CMS is looking for payers willing to align their payment structures, quality metrics, and data sharing with those of Medicare to meet the goals of its two-track successor to the Comprehensive Primary Care initiative.
Federal officials are intensifying their efforts to promote and lead transformational change at primary care practices across the country.
Four years ago, the Centers for Medicare & Medicaid Services launched the agency's first national primary care reform program, the Comprehensive Primary Care (CPC) initiative, which is set to end in December. Last week, CMS announced a two-track successor to CPC, Comprehensive Primary Care Plus (CPC+).
On April 14, CMS conducted a webinar to introduce CPC+ to the program's key stakeholders: physician practices, payers and healthcare information technology vendors. Laura Sessums, MD, the CMS Division of Advanced Primary Care director, led the webinar.
"We know practices around the country have varying levels of experience and readiness to jump into the care delivery redesign that we envision; hence, we offer two tracks with different eligibility and care delivery redesign requirements," Sessums said to kick off the webinar.
As of October 2015, more than 400 primary care practices were participating in CPC, which has seven "regions" encompassing eight states: Arkansas, Colorado, New Jersey, New York, Ohio and Kentucky, Oklahoma, and Oregon.
When CPC+ launches its five-year span in January 2017, there will be as many as 2,500 primary care practices in each of the two tracks of the program across 20 regions, Sessums said. The regions will be selected by June 30 on the basis of payers who are willing to participate in the program, she said.
"CPC+ will be a multi-payer model to ensure practices have sufficient financial resources from the majority of payers who insure the patients they serve to support the staffing and other resources required to deliver the care we expect in CPC+," Sessums said.
Achieving alignment between Medicare, Medicaid and commercial payers has been essential for primary care practices to achieve success in the CPC initiative.
For CPC+, Medicare is "looking for payers willing to align their payment structures, quality metrics and data sharing with those of Medicare to meet the goals of CPC+," Sessums said.
Payment alignment, is sought in the three features of CPC+ payment, she said:
A care management fee.
For Track 2 only, at least a partial alternative to fee-for-service that can help practices deliver clinical care more efficiently and in a more patient-centered manner that does not necessarily require an office visit.
An incentive payment based on performance outcomes for each track.
The payment model for Track 1 of CPC+ is relatively simple compared to Track 2:
For Medicare beneficiaries, there will be a per beneficiary per month (PBPM) care management fee ranging from $6 to $30. The care management fee will be based on a four-tier risk-stratification scale tied to Medicare's Hierarchical Condition Category (HCC) model.
Standard Medicare fee-for-service payments.
A Medicare performance-based payment incentive pegged at $2.50 PBPM will be paid to primary care practices at the beginning of a CPC+ performance year. Medicare could claw back this payment incentive if practices fail to meet quality and utilization performance thresholds.
The payment model for Track 2 is potentially more lucrative for participating primary care practices:
For Medicare beneficiaries, there will be a PBPM care management fee based on a five-tier risk-stratification scale. The lowest four tiers mirror the risk-stratification scale for Track 1, with fees ranging from $9 to $33. In the fifth tier, Medicare will pay a $100 PBPM fee to practices for complex patients such as people with dementia.
Practices will receive Comprehensive Primary Care Payments (CPCPs). These payments will be a hybrid of Medicare fee-for-service and a value-based reimbursement model.
A Medicare performance-based payment incentive pegged at $4 PBPM will be paid to primary care practices at the beginning of a CPC+ performance year. Just as with Track 1, Medicare could claw back this payment incentive if practices fail to meet quality and utilization performance thresholds.
Practices will have to submit a letter of support from at least one healthcare IT vendor that outlines vendor commitment to boost advanced healthcare IT capabilities at physician practices.
Sessums outlined eligibility requirements for the two tracks of CPC+. "Track 1 is appropriate for practices ready to build the capabilities to delivery comprehensive primary care." Track 2 "is appropriate for practices poised to increase the comprehensiveness of care through enhanced health IT, to improve the care of patients with complex needs, and to inventory resources and community support to meet patients' unmet pyscho-social needs."
CMS plans to begin the CPC+ selection process for primary care practices on July 1, with participants announced in October. If more than 2,500 practices apply to participate in either track, CMS will use a lottery selection process.
Playing for High Primary Care Stakes
CMS should be applauded for attempting to revolutionize primary care, but CPC+ is a high-risk endeavor for the federal agency and for the primary care practices that will be participating in the program, says C. Timothy Gary, JD, MBA, CEO of Nashville, TN-based DW Franklin Consulting Group.
CMS has achieved a significant measure of success prodding health systems and hospitals to adopt value-based payment models such as accountable care organizations because those organizations have the financial resources necessary to development essential capabilities, including actuarial and data analytics muscle. The vast majority of primary care practices are relatively resource-poor, Gary says. "Physicians are in the best position to control costs; but at the same time, they don't have the infrastructure to manage the cost of a patient population."
In addition, accessing and interpreting data will be a daunting challenge for practices participating in CPC+, he says. "The real issue is getting actionable information to physicians and getting it in a form that they can feel good and safe applying to individual patients."
CPC+ has many elements similar to aborted attempts to introduce capitation to the healthcare industry three decades ago, and the program could suffer a similar fate if CMS botches the rollout of the agency's ambitious primary care reform effort, Gary says.
"I'm hoping they put enough data and information out there that it gives the system time to figure it out, and I hope they do it quickly… If they roll this out and it fails, either financially or in patient outcomes, physicians will be gun-shy."
The largest primary care practices will have the highest likelihood of success in CPC+ because they will be able to bank the biggest PBPM payments, says Chad Mulvany, director of healthcare finance policy, strategy, and development at the Westchester, IL-based Healthcare Finance Management Association. "If your practice is large enough, then those payments become more meaningful," he says.
For all practices that participate in CPC+, coding will be the critical factor in maximizing PBPM payments, Mulvany says. "Those payments are driven by HCC, which is driven by ambulatory coding… Practices have to understand patient needs and make sure the resources are there to ensure a good outcome. The accuracy of ambulatory coding becomes exponentially more important."
CPC+ is a high-risk gamble for CMS if there are high-profile failures in the program next year, but the agency has built up experience playing for high stakes, he says. "There has been risk in every program where CMS has stubbed its toe coming out of the gate.
While strategic plans require a long view, they need to be monitored and revised as needed.
This article first appeared in the April 2016 issue of HealthLeaders magazine.
To thrive, or at least survive, the revolutionary shift away from fee-for-service healthcare to value-based models, health systems, hospitals, and physician practices need to have a strategy.
"It's a very interesting time in healthcare, but the complexity has really ramped up in the last five years," says John DiCola, executive vice president of enterprise strategic development at Englewood, Colorado–based Catholic Health Initiatives, which operates in 19 states with 103 hospitals, and generated operating revenues of $15.2 billion in fiscal 2015.
At the same time, CHI is trying to operate with a five-year "planning horizon," DiCola says, noting "we certainly revise the strategy more than that." In 2011, he says the health system set three primary strategic goals that remain in play: achieving clinical and operational excellence, creating clinically integrated networks with population health capabilities, and unlocking the value associated with the new CINs.
At CHI, there are several key elements to "closing the loop on strategic planning with financial planning," DiCola says, including assessing the capital requirements linked to strategic objectives, allocating capacities, making sure the organization has a multi-year financial plan aligned with its strategic plan, and remaining open to course corrections. "Strategic planning is not set in stone—it's a living thing."
Over the past five years, CHI has had to adapt the health system's strategic planning efforts to accommodate the shift to value-based healthcare service contracts, changing market dynamics such as commercial insurance mergers, and growth opportunities through mergers, acquisitions, and clinical affiliations, DiCola says. "We consciously identified the need to move into a more urban direction for growth."
The 2013 acquisition of Houston-based St. Luke's Episcopal Health System is a prime example of CHI utilizing a merger-and-acquisition strategy to establish a significant presence in a new urban market. "Because of its size, it created a new region," he says, noting the impact of the St. Luke's acquisition on the parent health system's organizational structure. CHI St. Luke's Health features six acute care hospitals, a cancer center, and several health clinics in the Houston metropolitan area.
M&A as growth strategy
Growth through mergers and acquisitions has been a keystone of strategic planning for more than a decade at Phoenix-based Banner Health, says Dan Weinman, vice president of strategy and planning of the seven-state system that operates 29 acute care hospitals and reported net revenue of $7 billion in 2015.
"Banner has a comprehensive strategic planning process and corresponding core principles that include strategic growth, quality, service excellence, consumer engagement, and health management. We have had a '2020 Vision' that has been our long-term strategic plan for over 15 years. That has been our road map, and we only recently revised this as we have evolved our vision with a commitment to population health management and improving the health of the communities we serve through consumer-oriented, affordable delivery models and products," Weinman says.
"Banner Health was created in 1999 from a merger between Samaritan Health System and Lutheran Health Network, and our 2015 expansions involved the acquisition of the University of Arizona Health Network in Tucson, and Payson [AZ] Regional Medical Center, so it would be fair to say that mergers and acquisitions have played a critical role in Banner Health's existence and evolution, and support our strategic growth agenda. M&A has been and continues to be instrumental in expanding and enhancing our geographic footprint, care continuum delivery, and health management opportunities. We also use M&A to complement or develop needed competencies or expertise," Weinman says.
Banner has been developing an "M&A Playbook" since 2008, when the health system acquired Sun City, Arizona–based Sun Health in a deal that featured the acquisition of two acute care hospitals and a research institute. "The Playbook is infrastructure for change," says Bryce Carder, Banner's system vice president for information technology business services.
Banner's M&A Playbook is a collection of electronic documents that helps guide the health system's "integration teams" as they focus on key areas such as information technology and human resources, Carder says. "It's not a three-ring binder on someone's desk."
