Here's a statistic to make you feel ill: In the relentless upward march of U.S. healthcare spending, almost two-thirds (63%) goes to just 10% of patients, and nearly half (52.5%) is spent on 5% of patients, according to a recent study from the National Institute for Health Care Management.
Who are these high spenders? Increasingly, and not surprisingly, they are chronic care patients. This trend should be a call to action for healthcare financial leaders: this is where you should invest dollars now to prevent future losses in reimbursements. Chronic care patients were a money-maker under volume incentives, but they will be a drain to the bottom line when pay-for-performance and new readmission rate standards take hold.
At HealthLeaders' recent CFO Exchange event in La Jolla, CA, healthcare financial leaders agreed that their budgets will require deep cuts – as much as 20% – over the next few years. Doing so means going beyond the low-hanging fruit of efficiencies. Healthcare leaders must implement programs that address areas of greatest potential reimbursement loss under the Patient Protection and Affordable Care Act. Chronic care, with all its costs and complexity, is a great place to start.
How many chronic care patients are treated at your hospital today, and how many are likely to be enter your facilities in the future? Medicare will cease paying for 30-day readmissions. The chronic care patient has a proclivity to land in that category.
There is no shortage of pilot programs addressing chronic care populations, and the medical home concept, which incorporates a model for chronic care, is spreading rapidly. In the September edition of HealthLeaders magazine, I look at some innovative approaches group practices are taking for chronic care, as well as how medical homes can make margin.
Yet treating chronic care patients is a losing battle, in a sense. Wouldn't it be wiser to stop the problem before it happens? This is the line of thinking behind an innovative program launched by Ochsner Health System, an eight-hospital, nonprofit, academic healthcare system based in New Orleans.
Change the Kids, Change the Future aims to transform the health and wellness of the local community, starting with kids and using schools as the focal point. Based on research showing that chronic health problems such as diabetes, obesity, and hypertension stem primarily from lifestyle choices, Ochsner decided to put resources into attacking the problem at its root. Change the Kids, Change the Future helps educate students about how their lifestyle choices have a long-term impact on their health.
Ochsner chose a local school with health and population demographics typical of the average schools in this country. That meant some students receive public assistance, which is significant for health indicators; low-income individuals tend to be at higher risk for many chronic care diseases. Ochsner then engaged school administrators, students, teachers, families, and even the local grocery store to teach students about nutrition and cooking, fitness, and preventive health behaviors.
"We realized we needed to work with the whole family, because when these kids get home they don't have control of the menu. We could help the school offer better [food] choices, but we needed to get the family involved if we were going to make a total change," says Patrick J. Quinlan, MD, CEO of Ochsner Health System. "Often these kids can be change agents at home. Parents want to help; they are just doing what they do because that's all they know."
Ochsner provides the schools with a nurse practitioner and a mobile exercise van. But much of the labor involved to set up and run the program was donated by hospital workers eager to see the community get healthier. They worked with students to educate them and create a student wellness committee. The hospital also set up partnerships with businesses that could influence the success of the endeavor, including the grocery store, which agreed to put up signs on its shelves indicating healthy food choices.
It will take years to truly quantify how Change the Kids, Change the Future reduces the chronic care population in New Orleans. But Ochsner has the national healthcare system in mind. "These days we are all so focused eliminating cost. If you're worried about cost, there's nothing cheaper than a healthy person," Quinlan says. "Since these are problems hospitals are dealing with nationally, we set out to create a program that could be emulated on scale."
That's good for patients and CFOs alike. Financial leaders should guide their organizations toward investing in programs like Ochsner's, which address chronic care and the bottom line.
As a healthcare financial leader, you’re probably well aware of the performance-based penalties and rewards that accompany value-based purchasing (VBP). But is your clinical staff? How do you motivate healthcare professionals to drive down costs and improve quality to meet the directives of VBP? I can think of three possible approaches:
The big picture – Explain the potential penalties and rewards and show how these could impact your organization’s financial future
The pocketbook approach – Add incentive bonuses tied to specific quality and patient satisfaction metrics
Moral obligation – Depend on your staff’s desire to “do the right thing”
What’s the answer? Well, if you and your organization are anything like the panel of five CFOs I interviewed at the recent HealthLeaders Media CFO Exchange, then the answer is likely a combination of incentives and moral obligation.
Frankly, I would have thought an explanation of penalties and rewards would have been the first step. But this group of CFOs agreed that people at the director level already knew exactly how much their organizations stood to gain or lose from VBP. Staff at the clinical level, however, weren’t using VBP financial information.
Now, using hard numbers with the clinical staff isn’t an implausible approach, and it’s been done before with some success. Think of the many hospitals nationwide that launched campaigns encouraging staff at every level to cut costs, setting visible savings goals for each department. After all, margins are thin for most hospitals and health systems these days, and employees know it.
When it comes to VBP, aren’t clinicians really the ones tasked with putting the “value” back into care? Hard numbers should help enlighten staff on the potential financial affect—not just the quality impact—of VBP, right? Wrong.
Charlie Hall, executive vice president and CFO of the five-hospital system Piedmont Healthcare in Atlanta explains that clinical staff aren’t as concerned with the hospital’s financials; although Piedmont’s physicians are well aware of the quality metrics used for VBP because these are used in their bonus incentive plans.
“There are financial implications if the physicians don’t meet the metrics. It does put some attention on [VBP] as it affects them personally,” Hall says. Nurses, on the other hand, aren’t as focused on the financial outcomes of value-based purchasing as they are with care-giving.
