This article appears in the October 2012 issue of HealthLeaders magazine.
Addressing a litany of government mandates while dealing with a sluggish economy and decreasing patient volumes and reimbursements have created a challenge for CFOs looking to raise large amounts of capital. Only a handful of organizations have the wherewithal to generate enough cash from existing operations, reserves, or endowments, leaving most to weigh the options. Small and large hospitals and health systems are turning to mergers to find financial strength. However there are other opportunities, including joint ventures, venture capital, bank loans, and blends of these that can provide the critical dollars needed to stay competitive.
As value-based care and bundled payment systems take root, the demand for often expensive organizational competencies, such as IT, can put slow or underperforming hospitals at risk for faltering long-term. It's the precarious financial situation that some providers are now in that is limiting access to badly needed capital and that has sparked a jump in healthcare mergers in the past two years. But that avenue is not attractive for many organizations, and so they are looking at new ways to deal.
"Actually there's nothing new or different in capital financing that has occurred for at least 10 years, but now there are lots of shades of gray in how deals are created," says Robert Shapiro, senior vice president and CFO at North Shore-Long Island Jewish Health System in Great Neck, N.Y. In April the system, which has approximately $1.3 billion in long-term debt, issued about $50 million in tax-exempt fixed-rate debt to save money by taking advantage of low interest rates. With a $6.7 billion annual operating budget and 16 hospitals in the system, North Shore-LIJ has consistently used what Shapiro describes as a traditional capital allocation model, with cash generated from operations, fundraising, and borrowing; but that's changing.
"We've tried to take an approach our investors are comfortable with, and when you have access to the capital markets it's a pretty efficient way to access capital," he says. "However, we are looking at making acquisitions as we feel the need to expand into markets sooner than we may have before healthcare reform. Now we're starting to consider alternatives such as healthcare partners or joint venture dollars. We haven't done it yet, but we're likely to do so in the next year or two."
Until 2009, debt financing—or raising money for working capital or capital expenditures through the sale of bonds, bills, or notes—was considered an easy process, but those days have passed. Now, finding the scale and financial resources to secure a top-notch public credit rating can prove challenging, especially for hospitals with finances hit hard by the recession and in dire need of facility or infrastructure upgrades. A hospital's inability to secure a BBB- or better credit rating can stymie access to capital.
For the organizations that fall below that rating, mergers can be a good pathway to get access to capital for infrastructure upgrades or technology updates. Buyers tend to look beyond the credit rating and balance sheet and at the hospital's leadership, market position, and long-term viability.
For instance, in May 2010, North Shore-LIJ initiated an agreement to acquire the 652-bed Lenox Hill Hospital, which represented its first hospital in Manhattan. (The deal was finalized
in April 2011.) The partnership offered financial refuge for Lenox Hill Hospital—one of the last independent hospitals in New York City. Having no affiliated hospitals or networks of primary care doctors to feed patients into the 10-building complex, Lenox Hill found it was fighting a tide of declining admissions and carrying an operating loss with a five-year total of $165 million. Then in 2009, Moody's Investors Service downgraded Lenox Hill's credit rating to outlook "negative" and projected a possible $20 million operating loss for the hospital by the end of 2012. Shortly thereafter, the organization responded by putting out an RFP for potential partners.
"We had no presence in Manhattan, and we felt it was important to be there. So this was a very good opportunity from a strategy standpoint," Shapiro says. "But we also had to look at the organization to be sure we were compatible culturally, and we do monthly post-acquisition check-ins."
While the Lenox Hill merger allowed North Shore-LIJ to expand its market a strategic alliance with Hackensack (N.J.) University Health Network announced in March should serve to strengthen the credit standings of both organizations. But the outcome will depend on the programs generated by the endeavor through Hackensack University Medical Center, which is a leading tertiary provider that has created the clinical strength and depth of services that has allowed it to maintain a dominant (28.8%) market share in its service area, according to Moody's.
The alliance will allow both organizations to create joint programs and initiatives, but each entity stays independent and continues to be responsible for its own assets, operations, and liabilities. The as yet undefined programs will be jointly developed and the funding and operational management determined by a joint operating committee.
The alliance of North Shore-LIJ and HackensackUMC is an opportunity created by the current healthcare and economic environment, but HackensackUMC is also at the forefront of trying some unique capital lending transactions. In a recent transaction, Hackensack University Health Network, the parent company of HackensackUMC, created a joint venture with Dallas-based LHP Hospital Group, Inc., a for-profit company that forms joint ventures to own, operate, and manage acute care hospitals with not-for-profit partners. LHP served as an equity partner for the opening of two Hackensack-UMC hospitals: HackensackUMC at Pascack Valley in Westwood, N.J. and HackensackUMC Mountainside Hospital in Montclair, N.J.
In late 2007 and early 2008, HackensackUMC purchased a hospital's assets out of bankruptcy and negotiated a joint venture arrangement with LHP to reopen and refit the community hospital The agreement transitioned the former not-for-profit Pascack Valley Hospital into a for-profit one, and not-for-profit HackensackUMC holds a 35% interest in the facility and operations.
The HackensackUMC and LHP joint venture is written so HackensackUMC didn't need to invest any additional capital into the hospital; however, LHP is expected to contribute approximately $95 million, according to an LHP statement. Additionally, LHP and Hackensack partnered in a similar structure to take over the license for 365-bed Mountainside Hospital, a move that was approved by the state's attorney general in June.
"There's no high-quality organization out there that isn't also financially strong; to get there you need to grow. We started on these transactions over five years ago and the regulatory process for the first initiative took a long time; the second hospital took just four months," says Robert L. Glenning, executive vice president and CFO at HackensackUMC. "We looked at our situation and did an honest assessment of how we could achieve multiple and sometimes competing strategic goals for capital. We decided we needed to find a way to address how we could take on a new hospital without jeopardizing ourselves financially or losing sight of our mission."
Glenning says that by engaging LHP as a partner to help manage and operate these hospitals, HackensackUMC could keep its pocketbook out of risk and still align with the organizations.
"It was $190 million to just purchase HackensackUMC Mountainside; if we did that by ourselves that would've significantly impacted HackensackUMC's credit rating, and it would've only developed one community hospital. But our larger goal is to bring some stability to the region by being a well-run network that our community can depend on," he adds.
The HackensackUMC capital approach may be unique, but it's also on point with the industry trend toward consolidation. In the January HealthLeaders Media Intelligence Report M&A: Hospitals Take Control, 80% of healthcare leaders said they will have an M&A deal under way or will explore one in the next 12–18 months, and the prevailing reason was to shore up existing geographic markets. Also, HackensackUMC's use of private equity funds is in keeping with the widely reported slow and steady uptick in use of these firms in the healthcare space, though not all financial leaders see it as the right opportunity to pursue.
"Venture capitalists need to generate a substantial return," says Richard Magenheimer, CFO at Inova Health System in Falls Church, Va. Inova is a not-for-profit system that serves more than 2 million people per year and consists of five hospitals with more than 1,700 licensed beds and 16,000 employees. "Venture capital is probably one of the most expensive forms of financing; it can easily be 15%–20%. That's a very expensive form of financing, especially when you're talking about a bricks-and-mortar hospital. Plus, the venture capital hurdles can vary depending on the project; it can be very difficult to structure something with venture capital that works from a compliance standpoint."
In 2010, Inova Fairfax Hospital broke ground on the first phase of an $850 million campus improvement project. The three-phase, multiyear project is intended to upgrade the campus to meet increasing demand for services—particularly for senior patients and obstetrics patients—and continued population growth in the hospital's catchment area. It also took years to get under way; though ready to go to contract in 2009, and costing an estimated $1 billion, the project was deferred following the market downturn in 2008–2009.
