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Publication: Healthcare Financial Management
Date published:
Language: English
PMID: 17804
ISSN: 07350732
Journal code: HFM

Now that the ink from President Obama's pen has dried on healthcare reform legislation, healthcare providers in the United States are taking a deep breath before making the changes necessary to adapt to the new realities of reform- and fewer dollars from Medicare and Medicaid.

However, providers must prepare now- by studying the healthcare reform law, understanding each provision's intent and implications, and devising action steps to address them- if they are to take advantage of the opportunities and ensure their organization's sustained success. Those that wait for final implementation language to be written before taking any meaningful action will, in all likelihood, end up on the outside looking in.

Reductions in Base DRG Payments

Under healthcare reform legislation, Medicare base diagnosis-related group (DRG) payments are dropping beginning this year. This change applies to all hospitals, regardless of whether they receive a value-based purchasing payment for the year.

Such reductions could be detrimental to providers, particularly because Medicaid and other insurance carriers may also reduce their payment rates. In many instances, Medicaid and commercial carrier programs that are DRG-based tend to mirror the Medicare program, at least in principle.

Providers should plan now for the impact. They should account for the reductions by negotiating with commercial carriers for contract renewals and implementing cost -containment measures.

Reductions in Market Basket Updates

Most Medicare providers, other than physicians, receive annual market basket payment updates based either on growth in the costs of goods and services or on the Consumer Price Index. Under healthcare reform, reductions in market basket updates for inpatient and outpatient services are directed at saving more than $150 billion over 10 years. For inpatient hospitals, reduction percentages will be 0.25 percent in FY10, o.3 percent in FY14,

o. 2 percent in FY15 and FY16, and 0.75 percent each FY17 through FY19. For outpatient services, the reduction percentages will be the same, but will apply on a calendar-year basis. Adjustments also will occur for other providers, including home healthcare agencies, inpatient psychiatric facilities, and ambulatory service providers.

The reductions in market basket updates may be partly offset by new annual productivity adjustments to reflect increased productivity in the U.S. economy, along with bonus payment offsets beginning in 3012 for certain providers based on specific economic indicators. In FY10, the productivity adjustments begin for inpatient and outpatient hospital services, inpatient psychiatric facilities, inpatient rehabilitation facilities, longterm care hospital services, and nursing homes. The adjustments start in FYi3 for hospice providers and in FYi 5 for home healthcare providers. In any particular year, the productivity adjustment will equal the current 10 -year moving average of changes in annual, economywide, private, nonfarm business productivity, as determined by the secretary of the U.S. Department of Health and Human Services (HHS).

Budgeting for the productivity adjustments will be difficult because measures for determining them are not yet known. However, providers can prepare for reductions in market basket updates now by containing costs and making sure their charge structures, billing, and collection are effective.

Maintaining stability and a healthy margin is key, particularly if the provider plans to enter capital markets to seek financing within the next few years. Any additional payments from productivity adjustments can be viewed as a bonus and applied to projects or initiatives that otherwise would have been put on hold due to lack of funding.

Reductions in OSH Payments

Disproportionate share hospital (DSH) programs under both Medicare and Medicaid are scheduled for substantial reductions: $21 billion for Medicare and $14 billion for Medicaid. The healthcare reform law assumes that DSH payments will become less critical as more people obtain coverage through some form of insurance and uncompensated care diminishes.

Beginning in FY14, Medicare DSH payments will be set at a level of 25 percent of what the DSH regulations would have otherwise indicated. Payments also will include an additional amount based on several factors, such as the percentage of U.S. citizens under 65 who are uninsured and the amount of uncompensated care provided by the particular hospital.

Also starting in FY14, the Medicaid DSH program will be reduced from 17.5 percent to 55 percent per year, on an increasing basis, based on the drop in the percentage of uncovered individuals within any particular state.

For many providers, Medicare and Medicaid DSH payments will remain important to maintaining healthy margins. Some providers may receive tens of millions of dollars in combined DSH reimbursement to help offset the cost of care for Medicaid and charity patients. But even for smaller providers that receive $1 million or less in DSH reimbursement, such payments are a key funding tool for operations and can mean the difference between positive and negative margins.

Providers will have several opportunities to minimize the impact of reductions in DSH payment. For example, the calculation of the Medicare DSH payment will still be determined using the regulatory language framed by the Centers for Medicare & Medicaid Services. The resulting amount will then be reduced to 25 percent. Providers should identify all appropriate Medicaid -eligible days that can be included in the calculation to make sure the base, to which the 25 percent is applied, is appropriate. Likewise, the Supplemental Security Income (SSI) component of the DSH calculation should be evaluated to make sure it is appropriate. Providers should challenge their patient admissions departments to capture all Medicaid-eligible and SSI -eligible patients within the system. Also, procedures should be in place to help patients apply for the Medicaid and SSI.