The M&A Playbook's "Handoff Document" for the HR integration team has more than 40 line items that require descriptions or explanations from the team's leaders. About half of the HR Handoff Document is focused on basic facts and figures, such as the HR team's point of contact at the entity targeted in an M&A deal and the number of employees at that entity. The other half of the Handoff Document is broken into categories, including talent acquisition, HR operations, benefits, compensation, and cultural discovery. Each category has multiple elements. In the case of cultural discovery, the Banner HR integration team is responsible for assessing previously conducted employee surveys and determining whether the targeted entity has an operational culture that is compatible with Banner's operational culture.
Banner's M&A Playbook has been designed to promote standardization, but there is flexibility that allows for the integration teams to craft deal-specific solutions, says Beth Stiner, divisional vice president of human resources for Banner-University Medicine. "The Playbook is agnostic so that it can evolve to every situation," she says.
Last year's agreement between Banner and University of Arizona Health Network includes an HR challenge that is not addressed in the M&A Playbook, Stiner says. "Physicians in Tucson are either employed by Banner or the university. As a result of this partnership, we have had to look at our benefits packages across both organizations to ensure that physicians practicing in a single medical group have comparable offerings."
Banner's IT integration team for the University of Arizona Health Network merger is also facing a challenge that requires thinking outside the M&A Playbook box, Carder says, noting the university uses Epic Systems Corporation software to manage electronic health records, and Banner uses EHR software developed by Cerner Corporation. "They had just made a significant investment implementing Epic. We are spending time to look at what they have and the impact of implementing our operational model and staying with Cerner," he says. "We're still in the planning phases. We've taken six to eight months for our internal leadership teams to see what we have … to make a decision on which path to take."
Banner has strategies to become a world-class health management company caring for whole communities through consumer platforms and an integrated delivery network, Weinman says. "While we still pursue traditional care delivery M&A opportunities through the merger and acquisition of health systems, hospitals, and medical groups, our focus on strategic partnerships that complement or support our population health management vision has resulted in expanding interests and relationships in the insurance, ambulatory, health management, telehealth, retail, and consumer sectors," he says.
Communicating complex plans
Downers Grove, Illinois–based DuPage Medical Group is implementing strategic planning initiatives on several fronts, CEO Michael Kasper says. With 2015 net revenue slated at $575 million and this year's net revenue expected to exceed $600 million, he says DuPage is reaping the benefits of not only setting successful strategies but also effectively communicating strategic goals to the physician practice's doctors, who hold a 100% ownership stake in the organization.
"To take an organization that is physician-owned and -directed, and move it in any direction, it takes time and effort. You need to make sure you are communicating early and often," Kasper says.
With a $250 million investment deal announced in December 2015 that is designed to expand DuPage's practice management company, DuPage Practice Management Solutions/Midwest Physician Administrative Services, and plans to accelerate delivery of telemedicine services, Kasper and his leadership team have faced a daunting internal communications challenge over the past year, he says. "If you don't communicate effectively, it could put the right answer at risk."
The growth-oriented investment deal that DuPage cut in December with Boston-based Summit Partners "is at the heart of our historic strategic planning process and the future of the practice," Kasper says.
DuPage has set two strategic goals for the infusion of $250 million in equity and debt from Summit Partners, he says: creating an "equity engine" financial model at the physician practice as opposed to a financial model pinned entirely on individualized compensation for physicians, and expanding the revenue streams at DuPage's practice management company.
Growing the practice management company's capabilities is a crucial element to sustaining broader organizational growth, Kasper says. "Our retained earnings model was not going to be enough to sustain the growth of the organization."
The equity boost from Summit Partners is designed to help DuPage shift away from the organization's "faux equity" financial model, he says. "Before this deal, partners put in $11,000 when they joined the practice, then partners got $11,000 when they left. … Expanding our medical services organization has created an opportunity for equity value."
DuPage has set an aggressive strategic goal for expansion of the practice's telemedicine services, Kasper says. "Our goal is to be the industry leader in virtual healthcare—not just in technology and tools but also leading the education of patients to accept the telehealth channel."
Patients had about 3,000 telemedicine visits with DuPage physicians in 2015, he says. "We would like to see that grow exponentially."
The biggest bang for physician practices seeking to increase telemedicine capabilities is in the area of follow-up visits with patients after a surgical procedure or other treatment at an acute care facility, Kasper says. "There has to be some level of oversight, and someone has to see the patient. In many cases, it is not feasible for doctors or patients to have 14 daily visits postdischarge from a hospital. I don't want a high-risk, fragile patient on the road driving to see the doctor."
The DuPage leadership team is well aware that achieving the practice's telemedicine strategic goal will take significant amounts of time, effort, and financial resources. "We have a long way to go. We're the only industry that still relies on pagers and facsimile machines. As long as we are using 1980s technology, we cannot call ourselves a technologically advanced industry," he says.
Ironically, one of the most difficult strategic planning obstacles at DuPage has been convincing the practice's physician owners to embrace innovations that will supplant healthcare service delivery models that have historically generated strong financial results, Kasper says. "It's always hard to change when you're successful, and this was a very successful organization. We did not have a burning platform, but we were able to convince our physicians that the burning platform was around the corner."
Hundreds of hospitals are apparently unprepared for Medicare's Comprehensive Care for Joint Replacement reimbursement model, survey data shows, but proponents say there is still time to get on the bundled payments bandwagon.
Federal officials are not fooling around when it comes to bundled payments.
On April 1, the Centers for Medicare and Medicaid Services imposed mandatory participation in bundled payments for hip and knee replacement procedures for about 800 hospitals under Medicare's Comprehensive Care for Joint Replacement (CJR) reimbursement model.
In two hospital surveys released last month, the majority of hospitals polled report they are not ready for CJR. A FORCE-TJR survey found 56% of hospital orthopedics programs report being unprepared for CJR. Last week, the Washington, DC-based consultancy Avalere Health released survey results indicating that 60% of the hospitals required to participate in CJR could lose money in the bundled payment model when downside risk begins in January 2017.
Despite these dire survey results, Christopher Stanley, MD, vice president of Englewood, CO-based Catholic Health Initiatives, says bundled payment late-adopters can catch up with the early-adopters such as hospitals and orthopedic surgeons who have been participating in Medicare's Bundled Payment for Care Improvement (BPCI) initiative. "Take advantage of these first three quarters. Look at this as an opportunity," he suggests.
CHI, which operates more than 100 hospitals in 19 states, is prepared for CJR mainly because the health system has a couple years of experience with BPCI, Stanley says. But the sprawling nonprofit healthcare provider is far from complacent. "Even though we are very advanced in this and have been doing it for two-and-a-half years, we are constantly re-evaluating and changing our programs. This is not a short-term project. This is a fundamental shift in how healthcare is provided and how it is paid for," he says.
Fred Bentley, vice president of Avalere's Center for Payment & Delivery Innovation, is not surprised at the widespread lack of preparedness for CJR. "[Providers] have really been focused on the care of patients in the four walls of the hospital and not really on the post-discharge side. They have been focused on growing their orthopedics volume and their referrals, and now they're going to be focused on the entire episode. And that's a big shift."
Under the CJR bundled payment model, each participating hospital will be given a target price for hip and knee replacement procedure episodes, which include the cost of post-acute care. The cost of hip and knee replacement procedure episodes for Medicare patients varies widely across the country, from $16,500 to $33,000, according to CMS.
Keys to Unlocking CJR Success
"What happens in the post-acute space is critical to success," Stanley says.
As CHI has ramped up its involvement in bundled payments for hip and knee replacement procedures, garnering a deep understanding of post-acute care and working closely with skilled nursing facilities (SNFs) have been major challenges for the health system. "There was high variability in the discharge destination," he says, noting 10% of joint replacement patients were being discharged to SNFs in one CHI market compared to 50% of patients being sent to SNFs in another market. "We rarely had any insight into it. Now, we're really aligning all of the incentives."
Pre-operative preparations also play a major role in achieving financial success in bundled payments for joint replacement, Stanley says. "It's not just as simple as saying, 'Where are we discharging patients to?' We make sure the patients are tuned up on the front end."
CHI provides several pre-operative services for patients before they have hip and knee replacement procedures, including smoking cessation, diabetes management and weight loss programs.
Mining the wealth of data that Medicare provides to hospitals participating in CJR is another critically important area, Stanley says. "Hospitals need to focus on using the data you get from CMS for both baselines and how care is provided month-to-month."
At one of CHI's hospitals, the readmissions data for hip and knee replacement procedures shocked the orthopedics department, he says. The hospital and its orthopedic surgeons thought the readmissions rate was about 7.5%. "When they looked at the data, they found out their readmissions rates were 15%."
To meet or beat target pricing in CJR, hospitals need to engage all of the stakeholders in the care continuum and set effective "care pathways," Stanley says. Those stakeholders include orthopedic surgeons, advanced practice nurses, SNFs, rehabilitation facilities and home health agencies.
"That care model piece is the hardest to do. Hospitals rarely work with their physicians and community providers on the 30- to 90-day post-operative period."
Physician engagement is critically important for hospitals that are behind the CJR curve, Bentley says. "There's still a lot of work that hospitals can be doing to partner with their physicians… to standardize care and adhere to care protocols. They just have to get more and more efficient at what they're doing."
Gainsharing with physicians is an effective strategy for hospitals participating in CJR to achieve standardization, he says. "They are developing gainsharing arrangements with surgeons. That is getting surgeons to move from using the favorite implant they like to use, and getting the whole program down to three or four implants."
Standardization and adherence to care protocols can be a tough physician-engagement hurdle to clear, Bentley says. "The accusation is that this is cookie-cutter medicine, but that changes when they have skin in the game."
Executives at this year's Revenue Cycle Exchange in San Diego say they're making significant progress accounting for alternative payments models, transitioning to new electronic health record systems, and boosting patient experience.
This article appeared in the May 2016 issue of HealthLeaders magazine and was based on Christopher Cheney's online column from March 28, 2016.
There is light at the end of the revenue cycle transformation tunnel.