"Following the capital markets' disruption in the fall of 2008, we determined we could not move forward with construction until we had confidence that we could access public debt markets as part of our financing plans," says Magenheimer. "In order to mitigate the financial risk of the project, we broke it down into three distinct phases and contracted separately for each phase. We had set aside $200 million in a special portfolio as a capital contribution toward the project. When the market meltdown hit, the portfolio retained its value."
To finance phase one of the project, a $225 million patient tower, Inova borrowed $190 million in the public debt markets. It's a financial approach Magenheimer says serves the organization well. "Generally, the public markets still tend to provide the best pricing compared to private financing. We have one bond issued as a private placement with TD Bank—and it was competitively bid—but in most instances our best pricing is in the public markets," he says.
In August, Inova completed a $400 million offering in the capital markets. Magenheimer says $300 million of that financing will go toward phase two of the south patient tower and a portion of phase three—a renovation of the existing campus slated for 2015.
"We are confident that Inova will have the necessary capital to complete all three phrases of the project. There's always a balance needed between borrowing at competitive rates and retaining some internal liquidity," he says. "One should first look at internally generated funds for project financing. However, we think the public markets in general will offer the most competitive cost of capital, provided an organization has to have the financial performance to access those markets," Magenheimer notes.
Though Shapiro and Magenheimer agree that commercial lenders tend to be better for short-term capital rather than long-term capital, such institutions are, nevertheless, viable lenders. Banks generally lend by directly purchasing tax-exempt debt with fixed or variable interest rates. The American Recovery and Reinvestment Act of 2009 widened the definition of bank-qualified debt, which encouraged approximately $70 billion of direct tax-exempt loans in 2009 and 2010, according to The Bond Buyer.
Although the temporary debt provisions under the ARRA ended with 2010, banks have continued to actively lend to healthcare organizations. "We're seeing a lot more activity, but the conversations are different," says John Hesselmann, specialized industries executive for Bank of America's Global Commercial Banking.
With borrowing, generally, the overall interest rate on direct bank loans is competitive when compared to public debt issuance levels. The interest rate varies with the borrower's creditworthiness and the credit spread. Hospitals have become more strategic about their borrowing approach, Hesselmann says, with more willingness to access lower-cost medium-term financing options, as opposed to longer-term borrowing for short term-needs.
In addition, cost savings from focusing on efficiency gains in the revenue cycle are getting more attention than ever. "Where we are having more conversations is as it relates to counseling clients on creating efficiency through treasury solutions, going end-to-end through the payment mechanism, and accelerating the receipt of cash and optimizing the back end by using the products that do that," Hesselmann says.
To gain savings within their true financial picture, hospitals are focusing on improvement in the revenue cycle, striving to reconcile their claims data with their reimbursement payment dollars to the highest automated degree possible, he adds.
Deciding which capital lending approach to take is individual to the organization and the project, says Glenning.
"There's no system that's grown significantly without a trail of tears in the learning process," says Glenning. "For those who want to avoid that, my best advice is to figure out what's important to your organization's core mission. For us it was our academic and tertiary service. … Investing in a community hospital was a way to ensure that goal, and this joint venture was the way to do it."
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This article appears in the October 2012 issue of HealthLeaders magazine.
The Massachusetts Medical Society released a study last week that may have escaped notice by many financial leaders, but it should be noted as it speaks to the willingness of physicians to get onboard with the new payment methods.
If Massachusetts is the national proving ground for healthcare reform, finance leaders should be paying close attention to how doctors' react to changes to payment models. What's happening in the Bay State could be an indicator of how resistant—or amenable—physicians are to changes in how they are paid.
According to a Massachusetts Medical Society survey of 1,095 practicing physicians in the state, half (49%) say they are likely to participate in a voluntary global payment system.
That's a 14% increase over 2011. Doctors working at community health centers are most open to the idea of global payments, while self-employed physicians were least likely to want to participate. It stands to reason that employed physicians (61.6%) are more likely to participate than self-employed doctors (43.4%).
The growing acceptance of this payment model is a positive one. But there is another pathway to payment reform that is attracting the interest of physicians in even greater numbers.
The MMS study notes that 60% of respondents surveyed are likely to participate in voluntary accountable care organizations—71% of primary care doctors versus 61% of specialists are identified as most likely to participate.
ACOs involve a network of providers coordinating care and agreeing to some level of financial risk in insurance contracts. The MMS study says single-specialty practices are least likely to embrace ACOs over multi-specialty groups or teaching hospitals.
"Yet we also see some positives, with more physicians willing to participate in accountable care organizations and global payments, and that bodes well as health reform continues to evolve," said the society's president, Richard Aghababian, M.D., in a statement.
"The payment reform bill signed in August has many provisions pertaining to physicians and the practice of medicine. While we are heartened by the law's provisions for medical liability reforms and preventive care, just how the law will affect our physician workforce and to what degree is unknown at this time. It is something we will be watching carefully."
Risk-based contracts were a subject of discussion at last month's HealthLeaders Media second annual CFO Exchange, an invitation-only event that pulled 30 of the nation's top healthcare CFOs together to focus thought leadership on today's most challenging healthcare issues.
Participation in risk-based contracting by physicians, hospitals, and health systems continues to be slow The contracts can be challenging for financial leaders to accept on behalf of their organizations and convincing physicians to agree can also pose a challenge.
Building a case for risk-based contracts requires gaining access to metrics which some organizations are still working toward acquiring, and access to payer patient data, which isn't necessarily forthcoming...
Bundled payment schemes lump patient populations and then push the risk to providers to make an agreed-upon percentage healthier or lose money. It's easy to see how risk-based contracts might not be all that appealing when the financial risk—regardless of the patient's level of participation in care—falls squarely onto the providers.
Hospitals and health systems can absorb some small margin declines, but smaller physician practices may not be financially capable of doing. Moreover, these contracts require that providers get their costs under control, which means providers much have a true understanding of what their costs actually are—no small undertaking.
"We're finding there's usually up-side, not down-side risk [to these contracts], but we're in the infancy," says Elizabeth Ward, CFO at University Hospitals UT Southwestern in Dallas, TX. Ward's response reflects the MMS' survey finding that University Hospitals are more open to these ventures.
"The insurers are putting a little bit of their skin in the game, and the insurance companies have an expertise to bring to the table that we, as hospitals, don't have; that's the actuarial analysis and the data. We're trying to see how we can use that to our advantage, particularly in these risk-based contracts to become partners," she says.
Ward explains, however, that working with payers and getting them to agree to a fair margin still adds to the complexity of the contracting negotiations.
"We need to get them to understand what margin it takes to support the organizations and provide care to the patient. Our negotiated payments aren't cost plus a fair margin like most other businesses."
"Everybody understands capitalizing your business, but what I don't think healthcare has done a good job of is projecting what our true costs are and what it takes to actually take care of a patient. Quite frankly, as an industry, we've done that to ourselves. Annd now we have to figure out how to fix it," says Ward.
Chris McLean, executive vice president and CFO at Methodist LeBonheur Healthcare in Memphis, says his organization has done a few risk-based contracts, and it has already tried to expand into the employer market, but without much success.
"We're going back to our insurance companies and the [larger] employers," McLean explains. "Our CEO went out and talked to the other CEOs of the large companies [in the area], but we found that some didn't want to do a direct contract with us. They wanted to go with Cigna and ‘cover the world.' Whether we like it or not, that's what the insurance companies bring to the table that we can't in our individual markets."
But McLean adds what healthcare organizations can reduce utilization to benefit the developing ACOs. "True cost comes back to our level of utilization; it's all over the board. It's what we've done because we're paid per click," he notes.
Patrick McGuire, MBA, CPA, and CFO, at St. John Providence Health System, Warren, MI has seen employers in his market take an interest in the total cost of care and thinks it will influence what happens with payer contracts.
"Employers in our markets are starting to look at the total cost of care, and over time, if we can actually influence the healthiness of the population, or the compliance of the population, and the overutilization we can reduce the cost."
