Summary
CMS has the objective of keeping their costs down, increasing quality, protecting the Stark laws against physician referrals, and guarding against beneficiaries being enticed to receive more services than necessary. CMS threw all these objectives into the ACE demonstration project. The problems with the ACE demonstration project are: 1) Providers are already suffering with negative Medicare margins, 2) Medicare initiatives do not drive quality as much as threats of malpractice do, 3) CMS has moved the politics of physician reimbursement away from Washington D.C. and into the hospital CEO’s office, 4) Providers do not have assurance that the “gain” will be there to be “shared” in the future given CMS’s past actions,It is unclear how the prohibitions against beneficiary enticement and paying for physician referrals will be enforced.
Analysis
Providers are already suffering with negative Medicare margins. CMS has designed the ACE demonstration project to be a competitive bid, with allowing only one ACE physician hospital organization (PHO) per market area. Even if a provider is foolish enough to submit a bid and receive designation as an ACE PHO, CMS has stated the PHO will not have assurance that in the future they will be a sole source ACE PHO in their market. Further, CMS will be evaluating the bids based on the discount from current reimbursement methodology (DRG payments). The issues with this is that providers already have negative Medicare margins. According to the MedPAC analysis of Medicare cost report data (September 2006), Medicare margins averaged -1.4% in 2003, -3.1% in 2004, and -3.3% in 2005. Given the projections for provider costs and net revenues in the future (there is a national shortage of healthcare workers), the margins are projected to get worse. Providers will now be asked to discount a line of business they are already losing money on. To give an example, my father recently had a total hip, DRG 469, one of the targeted DRG’s for this demonstration project. In talking to my dad, I found out the physician was going to use a top of the line implant for his hip, one that costs our hospital $13,000, and we have very good purchasing contracts with the orthopedic vendors due to our facility’s association with a national hospital chain. If my dad had the surgery at our facility, our DRG payment would have been less than $13,000. So, we would have lost money even before we started the surgery. There would have been no gain to be shared. In order to make money on this procedure, a hospital would need to substitute a lower demand implant, one that has a cost of less than $6,000. Quality would suffer, and I am glad my dad was not part of an ACE demonstration.
Why do hospitals, in the first hour, provide aspirin to patients presenting in an emergency department with chest pain? Because they do not want to be sued. The pay for performance initiatives has improved reporting of provider care, but the concern over a malpractice case has influenced provider behavior more than the threat of losing Medicare payments. Providers will still be held to the utilization criteria, and patients will be treated according to industry standards. Deviation from those standards or criteria carries with it an indefensible position in any litigation. Further, the opportunities for gain sharing with physicians will come through lessening the lengths of stay, or substituting lesser costly physician preference items (pharmaceuticals and supply items). Gain sharing will have the effect of aligning the physician incentives with the hospitals in regard to such cost reduction programs. It is only CMS babble to say that the ACE demonstration program is designed to increase quality, and the gain sharing incentives will be stacked against quality improvements. The best CMS can hope for is to prevent a decline of quality. To be fair, there have been some advances lately in surgical techniques which have the potential to increase quality while reducing costs. An example is the anterior approach to a total hip surgery as opposed to a posterior approach. However, such advancements are limited when compared to the menu of DRG’s included in the ACE demonstration project.
In order for gain sharing to work, the payment incentives need to be high enough to modify provider behavior. The gain sharing will be limited to 25% of the payment the physician would have normally received. Given that CMS has a formula driven 10% reduction of physician payments scheduled, physicians will at the most be looking to a 15% increase in payments over current. Given how physicians feel related to CMS not increasing their reimbursement commensurate with inflation, physicians will likely desire the entire 15%. However, remember that CMS expects the PHO to bid on the business by offering a discount over current DRG’s, DRG’s that hospitals are currently losing money on. Hospitals are faced with pressure today from physicians to “keep them whole” in relation to their expected income given the lack of advance in payments from Medicare. The fights that will go on in the hospital CEO’s office regarding how to “split” the gain will be intense. CMS may have been successful in one aspect of the ACE demonstration program, they have shifted the debate away from Washington D.C.. I cannot imagine any intelligent hospital CEO subjecting themselves to this program.
CMS has demonstrated, over a course of many years, that their intention is to find ways to cap the growth of Medicare payments. During the early years of DRG’s, the incentive to hospitals was to reduce costs of care and keep the full DRG payment, costs decreased, and hospitals had a positive Medicare margin. I am using the past tense as hospitals no longer have a positive Medicare margin. With the staffing shortages, high increases in wage rates, increasing Medicare proportion of the patient mix, and inflation in pharmaceuticals and supplies, and CMS not increasing the payments to keep pace with inflation, hospitals now have negative Medicare margins. This erosion in Medicare margins has happened at the same time as the explosion in critical access hospitals, which get paid 101% of cost. I can only imagine that the decline in Medicare margins at prospective payments hospitals has been worse that the average data shows. Hospitals have learned from this. When hospital management sees terms like “Medicare Payment Reform”, or “we are always looking for ways to improve the Medicare program, both in efficiency and in better care for patients”, management interprets this language as “payment reduction” and “higher costs”. CMS has extreme budgetary pressures to continually find methods to reduce Medicare expenditures. If hospitals do sign up for to be an ACE hospital, and the program is successful in reducing payments to PHO’s over prior reimbursement methodologies, CMS will not be able to ignore such data. In the long run, the “gain” potential will be taken away and Medicare margins will be ratcheted lower.
Finally, some of the ACE demonstration objectives can create problems with other laws hospitals and physicians adhere to. CMS has stated that hospitals will be allowed to market the fact that they are an ACE provider. To induce beneficiaries to participate in the demonstration program, half of the co-payments may be forgiven. To get physicians to participate, gain sharing will be allowed. However, Medicare also has rules against enticing beneficiaries to receive more services than is medically necessary and against paying physicians for referrals. In the solicitation for the ACE demonstration, CMS notes they will be watching closely utilization to guard against physician referral patterns changing and beneficiary enticement. How will CMS, or the Office of the Inspector General, measure the utilization changes and enforce the Stark rules? If a PHO is successful, beneficiaries are drawn to the program and physicians change their referral patters, the hospital will be bordering violation of the Stark rules. As a hospital, I would want a contract clearly identifying the safe harbors related to the ACE demonstration program.