Southwest General launched Medicare's bundled payment program for congestive heart failure in January 2015. "There was a million dollars at risk, and the question was, 'Do you budget for that? Do you budget for the potential shared savings? One of the reasons we chose CHF was that the data showed that if we were successful, we had an opportunity to get a check from Medicare for over $1 million," says Jill Barber, MHA, director of managed care and payer strategy at Middleburg, Ohio-based Southwest General Health Center, a 358-bed facility.
"And again," she says, "the question was, 'Do you budget for that? Do you plan for that?' What we chose to do is just say, 'If we lose, there will be some other contingency planning to fall back on.' Still a risk, but not incorporated into the budget. We actually felt we were going to be successful. For us, CHF and that $1 million opportunity represented a 'fish-in-a-barrel' opportunity. How hard could it be? We needed to save Medicare $80,000 and the rest would be for us."
As part of the effort to ensure bundled payment success, post-acute strategy is key. At the onset of the bundle, Southwest General closed its skilled nursing facility. "We didn't want to force leaders in our organization to be focused on volume and keeping days of stay ramped up and bodies in beds, which is the exact opposite of working with an alternative payment model like bundled payments. For many reasons, we chose to close our SNF and work with our community SNFs because there was capacity in the market."
Southwest General Health Center has made great strides over the past year in operating and financially managing bundled payments, says Barber. "One of our biggest results has been that our board members, our physicians, and our community members have a better idea of what's going to happen with alternate payment models. They're more comfortable with us taking risk. This is not nearly as scary as it was a year ago," she says.
Since starting the Medicare CHF bundle, she says the revenue cycle team at Southwest General has risen to multiple challenges, including legal and financial obstacles linked to apportioning gainsharing with physicians and satisfying auditors. As the community hospital has taken on more bundled payment initiatives such as joint replacement, more challenges have arisen. "You have to plan per episode. We have a CHF strategy for bundled payments, we have a joint replacement strategy for bundled payments, we have a strategy for sepsis bundled payments, and never are any two of these the same."
While Southwest General fell short of its $1 million CHF gainsharing goal for 2015, the hospital is expecting a $300,000 check from Medicare for 2015 and much better performance this year.
"And by the way, this is not just about finances," Barber says. "We did achieve the triple aim. We increased quality, we decreased costs, and we also increased patient satisfaction."
Launching an EHR Without Losing Your Shirt
The loss of revenue during the installation of a new electronic health record system ranks near the top of every revenue cycle leader's worst nightmares.
From June 2014 to September 2015, Columbus-based OhioHealth installed the Epic EHR at seven hospitals, 343 physician practices, eight urgent care centers, and three medical buildings. "We called it Big Bang," says Jane Berkebile, system vice president of revenue cycle.
"A lot of the problem with these EHR implementations is lost revenue, so we decided OhioHealth was not going to do that. We were going to make sure our revenue was intact," she says.
Berkebile's revenue cycle team pursued a multi-pronged strategy to limit revenue flow disruption, including efforts focused on charge generation, revenue reconciliation, revenue education across the organization, and integrating the clinical staff into revenue cycle functions.
"We decided to bring in a consultant for this portion of the project—revenue and revenue recognition as well as training and educating the organization about revenue. That was the best step we could have made. We have exponentially paid for it with the success from the entire project," she says.
"We wanted to establish a collaborative environment, not only with the consultants, but also with our entire IT staff, the Epic representatives onsite helping us with the implementation, our Finance Department, our clinical departments, and our physicians. We tried to bring everybody into the fold thinking about revenue."
OhioHealth was adamant about having a robust testing regime. "We insisted that we process 5,000 claims for every facility. We brought in our own frontline billing staff from revenue cycle to do the testing."
The EHR implementation results were impressive.
When the first two OhioHealth hospitals went live with Epic, regular revenue flow was re-established within 10 days. "By the time we got to hospitals three, four and five, we were back to our expected revenue by Day Four. So as you can see, as we got a few hospitals under our belt, we really started clicking."
Engaging Patients as Financial Partners
Revenue cycle teams are just beginning to achieve significant progress in improving the patient experience with the financial element of their care, says Mark Norby, chair of revenue cycle at Rochester, MN-based Mayo Clinic, which which has 4,200 staff physicians and scientists at facilities in Arizona, Florida and Minnesota.
"Our focus in the revenue cycle has not really been about the patient. It's been about churning out bills, which is important, but our staff has not been thinking about the consumer the way they think about themselves as consumers," he says.
"When we look at our patient satisfaction, clinical care is off the charts. When we see what our satisfaction scores are in the revenue cycle, they're average, but we're not average. We need to be above average," Norby says.
More than a year ago, Mayo's revenue cycle staff started paying closer attention to information from patients, including focus groups and recording conversations in the revenue cycle department's call center. They heard complaints about too many billing statements and confusion over the health system's website pages related to billing and insurance. "It's just chaos. It just goes to show you that we did not design this stuff with the consumer in mind. We designed it for ourselves."
Over the past year, Mayo has launched several initiatives targeted at improving patients' financial experience, he says. "We're going to change. We're only going to send statements to patients when they owe something. The key there is going to be fewer statements, you owe something to us, and it's going to be easy for you to understand."
Mayo also is committed to providing greater price transparency to patients such as an online cost estimation tool that will eventually provide real-time information on health plan benefits eligibility, including co-pays and deductibles, Norby says. "That's really what we believe patients want. They want to know, 'How much am I going to have to pay.' They don't care quite so much about the sticker price if they don't have to pay for it."
Livonia, MI-based Trinity Health, which operates more than 80 hospitals in 21 states, is making a subtle change in its revenue cycle staff that could have a major impact on patient experience, says Michael Grant, MBA, regional director for patient financial services in Indiana and western Michigan. "In planning a long-term strategy, our people said they were not financial counselors but more like benefits counselors," he says of the initiative to create a "benefits advocate" job title.
Dropping the financial counselor job title in favor of the benefits advocate designation recognizes that the position requires extensive healthcare benefits know-how such as Medicaid enrollment, Grant says. "These have been entry-level positions; but with all the things we're asking of them, they can't be entry level positions."
Benefits advocates play a critical role in revenue cycle teams, he says. "You're getting people at their most vulnerable time. We do surgery on patients' bodies, but we also do surgery on their wallets and bank accounts. You need someone who has knowledge, intelligence, and a heart."
With payment reform, technology advances, and other market forces shifting medical service delivery away from the hospital setting, home care presents both business opportunity and risk.
As hospitals reach outside their walls to be more closely involved in the entire care continuum of patients, home care presents some tantalizing opportunities.
With Medicare reimbursement changes providing a financial foundation for change, home care is increasingly becoming a critical component of integrated health systems, says Sheila Schubert, administrator of home health for Hollywood, FL-based Memorial Healthcare System.
“For a very long time, people have known this is the way medical care should be delivered. This has been predicted for more than 20 years, and now it’s really happening. We’re doing IV drips at home. We’re monitoring patients at home. Services that used to be done in the ICU are now being done in the home,” she says.
Schubert joined the staff at Memorial Healthcare five years ago and has worked in home care for two decades. “People are so much more comfortable if they can receive good care and be in their home.”
Memorial Healthcare, which has offered home-care services to patients since 1992 and operates five acute-care hospitals in southern Florida, is well-positioned for growth. “All of the components of a home health agency to serve the community were in place, including a staff trained in home health,” she says.
Recent changes in Medicare reimbursement rules such as the Hospital Readmissions Reduction Program and new payment models such as pricing services based on episodes of care are major drivers of change in home health.
In response, Memorial Healthcare has shifted away from its per-visit payment model for home care toward bundled payment models that are designed to promote quality and good clinical outcomes. Schubert anticipates “bundled payments based on diagnosis for acute care and post-acute care across the care continuum. We will be paid based on the quality of care and outcomes.”
The biggest bang for the home-care buck is in the area of cost avoidance, such as reductions in avoidable hospital readmissions. “Home care has taken the lead to make sure there are smooth transitions,” she says.
While cost avoidance may not be as exciting in the C-Suite as revenue growth, limiting unnecessary medical expenses is one of the keys to delivering value-based care. “It’s not that home care has to be a money-maker. It’s that home care improves health in the community and supports the health system,” she says.
Entering the Home-Health Market Through Acquisitions
Home care has followed a different, but no less significant evolutionary path at Pittsburgh-based Allegheny Health Network, which entered the home health market in 2014 through the acquisition of four companies. Each of the acquired companies had experience in a prime home-health specialty: home nursing, infusion therapy, medical equipment, and hospice.
“We own and operate all the home-health segments,” says Brian Holzer, senior vice president for diversified services at AHN, which runs seven acute-care hospitals in western Pennsylvania. “Once we acquired all the companies, we built a new care coordinator model.”
Care coordinators are a crucial component of Healthcare @ Home, the business unit that manages AHN’s home-health services, he says. Instead of having a handful of care coordinators at each home-health subsidiary, there are about 40 care coordinators on the Healthcare @ Home staff who help the subsidiaries coordinate all home-health services for each patient. “We have four home-health companies, but a single point of contact for the patient,” Holzer says.
Offering the full suite of home-health services gives AHN competitive advantages over standalone home-health companies, he says.
“High patient volumes driven out of the health system give us the volume we need to run home health. As a standalone agency, you’re not going to be able to quarterback the process. And health systems have the resources to make investments. We have sustainable volumes that our home-health companies can count on, and that allows us to invest.”
Healthcare @ Home is already showing signs of generating value for AHN. In 2015, the annual rate for all-cause 30-day hospital readmissions fell 5%, and the readmissions rate for high-risk patients such as those with congestive heart failure dropped 8%, Holzer says.
As a fully integrated health system with a strong Blue Cross Blue Shield corporate partner, Highmark Inc., AHN has financial advantages over standalone home-health organizations. Holzer explains: “There are two ways to generate value from home health, fee-for-service profits from your home-health companies and the value that comes from reducing unnecessary medical expenses. We’re in a position to do both—operate at a profit and drive down unnecessary medical expenses.”
