Post-Acute Outlook Post Debt Ceiling, Post Medicare Rate Adjustments, Etc.
OK, the title is a bit wordy and trust me, I could have included more “posts” but I think I got the point across. First, I’ll admit to having a crystal ball however, the picture I see is a bit like the first (and only) television set I remember having as a kid: Not in color, lines running vertically and horizontally, snow, and an antenna that required frequent manipulation and tin foil to get any kind of reception. And of course, there were only three channels available. The same today is true about my crystal ball on health policy and what to expect in the post-acute industry.
My crystal ball’s three channels are Medicare, Medicaid and the Economy. Reviewing each, here’s the programming I see for the fall lineup or if you prefer, the period post October 1 (fiscal year 2012) through early next year.
The Economy: The debt ceiling discussion and the actions taken by S&P and the Fed in the last couple of weeks are a reminder via a cold slap, of how mired in dysfunction Washington remains and how moribund the economy truly is. While technically not in a recession, the economy is not really growing either; a growth rate of less than 2% in GDP is like treading water. For unemployment to change, consumers to return and capital to re-enter the business investment side, GDP growth needs to be above 2% and ideally north of 4% for a sustained period. Unfortunately, in order for this to occur, fiscal policy in Washington needs to develop some semblance of coherency and consistency.
What I know from my economics training and background and my last twenty-five years plus in the healthcare industry boils down to some fairly simple concepts. These concepts are I believe, a solid framework for providers to use in terms of planning for the near future and even somewhat beyond.
- The U.S. debt level is fueled to a great degree by entitlement spending, less so by discretionary spending. If the prevailing wind is about debt reduction and balance in the federal budget (or getting closer to balance), two things must occur. First, spending constraint where spending primarily occurs, namely entitlements. Second, revenue increases in some fashion, namely taxes. The devil as we know it today, is how and where on both sides of the ledger (revenue and expenses). Spending reductions alone are insufficient, unless dramatic, to significantly lower the debt level or balance the budget; particularly in a period of near zero economic growth. Dramatic spending reductions are clearly unwise and potentially, deleterious to an industry sector (healthcare) that continues to provide steady employment. Similarly, for spending reductions on entitlements to truly have a positive impact and make sense, program reform must be at the forefront of “why” less spending is needed or warranted. Program reform, ala the health care reform bill which didn’t really reform Medicare or Medicaid but added new layers of entitlements, is far from the answer. For providers, there is no immediate or for that matter, longer-range future that doesn’t entail less spending on Medicare or Medicaid. As the only “trick” in Washington’s bag or the bags contained in the statehouses is rate cuts, anticipate and plan for the same.
- A lackluster, no growth economy with high unemployment levels fuels provider competition wars over paying patients. As fewer paying patients are available and/or fewer “good” paying patients are available, providers will compete for the same market share within and across the industry levels. What this means is that providers will seek to acquire market share within industry segments (home health, hospice, SNF, etc.) and across industry levels (hospitals seeking to maintain patient days versus referring to post-acute providers). The end result is more or similar levels of M&A activity, if capital remains available, and thus, consolidation that is driven primarily by market share motives.
- According to a recent healthcare expenditure outlook released by CMS, healthcare spending is projected to reach $4.6 trillion by the end of the decade, representing nearly 20% of GDP. The primary contributor to this projected level of growth is the Affordable Care Act, principally due to the expansion of Medicaid and the requirements for private insurance coverage (Medicaid growth of 20.3%). While CMS notes that Medicare spending may slow somewhat, this assumption is predicated upon the continuation of spending cuts and a 29.4% reduction in physician payment rates required under the current Sustainable Growth Rate (SGR) formula. Assuming, as has historically occurred, Congress evacuates the cuts called for under the SGR and as has been discussed, moves to a formula tying payment to the Medicare Economic Index, Medicare spending accelerates to a 6.6% growth rate (1.7% projected for 2012 with continuation of the SGR). Summarized, health spending is the two ton gorilla in the room and it will continue to have a heavy, significant influence on economic policy discussions at the federal level and beyond. Though I don’t agree with the recent rating action taken by S&P, it is impossible to ignore the consensus opinions of allof the rating agencies: Entitlement spending, namely driven by healthcare spending, is unsustainable at its present level with the present level of income support (taxation) and as long as the status quo remains fundamentally unchanged, the U.S. economy is not fundamentally stable.
