Healthcare Trends – Responses and Risks

By David J. Augustiniak, CPA, Raj Chaudhary, CRISC, CGEIT, and Tina M. Smith, CPA
| 7/12/2016


support-img-lp-risk-reward The healthcare industry is in the midst of tumultuous times. The passage of the Affordable Care Act (ACA) along with economic, demographic, and other forces have caused sweeping changes that affect all stakeholders, including patients, providers, and insurers. Healthcare systems of every size have responded by launching a variety of significant initiatives. Such initiatives, while necessary, often make hospitals vulnerable to some serious risks that can undermine – if not prevent – their ultimate success.

Healthcare Trends

In the healthcare industry, numerous trends are taking hold, but a few in particular are driving hospitals to adopt new initiatives.

Declining Reimbursements

The dramatic drop in reimbursement levels is the overarching trend for almost every healthcare provider today, and that is unlikely to change in the near future. Medicare is driving these changes due to the aging population and projected increases in the Medicare rolls in the coming years. Baby boomers started reaching the age of 65 in 2011, and by the time the last boomer hits age 65 in 2030, Medicare’s rolls are projected to grow from the current 54 million to 82 million.1 This impending fiscal challenge has prompted Medicare to shift payments away from fee-for-service to value-based and quality-focused payments. Medicare has already achieved its initial milestone of tying 30 percent of all traditional Medicare payments to quality or value through alternative payment models by 2016.2 This trend is expected to continue as Medicare plans to increase this to 50 percent by 2018.3 The following reimbursement model changes currently are affecting healthcare organizations:

Value-Based Purchasing (VBP). Healthcare systems continue to struggle with the paradigm shift from volume-based payments to value-based payments. This shift is unavoidable.  Purchasers – primarily the Centers for Medicare & Medicaid Services (CMS) at this point – are pushing the market toward adopting VBP. Hospitals are subject to 24 CMS performance measures for fiscal year 2016, with penalties looming if they fail to meet certain requirements. The penalties affect hospitals of all sizes, from small community hospitals to large regional healthcare systems.

The Hospital VBP Program is funded by a 1.75 percent reduction from participating hospitals’ base operating diagnosis-related group (DRG) payments for fiscal year (FY) 2016. Resulting funds are redistributed to hospitals based on their total performance scores (TPS). The actual amount earned by each hospital depends on the range and distribution of all participating hospitals’ scores for a fiscal year. It is possible for a hospital to earn a value-based incentive payment percentage that is less than, equal to, or more than the applicable reduction for that program year. The reduction in base DRG payments is expected to rise to 2 percent by 2017.4

The 2016 TPS will be calculated based on four domain scores: patient experience of care (25 percent weight), outcome (40 percent), clinical process of care (10 percent), and efficiency (25 percent).5 Notably, prior to 2014, patient outcome reporting wasn’t even a category of performance measurement. Its addition stems in part from findings that an average of 25.1 patient safety events occur per every 100 admissions.6 Requiring hospitals to evaluate outcomes implicitly requires them to consider how they deliver care in order to improve outcomes and patient safety.

Regulators add new performance measures related to patient safety and quality every year, but many providers don’t realize that current care practices determine performance scores affecting future reimbursement. For example, as of Oct. 1, 2015, hospitals are required to report their adherence to the evidence-based protocol (EBP) sepsis bundle. Their performance on this measure in 2015 will directly affect their reimbursement in 2017. A measure related to the prevention and management of Clostridium difficile will be added in 2017, which will affect 2019 payments. Commercial payers also are shifting to outcomes-based reimbursement models.
30-day readmission penalties. To encourage efforts to reduce readmissions, the Hospital Readmissions Reduction Program imposes penalties on hospitals with excess readmission ratios. The excess readmission ratio determines whether a hospital has a higher number of readmissions than the national average for other hospitals treating a similar clinical mix of patients (that is, patients with a similar mix of age and clinical risk factors for readmissions).

CMS applies a risk adjustment factor, but it does not take into consideration the demographics of a hospital’s service area. Studies have pointed out that economically challenged areas often have a higher readmission rate because, frequently, fewer resources and services are available to assist a patient’s post-acute care recovery. The rate is then compared to the Medicare national average of readmissions. If CMS deems the rate high, penalties could be imposed.

