By improving the efficiency and quality of health care services, electronic health records (EHRs) have been hailed as a promising new component of America's future health care industry. However, due to cost and other perceived implementation obstacles, the overall impact of EHRs on the health delivery system has been muted, and the new technology is still regarded as a luxury rather than a necessity for many health care providers.

The reluctance to embrace EHR technology seems likely to be replaced with real enthusiasm in many quarters given that the new federal legislation commonly known as the "stimulus package" strongly promotes rapid EHR adaptation. With a structural "carrot and stick" approach to EHR adaptation embodied in the American Recovery and Reinvestment Act of 2009 (ARRA), the time may have finally arrived for many hospitals and other eligible professionals to start or accelerate implementation of EHR technology. The ARRA sends a clear and powerful message to health care providers nationwide: Adopt EHR technology now or pay the price later. The legislation makes more than $17 billion available to hospitals and physicians that adopt qualifying EHR technology within specified timeframes, including potential payments of up to $11 million for individual hospitals and up to $44,000 for individual qualifying professionals. But institutional and individual providers that do not take advantage of the new opportunity by adopting EHR technology in a timely way will suffer reductions in Medicare reimbursement at a defined point thereafter.

Increased Reimbursement Now or Penalties Later

Hospital Incentives

Under the new law, a hospital that adopts and appropriately uses certified EHR technology will be rewarded with increased Medicare reimbursement. Incentive payments will be awarded to hospitals that demonstrate meaningful use of certified EHR technology during each incentive payment year. In order to encourage hospitals to adopt EHR technology early, the total possible amount of incentive payments ($11 million) will decrease the longer a hospital waits to become an EHR user.

In addition to Medicare reimbursement for services and items provided, under a defined formula qualifying hospitals will receive an incentive payment of $2 million plus a discharge-related payment. This amount is then multiplied by the hospital's Medicare share. The discharge payment is equal to an additional $200 for each inpatient discharged during the year between the 1,150th and 23,000th discharge. A hospital's Medicare share is determined as a fraction, with the numerator being the total of Medicare and Medicare Advantage inpatient bed days and the denominator being the total number of inpatient bed days adjusted by the hospital's total charges attributed to charity care.

The incentive payments will be paid out over four years on a transitional schedule with the full amount being received in the first year of payment, followed by 75 percent of the full amount in the second year, 50 percent of the full amount in the third year and 25 percent of the full amount in the fourth year. Hospitals that implement EHR technology and qualify for an incentive payment in 2011, 2012 or 2013 will receive the maximum payment amount over that time. Hospitals that first qualify for an incentive payment in 2014 or 2015 will receive incentive payments on the transitional schedule as if their first payment year was 2013. Notably, however, if a hospital waits until after 2015 to adopt EHR technology, incentive payments will not be available.

To summarize, the highest incentive payments will be granted to hospitals that adopt EHR technology in years 2011, 2012 or 2013. Reduced incentive payments are granted to hospitals that adopt EHR technology in years 2014 or 2015, while no incentive payments are granted to hospitals that adopt EHR technology after 2015.

As a distinct item, critical access hospitals (CAHs) that meet the statutory criteria to be "meaningful users" of EHR technology within the meaning of ARRA are also entitled to incentive payments and subject to penalties, although the incentives and penalties are calculated in a slightly different manner than is the case for hospitals that are not CAHs.

Professional Incentives

An "eligible professional"—including a doctor of medicine or osteopathy, a doctor of dental surgery or dental medicine, a doctor of podiatric medicine, a doctor of optometry or a chiropractor—who adopts and appropriately uses certified EHR technology will be rewarded with increased Medicare reimbursement. Similar to incentive payments to hospitals, incentive payments will be awarded to professionals who demonstrate meaningful use of certified EHR technology during each incentive payment year.

In order to encourage professionals to adopt EHR technology early, the total possible amount of incentive payments ($44,000) will decrease the longer a professional waits to become an EHR user. The incentive payments will be paid out over five years on a transitional schedule with the maximum incentive amount for the first year being $18,000, followed by decreasing payments each subsequent year of $12,000, $8,000, $4,000 and $2,000. Only professionals that implement EHR technology and qualify for an incentive payment in 2011 or 2012 will be eligible to receive the maximum payment amount over the five year period. Professionals that first qualify for an incentive payment in 2013 will receive a $3,000 reduction in the first year payment. Professionals that first qualify for an incentive payment in 2014 will receive incentive payments as if their first payment year was 2013. However, if a professional waits until 2015 or after to adopt EHR technology, incentive payments will not be available.