"But it wasn't that long ago that [our organization] had a conversation with a company [about working with employees] and basically their philosophy was, 'if it's not going to show up in my P&L in the next quarter, I don't want to talk about it,'" says McGuire.
"But now we're starting to get some employers understanding the concept of it taking longer for a price to change. That it may take two years before they see any benefit from this work, but we know that in the long run, that's what's going to sustainably reduce our costs."
At most organizations, nationwide financial leaders still need to lay some groundwork in terms of understanding their own true costs before their organizations embark on global payment contracts or any other risk-based ventures.
So, too, must physicians before they agree to participate in a risk-based contract with your organization. The pursuit of this payment model across the country, not unlike in Massachusetts, must and will be a slow one.
But in the long-run, the legwork done now will go a long way toward keeping a practice, hospital or health system financially stable while improving the care of a patient population.
This article appears in the September 2012 issue of HealthLeaders magazine.
The pursuit of population health and value-based care may be reviving the business case for organizations to join health information exchanges. Now more than ever providers need accurate and complete patient data to effectively manage chronic care populations and attain incentive payments; this means healthcare organizations must have the ability to capture their own data as well as that of their affiliates and competitors. Health information exchanges just became an essential for providers looking to succeed in the fee-for-value era.
An HIE is an organized regional network that enables hospitals, physicians, and other care providers to upload and access patient health information. HIEs connect data for organizations—from affiliates to competitors—to share clinical data that can improve a patient's overall care. The HIE is generally connected through a provider portal, giving easy access to clinical applications that allow caregivers to see all of the patient's clinical information in real time while restricting access to any claims data or other financial information. Early data indicates the HIE can reduce costs for participants.
In May, the Journal of the American Medical Information Association released a study of the members of the MidSouth eHealth Alliance in Memphis, Tenn., that focused on emergency department encounters and reported that the HIE was responsible for reduced costs of $1.9 million and a net savings of $1.07 million; reduced admissions accounted for 97.6% of the total savings. The study looked at HIE use across 12 hospitals over a 13-month period and included 15,798 HIE encounters.
Though preliminary results indicate HIEs can help healthcare organizations save money, there's still reluctance by some in healthcare to participate in these exchanges. "It's understandable," says Steve Robertson, executive vice president and CIO at Hawai'i Pacific Health, a four-hospital system with three physician groups based in Honolulu. "There's still a lot of uncertainty about the cost that hasn't been worked out, especially in these very difficult economic realities of healthcare reimbursements, like who will pay for it—the government, the insurance companies, the laboratories, the hospitals, the physicians?"
Robertson, who manages IT for HPH as well as the revenue cycle, says healthcare leaders need to look at HIEs for long-term health improvements, not short-term tactical gains. An HIE allows immediate access to a patient's medical history for all providers involved in that patient's care, which makes information gathering and analysis easier for the physician and clinical staff, he says.
HPH helped to found the nonprofit Hawai'i Health Information Exchange in 2006 and has helped it evolve. The Hawai'i HIE is governed by its participants and is funded by participants, state grants, and donations. HPH recently donated more than $100,000 to the state HIE program.
HPH and its competitor, Queens Medical Center, exchange patient clinical information so if HPH patients receive treatment at Queens Medical, the doctors are able to access their medical records. "We've been able to save lives doing this," Robertson says.
"There is a competitive advantage to having data, and many healthcare organizations may not be willing to share with others. But patients can in some cases have five or more doctors working with them. It can be more dangerous for our patients if the data is fragmented, and that puts everyone involved at risk," says Robertson.
Moreover, having the clinical data when a patient presents for treatment can be a lifesaver, especially for patients visiting the island, Robertson says. With tourists coming from all over the country to Hawaii, health exchange enables HPH and other participants to link to critical data on the mainland, and helps reduce the likelihood of duplicate tests or other ancillary services, ultimately decreasing overutilization of services for participants.
Participating in the HHIE is part of a larger effort by the state to encourage its healthcare providers to get involved with patient-centered medical homes, Robertson says, and the exchange will help track the results as these efforts get further along.
As the HIE in Hawaii picks up steam, in Cincinnati, HealthBridge, an HIE developed in 1997, is fully established in the healthcare community. HealthBridge, a nonprofit corporation, serves parts of the tristate area of Ohio, Kentucky, and Indiana. HealthBridge launched without any government funds, receiving its start-up money from investments by two health plans and five health systems. Each of these founding funders maintains a seat on the HealthBridge board of directors along with other community employers, physicians, and representatives of public health. The composition of the board has successfully allowed competitors to work through concerns surrounding data sharing, allowing for even greater adoption in the region.
"Whether to participate in HIE is a strategic conversation … but all the participants have to be willing put aside their individual issues and agenda and to work toward a solution that's best for the patient. If you treat participation in an HIE as a competitive advantage, then you won't get anywhere; but if providers get beyond their differences, then everyone can benefit from economies of scale from sharing information," says James Gravell, senior vice president and CFO at Catholic Health Partners based in Cincinnati. CHP is the largest health system in Ohio and one of the largest nonprofit health systems in the United States, with $5.4 billion in assets and 24 hospitals.
Gravell began working with HealthBridge more than 10 years ago as interim president and CEO of the three-hospital Community Mercy Health Partners and acted as HealthBridge's board chair when it was established. In the 15 years since it started, HealthBridge's HIE network has grown to more than 50 hospitals and 7,500 physicians in three states and transmits an estimated three million electronic messages per month, including clinical lab results, radiology reports, operative notes, discharge summaries, and other clinical information. The HIE connects more than 80% of physicians and acute care hospitals within its service area, and as of 2011, it estimates it has reduced healthcare costs to participants by over $20 million annually.
Although the American Recovery and Reinvestment Act allotted grants to encourage the establishment of HIEs, participating in an HIE still doesn't come free. Participants must have an EHR in place, and most HIEs ask participants to pay a fee to connect; that price can vary depending on an organization's size and the degree and complexity of the connectivity needed.
For instance, the fee for a hospital HealthBridge subscription includes a predetermined portion that management has allotted be covered by hospitals (a cost spread among all participating hospitals) and is based on the hospital's gross expenses. In addition to that amount, participants pay an EHR data exchange fee based on how much data a participant receives and sends.
"When HIE started in Cincinnati, it paid for itself for participants just in the elimination of fax and mail cost, but the technology has gotten better and it costs more," says Gravell. "The federal government is spending billions to digitize healthcare … and there's a renewed interest in capitation and population health. Whereas episodic care doesn't require data, population health does. HIE is the solution to community health."
As of 2010, HealthBridge began working to aggregate raw data from its participants to help its members pursue population health initiatives and related payment models. It's an effort that has led the HIE to connect to organizations beyond physician groups and hospitals, such as long-term care facilities and home-care agencies.
Gravell notes population health management is generally accompanied by incentive programs such as pay-for-performance or shared savings, which are designed to motivate doctors to make less costly treatment choices for patients and to manage the total cost and treatment of a patient beyond a single encounter.
However, these incentive programs shift a great deal of payment risk from the payers onto the providers. Reimbursement is based on data showing a patient's progress, which requires complete clinical data. Without that, physicians cannot fully and accurately treat a patient, and that can influence outcomes and decrease incentive payments. All of that makes participating in these programs less appealing to physicians.
"There's no way to prevent patients from going outside a network, but you can't manage a population without having all the information. HIEs give providers a tool to get all the information," says Gravell.
The Indiana Health Information Exchange, a nonprofit organization formed by the Regenstrief Institute, private hospitals, local and state health departments, BioCrossroads, and other healthcare and community organizations in that state, is making some progress with population health. IHIE links more than 93 hospitals, long-term care facilities, rehabilitation centers, community health clinics, and other healthcare providers and affects in excess of 10 million patients.