Under the final inpatient prospective payment system (IPPS) rule for FY 2016, CMS will continue to assess a maximum penalty of 3 percent of base Medicare payments for readmissions. Notably, the Hospital Readmissions Reduction Program is based on a three-year performance period. Therefore, current efforts to reduce readmissions will not produce immediate improvement in the CMS calculation of readmission rates. In addition, the penalty does not apply only to readmission cases; it applies to all Medicare discharged patient payments as well.

High-deductible health plans (HDHPs), underinsured patients, and 501(r) requirements. HDHPs are becoming prevalent across the country, leaving patients financially responsible for a greater portion of their healthcare than before. For providers, this frequently means increased bad debt and longer collection times as well as the need to change their front-end collection processes. Collection practices, however, are subject to the new restrictions under Section 501(r) of the Internal Revenue Code.

Section 501(r), created by the ACA, imposes new requirements on not-for-profit hospitals. Each such hospital organization must satisfy four general requirements on a facility-by-facility basis, including billing and collection requirements. Specifically, not-for-profit hospitals are prohibited from engaging in certain “extraordinary collection actions” (for example, reporting a debt to a credit bureau, selling the debt to a third party, or garnisheeing wages) without first making reasonable efforts to determine whether a patient is eligible for assistance under the hospital’s financial assistance plan. This can slow collections and reduce or delay reimbursement.

Payer contracts and capitation. Private payers typically follow the Medicare payment trends, so the challenges related to VBP with CMS will only multiply. One model that CMS is exploring, which could also eventually spread to private payers, is capitation. The American Medical Association (AMA) has identified several types of capitation, including relatively modest per member per month (PMPM) case management payments, primary care physicians involved in patient-centered medical homes, PMPM payments covering all professional services, and PMPM payments covering the total risk for all services (professional, facility, pharmaceutical, clinical laboratory, and durable medical equipment).7 Hospitals need to know where their break-even points are with capitation contracts.

In 10 states, CMS already has launched capitation demonstrations intended to improve care and control costs for individuals who are dually eligible for Medicare and Medicaid. The states are using managed care plans to coordinate services for beneficiaries through a person-centered planning process that focuses on the beneficiary’s strengths, needs, and preferences.8

Bundled payments. Bundled payments are intended to improve quality and reduce costs. Many hospitals have begun conversations or have already made contractual arrangements with physicians and other professionals about bundling payment for services that patients receive across a single episode of care. The bundled payment initiative is intended to encourage doctors, hospitals, and other healthcare providers to work together to better coordinate care for patients, both when they are in the hospital and after they are discharged. Many systems are not designed to track the care of the patient once the patient is discharged from the hospital. Additionally, patient billing systems are not designed to allocate funds between services or providers, complicating the distribution of a single payment to various parties.

Population Health Management

Hospitals and payers alike are setting their sights on population health management as a key to surviving the changing healthcare environment. Generally, the term refers to the efficient management of a defined group’s health needs, partly by taking advantage of modern technologies to proactively identify, prevent, and, when necessary, treat and manage chronic illness.9

CMS explains:

For medical practices, which are structured around individual, face-to-face encounters, pursuing a population-based approach means considering what happens between visits; using patient registries and other tools to improve the use of preventive care services; addressing health disparities by considering social, economic, and cultural factors; and referring patients to a wider range of community services. Through our Innovation Center, CMS is testing various approaches for medical practices, including methods for linking practices and patients to social support services and care management payments for non-face-to-face services to support outreach and coordination. CMS Health Care Innovation Awards (HCIAs) are being used to facilitate referrals between medical homes and community resources and to assign community health workers to assist patients with translation, appointment scheduling, referrals, and transportation.10

For example, population health management offers incentives to healthcare systems, physicians, and other types of providers to work together to identify populations with high cholesterol early on and act accordingly to avert blockages that eventually require stents. The idea is to manage overall health rather than individual health events – to be proactive rather than reactive.