It makes sense to align your physicians’ incentives to the core measures being used for value-based purchasing, because where they lead, others follow. But what is the non-physician clinical staffs’ impetus to achieve the end goal?
“When you identify and communicate to the masses what the right thing to do is, rather than how it is financially beneficial, they respond,” says Ann Pumpian, senior vice president and CFO at Sharp HealthCare, an eight-hospital system in San Diego.
“We just try to approach [VBP] as the right thing to do, quite frankly,” says James Moylan, vice president of finance and CFO at Griffin Hospital in Derby, CT. “We’re a hospital; we’re supposed to be doing this. It’s the right thing to do, and here’s all the literature about cutting down on infections.”
Moylan acknowledges that challenges come with the moral obligation approach, such as trying to educate the staff on what value-based purchasing is about. “That’s why we’re doing audits. It’s a kind of peer pressure if you’re not doing what you’re supposed to be doing,” he says.
So to sum up, to get your staff on board with VBP, moral obligation and peer pressure can be a successful carrot and stick, while still saving money.
Pumpian says the key to this approach is for healthcare leaders to “identify the clear connection of cost savings with an act, and then implement that act in a manner in which everybody understands it to be the ‘right thing to do.’”
Perhaps one of the best lessons learned from these CFOs is that, for healthcare workers, value-based purchasing is not primarily a financial or clinical initiative. Instead, you must understand and harness the moral nature of your team.
Are we headed for a double-dip recession? I put that question to hospital and health system chief financial officers at the HealthLeaders CFO Exchange last week, and the response was less than optimistic.
The inaugural CFO Exchange, held in La Jolla, CA, gathered nearly 30 healthcare financial leaders from varying facilities for an opportunity to exchange ideas on how they’re addressing the many healthcare initiatives and challenges they face today.
“Whether it’s a continuing [recession] or a second dip isn’t certain,” says James Doyle, senior vice president and CFO for Elmhurst Memorial Healthcare, a 315-bed, not-for-profit institution in Elmhurst, IL. “The employment situation is a fundamental in [addressing] this problem, and right now there [are] no certainties that the economic situation will create job growth.”
The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) last year decreed that business activity turned upward in June 2009, officially ending the recession that began in December 2007. The 18-month recession was the longest since World War II, surpassing the two 16-month recessions in 1973-75 and 1981-82, respectively.
Although NBER announced the conclusion of the recession, it did not say that economic conditions had returned to normal capacity, only that a slow recovery had begun. However, the official position on the recession doesn’t necessarily match the opinions of financial leaders.
In early August, CFO magazine surveyed its readers across all industries on the state of the economy. A fifth of respondents felt we were already in another recession and 23% said the economy was headed that direction.
Just 11% of respondents gave a firm “no” to the notion of a W-shaped recession. These responses echo the sentiments of the financial leaders I spoke with at the HealthLeaders CFO Exchange.
“I don’t see where we really ever left the [last] recession, especially in some areas of the country,” says Michael Burke, senior vice president and vice dean, corporate CFO at NYU Langone Medical Center, a 705-bed acute care facility in New York City. “Healthcare was the last bastion of growth for jobs and now they are going to ratchet it down. … Now they’re implementing massive reductions to the Medicaid program and potentially massive reductions in the Medicare program.”
The debt ceiling crisis put Medicare in the political crosshairs, and as financial leaders know all too well, Medicare rates will be on the chopping block in some capacity. Potential reductions in Medicaid and Medicare, however, pale in comparison to the nation’s larger woes, which will influence healthcare. These include a stagnant unemployment rate, failing banks, high rates of housing foreclosures, and the shaky stock market.
As a result, ratings agencies are keeping a wary eye on healthcare. Two days after the Eastern seaboard survived a significant soaking by Hurricane Irene, Moody’s whipped up a storm of its own with its announcement that its ratings outlook for the U.S. not-for-profit healthcare sector was negative.
"Operating pressure[s] in place when the outlook was changed to negative in October 2008 are fully captured in the underlying trends shown in the fiscal year 2010 medians--namely weaker revenue and volume growth trends," said Moody's vice president and senior credit officer Beth Wexler in a statement.
Charlie Hall, executive vice president and CFO at Piedmont Healthcare, a 481-bed not-for-profit hospital in Atlanta, muses that “In years past we always thought of hospitals as being recession-proof, but the fact is this has been going on for almost four years, and this time it’s different.”
“Georgia has not come back, particularly Atlanta. In some parts of the country there is 5% unemployment, but we happen to be at 11% unemployment,” he says. “And there’s going to be a lot more than 11% [unemployment] if things don’t turn around. I think we could easily slip into a second recession. I think we’ve been in a downturn for a long time.”
So will there be a double-dip recession? When I looked at this possibility back in 2009, President Obama remarked that if the nation kept adding to deficit spending through tax cuts or more stimulus spending, a second downturn could be the result. Here we are two years later, and economic fundamentals have not improved. Healthcare financial leaders would be wise to batten down the hatches even more.
With Medicare and Medicaid already caught in the cross hairs of the debt ceiling crisis, it now seems that putting Americans back to work has the potential to put some hospitals out of business, and to force an even swifter consolidation of the industry.