In June the Central Beacon Community Program, the IHIE, and the Office of the National Coordinator for HIT released the first-year results of a three-year study looking at the use of HIE in Central Indiana. In just one targeted area—to increase the number of colorectal cancer screenings—participants increased screenings by nearly 15%. In March 2010 (prior to the Beacon program), 57.54% of the measured population received the necessary colorectal cancer screening, but as of December 2011, more than 66% of patients were screened.
The program's goal was to drive improvements for patients and the community by "supporting better chronic disease management, better utilization of healthcare services, timely preventive care services, and to give a real-world national health IT model that achieves measurable and sustainable improvements," according to a St. Vincent Health statement. St. Vincent was among the participants in the study.
"By pooling of the clinical and financial data, and then the blinding of proprietary information allows all providers to get a truer picture of what's happening with the patients, and that's what's needed to manage a population," says Alan D. Snell, MD, chief medical informatics officer at the 22-hospital system St. Vincent Health (a member of Ascension Health) in Indiana. In June, Snell was among 82 healthcare providers in the United States to be recognized by the White House and the Department of Health and Human Services for their work with health IT.
The need for more useful population health data has the IHIE compiling health data that allows providers to track improved health outcomes for patients and is specifically focusing on areas such as cancer screenings, diabetes care, heart health, asthma care, well-child visits, and other care interventions. As the study will take three years to complete, no additional outcomes data could be released.
"As we roll toward ACOs, we're going to see more providers having to contract with some sort of entity, and there's a financial risk involved. The better the performance you have and can show proof of, the better rewarded providers will be financially," says Snell. "Over 2,500 primary care providers in Central Indiana receive reports through IHIE's Quality Health First program and they can see how they compare with their peers on prevention and chronic disease management. That also ties to the financial incentives that hospitals and payers have with providers—if they hit their quality marks, that can add up to significant dollars. And that's beginning to help us see significant improvements in the quality indicators for those participating providers. Now we have the whole medical community moving toward pay-for-value and away from
pay-for-service," explains Snell.
Snell says that Indiana has come a long way from when it started its HIE and now has five, noting that the issue of working with competitors was a very real one when it began.
"You have to work with your competitors because patients are going to expect providers to be able to access their clinical information wherever they happen to be, and not being able to do so will become a competitive disadvantage," says Snell.
With the majority of HIE organizations, governance is coming from the participants, [so] it's unlikely that the "wrong" information will get shared, Snell says. "HIE isn't a Wild West–type of business; health information is tightly regulated through HIPAA and state laws, and maintaining business security and confidentiality of that information is paramount for our participants," says John Kansky, vice president of strategy and planning for IHIE. "We have very detailed data usage agreements that reference the powers of our governance body. If we come up with an idea for how to use data, the governance body has to approve it before we can pursue it."
Though regional HIE networks are the first step for many healthcare organizations, the future of HIEs lies in eventually linking all HIE networks nationwide. But before healthcare can achieve this goal healthcare leaders must make a clinical and financial leap of faith by working with competitors, says Gravell.
"For CHP, HIE is something we are looking at for every community we're involved in," he says. "We feel strongly that from both a financial and IT perspective using HIE is a more cost-effective way to move information, and having access to that information in real-time is the right thing to do for our patients."
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This article appears in the September 2012 issue of HealthLeaders magazine.
With health insurance exchanges mandated to launch in 2014, the government has awarded its next round of Affordable Insurance Exchange Establishment grants in an effort to get these programs up and running on schedule. The money is intended to give states the flexibility and resources to create new health insurance marketplaces.
But healthcare CFOs remain wary of the potential financial ramifications of these state-run commercial payer plans, with some calling it "scary" or a "game-changer."
Many industry experts believe organizations that face greater uncompensated care stand to fare better with health insurance exchanges (HIX), as the uninsured will now have some coverage. However, for those healthcare organizations with few uninsured and small Medicare and Medicaid populations and greater amounts of commercial insurance, exchanges stand to hurt the bottom line.
"For us, we have very little Medicaid, very little uninsured, and we have 40% commercial insurance, which is going to now get paid at Medicare or Medicaid rates," says Mary Ann Freas, CFO at Southwest General Health Center, a private, nonprofit, 354-bed hospital located in Middleburg Heights, Ohio. Freas was one of several CFOs who spoke about insurance exchanges while attending the HealthLeaders Media CFO Exchange, an invitation-only event held in September at Kiawah Island, SC.
"We've worked so hard to get our payment rates up to a par with some of the other larger organizations that have a lot of market power in Cleveland, and now [those healthcare organizations] are saying they're going to create our own exchanges. We could be looking at huge reductions in reimbursements from exchanges, and that's what's scary," she says.
Last spring, the U.S. Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act but made participation in the expanded Medicaid program optional. The new flexibility with Medicaid expansion led many states announce that they'd opt out of the program—a decision with the potential to leave an estimated three million people uninsured, according to the Congressional Budget Office.
But PPACA also requires that states make insurance plans available for purchases through HIX by January 1, 2014.States must also demonstrate to the Department of Health and Human Services by January 1, 2013, that an exchange will be operational by 2014. If a state cannot meet that 2013 deadline, then the federal government has the authority to establish and operate an exchange for that state.
To encourage states to create their own HIX, the federal government has allotted about $1 billion to go toward research, planning, and technology for exchanges. Just last week, HHS Secretary Kathleen Sebelius announced that Arkansas, Colorado, Kentucky, Massachusetts, Minnesota, and the District of Columbia would receive one of the Affordable Insurance Exchange Establishment grants.
These six are among the 49 states, plus the District of Columbia and four territories, that have now received federal grant money to plan HIX; 34 of those states plus the District of Columbia have received grants to build an exchange. The ultimate goal is to allow consumers in every state to be able to buy insurance from qualified health plans directly through these marketplaces and to be eligible for tax credits to help pay for their health insurance.
Establishing a state exchange is a highly complex process, however—another reason several financial leaders at the HealthLeaders Media CFO Exchange expressed concern about how they might ultimately impact healthcare organization finances.
For instance, states must grapple with establishing governance and certification procedures, determining competitive standards among plans, and creating IT structures. Additionally these exchanges must develop small-business health plan options as well as plans that can take on a disproportionate share of high-risk, high-cost individuals that don't impose higher premiums on those individuals.
Once these exchange plans are established, some financial leaders believe they could cause area employers to stop offering their sponsored programs altogether, forcing employees to opt for the new plans instead.
A McKinsey & Company report says, "30% of employers will definitely or probably stop offering ESI [employer-sponsored insurance] in the years after 2014 and at least 30% of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries." It also noted that "Contrary to what many employers assume, more than 85% of employees would remain at their jobs even if their employer stopped offering ESI, although about 60% would expect increased compensation."
Aaron Coley, vice president of decision support for MemorialCare Heath System, a six-hospital system based in Southern California, says "We did some modeling around what would happen if our commercial rates went just halfway between where they are now and Medicare, and what does that do in terms of revenue here? It will be $200 million for us a year that comes out of our system on a total net revenue base of about $2 billion. And that's just if the rate goes halfway to Medicare [rate]; that's not even getting to Medicare rates."
Freas adds, "In many ways, exchanges are worse than losing [inpatient] volume, because now we're taking care of all those patients, perhaps even more patients than before, and that's going to drive up the competition for [clinical] labor and the need for more staff, and we'll have to deliver care at a much lower cost. I just don't know how this is going to work out for us."
Trying to get a handle on which employers and industries might forgo offering insurance in favor of HIX is causing a great deal of financial uncertainty, as CFOs try to analyze how much of their patient base may be at risk to leave higher-reimbursing, employer-sponsored plans for the likely lower-reimbursing exchange plans.
"It's probably going to be industry-specific to some extent. And in certain industries they may say, My competitor is doing it and since they've already opted to use [an exchange], then I don't have to fear losing my employees if I do it as well," says Coley.
