Health care providers can receive Medicare or Medicaid financial incentives for adopting and using electronic health records (EHRs). The incentives come from more than $19 billion for investment in health information technology (HIT) in the American Recovery and Reinvestment Act of 2009 (ARRA)—the $787 billion economic stimulus package signed into law on February 17, 2009. The federal money to promote provider EHR uptake is a down payment on the national goal of “an electronic health record for each person in the United States by 2014.”

Federal EHR Financial Incentive Programs

Medicare Incentives. ARRA authorizes the Department of Health and Human Services (DHHS) to use Medicare reimbursement to reward physicians and hospitals that are “meaningful EHR users.” Between 2011 and 2016, Medicare will pay increased reimbursement to these “meaningful EHR users.” Physicians and hospitals that are not “meaningful EHR users” by 2015 will experience reduced Medicare reimbursement.

Medicaid Incentives. ARRA provides States money to fund incentive payments to promote adoption of EHR technology by Medicaid providers so they, too, will become “meaningful EHR users.” Providers opting for State Medicaid financial assistance for EHR adoption will not be eligible for the Medicare incentive payments for EHR use.

“Meaningful EHR Users.” Physicians and hospitals must meet the following requirements to be “meaningful EHR users”:

  • “Meaningfully” use “qualified EHR technology” that (a) is certified as meeting the standards that DHHS adopts for the type of EHR involved, and (b) allows for electronic exchange of health information.
  • Use the EHR to report clinical quality data and other measures to Medicare, as DHHS specifies.

If DHHS specifies, “meaningful EHR use” will require e-prescribing.

“Qualified EHR Technology.” To be “qualified” for incentive payments, EHR technology must have (a) the capability to include patient demographic and clinical health information, and (b) the capacity to (i) support order entry, (ii) provide decision support, (iii) capture and query information relevant to health care quality, and (iv) exchange electronic health information with and integrate electronic health information from other sources.

Benefits of EHR Adoption. According to the Congressional Budget Office, provider adoption of HIT, including EHR technology, will “reduce total spending on health care by diminishing the number of inappropriate tests and procedures, reducing paperwork and administrative overhead, and decreasing the number of adverse events resulting from medical errors.”[1]The Congressional Budget Office also sees benefits for private health plans and employers in provider HIT and EHR adoption because of “lower health care costs for private payers.”

Opportunities for Health Plans, Hospitals and Other Health Care Organizations. To accelerate the benefits of provider EHR adoption, health plans, hospitals and other health care organizations may want to mimic the federal lead and offer financial incentives to encourage their network providers, medical staffs and affiliated physicians to adopt and use EHRs. Health plans, hospitals or other health care organizations that piggyback EHR adoption incentives on the Medicare and Medicaid incentives may find heightened acceptance by their network providers, medical staffs and affiliated physicians. Indeed, if appropriately structured, their incentive programs should add little additional technological, training, implementation or administrative burdens for EHR adopters.

Anti-Kickback Statute and Stark Law Compliance. Health plans, hospitals and other health care organizations offering EHR adoption incentives need to take into account the federal prohibitions on remuneration in return for referrals of Medicare, Medicaid or other federal health care program business. Health plans, hospitals and other health care organizations should consider structuring their EHR adoption incentives to fit within the federal Anti-Kickback Statute EHR safe harbor and Stark Law EHR exception to avoid potential federal fraud and abuse complications.

Medicare Incentive Payments for Physician EHR Use

Physician Incentive Payments. Beginning 2011, Medicare will pay a physician (or the physician’s group practice) annual incentives for being a “meaningful EHR user” up to the following amounts.

Physicians Eligible for Incentive Payments. Any physician (including a dentist) participating in Medicare is eligible to receive Medicare incentive payments for being a “meaningful EHR user,” except physicians who furnish substantially all of their services in inpatient or outpatient hospital settings. Consequently, emergency physicians, anesthesiologists, radiologists, pathologists and other hospital-based physicians are not eligible for the Medicare incentive payments for EHR use.

Adjustments in Physician Incentive Payments. DHHS will increase the Medicare incentive payments for EHR use by 10% for a physician who is a “meaningful EHR user” and serves primarily a health professional shortage area. A physician’s Medicare incentive payments for EHR use in any year may not exceed 75% of the physician’s Medicare Part B payments for that year. To prevent double payments, physicians receiving the Medicare EHR incentive payments will not receive Medicare e-prescribing incentive payments.[2] Medicare incentive payments to physicians for EHR use stop after 2016.