President Barack Obama’s $447 billion American Jobs Act bill, which he urges Congress to pass “right away” in order to “jolt an economy that has stalled,” takes aim at Medicare and Medicaid. "Now, I realize there are some in my party who don’t think we should make any changes at all to Medicare and Medicaid, and I understand their concerns," Obama said last week. "But here’s the truth: Millions of Americans rely on Medicare in their retirement. And millions more will do so in the future. They pay for this benefit during their working years. They earn it. But with an aging population and rising health care costs, we are spending too fast to sustain the program. And if we don’t gradually reform the system while protecting current beneficiaries, it won’t be there when future retirees need it. We have to reform Medicare to strengthen it."
The battle cry for Medicare and Medicaid reform is one that politicians have been shouting for years, and that is unlikely to change with the 2012 election on the horizon. In fact, Medicare and Medicaid rates have been reduced and then reinstated at the eleventh hour by lawmakers for years. What has put this political pawn into real jeopardy in recent months is the debt ceiling crisis, high unemployment nationwide—with benefits about to expire—and an economy that continues to show few signs of rebound.
As healthcare leaders know well, the Patient Protection and Affordable Care Act already calls for Medicare and Medicaid reimbursement cuts, while the recent debt ceiling crisis brought the possibility of even steeper rate reductions. Hospitals and health systems have already braced for the first round of rate reductions, but at organizations with payer mixes dominated by Medicare and Medicaid, further reductions would increase charity care and bad debt to such a degree that some facilities could be left teetering on the financial edge.
Moreover, additional rate reductions could cause institutions with a poor payer mix to see another drop in their credit ratings, decreasing their ability to raise capital from commercial lenders. In a July Moody’s Investor’s Service report, “Medicaid Funding Cuts Add to Credit Strain for U.S. Not-For-Profit Hospitals,” the ratings agency gave U.S. not-for-profit hospitals a negative credit outlook overall. The agency points to “government funding cuts in the Medicare and Medicaid programs” as a major driver for its decision.
“State government budget pressures caused by the great recession of the late 2000s, the slow economic recovery that has followed, and the recent expiration of federal stimulus funding are placing downward rating pressure on U.S. not-for-profit hospitals that rely heavily on Medicaid. We expect Medicaid funding pressures will significantly stress hospital credit quality for at least the next several years,” the report says.
The ratings agency notes that these reimbursement cuts are made worse by the difficulties that hospitals and health systems have had generating revenue growth. Moody’s reports that the preliminary median revenue growth rate for nonprofit hospitals was 4.2%—the lowest rate in more than a decade and a sharp decline from the 2009 rate of 6.5% and the 2008 rate of 7.0%.
“Revenue growth has been stymied on numerous fronts: declines in patient volumes, higher levels of uncompensated care, less favorable contracts with commercial payers, and, most significantly, reductions in federal Medicare reimbursement rates, a challenge which we believe will likely intensify given ongoing federal budget challenges. Medicaid reductions are creating yet another strain on top-line revenue growth that hospital management teams must address,” the report states.
Tripp Umbach, a firm specializing in economic impact studies, released a new analysis late last week saying that a 2% cut in Medicare will translate to a projected loss of approximately $41 billion over the next 10 years for hospitals.
“By 2021, this could lead to more than 194,000 jobs lost,” their study says.
With no plan laid out as yet for how the American Jobs Act would be funded, it’s hard to say with certainty what will happen next. A "more ambitious deficit plan" is set to be released today that would "not only cover the cost of the jobs bill, but stabilize our debt in the long run,” the President says.
From my perspective, though, if even steeper Medicare and Medicaid cuts find their way through Congress, healthcare leaders nationwide can expect to see struggling organizations pushed to the brink or even to bankruptcy, along with an even greater spate of mergers, acquisitions, and joint ventures. The consolidation of healthcare is a certainty at this point. How swiftly it will takes place, however, depends entirely on the speed and size of the cuts lawmakers make to Medicare and Medicaid.
If you are looking for a new service line to add—one that could be a dream to get off the ground—then don’t rest until you determine if your community needs a sleep center. In the past decade, the number of people reporting sleep problems has increased nearly 13%, according to the National Sleep Foundation. The growing number of potential patients, combined with a low start-up cost, minimal operating expense, and high level of reimbursement, makes this service line something you shouldn’t sleep on.
On average, hospital-based sleep labs bring in $1,100 to $1,200 revenue per patient from third-party payers, against an expense per patient of approximately $600, earning a net profit of $500 to $600 per patient visit. If the volume is sufficient, the center can break even or even make a profit within the first year.
Since their inception in the 1970s, nearly 3,500 sleep labs or centers have been opened across the country. Approximately 1,400 of these centers are accredited by the American Academy of Sleep Medicine. Research supports the need for these facilities; new studies link sleep disorders with increased risk of stroke, cardiac disease, diabetes, rheumatoid arthritis, metabolic disorders, and other ailments.
Making sleep centers even more attractive to healthcare financial leaders is that these facilities can operate as an ancillary service, either in-house or as satellites off-campus. Yet for billing purposes, hospitals and health systems are still able to use the same provider number without sacrificing the most expensive real estate—a hospital bed.
Paul Brown, manager of non-invasive cardiology and sleep labs at Genesys Regional Medical Center in Grand Blanc, MI, says that over the past 25 years, he has seen steady growth in sleep lab service lines, from one bed in 1985 to two off-campus locations today, 10-bed and 4-bed facilities.
