Health Care Reform Legislation Makes Significant Changes to Medicare Reimbursement Methods

26 May 2010 Publication
Authors: Maria E. Gonzalez Knavel Denise R. Rodriguez Chris E. Rossman Lawrence W. Vernaglia Judith A. Waltz

Legal News Alert: Health Care

On March 30, 2010, President Obama completed the enactment of federal health reform law by signing a package of reconciliation amendments to the Patient Protection and Affordable Care Act. The final version of the law includes many provisions that will significantly revise the way that the Medicare program reimburses providers. The Secretary of Health and Human Services (Secretary) is required to promulgate regulations to implement many of these provisions. In some cases, the provisions will not become effective until 2011 or several years later. In other cases, they will be phased in over a number of years.

This Legal News Alert highlights some of the key provisions of the new law affecting Medicare reimbursement. This alert uses the term PPACA to refer to the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the reconciliation amendments).

Linking Medicare Payment to Quality of Care and Patient Outcomes

PPACA contains a number of provisions that are intended to significantly increase the link between the Medicare payments to providers and the quality of the services furnished and patient outcomes. Some of these provisions require the Secretary to implement payment adjustments that take into account quality measures and patient outcomes, while others require the Secretary to begin evaluating such payment adjustments and to submit reports to Congress regarding value-based purchasing programs that could be implemented in the future. The collection of quality data is the first step on the path to the development of value-based purchasing programs. Information regarding the performance of individual providers on the quality measures will be made available to the public.

Value-Based Purchasing Program for Acute Care Hospitals

For several years, acute care hospitals have been required to submit information to an agent of the Secretary on a quarterly basis on 10 (later expanded to 43) quality measures. Prior to PPACA, hospitals that failed to report this information on a timely basis were subject to payment reductions, in particular a reduction in the annual Medicare Market Basket Index payment update.

Under PPACA Section 3001, Medicare will move beyond simply requiring the reporting of quality data and will tie the amount of Medicare payment to each acute care hospital to the hospital’s performance on certain quality standards. PPACA requires the Secretary to develop value-based incentive payments for common and high-cost conditions and to begin applying such incentive payments for hospital discharges occurring on or after October 1, 2012. Quality measures included in the program (and in the other value-based payment programs in PPACA) will be developed and chosen with input from external stakeholders. The Secretary must select measures that cover at least the following five specific conditions or procedures: (1) acute myocardial infarction; (2) heart failure; (3) pneumonia; (4) surgeries; and (5) health care-associated infections. For discharges on or after October 1, 2013, the measures also must include efficiency measures, including the amount of Medicare spending per beneficiary.

The Secretary will establish and announce the performance standards for hospitals at least 60 days prior to the beginning of the performance period applicable to the fiscal year. Hospitals that meet or exceed the performance standards will receive incentive payments, and hospitals that achieve the highest performance scores will receive the largest value-based incentive payments. The incentive payment will be calculated as an increase to the hospital’s base Diagnosis Related Group (DRG) payment amounts. This program will be budget neutral. CMS is required to promulgate regulations to implement this program. Information regarding the performance of individual hospitals on the quality measures will be made available to the public on Department of Health and Human Services’ Hospital Compare Web site.

Reduction in Medicare Payment for Physicians Who Do Not Submit Quality Data

PPACA Section 3002 extends through 2014 incentive payments for physicians who report quality data to Medicare. Beginning in 2015, Medicare payments for physician services will be reduced if the physician does not satisfactorily submit quality data. For 2015, the reduction will be 1.5 percent. This will increase to two percent in 2016 and subsequent years.

Value-Based Purchasing Program for Physician Services

PPACA Section 3007 requires the Secretary to develop and implement a budget-neutral payment system that will adjust Medicare physician payments based on the quality and cost of care that the physician delivers. The new payment system will be phased in over a two-year period beginning in 2015.

