EDN 816 Module 7 Government Payment and Oversight Example

Paid, Rewarded, Penalized and Audited: How Government Programs Shape a Community Hospital's Finances

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Doctor of Education Program, Aspen University

EDN 816: Financial Management in Healthcare Environments

Instructor Name

Month Day, Year

Paid, Rewarded, Penalized and Audited: How Government Programs Shape a Community Hospital's Finances

More than 60% of Linden Ferry Medical Center's patient days are paid for by Medicare or Medicaid, and the same government agencies that pay the hospital also reward it, penalize it and audit it. Nurse leaders feel these programs mostly as pressure: to discharge on time, to prevent falls and infections, to document completely. This paper explains the programs behind that pressure, how each affects the hospital's finances this year, what the evidence shows about their effects, and which of them nursing practice can influence. Amounts are composite.

Paid: Medicare's Fixed Payments

Most Medicare inpatient stays are paid through a prospective system that sets one amount per discharge from the diagnosis-related group, then adjusts it for local wages, teaching and the hospital's share of low-income patients. The fixed payment is the root of the hospital's incentives: a stay that runs longer than expected, or uses more resources, costs more without earning more. Hospital outpatient care has its own prospective fee schedule, which also fixes a rate for each service. Because these rates are set nationally, the hospital's main financial levers are cost per case, accurate documentation of patients' conditions and avoiding complications.

Rewarded and Penalized: Quality Programs

Three federal programs adjust inpatient payments for quality. The value-based purchasing program withholds 2% of base payments from every participating hospital and returns more or less than that amount depending on performance on outcomes, safety, how patients rate their care, and efficiency. The readmissions reduction program reduces payments by up to 3% for hospitals with more readmissions than expected for targeted conditions. The hospital-acquired condition reduction program takes 1% off the payments of the quarter of hospitals that score worst on infections and other avoidable harms. Each ties money to outcomes that nursing care strongly influences.

Medicaid, Supplemental Payments and 340B

Medicaid, run by the state, pays Linden Ferry below cost for most services, as Module 1 showed. The state partly offsets that shortfall with supplemental payments, including disproportionate share payments to hospitals whose patients are disproportionately low income. Because its Medicare disproportionate share percentage exceeds the 11.75% threshold for general acute hospitals, Linden Ferry also qualifies for the federal 340B program, which lets it buy outpatient drugs at discounted prices. The savings are meant to help hospitals serving vulnerable patients stretch their resources, and the program's use of those savings is closely watched by regulators and legislators.

The Programs in Dollars

The table shows each program's effect on Linden Ferry this fiscal year, based on $52.0 million of Medicare base inpatient payments.

What the Evidence Shows

Payment incentives do change behavior. Zuckerman et al. (2016) examined Medicare data from 3,387 hospitals: for the penalized conditions, readmissions dropped from 21.5% in 2007 to 17.8% in 2015, and rates for other conditions from 15.3% to 13.1%, with the steepest drop soon after the program was enacted. Observation stays rose over the same period, raising a concern that hospitals were relabeling readmissions, but within hospitals the increase in observation stays was not significantly associated with the fall in readmissions. The finding suggests that most of the improvement was real, which is encouraging for nurse leaders whose discharge work drives it.

Audited: The Cost Report and Enforcement

Every year Linden Ferry files a Medicare cost report detailing its costs, statistics and charges, which Medicare uses to settle certain payments and to set future rates. Payments are also reviewed by Medicare contractors and auditors, and billing errors can lead to repayment. Serious or knowing errors fall under federal fraud laws, most importantly the False Claims Act. Among 379 whistleblower-initiated federal health care fraud cases, recoveries reached $9.3 billion, and 75% of whistleblowers worked for the organizations they reported (Kesselheim & Studdert, 2008). Accurate documentation and coding are therefore both a revenue issue and a compliance obligation.

Tax Exemption and Community Benefit

Nonprofit status is itself a government program of a kind: Linden Ferry's tax exemption is worth several million dollars a year. In return, federal rules require nonprofit hospitals to assess community health needs every three years, adopt a financial assistance policy, limit charges to patients who qualify for assistance and report community benefit to the Internal Revenue Service. National evidence shows that nonprofit hospitals as a group devote a smaller share of expenses to charity care than government or for-profit hospitals, $2.3 per $100 compared with $4.1 and $3.8 (Bai et al., 2021), which has increased scrutiny of how hospitals earn their exemption.

Where Nursing Makes the Difference

Most of the program effects in the table depend on nursing practice. Falls with injury, pressure injuries and catheter infections drive the hospital-acquired condition and value-based scores. Discharge teaching, medication reconciliation and follow-up calls influence readmissions. Complete documentation of patients' conditions affects the diagnosis groups that set Medicare payment and supports the eligibility and records that Medicaid and 340B depend on. A reduction of just 0.2% in the readmissions penalty would save about $104,000, roughly the cost of one experienced nurse.

Tensions to Manage

The programs also create tensions. Penalties fall more heavily on hospitals serving poorer and sicker patients, whose readmission risks are harder to control, although the readmissions program now compares hospitals with peers serving similar shares of dually eligible patients. Pressure to shorten stays can conflict with safe discharge. And incentives tied to measured conditions can draw attention from unmeasured ones. Nurse leaders should use the programs as tools for improvement without letting the measures define the whole of quality.

Conclusion

Government programs pay Linden Ferry for most of its care, adjust that payment for quality, supplement it for low-income patients, audit it and grant the tax exemption that sustains the hospital. This year the quality programs cost the hospital a net of about $104,000, while supplemental payments and 340B savings added more than $7 million. Nearly every one of these effects depends on nursing care and documentation, which makes financial literacy about government programs part of the nurse leader's job.

References

Bai, G., Zare, H., Eisenberg, M. D., Polsky, D., & Anderson, G. F. (2021). Analysis suggests government and nonprofit hospitals' charity care is not aligned with their favorable tax treatment. Health Affairs, 40(4), 629-636. https://doi.org/10.1377/hlthaff.2020.01627

Kesselheim, A. S., & Studdert, D. M. (2008). Whistleblower-initiated enforcement actions against health care fraud and abuse in the United States, 1996 to 2005. Annals of Internal Medicine, 149(5), 342-349. https://doi.org/10.7326/0003-4819-149-5-200809020-00009

Zuckerman, R. B., Sheingold, S. H., Orav, E. J., Ruhter, J., & Epstein, A. M. (2016). Readmissions, observation, and the Hospital Readmissions Reduction Program. New England Journal of Medicine, 374(16), 1543-1551. https://doi.org/10.1056/NEJMsa1513024