Home Care Key Player in Shift Away from Hospital-Based Services
In a potentially existential irony for hospitals, reaching outside the campus walls is threatening to become a claustrophobic experience as the healthcare “space” in the community grows and the healthcare “space” in the hospital shrinks.
“The awareness of other people who can support health has expanded beyond the doctor in the hospital to nursing facilities and home health now. It will continue to expand to all other providers in the community as time goes on and technology improves,” says Marybeth McCaffrey, JD, a principal at the University of Massachusetts School of Medicine’s Center for Health Law and Economics.
“The advances are just beginning and are related to transitions of care, documentation, and transfers between facilities. Then there’s mobile health improvements, where providers are working to leverage information people are collecting in the home.”
As more and more medical services are moved from the hospital setting to settings dotted across the community, the operational and financial stakes for hospitals are reaching epic proportions, says David Friend, MD, MBA, managing director and chief transformation officer at New York-based consultancy BDO’s Center for Health Care Excellence & Innovation.
“The hospital,” he says, “is taking care outside the four walls into the community, which addresses the care continuum issue. It begs the question: What happens in the four walls of the hospital? It begs the question: What are hospitals going to do in the future?”
From a financial perspective, home care presents both an opportunity and a challenge. “We want to make sure the patient does not bounce back to the hospital, but there are significant investments for effective home care,” he says. “For a hospital, it makes a lot of sense to have home care. Either you own it, or you have a partner. A lot of folks don’t have the capital to play in the space anymore.”
Bundled payments that encourage providers to deliver services with high quality and low costs are going to revolutionize the healthcare industry, particularly in the post-acute care sector, Friend contends. “Hospitals are looking for skilled-nursing partners and home-health partners who have these capabilities, and the mom-and-pop home-health agencies don’t have these capabilities.”
Shifting away from per-visit payment models is a huge step forward for home care, he says. “There’s going to be a lot more creativity. No more, ‘Paying for 10 visits.’ [Providers] will be paid for making patients better.”
As patients adapt to their heightened financial responsibilities, health systems and hospitals must help make sure patients pay for as much of their bills as possible.
This article first appeared in the March 2016 issue of HealthLeaders magazine.
With more healthcare costs shifting to patients through high-deductible health plans and other trends, health systems and hospitals are facing the need to develop a new skill: asking patients for more money. To rise to this challenge, revenue cycle innovators are engaging patients as financial partners from hospital registration to bill collection, and every point in between.
"In today's healthcare environment, everybody owes something for their healthcare, and this is a cultural shift," says Jane Berkebile, system vice president of revenue cycle for OhioHealth in Columbus. In the fiscal year ending June 2013, OhioHealth posted total revenue at $2.1 billion, with net income pegged at $348.7 million.
This cultural shift includes a patient learning curve laden with risk for healthcare providers, she says. "Very few people budget for healthcare expenses. It usually comes as a surprise for them. … If someone has a health incident and they have a $10,000 deductible, that's a big shock to them."
As patients adapt to their heightened financial responsibilities, health systems and hospitals must reach out early and often to help make sure patients pay for as much of their bills as possible, Berkebile says. "We're more likely to get paid if there is at least an expectation that there is an out-of-pocket expense and we expect the patient to pay it."
While rising to this bill-collection challenge, healthcare providers must avoid pressing their patients too hard, she says. "We walk a very fine line. … We don't want to be seen as having heavy-handed tactics. It's more a conversation."
Point-of-service collections
A robust effort to engage patients as financial partners can generate impressive revenue cycle results, including higher point-of-service collections, lower bad debt, and less spending on financial assistance, Berkebile says.
OhioHealth posted $22 million in POS cash collections at the health system's four central Ohio hospitals in 2015, she says. "We stress the need for communication with patients. We set targets. We track the dollars we collect."
POS cash collections have increased every year at OhioHealth since 2009, when the figure was $9 million, according to health system records.
Berkebile says POS cash collection is a key focus for the training and education unit within OhioHealth's revenue cycle team. The training and education unit has about nine full-time staffers, and it provides instruction to revenue cycle team members and many employees outside the department who work with patients. "It is critical that all of our physician practices know the policies for registration, point-of-service collection, and messaging to the patient. The last thing you want someone to do is say, 'Don't worry about paying for that.' "
Financial partnering with patients helps minimize bill-collection bad debt at OhioHealth, which tracks bad debt on a monthly basis. Bad debt accounts for less than 2% of gross patient revenue "across the whole organization," she says.
"Bad debt as a percentage of gross patient revenue is considered excellent if at or below 2% of gross patient revenue. Starting at a target of 2% of GPR, we have continued to whittle that down as we have made progress. As we bring on new facilities, our initial target is always 2% GPR."
Assessing the propensity of patients to pay also helps to contain the budget line for financial assistance at OhioHealth, Berkebile says, noting many low-income patients benefit from the financial counseling services offered at the health system, such as Medicaid enrollment facilitation.
In Ohio, the expansion of Medicaid under the Patient Protection and Affordable Care Act has been a boost for OhioHealth and the health system's low-income patients. "That's a benefit to the patient," she says of the access to medical services that comes with Medicaid enrollment, adding that the health system's "charity care has been cut roughly in half" since Ohio expanded Medicaid to provide coverage to more low-income adults in January 2014.
A positive financial experience
As patients become increasingly important economic players in healthcare, providers who fail to focus on the financial interactions with their patients do so at increasing risk, says Corey Meyer, director of patient access and virtual health at Lancaster General Health in Pennsylvania. "In any other industry, a bad experience with the financial transaction will send the consumer looking for an alternative. Why would healthcare be any different?"
Lancaster General Health has a total of 689 staffed beds between its acute care hospital, its rehabilitation hospital, and Women & Babies Hospital. In 2013, the health system posted total revenue at $827.1 million, with net income pegged at $92.5 million.
An August 2014 survey of 500 healthcare patients shows a clear link between billing experience and financial consequences, Meyer says. The survey, which was conducted by Connance, a Waltham, Massachusetts–based vendor of predictive analytic technology solutions, found that 74% of patients who gave their billing experience a top score paid their bills in full, compared to a 33% payment rate for patients who were less than satisfied with their billing experience.
A positive billing experience also has a major impact on patient loyalty, the Connance survey found. For patients who gave their billing experience a top score, 95% reported they would return to the same hospital for another elective medical procedure. For patients who were less than satisfied with their billing experience, only 58% said they would return to the same hospital for another elective procedure.
"Patients have choice in where to get care, as well as a choice about whether to get care at all. If a patient has a great clinical experience but their financial experience is not great, data suggests the patient will be very unlikely to recommend the hospital to a friend, or pay their bill in full," Meyer says. "We are focusing on the entire financial experience from price estimation, to properly capturing insurance information, providing easy-to-understand bills, and offering multiple payment options including online payment and self-service payment plans."
There is a heavy price to be paid when financial relationships between healthcare providers and patients go sour, according to Mayo Clinic billing experience data presented in June 2015 at the annual conference of the Healthcare Finance Management Association in Orlando, Florida.
Yvonne Chase, manager for patient access and business services at Mayo Clinic Arizona and Florida, shared data from a 2011 study that found 93% of patients who are satisfied with their billing experience are also satisfied with their clinical experience. When the billing experience is negative, only 63% of patients are satisfied with their clinical experience.
With major campuses in Minnesota, Arizona, and Florida, Mayo Clinic served 1.3 million patients in 2014, including 128,000 hospital admissions. In 2014, Mayo Clinic posted total revenue at $9.8 billion, with net operating income pegged at $834 million.
Strategies for partnering
Devoting time and resources to cultivating customer service capabilities is one of the primary keys to success in engaging patients as financial partners, Meyer says.
"There are many investments to consider, but first and foremost would be our people and the patient experience. We need to have great people who can properly engage patients when they call or interact with us in person. The financial experience goes best when we collect proper insurance information from the patient and are able to provide financial information in plain language early in the process.
"We get great feedback from patients who receive calls from our financial estimators prior to a scheduled service explaining their benefits and out-of-pocket expenses. Many of those patients choose to provide a down payment for their scheduled service because we have built the trust," Meyer says.
In addition to traditional channels such as registration and collections, the OhioHealth revenue cycle team has multiple customer service touch points to connect with patients at every step in the billing process, including a Monday-through-Saturday call center and financial advisors at every hospital in the health system, Berkebile says.
The OhioHealth customer service call center serves a hotline function for anxious patients who are seeking financial information about an upcoming medical procedure, she says, noting electronic communication with commercial payers is essential to access deductible and coinsurance information. "Patients can contact us ahead of time, and we can give them an estimate of charges and coverage."
Eligibility-verification and cost-estimation tools are key building blocks for engaging patients as financial partners, Chase says. "This way we can verify the specifics not covered by insurance and the patient's out-of-pocket expenses based on what is ordered by the physician."
OhioHealth employs dozens of financial advocates, with at least two at the health system's smallest hospitals and as many as 10 at the largest hospitals, Berkebile says. "We can really sit down with patients and help them understand the responsibility."
For nonelective inpatient cases, the financial advocates meet with patients as soon as possible following estimation of payer coverage and out-of-pocket costs, she says, noting clinicians are consulted to make sure patients are fit to hold a conversation. "We begin that dialogue, and we are standardized in our scripting and messaging. We ask for the copay and deductible until it gets paid."
Overcoming challenges to financial partnering The first hurdle that confronts many revenue cycle teams as they seek to build financial partnerships with patients is internal resistance, Chase says, noting nervousness about the potential for a negative reaction to a more active effort to collect patient bills. In practice, concerns over offending patients and driving them to competitors are found to be unwarranted, she says. "We find patients who we are transparent with regarding costs have a much more positive patient experience."
