I. Overview

Under United States federal legislation and rules being promulgated thereunder, a set of incentives and penalties is being implemented to encourage eligible hospitals and healthcare providers to obtain certified electronic health record systems and employ them in a manner which is deemed to constitute “meaningful use”.

On December 30, 2009, the U.S. government provided substantial guidance as to what functions electronic health care records1 (“EHR”) technology must be able to perform in order for eligible users (generally Medicare and Medicaid physicians and hospitals) of such technology to be entitled to receive government financial incentive payments and to avoid financial penalties provided for under the HITECH Act2. The government has designated $19.2 billion as available financial incentives for EPs (as defined below) and eligible hospitals which are meaningful users of Certified EHR Technology (as defined below). Moreover, under the HITECH Act, one of the government’s goals is that every healthcare provider in the United States will utilize EHR technology by 2014, thus suggesting a much broader application than just for Medicare and Medicaid EPs and eligible hospitals. Accordingly, suppliers offering EHR technology which satisfy the capabilities listed for certification (and the several others provided for within the “meaningful use” rules) should witness significant market expansion and benefit from a competitive advantage and physicians and hospitals will have compelling incentives to use such technology.

This memorandum provides a background summary, selected details regarding the program, including timing, and sets forth a summary of CMS’s (as defined below) proposed definition of meaningful use and HHS’s (as defined below) certification criteria for EHR technology. The Proposed Rule (as defined below) and IF Rule (as defined below) include over 700 pages of rules and discussions in addition to the lengthy HITECH Act itself, which contains some operative provisions that are not covered by these rules. The complete publication of the Proposed Rule and IF Rule can be found on the Office of the Federal Register’s website (www.federalregister.gov). This memorandum only briefly summarizes certain aspects of the HITECH Act, Proposed Rule and IF Rule and should not be relied upon as providing definitive advice pertaining to them. This memorandum is intended primarily for electronic health care record providers and does not constitute legal advice regarding healthcare itself.

II. Introduction

On Feb. 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) which, among other things, appropriated approximately $49 billion to promote the utilization of EHRs. The legislation’s goal is through financial incentives and financial penalties, provide major opportunities for the Department of Health and Human Services (“HHS”), its partner agencies, and the States to improve the nation’s health care through health information technology by promoting the meaningful use of Certified EHR Technology. The HITECH Act portion of the Recovery Act authorizes the Centers for Medicare & Medicaid Services (“CMS”) to provide payments to eligible professionals (“EPs”)3 and eligible hospitals4 who are successful in becoming “meaningful users” of EHR technology while imposing financial penalties upon those which do not.

Under the HITECH Act, funding will be available to EPs and eligible hospitals (collectively, “Providers”). Funds will be distributed through Medicare and Medicaid incentive payments to Providers who are “meaningful EHR users.” In addition, with regard to the Medicaid program, federal matching funds are also available to state governments to support their administrative costs associated with these provisions. In general, the incentive payments begin in 2011, and gradually decrease through 2014. Moreover, beginning in 2015, Providers will be subject to financial penalties under Medicare if they have not adopted and are not actively utilizing Certified EHR Technology in compliance with the “meaningful use” definition.

Under the HITECH Act, initial incentive payments for eligible hospitals which demonstrate meaningful use of a certified EHR system range from $2 million to $6.37 million annually (based on the volume of Medicare-supported patients). EP’s who adopt Certified EHR Technology as early as 2011 or 2012 may be eligible for up to $44,000 in incentive payments spread out over 5 years (increased by 10% for EPs who predominantly furnish services in a health professional shortage area)5. Thereafter, incentive payments may continue for a five year period so long as meaningful use requirements continue to be met.

On December 30, 2009, as required by the HITECH Act, CMS issued proposed rules (the “Proposed Rule”) to govern the Medicare and Medicaid EHR incentive programs, including the definition of the central concept of “meaningful use” of EHR technology. In conjunction with CMS’s Proposed Rule, on December 30, 2009, HHS published an interim final rule (the “IF Rule”) containing an initial set of standards, implementation specifications, and certification criteria for EHR technology. The IF Rule sets forth those requirements necessary in order for EHR technology to be eligible to be “certified,” and the technical specifications needed to support secure, interoperable, nationwide electronic exchange and meaningful use of health information. The certification criteria adopted in the IF Rule establishes the capabilities and related standards that Certified EHR Technology will need to include in order to, at a minimum, support the achievement of the proposed Stage 1 meaningful use by EPs and eligible hospitals under the Medicare and Medicaid EHR incentive programs.