Some have dubbed population health management “cradle-to-grave” care. This perspective is reflected in CMS’ suggested measures, which relate to such matters as tobacco use, body mass index, physical activity, fruit and vegetable consumption, diabetes, drinking and driving, blood pressure medication, colorectal cancer screenings, immunizations, HIV, and birth rate.11

Evolving Technology

Technology has affected and advanced healthcare at an astonishing rate, extending its reach into almost every aspect imaginable, from recordkeeping to physician visit alternatives.

Ten years ago, hospitals used paper medical records and employed abstracting departments to finesse massive piles of documentation into something useful. The movement toward portable healthcare information led to the introduction of electronic health records (EHRs), and meaningful use incentives expedited the use of these digital records. EHRs are not without their issues, though.

Current EHRs, for example, are a product of their design goals. In other words, they’re better at assuring compliance with documentation requirements than managing the continuum of care. In addition, the value of EHRs is limited by the integrity of the data entered – as the saying goes, “garbage in, garbage out.” Interoperability also has been a high hurdle. It’s been estimated that only 20 to 30 percent of providers are using EHRs to communicate with physicians at other institutions.12

As the sharing of EHRs becomes more common, cyberattacks and breaches are becoming more common, too. EHRs collect an incredible amount of data, including insurance information that renders EHRs tempting prey for fraud perpetrators. Indeed, experts now say that medical information is worth 10 times as much as a credit card number on the black market.13 Names, birth dates, policy numbers, diagnosis codes, and billing information are among the available data.14 Perpetrators use the data to create fake IDs to buy medical equipment or drugs for resale. In addition, they can match up a patient number with a fake provider number to file false claims with insurance companies.15

Technology also is altering patient-physician interactions. With telemedicine gaining a foothold, patients are expected to schedule fewer face-to-face office or hospital visits, turning instead to cost-effective virtual options for services such as vital sign monitoring. Insurers are beginning to encourage this more cost-effective approach to care delivery. Healthcare systems are recognizing that the shortage in primary care physicians and specialists, cost concerns, and similar issues are making technological interaction a necessity today.

In 2015, for example, the Cleveland Clinic announced a joint venture with Cox Communications to foster in-home monitoring and treatment such as video consultation via broadband and home use of equipment to monitor and manage recovery from surgery.16 The previous year, the clinic entered a joint venture with HealthSpot to provide care to patients in virtual walk-in kiosks located in nontraditional but high-density healthcare settings, including universities, workplaces, and retail locations.17


Part of the popularity of such remote-care options is a result of the rise of a previously unseen consumerism in healthcare. As patients’ shares of their healthcare costs climb steadily upward, they’re becoming more discriminating shoppers. In the same way that consumers have turned to online shopping options, patients are seeking nontraditional healthcare options that provide greater convenience, lower costs, and transparency. In addition to provider-affiliated kiosks and in-home virtual alternatives, patients increasingly are visiting clinics at retail stores. The emergence of “retail care” only heightens the competition for patients and payers.

Consumerism also means that patients are more willing to shop around than they have been in the past. If patients have an unpleasant or unsatisfactory experience with one provider, they’re much more likely than their parents would have been to take their business elsewhere.

Moreover, fewer patients are counting on word-of-mouth to find physicians. Instead, they’re conducting their own research. One survey firm found that 45 percent of surveyed consumers said they have viewed provider ratings and reviews, and 29 percent claimed that viewing online ratings and reviews is their first step in a physician search. Thirty-one percent said they have selected a physician based on a positive review; 32 percent said they have avoided a physician based on a negative review.18 The results were similar in an AMA survey: Among those who had sought online physician ratings in the preceding year, 35 percent reported selecting a physician based on good ratings, and 37 percent said they had avoided a physician with bad ratings. That survey also found that 59 percent of respondents said they regarded physician rating sites to be “somewhat important” or “very important."19  

Common Hospital Responses

In response to healthcare industry trends, hospitals are pursuing new or refined initiatives, sometimes simultaneously. The most common relate to:

Financial performance. Hospitals are implementing initiatives aimed at improving financial performance. For example, some are able to keep readmissions below CMS’ penalty threshold by monitoring relevant metrics. Some also are putting in place controls to limit bad debt expenses. That might include monitoring HDHPs and increasing upfront communications with HDHP policyholders about their payment responsibilities. The increase in merger and affiliation activities also is a result of pressures on the bottom line as organizations look to cut administrative costs and realize greater economies of scale.