- Current economic realities and the rating agencies actions and statements foreshadow a stormy, near term future for the healthcare industry. As is always the case, there will be winners and losers or more on-point, those more directly impacted and those less so. On the post-acute side, excluding reimbursement impacts, I’ve summarized my views on what I see in terms of economic impacts for the near term (below).
- The credit rating side will remain pessimistic for most of the industry “brick and mortar” providers. Moody’s, Fitch, et.al. will continue to have negative outlooks on CCRCs, SNFs, etc. primarily due to the economic realities of the housing market, investment markets, and reimbursement outlook. Within this group of brick and mortar providers, Assisted Living Facilities will fair the best as they are the least impacted by the housing market and for all intents and purposes, minimally impacted by reimbursement issues (save the providers that choose to play in the HCBS/Medicaid-waiver arena).
- The publicly traded companies (primarily SNFs but home health and LTACHs as well) will continue to see stock price suppression due to the unfavorable outlooks and credit downgrades provided by the rating agencies. This will occur regardless of the favorable earnings posted by some of the companies. Reimbursement trends (down) are the primary driver combined with the hard reality that Medicaid is in serious financial trouble, even more so going forward as enrollment jumps due to continued healthcare reform phase-in schedules.
- Capital market access will continue to be tight to inaccessible for some providers. Reimbursement, negative rating agency outlooks, lending/banking reform, above historic levels of failures/bankruptcies, etc. all continue and will remain as an overhang to the lending environment. Problems with potential continued stable to increasing funding levels at Fannie, HUD, etc. create additional credit negativity and tighter funding flow. Capital access, when available, will continue to have a credit premium attached, in-spite of low base rates. I expect to see continued development and demand for private equity participation.
- Given the above, financially driven mergers and acquisitions will remain somewhat higher as organizations seek to use the M&A arena to create financially stable partnerships and bigger or larger platforms from which to derive credit/capital access.
Medicare: The problems with Medicare are too deep and lengthy to rehash here and thus, I’ll move to brevity. Medicare is, as I have written before, horribly inefficient, bureaucratic, and inadequately funded to remain or be, viable. As a result, only two real scenarios exist today: Cut outlays or increase revenues. Arguably, a third that involves portions of each scenario is the most probable solution. Real reform is light-years away as the current and forseeable political future foretells no scenario that includes a Ryanesque option (Paul Ryan plan from the Republican Congressional Budget and/or Roadmap for America). Viewed in this light, the Medicare outlook for post-acute providers is as follows.
- For SNFs and Home Health Agencies, reimbursement levels are on the decline. The OIG for CMS and MedPac have each weighed-in that providers are being overpaid. Profit margins as a result of Medicare payments or attributable to Medicare, are deemed too high (mid to upper teens) and as such, the prevailing wind is payment or outlay reductions. The bright-side if such exists, and as I have written before, this “cutting” trend will impact some providers far more than others. The providers that have relied heavily and primarily on certain patient types for reimbursement gains will be more negatively impacted than providers with a more “balanced” book – a more diverse clinical case mix. The movement is toward a more balanced level and thus lower level, of reimbursement theoretically closer aligned with the actual clinical care needs of patients. Providers with more diverse revenue streams and more overall case-mix balance will not be as adversely impacted although, the Medicare revenue stream will be lower or less profitable.
- Hospice has remained relatively unharmed, principally due to its lower overall outlay from the program. It remains a less-costly level of care than other institutional alternatives. A note of caution here is important. While rates have not been cut, program reform is occurring on the fringes and I suspect a wholesale re-design of the Medicare Hospice benefit is forthcoming. In such a fashion, payment reform rather than rate reform or reduction will occur. The obvious trend is to restructure payments away from a reward for lengthier stays and to require more precise determinations of terminality, tied to a tighter or imminent expectation of death. OIG and MedPac have issued a number of papers and memos regarding the relationships between Hospice and SNFs that correlate to longer stays for certain diagnoses. Summarized, payment reductions via rate are less of an issue but utilization reform is forthcoming via additional regulation designed to reduce overall payments to Hospices or as CMS would say, to more closely align payments to the real necessity of care for qualified, terminally ill patients. Without question, the largest impact (negative) going forward will be on hospices that have sizable revenue flows tied to nursing home patients.
