Editor's note: This is the second in a two-part series that examines the service line structure and implications associated with severity-graded DRGs. Part I detailed the idea of service line management as an organizing concept.
The new severity-graded DRG reimbursement structure, which went into effect October 1, 2007, represents one of the most significant changes introduced by CMS to the system since its implementation. The changes are meant to better tie Medicare payments to hospital costs and more accurately reflect the severity of illness. The changes, however, also bring with them the need for reorganization of healthcare infrastructures based on the old charge-based DRGs. Part I of this article examined the challenges service line structures face in today's healthcare systems. In Part II we continue our discussion of how to improve quality of service and patient care by restructuring service lines in response to the new cost-based DRG system.
Opportunities abound
Taking advantage of the new, margin-neutral environment means several things. First, because the new system is cost-based (rather than charge-based), charge systems that were intended to "subsidize" unprofitable departments and service lines (e.g. general medicine) should be dropped. That will remove a layer of complexity, drastically simplifying the evaluation of profitability across the services you provide, and making it easier to focus on those areas that offer the greatest opportunities for gains in efficiency.
Second, restructure your service lines to fit the community in which you provide services. You no longer need to compete strenuously for specific patient segments—almost all of them should be profitable. Instead, you can seek to distinguish yourself in any niche, or you can provide a full array of services without fear of gross under-reimbursement in any one of them.
Third, consider specializing in specific service lines to drive increased volume. The reason for this hasn't changed—efficiency of resource utilization will increase as your volume increases—but its effectiveness as a strategy will improve. Neutralization of financial incentives may point you toward specializing in the treatment of formerly unprofitable niches, and the first to recognize these opportunities will be positioned to capture the greatest economies of scale. Moreover, because the pressure to compete for a few highly profitable segments will decrease, there will be increased willingness on the part of competing hospitals to "yield" market space to competitors who aggressively chase a specific segment, making the "high-volume, specialized service" model more realistic.
Shaking-out period ahead
This process of specialization will take some time to shake out, but the implications for cost and quality of care, especially within large urban areas, are enormous. Resources and expertise needed to care for particular patient populations will be centralized, and higher volumes will help to justify capital investment and workflow optimization that will drive down cost. The result will be better care, at lower cost, across all areas of care. The benefits obviously are not restricted to CMS patients. Every patient who comes through your doors benefits from your ability to work better and work toward higher quality standards more efficiently.
Finally, take the opportunity to maximize the extent to which you forward your mission. Push care toward earlier intervention--that is, toward cases that are uncomplicated—and relax controls that protected you against the runaway cost of treating those with the most complications. Where previously this was a money-losing proposition, it is now effectively margin-neutral. On the "early intervention" end, there may even be a chance to push for more cross-hospital coordination in education and preventive efforts, such as cooperative community-based initiatives focused on cardiovascular health or diabetes prevention. It's easier to agree to efforts that may reduce your revenues when operations are broadly profitable than when you're struggling to get by.
CMS's revisions will increase operational flexibility by creating nearly guaranteed profitability—regardless of specialist or generalist focus, and regardless of precisely what a specialist hospital specializes in. The imperative—keeping all-in costs below reimbursement—becomes much more straightforward now that the impact of patient characteristics is greatly reduced.
And what about those who currently specialize in highly profitable niches to the exclusion of other lines of business? These groups will need to focus on efficiency of operation, expand the services they provide along the continuum of care, and seek to increase revenues by maximizing volume. They are unlikely ever again to see the outsized margins they have in the past, but with appropriate adaptations to the new reality most will remain profitable.
Careful of the caveats
There are two caveats to this hopeful scenario. First, while CMS believes that these changes will make it easier to update payments on a regular basis, there is a real risk that CMS will once again allow its IPPS to become hopelessly behind the times. This would once again cause certain diagnoses to become highly profitable while others become unprofitable. It is in the best interests of the healthcare system as a whole to avoid this outcome, so it is incumbent on the heads of hospitals and hospital systems to agitate for regular revision to the IPPS to reflect true costs of treatment, assuming efficient operations.
Secondly, while the changes to the DRG system and IPPS will reduce the inequities inherent in the system, they will not entirely eliminate them. There will certainly be some lines of service that are relatively profitable, and some may remain unprofitable. Despite the improvements, specific moves may or may not make sense for your hospital, and due care should be taken before setting a bold new course.
Despite these cautions, the importance of these changes should not be underestimated. The first hospitals to recognize that neutralization of financial incentives changes the shape of the playing field and opens up opportunities to move aggressively into formerly unprofitable niches stand to position themselves as leaders in the coming years (and profit as well). For many of you, CMS' overhaul of its payment system brings your financial imperatives back into alignment with your mission and frees you to provide the right care at the right time—while keeping your head above water at the same time.
Mark Morgan is a senior business analyst, Rita E. Numerof is president, and Stephen Rothenberg is a business analyst for Numerof & Associates Inc., a strategic management consulting firm in St. Louis. They may be reached at info@nai-consulting.com.For information on how you can contribute to HealthLeaders Media online, please read our Editorial Guidelines.