"I wouldn't be surprised if we see some municipalities who have highly unionized workforces also dump their people into exchanges because they need to get out from under their costs, which are crushing the state budgets," adds Michael T. Burke, CFO, senior vice president, and vice dean at NYU Langone Medical Center, a three-hospital system in New York, NY.
Not only will a state's industry's response dictate the degree to which hospitals and health systems may be affected by health insurance exchange, healthcare finance leaders at the HealthLeaders Media CFO Exchange believe the state offerings will influence their response.
"I know in Massachusetts, the exchange-offered products which were almost tied to the Medicaid HMOs and were run by Cambridge Health Alliance, Boston Medical Center, and places like that … did allow you to access care at other institutions and to be paid at a certain rate, but it was always a Medicaid base type of payment rate, which isn't necessarily great. It could be a huge reduction in reimbursement for some [if it happens like that elsewhere]," says Burke.
Though at one time Medicaid reimbursement rates weren't very appealing to organizations, with the addition of insurance exchanges, financial leaders at the HealthLeaders Media CFO Exchange say they may be wishing for those rates in the coming years. But can they survive on them?"There's no way," says Freas. "Not on Ohio's [Medicare reimbursement] rates."
"Or California's rate either," adds Coley. "If reimbursement on a commercial side goes, and you don't have this cross-subsidization happening anymore, it's going to be a game changer."
Though there is a great deal of discussion about the $750 billion that the U.S. spends annually on ordering unnecessary medical procedures, the financial waste resulting from patient non-compliance gets less press.
Hospital financial leaders are all too aware of the scope of the problem, however.
It has been estimated by numerous studies that one-third to one-half of all patients are non-compliant with medical direction. So what can hospital and health systems do to drive out patient non-compliance costs? The answer lies in financial incentives and population health efforts—but don't expect too much too soon, say healthcare CFOs gathered at the recent HealthLeaders Media CFO Exchange in Kiawah Island, SC.
Patient non-compliance is perhaps most easily seen in how patients fill and use prescription medications. As many as 20% to 30% of prescriptions for medication are never filled, and up to 50% of medications for chronic disease aren't taken as prescribed, according to a recent article in the Annals of Internal Medicine. The analysis notes that the patients' failure to comply with medication prescriptions—albeit for a variety of reasons—costs the U.S. health system between $100 billion and $289 billion a year.
Yet most patients don't particularly care how their individual non-compliance affects the cost of care at their hospital or in the healthcare system overall. The resounding sentiment of most attendees at the CFO Exchange is that people just know they want to pay less for their own treatment.
"There's no easy answer. We've talked about what happens when we discharge a patient and they aren't compliant," said Elizabeth Ward, CFO at UT Southwestern University Hospitals, a two-hospital, 420-bed system based in Dallas that is one of the top academic medical centers in the country. Ward noted that her organization sees some chronically ill patients who rarely follow instructions and are consistently readmitted to the hospital.
Starting next week, healthcare organization can be penalized by the Centers for Medicare and Medicaid for these 30-day readmissions. During a group discussion at the CFO Exchange, Ward pondered whether hospitals should ever discharge a patient for non-compliance? "In the long run, [patient non-compliance] also goes against our mission to make the patient well," she noted.
With more patients moving to consumer-directed health plans, however, and the advent of greater population health management initiatives among providers, the hope is that patients will be more engaged in improving their own health.
The tide may be turning slowly in that direction, as patients are starting to ask more frequently about the cost of treatment, said James Dregney, CFO at Lakewood Health System, an independent, integrated rural healthcare system in Staples, Minn., which operates a 25-bed critical access hospital and primary care clinics across the region.
Price transparency is driving the need for healthcare finance leaders to try to arrive at a "truer cost" than in the past, but as CFO Exchange attendees noted, the costing process is still inexact.
"My board would like to know how much a pen costs, but I can't tell them that exactly. I can only give them an average [price]," said Benjamin Carter, senior vice president and CFO at Novi, Mich.–based Trinity Health, the 10th-largest health system in the nation and the fourth-largest Catholic health care system. And these "average" prices are still higher than most consumers would like to pay.
Moreover, there's still a great deal of debate in healthcare over how much influence cost really has on a patient's actions. For instance, many commercial payer health plans offer a monetary incentive for members to join a gym. However, there's no requirement on how frequently the member must exercise in order to get that incentive payment.
Jerry L. Miller, MD, a retired family practice physician and founder and past president of Holston Medical Group, a Kingsport, TN–based private practice with over 150 physicians and specialists, offered his thoughts on non-compliance during his keynote address at the CFO Exchange. He believes the phrase "patient non-compliance" should be eliminated from the healthcare vernacular.
Miller remarked that if patients aren't compliant, there's a reason, and it's a healthcare provider's obligation to find out what it is; understanding a patient's personal and social circumstances is crucial to caring for the patient and will ultimately drive down costs. The solution to this problem lies in the development of an open, co-operative doctor-patient relationship, he said.
Healthcare financial leaders at the CFO Exchange agreed with Miller that tackling patient non-compliance and saving on those costs rests with those on the frontlines and not in the financial back office.
"It's important to create a central organization, one that's high-touch and works with the patients on the frontline to bring the costs down," said Carter. "For us, that means applying for a [Medicare] ACO, and we're looking at bundled payments and risk-based contracting. We also have a number of patient-centered models we're looking at to address this problem."
While many healthcare providers are working with payers and employers to encourage better incentives for patients to participate, non-compliance is likely to remain a vexing problem. CFOs grudgingly agree that patient non-compliance, and its cost, is unlikely to decline any time soon.
It's the kind of news that makes financial leaders shudder: 2,211 hospitals stand to forfeit an estimated $280 million in Medicare funds beginning October 1, as year one of Medicare readmissions penalties take effect in October 1st.
With each claim that providers submit, a penalty of up to 1% may be deducted from the organization's Medicare reimbursements under a provision of the Patient Protection and Affordable Care Act.
How widespread will the financial penalties be? A Kaiser Health analysis of Centers for Medicare & Medicaid Services data indicates that 278 hospitals (8.3%) stand to receive the maximum, while 1,933 (57.4%) of hospitals will receive other penalties. The average penalty will be approximately $125,000, and an estimated 1,156 hospitals (34.3%) will receive no penalty.
Gundersen Lutheran Health System in La Crosse, WI, an integrated system that operates a 325-bed hospital, is among the organizations with readmissions rates that will not to be penalized this year. "We've been doing patient- and family-centered care for some time, but the emphasis and awareness of what happens if things go wrong has certainly increased with the [readmissions] penalties," says Jerry Arndt, senior vice president and CFO.
Arndt attended the invitation-only HealthLeaders Media CFO Exchange last week in Kiawah Island, SC, to discuss topics such as readmissions rates, cost reduction, and mergers and acquisitions with some of the nation's top healthcare financial leaders.
"When you involve patients and families more in the process and there's more education pre-discharge, it goes a long way [toward preventing a readmission]. We also embrace the concept that a discharge is not a discharge, but the next step in the transition into the continuum of care. We stay connected with the patient when they leave the hospital," adds Arndt.
Patient-centered care and care coordination programs have sprouted at many hospitals nationwide, though at some hospitals the initiatives came after CMS began tracking readmission rates.
For the last few years the federal government has been gathering readmissions data on hospitals nationally, in an effort to decrease the 19% national average readmissions rate.
Readmissions penalties are calculated based on the frequency of Medicare patients readmitted within 30 days between July 2008 and June 2011.
Starting October 1, 2012, hospitals will face a 1% penalty for readmissions related to acute myocardial infarction, heart failure, or pneumonia. A year later the penalty will increase to 2% and then 3% in 2014. Moreover, as of next month, hospitals will be penalized or rewarded based on their level of adherence to basic standards of care and how patients rate their experience.
