New data exposes aggressive tactics by payers for Medicare Advantage denials.
Hospital CFOs are in the crosshairs of aggressive Medicare Advantage (MA) payers, who are increasingly denying claims and bending the rules.
This tug-of-war between hospitals and payers isn’t just about paperwork—it’s a high-stakes battle impacting patient care, hospital revenue, and the financial sustainability of health systems. As denial rates for inpatient stays rise, CFOs must ramp up their strategies to combat rule-breaking payers and protect their bottom lines.
Now, new data from Kodiak Revenue Cycle Analytics reveals a disturbing trend: some MA payers are refusing to comply with CMS’s Two-Midnight Rule, leaving hospitals struggling to secure proper reimbursement. Kodiak examined claims data from more than 1,900 hospitals and 250,000 physicians across the country, collectively representing about $1.4 trillion in annual gross revenue.
The report examines payers who are not following the Two-Midnight Rule set by CMS to determine how to cover and pay health systems for care provided to Medicare beneficiaries.
The report reveals a wide variation in patient observation rates amongst health plans and wide variations in patient observations rates within a health plan type over time.
The Data
From this data, the report found four primary trends amongst Medicare, MA, and commercial health plans.
The observation rate for Medicare Advantage (MA) plans is significantly higher than traditional Medicare. MA plans seem to follow the Two-Midnight rule some of the time, but there is still a large gap and MA members are not getting the same inpatient coverage as traditional Medicare counterparts.
The data also shows that the observation rate for MA plans is falling, but so is the traditional Medicare observation rate. For MA plans, this decline reflects CMS’ requirement for them to follow the Two-Midnight Rule starting in January 2024. The biggest decline was in December 2023 when MA plans observation rates were at 19.0% to 15.0% in January 2024. This shows that commercial payers are beginning to adhere to the traditional Medicare guidelines for their MA members, resulting in fewer denials for inpatient stays.
For traditional Medicare, the rate is also unexpectedly falling, declining to 3.7% in June 2024, the lowest it's been in the past 18 months. Kodiak surmises that this rate could be coming from a more standardized provider approach to use the Two-Midnight rule, more accurate clinical documentation and more accurate provider coding. This low could also be coming from a higher percentage of Medicare patients that require inpatient care versus outpatient care as more care moves to ambulatory or virtual settings.
Lastly, the report found that the observation rate or commercial/managed care health plan is rising after a slight dip. The observation rate for these plans jumped from 15.0% in January 2024 to 18.5% in June 2024, marking a whopping 23.3% increase in just six months.
This jump shows a tense shift in payer claims behavior and is once again putting providers between a rock and aggressive inpatient denial tactics. This data also suggests, according to Kodiak, that payers are focused on commercial lines as a means to manage inpatient denial rates, possibly due to stricter Medicare regulations. Many of the largest commercial payers also make up the majority of the managed Medicare marketplace.
Despite the slight reduction in denials, there is still a much greater chance of MA members and their providers facing more inpatient denials for hospital stays compared to traditional Medicare members.
The CFO Playbook
A recent AHA report zoomed in on rising hospital administration costs, citing longer times and higher expenses in appealing and overturning inaccurate claims denials by MA plans as the primary cause.
Providers will need to reinforce their denial management practices and ensure their documentation and case reviews are optimized. Now is a critical time for providers to double down on this initiative to continue riding the momentum of the trending decrease in observation rate for Medicare members.
Providers have struggling with reimbursement for years now, and sticking to a sustainable strategy can be difficult. Some CFOs suggest conducting weekly payer meetings to ensure both parties have accurate up-to-date data and minimize the margin for error.
As denials rates increase year over year, CFOs and all finance executives will need to keep up with hardball payer tactics, and ensure they focus on reducing observation denials in MA while leveraging stability in observation denials in traditional Medicare.
The benefits of AI in healthcare are no secret. Health systems all over the country make use of AI to automate tasks, take on administrative work, reduce staff burnout, streamline operations, and optimize departments like revenue cycle.
But health systems can also leverage their internal relationship with their AI tools to boost income and uncover new opportunities for growth, and CFOs can play a big role in helping their organizations utilize AI for financial growth.
CFOs should collaborate with CTOs and other tech executives to ensure the AI they are using is solving a specific challenge in their organization. To do this, a deeper understanding of the technology is vital.
Generative AI in particular can help health systems tighten the screws on a number of challenges such as patient engagement and supply chain improvements. GenAI can identify subgroups of patients that are likely to respond to a specific treatment, but it can also analyze inventory levels, among other factors, in supply chains to help minimize risk.
