Red-Tape Mandates Spark Innovation

This article appears in the March 2012 issue of HealthLeaders magazine.

Talk to many hospital and health system CEOs these days, and it's clear they see the healthcare glass as half-empty. Drastic changes to the way their business is conducted—from ICD-10 compliance (even with HHS' deadline delay) to meaningful use directives to value-based purchasing rules—mean CEOs have lots to complain about. 

A litany of expensive mandates face healthcare organizations, and the bill for them is coming due in the next decade. In many cases, these costs can't be recovered, at least not in a traditional measure of ROI. In fact, there's good reason for pessimism among hospital and health system leaders, says Paul Keckley, executive director of the Deloitte Center for Health Solutions, an industry think tank in Washington, DC.

These regulations are "not about an expanded revenue stream," he says. "It's a matter of how much they'll be impacted by the costs."

Even outside of regulatory costs, he says, the reimbursement environment is weak at best. For example, a 2% Medicare cut mandated after the so-called congressional debt super committee failed at its task of reducing the federal budget deficit will result in $123 billion in cuts to Medicare if Congress cannot agree on an alternative.

Hospitals would shoulder about 40% of those cuts ($49 billion) through reductions in reimbursements for inpatient and outpatient services, according to Avalere Health LLC, a Washington, DC–based consultancy and research firm.

Even if that calamity is averted, hospitals "can look at market basket updates shrinking, and that's before the additional cost of complying with new reporting," Keckley says. "So it's a pretty perilous time. One out of four hospitals will not survive this."

Despite that dire prediction, through a series of interviews with HealthLeaders, it becomes clear that many leaders are less pessimistic than it would be reasonable to expect about their ability to succeed in the new environment.

They see regulatory changes ranging from CMS's value-based purchasing initiative to ICD-10 implementation as severe challenges, of course, but they also see them as ways to transform a calcified and hidebound payment system into something that yields payoffs for necessary investments in quality, revenue capture, and efficiency, not to mention better responsiveness to their customers' needs and desires.

"We're at a very significant time in the history of healthcare, where through healthcare reform, the government, our primary payer, is trying to make a significant shift in the way healthcare organizations operate by changing the incentives to get a better product," says Michael T. Rowan, executive vice president and chief operating officer at Catholic Health Initiatives, which is based in Englewood, CO, and operates 76 hospitals and other facilities in 19 states. "Behind that is the notion of moving us to cost-effective care, with the idea that high-quality care can be delivered at a lower price than we have now."

Revenue on the wane

While that is a laudable goal, and sorely needed in healthcare, leaders are challenged by the fact that all of this re-engineering must take place not only under a backdrop of declining reimbursements, but essentially simultaneously, making the tasks more difficult and expensive. However, without mechanisms to punish healthcare organizations for noncompliance, the goal would likely be unachievable.

Like many healthcare organizations, CHI loses money on Medicare patients. So senior leadership is implementing a variety of solutions to become more cost effective, Rowan says.

"In the past we've done some significant cost cutting and we, like most others, have done that by going after the administrative, back-office stuff," he says.

In 2009, through those efforts, CHI cut $250 million in costs from the system, which has $9.6 billion in total annual operating revenues.

"That improved our financial performance in the trough of the recession and got us to a place where we were able to absorb decreases in reimbursement," Rowan says. "But now we're back there again, and there's a limit to how cheap you're going to buy Band-Aids."

Since the relatively easy work in the back office has already been significantly accomplished, CHI's work on information systems and, more important, changes in the ways its clinical personnel interact with the patient and the patient's information, is what's most critical now.

"The real opportunities are not in those back-office areas anymore," he says. "The primary cost drivers are actual clinical processes because that generates 85% of the cost of care." 

Necessary investments, uncertain return

Spectrum Health, a Grand Rapids, MI–based integrated delivery system with nine hospitals, a health plan, a medical group, and various ancillary services, seems well-positioned structurally to deal with many of the regulations, which are meant to encourage more specific diagnoses (ICD-10) and coordinated care (VBP and, to an extent, the HITECH Act). However, even with the advantages of an IDS, the organization is far less integrated than it needs to be, says Joe Fifer, vice president of finance with Spectrum Health's Hospital Group.

He says the system is spending investment capital to redesign how care is delivered throughout the organization and is especially investing in acquiring primary care capabilities.