Physician Payment Reductions for Non-EHR Use. DHHS will decrease Medicare Part B payments to physicians who were eligible to be, but failed to become, “meaningful EHR users” by 2015. The reductions will be as follows.

 After 2017, DHHS may decrease Medicare Part B payments an additional 1% for each year in which less than 75% of the physicians eligible to be “meaningful EHR users” are using EHRs. The maximum Medicare Part B payment decrease is 5%. DHHS may exempt from the Medicare Part B payment reductions a physician for whom becoming a “meaningful EHR user” would be a “significant hardship.” An exemption must end after five years.

Medicare Incentive Payments for Hospital EHR Use

Hospital Incentive Payments. Hospitals can receive millions in Medicare incentive payments over four years by becoming “meaningful EHR users.” Beginning fiscal year 2011, Medicare will pay an annual incentive to a hospital for being a “meaningful EHR user” based on the product of the following three factors:

  • The sum of (i) a $2,000,000 base amount and (ii) the hospital’s annual “discharge-related amount,” multiplied by
  • The hospital’s annual “Medicare share,” multiplied by
  • The hospital’s annual “transition factor.”

“Discharge-related amount.” A hospital’s “discharge-related amount” is the product of the hospital’s estimated annual number of discharges between 1,149 patients and 23,000 patients multiplied by $200 per discharge.

“Medicare share.” A hospital’s “Medicare share” is its estimated number of inpatient-bed-days attributable to Medicare Part A and Medicare Advantage patients, divided by the product of (i) its estimated total number of inpatient-bed-days multiplied by (ii) its estimated total amount of eligible hospital charges less charges attributable to charity care divided by its estimated total amount of hospital charges. DHHS sets the period over which these components are to be determined.

“Transition factor.” A hospital’s “transition factor” is determined as follows.

Medicare incentive payments to hospitals for EHR use stop after 2016.

Hospitals Eligible for Incentive Payments. Hospitals participating in Medicare, other than critical access hospitals, psychiatric hospitals, children’s hospitals, rehabilitation hospitals, long-term care hospitals and cancer hospitals, are eligible to receive Medicare incentive payments for being “meaningful EHR users.”

Critical Access Hospital Incentive Payments. Starting 2011, Medicare will make incentive payments to critical access hospitals for the purchase of EHR technology to enable them to become “meaningful EHR users.” The incentive formula for critical access hospitals is as follows:

  • The critical access hospital’s “Medicare share” plus 20 percentage points (though the hospital’s “Medicare share” may not exceed 100%), multiplied by
  • 101% of the critical access hospital’s reasonable cost of purchasing the EHR technology.

Critical access hospitals are eligible for Medicare incentive payments for the purchase of EHR technology for up to four consecutive years. No Medicare incentive payments may be made, however, if a critical access hospital fails to purchase EHR technology before 2016.

Hospital and Critical Access Hospital Payment Reductions for Non-EHR Use. DHHS will decrease Medicare Part A payments to hospitals that were eligible to be, but failed to become, “meaningful EHR users” by 2015. The reduction will be to the Medicare inflation adjustment factor (i.e., the applicable “Medicare market basket percentage”) that DHHS applies each year to the Medicare Part A inpatient prospective payment system. The amount of each annual reduction will be as follows.

Critical access hospitals that fail to become “meaningful EHR users” before 2015 will have their Medicare Part A cost reimbursement reduced from 101% to 100.66% in 2015, to 100.33% in 2016, and to 100% in 2017 and each year thereafter.

DHHS may exempt from these Medicare payment reductions a hospital for which becoming a “meaningful EHR user” would be a “significant hardship.” An exemption must end after five years.

Medicare EHR Use Incentive Payments to Medicare Advantage HMOs

Medicare Advantage organizations that are health maintenance organizations (MA HMOs) qualify to receive Medicare EHR incentive payments (a) for physicians they employ or physicians with whom they contract and who provide at least 80% of their services (based on at least 20 hours per week providing physician services) to the MA HMOs’ members, and (b) for hospitals under common control with MA HMOs. The Medicare EHR incentives paid to—and the associated Medicare payment reductions for failure to use EHR technology assessed against—MA HMOs are comparable to those under Medicare Part A for hospitals and those under Medicare Part B for physicians.

