The Issue

Hospitals should begin preparing now for a decade of reductions in Medicare payment that will result from the Affordable Care Act and the Budget Control Act of 2011.


Cuts in Medicare payment that will result from the Affordable Care Act and will likely result from the Budget Control Act of 2011 will significantly affect hospital finances over the next decade.

Reductions in Medicare payments to hospitals that will result from the Affordable Care Act will total $112.6 billion for FY10-FY19. These reductions will put greater financial pressure on hospitals. The Affordable Care Act mandates negative adjustments to the Centers for Medicare & Medicaid Services' market basket update for the inpatient prospective payment system, as well as to-be-determined productivity adjustments for FY12 through FY20 and beyond.

The Budget Control Act of 2011 also could result in cuts to Medicare payment for hospitals. By Nov. 23, 2011, a 12-member joint committee of Congress will propose ways to reduce the nation's deficit; among the proposals will be spending cuts for Medicare, including Medicare payment to providers.

Hospitals need to formulate and implement strategies now that can help them absorb the impact of these changes and emerge financially and operationally stronger.

Action Steps for Providers

Six key strategies will set a hospital on a course to achieve positive Medicare margins consistently despite ongoing declines in Medicare payment.

Partner with clinical leadership. A hospital's senior finance executive should meet with the chief medical officer and other clinical leaders to forge a financial-clinical partnership. The CFO should:

  • Provide an assessment of the current financial condition of the hospital to the team
  • Explain the financial pressures and their likely impact on the organization
  • Solicit the support and assistance of the clinical leadership team in achieving positive Medicare margins

Perform detailed margin analysis. Hospital finance departments should identify services for which payment is significantly lower than actual cost, and ensure that cost-saving strategies are targeted at these services. An analysis should focus in particular on the five services with the highest volumes, the five with the highest profitability, and the five with the greatest losses, with an in-depth review to ascertain the reasons for profit or loss.

Engage with service line managers and physicians. Hospital finance departments should take the lead in assembling a clinical performance improvement action team composed of service line managers and physicians. This team should identify ways to make improvements in the following areas:

  • Supply utilization
  • Length of stay
  • Drug costs
  • Readmissions within 30 days of discharge
  • Ancillary testing usage

Revamp care coordination. The hospital's clinical leaders should evaluate and improve care coordination policies. Avoidable readmissions can be reduced by improving the discharge planning process. Other important steps and considerations include:

  • Ensuring that every discharge summary is sent to the primary care physician
  • Establishing or connecting with a local or regional health information exchange to enhance care coordination, prevent duplicative tests, and reduce costs
  • Understanding how attending physicians are using consultants and the potential impact on costs and bed days

Ensure efficient operating room (OR) utilization. To optimize OR utilization, hospitals should take specific steps to decrease scheduling gaps and delays, reduce costs, and enhance care delivery. Improved scheduling (that aligns surgeons and surgeries), method changes, standardized processes, and operational reporting are just a few of the means for accomplishing these ends.

Improve emergency department (ED) operations. Much has been written in recent years about the space and staffing challenges faced by EDs. Data analysis and review of ED supply and drug utilization, ancillary testing, and inappropriate usage can help improve ED operations and reduce costs.

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