But to successfully utilize GenAI, CFOs will need to focus on a few key actions.
Development costs
Firstly, CFOs will need to develop cost models to manage the unique cost structures of GenAI, which can be expensive to get started. This includes the costs for data acquisition, cleaning, licensing, partnering with AI engineering talent, and computing resources, both cloud-based and internal.
CFOs will need to carefully assess these costs and create a plan of how to amortize them over revenue streams to get to their desired return on investment. CFOs can align use cases with strategic financial goals and identify the most valuable opportunities for AI adoption.
Determining market needs
Health systems must be careful not to use AI simply for the purpose of using AI. CFOs will need to examine the specific needs of their market and ask the right questions. Does it encompass a large Medicare population? Is there a growing number of behavioral health patients? Are there reimbursement gaps?
After CFOs have developed a focus on a few key market populations and their needs, then they can determine where specific types of AI and automation can help and truly make a difference in the bottom line and patient outcomes. CFOs can utilize AI in the continuum of care by making use of programs that automatically follow up with the patient and offer additional resources for them to record symptoms and outcomes remotely.
Utilization balance
Even though AI can be majorly helpful for health systems looking to cut costs, CFOs must ensure that they don’t move too fast with AI adoption. To see a favorable ROI, CFOs must make sure all staff have thorough training with new AI programs and feel comfortable working alongside them.
Moving at a steady pace for AI adoption can also help with patient retention. Health systems must be open and transparent about their use of AI programs, or they risk losing the trust of some patients. An AI investment return may not be as significant if the organization loses patients who are confused or distrustful of AI practices.
Is a partnership the right path for your organization?
As the need for mental and behavioral health facilities grows, could more partnerships be a part of the solution?
By partnering with behavioral health providers, health systems could see numerous clinical and financial advantages, including reducing readmissions, retaining staff satisfaction, and streamlining operations. CFOs can examine the financial viability of this option for their organization by asking themselves a few questions and doing a little research.
CFOs can be pivotal in providing vital data protection for their organization.
Ever since the healthcare industry was shaken by the massive Change healthcare ransomware attack, tensions have been high. But are health systems acting on that tension with data protection strategies?
With the increasing frequency of cyberattacks, it’s crucial for CFOs to ensure that both financial resources and strategic planning are aligned to protect sensitive patient data and maintain operational integrity.
The repercussions of a data breach can be devastating, leading to significant financial losses, reputational damage, and legal penalties. According to the American Hospital Association, as of October 7, 2024, 386 healthcare cyber attacks have been reported. Although the average cost associated with a cyberattack has dropped from $10 million in 2023 to $9.8 million in 2024, these attacks still outweigh many other sectors, making healthcare the most expensive industry for such incidents.
Fostering a Culture of Cyber Awareness
The first step is education. What are the first signs of a potential cyberattack? Would staff be able to recognize these signs? CFOs must educate themselves on the different factors that go into cybersecurity preparation, while ensuring that the entire organization has a strong awareness about cybersecurity and everyone’s role in protecting data.
CFOs can collaborate with CTOs and administrative staff to implement regular training and education for staff on recognizing and responding to cyber threats, which can significantly reduce vulnerability. By making cybersecurity a shared responsibility, CFOs can enhance their organization's resilience against attacks.
Strategic Technology Investments
In the financial case for cybersecurity, CFOs should examine what cybersecurity investments will be right for their organization. They should examine all the advanced solutions available, including firewalls, intrusion detection systems, and endpoint protection. AI-powered solutions can also proactively identify and respond to cyber threats, reducing response times and potential damage.
Data Encryption and Access Control
CFOs can collaborate with CTOs to get into the nitty-gritty of data protection.
They can protect sensitive information by implementing hardy encryption protocols for data storage and transmission. They can also establish strict access controls and authentication measures to minimize the risk of unauthorized access to patient data. As a case in point, according to court testimony, outdated security protection was a critical factor in enabling the Change Healthcare attack to affect so many organizations.
CFOs can also look into investing in upgraded collaboration tools, such as secure messaging and collaboration platforms that enable staff to share information efficiently while ensuring data protection. These tools can streamline workflows and enhance interdepartmental communication without compromising security.
Measuring ROI on Cybersecurity Investments
Lastly, CFOs can measure the ROI of their cybersecurity investments to know if the systems truly are making a difference. With strategic KPIs in place, CFOs can determine whether these actions have reduced the number of cybersecurity incidents, improved response times when incidents do take place, and comply with regulatory standards.
By demonstrating the financial benefits of investing in cybersecurity, CFOs can build a strong case for ongoing funding and support.
