Dawn SamarisThe Centers for Medicare & Medicaid Services (CMS) is taking a carrot-and-stick approach in its efforts to decrease medical costs, reduce preventable hospital readmissions, and improve care quality through value-based care initiatives. These varied efforts include payment penalties for issues such as hospital-acquired infections, and alternative payment models that offer providers incentives to deliver efficient and effective care.

Sylvia Mathews Burwell, secretary of the U.S. Department of Health and Human Services, recently announced goals for Medicare payments over the next several years:

  • 30 percent of payments will be made through alternative payment models such as accountable care organizations (ACOs) and bundled payments by the end of 2016, with the share expanding to 50 percent by the end of 2018
  • 85 percent of fee-for-service payments will be tied to value-based or quality-incentive programs by the end of 2016, with the share expanding to 90 percent by the end of 2018

Recognizing that one program will not work for all, the agency continues to announce diverse initiatives aimed at attracting a range of healthcare providers to the new business model. For individual hospitals and health systems, CMS’s efforts could result in significant payment penalties or bonuses in coming years. Healthcare executives should be aware of the initiatives underway, project the potential range of impacts on their organization, and prepare accordingly.

Sticks: Penalties for Failing to Meet Quality Standards

CMS is using three major “sticks” that, taken together, expose hospitals to a Medicare payment reduction of as much as 5.5 percent in FY15 and 6 percent in FY17.

Hospital Readmissions Reduction program. CMS increased the maximum penalty from 2 percent in FY14 to 3 percent in FY15 for preventable readmissions up to 30 days post-discharge for patients with any of five common chronic conditions. Medicare fined three-quarters of the hospitals that were subject to the program in 2014, according to Kaiser Health News.

Hospital-Acquired Condition (HAC) Reduction program.Hospitals in the lowest-performing quartile for reducing HACs—representing one in every seven hospitals—are seeing a 1 percent reduction in their Medicare payments for the current fiscal year.

Hospital Value-Based Purchasing (VBP) program. The aggregate VBP payments across all hospitals will be funded through a reduction in base-operating DRG payments of as much as 2 percent in FY17.

Carrots: Rewards for Delivering High-Quality, Low-Cost Care

On the “carrot” side, CMS is encouraging hospitals and health systems to transition to value-based payment through a variety of programs and payment models designed to reward high-quality, lower-cost care.

Medicare Shared Savings Program (MSSP). More than 400 ACOs participate in the MSSP, which serves more than 7.2 million beneficiaries in 47 states, according to CMS. Most of the ACOs are participating in an upside-risk-only model, but will be required to assume downside risk in the future. In March, CMS announced a new “Next Generation ACO” model, which offers providers the potential for higher returns in exchange for accepting a greater level of risk than in previous ACO models. Many commercial insurers also offer ACO programs.

Bundled payments. This payment model aims to encourage better coordination, quality, and efficiency of care by offering a single, predetermined payment covering all services in a defined “bundle” of services or episode of care. Many of these arrangements exist through CMS’s Bundled Payments for Care Improvement (BPCI) initiative, Medicaid, or commercial payers. Bundled payments for orthopedic services are most common, but BPCI also includes care episodes for congestive heart failure, chronic obstructive pulmonary disease, and pneumonia, with scope typically covering three days prior to admission through 30 days after discharge.

Medicare Advantage (MA) program. Approximately 15.7 million seniors—or 30 percent of the Medicare population—were enrolled in MA plans in 2014. The program allows beneficiaries to choose from numerous privately administered plans. CMS pays those plans a capitated amount per enrollee to provide all Part A and B benefits. The capitated structure gives hospitals and health systems an incentive to improve the overall cost of services provided across the care continuum.

Looking for Opportunities

Although the various programs have many differences, they have one common objective—improving the value of care. Hospitals and health systems should use CMS’s efforts as a platform for implementing transformational care and cost management initiatives. With a meaningful portion of Medicare payments at risk, providers need to move beyond traditional cost-reduction strategies and, instead, rethink how and where they deliver care to truly redefine their cost structure.

In considering participation in elective value-based programs such as ACOs and bundled payments, healthcare leaders should evaluate the alternatives and determine which ones best fit their organization given its unique market conditions and readiness level for value-based care. Participation can offer a financial upside and help organizations build essential capabilities for population health management.


Dawn Samaris is a senior vice president in the financial planning practice of Kaufman, Hall & Associates, Inc., Skokie, Ill., and a member of HFMA’s First Illinois Chapter.

Publication Date: Thursday, April 23, 2015