As operations grew, Genesys moved its labs off-campus to help keep costs low and provide a better site for patients. “It’s also quieter, which is better for the patient,” Brown notes.
Brown says an off-campus sleep center can be built for approximately $500,000, with the majority of the cost going to creating a hotel-like site for the patients to relax and sleep, as well as some basic equipment such as digital diagnostic equipment and a digital video recorder.
Virtua, a four-hospital health system based in New Jersey, launched its sleep lab with one hospital bed back in 1994. Virtua has since moved its sleep labs out of the hospital and now operates four centers, totaling 20 beds. The start-up cost for the centers has been minimal, explains Dean Mazzoni, vice president of operations for Virtua’s SleepCare Centers, in part because Virtua rents the property for these centers and contracts with SleepCare in Mount Laurel, NJ, to oversee the operations.
Mazzoni says partnering with an established sleep lab company like SleepCare has helped keep costs low and brings technical and clinical expertise. “We expected our volumes to get us to the break-even point the first year, and it has. We’ve been at break-even or above now for years,” he says. The same is true for Genesys, which earns a net profit of $600,000 to $700,000 and revenues of $1.7 million annually from its two sleep centers.
My column last week encouraged you to stop trying to cut your way to prosperity, instead looking for unique approaches to growth. If your community has a need for a sleep center, don’t snooze or you may lose on this money-making service line.
Cost efficiency and reductions top the priorities list of nearly every financial leader in healthcare. But is the cost-cutting tunnel vision too narrow? Or are there better options for boosting the bottom line?
In a recent survey of the HealthLeaders Media CFO Exchange, the number one priority anticipated by CFOs for the next three years is cost reductions. Yet maximizing revenue came in eighth on this list of nine priorities. I find this one-sided view interesting.
Every financial leader has heard the expression “you cannot cut your way to prosperity,” yet with all the concerns over Medicare reimbursement decreases, what you know you should be doing versus what you are doing don’t always jibe. I’m not suggesting CFOs stop looking for ways to reduce costs, but as our survey results suggest, you may want to concentrate equally on protecting and improving the top line.
Here are four opportunities beyond cost-cutting for your hospital or health system to enrich its financial picture:
1. Physician retention: It’s not enough to recruit the best doctors for your hospital – you also have to keep them, or you are essentially throwing thousands of dollars out the front door. Physician recruitment dollars are the subject of more than a few healthcare conferences, yet physician retention is rarely mentioned by financial leaders.
Stovall discovered that the group was spending $250,000 to $300,000 per physician on recruitment but zilch on retention.
This lopsided approach to physician employment resulted in a 14% physician turnover rate – far above the current industry average of 6.1%. The remedy was the creation of a $100,000 budget to improve retention rates (averaging just $300 per physician), which succeeded in lowering the system’s turnover rate to 4% and saving approximately $1 million per physician who stayed.
2. Process improvement: Lean and Six Sigma methods are ways to improve your processes that bear financial fruit. I’ve written a number of columnsand magazine articles on this topic. Creating this type of cultural mindset change requires only a modest up-front investment, depending on how many “black belts” you want to train to get the ball rolling. It’s estimated that 53% of hospitals apply some type of Lean process initiative and 42% use Six Sigma methods, which leaves a lot of room for improvement, quite literally.
My favorite example of why healthcare leaders should implement an enterprise-wide process improvement initiative comes from Seattle Children's Hospital. When this 250-bed hospital began planning a new outpatient facility in late 2007 to expand its capacity, however, it followed the standard “reduce variation” approach to the design of the facility. Just a few months later, however, the tanking economy forced hospital executives to figure out how to reduce the scale and cost of the project without sacrificing the goals for the facility.
Seattle Children’s Hospital management applied a modified version of the Toyota Lean Process Improvement process, called Continuous Performance Improvement, to the entire design process.
The result: a 30% reduction in square footage, from 110,000 to 75,000 square feet, without any loss to the intended number of workspaces or programs. In essence, they cut out the fat. The project was completed on time and within the $75 million budget.
3.Bye-bye bad debt: The days are gone when patients had no clue how much their care cost and how much insurance companies paid for it. Insurance deductibles and co-pays are on the rise, and more uninsured or underinsured patients are paying medical costs out of pocket.
Naturally that means financial leaders are seeing bad debt continue to rise. Nearly 90% of organizations in an American Hospital Association survey reported increased bad debt and charity care as a percentage of gross revenue in 2010. This trend is unlikely to ease anytime soon, with healthcare reform introducing 20 million to 40 million new patients into the healthcare system.
Getting your up-front collections process in order and collecting every dollar possible from your self-pay patients is essential. Yet when was the last time you quantified your true self-pay collection rate?
Centura Health, Colorado's largest healthcare provider, set up a progressive incentive structure for its customer-facing staff to improve up-front collections. A team of financial counselors helps customers complete insurance verifications and authorizations before scheduled procedures, reminds patients of any past-due balances, and determines the patient's portion of the bill due at time of service. Through this effort, Centura Health collected about $1.5 million at the point of service in 2010, more than triple what it brought in two years prior.
4. Mergers and acquisitions: Growth may be good, but it doesn’t come cheap or easy. Because recruiting individual physicians is time-consuming and costly, merger with or acquisition of a group practice is an increasingly popular shortcut to market share.
These days, though, getting the capital together to purchase another organization isn’t easy, which is one reason that private equity firms are entering the healthcare sector. A Pepperdine University survey of private equity executives at the end of 2010 found that 11% planned to invest in healthcare – more than double the response just six months prior (4.8%).
