medicare claims, according to the AHA's RACTrac Survey of 653 hospitals. Even though RACs are limited to requesting no more than 200 records every 45 days, the volume of requests could put a strain on hospitals. Every request requires clinical notes, completed forms, bills, lab results and other documents be pulled and reviewed.

Audits heated up this summer. This summer, RACs were allowed to begin performing medical necessity audits, which accounted for 40 percent of all improper payments identified in the three-year RAC demonstration project. Such audits can erase much of the payment for an admission, leaving behind only some billing for Part B ancillary services. In early August, the CMS New Issue Review Board approved RAC audits for 18 types of inpatient hospital claims and one type of durable medical equipment claim. By the end of August, contractors in regions B, C and D had issued lists of claims for medical necessity reviews.

Scrutiny moving beyond Medicare.
In 2011, RACs will move beyond Medicare in an expansion ordered by the healthcare reform law. Medicaid, Medicare Part C (Medicare Advantage plans) and Medicare Part D (prescription drug plans) have to employ RACs by Dec. 31, 2010. Under the Medicaid RAC program, each state Medicaid agency is required to contract with a contractor in programs that will be separate from the current Medicaid integrity programs.

4. For-profits buy up hospitals. It is no accident that the two biggest healthcare purchases this year were announced within a few days of signing the healthcare reform law. And it is no surprise that both of the buyers were for-profit, investor-owned organizations with easy access to capital. Vanguard Health Systems announced plans to buy eight-hospital Detroit Medical Center, Michigan's largest healthcare system, for $1.4 billion while Cerberus Capital Management, a New York private equity firm, bid for Caritas Christi Health Care, a six-hospital system in the Boston area, for $830 million. Analysts noted the reform law, with its expanded healthcare coverage, made these two struggling systems, each with a high percentage of uninsured patients, attractive acquisitions for private investors.

Hospital sales on the rebound. Hospital acquisitions, which had been in the doldrums for a few years, are perking up. Avondale Partners reports the value of hospital acquisitions, based on revenues, was about $2.4 billion last year, but this year acquisitions are shaping up to total more than $6 billion. Sellers have been bringing down their asking price 0.9 times annual revenues in 2007-2008 to about 0.5-0.6 times revenues in sales this year, Avondale reports. These hospitals are hungry for capital to keep them competitive, but loans with reasonable rates are much harder to get in the recession. Add these changes to the healthcare reform law, which "moved sellers off the fence by providing some clarity about the future landscape," according to Kemp Dolliver at Avondale. Mr. Doliver predicts for-profits have enough pent up demand for this upsurge in activity to last a couple of years.

5. Ban on physician-owned hospitals.
The twists and turns in the passage of healthcare reform in the first quarter of 2010 were an emotional roller coaster for physician-owned hospitals. If the reforms had failed, which seemed quite likely at a few points, the sector would have been saved, but the final law is quite brutal. It bars existing facilities from expanding and new facilities from opening. Some 260 existing facilities cannot add ORs or patients beds or increase the percentage of physician ownership. New projects had to step up the pace of construction or close down. Industry lobbyists did manage to push back a ban on new construction from a retroactive date in the House bill to the end of 2010. But the damage is quite extensive. Two months after the law was passed, ongoing construction on 27 new physician-owned hospitals had stopped.

Alternatives discussed. Planners also began discussing alternative ways to open physician-owned hospitals. These included switching to a non-profit foundation, selling to non-physician investors, allowing physicians to operate under a management agreement and allowing them to own the real estate and not the hospital. Some even considered serving just private payors and self-pay patients, thus avoiding the threat of losing Medicare and Medicaid reimbursements if they opened.

6. Physician fee cuts. Congress' automatic cuts in Medicare physician fees, set 13 years ago, came home to roost in 2010, as the House and Senate blundered through three short-term fee fixes, reimbursements were postponed and many physicians had to lost faith in Medicare. Congress had temporarily delayed the cuts every year since 1997, but amount of the cut continued to accumulate, so that by 2010 it added up to more than 21.3 percent.

Deal with AMA goes sour. In negotiations for the healthcare reform law in late 2009, Congressional Democrats apparently assured the AMA the automatic fee cuts would be permanently abolished. However, since abolishment would cost a whopping $250 billion in lost revenue — on paper, at least — and Democrats wanted a revenue-neutral bill, the fee fix was removed from healthcare reform. The House passed a separate fee fix. Senate Democrats removed a modest one-year fee-fix from their reform bill but never passed a separate fee fix due to the cost.

Constant state of crisis. Over the first half of the year, the threat of Medicare fee cuts created an almost constant state of crisis. In late Dec. 2009, with a permanent fee fix still out of reach and just days to go before Congress' 2008 fee fix was to expire, House and Senate passed a shorter two-month fee fix in hopes of hashing out a permanent solution in that time. But as the March 1 onset of a new fee cut loomed and Congress still hadn't passed healthcare reform, it stalled for time and passed a one-month fee fix. The fix came a few days late, forcing CMS to freeze payments. CMS had to do this again on April 1, but this time the freeze lasted for 15 days before Congress passed yet another temporary extension, this time for two months.