III. Criteria for Qualifying for Incentive Payments

In order to qualify for incentive payments under the HITECH Act, a Provider must demonstrate “meaningful use” of Certified EHR Technology.

A. Proposed Definition of Meaningful Use

The Proposed Rule contains proposed provisions to govern the EHR incentive programs, including defining the central concept of “meaningful use” of EHR technology. These rules will not be effective until after a comment period and further period for the government to consider revisions. However, since CMS received and considered in advance substantial input from a multitude of constituencies, it is quite possible that the final rules will be substantially similar to the Proposed Rule.

The Proposed Rule would define the term "meaningful EHR user" as an EP or eligible hospital that, during the specified reporting period, demonstrates meaningful use of Certified EHR Technology in a form and manner consistent with specific objectives and measures presented in the Proposed Rule. The purpose behind these objectives and measures is to foster use of Certified EHR Technology in a manner that improves quality, safety, and efficiency of health care delivery, reduces health care disparities, engages patients and families, improves care coordination, improves population and public health, and ensures adequate privacy and security protections for personal health information.

The Proposed Rule defines meaningful use for the Medicare EHR incentive programs. It proposes one definition that would apply to EPs participating in the Medicare fee-for-service and the Medicare Advantage EHR incentive programs as well as a proposed definition that would apply to eligible hospitals and critical access hospitals. These definitions also would serve as the minimum standard for EPs and eligible hospitals participating in the Medicaid EHR incentive program. The Proposed Rule proposes that states could request CMS approval to implement additional meaningful use measures, but could not request approval of fewer or less rigorous meaningful use measures than required by the rule.

The Proposed Rule proposes a phased approach to implement the ultimate requirements for demonstrating meaningful use. This approach initially establishes criteria for meaningful use based on CMS’s understanding of currently available technological capabilities and providers’ practice experiences. CMS intends to establish stricter and more extensive criteria for demonstrating meaningful use over time, as anticipated developments in technology and providers’ capabilities occur, which will be incorporated in future phases.6

1. Stage 1 Criteria for Meaningful Use

The proposed Stage 1 criteria for meaningful use focuses on electronically capturing health information in a coded format through Certified EHR Technology using that information to track certain key clinical conditions, communicating that information for care coordination purposes, and initiating the reporting of clinical quality measures and public health information.

The proposed criteria for meaningful use are a series of specific “objectives”, each of which is tied to a proposed “measure” that all EPs and hospitals must meet in order to demonstrate that they are meaningful users of Certified EHR Technology. For Stage 1, which begins in 2011, CMS proposes 25 objectives/measures for EPs and 23 objectives/measures for eligible hospitals. There are more favorable standards available for Medicaid EPs and eligible hospitals as compared to Medicare standards. In addition to EHR technology meeting the certification requirements referred to below, suppliers and healthcare providers will require them to be able to accomplish all of the foregoing functionalities on the terms and to the extent under the final version of the Proposed Rules so as to meet the objectives and measures requirements.

2. Beyond Stage 1 Criteria for Meaningful Use

CMS stated that it intends to propose through future rulemaking two additional stages of criteria for meaningful use. Stage 2 is expected to expand upon the Stage 1 criteria in the areas of disease management, clinical decision support, medication management, support for patient access to their health information, transitions in care, quality measurement and research, and bi-directional communication with public health agencies. CMS may consider applying the criteria more broadly to both the inpatient and outpatient hospital settings. Stage 3 is expected to focus on achieving improvements in quality, safety and efficiency, focusing on decision support for national high priority conditions, patient access to self management tools, access to comprehensive patient data, and improving population health outcomes.

B. Interim Final Rule Certification Criteria for EHR Technology

The goal of the rules regarding certification are to establish initial specified applicable standards and implementation methodologies or criteria to be used to test and certify that given EHR technology includes delineated capabilities. In doing so, the rules establish initial criteria for various activities (e.g., transmitting electronic information) and for required functionality (e.g., storing specified electronic information). Technology meeting all such requirements, but only if it is certified as such, is referred to as Certified EHR Technology. Only the use of Certified EHR Technology can constitute Stage 1 “meaningful use.” The standards, implementation specifications, and certification criteria adopted in the IF Rule are meant to serve as the basis for the testing and certification of Complete EHRs and EHR Modules (both as described below).