To help make elevated patient financial responsibility financially sustainable for healthcare providers, revenue cycle teams need to establish streamlined processes for patients to follow, Meyer says. "We need make the financial experience simpler and less overwhelming for patients. Reducing surprises by explaining insurance benefits and options up front can reduce the sticker shock and can help engage patients in their care." Mindset is a mammoth hurdle to clear as healthcare providers conduct financial conversations with patients, he says. "Healthcare is something that no one really wants to buy. If I need a new couch or a new car, there is excitement in the purchase. Additionally, I will do some research on the item and the costs. With healthcare, it is not something that people want to spend money on or wade through cost information." Building an expectation of patient financial responsibility can be delicate, but it is not an entirely foreign concept, Berkebile says. "It's getting patients to understand that healthcare costs money. When I take my cats to the vet, I have my checkbook out."
To effectively engage patients as financial partners, revenue cycle teams must balance bill collection with compassion, she says. "The main challenge is the patient's stress or anxiety related to the case. We're saving lives. We're working with people. We're not going to turn people away for medically necessary care."
Providing on-site and near-site health services for large employers fed up with rising health insurance premiums presents a golden growth opportunity for some health systems.
A small health system in Wisconsin is seeking to have a big impact in the market for on-site medical clinics at large employers.
"We think more health systems should get in this business," says Randy Van Straten, vice president of business health at Green Bay-based Bellin Health System, which features an acute-care hospital, a critical access hospital, and 31 primary care clinics. "We host health systems about every other week who want to learn from us."
In the early 2000s, a harsh reality turned into a dream opportunity for Bellin, Van Straten says. The health system was facing a 30% increase in premium costs for its employee health insurance. "What we found out was that we really didn't know our employees," he says.
Bellin, which employs 3,650 people, examined the health of its workforce and launched an aggressive effort to improve their medical status.
The results are eye-popping. Bellin has saved about $23 million in employee-healthcare costs over the past 12 years.
The number of employees at risk for one or more serious medical conditions has dropped from 14.2% to 6.6%. From 2014 to 2015, Bellin was able to decrease its per-employee healthcare costs 1%. "Who has a decrease these days?" Van Straten asks rhetorically.
When Bellin's executive team starting reporting the population-health gains among its employees, the health system's board of directors, which includes leaders from several Green Bay-area large employers, were more than impressed. "We got pulled into this business by our own board," Van Straten says.
Bellin now provides a range of on-site services to 125 companies, including an on-site clinic at the home of the National Football League's Green Bay Packers, Lambeau Field. The Packers, who offer access to their clinic for all of the team's workers, have a seat on Bellin's board.
In addition to on-site health clinics, Bellin offers on-site occupational health services, a turn-key corporate health and wellness program, fitness centers, and at-risk strategic partnerships that feature health clinics based on pay-for-performance and shared savings models.
The health system has assembled a portfolio of 20 strategic partners and annual revenue growth from strategic partnerships is exceeding Bellin's 10% goal, posting gains from 12% to 18% in recent years, Van Straten says.
Convenience for Workers and Productivity Gains for Employers
Large employers are making big bets on on-site health clinics, says Karen Marlo, vice president of benchmarking and analysis at the Washington, DC-based National Business Group on Health.
On-site clinics align convenience for workers with productivity gains for employers, she says. "In certain areas of the country, having on-site clinics is a major time-saver."
In survey results from 107 large employers that NGBH published last year, 60% of businesses reported offering an on-site health clinic to at least a portion of their workforces. The 2015 EMPAQ Insights survey—which polled large employers in eight sectors including healthcare, post-secondary education, retail and manufacturing—found dramatic attendance gains for businesses with on-site clinics. Workers at employers that offered access to on-site health clinics for all of their employees missed an average of less than five days on the job annually. Workers at employers that offered no on-site health clinics or other on-site access to health services for their employees missed an average of more than 20 days on the job annually.
On-site physical therapy is a particularly great fit for workers and employers, Marlo says. Because physical therapy regimens often call for three sessions per week, and off-site PT services are a significant inconvenience for employees and costly financial hit for employers, they can result in a "huge loss of productivity."
The manufacturing sector, which has faced safety challenges since the Industrial Revolution, and other large employers have been operating on-site health clinics for decades, Marlo says. "On-site clinics have been around for a long time, but now they are being leveraged to provide more services."
The EMPAQ Insights survey results reflect the occupational-health roots of the more robust on-site clinics that Bellin and other health systems are operating with large employers. Manufacturers are the most likely to offer an on-site health clinic to their workers, at 86%. Financial services and insurance firms are the least likely to offer an on-site health clinic, at 29%.
"In recent years, innovative employers have looked to redesign on-site clinics, transforming them from occupational health clinics to health centers that treat both the acute and chronic medical needs of employees," the EMPAQ Insights report states.
Free Preventive Care Nets Savings
Bellin's strategy for offering on-site health services is grounded on generating results for employers and using that track record to attract new clients, Van Straten says. "You don't want to grow your business on the backs of employers. You want to generate results for them. We don't want to do more healthcare for them; we want to do better healthcare for them."
Other health systems that want to offer on-site medical services to large employers should follow Bellin's lead and start with generating healthcare coverage value for their own workforce, he says. "They should really focus on their own employees… It's hard to tell an employer, 'we're going to help you control your costs,' when you can't control your own costs."
Bellin's medical benefit costs for its employees are at least 10% below the sector average, he says.
An effective cost-containment strategy at Bellin has been offering free services such as preventive care for a half-dozen medical and behavioral health conditions, including diabetes, tobacco addiction, and cardiovascular disease. The free services program has netted significant reductions in the number of claims for care more than $50,000 because it has reduced access barriers for high-risk employees with chronic diseases, Van Straten says.
"They don't want to come in because of the costs… We've been able to reduce our large-claim spend. They're at a lower cost because we're catching things earlier."
Offering on-site health services to large employers requires investments in the service line, he says. "We also have an employer customer to deal with."
Bellin has five account executives and three sales executives to generate and maintain large-employer clients for on-site health services. The account executives are deployed based on business-mix segments of the local market, and the sales executives are deployed based on regions and types of on-site services. "I call it the get-and-keep strategy. There are sales incentives. If you're going to do this and do this well, you have to have a sales team," Van Straten says.
Primary care growth is a key metric that Bellin is monitoring to gauge the financial performance of its on-site health service business. In recent years, Bellin has boosted its primary care patient population at annual rates of more than 10%, he says. Health-risk appraisals at large employer on-site clinics are a top growth driver. "It's our portal to build primary care relationships."
Is the distinction beginning to blur between for-profit and nonprofit healthcare organizations?
This article first appeared in the March 2016 issue of HealthLeaders magazine.
For-profit and nonprofit hospitals are fundamentally similar organizations with subtly different cultural approaches to managing the economics of healthcare.
All acute care hospitals serve patients, employ physicians and nurses as their primary personnel, and operate in the same regulatory framework for delivery of clinical services.
For-profit hospitals add a unique element to the mix: generating a return for investors. This additional ingredient gives the organizational culture at for-profits a subtly different flavor than the one at their nonprofit counterparts, says Yvette Doran, FACMPE, chief operating officer at Saint Thomas Medical Partners in Nashville, which is affiliated with Ascension Health, a nonprofit based in St. Louis that owns 131 hospitals in 24 states and the District of Columbia.
"When I think of the differences, culture is at the top of my list. While quality care is a priority for both, the culture at for-profits is business-driven. The culture at nonprofits is service-driven," she says.
However, the fundamental similarities of all acute care hospitals blunt the impact of the business-driven culture at for-profits, Doran says, noting the differences between for-profits and nonprofits reflect cultural nuances rather than cultural divides. "Good hospitals need both. Without the business aspects on one hand and the service aspects on the other, you can't function well."
Doran has prior work experience at Franklin, Tennessee–based for-profit Community Health Systems. CHS operates 202 hospitals in 29 states, and reported 2014 net operating revenues of $18.6 billion and adjusted EBITDA of $2.8 billion.
The executive leadership at Capella Healthcare, a relatively small for-profit health system based in Franklin, Tennessee, shares much of Doran's nuanced perspective on the differences between for-profit and nonprofit hospitals.
"At Capella, we do not believe there are significant differences between for-profit—or taxpaying—hospitals and nonprofit hospitals. In fact, that line of differentiation has become exceptionally blurred in recent years," says Michael Wiechart, president and CEO of Capella, a privately held company that operates 10 acute care and specialty hospital facilities in five states, and for fiscal year 2014 reported $713.4 million in revenue from continuing operations, net of the provision for bad debts, and adjusted EBITDA of $103.3 million.
"Both of us share the mission of delivering the highest-possible quality of care. And both of us must make a sustainable bottom line in order to achieve the mission and to expand care for the future. We are both held accountable on our quality of care, our ability to be good stewards of the operations, and to make our organizations great places to work for both employees and physicians. While each operates by some slightly different rules and regulations based on our business or tax structure, both of us have all of the same basic goals and challenges."
For-profits and nonprofits have a nearly identical mission under ground rules designed to foster and support value-based care, Wiechart continues. "Neither for-profits nor nonprofits have the luxury of ignoring sustainability or patient-care excellence. We're all dealing with the same environment and the same challenges. And it's about who can do it better. Being able to make a sustainable bottom line is necessary for reinvestment and growth for everyone, regardless of your tax status.
"You just have to consider what the motivation is around making the profit. For us, it's about being able to reinvest in our family of hospitals, which we historically have done by reinvesting 100% of free cash flow into growth and quality improvements, not in dividends to shareholders."
Comparing business model theories
In theory, for-profit hospitals should operate with more zealous attention to business objectives than nonprofits because shareholders have their money on the line.
"The absence of a residual claimant with a financial interest in the organization means that no one individual, or group of individuals, has strong incentives to monitor the behavior of the organization at nonprofit hospitals," Rexford Santerre, PhD, a professor of finance and healthcare management at the University of Connecticut, wrote in a 2005 National Bureau of Economic Research report with a Finance Department colleague John Vernon, PhD. The NBER is a private, nonprofit economic research organization based in Cambridge, Massachusetts.
