Bonuses, risks of ACOs

Hospitals enter the new year with more certainty that health reform initiatives, such as accountable care, will advance, but with the prospect of costly new policies to address the federal debt and deficit issues.

Medicare's experiment with accountable care was scheduled to start its second year on Jan. 1 by introducing more financial risk for some existing ACOs and by adding a new crop of organizations.

Accountable care ties performance on quality and cost-control targets to financial incentives—potential bonuses and possible losses—for hospitals and medical groups. The new payment model is one of several included in the Patient Protection and Affordable Care Act that seeks to shift Medicare spending toward incentives for results and to stop rewarding providers for the volume of care they provide.

Among the first Medicare accountable care organizations—so-called pioneers created by the Center for Medicare and Medicaid Innovation—some deferred the risk of potential losses until the second year, which began in January. Another Medicare accountable care program, known as shared savings, was scheduled to expand Jan. 1 beyond the 116 ACOs named in 2012.

Hospitals continue to respond to pressure on operating margins from the weak economy, health reform and Medicare cuts scheduled for 2013 with efforts to curb operating expenses. But after years of such efforts, the strategy may prove increasingly difficult to sustain, rating agencies say.

“Fitch (Ratings) believes that the next level of cost reduction within the industry will need to be realized from a change in the care delivery operating model through integrating clinical operations, implementing standardized protocols, coordinating care and managing population healthcare, which will be more difficult to accomplish,” Fitch analysts said in the agency's outlook for not-for-profit hospitals for the coming year. Fitch projects that hospital profits will weaken after 2013.

Hospitals ended 2012 with less certainty over how federal budget talks would end up affecting Medicare payments and the cost of one popular not-for-profit hospital debt market. A last-minute deal by the White House and Congress to avert tax increases and spending cuts scheduled for the new year delayed for two months an up to 2% reduction to Medicare spending.

Not included in the deal was a proposal the White House previously endorsed that could raise borrowing costs for not-for-profit hospitals that seek capital in municipal bond markets. Through mid-December, not-for-profit healthcare borrowers issued 437 bonds for a total of $29.6 billion (see chart above), according to data from Thomson Reuters. The proposal would cap the tax break to investors who buy tax-exempt bonds.

But the proposal will likely resurface as lawmakers work toward another deadline to address the delayed Medicare cuts and other pending spending reductions, says Chuck Samuels, an attorney for the National Association of Health and Educational Facilities Finance Authorities.