Because most healthcare companies are too small to be publicly traded, private equity can be a conduit to funding for M&As. But it isn’t the only avenue, of course. I discussed private equity and other funding paths in the special report,Hospital Mergers & Acquisitions: Opportunities and Challenges.
Certainly cost reductions will never be out of vogue for healthcare CFOs. But top-line growth, efficiencies, and funding must take equal if not greater priority in the coming years. With the prospect of declining reimbursements, finding ways to shore up your balance sheet is a must.
Private equity firms are demonstrating a growing interest in the healthcare sector, and, with shrinking margins and growing capital expenses, many nonprofit healthcare organizations would welcome the attention. However, caution is merited before considering this approach.
"We're seeing lots of acquisitions of physician groups and more consolidation," says Brian Miller, president and founder of the nonprofit Healthcare Private Equity Association and managing partner in the Chicago-based private equity firm Linden Capital Partners. "As the healthcare landscape shifts … if a hospital can't afford an acquisition today they may look to partner with a private equity firm."
Growth tops the long-term strategic goals of many nonprofit healthcare organizations, and mergers and acquisitions and bricks-and-mortar expansions are two paths to achieve that end. The 2011 HealthLeaders Media Industry Survey showed nearly 46% of finance leaders anticipated either acquiring an organization or being acquired by another. Also, 26% of leaders plan their capital budgets for a new wing or building, according to the HealthLeaders Media Intelligence Report, 2011 Capital Spend: EMR Dominates Budget. The same survey showed that 42% of healthcare leaders anticipate increasing their capital expenditures budgets.
Mergers and acquisitions as well as expansion require large sums of capital, something that is—without the help of an outside funding resource—in short supply for many nonprofit healthcare organizations; indeed, 38% of finance leaders at nonprofits reported margins of less than 1.5%, according to the 2011 HealthLeaders Media Industry Survey. Reduced levels of revenue through Medicaid, Medicare, and reduced financing through the bond market have challenged nonprofit hospitals that have deteriorating operating margins and degraded credit ratings due to so-so balance sheets.
Stirring private equity interest
Though some nonprofit hospitals and health systems continue to turn to debt leveraging as a means to pursue growth opportunities, others are turning to and being welcomed by private equity firms. A Pepperdine University survey of private equity executives at the end of 2010 found that 11% planned to invest in healthcare, more than double what it had been just six months prior, 4.8%.
Healthcare is underrepresented in the public asset classes, according to data provided by HCPEA. It represents just 12% of Standard & Poor's 500, but is 17% of the gross domestic product. Moreover, Miller explains that the total healthcare equity market cap is $1.3 trillion; however, only a sliver of that is represented by for-profit hospitals and health systems (note that nonprofit hospitals cannot be traded): • 70% pharma/biotech • 16% medtech • 8% managed care • 6% other (including hospitals, nursing, doctors, distribution, services, supplies, life science, etc.)
"Healthcare is so fragmented that the vast majority of healthcare companies are too small to be publicly traded. The only way to access this investment class is through investment in private companies via private equity funds," Miller says.
What makes these opportunities so appealing to private equity firms now has much to do with the Patient Protection and Affordable Care Act. Fitch Ratings recently reported that although nonprofit hospitals still face financial challenges, they will benefit from increases in patient volume and "dramatic reductions" in uncompensated care, and be helped by provisions in the legislation that will promote "efficiency and effectiveness in the delivery of care" via pilot programs and payment incentives. Nonprofit hospitals or systems that traditionally served a large proportion of the poor and uninsured are expected to benefit from the legislation, which will extend insurance to 32 million previously uninsured.
There have been numerous well-publicized agreements between private equity firms, such as the Blackstone Group, which acquired the majority share of the 16-hospital, Tennessee-based for-profit Vanguard Healthcare system. Another well-publicized deal was the buyout of Massachusetts-based Caritas Christi Health Care, which was a nonprofit, by Cerberus Capital Management. The 2010 sale not only gave Caritas a cash infusion, but altered its tax status to for-profit. These acquisitions moved to center stage the use of private equity capital as a strategic opportunity for healthcare leaders.
For instance, this past February, the nation's largest Catholic health system, Ascension Health, partnered with the Stamford, CT–based private equity firm Oak Hill Capital Partners, embarking on a joint venture to buy Catholic hospitals.
Leo P. Brideau, FACHE, president and CEO of the St. Louis–based Ascension Health Care Network, says the joint venture allows the organization to provide an alternative funding source for the acquisition of Catholic healthcare entities. He notes that through this partnership, Ascension will be able to offer financial, clinical, and operational resources to the entities it acquires. The system currently operates 68 acute care hospitals in 20 states and the District of Columbia, and Oak Hill Capital Partners has over $8.2 billion in total capital, a portion of which the organization can draw upon.
Brideau explained that Ascension Health Care recognized that to stay competitive and provide quality care, it needed to transform its system from acute care to a population health management approach; that required capital Ascension didn't have.
"Hospitals needed to invest in their technology and their facility to stay current, and the traditional approaches to doing this just didn't suffice—they have to be more creative," he says. "Before partnering with Oak Capital, our capital was spoken for by the needs of our hospitals. So, bringing in another hospital—especially one that might have significant capital needs—just wasn't feasible."
