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Information for administrators

Is your organization ready to implement the Affordable Care Act’s cost-cutting changes?

An important motivation for enacting the ACA was the need to control rapidly rising health care costs (a process known colloquially as “bending the cost curve”). To achieve this, the ACA included a number of cost-cutting provisions aimed at reducing the prices paid to providers and reducing the volume of utilization. Many of the most important ACA efforts toward cost control are also intended to improve the quality of care.

Disproportionate share hospital allotment reductions

Medicaid DSH

Drafted with the expectation of broadly expanded coverage through Medicaid and health insurance marketplaces – and commensurate reductions in hospital uncompensated care – the Affordable Care Act directed the Secretary of Health and Human Services (HHS) to make aggregate annual reductions to state Medicare and Medicaid DSH allotments beginning in 2014.

Under current law, in FY 2026, states’ DSH allotments will return to their pre-ACA inflation-adjusted levels.

Annual aggregate reductions in federal Medicaid DSH funding
YearReductionMandated by
2014 $500 million (Eliminated) Bipartisan Budget Act of 2013
2015 $600 million (Eliminated) Bipartisan Budget Act of 2013
2016 $1.2 billion (Eliminated) Protecting Access to Medicare Act of 2014
2017 $1.8 billion (Eliminated) Medicare Access and CHIP Reauthorization Act (MACRA) of 2015
2018 $2.0 billion MACRA 2015
2019 $3.0 billion MACRA 2015
2020 $4.0 billion MACRA 2015
2021 $5.0 billion MACRA 2015
2022 $6.0 billion MACRA 2015
2023 $7.0 billion MACRA 2015
2024 $8.0 billion MACRA 2015
2025 $8.0 billion MACRA 2015

» Visit for a fact sheet on the Medicaid DSH reductions.

Medicare DSH

Section 3133 of the Affordable Care Act reduces Medicare DSH payments by $22.1 billion from FY 2014 through FY 2019.

The ACA requires that, beginning in 2014, hospitals initially receive 25 percent of the Medicare DSH funds they would have received under the traditional formula, with the remaining 75 percent flowing into a separate funding pool for Medicare DSH hospitals. This pool will be reduced as the percentage of uninsured declines and will be distributed based on the proportion of total uncompensated care each Medicare DSH hospital provides.

Each Medicare DSH hospital will receive an uncompensated care payment based on its share of insured low-income days (that is, the sum of Medicaid days and Medicare SSI days) reported by Medicare DSH hospitals.

Each hospital’s uncompensated care payment is the product of three factors:

  • 75 percent of the estimated DSH payments that would otherwise be made under the old DSH methodology (section (d)(5)(F) of the Social Security Act)
  • 1 minus the percent change in the percent of individuals age of 65 or younger who are uninsured (minus 0.1 percentage points for FY 2014, and minus 0.2 percentage points for FY 2015 through FY 2017)
  • A hospital’s amount of uncompensated care relative to the amount of uncompensated care for all DSH hospitals expressed as a percentage

» Visit for details on the Medicare DSH adjustment.

Care delivery and quality improvement

Accountable Care Organizations

The ACA authorizes the use of Accountable Care Organizations to improve the safety and quality of care and reduce health care costs in Medicare. An ACO is a group of providers and suppliers that work together to coordinate care for the patients they serve under Medicare. The Medicare Shared Savings Program rewards ACOs that lower growth in Medicare costs while meeting performance standards by allowing the ACO to share in accrued savings. Patient and provider participation in an ACO is purely voluntary.

To share in savings, ACOs must meet quality standards in five key areas:

  1. Patient/caregiver care experiences
  2. Care coordination
  3. Patient safety
  4. Preventive health
  5. At-risk population/frail elderly health

» Visit for more information on the Shared Savings Program.

Bundled payments

The ACA instructs the secretary of health and human services to implement, no later than Jan. 1, 2013, a voluntary national pilot program focused on payment bundling. Bundling payment for services that patients receive during a single episode of care, such as heart bypass surgery or a hip replacement, is intended to encourage doctors, hospitals and other health care providers to work together to better coordinate care for patients, both when they are in the hospital and after they are discharged.

The pilot program will be conducted initially for five years. However, at any point after Jan. 1, 2016, if it is determined that expanding the pilot program will either maintain or improve quality and reduce costs, the secretary of HHS can extend its duration and scope indefinitely.