In a way, Dallas's Parkland Hospital is running out of time. But it doesn't have to be that way. Its day of reckoning is coming now that the hospital's leadership won approval from its board of managers to ask the county commission to allow a bond election this fall. The election, which commissioners are expected to approve, will ask Dallas County voters to tax themselves to the tune of up to $747 million—60% of the estimated cost of building a $1.3 billion replacement hospital.
Yikes. Good luck with that.
Despite voters' usual disinterest in raising their own taxes, however, this particular measure would likely be a good investment. In many ways, Parkland is a model of best practices in how to run a public hospital in an admittedly thin—and rapidly thinning—field of compatriots. It was the first Level I trauma center in north Texas. It's the second-largest regional burn center and the busiest maternity hospital in the U.S. And it provided $409 million in uncompensated care in the past fiscal year and logs about 140,000 ED visits each year.
And here's the important thing for voters: Parkland makes a margin—at least on operations. Operating revenues increased 14.2% from 2004 to 2005 and 18.7% from 2005 to 2006, while operating expenses increased 8.1% from 2004 to 2005 and 5.1% from 2005 to 2006. Despite its huge uncompensated care load, the hospital takes its finances seriously. After discovering that hundreds—if not thousands—of well-off patients living outside Dallas County were pleading poverty (and fraudulently claiming county residence) to take advantage of the hospital's generous charity care policy, Parkland went after them aggressively in the courts and won judgments more often than not.
That's remarkable compared with Parkland's brethren. Public hospitals are closing at a far faster rate than hospitals in general because running a public hospital without losing millions each year is darn hard. Some might argue with me, but as a group, they are generally less well-managed than other hospitals for a lot of reasons—chief among them being political interference. Because of their charitable mission, they are dependent on philanthropy and tax revenue for their support. And they can't simply pack up and move to the suburbs where the paying patients are to supplement their bottom line. Many of them are used as jobs programs by local politicians who often also are heavily involved in the hospital's governance. That's what makes Parkland a shining example of what's right with the model.
But the current Parkland is old and decrepit.
Its longtime CEO, Ronald Anderson, MD, has run the hospital since 1982, when he was named CEO at age 35. Still, the hospital he works in is almost as old as he is. Built in 1954, the 862-bed hospital is serving twice as many patients each year as it was designed for.
The hospital is already gearing up the likely bond referendum PR effort on its Web site. In the "who we are" section, the story is headed by the phrase, "we live in a house that yesterday built." It's a tribute to those of the past who built the institution but also a subtle hint that the hospital is too run-down, too small, and too old. Still, convincing taxpayers—many of whom feel they are already overtaxed—to add to their burden is a monumental undertaking.
But look at it this way, Dallas voters. The new Parkland's price tag is only a couple hundred thousand more than the new Cowboys stadium going up in nearby Arlington, which, by the way, is kicking in $325 million of tax money for that gleaming monument to excess. Despite all that, the team is still going to be called the Dallas Cowboys. So Arlington's paying the freight on your football team. That Jerry Jones must be a heckuva salesman.
Maybe Ronald Anderson should give him a call.
Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.
Note: You can sign up to receive HealthLeaders Media Finance, a free weekly e-newsletter that reports on the top quality issues facing healthcare leaders.
A new high-tech imaging center is opening in Southdale Medical Center in Edina, MN. Called Suburban Imaging, the joint venture involves two large radiology groups, the state’s third-largest hospital and clinic group, Fairview Health Services; and 21 physician groups in the area. Its opening is likely to reignite a debate on whether Minnesota has too many diagnostic imaging facilities and encourages doctors to order unnecessary procedures and pushing up medical costs. It’s also likely to raise the question of whether doctors should refer patients to a facility in which they have a financial stake.
Prince George's County in Maryland is considering converting empty stores in old shopping centers, even entire malls, into medical facilities. County officials are reviewing a feasibility study that recommends creating "medical malls" in four underutilized shopping centers in neglected communities. Under the plan, the county would partner with private retail owners to renovate or build spaces where customers could, for example, shop for clothes in one end of the mall and get a mammogram or a physical in another. The partnership would be paid for with public and private dollars.
As pressure builds for Grady Memorial Hospital CEO Pam Stephenson to answer questions regarding her law degree, efforts are under way to oust her as chairwoman of the Atlanta hospital's authority board. Some state and local officials have criticized Stephenson for the multiple hats she's donned in Grady management, saying they represent conflicts of interest. The latest controversy over her law degree is adding momentum to efforts to remove her as the Grady authority chairwoman. The 10-member board will soon meet to elect its officers. While it remains unclear whether there are enough votes to oust her as chairwoman, some authority members say Stephenson's controversies have become a distraction from overseeing the business of Grady.
Hospital-acquired infections are claiming more American lives each year than AIDS, breast cancer, or automobile accidents. The right physical environment, including single-patient rooms; well-designed ventilation systems and air filters; easy-to-clean, nonporous surface materials; and plenty of sinks for washing hands; could reduce the spread of infection, architects say. They even have research supporting the concept, and now hospitals across the country are using this information to reduce infections from the ground up.