Brideau says seeing other Catholic hospitals financially flounder—only to be sold to non-Catholic entities—aligns with the organization's mission to grow its network of Catholic hospitals. The vision to strengthen Catholic healthcare was another driver for Ascension's partnership with Oak Hill Capital. Once the management team opted to go the private equity route, selecting a partner was a lengthy process. Finding firms with funds wasn't the issue, Brideau says; what made the process challenging was ensuring the right cultural fit. One of the deciding factors was Oak Hill Capital's agreement that Ascension Health would remain the sole authority over its Catholic healthcare identity, and that extends to any acquisitions.
Defining goals through due diligence
The core goal of a nonprofit hospital or health system is to provide patients with high-quality, cost-effective care, while earning a healthy margin; private equity firms have a different end goal. The general aim of a private equity firm is to achieve a large return on investment in the form of capital gains. How the private equity firm achieves those ends is where hospitals need to do their homework, Miller says. "Each equity firm has its own mission and values, and there are as many types of equity firms as there are hospitals," Miller says. "It's up to the hospital to do the due diligence and reference checks and to look at deals that these firms have done successfully and the ones that have gone south."
Though each agreement is different, in many instances the pathway to financial success is through an exit by the private equity firm, which may be through the sale of the equity stake rather than through a dividend income. In the case of Ascension Health Care, Brideau says there is no set exit date on Oak Hill's investment. Another key to its selection of this private equity firm, Brideau says, was the firm's approach to getting its return on investment.
"Many firms pay themselves a finder's fee so they can give it to the investors. Then they either charge a management fee or pay dividends to themselves as they go along. Oak Hill Capital doesn't take its profit until they exit. As the operator of a company, when you think about it, that's a terrific benefit because then their incentive is to make you as strong as possible for when they sell … and they aren't going to keep you capital-poor [in the process]."
Another exit strategy may also be through an initial public offering or a straight sale. This past spring, Vanguard Health Systems, which since 2004 has been majority-owned by private equity firm Blackstone Group, filed with the U.S. Securities and Exchange Commission to raise $600 million via an IPO.
The filing came not long after for-profit health system HCA raised $3.8 billion through the largest private equity-backed U.S. IPO on record. Due to the status of the pending IPO with the SEC, representatives from Vanguard Health Systems were not able to offer comment.
Regardless of how and when the profit is parceled out, once a private equity firm has made the investment, its primary objective is to generate a rate of return for its investors. To ensure some control, many private equity agreements require a majority stake in the partnership. In doing so, they may supplant or supplement the healthcare organization's management team or change the governance structure.
"We do an assessment of the quality of management team," says Brideau of how Oak Hill partners and Ascension approach managing the organizations they acquire. "If our assessment is that there is strong management but they are not succeeding because they are capital starved or because of some historic decision that put them in the hole, then those things are fixable—then you're crazy to want to turn over the leadership. High-quality leadership is scarce in healthcare."
It's no secret that the debt ceiling crisis is worrisome for healthcare. In blunt terms, Medicare reimbursements stand to be eviscerated.
The U.S. government, to balance the budget would need to cut spending by about 40% and Medicare represents 23% of the Federal budget. Moreover, the whole debt crisis situation is a perfect opportunity for political posturing and negotiating. All of that adds up, unfortunately, to Medicare being a ripe target for scrutiny and cuts.
Standard and Poor’s released a report last week, titled The Deficit Remedy Could Be Toxic for U.S. Health Care Companies. In it the ratings agency notes, the “U.S. debt crisis has put a fire under the government's efforts to slow growth in healthcare spending.”
S&P goes on to calculate that with the Centers for Medicare & Medicaid Services (CMS) estimating Medicare costs are currently $556 billion (or 3.6% of GDP), up from $247 billion (or 2.6% of GDP) under the elder care program just 10 years ago. Unfortunately, the idea of curbing Medicare expenditures further is going to be problematic for all providers’ bottom lines; especially
on the heels of the 2010 Affordable Care Act’s previous decree for a $155 billion reduction in Medicare payments to hospitals over 10 years.
The proposal Congress approved two weeks ago is expected to slash about $2.4 trillion from the national debt from 2012 through 2021. About $917 billion in cuts would be identified in the budget process, and $1.5 trillion in reductions would be found by a special, 12-member, bicameral, bipartisan commission.
This Joint Committee of Congress created under the Budget Control Act, and dubbed would meet later this year, and its recommendations for cuts would be subject to a simple majority vote in the House and Senate.
Medicaid and Medicare are not expected to be impacted in the first round of cuts, but these two are expected to be targeted by the 12-member committee in subsequent rounds. However, if the super committee fails to cut the deficit by its mandated $1.5 trillion, automatic spending cuts could be triggered and Medicare providers would face reimbursement cuts capped at 2% beginning in 2013.
Last week several hospital chiefs forecasted greater reimbursement cuts than that saying they anticipate closer to 6% or $155 billion over the next 10 years, as do theAmerican Hospital Association and National Nurses United—all of whom have criticized the $2.4 trillion debt ceiling and deficit reduction package. Unquestionably, if that percentage of cut comes to fruition it will be very bad for the healthcare bottom lines. But even before any cuts take place, the simple possibility for cuts of this magnitude is troubling for hospitals and health system credit ratings—and S&P makes no bones about that.
