Bloomberg News

Health Rules Prod U.S. Hospitals to Form Networks for Care

November 01, 2011

(Adds Medicare comment starting in fourth paragraph.)

Oct. 20 (Bloomberg) -- Hospital chains such as Community Health Systems Inc. may get as much as $1.9 billion in bonuses by forming joint ventures to improve care and cut medical costs under regulations released by the Obama administration.

The U.S. Department of Health and Human Services issued final rules today for so-called accountable care organizations for the elderly and disabled, a centerpiece of the health-care law designed to save as much as $940 million in three years. Savings would be shared between providers and the government.

Participants can keep more savings after reaching targets, and will need to meet about half as many quality measures as first outlined in March. The delayed rule marks a victory for hospitals, clinics and large doctors’ practices that have lobbied to alter draft regulations they viewed as too burdensome and financially risky.

“We heard loud and clear that the proposed rules didn’t create a strong business case, and we felt those comments were credible,” said Jonathan Blum, director of Medicare. “We’ve worked hard to adjust the financial model.”

The government projected as many as 270 organizations would participate in the program aiming to coordinate care for large groups of Medicare patients. The government said in its regulatory filing that it “made significant modifications to reduce burden and cost” for participants, including increased potential bonuses and letting hospitals and doctors participate without risk of financial loss.

Insurer Concern

“The new rule is an easier pill to swallow, but still difficult for most systems to fully digest,” said Dan Mendelson, chief executive officer of Avalere Health LLC. “ACOs will get to keep more of the upside profits from effective cost control --including savings from reduced re-hospitalizations -- and there are fewer quality metrics and many of the industry’s legal concerns appear to have been addressed.”

Taxpayers may lose money on the program. The government said in its regulatory filing that in “extreme scenarios,” the effort could cost Medicare as much as $1.1 billion in its first three years, or yield as much as $2 billion in savings.

Physician-owned groups and rural providers will also be able to get $3.5 million in financial support to make upfront investments in information technology and staff. The payments would be recovered from any future savings the organization achieves.

Quality Standards

An ACO’s potential reward will depend on its performance on almost three dozen quality standards. Other changes include a flexible start date in 2012, providing a list of likely patients up front and expanding participation to include rural health clinics and organizations where specialists provide primary care. Health-care providers won’t be required to pay back the government if they don’t hit savings targets.

In its filing, Medicare rebutted a study by the American Hospital Association that found start-up costs for accountable care groups could be as much as $11.6 million. The association conducted its study before the government had proposed rules for the organizations, regulators said.

A 2008 study by the Government Accountability Office found that physician groups participating in an earlier Medicare experiment in coordinated care spent about $555,000 to start up and had about $1.2 million in annual operating costs. The GAO study is a better predictor of costs for the accountable care program, regulators said.

Voluntary Program

Congress declared participation in the Medicare ACO program to be voluntary, making it important to design the initiative to appeal to providers while trying to ensure patient care wasn’t sacrificed to meet savings targets.

Thomas Scully, who managed Medicare under George W. Bush and is senior counsel at Alston & Bird LLP, said Medicare officials “did their level best to respond to the criticisms and get the thing rolling. I think there’s still plenty of interest out there.”

Blair Childs, senior vice president at Premier, an alliance of 2,700 not-for-profit hospital systems, said many would pursue joint ventures because of the simpler federal requirements and reduced risk in the rule. “I think we’re going to see a lot of systems step up and do this,” he said.

The final rules make government antitrust reviews voluntary, a change from the original agreement between the Justice Department and the Federal Trade Commission issued in March. The first accord said any physicians’ group with more than 30 percent market share in its local area was required to submit to some form of review, while the final agreement says any group with 30 percent or less market share and approved as an ACO by Medicare will be considered legal.

Efficiency Model

The program is modeled after integrated health systems such as the Cleveland Clinic that deliver more efficient care. Those providers panned the proposed rules as overly prescriptive.

Hospitals complained that setting up the joint ventures as the government originally envisioned would have required as much as $11.6 million in initial investments for a 200-bed hospital.

Investor-owned hospital systems, represented by the Federation of American Hospitals, had criticized requiring antitrust reviews before companies could participate, saying it would be “a significant deterrent” to participation.

The Obama administration considers the ventures essential to reducing the growth of spending for the federal health insurance program, which accounts for 15 percent of the U.S. budget and is projected to increase with the retirement of Baby Boomers and increased use of medical services.

The government would waive some antifraud statutes for qualifying groups, including laws that forbid doctors from referring patients only to hospitals and other providers with which they have financial stakes.

Insurance groups, among other critics, are concerned the creation of market providers that dominate local markets could suppress competition and drive up costs.

--With assistance from Jeff Bliss in Washington. Editors: Steve Walsh, Adriel Bettelheim

To contact the reporter on this story: Carol Eisenberg in Washington at Ceisenberg1@bloomberg.net;

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.


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