Quality Reporting for Long-Term Care Hospitals, Inpatient Rehabilitation Facilities, Inpatient Psychiatric Hospitals, and Hospice Programs

PPACA Sections 3004 and 10322 require the Secretary to implement quality reporting measures for long-term care hospitals, inpatient rehabilitation facilities, inpatient psychiatric hospitals and hospital units, and hospice programs. The quality measures are to be published by October 1, 2012. Providers that fail to submit data on quality measures will be subject to a two percent reduction in their Medicare payment updates. This reduction will be effective for long-term care hospitals and inpatient psychiatric hospitals and hospital units beginning on July 1, 2013. The reduction will be effective for inpatient rehabilitation hospitals and hospitals beginning on October 1, 2013.

Quality Reporting for Prospective Payment System (PPS)-Exempt Cancer Hospitals

PPACA Section 3005 requires the Secretary to implement quality reporting measures for PPS-exempt cancer hospitals beginning October 1, 2013. Providers that do not successfully participate in the program will be subject to a reduction in the annual Medicare Market Basket payment update.

Quality Reporting for Skilled Nursing Facilities, Home Health Agencies, and Ambulatory Surgery Centers

PPACA Section 3006 requires the Secretary to submit a report to Congress by September 30, 2012 that outlines plans to implement value-based purchasing programs for skilled nursing facilities and home health agencies in consultation with affected parties. The Secretary also is required to develop a plan to pay ambulatory surgery centers based on the quality and efficiency of care they deliver.

Payment Adjustment for Conditions Acquired in Hospitals

Patients with hospital-acquired conditions (HACs), particularly infections acquired while in the hospital, often have to stay in the hospital longer than otherwise would be the case, or have to be readmitted. In order to provide an incentive for hospitals to reduce HACs, PPACA Section 3008 requires the Secretary to identify those hospitals that are in the top quartile of all hospitals, relative to the national average, of HACs for certain high-cost and common conditions. Beginning on October 1, 2014, such hospitals will be subject to a reduction in the Medicare payment for inpatient services. Information regarding HACs of each hospital will be made available to the public on the Hospital Compare Web site.

Payment Adjustments for Conditions Acquired in Other Providers

PPACA Section 3008 requires the Secretary to submit a report to Congress by January 1, 2012 regarding the appropriateness of establishing healthcare acquired condition policies for non-hospital providers participating in Medicare, including inpatient rehabilitation facilities, long-term care hospitals, outpatient hospital departments, nursing homes, ambulatory surgical centers, and health clinics.

Hospital Readmissions Reduction Program

PPACA Section 3025 provides that beginning on October 1, 2012, hospitals that have a high rate of potentially preventable Medicare readmissions will be subject to Medicare payment reductions. The first three conditions addressed under this program will be heart attacks, heart failures, and pneumonia. The hospital’s actual readmission rate for these conditions will be compared to its expected readmission rate, and the hospital will be subject to a reduction in Medicare payment for its “excess readmissions.” The Secretary will make the information on each hospital’s readmission rates available to the public. More lenient provisions apply to Medicare-dependent, small rural, and sole community hospitals.

Community-Based Care Transitions Program

PPACA Section 3026 provides funding for a five year program beginning January 1, 2011, to eligible entities that furnish improved care transition services to high-risk Medicare beneficiaries. Eligible entities include hospitals and qualifying community-based organizations that provide care transition services. The program is intended to improve the care of Medicare beneficiaries at high risk for readmission.

Extension of "Gainsharing" Demonstration

PPACA Section 3027 increases funding, and extends the end date, for gainsharing demonstration projects to evaluate arrangements between hospitals and physicians designed to improve the quality and efficiency of care provided to beneficiaries.