"We're not only employing physicians but we are redesigning how care is delivered in a primary care setting," he says. "It's simple in concept but really challenging. It's directionally correct, but it sucks up resources—time, energy, and money—to break down some of these fragments that have been there for multiple generations."

Still, there is an element of faith in some of the investments they're making because of regulations. 

"We know financial pressures will continue," says Fifer. "We like to think that investing in what is truly an integrated health system from insurance to care delivery is the right direction, and outcomes will be better. As time passes, more care will be delivered entirely within our health system."

At CHI, Rowan says the leadership team's response to the new regulations will not only allow it to further streamline its operations, but also will position CHI to compete with other healthcare organizations on a risk basis, something hospitals and health systems have previously only done in unusual circumstances. He predicts that the data and coordination the organization will be able to achieve will allow widespread risk-based contracting directly with employers and third-party payers.

"Going at risk is important. For example, if we have a group of patients where it currently costs $15,000 for an episode of care, if we do it right, could we bring it down to $12,000 and commit to it and keep a piece of that savings?"

He thinks the answer is yes, and with expanded hiring of people in leadership areas with risk-based contracting experience, coupled with the data mining capabilities that will come from reaching meaningful use targets, CHI will eventually get into managing population health. That will allow it to approach large employers and make a contract offer based on their employees' epidemiology and cost of care.

The big three mandates

Value-based purchasing, a sort of pay-for-performance initiative for Medicare; ICD-10, a new coding regime; and "meaningful use," an evaluation of how well organizations are meeting the mandates of the HITECH Act, are among the top five regulatory challenges that are currently worrying hospital senior executives, according to Reform's Impact: Staff and Service Cuts Expected, a December 2011 HealthLeaders Media Intelligence Report.

"If you're not setting aside investments in ICD-10 and meaningful use, you're teetering on being noncompliant, and that's where someone other than leaders in your organization will determine your fate," says Keckley.

Any one of these requirements alone would present quite a challenge, but with deadlines that have to be met within a tight timeframe, all three are the focus of significant investments in information technology solutions, consulting work, retraining, and labor costs—not to mention a significant disruption of entrenched processes that in the past were, and in some cases currently are, successful in keeping the organization financially viable, but that will be hindrances in the future.

So which ones are smart hospitals and health systems focusing on?

"We know financial pressures will continue," says Fifer. "We like to think that investing in what is truly an integrated health system from insurance to care delivery is the right direction, and outcomes will be better. As time passes, more care will be delivered entirely within our health system."

At CHI, Rowan says the leadership team's response to the new regulations will not only allow it to further streamline its operations, but also will position CHI to compete with other healthcare organizations on a risk basis, something hospitals and health systems have previously only done in unusual circumstances. He predicts that the data and coordination the organization will be able to achieve will allow widespread risk-based contracting directly with employers and third-party payers.

"Going at risk is important. For example, if we have a group of patients where it currently costs $15,000 for an episode of care, if we do it right, could we bring it down to $12,000 and commit to it and keep a piece of that savings?"

He thinks the answer is yes, and with expanded hiring of people in leadership areas with risk-based contracting experience, coupled with the data mining capabilities that will come from reaching meaningful use targets, CHI will eventually get into managing population health. That will allow it to approach large employers and make a contract offer based on their employees' epidemiology and cost of care.

The big three mandates

Value-based purchasing, a sort of pay-for-performance initiative for Medicare; ICD-10, a new coding regime; and "meaningful use," an evaluation of how well organizations are meeting the mandates of the HITECH Act, are among the top five regulatory challenges that are currently worrying hospital senior executives, according to Reform's Impact: Staff and Service Cuts Expected, a December 2011 HealthLeaders Media Intelligence Report.

"If you're not setting aside investments in ICD-10 and meaningful use, you're teetering on being noncompliant, and that's where someone other than leaders in your organization will determine your fate," says Keckley.

Any one of these requirements alone would present quite a challenge, but with deadlines that have to be met within a tight timeframe, all three are the focus of significant investments in information technology solutions, consulting work, retraining, and labor costs—not to mention a significant disruption of entrenched processes that in the past were, and in some cases currently are, successful in keeping the organization financially viable, but that will be hindrances in the future.

So which ones are smart hospitals and health systems focusing on?

"Well, all of them," says Spectrum Health's Fifer. "We don't have much of a choice. They're all on timelines."