CFOs can have a big influence in how their team operates and communicates.
The healthcare environment is packed with rapid change and uncertainty, and CFOs play a pivotal role in ensuring their organizations remain financially healthy and operationally resilient.
To get there, though, a resilient team is vital. A well-prepared team can not only adapt to changes but can also drive innovation and efficiency.
How can CFOs build a great team?
Crucial Communication
Clear communication is the bedrock of a resilient team. In a sector as complex and dynamic as healthcare, where regulations, technologies, and patient needs continuously evolve, CFOs must prioritize transparent communication at all levels of their organization. This involves not just top-down directives but also creating channels for feedback and dialogue among team members.
“It is my responsibility to make sure those managers have the tools, education and resources to find their answers about their budget, about what they can do to make money,” said Kyle Wilcox, VP of finance for MercyOne Medical Group.
Effective communication ensures that all team members understand the organization’s financial goals and challenges, aligning their efforts towards common objectives. Also, it cultivates a culture of trust, where employees feel valued and empowered to voice their ideas and concerns.
By implementing regular check-ins, updates, and open forums for discussion, CFOs can foster an environment where everyone is informed and engaged, leading to quicker and more effective decision-making.
Cultivating a Positive Organizational Culture
A positive organizational culture sustains resilience over time. A health system’s culture should be built on core values such as collaboration, accountability, and innovation. There are several strategies that CFOs can implement to promote these values.
First, CFOs must lead by example. A CFO should demonstrate a commitment to the organization’s mission and values in their daily interactions. When team members see their leaders embodying these principles, they are more likely to adopt them. Additionally, recognizing and rewarding behaviors that align with organizational values can reinforce an excellent culture.
CFOs must also be proactive about investing in professional development. CFOs can work with CEOs and other executives to provide team members with opportunities for training, mentorship, and career advancement. This may include investing in new technology to help staff streamline their work processes. These could not only boost their skillset but also show that the organization values their growth.
Adventist Health CFO John Beaman ensures he is recruiting the right physicians for his health system by creating opportunities for growth that are tailored to his organization.
“We've become more intentional around recruiting physicians that want to work for a not-for-profit health system or want to be in some of our communities that are very rural,” Beaman previously told HealthLeaders. “In fact, we have a rural residency program where we actually train physicians to be practitioners in a rural setting.”
Offering more opportunities like this leads to more satisfied employees, and also better staff retention. This investment fosters loyalty and encourages employees to take ownership of their roles, contributing to a more resilient team.
What's the next step for a CFO after a health system receives a downgrade?
Over a dozen hospitals and health systems have received downgrades in 2024. But CFOs shouldn’t panic right away, and instead look at a financial downgrade as a great opportunity to implement change.
HealthLeaders spoke with Adventist Health CFO John Beaman about what it means for a hospital to receive a downgrade. “I want to reinforce the importance of rating agencies. I do find my interactions with them valuable when we talk to them at least every year,” Beaman said. “[But] they have a good objective view of the entire industry.”
CFOs can look at several opportunities to identify underlying challenges and avoid future downgrades. Check out these four tips on how to navigate a downgrade.
The expanded partnership comes at a critical time for care access in the city.
On Oct. 7 Kaiser Permanente, announced an expansion of its partnership with two Denver-based HCA Health Systems, HCA HealthOne Rose and HCA HealthOne Presbyterian St. Luke's.
Kaiser Permanente is the largest nonprofit healthcare organization in the state of Colorado, and HCA HealthOne offers patient care across 170 connected sites throughout Denver.
The expansion is a significant move towards expanding affordable healthcare options throughout Denver. Going forward, Kaiser Permanente's physicians will be able to provide care in HCA facilities, and Kaiser members will have access to a wider array of services.
This will make the patient experience of receiving specialized care more seamless. In addition to expanding the network of available healthcare providers, the new agreement also ensures that Kaiser members can access a wider array of services without compromising on quality.
Colorado’s Care Crisis
Uncompensated care has become a pressing concern for healthcare providers nationwide, but particularly for Denver Health, which is not a part of HCA HealthONE, but is the state’s largest safety net hospital. Denver Health has been grappling with a rise in uncompensated care costs, straining its financial resources.
By collaborating with HCA Health Systems, Kaiser Permanente could alleviate some of these pressures and improve overall healthcare delivery in Denver.
"The largest conversation that we've had is related to uncompensated care and the trajectory that we've seen at Denver Health since 2020," said April Audain, chief financial officer at Denver Health. "We went from about $60 million in 2020, to projecting $155 million for 2025."
