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The Keckley Report

CMS’ One-Two Punch: More Bundles, Higher Penalties

By August 8, 2016March 1st, 2023No Comments

Last week, the Center for Medicare and Medicaid Services (CMS) announced higher penalties for avoidable readmissions to hospitals. The week prior, it announced it was doubling down on the mandated bundled payment program. They’re a one-two punch to hospitals many already unsteady on their fiscal feet.


Readmission Penalties: The Avoidable Readmissions program was included in the Affordable Care Act (Section 3025) with the intent that hospitals be penalized for excessive avoidable readmissions Last Tuesday, CMS released revisions to its formula for calculating avoidable 30-day readmissions effective October, 2016. It changed the way pneumonia-related readmissions were calculated and added coronary artery bypass grafts (CABG) to the clinical populations that already included treatments for heart attacks, heart failure, chronic obstructive pulmonary disease, and hip and knee joint replacements. Also included in the 2,343-page rule were changes to several quality reporting programs and a payment incentive program to reduce hospital-acquired conditions The penalties will save Medicare $538 million in fiscal year 2017, a 20% increase over FY16. The penalty of up to 3% of Medicare payments to hospitals is projected to hit 2,588 and 430 long-term acute care hospitals. Per Kaiser, that means 75% of hospitals will see a cut averaging .73% of their Medicare reimbursement for the six conditions based on their readmission performance from July, 2012 to June, 2015 (excluded are critical access hospitals, children’s and psychiatric hospitals). In FY13, 64% of hospitals were penalized increasing to 78% in FY15.

Bundled Payments: Like avoidable readmissions, bundled payment programs were included in the ACA (Section 3023) as a means of shifting financial risks to providers, thus weaning the payment system away from fee for service. The new 900-page announcement is for mandated bundles akin to its Coordinated Care for Joint Replacement (CCJR) initiative mandated for hospitals in 67 markets. The five-year program starts July 1, 2017 covering inpatient episodes for heart attack, bypass surgery, and surgical hip/femur fracture treatment. Each hospital will be accountable for the cost and quality of care provided to Medicare fee-for-service beneficiaries during the inpatient stay and for 90 days after discharge., Participating hospitals will be paid a target price that’s adjusted annually for each episode based on patient severity and medical management complexity. Upside and downside risk for each bundle increase each year and hospitals with costs exceeding the quality-adjusted target price will be required to repay Medicare.

Like earlier bundled payment programs, these bundles put a premium on collaboration between physicians and hospitals to streamline clinical processes and fully integrated post-acute providers in medical management and risk sharing. But there are three notable wrinkles in this bundle expansion:

Hospital participation in the heart surgery and heart attack bundles is mandated in 98 markets. No others need apply. (And for hip/femur treatment, it’s mandated in the same 67 markets mandated under the CCJR bundled program).

In years 4 and 5, regional costs are the basis in the calculus of costs: that means CMS is looking to a future in which systems of care operate across larger geographies and it means hospital costs comparisons will include organizations outside a hospital’s immediate service area.

For physicians in the markets where these mandates apply, their participation will be credited toward Advanced Alternative Payment Models beginning in 2018 in which they are eligible for additional financial rewards under Medicare Access and CHIP Reauthorization Act (MACRA).

Perhaps to soften the blows, CMS made another announcement last week: it said it will delay a $400 million FY17 cut from $6 billion Disproportionate Share Payment funding (for hospitals that serve large numbers of low income, Medicaid and uninsured patients) scheduled to begin in FY18, but in the same announcement, it affirmed it will increase its 1.5% hospital overpayment cuts from .8% currently resulting in savings to Medicare of $11 billion vs. $5 billion the hospitals had budgeted. Body blows to hospitals!

What’s it mean?

The persistence of CMS is part of the story. They’ve demonstrated relentless pursuit of their commitment to force hospitals, physicians and long-term care providers into more tightly integrated relationships capable of bearing both clinical and financial risk. Kudo’s for linking physicians’ participation in the mandated bundles to MACRA credit for alternative payment program participation, but for most providers, responding remains problematic.