Fixes delayed longer. In mid-May, House and Senate leaders discussed legislation to provide stable Medicare updates through 2014, but the idea was withdrawn when they couldn’t find the votes. When the temporary fix ended on June 1, Congress was totally unprepared to act. This time CMS could not hold back payments long enough and actually had to start paying claims with the 21.3 percent cut on June 17. A week later, Senate and House finally passed a six-month fee fix that postponed the problem until after the November elections. The cut was replaced with a 2.2 percent increase.

Impact on physicians. Some practices dependent on Medicare had to take out loans to cover the delay in reimbursements and some physicians began pulling back from Medicare. The AMA reported 17 percent of surveyed physicians said they would restrict the number of Medicare patients in their practice. The current fee fix runs out at the end of November, after the elections. How long the next fee fix will last is anybody's guess.

7. Hospital quality reporting. This year hospitals are reporting 46 quality measures involving process of care, clinical outcomes and patient satisfaction. CMS reports 99 percent of hospitals participated in the reporting program and 97 percent received compliance bonuses as of 2009. In July, CMS expanded its Hospital Compare website to include new measures related to outpatient care. The website, which provides selected information reported by each hospital, debuted five years ago. In April, CMS announced plans to introduce financial penalties and add 10 more measures.

Future plans. CMS will cut payments to hospitals with high readmission rates as of Oct. 2012 and cut pay by 1 percent to hospitals with the highest rates of healthcare-associated conditions starting Oct. 2014. In addition the new Center for Medicare and Medicaid Innovation will experiment with different care payment mechanisms to tackle priorities such as reducing readmissions and improving chronic care management. Meanwhile, the reform law has big plans for quality reporting. Beginning in 2012, payments to hospitals will be based on their scores rather than on simply reporting results. And in 2015, CMS will start reporting each hospital's scores and reduce payments by 1 percent to hospitals with the highest rate of medical errors and infections.

8. The war against healthcare fraud. The federal government has been beefing up operations to combat Medicare and Medicaid false claims and fraud by healthcare providers in the past two years. In May 2009 the Justice Department and HHS announced the creation of the Health Care Fraud Prevention and Enforcement Action Team. In Aug. 2010, the Labor Department had increased its staff of wage-and-hour investigators by one-third to investigate pay practices throughout the healthcare industry, following the revelation that many hospitals do not pay sufficient overtime.

Reform law adds to push. The healthcare reform law provides $300 million in funding for fraud investigation and enforcement by over the next 10 years. Some states also got involved in the investigating. North Carolina expects to recover tens of millions dollars a year in fraudulent Medicaid claims by hiring a contractor to sift through electronic submissions.

9. Big boost for healthcare IT. No one seems to disagree that healthcare IT, especially installation of an electronic medical record, reduces errors and makes hospitals more efficient. But many hospitals and practices still shy away from IT because it is costly and can be disruptive, and federal guidelines have turned out to be daunting. Even the prospect of generous federal incentive payments has not brought most hospitals and practices from the sidelines.

Incentive payments. Beginning in 2011 and lasting for the next six years, the federal government will offer $34 billion in incentives for healthcare IT to hospitals and practices, but not to ASCs and other healthcare facilities. Healthcare IT systems will have to conform with "meaningful use" criteria. The original proposed standards for meaningful use, released at the end of 2009, proved to be so demanding that even many IT-savvy institutions, like Partners HealthCare, Kaiser Permanente and Intermountain Healthcare, said they would be hard to meet. With its final "meaningful use" criteria, released this August, HHS has relented somewhat, allowing more time for providers to phase in the guidelines.

A long way to go. Studies have shown the vast majority of hospitals and practices haven’t even started the process. For example, a study this August in Health Affairs found the number of hospitals that had adopted an EHR system rose only slightly from 8.7 percent to 11.9 percent from 2008 to 2009, and only 2 percent of the hospitals had IT systems that would to meet meaningful use criteria.

10. Don Berwick arrives at CMS. Donald Berwick, MD, was nominated to head CMS in April but never went through confirmation hearings and finally took office on July 6 as a recess appointment. As former president and CEO of the Institute for Healthcare Improvement, Dr. Berwick holds an enormous amount of good will within the hospital community. Virtually all the national hospital organizations endorsed his nomination. But his controversial statements on rationing healthcare and his past enthusiasm for Britain's nationalized healthcare system also make him a controversial figure.

The face of reform. Dr. Berwick, with his career-long emphasis on process improvement and thinking up new ways of healthcare delivery, is a strong promoter of the healthcare reform law. He has declined media interview requests and has kept a low public profile, but he is said to be reveling in his new job. He has been personally involved in writing proposed regulations on accountable care organizations and picking test sites for new healthcare strategies. "This agency has just won my heart," he said in a CMS video.

Appointment ends before 2012. Dr. Berwick's recess appointment expires at the end of 2011. Unless he can win over some GOP senators who oppose him, he won’t be able to win a 60-vote confirmation in the Senate and would be forced to leave office. Dr. Berwick recently rebuffed a request from Iowa Senator Chuck Grassley, the ranking Senate Finance Committee Republican, for a list of Institute for Healthcare Improvement’s large financial donors. Sen. Grassley said the lack of a confirmation hearing has prevented the public from learning of Berwick’s potential conflicts of interest.

Contact Leigh Page at leigh@beckersasc.com.


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