ICD-10 implementation, for example, seems like a pretty straightforward process of changing over literally hundreds of information systems touched by coding. But it also involves cultural change. The systems can be in place, but coders, and especially clinicians, have to be taught how, and more important, why, they must use it. At Spectrum Health, Fifer chairs the ICD-10 work team, which has leaders from hospitals, medical groups, and the health plan to evaluate systems and processes.

"It's a ton of work, but it's pretty clearly identified what we have to do," he says. "That's different from meaningful use."

There, not only does the health system have to coordinate coding with the electronic health record, but documentation has to evolve so that those standards are auditable.

"That's a job in itself," Fifer says.

Fifer says many of the changes under way at Spectrum Health would have been done eventually, but deadlines are ramping up efforts considerably. He cites the example of problem lists, which is one of the standards for achieving meaningful use designation.

For example, "what that means is in the EMR, that problem list is populated by physicians. It's as simple as that."

Simple, but not easy, because it involves significant culture change among physicians.

"The idea is spot-on, and this has happened informally for years with physician talking to physician, but it's not been documented. We're changing culture with that, and that's difficult."

Further, the standards mean the organization has to develop an audit trail so that when an investigator makes Spectrum Health prove that it complied with the standards, "we have a document we can pull out," says Fifer. "That audit trail process is a real challenge and time consuming."

Spectrum Health has developed scorecards that show leaders where it stands on achieving standards on both the hospital and physician sides. But the work has to take place physician by physician and practice by practice. And while the investment will pay off in the sense that meaningful use targets will be achieved and incentive payments will come from the government, Fifer says it's difficult to truly isolate the investment and whether it will pay off.

He says work on VBP standards is even more challenging because it is less specific than the other two.

"Most of the VBP criteria we really already are working on," he says. "In tracking our numbers and where we're close or short of the thresholds, we pay attention, but don't have to develop extra infrastructure to comply."

Regarding value-based purchasing, CHI's approach is strategic, says Rowan.

"As we look at the handoffs surrounding improving care, the idea is that when a patient has a problem, they don't experience four to five discrete events in our system," he says.

For instance, a patient might see a physician. Then, the patient might come in to the hospital for testing. Then he or she might be admitted and may need follow-up care and lab work in between.

"We need a clinical person who looks at [the patient] across all five events," he says. "Meaningful use is about that, but when you come in, we shouldn't be scratching our head on what started this whole thing out on the ambulatory side, and we shouldn't have to do expensive things like taking new imaging."

While larger systems like CHI and Spectrum rely on developing or hiring internal expertise on the big three, at Baptist Health System in Birmingham, AL, a smaller system with four hospitals, the compliance push is using outside as well as internal resources, says Alan Bradford, Baptist's chief human resources officer.

"On the revenue side all the VBP formulas continue to be refined. If you miss any of that detail, you're really going to cripple yourself on your revenue, so we've leaned on internal and external resources to make sure we fully understand our obligations," he says.

Of the three, ICD-10 might be the easiest to understand, at least procedurally, but that doesn't make compliance any less challenging.

"We have a pretty detailed plan, and each component has its own milestones," Bradford says. "We're on target with ICD-10 because we have an education and training component for both the clinician and revenue cycle team."

Baptist is also working on training what Bradford calls super-users on the IT side who can help clinicians and revenue cycle team members reconcile errors.

Further, Bradford says he doesn't see a future need for additional coders to handle the complexity involved in ICD-10 compliance, but he says the organization will probably have to reorganize its coding staff to include more specialized coding competencies that reside within a few people as opposed generalists who can operate in any clinical theater.

Fifer, of Spectrum Health, does see additional costs from the conversion.

"ICD-10 absolutely affects labor costs," he says.

He says he's seen high estimates of what ICD-10 implementation will cost from other organizations that range as high as $30 million–$40 million.

"That seems high, and it all really comes down to what you count. But when we went through budgeting—and we're pretty conservative—the request was to spend an additional $4 million annually on infrastructure to deliver ICD-10 results," Fifer says.

Spectrum Health pared that back significantly by redeploying people within the organization as opposed to hiring consultants, but the transition costs will still be $1 million annually, and that's without tracking time spent on retraining.

"What we don't know is what ICD-10 will do to coding productivity," he says.

What will mitigate those investments is a likely increase in productivity from computer-assisted coding. At least Fifer's hoping so. 

