Healthcare Reform & You

The Patient Protection and Affordable Care Act of 2010 (PPACA), frequently referred to as “Healthcare Reform”, promises to impact the financial operations of healthcare provider organizations in a number of different ways.

  • Some Healthcare Reform issues will increase revenue and profits for healthcare organizations
  • Other Healthcare Reform issues will result in reduced reimbursements for healthcare organizations
  • Several Healthcare Reform issues will have either a positive or negative financial impact, all depending on how the healthcare organization responds
    With other Healthcare Reform issues, it is too early to project the financial impact (i.e. Accountable Care Organizations)

Two financial issues that healthcare provider organization executives will need to consider are Coverage Expansion and Reimbursement Changes

Coverage Expansion

Healthcare Reform will result in a significant reduction in the size of the uninsured population.  However, provider organizations have no control over this change but must respond appropriately to efficiently manage this new population mix.

1. Presently some uninsured are receiving care, but providers are not being compensated.  This relationship will change as providers will receive some compensation for care they would have otherwise provided and not received any reimbursement.

  • Current patient volume will shift away from uninsured to Medicaid and Healthcare Insurance Exchanges (HIE)
  • Legislation does not impact Medicare volume
  • CBO projects a 58% reduction in uninsured population in 2019
  • Most significant impact begins in 2014 and continues in perpetuity

2. There are also uninsured who are not presently receiving any type of care.  Many of these people will now have insurance and will receive care they would have otherwise forgone.  Providers will receive reimbursement for this care, but not at the levels of private insurance.

  • These new patients will likely not utilize healthcare services at the same high rate as those currently with private pay insurance
  • Fully burdened cost of care for new patients may exceed net revenue
  • However, the incremental contribution margin will likely be favorable because direct variable costs are relatively low (estimate 25%)

Reimbursement Changes

Many of these Healthcare Reform issues are outside the control of provider organizations; however, other issues can be influenced by a direct response by the organization to a particular Health Reform issue.

1. Medicare Market Basket adjustments will be reduced each year between 2010 – 2019

  • Reductions to the Medicare Market Basket will be based on a specific fixed amount each year
  • Beginning in 2012, additional Market Basket reductions will be based on a variable impact calculated every year
  • The Congressional Business Office (CBO) projects $156.6B in Market Basket cuts over the 10 year period – about 2/3rds will impact hospitals directly

2. Disproportionate Share (DSH) reimbursements will be reduced each year between 2010 – 2019 (DSH – hospitals that serve a disproportionate share of Medicare and Medicaid beneficiaries)

  • Medicaid: DSH payment cuts begin in 2014 and have a total cumulative effect of $14.0B payment reduction by 2019
  • Medicare: DSH payment cuts begin in 2015 and have a total cumulative effect of $22.1B payment reduction by 2019

3. Reduced reimbursements for unnecessary hospital readmissions

  • Beginning in 2013, hospitals with readmissions above the 75th percentile for selected conditions will incur reduced reimbursement
  • Updates on which conditions to include will be determined by identifying those conditions with the largest variation in readmission rates
  • CBO estimated cumulative penalties of $7.1B through 2019

4. Reduced reimbursements for certain Hospital Acquired Conditions (HACs)

  • Beginning in fiscal year 2015, hospitals with a high volume of certain HACs will receive cuts in their Medicare reimbursement
  • Penalties will be levied upon the bottom quartile
  • CBO estimates cumulative penalties of $1.4B through 2019

5. Value Based Purchasing (VBP) implemented

  • Reimbursements will be tied to outcomes of specific quality measurements
  • Beginning in fiscal year 2013, VBP applies to all acute care inpatient PPS hospitals
  • Cuts will be assessed to the bottom quartile with paybacks to the top quartile
  • Although CBO estimates VBP to be budget neutral, there will likely be a significant shift in reimbursement among hospitals

Aside from addressing the concerns of Coverage Expansion and Reimbursement Changes, healthcare provider organizations will need to be mindful of many other initiatives such as Accountable Care Organizations (ACOs) and Medical Homes. However, it will prove challenging to quantify the financial impact at this time for the following reasons:

  • Ambiguity in the marketplace about how to best respond to Accountable Care Organizations (ACOs) and Medical Homes
  • CMS still trying to determine best way for ACOs to become an accepted practice within the healthcare industry
  • ACO and current Pioneer Models gaining marketplace acceptance Healthcare Reform’s Impact on Hospitals & Physicians

Healthcare Reform Impact Summary

Health Reform Issue Organization
Organization Financial Impact General Financial Impact
a) Coverage Expansion
Current Uninsured Mix becomes Insured None Revenue and profit will increase, the magnitude will vary depending on circumstances Positive
Current Untreated Mix becomes Insured None Revenue and profit will increase, the magnitude will vary depending on circumstances Positive
b) Reimbursement Changes
Market Basket Adjustment None Will be reduced by a fixed percentage each year as well as a productivity-based reduction Negative
DSH (Disproportionate Share) Adjustment None Medicaid cuts begin in 2014, Medicare cuts begin 2015 Negative
Reduced Readmissions Reimbursement Yes Reduced reimbursement policy begins in 2013 EqualNegative
Reduced HAC Reimbursement Yes Medicare cuts begin in 2015 for certain HACs EqualNegative
Value Based Purchasing Yes Beginning in 2013, some Medicare reimbursement will be tied to quality outcomes PositiveNegative


Key: + positive result, – negative result, = neither positive or negative result.