Medicare EHR incentive payments will be earned by MA HMOs only with respect to those affiliated physicians and hospitals that are “meaningful EHR users” during a Medicare EHR incentive payment year. An MA HMO may choose (within parameters to be established by DHHS) a year from 2011 through 2015 as its first Medicare EHR incentive payment year. The Medicare incentive payments to MA HMOs stop after 2016. Medicare payment reductions assessed against MA HMOs for failure of their affiliated physicians or hospitals to use EHR technology continue beyond 2016.

Medicaid Incentive Payments for Purchase and Use of EHR Technology

ARRA allocates funds to State Medicaid agencies to pay 100% of the incentives to encourage Medicaid-eligible professionals and Medicaid-eligible hospitals to purchase and maintain EHR technology, as well as to offset 90% of State Medicaid agencies’ costs to administer and oversee their Medicaid EHR incentive programs.

Medicaid-Eligible Professionals. The professionals eligible to receive Medicaid EHR incentive payments are physicians, dentists, nurse-midwives, nurse practitioners, and some physicians assistants, as long as they are not hospital-based like emergency physicians, anesthesiologists, radiologists and pathologists. To be eligible for Medicaid EHR incentive payments, a professional must devote the applicable percentage of his or her practice to serving Medicaid patients (e.g., 30% for an internist or 20% for a pediatrician).

Incentive Payments to Medicaid-Eligible Professionals. Medicaid-eligible professionals may receive from State Medicaid agencies up to $21,250 in federal dollars for the purchase of EHR technology. They may also receive from State Medicaid agencies up to $8,500 in federal dollars annually, for five years, for the operation, maintenance and use of their EHR technology. Their maximum Medicaid EHR incentive payments in federal dollars is, thus, $63,750. DHHS may reduce the maximum of federally-funded EHR incentive payments for Medicaid-eligible professionals if DHHS determines that the average cost for purchasing and maintaining EHR technology is less than $63,750.

Professionals accepting Medicaid EHR incentive payments are not eligible to receive Medicare EHR incentive payments. Medicaid-eligible professionals must pay at least 15% of the cost to purchase and maintain their EHR technology (i.e., State Medicaid agencies may pay no more than 85% of the professional’s cost to purchase and maintain the EHR technology). Federal funds may not be used for Medicaid incentive payments for the purchase of EHR technology after 2016 or for the maintenance of EHRs after 2021.

Medicaid-Eligible Hospitals. The hospitals eligible to receive Medicaid EHR incentive payments are acute-care hospitals with at least 10% of their patients drawn from Medicaid beneficiaries and children’s hospitals.

Incentive Payments to Medicaid-Eligible Hospitals. The Medicaid EHR incentive payments for Medicaid-eligible hospitals are determined by (a) using the formula for the Medicare hospital incentive payments (with the “Medicare share” factor deemed “1”) calculated over the four-year incentive payment period, then (b) multiplying the product of that formula by the hospital’s “Medicaid share” (i.e., the hospital’s inpatient-bed-days attributable to Medicaid patients, divided by the product of (i) its total inpatient-bed-days multiplied by (ii) its total eligible hospital charges less charges attributable to charity care divided by its total hospital charges).

Medicaid EHR incentive payments for a Medicaid-eligible hospital may be spread over a three to six year period, as long as the hospital begins receiving the payments before 2016. No federal funds may be used for incentive payments to hospitals that have not begun receiving Medicaid EHR incentive payments before 2016. Hospitals accepting Medicaid EHR incentive payments are not eligible to receive Medicare EHR incentive payments.

Programs for EHR Support at Medical Schools and by States and Tribes

Medical and other health professional schools are eligible for federal funds to pay for the development of academic curricula that integrate EHR technology into health professional education. The schools must pay at least 50% of the cost of these educational activities to receive federal funds, unless DHHS waives the cost-sharing requirement. Schools may not use the federal funds to purchase EHR hardware, software or services.

Beginning 2010, States and Native American tribes may compete for federal grants to subsidize loan and loan guarantee programs to facilitate widespread adoption of EHR technology by the providers serving their states or tribes.