Where hospital margins to be squeezed, that would place hospital laboratories under greater budget constraints

Hospitals are honing in on Medicare’s new value-based purchasing program quality metrics in an effort to improve patient care—and earn reimbursement rewards. Clinical laboratory managers and pathologists will want to track implementation of this program, because it is one further step forward in Medicare’s plan to move away from fee-for-service reimbursement.

As part of its effort to drive quality improvement at U.S. hospitals, the Centers for Medicare and Medicaid Services (CMS) issued final rules in 2011 for the first year of its Hospital Value-Based Purchasing Program (HVBP). The program is a pay-for-performance initiative that begins in fiscal 2013. Modern Healthcare reported on this story.

“[The HVBP structure] has been very eye-opening to a lot of people because we are not used to being compared that way,” observed Jeff Costello. He is Chief Financial Officer at Memorial Hospital & Health System in South Bend, Indiana. This 526-bed institution is on the latest Thomson Reuters’ 100 Top Hospitals list.

Hospital incentive payments for the first year of the HVBP program will apply to Medicare discharges that occur on or after October 1, 2012. That is the first day of the government’s 2013 fiscal year.

Medicare’s New Hospital Value-Based Purchasing Program

According to the CMS website, the HVBP program is a CMS initiative that rewards acute-care hospitals with incentive payments for the quality of care they provide to people with Medicare. The program represents the broader shift away from fee-for-service models and toward quality-based models.

The HVBP Program was established by the Affordable Care Act of 2010 (ACA). The program is based on data collected through the Hospital Inpatient Quality Reporting (IQR) Program. More than 3,000 hospitals across the country are eligible to participate in the HVBP Program.

Funding for the incentive payments will derive from a reduction in base operating Diagnosis-Related Group (DRG) payments. The reductions will be:

  • 1% for fiscal year (FY) 2013
  • 1.25% for FY 2014
  • 1.5% for FY 2015
  • 1.75% for FY 2016
  • 2% for FY 2017 and subsequent years.

“[T]he worst [hospital] performers will lose 1% [in the first year of the program],” explained Joseph Becht, Director, Healthcare Provider Practice, Deloitte & Touche in Richmond, Virginia, in the MH story. “The ones [hospitals] in the middle will earn their 1% back, and the ones that are above the middle will earn their 1% back plus a portion of the pool.”

In the HVBP program, CMS will evaluate each hospital’s performance on a variety of weighted measures within a number of quality domains. The measures will feed into a total performance score. Scores will then be compared against scores of other hospitals, nationally.

In just six months, on October 1, 2012, the Centers for Medicare and Medicaid Services (CMS) will commence its hospital value-based purchasing program (HVBP). Hospitals that perform poorly can their reimbursement from Medicare reduced by as much as 8% for certain services. In turn, loss of Medicare revenue from this source could result in hospitals shrinking the budgets of their clinical laboratories.

In the first year of the program, 70% of each hospital’s total performance score will be based on 12 clinical process-of-care measures, MH reported. The treatment areas will involve heart attack, heart failure, pneumonia, infection-reducing measures, and complications of surgery. Eight patient-satisfaction measures will make up the remaining 30%.

AHA Concerned about Lower Hospital Margins Due to DRG Cuts

The American Hospital Association (AHA) has expressed concern that the new HVBP program will put Medicare revenues at risk. It will also cut into profit margins and present challenges for poorer performing hospitals trying to improve. MH reported that the AHA estimates that about 10% of Medicare revenue will be at risk in 2017. The organization attributes this to four factors:

  1. Value-based purchasing.
  2. Penalties for high rates of readmissions and hospital-acquired conditions.
  3. Incentives for participation in the inpatient quality-reporting program.
  4. Incentive payments tied to achieving meaningful-use standards in the use of electronic health-record systems.

According to the Healthcare Financial Management Association (HFMA), the 2% cut scheduled for 2017 will mean about 0.4% of the average hospital’s margin. “It doesn’t sound like a lot, but when you think that the average hospital’s margin is somewhere around 3%, and you suddenly have a margin of 2.5%, that could have some real impact on hospitals,” observed Chad Mulvany, MBA, HFMA’s Technical Director, Reimbursement and Regulatory Issues.

Hospitals may find it difficult to move up in the relative standings once they are among the poorest performers, according to Auburn Daily. She is Principal Counsel, Health Law, Office of General Counsel, at the University of California. “You would have to make huge strides in your performance while also having a better performing hospital start to perform more poorly.”

CMS plans to add more measures and domains to the HVBP Program in future years. The additional items for year two will include: three condition-specific mortality measures, eight hospital-acquired condition measures, and composite measures for patient safety and mortality. CMS also plans to add a domain for efficiency. Proposed weighting for 2014 is 30% each for HCAHPS and outcomes, and 20% each for efficiency and process of care.

With as much as 10% of Medicare revenue at risk in downstream years because of this new Medicare HVBP program, it is likely that hospital-based medical laboratories and anatomic pathology departments will be forced to deal with shrinking budgets from their parent hospital or health system. But that’s just one obvious consequence.

If hospital administrators become motivated to address sources of systemic errors while simultaneously working with physicians to improve the outcomes of Medicare patients, then medical laboratories in hospitals will find themselves engaged in both of these activities. The urgency to identify and reduce the source of systemic errors means wider implementation and use of process improvement methods, including Lean and Six Sigma.

In the same vein, more hospitals will want to adopt a quality management system (QMS). That means more interest in ISO 9001 certification by hospitals. It will also translate into more ISO 15189 accreditations by hospital and health system laboratories.

Certainly these consequences are a few years down the road, since Medicare’s HVBP program won’t start until October 1, 2012, just six months from now. But that is positive for pathologists and clinical laboratory managers, because it gives them time to prepare their laboratory organizations for this developments.

Pamela Scherer McLeod

Related Information:

Pursuing value: Providers aim for rewards by emphasizing quality metrics used in the CMS’ new purchasing system

AHA letter to CMS August 29, 2011

The Official Website for the Medicare Hospital Value-based Purchasing Program

Potential Future Measures for Medicare’s Hospital Value Based Purchasing Program

ISO 15189 Laboratory Accreditation