The hospitals that stand to fare the worst are those in New Jersey, New York, the District of Columbia, Arkansas, Kentucky, Mississippi, Illinois, and Massachusetts, according to CMS data on overall readmissions rates.
Readmissions penalties will be lightest in hospitals in Utah, South Dakota, Vermont, Wyoming, New Mexico, and Idaho. Idaho is the only state in which Medicare will not penalize any hospital under the initial metrics.
The readmissions penalty may hit some of the nation's top-rated hospitals hardest. In calculating the amount of a provider's penalty, Medicare will weigh the severity of patients' illness, but not racial or socio-economic background. CMS data indicates that providers that care for the lowest-income patients are 2.7 times more likely to have high readmissions rates.
Safety-net hospitals, which tend to have higher rates of readmissions, care disproportionately for low-income patients. These facilities attribute those readmissions to poor post-discharge access to doctors and medication.
Several financial leaders at the HealthLeaders Media CFO Exchange commented that the readmissions program should be reviewed by the Medicare Payment Advisory Commission, with particular attention paid to socio-economic factors.
"We were fortunate not to get hit much, [but] that's not the case for everyone in our area," says Michael T. Burke, CFO, senior vice president, and vice dean at NYU Langone Medical Center, a three-hospital system in New York, NY.
"We focused our effort on reducing length of stay and managing the patients in that [Medicare] population so they wouldn't be readmitted. But we also don't have a lot of those patients. A larger percentage of our population is paid for out of employer-based insurance or is Medicare/Medicaid HMO. We tend to find that those patients are more compliant with post-discharge instructions."
The Kaiser Health analysis indicates that 76% of the hospitals with a high percentage of low-income patients will lose Medicare funds starting in October, while just 55% of providers that treat a low percentage of poorer patients will be penalized. Readmissions penalties are not a certainty for this category of hospitals, though. For instance, University of Mississippi Medical Center in Jackson and Denver Health Medical Center in Colorado, both safety-net hospitals, are not slated to be penalized this year.
Even for those hospitals that fared well during the first round of readmissions penalties, constant vigilance is needed to stay above the CMS bar, while for those that felt the sting of penalties this year there will likely be a renewed push to correct problems.
"We'll continue to focus on our patient-centered approached and the quality of the care we provide. But with mortality and morbidity, we'll look to be sure we are doing a better job coding the healthcare situation, so the mortality and morbidity index is better determined. Underquoting care can obviously cause the statistics to be distorted, and we don't want that to happen," notes Arndt.
Should financial practices of HCA be vilified or lauded? That's a question I found myself asking while reading the recent New York Times series analyzing how the for-profit healthcare giant is somewhat craftily succeeding at making margin in healthcare.
HCA has carved a path to profit in healthcare—which is not easy—in its growth into a healthcare behemoth. And while some criticize its tactics (and the government investigates them), other healthcare organizations, both not-for-profit and for-profit, are modifying their practices to try to get similar results.
Profit, though a taboo word in the NFP world, is nevertheless essential to the survival of any healthcare organization. For-profits like HCA have private equity investors who demand returns, and that comes from growth and tight cost control. HCA owns 163 hospitals from New Hampshire to California, a sizable footprint to which many NFP hospitals and health systems aspire.
The healthcare industry consolidation is booming, driven by the need for hospitals to find financial strength by expanding market share and reducing costs. Still, too much organizational growth brings challenges. HCA is the second-largest healthcare organization in the U.S., second only to the U.S. Department of Veterans' Affairs, which has struggled with its own quality issues over the years.
HCA says more than 80% of its hospitals rank in the top 10% for federal quality measures, versus 13% in 2006. That means about 130 of their 163 hospitals are doing quite well, but the other 33 can easily besmirch that record through less-than-stellar practices. The New York Times reports that HCA owned eight of the 15 worst hospitals for bedsores among the 545 profit-making hospitals.
Bedsore statistics can reflect a nursing staff shortage, which is a dangerous problem. HCA uses a flexible nurse staffing system that fluctuates with patient volume, a practice that is not uncommon. In fact, I've even written about it as a cost-cutting mechanism, and more than a few hospitals nationwide use flexible staffing practices.
Some HCA nurses report that important areas are inadequately staffed. That could very well be true, but is that a consequence solely of flexible staffing, or could the nationwide nursing shortage also be a factor? I will venture to say that HCA isn't the only hospital, regardless of tax status, that has been or will be accused of insufficient nursing staff.
I don't wish to belittle these incidents, or how painful and severe bed sores are to patients, only to make the point that their occurrence may not be solely attributable to HCA's profit motive—rather, they may also be a reflection of some of healthcare's larger woes.
But HCA's practices over the years haven't been beyond reproach, and in fact HCA is in hot water again with the Justice Department, which recently launched a review of cardiac businesses at 10 HCA hospitals. The investigation is intended to discern if some HCA hospitals conducted unnecessary procedures and therefore resulted in unjustified reimbursement from Medicare and other insurers.
Though only 10 hospitals are under review, ultimately the Justice Department has another 153 hospitals to choose from and hundreds of thousands of employees with the potential to complain of HCA practices.
Though folks may have chided HCA for its aggressive billing tactics, much of what the organization does has also been modified and imitated by other healthcare providers. HCA managed to garner more revenue from private insurance companies and Medicare by aggressive billing practices. They worked the coding system to their advantage (note that HCA was never formally charged with up-coding).
By way of explanation at the time, HCA said the change in coding practices better reflected the services provided. Partly as a result, its earnings increased $100 million in the first quarter. That's a profit to be proud of, unless the government rules otherwise.
Some people also take umbrage with HCA emergency room triage tactics, which are designed to discourage non-urgent care patients from using the ED for care. Patients are assessed by caregivers and then non-urgent patients are discouraged from staying (though physicians can override the system to treat a patient as necessary).
Some HCA doctors don't care for the screening practice, which encourages non-urgent patients to go to free clinics or to pay copayments or fees before services can be rendered.
HCA's approach parallels a goal of healthcare reform, to keep people out of the ED to help reduce healthcare costs. The government is doing this by encouraging patients to get preventive care and to see primary care physicians. HCA took more of a sledgehammer approach.
Although HCA's approach is distasteful to some, it has not been found to be a violation of the Emergency Medical Treatment and Labor Act. Keep in mind that patients at primary care offices are asked to pay co-pays upfront, and essentially non-urgent care is like primary care.
Moreover, many hospitals are now analyzing patients' high-deductible health plans to determine the patient's upfront payment before care. So was HCA out of step, or did it just take the step too early? Similar ED triaging strategies are now proving to be ED time- and money-savers, as several hospitals are demonstrating.
The New York Times article says that HCA doctors and nurses felt strained over "whether the chain's pursuit of profit may have, at times, come at the expense of patient care." I'm certain their sentiments are true, but are there any healthcare CFOs that haven't heard similar comments from clinicians? The fact is, the clinical and financial sides of healthcare often butt heads—yet one cannot succeed without the other.
This article appears in the August 2012 issue of HealthLeaders magazine.
Whereas gainsharing is still viewed with apprehension by many in healthcare, shared savings programs are being embraced by hospitals nationwide. The two models pursue the same goal—to reduce costs without negatively impacting the quality of care—but there are unique legal and structural challenges that come with each approach; however, for hospitals and health systems willing to overcome some hurdles, both gainsharing and shared savings can add millions in sustainable savings to the bottom line.
Gainsharing tends to target device and supply usage within a specific service line, such as cardiology or orthopedics, whereas shared savings programs take a broad-spectrum look at cost reduction by targeting specific patient populations, such as diabetics.
"We're all trying to partner effectively with our medical staff to find savings. We've done a lot of initiatives, joint ventures, employment agreements and service line management agreements," says Robert Glenning, executive vice president and CFO at the 775-licensed-bed Hackensack (N.J.) University Medical Center. "Gainsharing and shared savings have been missing in our approach until recently. We recently added shared savings to our oncology service line."