In the absence of mitigating factors such as shared regulatory frameworks and shared interests in providing quality services, financial considerations would dominate decision-making at for-profit hospitals, Doran says. "If I were a fly on the wall at a for-profit meeting, the dollar would be at the top of the list. If I were a fly on the wall of a nonprofit meeting, the patient would be at the top of the list."
In an interview with HealthLeaders, Santerre explains that for-profit boards and their executive leadership teams, which invariably have monetary performance incentives built into compensation packages, face a measure of financial pressure that is absent at nonprofits. "Theoretically, there is a residual claimant, and that residual claimant wants to maximize profit," he says, referring to for-profit shareholders.
In contrast, Santerre says nonprofit boards and their executive leadership theoretically have an "incentive not to compromise quality," noting a nonprofit is required to distribute earnings back into the organization or into its service-area communities. Nonprofits can reinvest earnings in facilities, lower charges to patients, or offer community benefits. In contrast, one of the prime benefits of operating as a for-profit is the opportunity to bank positive operating margin after taxes. "You can take on risks, but you can also gain the rewards as a for-profit," he says.
Quality as a common denominator
Despite the indications of business theory, there is no evidence that for-profits compromise quality of care through cost-cutting, Santerre says. "It's never played out in reality. … Physicians play a huge role at hospitals, which are the workshop of physicians. The physicians will do what they do regardless of the ownership structure of the hospital. Studies have shown not a dime of difference between for-profits and not-for-profits in terms of performance … measures such as quality, community benefits, and costs."
There also is no indication that for-profit hospitals are posting higher operating margins than their nonprofit counterparts, Santerre says. "There may be a different target at for-profits, but they're not achieving a different margin. … When taken as a whole, the literature does not show a significant difference in the profitability of for-profit and nonprofit hospitals. That's what we report in our textbook."
The 2016 HealthLeaders Media Industry Survey indicates there is little difference in reported margin among for-profit and nonprofit organizations. Fifteen percent of the for-profits reported a negative operating margin for the most recent fiscal year, nearly equal to the 16% of nonprofits reporting negative margin. Similarly, 9% of respondents from for-profits reported that their organization's financial forecast for the current fiscal year was negative or very negative, just a few points better than the 12% of nonprofits reporting a negative outlook.
For-profit and nonprofit hospitals achieve similar levels of quality care, says Mark R. Chassin, MD, FACP, MPP, MPH, president and CEO of The Joint Commission, an independent nonprofit that accredits and certifies nearly 21,000 healthcare organizations and programs in the United States.
The organization's Top Performer program has measured hospital quality performance from 2010 to 2014. The program recognizes those that attain excellence in accountability measure performance. The data report on evidence-based interventions for heart attack, heart failure, pneumonia, surgical care, children's asthma care, hospital-based inpatient psychiatric services, venous thromboembolism, stroke, immunization, perinatal care, substance use, and tobacco treatment.
"By 2014, there really are only minor differences between quality outcomes of for-profit and nonprofit hospitals," Chassin says.
The data shows that a greater share of for-profit hospitals make the quality cut as a Top Performer than nonprofits, he says. In 2010, 30.7% of for-profit hospitals participating in the quality assessment program earned Top Performer status, but only 9.7% of nonprofit hospitals qualified for the top honor.
Nonprofits have improved their standing in the Top Performer program significantly, Chassin says, noting 30.6% of nonprofits qualified as Top Performers in 2014. But for-profits continue to outperform nonprofits in Top Performer propensity, with 47.8% of for-profits qualifying as Top Performers in 2014. "Not-for-profit hospitals made up a lot of ground on the quality measures over this time period," he says.
For the 2014 results announced in November 2015, 3,315 hospitals provided data to The Joint Commission and 1,043 were recognized as Top Performers.
All hospitals have been under pressure to improve quality since the publication of an Institute of Medicine report in 1999 that estimated as many as 98,000 people die in hospitals each year from preventable medical errors.
To Err Is Human: Building a Safer Health System launched a systemic push to improve quality at hospitals, Chassin says. "Community stakeholders started asking questions. Boards of directors started asking questions. CEOs started asking questions. Adverse events got into the media. The quality problem needed to be addressed."
In September 2013, a report in the Journal of Patient Safety estimated that more than 400,000 premature deaths occur annually due to preventable harm to patients at medical facilities. The report also noted that serious harm seems to be 10- to 20-fold more common than lethal harm.
The staff and quality
The motivations of for-profit health system and hospital leadership teams extend far beyond financial incentives, Chassin says. "Self-interest is a very narrow view of how for-profit hospitals see their pathway to success. You can get by for a while scrimping on quality … but in order to be recognized, grow volume, and attract physicians as well as patients, you can't cut corners on quality for long."
Quality is a goal for all hospitals, Chassin says. "Nothing significantly separates not-for-profits and for-profits now on quality measures. The difference is a few percentage points one way or the other in care measure data. Qualitatively, hospitals of all kinds are focused on quality. They are all very attuned to a much wider array of quality initiatives than before, both external metrics and internal metrics."
The staff members who provide care in hospitals have motivations that trump financial incentives, says Dereesa Reid, CEO of Hoag Orthopedic Institute in Irvine, California, a 70-staffed-bed joint venture between physicians and Hoag Memorial Hospital Presbyterian.
"Economic theory does not totally apply in healthcare because one of the variables that is not considered in traditional economics is the vocational calling factor," says Reid, who worked at a county hospital, a state-owned academic medical center, and a faith-based nonprofit health system before leading HOI, which has a nonprofit/for-profit ownership structure. Hoag Memorial Hospital Presbyterian, a nonprofit health system based in Newport Beach, California, holds a 51% ownership stake in the for-profit HOI and for-profit physician groups hold a 49% stake. "Doctors and nurses go into the profession because they want to help people. It is a calling."
Business-driven operational discipline
In practice, manifestations of the economic pressures inherent to the business model at for-profit hospitals are subtle but significant, says Neville Zar, senior vice president of revenue operations at Boston-based Steward Health Care System, a for-profit that includes 3,000 physicians, nine hospital campuses, 30 affiliated urgent care providers, and six ambulatory surgery centers, plus home care, hospice, and other services. The system earns nearly $2.4 billion in net patient service revenue and serves more than 1 million patients annually in more than 150 communities. The system is owned by New York City–based Cerberus Capital Management.
With positive financial performance among the primary goals of shareholders and the top executive leadership, operational discipline is one of the distinguishing characteristics of for-profit hospitals, Zar says. "At Steward, we believe we've done a good job establishing operational discipline. It means accountability. It means predictability. It means responsibility. It's like hygiene. You wake up, brush your teeth, and this is part of what you do every day."
A revenue-cycle dashboard report is circulated at Steward every Monday at 7 p.m., and includes point-of-service cash collections, patient coverage eligibility for government programs such as Medicaid, and productivity metrics, he says. "There's predictability with that."
Steward's commitment to operational discipline is reflected in the health system's training and staff development programs, Zar says. "They're one of the last things we cut if there are budget reductions. That's how you lose operational discipline."
The revenue cycle team at Steward has an internship program for college students and peer-to-peer coaches who work side by side with the low performers on the staff, he says. "The reason the coaches are effective is the coach is not the boss, and they have to be high performers."
The coaching program also serves as a performance incentive. "People want to be coaches. It takes them out of production, at least temporarily. It gives them recognition. It gives them an opportunity to advance," Zar says.
Operational discipline is an essential building block for developing speed of execution capacities, he says. "At Steward, we have a flat organization. We have eliminated a lot of the bureaucracy you see at nonprofits and academic medical centers. The revenue cycle leaders sit down with the IT team every week. Once we decide something is important, we roll up our sleeves and get it done."
Another method of addressing operational efficiency involves a thorough review of practices.
"One of the initiatives we've had success with—in both new and existing hospitals—is to conduct an operations assessment team survey, says Andrew Slusser, executive vice president and chief development officer at Capella. "It's in essence a deep dive into all operational costs to see where efficiencies may have been missed before. We often discover we're able to eliminate duplicative costs, stop doing work that's no longer adding value, or in some cases actually do more with less," he says.
An emphasis on financial accountability
A high level of accountability also fuels operational discipline at Steward and other for-profits, Zar says.
There is no ignoring the financial numbers at Steward, which installed wide-screen TVs in most business offices three years ago to post financial performance information in real time. "There are updates every 15 minutes. You can't hide in your cube," he says. "There was a 15% to 20% improvement in efficiency after those TVs went up. It's not punitive. It builds teamwork. … Your name is on the board, or your team's name is on the board. It becomes competitive; people are naturally competitive."
The TVs display several metrics, such as receivable follow-up performance and claims denial reversal rates. "Everybody's throughput is up on the board," Zar says.
Accountability for financial performance flows from the top of for-profit health systems and hospitals, says Dick Escue, chief information officer at Valley View Hospital, a 78-licensed-bed nonprofit community hospital in Glenwood Springs, Colorado.
Escue worked for many years at a rehabilitation services organization that for-profit Kindred Healthcare of Louisville, Kentucky, acquired in 2011. "We were a publicly traded company. At a high level, quarterly, our CEO and CFO were going to New York to report to analysts. You never want to go there and disappoint. … There's so much more accountability. You're not going to keep your job as the CEO or CFO of a publicly traded company if you produce results that disappoint."
Finance team members at for-profits must be willing to push themselves to meet performance goals, Zar says. "Steward is a very driven organization. It's not 9-to-5 hours. Everybody in healthcare works hard, but we work really hard to serve the communities in which we are invested. We're driven by each quarter, by each month. People will work the weekend at the end of the month or the end of the quarter to put in the extra hours to make sure we meet our targets. First and foremost is patient satisfaction, patient safety, and clinical outcomes. There's a lot of focus on the financial sustainability, from the senior executives to the worker bees. We're not ashamed of it."
"Cash blitzes" are one way Steward's revenue cycle team goes into to overdrive to boost revenue when financial performance slips, he says. Based on information gathered during team meetings at the hospital level, the revenue cycle staff focuses a cash blitz on efforts that have a high likelihood of generating cash collections, including tackling high-balance accounts and addressing payment delays linked to claims processing such as claims rejections from payers.