Providers also may be able to maximize Medicare and Medicaid DSH payments by evaluating the "capture" of charity care services. The revised methodology for payment will rely on some form of charity care service measures, either specific, state-specific, or national, depending on the particular calculation. Although providers may not be able to directly impact the national average, they can affect the state -specific and provider-specific components by properly identifying charity care services. Providers should focus on either enhancing current procedures or putting into place new procedures to effectively identify and report all charity care services provided.

Lessening the Impact of Lower Reimbursement

As healthcare reform is rolled out over the next few years, there will be numerous other opportunities for a hospital or health system to soften the potentially potent impact of lower payments. Following is an overview of steps an organization should consider taking.

Plan to take maximum advantage of incentive payments provided for in the reform legislation. The law establishes a new hospital value -based purchasing program under Medicare that, beginning in FY12, will provide incentive payments if hospitals meet certain HHS criteria. Initially, the program will cover heart attacks, heart failure, pneumonia, surgeries, patients' perception, and healthcare - associated infections.

Certain hospitals will be excluded from the program, including those that fail to report quality measures under the Reporting Hospital Quality Data for Annual Payment Update program and those cited by the Secretary of HHS for deficiencies posing immediate jeopardy to the health or safety of patients. Also, to participate in the program, hospitals must have a minimum number of patients with conditions related to the quality measures or meet a minimum number of quality standards.

To participate in the value-based purchasing program, hospitals should have an integrated team with representatives from operations, finance, legal, and IT. The team should analyze industryaccepted quality and efficiency measures, create baselines, and develop action plans to improve performance.

Hospitals that take action now will have a greater likelihood of being able to address any quality and efficiency issues proactively, and any necessary adjustments will likely be minimal and easier to address.

Evaluate and challenge financial processes and operational costs and the capabilities and efficiency of IT systems. Now more than ever, hospitals should ensure that their operations team is managing as efficiently as possible and actively seeking opportunities to decrease costs and increase productivity.

In today's challenging economic climate, many industries have already reduced costs or increased productivity substantially. The manufacturing industry, for instance, has created more efficient product now, from initiation to completion. Are there aspects of this process that could be applied to patient flow? In answering this question, the focus should be not so much on the obvious differences between products and patients, but more on the flow of each within the organization. Providers should look for ways to introduce efficiencies into the various aspects of patient flow that could reduce costs and increase patient satisfaction.

Pay attention to the basics of hospital management. Maintaining a strong command over day-to-day operations, productivity standards, and supply chain processes is vital. These management areas represent basic blocking and tackling, but they can be easy to neglect in the daily clamor of healthcare delivery.

An organization's board should encourage the CEO to designate an individual as the point person for ensuring that daily operational needs are being identified and met. Although the CEO and other members of management, as well as the board to a certain extent, will be dealing with the strategic implications of healthcare reform, the hospital will continue to operate- and will need to do so efficiently. Having someone dedicated to this task will minimize the disruption to the CEO and his or her focus on strategic decision making.

Supercharge the organization's ability to manage cash, charge structure, and charge capture, along with other key processes in the revenue cycle. In the midst of declining payments, managing these processes is essential to maintaining the health of an organization. Evaluating the effectiveness of the revenue cycle will be a critical concern. Are insurance carriers and individuals being held to the appropriate payment terms? Are updated payment terms being developed and introduced to carriers and individuals? Are collection procedures consistent and appropriate?

Challenge pricing to allow for comparability across all patients regardless of whether they have insurance. All services being provided on the nursing floors should be assessed. Are all services and supplies being captured and charged for? With the reductions in payments, all appropriate charges must be captured if all appropriate payments are to be received. The reductions in reimbursement will be difficult for an organization to control, but efficiencies within the revenue cycle and what is billed and collected can be controlled to minimize the effects.

An Ounce of Prevention

The payment changes brought on by healthcare reform create considerable risks that will challenge all providers. Having an integrated team of operations, finance, reimbursement, legal, and IT will give organizations a good start on addressing the changes. The team should have the support of the CEO and the board as it evaluates the various provisions of healthcare reform and develops and implements action steps not only now, but throughout the next several years as new language is written.

By taking carefully planned and executed steps to address the changes, hospitals and health systems can greatly enhance their ability to make a smooth transition to the new era in health care.

Author affiliation:

About the authors

Venson Wallin, Jr., CPA,

is a senior manager, Ernst & Young, LLP, Richmond, Va., and a member of HFMA's Virginia Chapter (

Lynne Parrott, FHFMA, CPA,

is a partner, Ernst & Young, LLP, Columbus, Ohio, and a member of HFMA's Central Ohio Chapter (

John Simon

is a principal, Ernst & Young, LLP, Pittsburgh, and a member of HFMA's Western Pennsylvania Chapter (

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