Physician alignment. Health systems are taking steps to assemble the right complement of primary care and specialty physicians to attract both patients and payers. Specialty physicians are necessary if an organization is to offer the whole spectrum of care, but the influx of newly insured patients also is increasing the demand for primary care physicians. A recent study conducted for the Association of American Medical Colleges found that the United States likely will experience a shortage of about 12,500 to 31,000 primary care physicians by 2025.20

But alignment doesn’t benefit only hospitals. It can benefit physicians who have found it more difficult to manage their own practices in light of the growing administrative burden.

Clinical excellence and patient experience surveys. With reimbursement directly tied to a hospital’s performance on quality metrics, healthcare systems are working to improve their scores on clinical excellence and patient experiences by standardizing care through evidence-based protocols, benchmarks, and corrective plans. Monitoring of hospital-acquired infections and similar conditions also is intensifying.

Some hospitals are conducting audits of important practices related to CMS measures. For example, one hospital underwent an audit of its central lines data in hopes of avoiding CMS penalties for central-line-associated bloodstream infections (CLABSIs). The auditors found that the hospital was collecting data on the number of central lines – but the Centers for Disease Control and Prevention and CMS wanted to know the number of patients with central lines. As a result, the hospital’s reported infection rate could appear lower than it actually was, therefore unintentionally missing the penalty thresholds. In addition, this hospital was missing a baseline related to such benchmarks as device days, the length of time the lines stayed in, whether the lines were necessary for the therapy, and whether indications for insertion and continued use were clearly documented. Had such metrics been in place, outliers could have alerted the hospital to the need for a corrective plan.
Hospitals also are tracking their patient survey results closely. Rather than simply reviewing the results and hoping for the best going forward, the appropriate department heads need to develop a more service-oriented approach than used in the past, with the goal of earning higher patient experience scores and, in turn, higher reimbursements.

Employee engagement. “Employee engagement” has become a buzzword in human resources, and it’s particularly important for hospitals. Hospitals are undergoing immense changes, which can make it more difficult to retain employees. Some employees, for example, are confounded and frustrated by documentation requirements, EHRs, or ICD-10. They might feel as though they’re expected to do more with fewer resources while excessive amounts of data leave them susceptible to getting penalized for performance issues. In addition, growing nursing and physician shortages are pushing hospitals to take steps to keep the medical professionals that they have.

Of course, few institutions are in a position where they can rely solely on salaries to keep quality employees on board. More commonly, hospitals try to engage their staff with programs designed to increase their happiness on the job and off. That might include implementing wellness programs or staging regular events that open the lines of communication between employees and top management.

Growth and innovation. In the search for overall financial stability – and in response to shifts in the market – many hospitals are seeking growth, whether through partnerships with accountable care organizations (ACOs), membership in health exchanges, or expansion into areas like home healthcare or skilled nursing facilities. They’re also experimenting in innovations such as telemedicine to accomplish growth.

Some hospitals are either buying or starting insurance companies. According to Modern Healthcare:

Demands from employers and policymakers to slow health spending are driving healthcare systems’ push into insurance. New initiatives that save money by eliminating waste, improving quality, and promoting health require access to data captured by insurers, industry executives and experts say. That data can identify how often and what care patients receive – or don’t – and help providers identify possible targets to bolster care. Competition and consolidation among insurers may also be behind the deals.21

Standardized and streamlined processes. Hospitals are standardizing their processes on both sides of the organization. On the administrative side, they’re centralizing functions such as revenue cycle, human resource, finance, IT, and supply chain management; on the patient care side, they’re adapting EBPs.

Population health management. Healthcare systems are acting now to prepare for the widespread adoption of population health management, including through clinical integration. A hospital might affliliate with an existing ACO to benefit from data sharing, mining, and monitoring as well as the sharing of best practices. Other healthcare systems are offering broad-based services throughout a large geographical area to appeal to employers.