- LTACHs are in a similar reimbursement boat as hospice; small overall outlay within the program and for the past few years, minimal expenditure growth. The industry is from a cost perspective, fundamentally flat. What will be interesting to watch is whether under certain aspects of healthcare reform, this niche’ takes on a growth spurt. Bundled payments, ACOs (Accountable Care Organizations), and shifts in SNF reimbursement away from higher acuity, rehab patients may lead toward more utilization of the LTACH product. This being said, the prevailing Medicare reimbursement profile is fundamentally flat. Given a bit more creativity on the part of the LTACH provider community, this segment may be poised for some growth, although not directly via increasing payments.
- The most uncertainty lies on the Part B provider side, particularly providers that are reimbursement “connected” to the Physician Fee Schedule (therapy for example). As of today, the required change to the fee schedule as a result of the Sustainable Growth Rate formula is a fee cut of 29.4%. It is quite possible, due to the current negative or flat growth trajectory of the economy, and sans any change in the law, for fees to be cut again in 2013, barring Congressional action. Most acutely impacted in this scenario are physicians and predominantly, primary care physicians. I have yet to see a Congress that fails to intercede and repair cuts this draconian but the political times and the budget deficit debates are markedly different than during any prior period. Critical to whether this cut or some level less than this is implemented is the issue of access, already a hot topic for physicians. Physicians, particularly primary care specialists, are already in short-supply nationally, woefully short in certain markets. If cuts of this magnitude or perhaps any magnitude roll forward, I suspect many physicians will curtail or close their practice to new Medicare patients. On the other side represented by non-physician providers, Part B cuts of this magnitude will no doubt limit service and access. Fixing the formula and the law has been difficult for Congress as the dollar implications are substantial. I foresee another round of patches, etc., occurring close to the “cut” date, especially since 2012 is an election year.
Medicaid: For as many reasons as Medicare is a mess, Medicaid is as well, though magnified by a factor of two or more. Medicaid’s biggest problem now is rapid growing enrollment, primarily due to high unemployment and upcoming federal eligibility changes mandated via the Accountable Care Act (healthcare reform). Given Medicaid’s current funding structure, this issue poses huge problems in flat to negative growth economies. States simply due not have the revenue to create a higher matching threshold or level, necessary to achieve more federal dollars. In July, the enhanced federal match provided via the Recovery Act (stimulus) sunsetted leaving states with huge structural deficits and the prospect of deficit growth due to increasing enrollment. In virtually every state, rate cuts have been discussed and in half-again as many, implemented. States continue to move to the federal government seeking relief from required or imputed service provision requirements and/or relief from eligibility requirements (waivers). The inherent difficulty with balancing Medicaid funding is that the same is directly tied to stable to growing state revenues and a clear picture of population risk or need. Changing (increasing) populations often present adverse-risk scenarios, creating higher than normative utilization. For obvious reasons, lower than market reimbursement levels, access is a big issue. Not all providers willingly and openly desire Medicaid patients and those that do are not on the increase. Without additional funding assistance at a level beyond what is called for in the Accountable Care Act, regulatory relief and an improving economy, the reimbursement prospects under Medicaid are all bleak.
- In the post-acute environment, the biggest impact of this continued ugly Medicaid scenario will fall directly on SNFs. Matching prospective or real Medicaid cuts with Medicare cuts forthcoming is a true “negative” Perfect Storm. For most SNFs, Medicaid is the largest payer source and until recent, Medicare was used as a make-up funding source for Medicaid reimbursement shortfalls. Adding fuel to an already smoldering fire, the suppressed earnings available to seniors, no growth in Social Security payments, and a stock market that presently produces only a flat return trajectory limits the pool of private paying and privately insured patients. In short, there is no additional room on the revenue side to make-up an SNFs Medicaid losses. For SNFs, only the few that have limited leverage, high occupancy, an extremely balanced payer mix, and stable staffing will weather the Medicaid near term future; a future of no rate increases or likely cuts.
- While not a huge segment of the post-acute environment, HCBs providers will feel the Medicaid pinch as well. As a result of needing to reign in Medicaid spending, states are rapidly curtailing their funding and payment levels for HCBs programs. While most states still claim that HCBs expansion would help soften their Medicaid deficit, states that bit a big bullet in this arena early on (California for one), now realize that waiver programs produce massive new levels of beneficiaries who want and need access to community support services. SNF access was already somewhat limited as the industry has truly shrunk but the demand for services in this growing eligibility pool has expanded. Funding these services is becoming a real problem for states and as such, support payments will remain flat, decline and program growth will be capped.
