The administration’s proposed budget includes numerous reforms that, if enacted, will profoundly affect hospitals and other health care service providers.

On February 26, 2009, President Obama released his first budget proposal, revealing a plan to extensively restructure the United States’ health care system. The plan calls for the creation of a $634 billion reserve fund to permit substantial systemic health reform, $316 billion of which will come from Medicare and Medicaid spending reductions. Where precisely those spending reductions come from will be a key question for health care service providers. Under the president’s proposal, fully $176 billion, the largest portion, would result from establishing competitive bidding for private Medicare Advantage plans. However, service providers would also be subject to spending reductions. Following are a few examples of where hospitals and certain other health care service providers may be most vulnerable.

Hospitals: Reducing Readmission Rates and Bundling Payments

Under the current proposal, hospitals could become subject to reduced payments tied to readmission rates. The administration contends that nearly 18 percent of Medicare patients discharged from a hospital were re-admitted within 30 days of the initial hospitalization. Under President Obama’s plan, hospitals with high rates of re-admission will be paid less if patients are re-admitted within the same 30-day period. Although the president’s plan is short on details, the language suggests support for a re-admission rate benchmark set as the average re-admission rate across similar hospitals or top performing facilities, and then penalizing hospitals that exceed that rate.

Additionally, the President’s plan calls for a new paradigm for bundled payments. Medicare would pay hospitals a bundled or global payment for all services provided to a patient during hospitalization and for certain post-acute care services during the 30 days following the initial hospitalization. According to the plan, this bundling will promote efficient use of primary care and encourage providers to take greater responsibility for the coordination of patient care.

The Administration believes this combination of incentives and penalties will yield a savings of approximately $26 billion over 10 years.

Action: Hospitals should begin to examine re-admission rates to gauge how they compare to peer groups. Additionally, hospitals should consider alliances or other integrations with post-acute providers to facilitate greater coordination under expanded bundled payment regimes.

Hospitals: Pay for Performance

The budget also calls for expansion of quality incentive programs, or so called “value-based purchasing.” Although Medicare hospital payments have for years been linked to reporting quality data, the plan proposes taking the next step, which is actually linking a portion of Medicare hospital payments to performance on specific quality measures. According to the plan, this pay-for-performance strategy will yield $12 billion in savings over 10 years and result in a higher quality of care.

In November 2007, the Centers for Medicare and Medicaid Services provided a roadmap for moving Medicare from pay-for-reporting to pay-for-performance. Key questions as Congress considers moving ahead with value-based purchasing are whether the program not only rewards facilities that meet quality benchmarks, but also those that have made substantial quality gains in performance relative to prior years. Congress also should consider whether certain safety net providers, such as sole community hospitals, should be subject to the same payment penalties.

Action: Hospitals with below-standard-quality measures may wish to explore relationships with management companies or better performing partners who can improve overall quality. Hospitals may also consider new relationships with physicians to invest doctors in quality outcomes. In addition, safety net hospital groups should consider advocating for targeted treatment under any pay for performance provisions.

Physician-Owned Hospitals

The plan also calls for addressing the conflicts of interest in “physician-owned specialty hospitals." Although the president’s support for restrictions on physician ownership has been known for some time, mention of restrictions in the budget should leave physician-owned hospitals concerned, because the issue is now linked to health care reform and becomes a funding imperative for achieving systemic changes. Though the budget specifically names “specialty” hospitals as the target for physician-ownership restrictions, given recent congressional action, it seems likely the debate about conflict of interest will move beyond specialty hospitals to include physician ownership of any hospital.

Action: Those contemplating participating in physician-owned hospitals should understand these likely developments, and plan accordingly.

Home Health Care

Reductions in payments to home health care agencies represent more than $37 billion in savings over 10 years under President Obama’s plan and could involve a significant reduction in profit margins for home health care agencies. While the budget proposal does not state the exact percentage amounts of proposed reductions over the 10-year period, in January 2009, the Medicare Payment Advisory Commission recommended that Congress reduce home health payments by 5.5 percent in 2010. Payment cuts of this magnitude could threaten the viability of many home health agencies and lead to a large number of elderly patients quickly losing access to essential care.

Some health systems may find themselves needing to subsidize and buttress home health providers to maintain care in their communities. Others may find it prudent to partner with national for-profit chains.

Radiology Benefit Managers

The president’s plan also includes a proposal to curb Medicare outlays for imaging by utilizing radiology benefit managers (RBMs) to make judgments about whether to approve payment for an imaging service ordered by a physician. The federal government contends that Medicare expenditures for imaging doubled between 2000 and 2006, and the administration projects $260 million in savings over 10 years through the use of RBMs. The RBMs’ decisions would be based on criteria formulated from recommended guidelines for clinical practices, and Medicare would not pay for services that were not approved. The proposal presents a specific challenge to imaging equipment makers and radiologists, and decreases the decision-making power of physicians.

Action: Investments in advanced imaging modalities are particularly vulnerable, and should be undertaken only with a complete understanding of likely changes to reimbursement. Hospitals may have opportunities to bring more imaging services in-house as market pressures shake out poorly utilized players.


While the current budget proposal is short on details, it reveals the president’s priorities, and implicitly offers support for other familiar legislative and regulatory proposals from which more detail can be gleaned. The administration has indicated that it will release a more extensive version of its health care plan later this spring.

The final budget will be negotiated and drafted by Congress. As the budget and health care reform legislation develops, further communications covering the highlights will be forthcoming.