Stepping back, the bigger story is this: what’s the future for hospitals? Most face an uncertain future. Though hospital care is 32% of U.S. health spending ($1.06 trillion last year), a few are handling changes and cuts reasonably well but most aren’t. The rules keep changing. The measures used to reward and penalize hospitals keep changing. How medical education is funded, how uncompensated care is defined and absorbed, how capital for innovation is accessed, how site neutral payments for hospital outpatient services settles and how all this plays out against increasingly aggressive negotiations by private insurers and physician expectations that their income be protected as MACRA is implemented (keeping in mind that 245,000 are now employed by hospitals—up 9.8% last year per MGMA) are reasons to pause.

Unlike private insurers who are not obligated by law to provide services to individuals who don’t pay their premiums and enjoy the latitude to purge their rolls of unprofitable groups and individuals, hospitals are obligated to treat everyone, at least when they show up in the emergency room (EMTALA 1986). Physicians have the option to limit their exposure to patients they don’t know or can’t pay and many contract with a hospital to provide services for which the hospital will get nothing. Safety net funding for hospitals is shrinking fast, and the ability to cost-shift uncompensated care and underpayments from Medicaid and Medicare is evaporating. Hospitals must make long-term bets on the future for care delivery—the facilities, technologies and processes for diagnosing and delivering care—while competing in a highly regulated, short-term economic environment. However, findings from a recent MedPAC study show hospitals have room for improvement – of the 1,953 hospitals screened for performance and efficiency 302 (15%)* were found to be “relatively efficient” during the 2011 to 2013 period.

Hospitals are in the ring and they’re fighting. All acknowledge the need to transition from an inpatient-outpatient chassis to fully integrated systems of health that manage financing and delivery of services to individuals across the spectrum of health. All recognize the need to be efficient and transparent. All want to connect health and human services programs to enhance total population health, especially for the most vulnerable and disadvantaged. All welcome competition and transparency. But getting from here to there is problematic when the body blows keep coming. The strongest have trained effectively and are able to punch back, but many aren’t.

CMS’ one-two punch last week isn’t a knockout, but many hospitals are bruised and bleeding. Maybe before the final bell rings, we should call time out and take a fresh look at their future.


P.S. In the heat of Campaign 2016, there’s a rich irony in postulation that Donald Trump’s behavior might be the result of a mental disorder, narcissistic personality disorder aka NPD. In Saturday’s Op Ed, Washington Post writer Kathleen parker recounts her concussive episode (“After a brain injury, I suddenly displayed some behavior similar to Donald Trump’s”), Fox Commentator, Psychiatrist and Conservative Columnist Charles Krauthammer has opined to a “personality disorder”, and last week, Congresswoman Karen Bass (D-CA) circulated a petition calling on Republicans to require Donald Trump undergo mental evaluation due to his NPD-like behavior. For healthcare gad-flies like me, perhaps the silver lining in this election season will be increased attention to mental health. Mayo says the 9 symptoms of NPD, a disorder originating in an “excessive sense of self-worth,” is evident in as many as 200,000 Americans though frequently undiagnosed.  

*Notes: The 302 highly efficient hospitals that made a 1% margin on their Medicare book of business without sacrificing quality, compared with the national average, had:
•    5% lower readmissions;
•    9% lower standardized costs; and
•    12% lower 30-day mortality rates


Report to the Congress: Medicare Payment Policy, Hospital inpatient and outpatient services: Assessing payment adequacy and updating payments, March 2016.

American Hospital Association (AHA) Hospital Statistics – Health Forum (2015). 

US NFP hospital medians indicate continuing revenue growth, Preliminary FY 2015, Moody’s Investors Service, February 2016.

US for-profit hospital earnings growth will be tempered by margin challenges, Moody’s Investors Service, April 2016.