Medicare Incentives for Hospitals - The Simplest Explanation (source:  HHS)

• Incentive payments are provided, beginning with October 2010, for eligible hospitals and critical access hospitals (CAHs) that are meaningful EHR users. Reduced payment updates beginning in FY 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. 
• Incentive Payments for Hospitals
  • The incentive payment for each eligible hospital would be calculated based on the product of (1) an initial amount, (2) the Medicare share, and (3) a transition factor. 

(a) The initial amount is the sum of a $2 million base year amount plus a dollar amount based on the number of discharges for each eligible hospital.

(b) The Medicare share is a fraction based on estimated Medicare fee-for-service and managed care inpatient bed days divided by estimated total inpatient bed-days and modified by charges for charity care.

(c) The transition factor phases down the incentive payments over the four-year period.  The factor equals 1 for the first payment year, ¾ for the second payment year, ½ for the third payment year, and ¼ for the fourth payment year, and zero thereafter.

The Secretary has discretion to use other data if the required data to calculate the incentive payment formula does not exist.  

• The transition factor is modified for those eligible hospitals that first become meaningful EHR users beginning in 2014.  Such hospitals would receive payments as if they became meaningful EHR users beginning in 2013 (i.e., if a hospital were to begin EHR meaningful use in 2014, the transition factor used for the year would be ¾ instead of 1, ½ for the second year, ¼ for the third year, and zero thereafter ).
• For CAHs that are meaningful EHR users, reasonable costs for the purchase of certified EHR technology would be computed by expensing such costs in a single payment year, rather than depreciating them over time.  In addition, 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 percent).  CAHs would receive a prompt 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.
• Market Basket Adjustments for Hospitals that are not Meaningful Users
  • 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.
  • The Secretary of 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 percent of reasonable costs are subject to the following payment adjustments: in FY2015, reimbursement for inpatient services at 100.66 percent of reasonable costs; in FY2016, reimbursement for inpatient services at 100.33 percent of reasonable costs; and in FY2017 and each subsequent year, 100 percent of reasonable costs.

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