Medicare Disproportionate Share Hospital Payments

Beginning on October 1, 2013, Medicare Disproportionate Share Hospital (DSH) payments will be reduced by 75 percent pursuant to PPACA Section 3133. Hospitals qualifying for DSH payments may receive additional DSH payments based on a formula that includes certain factors, including the hospital’s reduction in DSH funds, the percentage change in the uninsured under-65 population, and the relative share of uncompensated care provided by the hospital. The expectation is that there will be fewer uninsured patients, and that hospitals will have lower uncompensated care costs. Many hospitals receive substantial Medicare DSH payments, and it remains to be seen whether the increase in reimbursement as a result of additional persons being covered by insurance and Medicaid will offset the large reduction in Medicare DSH payments.

PPACA Section 3133 also provides that:

[t]here shall be no administrative or judicial review of either (A) any estimate of the Secretary for purposes of determining the factors described in PPACA that are used to calculate the DSH payment, or (B) any period selected by the Secretary for such purposes.

The preclusion of any administrative or judicial review of the factors estimated by the Secretary to calculate DSH payments is very significant and in stark contrast to the current DSH payment statute and regulations, regarding which there has been a tremendous amount of litigation. The current DSH payments have been subject to successful litigation by many providers, because the Centers for Medicare and Medicaid Services (CMS) Administrator has been held to have made many errors in determining the DSH payments. It is possible that the increased complexity created by PPACA could result in more errors that would not be subject to judicial review.

Medical Education Provisions

Medical Education Payments for Residents Training in Jointly Operated Residency Programs

PPACA Section 5504 provides that all the time spent by a resident in a nonprovider setting as part of an approved training program will be counted towards the determination of the number of full-time equivalent residents, if the hospital incurs the costs of the stipends and fringe benefits of the resident during the time the resident spends in that setting. If more than one hospital incurs the costs of training residents in nonprovider settings, either directly or through a third party, such hospitals will be entitled to count a proportional share of the time, as determined by written agreement between the hospitals, that a resident spends training in that setting. This provision is effective for cost reporting periods beginning on or after July 1, 2010.

There are significant gray areas and appeal opportunities under current law applicable to nonprovider site resident rotations. After the effective date of this new PPACA provision, there may not be as many appeals on nonprovider site rotations.

Redistribution of Unused Medical Education Residency Positions

PPACA Section 5503 provides for the Secretary to reduce the medical education residency limits for certain hospitals and to redistribute such positions. For each hospital with an approved medical education residency program, the Secretary is to compare the otherwise applicable resident limit to the highest resident level for any of the three most recent cost reporting periods for which a cost report has been submitted. If the hospital had fewer residents than its resident limit, its resident limit will be reduced by 65 percent of the unused resident slots. This reduction will be effective for portions of cost reporting periods occurring on or after July 1, 2011. The Secretary is directed to redistribute the positions resulting from such reductions to qualifying hospitals that submit applications for an increase to their resident limits. This provision does not apply to rural hospitals. This provision also requires 75 percent of reallocated residency slots to be allocated for primary care or general surgery residencies.

This provision could provide a significant benefit for hospitals receiving an increase in slots. This creates an opportunity for advance planning by teaching hospitals. The future effective date gives some time for advance planning, because residency slots all run from July 1 through June 30, so the 2011 – 12 residency year does not start for more than a year.

Resident Time Spent on Didactic and Training Activities

PPACA Section 5505 addresses the way didactic time spent by residents is treated for direct graduate medical education (GME) and indirect medical education (IME) purposes, and some of these changes have retroactive effect. PPACA provides that, for GME purposes, all time spent by an intern or resident in a nonprovider setting in non-patient care activities such as didactic conferences and seminars, but not including research not associated with the treatment or diagnosis of a particular patient, shall be counted toward the determination of full-time equivalency.

The preceding paragraph applies to IME, except that time spent by an intern or resident in an approved medical residency training program in research activities that are not associated with the treatment or diagnosis of a particular patient, in either an inpatient or outpatient setting, shall not be counted toward the determination of full-time equivalency.

There have been appeals on the research issue in the past. The above IME and GME provisions may be closing the door on the possibility of success in these appeals after the new law’s effective date.