Finding unique ways to incentivize employees is part of the business-driven culture for Steward's revenue cycle team, Zar says, adding that nonmonetary incentives can be just as effective as a little extra money in a paycheck. In November, when the health system posted cash collections at a record pace, members of the revenue cycle staff received fleece sweaters with the cash goal for the month embroidered on the sleeve. "People wear those fleeces for bragging rights," he says.
Executive compensation and incentives
For-profit hospitals routinely utilize monetary incentives in the compensation packages of the C-suite leadership, says Brian B. Sanderson, managing principal of healthcare services at Oak Brook, Illinois–based Crowe Horwath LLP. "If your income is tied to the success of the business, you will pay a lot of attention to operational discipline. The compensation structures in the for-profits tend to be much more incentive-based than compensation at not-for-profits," he says. "Senior executive compensation is tied to similar elements as found in other for-profit environments, including stock price and margin on operations."
In contrast to offering generous incentives that reward robust financial performance, for-profits do not hesitate to cut costs in lean times, Escue says, noting cost discipline is a key element of the organizational culture at such hospitals.
"The rigor around spending, whether it's capital spending, operating spending, or payroll, is more intense at for-profits. The things that got cut when I worked in the back office of a for-profit were overhead. There was constant pressure to reduce overhead," he says. "Contractors and consultants are let go, at least temporarily. Hiring is frozen, with budgeted openings going unfilled. Any other budgeted-but-not-committed-spending is frozen. … Even capital spending can be affected. Capital spending almost always creates new operating expenses. Capital spending such as IT projects can be slowed down or stopped."
The impact of tax status
The for-profit hospital business model has several unique characteristics. The most obvious difference—tax status—has a major impact financially on for-profit hospitals and the communities they serve.
"I see taxes as a preferred dividend back to the community. They're first in line," Wiechart says of Capella's local and state taxes. "They give us their trust and their patients. The community can then turn around and redeploy tax payments for other social needs like schools, roads, and public safety."
Hospital payment of local and state taxes is a significant benefit for municipal and state governments, says Gary D. Willis, CPA, executive vice president and chief financial officer at Capella. "Our hospitals are proud of the community support they provide, including the payment of property and sales taxes used to help fund community needs such as support of their local schools, development of roads, recruitment of business and industry, and other needed services. Taxes paid in the communities we currently serve ranged in 2014 between $984,856, in a state with no sales tax, to $3.6 million."
The financial burden of paying taxes helps to create a corporate culture that emphasizes cost consciousness and operational discipline, says Slusser. "For-profit hospitals generally have to be more cost-efficient because of the financial hurdles they have to clear: sales taxes, property taxes, all the taxes nonprofits don't have to worry about."
The advantage of scale
Scale is another hallmark of the for-profit hospital sector.
There are 4,974 community hospitals in the United States, according to the American Hospital Association. Nongovernmental not-for-profit hospitals account for the largest number of facilities at 2,904. There are 1,060 for-profit hospitals, and 1,010 state and local government hospitals.
The for-profit hospital sector is highly concentrated. The country's for-profit hospital trade association, the Washington, D.C.–based Federation of American Hospitals, represents 14 health systems that own more than 1,000 hospitals. Four of the FAH health systems account for about 520 hospitals: CHS; Nashville-based Hospital Corporation of America; Brentwood, Tennessee–based LifePoint Health; and Dallas-based Tenet Healthcare Corporation.
"For-profits represent 20% of the total hospitals but only a handful of companies—companies that have huge sets of assets," says Chip Kahn III, FAH president and CEO. And that scale generates several benefits at for-profit hospitals.
"Scale is critically important," says Julie Soekoro, chief financial officer at Grandview Medical Center, a CHS 250-staffed-bed tertiary care hospital in Birmingham, Alabama. "What we benefit from at Grandview is access to resources and expertise. I really don't use consultants at Grandview because we have corporate expertise for challenges like ICD-10 coding. That is a tremendous benefit."
Grandview also benefits from the best practices that have been shared and standardized across the 200 CHS hospitals. "Best practices can have a direct impact on value," Soekoro says, adding that large health systems can support individual hospitals in several ways. "The infrastructure is there. For-profits are well-positioned for the consolidated healthcare market of the future. … You can add a lot of individual hospitals without having to add expertise at the corporate office."
The High Reliability and Safety program at CHS is an example of how standardizing best practices across every hospital at the health system has generated significant performance gains, she says.
"A few years ago, CHS embarked on a journey to institute a culture of high reliability at the hospitals. The hospitals and affiliated organizations have worked to establish safety as a core value. At Grandview, we have hard-wired a number of initiatives, including daily safety huddles and multiple evidence-based, best practice error-prevention methods. Meetings begin with a safety moment, we have safety coaches throughout the facility, and other structures designed to support safety as a core value.
"For example, at 9 a.m. on weekday mornings at Grandview, each department gets on a facilitywide safety call where we address all manner of safety concerns," Soekoro says. "Frequently heard [comments] may include: 'It's raining today—make sure the entrances are adequately managed for possible wet floors'; or 'Two patients with same name on the seventh floor today—assign different nurses to avoid confusion in dispensing medications'; and 'Based on anticipated volumes today, any anticipated staffing issues?'
"The success of these efforts is measured by companywide reductions in serious safety events, which are shared on a quarterly basis," she says.
Expertise in the corporate office has been a key to success for Capella, which has many executives with ownership stakes in the company, Wiechart says. "We're vested consultants who have a shared interest in our hospitals' success."
Members of Capella's executive leadership teams at the health system and hospital level own 48% of the economic value of the company and control 51% of the Capella board of director voting rights, he says.
The ability to access capital
Scale also plays a crucial role in one of the most significant advantages of for-profit hospitals relative to their nonprofit counterparts: access to capital.
"There's no question that scale is additive to the discussion when it comes to access to the capital markets," Wiechart says, noting investors covet the diversified risk that comes with scale.
Investors are also drawn to for-profits because of their focus on the financial side of their business, says Willis, Capella's CFO. "A significant difference is that we often have better access to capital for investment in our hospitals due to the expectation that we will be good stewards with capital deployment."
Ready access to capital gives for-profits the ability to move faster, says Crowe Horwath's Sanderson. "They're finding that their access to capital is a linchpin for them. … When a for-profit has better access to capital, it can make decisions rapidly and make investments rapidly. Many not-for-profits don't have that luxury."
The result, Wiechart says, is "a better structure through which to access capital dollars for investing in facilities, services, and recruitment. For-profit organizations don't have to rely on taxes or bond support to launch needed services or recruit vital providers. And, while we rely on leadership and support from our communities, we don't have to ask them to fund our investments. Nonprofits tend to rely on their communities for financial support. We can be more nimble or flexible, responding more quickly to what's needed."
Learning from the for-profit model
The similarities between for-profit and nonprofit hospitals outweigh the differences, but there are valuable lessons for nonprofits to draw from the for-profit business model as the healthcare industry shifts from volume to value, Doran says.
When healthcare providers negotiate managed care contracts, for-profits have a bargaining advantage over nonprofits, she says. "In managed care contracts, for-profits look for leverage and nonprofits look for partnership opportunities. The appetite for aggressive negotiations is much more palatable among for-profits."
As patients take on more out-of-pocket costs and become more prominent economic agents in the healthcare industry, the revenue cycle teams at nonprofit hospitals can improve their bill-collection performance through adoption of the business-driven culture at for-profits, Doran says, noting "the level of zest with which you pursue the patient's responsibility" is more intense at for-profits.
Particularly for faith-based nonprofits such as Ascension Health that actively reach out to economically disadvantaged patient populations, embracing elements of for-profit culture will require walking fine lines, she says. "In addition to conducting charity care, we have additional Medical Missions that include the poor and vulnerable within the community. It's a little bit of a twist that makes us different from for-profits."
And of course, a successful organization can better meet its mission. "Good business practices make sense for nonprofits because if you're managed effectively, you can provide care to a lot more people, Reid says. She also notes that nonprofit hospitals can even learn from for-profit organizations outside the healthcare industry.
"Hospitals can learn from other industries on how to align and incentivize employees closer with pay for performance. Semiconductor wafer fabricators are a wonderful model to study. They measure quality, efficiency, and cost in almost real time. I have seen wafer fabricators where frontline employees can see real-time metrics and how they are trending to monthly incentive goals," she says.
"The idea is to make an impact as soon as the data starts trending in the wrong direction—waiting weeks or months for the perfect report results in inertia," Reid says. "Semiconductor employees know how many defects are in the manufacturing line. They know where the defects occur and they know how their efficiency is trending. At hospitals, this approach could be applied to OR turnover times, staffing targets, and bed turnover."
Delivering healthcare services based on value is going to be a far more complicated and risky business environment for all hospitals, and nonprofits can help ensure their existence through adoption of a more business-driven organizational culture, Kahn says.
"If you have any kind of an enterprise in our economy: No margin, no mission. Every hospital has to make a margin," he says. "The no-margin, no-mission imperative is always present on the private investor side; but on the nonprofit side, sometimes they forget that. And they forget at their own risk."
"At some point," Sanderson says, "part of the mission is to be a relevant, thriving healthcare organization. If you have no margin, if you have no money to invest, if you cannot maintain a reputation as a high-quality provider, then it's hard to remain a relevant organization in the communities you serve."
"Since Capella's decentralized management approach involves local control of the hospital, this is particularly important. … Without their support, buy-in, and involvement, the hospital will not make progress."
With hospitals leading the charge, rural healthcare providers are finding pathways to success in population health and risk-based contracting with payers.
Like neighboring farmers banding together to raise a barn over a weekend, rural hospitals are banding together to raise their value-based healthcare capabilities as quickly as possible.