"Uncertainty about third-party reimbursement is an ongoing risk that we factor into our ratings on U.S. corporate healthcare providers," says S&P's credit analyst Rivka Gertzulin. "Nine of the for-profit healthcare providers we rate garner the majority of their revenues from Medicare, and these companies will feel the biggest pinch from reductions in reimbursement or onerous changes to Medicare rules."
For many years Medicare has given healthcare financial leaders agita, and from the looks of this debate, that’s not going to change any time soon and it may worsen. Though the immediate debt ceiling situation has been waylaid, keep a watchful eye on this and bolster your contingency fund for the possibility of a large cut—better to be safe than sorry.
I very much respect my primary care physician and her advice on my health does make an impact on my actions. Once I told her that my knees were hurting a bit and I asked her what I should do. She took out a note pad and scribbled on it and handed me the paper. On it, in big bold letters she had written, “EXERCISE.” I laughed. She then added that if I lost just 10 pounds she could promise me the pain would disappear completely. I took the message to heart and followed her recommendation; she was right.
I don’t bring this up because I think hospitals or health system should open weight loss clinics—although my colleague recently wrote an interesting column on this topic. I recount this story, as part two of my look at the patient-centered medical home. These days, what my doctor did, now nearly eight years ago, is still somewhat out of the norm.
In a fee-for-service reimbursement environment, it isn’t beneficial for me to get well, or in this case fit—especially if I do it without the help of my healthcare provider. However, in the coming years, how you are reimbursed will change and you will be penalized if your patients’ health continues to decline—especially those with chronic health issues. Right now, medical homes nationwide are gathering data to see if their work will help reduce readmission rates.
Although it makes logical sense that by maintaining the health of chronic care patients they will have fewer trips to the hospital, as of yet there is no hard data supporting it. Watch for that information in the next year or two though. Last week we looked at how one program had created a sort of self-sustaining version of a medical home by keeping the same number of staff and increasing preventive care. But is that approach possible in all circumstances? It’s a question healthcare leaders are exploring through pilot programs in nearly every state as they try to determine the best way to run a medical home.
In Maine, Penobscot Community Health Care is one of them. In 2009, three of Penobscot’s offices were chosen to participate in the Maine patient-centered medical home pilot project, though they decided to roll it out in all four offices. Here’s how they are approaching this task and where they are finding successes and challenges.
Robert Allen, MD, executive medical director at Penobscot, explains that the first step they took was to hire four nurse care managers. Using data from its EMR, the team identified patients who were struggling with specific conditions, such as diabetes. The team also approached physicians to ask for their insights on who could benefit from the program—a key component, Allen says, for buy-in.
“Whether the patient has been in the ER, admitted to the hospital in the last six months, or if the primary care physician just felt they could benefit from the care manager because they were a frequent visitor or had a lot of questions, those where the people we looked at,” says Allen.
Once they started gathering data and speaking with patients, they realized that four care managers weren’t enough to handle the number of patients who needed outreach. So they hired four health coaches and a medical assistant to help with panel management.
“Right now that’s all funded through grants. But as we continue with this, one of our major concerns has been, the more we do this, the more we like it, and we’re worried about the financial sustainability of this long-term,” says Allen. “We hope there will be a change in how medicine reimburses because of all the pilots that are doing patient-centered medical home, and that they [payers] will save a huge amount with it.”
In Maine, Allen explains, the Maine Health Management Coalition is working with the Maine Quality Forum Advisory Council, the insurance companies, the providers, and the local business to encourage payers to change how physicians are reimbursed to allow the medical home to continue.
“This is a proactive state and we tend to work together. But we need to find a different reimbursement structure in the next couple of years. If we don’t [change] it will put this [program] at risk,” he says.
Though they have no way of knowing what will become of the financial side of this pilot, Penobscot continues to cultivate their program. After adding staff, the next task they undertook, not unlike Southern Maine Medical Center PrimeCare Physicians, was to improve access and get to same-day service of the patient.
When the Penobscot team started, patients sometimes had to wait nearly three months for a follow-up appointment to see their primary care physician. To address the problem, the first step was to open up access. Penobscot did this by expanding office hours to meet the demand, explains Hilary Worcester, a practice manager at Penobscot. They added some weekend hours and extended care until 8 p.m. in the clinic.
“Now when a patient comes in the same day, they are surprised they get to see their own doctor,” she says. “But it adds to the continuity of their care if the patient gets to see the primary care physicians.”
While correcting the access issue was done in short order, one part of the medical home pilot directive that the team continues to struggle with is the creation of a patient advisory committee. “Finding patients who want to meet every other month to talk about things in our practice and what you can do better for them has been a real challenge,” says Worchester. And it’s an area Penobscot continues to try to address.
Overall, though, the pilot has helped Penobscot refocus efforts toward treating the whole person, says Allen.
“The medical home concept has a warm feel to it, too,” adds Worchester. “But now we also have more eyes looking at things. Between the care managers, the health coaches, nurses, and physicians, we can spot gaps in care and identify and treat all of the patient’s needs.”
While the financial benefits and long-term viability of the medical home is still unclear, those practices that participate in the pilots say the benefit to their patients’ overall health is generally positive. As hospitals and health systems press onward into the next era of healthcare reimbursement, this is certain: The fee-for-service methodology won’t help the patient’s health improve or the health of the bottom line.
In the future health insurance companies may reward patients who maintain their health through employee health programs that pay people to get active. For now, however, the future of reimbursements lies within the provider's ability to keep a patient healthy.
