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Payment Cuts to Critical Access Hospitals 'Inevitable'

 |  By John Commins  
   February 08, 2012

The more than 600 hospital leaders packed in a hotel ballroom at this week's 25th Annual Rural Health Care Leadership Conference in Phoenix were asked a simple question: How many of you have made contingencies plans for Medicare critical access funding cuts?

Only a few hands were raised.

The man asking the question, James E. Orlikoff, a senior consultant at the Center for Healthcare Governance, told HealthLeaders Media after the presentation that he was not surprised that so many rural hospitals leaders are in denial about a major funding cut that he calls "inevitable" within the next three years.

"That response is very typical. There is a level of denial that says 'we understand there has to be a lot of change but it won't affect us,'" Orlikoff says. "Upton Sinclair has a wonderful quote: 'It is difficult to get a man to understand something when his salary depends upon his not understanding it.' Critical access hospitals are carved out and they have been protected. It's the normal human condition to think that this is normal, this will always last, it can't go away because if it does, it will destroy us."

In times of economic woe, however, Orlikoff says standard operating procedure is often the first casualty. Outsized payments for critical access hospitals provide low-hanging fruit for a cash-strapped healthcare delivery system.

"Anytime you face an economic crunch when you have carve-out artificial protections, they can't last," he says. "Is it evitable? Yes. 'When' and 'how' are the questions. It could happen much more quickly than any of us think depending upon how bad the market gets, how bad the debt issues become. I think things are going to happen much more quickly. I tell my critical access hospitals to strategically plan on three years to be off the cost-plus model."

Orlikoff says the critical access funding cuts will likely come sequentially, rather than hit all at once. "Many critical access hospitals don't fit within the rules, so first they will be the first to lose their protected reimbursements. Then the cuts will migrate to all critical access hospitals, especially as other markets can show the efficiencies that can be taken."

In other words, if one critical access hospital can achieve savings and efficiencies with lower reimbursements, the government will assume that every other critical access hospital can do the same.

"Many of the leaders here are so embedded in that protective philosophy that they don't know what their finances are. They don't know how much inefficiency they have in the system. So when the time comes they are going to be paralyzed," Orlikoff explains. "If they start thinking about it now, maybe they can get ahead of the curve."

So what can critical access hospitals do to prepare? Rather than looking for a magic bullet, Orlikoff recommends a series of baby steps that begin with a simple question: "'If we're taken off the cost plus reimbursement and put on prospective payment system, what would happen to us? What is our percent cushion?'" Orlikoff says. "Assuming that is lost, the second question would be 'would we be able to stay in business?' For the vast majority the answer is 'no.'"

Start with understanding your current financial situation. "Most critical access hospitals have no idea about their economic performance or how dependent they are or whether they'll go out of business if the reimbursement model changes," Orlikoff says. "Or suppose they don't eliminate the reimbursement model but they cut it by 5%. Would you swing from the black to the red?"

"Understanding that leads to 'where do we tighten up? What is the most frequent Medicare diagnosis we treat in this hospital?'  Let's look at the variation there," he says. "In that one or two most frequent things we do, if we standardize to the highest quality and the lowest cost how much would that save?'"

"When you see that, you begin to realize that if standardizing is the best practice, we would have spent X dollars less. Then the leadership gets it. And you do it again and do it again," he says.

Finding the savings through improved quality and efficiency, and reduced waste is "liberating," Orlikoff says, because hospital leaders will understand that it is possible to survive—and perhaps even thrive—in an era of reduced reimbursements.

Of course, none of this can happen unless hospital governing boards acknowledge the new economic forces that are driving healthcare reform, and realize that no funding is beyond the reach of budget cuts.

"Boards are buried by curvy information and details and they aren't asking the right questions," Orlikoff says. "As the models change the questions the leaders have to ask have to change. Many of these folks are thinking the right thing but they are sucked back into the morass of old model governance."

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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