PPACA also provides that in determining the hospital’s number of full-time equivalent residents for both GME and IME purposes, all the time that is spent by an intern or resident in an approved medical residency training program on vacation, sick leave, or other approved leave, as such time is defined by the Secretary, and that does not prolong the total time the resident is participating in the approved program beyond the normal duration of the program, shall be counted toward the determination of full-time equivalency.

The foregoing GME and IME provisions have the following effective dates:

  • Except as otherwise provided, the Secretary will implement the amendments made by this section in a manner so as to apply to cost reporting periods beginning on or after January 1, 1983.
  • The GME provisions apply to cost reporting periods beginning on or after July 1, 2009.
  • The IME provisions apply to cost reporting periods beginning on or after October 1, 2001. With respect to IME, PPACA provides that the IME section should not give rise to any inference on how the law in effect prior to such date should be interpreted. 

Medicare Prescription Drug Program — Closing the “Donut Hole”

PPACA Section 1101 provides for the gradual elimination of the so-called donut hole in the Medicare prescription drug program under Medicare Part D. PPACA provides that every senior who participates in the Medicare Part D prescription drug program and who enters the donut hole in 2010 will receive a $250 rebate to begin to offset each beneficiary’s prescription drug costs in the donut hole. In 2011, beneficiaries will also receive a 50 percent discount on brand name drugs and the size of the donut hole will begin to shrink. The goal is to have the donut hole completely eliminated by 2020.

Medicare Advantage Program

PPACA provides for a gradual decrease in funding to certain popular private insurance plans offered in the Medicare Advantage Program. These plans generally offer lower out-of-pocket costs to beneficiaries than traditional Medicare. As payments by the government to these plans are scaled back, it is possible that senior citizens will begin an exodus from the Medicare Advantage Program if beneficiary out-of-pocket expenses rise. PPACA also provides for incentive payments to high-quality Medicare Advantage plans.

Accountable Care Organizations

PPACA Section 3022 requires the Secretary to establish by January 1, 2012 a Shared Savings Program to (1) promote accountability for a patient population, (2) coordinate services and items under Medicare Parts A and B, and (3) encourage investment in infrastructure and redesigned care processes for high quality service delivery. Accountable Care Organizations (ACOs) are the vehicle through which the Medicare Shared Savings Program will be implemented. To qualify as an ACO, a group of eligible providers of items and services covered by Medicare Parts A and B must:

  • Agree to participate in the program for at least three years
  • Agree to be accountable for the overall care provided to at least 5,000 Medicare fee-for-service beneficiaries assigned to the ACO
  • Establish a formal legal structure that allows the ACO to receive and distribute Shared Savings payments to its participating providers and suppliers
  • Include enough primary care physicians to care for the Medicare fee-for-service population assigned to the ACO
  • Have in place a leadership and management structure that includes clinical and administrative services

An ACO will be responsible for defining processes to promote evidence-based medicine and to coordinate care through the use of tele-health, remote patient monitoring, and other enabling technologies. The Secretary is required to establish appropriate measures to assess the quality of care furnished by the ACO, including regularly updated performance standards.

ACO providers will submit claims and directly receive Medicare reimbursement in the same manner as they would if they were not in an ACO. In addition, an ACO may receive an additional payment representing a percentage (defined by the Secretary) of Shared Savings achieved by the ACO. Shared Savings will be measured by the difference between (1) the estimated average per capita Medicare expenditures in a year for services and items provided to the ACO’s assigned Medicare beneficiaries, and (2) a benchmark set by the Secretary based on the historical cost of providing Medicare services and items to such beneficiaries. PPACA gives the Secretary authority to waive the provisions of the Civil Monetary Penalties law, the Anti-kickback Statute, and any provisions under Title XVIII (including the Stark law) as the Secretary deems necessary to implement an ACO Shared Savings Program. However, there are other legal issues that the Secretary is not authorized to waive, in particular antitrust laws, that will have a significant effect on structuring a legally compliant ACO.