That is why the medical home, has become the model to add to your hospital, health system or practice. Indeed, there are results (and dare I say an opportunity for revenue) in this patient-centric model, even now, before the reimbursement system changes occur.
Earning revenue from this model requires the help of the payer. For instance, six New York health plans – Aetna, CDPHP, the Hudson Health Plan, MVP Health Care, UnitedHealthcare and Empire BlueCross Blue Shield recently provided $1.5 million in incentive payments to 236 separate primary care physicians in 11 practices for achieving patient-centered medical home recognition by the NCQA.
They aren't the only ones, either. More and more health plans nationwide are offering some sort of incentive or bonus to providers who create a medical home—so if you haven't checked with your payers you may want to do so.
Unfortunately, not every hospital, health system, or practice that opts for a medical home will get the benefit of incentive dollars. In these instances, the trick is to create at least a self-sustaining medical home that functions under the current reimbursement structure, and doesn't lose money. Because providers of all sizes will want to have a medical home in place within the next couple of years, however, you don't want to create it at the financial expense of your current practice.
How is this accomplished? In a highly motivated practice where there is enough traffic that wellness can be practiced, practices can take on more cases, do more preventative care visits, and the dollars that come in can help support the program.
Because the patient-centered medical home is such an important part of the future of healthcare, this week and next week I'm going to take a look at two Maine patient-centered medical home pilot programs that are approaching this task and some of the results they are finding.
First up is Southern Maine Medical Center (SMMC) PrimeCare Physicians in Biddeford, ME, a multi-specialty group practice started in 1996 with over 40 physicians. The organization is also part of the 150-bed Southern Maine Medical Center. The practice's overarching goal is to preserve the quality of the personal relationship between patient and doctor. To that end, it decided to join the Maine Patient Centered Medical Home Pilot in 2008 and after being accepted got the program off the ground in 2009.
"It is in our plan that we achieve [NCQA] certification and that all our primary care offices are patient-centered medical homes," said Vicki Lyons, vice president of physician services for SMMC PrimeCare Physicians.
Using the existing staff, the practice, which serves 8,900 patients, formed small leadership teams to assess which areas to tackle. First on the list for improvement was patient access and communication. SMMC wanted to create a practice where patients who asked to be seen immediately, could be seen the same day.
The team started by measuring where the practice was in terms of access—a 12-15-day period was common—and brainstorming on how to improve it. Lyons says by eliminating structured scheduling templates and creating flexible templates and contingency scheduling plans, they were able to significantly reduce how long it took for a patient to be seen.
The practice also used IHI scheduling strategies and within one year patient access was reduced to three days, though the team is still working to bring that to one day.
"Access has been a great success for us," says Lyons. "You have to get a handle on supply and demand. How many patients are calling in for appointments for the same day? And once you do that, you need to create a contingency schedule to handle [clinical staff] vacations."
What the practice found was that patient access influenced other areas the teams were trying to address, such as care management. Although the practice had a nurse practitioner already in place when the pilot started, the practice added two care managers through the Physicians Health Organization of Maine.
Already paid for through the practice's dues to PHO, these two individuals began working in the office two days a week to contact chronically ill patients, such as those with diabetes, depression and heart issues.
"Our goal was to keep these people out of the ER. We asked, 'How can we accommodate these individuals – to see the ones that need support more often? By improving the patient's access, and getting them in to see the primary care physician or nurse practitioner when they need it."
However, after several months of the care managers contacting patients over the phone, the group realized that this model wasn't working for them. Lyons says because the practice had so many chronic disease patients, the team couldn't keep up with the patient demand. So the organization changed tactics. First, a full-time nurse practitioner was added solely to do chronic care outreach.
Second, PrimeCare Physicians opened a weekend clinic to help meet the patient demand and to reduce ER utilization. Moreover, the practice began scheduling more preventative care visits and the organization increased areas such as mammography to nearly 80% and the colorectal screenings to nearly 60%.
"As a pilot we are working to prove that this does pay off. So when we talk about reduced utilization in the ER and reduced readmission, we know that's where we need to be, but we're still tracking this piece," says Lyons. "We are also following our chronically ill patients and seeing that they come in for all the required tests and following up to see that they do it."
Though data on reduced ER use is not yet available, Sue Butts-Dion, director and quality improvement specialist for the Maine Patient-Centered Medical Home Pilot says early data shows that some of the access work the pilot programs are doing across the state are resulting in decreased ER use. In the next few years the plan is to have more definitive metrics on this.
As the practice has gone through this process, there have been several lessons learned—the care management area was just one of them. "It didn't work for us the way we tried it at first, so we changed it," explains Lyons. "Now our challenge is trying to sustain momentum and not take on more than we can handle."
As SMMC PrimeCare Physicians continues the patient-centered medical home pilot project, some funds are coming in from the effort. Along with seeing an uptick in the number of preventative care procedures and being able to schedule more patients, and in a timely manner, payers are also pitching in.
Organizations participating in the pilot receive a $3 per member fee from all but one payer in Maine.
"Maine has always been a state that's collaborative in nature. So when we started we had the right people come to the table with that collective, collaborative spirit. Naturally, there are expectations for this pilot. The payers have expectations too, they aren't doing this and not expecting anything in return," notes Butts-Dion. "But the good thing about the pilot is we are able to support these programs and help them get the funds they need."
Next week I'll take a look at how Penobscot Community Health Care in Maine is approaching its medical home and where it's finding opportunities to improve and change care without disrupting the bottom line.