In a separate initiative, Kaiser is also working to build replacement medical offices and renovate up to 29 medical offices in Colorado, expanding care access throughout the state.
Kaiser and HCA HealthOne employees have a strong history of working with each other in the metro Denver area, according to the press release. Kaiser members also have access to multiple Chicago-based CommonSpirit Colorado facilities through their expanded partnership.
"We're thrilled to offer our members greater choice, more convenience, and increased access in Central Denver, where they live and work," said Mike Ramseier, regional president of Kaiser Permanente in a press release. "We're confident that having our physicians and employees care for our patients in these hospitals will extend the value-based model of care that Kaiser Permanente has proudly delivered to Coloradans for more than 55 years."
The expansion aligns with broader trends in the healthcare industry, where integrated care models are becoming increasingly essential. By leveraging the strengths of both organizations, Kaiser and HCA can streamline operations, reduce redundancies, and ultimately provide a higher level of service to patients. This strategic alliance is expected to foster collaborative approaches to patient care.
CFO Bob Flannery explains his targeted approach to resource allocation.
Adopting data analytics may seem like a daunting task for health systems, but under the right leadership, it can drive better decision making.
An evolving factor within the CFO role is collaborating with other departments and understanding their needs. How can executives effectively communicate with other leaders to ensure resource allocation to high impact areas?
On this episode of HL Shorts, we hear from CFO and HealthLeaders Exchange member Bob Flannery, (UW Health) about the impact of data analytics on resource allocation.
Many providers have had it with the government plan, and dozens have already left it this year.
In the upcoming weeks the Senate Permanent Subcommittee on Investigations will release a report on Medicare Advantage following up on the concern with MA plans' prior authorization requirements, including the use of AI.
"Anybody following our hearings and public comments knows our findings will be very dramatic and powerful," Richard Blumenthal, a Democratic senator from Connecticut and chair of the subcommittee, said during a press conference on Oct. 2.
"What we have found is, essentially, there is no advantage for people in Medicare Advantage, all too often."
Last year, the committee sent letters to CVS Health, UnitedHealth and Humana to seek internal documents detailing how these payers managed claims, including their use of AI in the claims process. These payers, among others, have been accused of using AI to improperly deny care.
Recently MA plans have faced scrutiny from lawmakers over several issues, including prior authorization requirements, overpayments and misleading marketing.
As the tension around Medicare Advantage grows, CFOs are taking note not just of the current MA challenges, but also the ones that lie ahead.
According to Doug Watson, Allina Health, a CFO is at a huge disadvantage if they don’t understand how MA programs work at the insurer level.
Population Health & Medicare Advantage
HealthLeaders spoke with Rick Gundling, Senior VP for Content and Professional Practice at the Healthcare Finance Management Association (HFMA). Gundling says in today’s healthcare regulatory landscape, hospitals are going to have to figure out how to stay afloat with less.
“Medicare Advantage payments are not expanding, so you're trying to do this on a much tighter rope, and I think that causes a lot more pressure,” Gundling said.
Gundling also highlighted how these challenges will have greater effects on smaller rural health systems, and cost cutting strategies will need to be more aggressive.
“You're on a much tighter margin,” Gundling said. “You don't have the same financial resources.”
With a rapidly aging population, low birth rates, and Medicare Advantage reimbursement challenges, the healthcare environment has created a perfect storm for health systems and they will need to prepare for the intensive care of a senior population, including implementing different care strategies that focus on this population’s specific needs.
However, coupled with the reimbursement challenges, the industry has seen 27 providers ditch the plan this year so far. According to Gundling, the trend is leaving health systems with fewer options, turning hospitals into “de facto collection agencies.”
As CFOs search for long term solutions amid MA woes, Gundling says they will have to turn to Medicaid funding and look for efficiencies. Gundling says CFOs will need to ask themselves: “Should we narrow down the types of services that we're providing if we can't afford it?”
This will go beyond cost cutting but will involve strategic look at how health systems provide care and understanding the regulatory structure of insurance.
CFOs need a game plan for investing and adopting data analytics.
Adopting data analytics may seem like a daunting task for health systems, but it can drive better decision making, especially when it comes to reviewing large datasets and allocating resources.
CFOs and HealthLeaders Exchange members Pat Keel (CFO, St. Jude’s Children’s Research Hospital) and Bob Flannery (CFO, UW Health) shared what works for their health systems as they prioritize data and analytics.
The role of real-time data and analytics has evolved into a primary driver of informed decision-making for finance executives. With quick insights and operational overviews, CFOs must recognize the importance of adopting analytics to optimize outcomes for their organization.
Also be sure to check out the accompanying article here.