Establishment of Center for Medicare and Medicaid Innovation

PPACA Section 3021 creates a Center for Medicare and Medicaid Innovation (CMI) within CMS. The purpose of CMI is to test innovative payment and service delivery models to reduce costs and to improve the quality of care and submit periodic reports to Congress. CMI is to be functioning by January 1, 2011. Payment reform models for CMI to consider include rural tele-health expansions and the development of a rapid learning framework.

National Pilot Program on Payment Bundling

PPACA Section 3023 requires the Secretary to develop a voluntary pilot program for hospitals, doctors, and post-acute care providers to improve patient care and achieve savings for the Medicare program through bundled payment modes. The program is required to be established by January 1, 2013 and is to run for a period of five years. Before January 1, 2016, the Secretary must submit a plan to Congress to expand the program if that would improve patient care and reduce spending. The Secretary is authorized to expand the pilot if it is found to improve quality and reduce costs.

Revision of Certain Market Basket Updates and Incorporation of Productivity Improvements Into Market Basket Updates That Do Not Already Incorporate Such Improvements

PPACA Section 3401 contains many changes to the Medicare Market Basket updates for inpatient hospital services, home health providers, nursing homes, hospice providers, inpatient psychiatric facilities, long-term care hospitals, and inpatient rehabilitation facilities. Various effective dates are specified. A productivity adjustment also is incorporated into payment updates for Part B providers who do not already have such an adjustment. Other modifications to the Medicare Market Basket updates for various providers are contained in this section.

Independent Payment Advisory Board

PPACA Section 3403 creates a 15-person Independent Payment Advisory Board that is responsible for presenting annual recommendations to the President, Congress, and private entities on actions they can take to improve quality and constrain the rate of health care cost growth in the private sector. The Board must make non-binding Medicare recommendations to Congress in years where Medicare growth is below the targeted growth rate. In years when Medicare costs are projected to be unsustainable, the Board’s proposals will take effect unless Congress passes an alternative measure that achieves the same level of savings. Beginning in 2020, the Board may make binding recommendations to Congress only every other year if the growth in overall health spending exceeds growth in Medicare spending.


As the foregoing indicates, the already complex Medicare payment policy will become much more complex under PPACA. The vast number of regulations and demonstration and pilot projects required by PPACA, as well as inevitable future statutory changes, will contribute to this increased complexity. There will continue to be much need and many opportunities for hospitals to plan in advance for Medicare reimbursement policies and potential appeals. Areas on which hospitals should focus their advance planning include:

  • Quality issues, such as reporting quality data, quality measures’ effect on Medicare payments, and availability of quality data to the public through the Hospital Compare Web site.
  • ACOs and similar multi-provider clinically integrated networks are being planned and implemented by many providers to best respond to demands of the new law and the commercial marketplace. These networks, if structured properly, will change the nature of both Medicare and non-Medicare payments, improve quality, and reduce overall costs.
  • The methodology for medical education payments and per-resident FTEs is substantially changed. Most changes are prospective in nature, and teaching hospitals should focus on understanding and planning in advance for these significant changes.
  • Medicare DSH payments will decrease substantially. There are options for a hospital to increase its DSH payment somewhat, but this will require the hospital to prepare the necessary data to qualify for the adjustment.

There are several years of cost reports that will continue to be settled under existing law, most of which have not been changed by PPACA. Even as various provisions of the reform legislation become effective, many of the adjustment factors will continue to create the possibility for administrative and judicial review. However, many other provisions, such as quality payments and DSH payments, have sections that limit the extent of judicial review of the Secretary’s actions. 

For More Information on Health Care Reform

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our health care clients and colleagues. If you have any questions about this alert or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:

Jeffrey R. Bates
Los Angeles, California

Chris E. Rossman
Detroit, Michigan

Maria Gonzalez Knavel
Milwaukee, Wisconsin

Denise Rios Rodriguez
Los Angeles, California

LawrenceW. Vernaglia
Boston, Massachusetts

Judith A. Waltz
San Francisco, California

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