HUMC's decision in the first quarter to pursue shared savings was based on the organization's strategic goal to reduce overall costs; but why not choose gainsharing?
"Gainsharing has been difficult to implement because of the process of obtaining an opinion from the Office of Inspector General, and it tends to work for a subset of physicians, like orthopedists or cardiac surgeons, but not all physicians. Though the OIG has granted waivers, it is complex to get those waivers; at least it was in the past. I think people are still uncomfortable with the waivers, which is
why gainsharing has struggled," explains Glenning.
The Centers for Medicare & Medi-caid Services has no fixed definition of gainsharing, but says the term generally refers to an arrangement in which "a hospital gives physicians a percentage share of any reduction in the hospital's costs for patient care attributable in part to the physicians' efforts." These agreements were initially found to violate the Civil Monetary Penalties Law, the Stark Law, and the anti-kickback statute, though they did demonstrate promise in cost saving when
structured correctly.
Though the OIG can grant waivers to allow these arrangements to take place, the potential to violate several key statutes deterred most healthcare organizations from attempting the use of these agreements and cast a negative cloud around them, explains Addison, Texas–based healthcare attorney Cynthia Marcotte Stamer.
There is a key legal distinction between an accountable care organization shared savings arrangement and a gainsharing one, notes Marcotte Stamer. New shared savings rules outline detailed requirements pursuant to which ACOs can reward providers by providing shared savings. In contrast, if the ACO does not meet the ACO shared savings rules or the party other than an ACO offers gainsharing, "the gainsharing arrangement is presumptively against the law and participating parties are subject to enforcement, unless the parties seek and obtain an advisory opinion in which HHS agrees not to enforce the Stark, Fraud & Abuse, and CMP laws without revoking the ruling based on the gainsharing arrangement and the parties receiving that ruling in fact comply with the assumptions of the advisory opinion so as to qualify to rely upon that agreement not to enforce," she explains.
Moreover, each advisory opinion on gainsharing participation is directed specifically to that organization. "The ability to rely upon the [advisory opinion] remains limited to the requesting parties. The fact that a party has obtained an advisory opinion based on its application does not allow a different party to rely upon or claim any protection against prosecution for its gainsharing arrangement even if the facts are similar or even identical," says Marcotte Stamer.
Some of the elements that the OIG requires of those wishing to obtain the commitment not to enforce are defined, Marcotte Stamer says. In 2005, the Deficit Reduction Act renewed interest in gainsharing agreements, and the OIG has agreed not to prosecute organizations that pursue gainsharing arrangements if following criteria are applied: (1) measures that promote accountability and transparency, (2) adequate quality controls, and (3) controls on payment related to referrals, she explains.
The initial DRA exemptions to gainsharing were intended to allow Medicare to create pilot programs for cost savings in its fee-for-service population. However, with the passage of the Patient Protection and Affordable Care Act, gainsharing evolved into shared saving as part of the accountable care organizations program.
However, Marcotte Stamer notes that the regulations surrounding the Medicare ACO model shouldn't be deemed less complex. "These rules are just coming out and … there's tremendous cost involved and liability risk. You're building a very complex organization and asking providers to sign on and consent to rules that could change." Moreover, as with gainsharing, organizations that participate in the Medicare ACO program will need to demonstrate not only cost savings, but also steady or improved patient outcomes.
For those organizations that are willing to work within the OIG's guidelines and pursue gainsharing, there are bottom-line rewards. At the 864-licensed-bed St. Luke's Health System, based in Boise, Idaho, gainsharing was a choice the organization made to encourage greater supply-chain savings in its cardio, spine implant, and total joint implant service lines while maintaining or improving the quality of products and care to the patient. The system, which reaches southwest Idaho, northeast Nevada, and southeast Oregon, began looking into gainsharing in 2009 after doing a cost analysis, explains Cam Marlowe, St. Luke's system director of contracting and sourcing for supply chain management. The analysis showed that St. Luke's combined spend for cardiology, spine implants, and total joint implants totaled $39 million.
"We had a sense that our three largest spend areas had contract prices that were average at best, and perhaps below average given our size," says Marlowe. "We need to reduce our costs and wanted to get the doctors involved to help us determine how we could lower our cost while maintaining or improving quality. The gainsharing program was the best way to jump-start that collaboration."
Also wary of the OIG guidelines, the organization worked with Goodroe Healthcare Solutions, a subsidiary of VHA, to guide it through the legal logistics and help it get its data gathering processes in place.
St. Luke's gainsharing agreements took effect in two of its hospitals in 2009, but year one was filled with trial and error and limited returns, Marlowe says. By 2010, however, the organization had cleared a path to reap financial savings, reducing the cardio, joint implant, and spine implant spend by $1.3 million for the two participating hospitals, and garnering another $450,000 in rebates from implant device vendors. In 2011 St. Luke's saved another $7.1 million, and it anticipates estimated savings of an additional $3.7 million in 2012, he says.
By year two Marlowe says the organization invested in a benchmarking service that provided data on vendors by tracking hundreds of hospitals supply prices. The information helped with vendor contract negotiations. And, to encourage collaboration between the hospital and the physicians and help measure progress and define the financial goals for the gainsharing model, clinical department administrators and directors together with supply chain leaders shared data on individual performance with the physicians. They held regular group meetings with the cardio, orthopedic, and spine implant physicians and reviewed physician usage data and discussed optimal implant product choices and pricing.
To help physicians gauge their performance, individual physician data was compared to that of their peers and to the group average to allow for easy comparison and discussion. The gainsharing company provided quality and competitive cost data for key devices. In addition, St. Luke's tracked and reported patient outcomes to ensure these remained constant, or improved.
Implementation of the savings program did not adversely affect clinical care in any of the specialties included in the gainsharing program, Marlowe says. "The physicians did not alter the demographic makeup of the patient populations they treated. Indicators such as outcomes, case severity, age, and payer are monitored throughout the program to assure no significant changes from historical measures," he adds.
Marlowe says that ultimately the greatest challenge in setting up a gainsharing program proved not to be working with the OIG guidelines, but gathering the data and learning to communicate better with physicians. "Establishing gainsharing is challenging; it isn't a cake walk, but it's been very successful for us. Although we had a gainsharing partner, they didn't do all the work; we still have to engage the physicians and work with them to make this a continual success," says Marlowe. "Through this process I have learned that physicians are eager to work with the hospital to accomplish shared goals."
Getting physician buy-in and collaboration has proved a similar challenge for those organizations that do opt to pursue a shared savings program, notes Mark Shields, MD, MBA, senior medical director for Advocate Physician Partners and vice president of medical management for Advocate Health Care, an Oak Brook, Ill.–based system that includes 10 hospitals, 2 integrated children's hospitals, and more than 3,222 beds.
"On the surface it can look like a gainsharing program might be a quicker and easier path to cost reductions because it's typically limited to one to two service lines or handful of DRGs," says Shields. "But we felt it really wasn't easier due to the administrative and legal complexities, and the organizational hurdles to get the physicians working together."
Advocate Physician Partners entered into a care management and managed care contracting joint venture between the Advocate Health Care System and 3,900 physicians on the medical staff of the Advocate hospitals to create one of the first commercial ACOs and shared savings programs. The system created a clinical integration program in which physicians collaborate to address the quality and cost associated with an entire episode of care, explains Shields.
"If an organization hasn't strategically committed to wanting to be a population health management company, then shared savings isn't going to fit for them; gainsharing may be a better approach," he says.