The bundled payments initiative comprises four broadly defined models of care, which link payments for multiple services beneficiaries receive during an episode of care:

  • Model 1 includes an episode of care focused on the acute care inpatient hospitalization. Awardees agree to provide a standard discount to Medicare from the usual Part A hospital inpatient payments.
  • Models 2 and 3 involve a retrospective bundled payment arrangement where actual expenditures are reconciled against a target price for an episode of care.
  • Model 4 involves a prospective bundled payment arrangement, where a lump sum payment is made to a provider for the entire episode of care.

» Visit for more details on the Bundled Payments for Care Improvement Initiative.

Quality programs

Hospital Readmissions Reduction Program

Section 3025 of the ACA established the Hospital Readmissions Reduction Program, which requires Centers for Medicare and Medicaid Services to reduce payments to Inpatient Prospective Payment System (IPPS) hospitals with excess readmissions, effective for discharges beginning on Oct. 1, 2012.

The Hospital Readmissions Reduction Program requires a reduction to a hospital’s base operating Diagnosis-Related Group (DRG) payment to account for excess readmissions of selected applicable conditions. For FY 2015 and FY 2016, these conditions are acute myocardial infarction (AMI), heart failure (HF), pneumonia (PN), chronic obstructive pulmonary disease (COPD), and elective primary total hip and/or total knee arthroplasty (THA/TKA).

Federal regulations established a methodology to calculate the excess readmission ratio for each applicable condition, which is used, in part, to calculate the readmission payment adjustment. A hospital’s excess readmission ratio for AMI, HF PN, COPD, and THA/TKA is a measure of a hospital’s readmission performance compared to the national average for the hospital’s set of patients with that applicable condition.

CMS established an applicable period of three years of discharge data and the use of a minimum of 25 cases to calculate a hospital’s excess readmission ratio of each applicable condition. The performance periods for each federal fiscal year (FY) are:

  • FY 2013: July 1, 2008 to June 30, 2011
  • FY 2014: July 1, 2009 to June 30, 2012
  • FY 2015: July 1, 2010 to June 30, 2013
  • FY 2016: July 1, 2011 to June 30, 2014
  • FY 2017: July 1, 2012 to June 30, 2015

» Visit for more details on the Hospital Readmissions Reduction Program.

Hospital Value-Based Purchasing Program

The Hospital Value-Based Purchasing Program rewards acute-care hospitals with incentive payments based on the quality of care provided to Medicare patients, how closely best clinical practices are followed, and how well hospitals enhance patients’ experiences of care during hospital stays.

As required by the ACA, a pool of funds to be redistributed to hospitals based on quality-performance will be funded through an across-the-board reduction to Medicare IPPS payments. The reduction began at 1 percent in FY 2013, and will increase by 0.25 percent each year until the reduction reaches 2 percent for FY 2017 and subsequent years.

CMS utilizes a linear exchange function to translate the estimated amount available into a value-based incentive payment percentage for each hospital, based on its total performance score. CMS then calculates a value-based incentive payment adjustment factor which will be applied to the base operating DRG payment amount for each discharge occurring that fiscal year, on a per-claim basis.

» Visit for more details on the Value-Based Purchasing Program.

Hospital-Acquired Condition Reduction Program

The ACA establishes an adjustment to hospital payments for hospital-acquired conditions (HACs), or a Hospital-Acquired Condition Reduction Program, under which payments to applicable hospitals are adjusted to provide an incentive to reduce hospital-acquired conditions, effective for discharges beginning on Oct. 1, 2014 (FY 2015).

The HAC reduction program requires CMS to reduce hospital payments by 1 percent for hospitals that rank among the lowest-performing 25 percent with regard to HACs. The HAC payment penalty adjustment would occur after base DRG payment adjustments have been calculated and made for the VBP and readmission reduction programs.

The HAC program has three measures for FY 2016:

  • Patient safety indicator (PSI) 90 composite measure
  • Central line-associated bloodstream infections (CLABSI) measure
  • Catheter-associated urinary tract infections (CAUTI) measure
  • Surgical site infections (SSI) measure

» Visit for more details on the Hospital-Acquired Condition Reduction Program.

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