Information technology. As noted, the scope of IT initiatives is far-reaching. IT is intrinsically tied into initiatives from telemedicine and virtual health to the governance policies required for a hospital to harness and properly use the vast amounts of data rapidly compounding every day. EHR initiatives still exist, as well. Now that the initial stages of meaningful use implementation have passed, for example, larger health systems are switching to outside vendors to provide health IT solutions. Such switches typically are major (and stressful) endeavors for all involved.

Risks to Hospital Initiatives

Whatever the initiative, hospitals can expect to encounter challenges. Four specific risks are posing challenges for many healthcare systems as they attempt to implement initiatives already described.

1. Gaps in Data Collection, Management, and Analytics

Today’s hospital initiatives rely heavily on data. Organizations are collecting ever-growing amounts of data, but not all of it is usable. The lack of system interoperability among different ACOs, health information exchanges, or merged organizations can pose problems when aggregating data. For example, merged hospitals might use disparate systems, and one might not be pulling data from the necessary fields to compute VBP metrics.

That’s assuming the data has been collected in the first place. EHRs originally were developed for yesterday’s paradigm – not VBP, which continues to change – and might not have fields for all of the required data. Essential fields that have been created could remain empty if staff members haven’t been properly trained, and even if all the requisite data has been collected and entered, it might not be in a usable format. Some providers enter scanned images of documents in their EHRs. The data is in a digital format, but it can’t readily be accessed by other applications.

Data integrity is another stumbling block. As previously mentioned, data suffers from “garbage-in, garbage-out” syndrome. Questions have been raised about the accuracy of data collected with remote tools that lack any assurance that the entry is done properly and by authorized persons rather than fraudsters.

All of these problems impede a hospital’s ability to create value and improve decision-making with data analytics.

2. Evidence-Based Protocols

Evidence-based nursing practice is critical to the delivery of high-quality care that maximizes patient outcomes. Standardization of processes reduces variation and raises the quality of care. The VBP program includes 24 measures broken down into four categories, with patient outcomes accounting for 40 percent. Hospitals must use EBPs of care and monitor for deviations from protocols. Proactive monitoring is critical, as the shortcomings in quality care will hurt organizations through future reimbursement reductions.

3. Staying Ahead of the Measures

The ACA has introduced initiatives designed to measure and compensate hospitals for healthcare outcomes. As a result, reimbursement models are increasingly shifting from volume-based to outcomes-based. Outcomes-based reimbursement models are tied to care that occurred during a performance period that is often two years prior to the reimbursement period. For example, in 2016, CMS will reduce Medicare payments to 758 hospitals by approximately $364 million for being among those with the highest rates of hospital-acquired conditions during the 2014 performance measurement period.22 Therefore, what hospitals do today will affect future reimbursement. The success of ongoing efforts to improve healthcare quality, patient safety, and value will depend on proactively identifying emerging clinical risks and efficiently aligning clinical processes and resources to address those risks.

4. Physician Practice Management Challenges

If they didn’t already know it, hospital managers quickly are learning that physicians don’t always adapt well to change. In fact, they often resist it, which can undermine many initiatives. Physicians who are accustomed to working with relative value units (RVUs) might not adapt well to value metrics, productivity monitoring, and mandatory coding. They might rebuff suggestions that their “bedside manner” could use improvement to enhance patient satisfaction and recoil at the notion of being subject to online reviews.

Compensation for physicians who are now employees is another potentially touchy issue. Their compensation arrangements must comply with the Stark Law, the anti-kickback statute, and IRS guidelines. Organizations need to change compensation arrangements to align with new reimbursement paradigms, or they will risk a disconnect between organizational goals and physician behaviors. As reimbursement moves away from metrics related to volume and toward those related to VBP and quality, so must physician compensation arrangements move away from RVU-based incentives toward patient satisfaction and quality measures.

Finally, physicians who previously had managed their old practices might have taken a more relaxed approach to their revenue cycle than their new employer does. They could have done a poor job of capturing all charges and overridden or ignored standardized controls over the entire process, from patient registration to payment collection.

Weigh the Risks

When change is happening at such a whirlwind pace, it’s tempting for a hospital to seize any available initiative in hopes of surviving. However, every potential initiative comes with risks. Many initiatives ultimately fail to achieve desired results because the hospital didn’t properly consider the risks in advance or throughout implementation. The results can prove devastating not just to the bottom line but also to the hospital’s reputation.