Physicians work directly with patients to reduce the physical and financial effects of disease and illness by designing treatment plans that include medical intervention and lifestyle changes. The program came about during a contract renewal with BlueCross BlueShield of Illinois in late 2010. With just four months left in the year to establish the program, the payer and Advocate agreed to set provider incentives in the contract based on meeting specific quality, safety, efficiency, and patient satisfaction metrics. Dubbed AdvocateCare, the accountable care and shared savings project started in January 2011.
In the case of Advocate Health Care, population health management was a key strategic goal, so the opportunity to work with BCBS of Illinois aligned with that goal. The organization hired 60 full-time nurses to act as outpatient care managers and work closely with the sickest 3% of the patient population, and it added software to enable costs and outcomes to be monitored and measured against core metrics.
Data is essential for the program to succeed, Shields says, as it allows the team to dig into the numbers by physician, group practice, disease type, etc., and to provide all participants quarterly feedback on progress. Although it tracks nearly 160 metrics, Shields says "a handful are high-priority areas and help maintain the focus for our physicians and our hospital."
In April, Advocate released its 2012 Value Report based on the organization's 2011 results for the first full year of the program, and the cost savings for its shared savings, population health management-based approach are promising.
The Value Report notes Advocate set a generic prescribing target rate of 73% or better for its physicians and it reached 74%, resulting in savings of $12.4 million. Its asthma outcomes initiative resulted in a control rate for its patients of 59%, some 17 percentage points above the national average, saving $8.9 million annually in both direct and indirect medical costs. Additionally, its diabetes care initiative calculated savings of $4.3 million just for making improvements to poor HbA1c levels.
Both gainsharing and shared savings programs can reduce costs by millions of dollars, and while the two approaches differ in their implementation structure, the cost savings goal is consistent and the cornerstone for both rests on physician collaboration.
"We'd been on a clinical integration road for a decade, so we had a lot of relationships with physicians and infrastructure already built," says Shields. "But I think for people who are particularly new to clinical integration, gainsharing can offer a good beginning. Whichever path is chosen, it needs to fit with the larger organizational strategy."
This article appears in the August 2012 issue of HealthLeaders magazine.
Summer may be winding down, but while many CFOs found time to take a vacation, the business of healthcare did not slow down.
In fact, there's so much going on that it's dizzying to keep pace. Much of this summer's healthcare discussions have centered on uncertainty and everyone from the financial ratings agencies to politicians to physicians are stirring the pot. So, in case your much-needed time off didn't allow for you to keep up on all the big healthcare news, here's the rundown:
1. SCOTUS decision confusion. Though the Supreme Court's ruling on the constitutionality of the Patient Protection and Affordable Care Act was supposed to offer some clarity, it didn't in all areas. Pay attention to these in particular:
2. Ratings agencies outlooks. Both Moody's and Standard and Poor's have written extensively about how healthcare reform will negatively influence hospital and health system ratings. In mid-July Moody's Healthcare Quarterly reported that even new revenue sources for not-for-profit hospitals won't offset Medicare reductions of $150 billion over the next 10 years.
The Moody's report follows on the heels of a June S&P Healthcare Economic Index report finding that the average per capita cost of healthcare services covered by commercial insurance and Medicare programs has increased by 6.14% over the 12-months ending April 2012. Both reports offer a dour perspective, but they are nevertheless essential reading for financial leaders.
3. Innovation delayed. Before the historic Supreme Court ruling on the ACA, we knew that the long-awaited decision was negatively impacting healthcare business innovation. The upshot? Growth is still compromised. For even if a hospital or health system opts to grow—likely through a merger—it still may flounder without at least attempting to pioneer some new programs.
4. M&A in motion. Speaking of mergers, industry consolidation though mergers and acquisitions continue to grow and at a historic pace. The activity that has taken place during the last two years is beginning to reshape who the key players are in healthcare. So far, the number of transactions in 2012 has nearly doubled that of (during this same time period), with healthcare service mergers comprising transactions worth $19.2 billion.
You likely have heard about many of the larger deals, but you may not realize that 21 physician groups have merged thus far in 2012. That's going to change the approach of care delivery in many areas. For additional details on mergers and acquisitions, check out the HealthLeaders intelligence report, M&A: Hospitals Take Control.
5. ICD-10 deadline delay confirmed. The deadline delay sealed by the Centers for Medicare & Medicaid Services in its final rule Friday was just that, a delay and not the death of this initiative.
Any hospitals and health systems that had been using the uncertainty around the deadline as an opportunity to further procrastinate on implementing this initiative now know that the clock runs out on Oct. 1, 2014. Whether those delay tactics proved to be a costly mistake for hospitals is something only time can tell. Some of the larger systems, such as Mayo Clinic, however, haven't been wasting time getting training started. They've smartly been proceeding with their plans.
There is a pervasive amount of ambiguity in healthcare these days. All the rules have changed in the last few years, and what you knew last week (before your vacation) may not help you with the decisions you need to make next week (when you get back to work).
To get clarity and ultimately to keep your organization ahead of the curve you'll need to stay nimble and keep a watchful eye for innovative solutions (HealthLeaders Media will help you with that).
Now that the smoke has cleared from the U.S. Supreme Court's June ruling on the Patient Protection and Affordable Care Act, what's the upshot for financial leaders? It appears the only thing healthcare CFOs can count on is that they will have to slash costs.
For starters, most states are taking a hard look at Medicaid eligibility to determine if they'd like to participate in the expansion program. While each state tries to determine the pros and cons of participation (both political and financial), hospitals and health systems need to figure out the consequences of any path their state chooses.
To join in the expansion, states must identify the newly eligible, assess how eligibility will be determined, and then streamline the process and coordinate enrollment across Medicaid, the Children's Health Insurance Program, and the state health insurance exchanges—and complete the process by January 1, 2014. (You thought Usain Bolt was fast? Now that's a sprint.)
Currently the Medicaid component of PPACA calls for the federal government to pay 100% of the Medicaid expansion for the first three years. The proposed federal match levels are 100% in 2014, 2015, and 2016; 95% in 2017; 94% in 2018; 93% in 2019; and 90% in 2020 and thereafter. Then the funding begins to drop to 90%, forcing states to pick up the tab for the difference for a program having more members than ever before. No one knows for sure how many people will qualify for enrollment, so quantifying the ultimate cost to each state is challenging.
Once federal funding levels decline, states must figure out how to pay for all those newly enrolled individuals, which could be costly. But if states wait to participate in the expansion, they could also miss out on the three years of full federal funding—also a significant amount of money. To help get states off the fence on participation, only last week the feds announced that states could expand their Medicaid programs to 138% of the federal poverty level for some period of time, and then drop out.
Whether this approach will work is unclear. However, with an estimated 30 states, including Texas and Florida, already declining to participate in Medicaid expansion, and other states reportedly awaiting clarifications before making a decision, the federal government had to do something to garner greater interest and participation.
In addition to the decision states are making on Medicaid expansion, there's another matter CFOs need to pay attention to: a substantial number of employers could drop insurance coverage altogether in your state. Already, 10% of employers have dropped insurance coverage in the last decade for no other reason but cost, and another 10% could drop it in the next ten years, says Paul H. Keckley, PhD, executive director at the Deloitte Center for Health Solutions in Washington, D.C. That means more people will have to find insurance coverage on their own or through the federal insurance exchange program. That can come out hospitals' bottom line. People seeking independent coverage tend to select high-deductible, high-copay plans that put a large chunk of hospital or health systems money at risk for going unpaid. Bad debt isn't good for the balance sheet.
Regardless of which path a state takes on Medicaid expansion or the rate at which state insurance exchanges reimburse for coverage, ultimately CFOs must count on cutting costs and proving value for their organizations to survive and thrive.
"We have to demonstrate quantifiable value for the consumer and the employers now. Folks aren't happy with their care and the costs are running away," says Keckley. "I tell [executives] we're living on borrowed time … to fix this we're going to have to go big or get out. People need to develop new models to fix this, and they must be ready to throw out the sacred cows to find savings."