To summarize, the highest incentive payments will be granted to professionals who adopt EHR technology in years 2011 or 2012. Reduced incentive payments are granted to professionals who adopt EHR technology in years 2013 or 2014, while no incentive payments are granted to professionals that adopt EHR technology in 2015 or after. Incentive payments are increased by 10 percent if the professional predominately serves in an area designated as a health professional shortage area.

In lieu of Medicare incentive payments, an expanded group of professionals may receive Medicaid incentive payments if they adopt EHR technology before 2016. Medicaid incentive payments are available to qualifying physicians, dentists, certified nurse midwives and nurse practitioners, and physician assistants (PAs) in PA-led rural health clinics or federally qualified health centers. The maximum Medicaid incentive for professionals is $63,750, with up to 85 percent of the allowable cost of $25,000 payable in the first year to aid in adopting, implementing and upgrading to certified EHR technology. As much as 85 percent of the allowable cost of $10,000 for the operation and maintenance of the EHR system is payable over a period of up to five years.

Hospital Penalties

In addition to the foregoing incentive payments, a hospital that does not adopt EHR technology by 2015 will be penalized by reduced Medicare payments. Hospitals that are not meaningful users of certified EHR technology and do not submit the required quality data will be subject to a 25 percent reduction in their annual Market Basket update. This is a drastic increase from current law that has only required a 2 percent reduction. In addition, three-quarters of the Market Basket update is subject to a further reduction by one-third in 2015, two-thirds in 2016 and 100 percent in 2017. Although there is a limited exception to the penalty for significant hardship, it is only available until 2020, when the penalties will become fully effective.

Professional Penalties

Professionals that do not adopt EHR technology by 2014 will not only forego incentive payments, but will also be penalized by a reduction in Medicare payments. If an eligible professional is not a meaningful user of certified EHR technology during 2015 or any subsequent payment year, the Medicare fee schedule amount will be reduced to 99 percent in 2015, 98 percent in 2016 and 97 percent in 2017 and in each subsequent year. In addition, the secretary of the Department of Health and Human Services (the "secretary") has discretion to continue to decrease the fee schedule amount by one percentage point if less than 75 percent of eligible professionals are meaningful EHR users. Similar to the provision for hospitals, there is a limited significant hardship exception to the penalty provisions, but it is only available until 2019, when these penalties will also become fully effective.

Qualifying for Incentives

Under ARRA, hospitals and eligible professionals are entitled to receive incentive payments if they become meaningful users of certified EHR technology. In order to qualify as a meaningful user of EHR technology, three requirements must be met. First, a hospital or professional must demonstrate it is using EHR technology in a meaningful manner. Second, a hospital or professional must demonstrate that its EHR technology provides for electronic exchange of health information in a way that improves health care quality. Third, a hospital or professional must submit clinical quality measures and other similar information as determined by the secretary. A hospital or professional may demonstrate the first two requirements, i.e., meaningful use and information exchange, through a variety of means specified by the secretary. These means may include an attestation, submission of claims with appropriate coding, a survey response and reporting. In addition, in order for a professional to demonstrate meaningful use, the EHR technology must include electronic prescribing capability.

In order for EHR technology to be certified as required, it must be able to create an EHR that includes patients' demographic and clinical health information and that provides clinical decision support, supports physician order entry, captures information relevant to health care quality, and exchanges and integrates electronic health information from other sources. In addition, the EHR technology a hospital or professional employs must be certified by an independent body as meeting specific standards determined by the secretary by rulemaking before December 31, 2009.

Planning for the Future

Some of the exact requirements to qualify for incentive payments are still uncertain and subject to federal administrative rulemaking. However, it is clear the ARRA creates a real incentive for hospitals and professionals to adopt EHR technology in the relatively immediate future and imposes a real cost upon those who do not. In the context of overall health system and joint hospital/physician collaboration, including development of integrated delivery systems, further reference to existing safe harbors and exceptions under the Anti‑Kickback Statute and Stark Law, respectively, may also be necessary to proceed in a legally compliant manner in accordance with requirements of the Office of Inspector General and Centers for Medicare and Medicaid Services. It is important for hospitals and physicians to stay informed of developments in this overall area as they begin to develop or expand existing EHR strategies to take advantage of the incentives offered under the new federal law.