"The hospitals typically have the resources to build an ACO in a rural market. It's prohibitive for rural doctors. You would have to partner with several tiny practices," says Lynn Barr, chief transformation officer at the National Rural Accountable Care Consortium.
NRACC is a nonprofit based in Nevada City, NV. It organized 23 rural Medicare Shared Savings Program ACOs in 2015, including 147 community and critical access hospitals in nine states. This year, NRACC plans to nearly double the number of rural ACOs participating in MSSP and plans to operate ACOs in 32 states.
NRACC ACOs are serving 500,000 Medicare beneficiaries in rural communities, Barr says. The figure accounts for about 5% of Medicare's rural patient population and rural ACOs operating outside NRACC serving at least as many Medicare beneficiaries.
An effort to launch an ACO in the North Country of New Hampshire reflects the key role hospitals are playing in adoption of value-based healthcare models in rural markets, she says. The new ACO, which is launching this year, includes a handful of rural hospitals, including Berlin-based Androscoggin Valley Hospital, a 25-bed critical access hospital.
By banding together, the hospitals will be serving about 10,000 patients, which should be sufficient scale to make the new ACO financially sustainable, Barr says. "It took five hospitals to get there, but now they're all in an integrated network. Now, we can go to Medicaid, we can go to Blue Cross, and we can enter risk-based contracts."
The effort will be Androscoggin Valley's first foray into risk-based reimbursement of any kind, says James Patry, the hospital's public relations and marketing director. "We're still very early on in the ACO process."
The leadership team and physicians at Androscoggin Valley are preparing to deliver care under an ACO model with two prime goals, he says: maintaining quality and embracing innovation.
"We're going to measure success in value-based care the same way we do in volume-based care: It's quality. If we continue to provide quality care, the rest will fall into place… A lot of it is Yankee ingenuity. We get people around the table, find out what we can do, then get busy doing it the best we can."
A little financial help from the feds doesn't hurt.
The Centers for Medicare & Medicaid Services recognizes that rural health systems, hospitals, and physician practices often lack the financial resources to retool their organizations for value-based care delivery with costly investments such as new electronic medical record systems, Barr says. "Nobody can afford to build an ACO. It takes $2 million to $2.5 million to build one."
To help finance the formation of rural ACOs, NRACC is tapping funds through the CMS's Center for Medicare and Medicaid Innovation, which gave rural healthcare providers $46 million in 2015 through the ACO Investment Model program.
The feds provide the money upfront and the funding converts to grants if ACOs fail to earn shared savings payments. With the vast majority of rural providers operating on thin margins, the low-risk proposition to begin adopting value-based care models is enticing, she says. "They're not making big bets on new models of care."
Rural-Market Inherent Advantages for Value-Based Care
Although there are daunting financial challenges to adopting value-based care models in rural markets, there also are advantages to seize upon. The biggest built-in advantage is familiarity with patients.
"That is the key—that relationship. If people don't know you, they don't open up. And rural providers know you. They know how much you drink and how much you argue with your wife," Barr says.
The staff members at rural hospitals establish a level of familiarity that is hard to match in urban markets or at large medical centers, says Bruce King, president and CEO of 83-bed New London Hospital, which is also located in the New Hampshire North Country. "We're more nimble. Those patients who come to the emergency department, we get to know them," he says. "That's where I think scale works for us."
New London Hospital, which is affiliated with Lebanon, NH-based Dartmouth-Hitchcock, is using familiarity with patients to "reach out proactively" in ways that support core goals of population health, King says.
The hospital is planning to launch a mobile integrated health initiative that will capitalize on the ambulance crew's familiarity with members of the community. Hospital EMTs and paramedics will be helping to conduct follow-up visits with chronically ill patients. "It's a little like home healthcare," he says.
Familiarity with patients fuels care coordination, which is one of the prime mechanisms of population health, Barr says. "The number one factor of care-coordination success is the relationship with the patient."
Healthcare is a "very personal" business in rural markets, and hospitals can play a pivotal role as catalysts for change in isolated areas of the country, she says. "They can really mobilize the community. They have social prestige and can focus on a particular campaign [such as smoking cessation]."
Rural Physician Practices Get on Value-Based Bandwagon
Even resource-starved physician practices in rural markets can make progress toward adopting value-based care models, Barr says.
Changing workflows at practices such as more intensive pre-visit screening and boosting preventive care are essential steps for introducing population health models of care at the physician-practice level, she says. "This is just redesigning what we do at the front desk… It doesn't take a lot of resources."
And improved workflows can pay huge dividends in patient satisfaction scores. "It is very impactful," Barr says.
All rural healthcare providers can capitalize on a market mindset that has a softer edge than urban markets, she says. "We don't compete against each other, so there's a lot of sharing of the best ideas."
CMS says a 0.2% Medicare payment cut for hospitals is needed to offset the estimated costs of implementing the two-midnight rule. Hospitals contend it is "an arbitrary standard." But an analysis of the financial impact of the rule will likely take years and another round in federal court.
The three-year-long struggle over Medicare's two-midnight rule for hospital admissions could be over as soon as next month.
Under the rule, which the Centers for Medicare & Medicaid Services launched in 2013, a hospital stay that spans less than two midnights is generally not considered appropriate for designation as an inpatient admission. The two-midnight rule has financial implications for hospitals because inpatient cases are reimbursed at Medicare A reimbursement rates, which are significantly higher than Medicare B rates for outpatient care.
Joanna Hiatt Kim
Hospitals have been vocal critics of the two-midnight rule since its inception. "CMS has developed an arbitrary standard," Lawrence Hughes, assistant general counsel of the Chicago-based American Hospital Association, told me last week.
In January, CMS enacted a pair of two-midnight rule concessions, including a revision that allows an attending physician to designate anyone for inpatient care based on medical necessity as supported by the medical record.
But a financial sticking point linked to the rule still divides CMS and hospitals: a 0.2% payment cut that CMS imposed on hospitals in the federal fiscal year that began in October 2013 (FY 2014).
"It really added insult to injury," says Joanna Hiatt Kim, AHA's vice president of payment policy. CMS estimates the cut will total $220 million for FY 2014. "It was an arbitrary rule with an arbitrary payment cut... CMS needs to get it out of there."
In September, US District Court Judge Randolph Moss cast doubt on the legality of the 0.2% payment cut, and ordered federal officials to justify the reimbursement reduction and to subject their justification to public comment.
According to the court ruling, Medicare actuaries calculated that implementing the two-midnight rule would result in a net annual shift of 40,000 patient encounters from outpatient status to inpatient status, which would increase Medicare spending by $220 million in FY 2014. The 0.2% across-the-board Medicare payment cut to hospitals was designed to offset that increased cost, the court ruling states.
The payment cut was remanded back to CMS for justification in part because the agency had omitted critical material on which it relied to determine the reimbursement reduction and deprived the public of its right to participate in rulemaking, Moss ruled.
In December, CMS officials filed their justification for the 0.2% payment cut in the Federal Register. In the 32-page document, the federal agency says it is still examining claims data from FY 2014 to gain a firm understanding of the financial impact of the two-midnight rule. But even without a determination of the rule's impact on hospitals that is based on empirical data, CMS is standing its ground on the 0.2% payment cut.
CMS made a good-faith effort to estimate the financial impact of the rule, according to the federal agency's justification document: "The task of modeling the impact of the 2-midnight policy on hospital payments begins with a recognition that some cases that were previously outpatient cases will become inpatient cases and vice versa. Therefore, our actuaries were required to develop a model that determined the net effect of the number of cases that would move in each direction."
In addition, CMS asserts that the methodology used to predict an annual shift of 40,000 patient encounters from outpatient status to inpatient status may have been based on "an overly conservative definition of observation services," resulting in an underestimation of the cost to the Medicare program.
Hospital officials have been skeptical of the logic behind the 0.2% payment cut since it was first proposed, Hughes says. "We never thought the estimate of the impact was realistic in the first place."
The data that hospitals have collected to gauge the financial impact of the two-midnight rule indicates that CMS grossly overestimated the cost to Medicare, Hiatt Kim says. "If anything, we think there was a net decrease in inpatient volume. They can argue for whatever they want, but it doesn't mean it's grounded in reality."
Members of the public had until Feb. 2 to submit comments on the CMS justification document for the 0.2% Medicare payment cut. CMS is expected to take a final stand on the payment cut by March 18. As of Friday, the public comments had not been posted online for viewing.
In the AHA's public comment letter, which was submitted Feb. 2, the hospital association assails the calculations that CMS used to set the 0.2% payment cut, arguing that more accurate methodologies would have found the reimbursement reduction unjustifiable.
"Had CMS's actuaries properly accounted for the portion of observation stays that were not continuous, the net change in the number of cases shifting from outpatient to inpatient would have been zero, or even a small net decrease in inpatient stays," the AHA comment letter states. It makes "only a few minor corrections to CMS's actuaries' assumptions would entirely negate the net increase in inpatient stays predicted by CMS."
CMS is likely facing an avalanche of criticism in the public comment letters about the agency's justification for the 0.2% payment cut, but federal officials are unlikely to budge on the reimbursement reduction, says Colleen Hall, a senior manager for the Chicago-based healthcare consultancy Crowe Horwath. "I do not believe the comments alone will make CMS overturn their ruling on the payment cut… It will go back to the courts."
If the payment cut controversy lands back in US District Court, the case could take a couple of more years to resolve, she says.
"It's all going to come down to the validity of the calculation. As time goes on, we can see real analysis at the provider level. Only then will there be clear and irrefutable evidence for the court to overturn CMS," Hall says.
Data to conduct that level of analysis on the financial impact of the two-midnight rule will not be available until next year, she says. Implementation of the rule was delayed in 2014 and 2015 and "A full year of good data will not be available until FY 2017."
Even if CMS and hospitals can resolve their differences over the two-midnight rule, friction between the parties over drawing the line between inpatient and outpatient care, and the associated financial impacts, will be hard to eliminate. "Medicare officials will never define inpatient medical necessity, and that's the challenge," Hall says.
