Hospitals, physicians and related health care providers have just 20 months to react to changes in the way Medicare, and perhaps the private sector, will begin to pay for services under the comprehensive health care reform legislation signed into law yesterday by President Obama. The massive overhaul of the health care system enacted yesterday, the Patient Protection and Affordable Care Act (the Act), is still subject to revision under a reconciliation bill being debated in the Senate (Click here to download a summary of the Act). The Act will require the purchase of health insurance for nearly 95 percent of the population covering approximately 32 million more Americans by Jan. 1, 2014. The most significant taxes and penalties associated with paying for this new entitlement begin in 2014 and following years. Certain popular and well-publicized provisions, such as access to parents’ insurance for children, kick in later this year.

Of particular importance to health care providers such as physicians and hospitals are two provisions in the Act that should motivate providers to create and participate in “Accountable Care Organizations” (ACOs). The first is a shared savings program to begin Jan. 1, 2012 (Shared Savings Program) and the second is a pilot program to begin Jan. 1, 2013 that will bundle payments for hospital and physician services for integrated care surrounding a hospitalization (Payment Bundling Pilot). Throughout our close analysis of this legislation while it was pending in the last several months, we discerned consensus among insiders and thought leaders, from health care strategists to Wall Street financiers and government insiders from both parties, on three points relevant to the government’s interest in ACOs.

First, health care costs, both to the public and private sectors, will rise substantially and quickly after passage of the Act because the Act, in itself, does little to impede this upward cost curve. Second, pressure to maintain output while lowering costs will fall on providers. Finally, the most likely winners among providers will be those in each region who can settle on a manner of formal integration and cooperation in order to form organizations that are poised to act as ACOs to manage costs and take advantage of new reimbursement opportunities.

The Act does not establish how either the Shared Savings Program or the Payment Bundling Pilot will structure payments. Instead, the Department of Health and Human Services is directed to fill in important details through regulation. However, it provides guidance on what would constitute an acceptable ACO, in language influenced by the Medical Group Management Association, emphasizing elements of governance and revenue sharing necessary for ACO formation by hospitals and physicians.

Beyond that opportunity, the new law is loaded with provisions that will place many health care providers under further pressure and scrutiny. Among them are new limitations on physician-owned hospitals, new Stark self-referral requirements for referrals for imaging services; a requirement for formal compliance programs; and expanded resources for fraud and abuse enforcement.

Although portions of the law are subject to court challenge, those provisions affecting providers likely will not be included in those challenges. Most involve changes to the Medicare program that are likely to influence the private sector to act in a similar manner.