"Absent that, I would expect a decrease in productivity by 30%–50%, and I don't know if I could find that many coders in the future."

Janice Jacobs, a director with IMA Consulting of Chadds Ford, PA, says she thinks labor costs associated with coding will increase permanently.

"Coders' methodology is changing dramatically and it requires more time to assign codes, so even after the learning curve is over and they're recertified, they only regain about 85% of initial productivity," she says. "On the other hand, we will be talking about computer-assisted coding more and more. This will not eliminate the coder, but will move them into an audit role and may alleviate some of the loss in productivity."

Bringing it all together

One way some organizations are trying to limit their investments in compliance is by trying to make sense of the new regulations as a whole. In that way, perhaps it's ironically helpful that most of the deadlines are within a relatively short five-year time frame. 

"Leaders are overwhelmed that all of these initiatives are really happening at the same time. It's very expensive for healthcare organizations and very labor intensive, and mandatory regulation compliance issues are exhausting their budgets," says Jacobs. "I've been in this industry for 30 years, and I don't remember so many things going on at the same time before."

Still, Fifer says finding a way to look at all of the work holistically is important so that duplication of efforts doesn't happen or that work by one group on ICD-10, for example, doesn't set back work on meaningful use. 

"We're trying to find the common ground among all of these regulations so everyone is not duplicating efforts," he says. "That's hard to do because they are so specific and we have totally different work teams. But we're trying to raise that level of awareness."

How? By encouraging the groups to meet together formally and informally such that "you've got hundreds of people looking for that common ground instead of one or two," Fifer says.

For his part, Rowan says it is helpful to integrate the regulatory requirements and compliance into a plan that incorporates the strategic goals of the organization, so that compliance doesn't feel like mandates that force investments that will never pay off. 

"First, we're trying to get paid for high performance by utilizing some of the metrics and indicators they have out there with HCAHPS and lowering readmission rates, and not reimbursing for mistakes that are made. They're trying to create a focus on preventive appropriate care, and move away from the idea that we get paid more for doing more volume," says Rowan. "Third, we'll all be better off if we digitize and automate all the data. Putting all that together has created a number of significant strategic initiatives for us."

For Baptist's Bradford, he sees the regulations as a framework that hospitals can use to create tools and processes to meet the goal of better care and cost control.

"Process is very important. We utilize Lean throughout our organization, and it works on all things we're talking about. It's part of the equation."

Hospitals: An endangered species?

All of this is fine for these organizations, which are multihospital systems with entrenched positions in their respective marketplaces. But what about smaller hospitals without the scale these organizations have?

Deloitte's Keckley argues that senior leaders of organizations without these advantages have good reason if they are among the pessimistic.

"It's going to be very Darwinian over the next six to eight years," he predicts. "The insurance market will shift dramatically, the economic recovery will be slow, and there will be a lot of pressure on folks to compete."

Keckley, as part of his research, recently completed interviews with 25 different hospital and health system CEOs about their coping mechanisms and strategies surrounding healthcare reform. 

"And I'm hearing the same things," he says. "Many of them are just tired. It's almost a thankless job."

In these economic times, perhaps it's a little hyperbolic to call such a well-compensated job thankless, but the turmoil is causing even some of the bigger organizations to rethink their role in the care delivery process.

"We're recasting ourselves from a hospital company to being an integrated delivery system," says CHI's Rowan.

CHI now employs a vice president of hospitals, a VP of ambulatory care, and a VP of home health, for example.

"They're not subsets of the hospital; now they're on peer," he says. "To lead in the market, we're no longer looking for hospital administrators, but market leaders who have an understanding of the whole continuum."

Technically, says Keckley, many hospitals that are too small to compete won't completely go away, but a number will.

"There will be a shrinking of the market. A number [of hospitals] will be converted away from acute care and into something else. They cannot operate with high safety and quality, which require a certain volume level. That will force small hospitals to either be absorbed or relicensed to long-term care."

That also means scale is the key to sustainability.

"You can't assume acute care can be delivered safely and efficiently where you're operating fewer than a couple hundred beds. There will be exceptions to that in rural areas," he says. "But mapping to all of these incentives that change from volume to value or outcomes means these hospitals have had or will have to put 6%–8% of revenue in IT systems. You just can't survive. You're not big enough to do everything you have to do."

Reprint HLR0312-2

This article appears in the March 2012 issue of HealthLeaders magazine.