Certified EHR Technology must include the capabilities included in the definition of Qualified EHR. Qualified EHR is an electronic record of health-related information of an individual which includes patient demographic and clinical health information (e.g., medical history and problem lists) and which has the capacity to provide clinical support, support physician order entry, capture and query information relevant to health care quality and exchange electronic health information with and integrate such information from other sources. Certified EHR Technology must be a Complete EHR or a combination of EHR Modules, each of which meets specified minimum requirements and has been tested and certified, thus a technology can be a fully functional standalone system or a combination of multiple systems (although the combining of different Certified EHR Modules does not itself need to be certified). Complete EHR is EHR technology that meets all applicable certification criteria. An EHR Module is any service, component or combination thereof that can meet the requirements of at least one certification criterion.

The IF Rule adopts, inter alia, technical standards for exchanging electronic health information; in other words, it defines the transport methods that must be used, such as the particular object access protocol that must be applied. Different types of records such as prescription information and administrative transactions are subject to different criteria in terms of their electronic transmission. The IF Rule also requires certain standards in order to protect the confidentiality of the information while it is created, maintained and exchanged, including encryption provisions. The IF Rules are intended generally to be consistent with other existing rules, such as HIPAA. There are 22 different functionalities that Complete EHR or EHR Modules must be able to perform. There are also additional certification criteria for Complete EHRs or EHR Modules designed to be used in an ambulatory setting, as well as additional ones for those designed to be used in an in-patient setting.

The IF Rule as a whole is effective immediately, although there is a 60-day comment period and the government reserves the right to make changes. Most provisions within it apply immediately. In a few instances standards are deferred to specified later dates.

The release adopting the IF Rule contemplates additional future rule making in this area, including in particular with respect to interoperability and standardization and as a result of more demanding definitions over time of meaningful use. According to HHS, in general, the standards adopted in the rule are consistent with current industry practices. Subsequent rules will likely contain standards that will provide greater detail, capability and specificity to achieving interoperability.

There will be a separate notice and comment period for rules to establish the procedures for the certification of EHR technology and the process a party will need to follow to become an authorized certification body.7

IV. Medicare Payment Incentives and Penalties for Eligible Professionals

EPs can receive between $40,000 and $60,000 over a five-year period if they implement health information technology compliant with the HITECH Act beginning in January 2011. Incentive payments are earned annually. The incentive payment is equal to 75% of Medicare allowable charges for covered services furnished by the EP in a year, subject to a maximum payment in the first, second, third, fourth, and fifth years of $15,000; $12,000; $8,000; $4000; and $2,000, respectively. For early adopters whose first payment year is 2011 or 2012, the maximum payment is $18,000 in the first year. There will be no payments for meaningful EHR use after 2016. There will be no payments to EPs who first become meaningful EHR users in 2015 or thereafter. For EPs who predominantly furnish services in a health professional shortage area, incentive payments would be increased by 10%. In other words, EPs, who adopt EHRs as early as 2011 or 2012 may be eligible for up to $44,000 in Medicare incentive payments spread out over five years (increased by 10% for EPs who predominantly furnish services in a health professional shortage area).

Beginning in 2015, negative payment adjustments will be imposed on EPs who are not meaningful EHR users. The Medicare fee schedule amount for professional services provided by an EP who is not a meaningful EHR user for the year would be reduced by 1% in 2015, by 2% in 2016, by 3% for 2017 and by between 3 and 5% in subsequent years. For 2018 and thereafter, if the Secretary finds that the proportion of EPs who are meaningful EHR users is less than 75%, then the reductions will be increased by 1 percentage point each year, but by not more than 5% overall.

A hospital-based eligible professional8 who substantially furnish its services in a hospital setting are not eligible for incentive payments or subject to financial penalties.

