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How to Break Even on Medicare Reimbursements

 |  By kminich-pourshadi@healthleadersmedia.com  
   February 28, 2011

Zero isn’t the best number to see if you’re taking a class, but when it comes to Medicare, seeing zero in lieu of red in terms of reimbursement versus expense is welcome. Medicare is rarely where hospitals and health systems expect to make money, but is it possible to break even? Could you, unlikely though it may seem, make a margin? It is possible. Let’s look at a couple of stats:

Stat #1: In the HealthLeaders Media Industry Survey 2010, 90.4% of CFOs rated Medicare reimbursement as having primary importance to their revenue stream in the next three years. Flash forward one year, and with all the proposed changes in Medicare reimbursement, not surprisingly in the HealthLeaders Media Industry Survey 2011, 78% of CFOs reported that Medicare/Medicaid would have a negative or strongly negative impact on their organization.

Stat #2: Medicare typically only reimburses 85% to 90% of costs, and it usually takes cost shifting—getting vastly better reimbursement from commercial payers—for a hospital to stay in the black. The equation looks like this: Positive margins from private payer business minus (usually) negative margins of Medicare and Medicaid and the balance (if any) is profit. Finding the breakeven point in that formula can have a significant financial impact for any hospital or health system. Once you’re no longer using your private payer profits to climb out of a Medicare hole, you’ll start to see a difference in your bottom line.

How can you make this happen? Bob Gift, director at Chadds Ford, PA-based IMA Consulting, offers a couple of suggestions about how healthcare leaders can position themselves better to make breakeven happen:

1. Adopt Process Efficiency. If you want to be profitable, you have no choice but to get a grip on your processes. Doing so goes beyond looking at your supply change and understanding expense management and Lean and Six Sigma process improvement programs.

“We find with hospitals that there’s a real desire to focus on supplies [to cut costs] because there’s always something there and it’s relatively easy pickings,” said Gift. “When you do expense management, you dig into labor, supplies, discretionary expenses, and everything else. You make incremental improvements on cost and cost structure by improving your labor and efficiency.”

While many organizations have added process improvement initiatives to select areas, for instance looking at their back office or nurse scheduling, for the most part Lean and Six Sigma remains confined to those areas.

The American Society for Quality conducted a study of 77 hospitals and found that 53% of hospitals have some type of Lean initiative and 42% are using Six Sigma. However, the same study reported that only 4% of hospitals have full deployment of Lean. A full-scale roll-out of this type of process improvement program may be in order, if you haven’t considered it.

Healthcare facilities that have successfully employed Lean and Six Sigma initiatives, such as Virginia Mason Medical Center and St. Vincent Mercy Medical Center, collectively agree that in order for process improvement initiatives to be fully effective they must be driven by a unified team mindset in all departments—everyone has to believe and act Lean. Unfortunately the study found that 30% of hospitals are still lacking leadership buy-in, while 59% are lacking resources to pursue such an effort. For a more in depth look at Lean and Six Sigma, watch for the April issue of HealthLeaders Magazine.

There isn’t a quick fix on this, you’ll need to do a process evaluation, and that can take four to six months to gather all the data, Gift says.

If you’re not sure where to begin your full-scale roll-out of Lean or Six Sigma, consider looking at your imaging and testing levels, since reimbursement cuts are already in place for these services. And you may be surprised to learn how many of these tests are duplicated.

“Often tests are orders and the lab, or whoever, doesn’t get the results on the chart quickly enough. So another lab is ordered by the physician. Or a test only needs to be performed only once but it is not noted on the record and so it’s ordered and performed every day,” Gift explains. “It’s a system [communication] breakdown.”

2. Instruct on Decreased Utilization. Along the lines of out-with-the-old philosophy, and in with the new, you must train your staff to understand why they must decrease their utilization across the board.

“You have to change the mindset of the physician,” says Gift. “You can have all the data, but what you find is that physicians have been trained to practice a certain way and that’s the way they continue to practice.”

It’s unfortunate, but most people resist change and the hospital employee is no different. However, the time for hesitation has passed and your staff must embrace the new. Reform means healthcare professionals must innovate and improve processes or watch your bottom line get worse with every passing day.

“You have to do a solid analysis of your utilization, because inevitably when you start to present data to nurses and physicians, [they] will challenge it,” he says. “You have to engage these people and get them to understand what’s happening and how they can impact the process.”

Though we all wish that Medicare reimbursements would go up instead of down in the coming years, the fact is, it’s highly unlikely. So, your best efforts will be needed in the coming years to try to at least get your Medicare to a breakeven point. 

Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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