Before launching any initiative, a hospital should perform a comprehensive risk assessment and take appropriate measures to mitigate identified risks. Establishing and tracking proper metrics throughout the project, based on validated data and continuous monitoring, are critical, too. New initiatives are not to be taken lightly; they’re an imperative for any hospital that wishes to stay successful in changing times.



1 “2015 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,” Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, July 22, 2015,
2 “HHS Reaches Goal of Tying 30 Percent of Medicare Payments to Quality Ahead of Schedule,” U.S. Department of Health and Human Services rel="noopener noreferrer" (HHS), March 3, 2016,
3 “Better, Smarter, Healthier: In Historic Announcement, HHS Sets Clear Goals and Timeline for Shifting Medicare Reimbursements rel="noopener noreferrer" From Volume to Value,” HHS, Jan. 26, 2015,
4 “Hospital Value-Based Purchasing,” rel="noopener noreferrer" Centers for Medicare & Medicaid Services, September 2015,
5 “Fiscal Year (FY) 2016 Results for the CMS Hospital rel="noopener noreferrer" Value-Based Purchasing Program,” Centers for Medicare & Medicaid Services, Oct. 26, 2015,
6 C.P. Landrigan, G.J. Parry, C.B. Bones, A.D. Hackbarth, D.A. Goldmann, and P.J. Sharek, “Temporal rel="noopener noreferrer" Trends in Rates of Patient Harm Resulting From Medical Care,” New England Journal of Medicine, Nov. 25, 2010,
7 “Capitation,” American Medical Association, visited March 31, 2016,
8 MaryBeth Musumeci, “Financial and Administrative rel="noopener noreferrer" Alignment Demonstrations for Dual Eligible Beneficiaries Compared: States With Memoranda of Understanding Approved by CMS,” Kaiser Family Foundation, Dec. 7, 2015,
9 Tom Sullivan, “What Exactly Is ‘Population Health,’ Anyway?” Healthcare IT News, May 26, 2015,
10 William J. Kassler, Naomi Tomoyasu, and Patrick H. Conway, “Beyond a Traditional Payer – CMS’s Role in Improving Population Health,” New England Journal of Medicine, Jan. 8, 2015,
11 “Suggested Population Level Measures for the CMS State Innovation Model Initiative,” Centers for Medicare & Medicaid Services,
12 Kenneth Corbin, “EHR Adoption Up, Challenges in Interoperability and Meaningful Use Remain,”, March 19, 2015,
13 Caroline Humer and Jim Finkle, “Your Medical Record Is Worth More to Hackers Than Your Credit Card,” Reuters, Sept. 24, 2014,
14 Ibid.
15 Ibid.
16 Lisa Richwine, “Cox Developing Digital Home Health Services With Cleveland Clinic,” Reuters, Feb. 19, 2015,
17 Timothy Magaw, “Cleveland Clinic Forms Joint Venture With Maker of Walk-in Kiosks,” Modern Healthcare, May 20, 2014,
18 Ryan Donohue, “The Digital Decision rel="noopener noreferrer" Maker: Consumer Trends in the Growing Space of Online Reputation,” National Research Corporation, April 2, 2015.
19 David A. Hanauer, Kai Zheng, Dianne C. Singer, Achamyeleh Gebremariam, and Matthew M. Davis, “Public Awareness, Perception, and Use of Online Physician Rating Sites,” The Journal of the American Medical rel="noopener noreferrer" Association, Feb. 19, 2014,
20 “The Complexities of Physician Supply and Demand: Projections From 2013 to 2025,” Association rel="noopener noreferrer" of American Medical Colleges, March 2015,
21 Melanie Evans, “Cutting Out the Middleman: Systems Buying and Developing Insurance Plans,” Modern rel="noopener noreferrer" Healthcare, March 23, 2013,
22 “Fiscal Year (FY) 2016 Results for the CMS Hospital-Acquired Conditions (HAC) Reduction Program,” Centers for Medicare & Medicaid Services, Dec. 10, 2015,

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