V. Medicare Payment Incentives Payments for Hospitals

Incentive payments for hospitals start at a rate of $2 million annually and hospitals may be eligible for additional amounts based on the volume of Medicare-supported patients. Incentive payments are provided, beginning with October 2010, for eligible subsection (d) hospitals9 and critical access hospitals (“CAHs”) that are meaningful EHR users. Reduced payments beginning in fiscal year 2015 will apply to eligible hospitals that are not meaningful EHR users. An eligible hospital that is a meaningful EHR user could receive up to four years of financial incentives payments, beginning with fiscal year 2011. There will be no payments to hospitals that become meaningful EHR users after 2015. The incentive payment for each eligible hospital would be calculated based on the product of (1) an initial amount10, (2) the Medicare share11, and (3) a transition factor12.13

In addition to receiving such incentive payments, for CAHs that are meaningful EHR users, reasonable costs for the purchase of Certified EHR Technology would be expensed in a single year, rather than depreciated over time. Moreover, incentive payments for CAHs would be based on the Medicare share formula used for subsection (d) hospitals, plus 20 percentage points (not to exceed a total of 100%). CAHs would receive an interim payment for the Medicare share of such costs (subject to reconciliation). Payments would not be made with respect to a cost reporting period beginning during a payment year after 2015, and in no case would a CAH receive payment with respect to more than 4 consecutive payment years.

Hospitals that do not qualify as meaningful users by 2015, will be subject to penalties and payment cuts, which are characterized as market based adjustments under the HITECH Act. As such, eligible subsection (d) hospitals that are not meaningful users for a fiscal year would receive a net reduction of ¼, ½, and ¾ of the market basket update that would apply in 2015, 2016, 2017 and thereafter, respectively. Generally speaking, penalties for a single violation can total $250,000, with a maximum of $1.5 million for repeated or uncorrected violations. However, HHS may, on a case-by-case basis, exempt a hospital if requiring the hospital to be a meaningful EHR user would result in a significant hardship. Eligible CAHs that are not meaningful EHR users for a fiscal year and otherwise would be paid at 101% of reasonable costs are subject to the following payment adjustments: (i) in fiscal year 2015, reimbursement for inpatient services at 100.66% of reasonable costs; (ii) in fiscal year 2016, reimbursement for inpatient services at 100.33% of reasonable costs; and (iii) in fiscal year 2017 and each subsequent year, 100% of reasonable costs.

VI. Medicaid Payment Incentives for Providers

The HITECH Act establishes 100% Federal Financial Participation (“FFP”) for States to provide incentive payments to eligible Medicaid providers to purchase, implement, and operate (including support services and training for staff) Certified EHR Technology. It also establishes 90% FFP for State administrative expenses related to carrying out this provision.

Under Medicaid, the statute does not define fixed amounts of incentive payments that an EP can earn for using an EHR, only ceilings that cannot be exceeded. CMS expects that the actual payment amounts will be more fully addressed through notice and comment rulemaking.

A. Medicaid Incentive Payments to Providers

Certain classes of Medicaid professionals and hospitals are eligible for incentive payments to encourage the adoption and use of Certified EHR Technology. To qualify, EPs must meet minimum Medicaid patient volume percentages, and must waive rights to duplicative Medicare EHR incentive payments. EPs may receive up to 85% of the net average allowable costs for Certified EHR Technology, including support and training (determined on the basis of studies that HHS will undertake), up to a maximum level, and incentive payments are available for no more than a 6-year period. Acute care hospitals with at least 10% Medicaid patient volume would also be eligible for payments, as would children's hospitals of any patient volume. Entities that promote the adoption of Certified EHR Technology, as designated by the State, are also eligible to receive incentive payments through arrangements with eligible professionals under certain conditions.

B. Medicaid Incentive Program Qualifications

To be eligible for incentive payments not associated with the initial adoption/implementation/upgrade of EHR technology, the Provider must demonstrate meaningful use of the EHR technology through a means approved by the State and acceptable to HHS. In determining what is “meaningful use,” a State must ensure that populations with unique needs, such as children, are addressed. A State may also require Providers to report clinical quality measures as part of the meaningful use demonstration. In addition, to the extent specified by HHS, the EHR technology must be compatible with State or Federal administrative management systems.

EPs may not receive an incentive under both Medicare and Medicaid in a given year. CMS and the States will develop means to prevent such duplicate payments. CMS expects that the prevention of duplicative payments will be addressed more fully through notice and comment rulemaking.