How Quality Will Pay for Hospitals Under New Reform Measures

While most hospitals have focused on promoting quality care at their facilities to help decrease costs, quality care will take on a somewhat different meaning under the new healthcare reform law: Hospitals will feel the pressure to maintain continuous quality improvement or risk being penalized under reform incentives scheduled over the next several years, according to a PricewaterhouseCoopers' Health Research Institute report titled "Health Reform: Prospering in a Post-Reform World."

According to the report, the new law can be expected to impact hospitals in three main areas:

• Hospital readmissions. Starting in October 2012, hospitals will be financially penalized by Medicare if they demonstrate "excess" readmissions within a 30-day period when compared to the "expected" risk-adjusted levels of readmissions. The readmissions are based on the measures for acute myocardial infarction, heart failure, and pneumonia.
• Hospital payments based on value based purchasing (VBP). Starting in 2013, hospitals will be paid according to a Medicare VBP program schedule, in which payments will be made based on hospitals' quality measure outcomes. VBP will measure hospital efficiency, patient satisfaction, and quality of care. These outcomes will be collected beginning October 2012.
• Penalties for hospital acquired conditions (HACs). Beginning in 2015, 1% of payments will be subtracted from hospitals with the highest rates of HACs—essentially those falling into the bottom quartile of hospitals when compared to the national average. This could result in a nationwide reduction of $1.5 billion in payments over the next 10 years.

The message hospitals need to pay attention to is "don't get stuck in the bottom quartile, and work towards continuous quality improvement," according to the report. The bottom quartile will change from year to year as the quality performance of hospitals change. However, at least 1,000 hospitals will end up in the bottom quartile—regardless of the quality provided.

Beginning in 2013, high scoring hospitals under VBP will receive a higher payment of 1%—which rises to 2% in 2017 and beyond. In addition to the direct financial impact, the reform law will require that an organization's quality metrics be publicly available and accessible.

In addition to the direct financial impact, hospitals also could feel the impact of consumerism. For years, healthcare has lagged behind in making information easily accessible to consumers, but this has been changing.

According to a 2009 PricewaterhouseCoopers consumer survey, individuals are using the Internet as a source for making decisions. Online content was found to edge out physicians as an information source: For instance, 48% of consumers said they use health websites to find information to make decisions about their healthcare.

Within this consumer realm, hospital quality information will move "beyond the organization and government websites" to health websites and consumer advocacy sites, the researchers note.

In addition, making more quality information available to consumers could impact a system's perception in the community and payers' contracting strategies with them. More informed decisions by patients could lead them away from organizations listed as "poor performers"—or those in the bottom quartile of hospitals.

For the typical hospital, being on the bottom quartile in terms of quality could mean millions of dollars lost annually. For instance, for a 300-bed community hospital with $50 million in Medicare inpatient net revenue, failure to improve on hospital readmissions (a loss of about $96,780), failure with VBP (a loss of $750,000), and ending up in the lowest quartile for HAC ($500,000), would create a drop of $1.35 million in income.

In addition to Medicare, hospitals also will have to learn to live with cuts in Medicaid. Hospitals that care for high numbers of uninsured and Medicaid patients currently receive extra funding from Medicare and Medicaid under the disproportionate share program. But in 2014, Medicare DSH will be reduced 75%—the same year that the insurance exchanges and individual and employer mandates go into effect.