- Home Health will also feel a bite from declining Medicaid funding although its Medicaid utilization levels are modest at best. For Home Health, Medicare is the big dog and Medicaid a minor element. Staffing costs are on the rise for Home Health as the competition for home health aides in many markets is brutal or getting rough. Competition, even in a high unemployment environment, for certain categories of employees, raises wages and benefit costs. Staffing is the largest expense for a home health agency and as such, a scenario with rising employment costs and flat to declining reimbursement negatively impacts margins. I don’t see this scenario changing any time soon.
Concluding, this may be one of my most depressing posts, if for no other reason than the current external view is dreary and nothing foreshadows improving weather. For brick and mortar providers, capital access is critical, especially for SNFs who have as a profile, some of the oldest physical plants. SNFs are capital-intensive operations and without an ability to fluidly and reasonably, access modest cost funds, deferred maintenance (already high) will increase. With so much revenue tied to reimbursement and a reimbursement outlook that is negative, it is unlikely that capital will flood back to the post-acute industry. Critically important to the viability of this sector is an improving economy combined with regulatory reform that, if reimbursement remains flat, allows providers to become truly more efficient. In short, increased program revenues under Medicare and Medicaid due to economic growth, will ease a lot of the immediate crunch and perhaps, buy sufficient time for absolutely critical, health policy reform.
CMS Announces Medicare SNF Cuts: The Implication
On Friday, CMS released its Final Rule regarding FY 2012 SNF PPS reimbursement. The Final Rule implements a reduction or “cut” in SNF PPS payments equal to 11.1% or $3.87 billion. The 11.1% reduction is based on 2011 rates and spending/outlays. In their proposed final rule published in May, CMS alluded to the real possibility that it would seek to reduce SNF payments via some element of program/technical correction as well as rate reductions. Their reasoning stemmed from claim and resulting outlay experience that was significantly greater in dollar amounts than originally forecasted when MDS 3.0 and RUGs IV was devised and implemented. Summarized, CMS had intended the conversion from RUGs III to RUGs IV to be expenditure neutral for Medicare. Per recent figures and analysis from the OIG, expenditures under RUGs IV are running 16% higher than the “neutral” target. For more information, see my recent post on this same topic at http://wp.me/ptUlY-8Q .
Given that the text of the Final Rule won’t be published until August 8 and as of Friday, CMS was still working on recalibrating the CMIs under RUGs IV, it isn’t possible to provide direct analysis of the actual rate scenario for FY 2012. What I do know however, is that the “bark” in this case is definitely worse than the “bite”. While overall spending is set for reduction, this doesn’t necessarily correlate directly to rate. Briefly, here’s why:
- CMS has factored into their projections of lower spending levels, a series of technical corrections such as changes in how minutes are allocated among participants in group therapy. This change closes a loophole or as I have said, an area of oversight in the transition from III to IV. Going forward, group therapy minutes must be divided in equal increments among all participants (e.g., one hour of therapy provided to a group of four equals four 15 minute therapy sessions; not an hour allocated to each participant as the system presently allows). Additionally, CMS is tightening the Change of Therapy assessment requirements to more specifically, capture any changes in a patient’s therapy needs that would preclude re-classification to a different (presumably lower) RUG category. This change is separate from any Change of Condition assessment.
- Recalibration of RUGs categories via adjustment to the CMIs will occur based-off of 2011 utilization and projections. The net result is change in category payments that will remain higher than experienced under RUGs III levels. In short, the net “cut” will not be 11% across the board. SNFs need to be astute as to how the CMIs work and translate into payments under each RUG. Recalibration is designed to restore parity to the overall expenditure profile. In order for CMS to do this, it will overlay utilization trends and patterns across the CMI continuum and adjust rates within the scope of its technical corrections, to forecast an overall program expenditure target that agrees (theoretically) with its original intentions in converting to RUGs IV. In short, this doesn’t mean an 11% direct rate reduction. If CMS were to impose and 11% cut to each category, overall outlays would reduce by more than 30% – that is not the target.
- Based on what I see from most providers with a fairly balanced Medicare book of business (mix of clinical/nursing and rehab cases on par with 40% clinical, 60% therapy), the net to their per diem will be flat to a reduction of 2 to 5%. This means that a facility with an average per diem today of $450 per day will see a 2012 per diem between $425 and $450 per day. Providers that took advantage of the group therapy option to escalate or maintain their high rehab payments under IV will likely see a greater revenue shock. In virtually all cases, providers that have a fairly balanced Medicare book should see a 2012 Medicare per diem that falls 6% to 8% higher than their FY 2010 per diem.
I will have a better idea of the actual impact when I see the final CMIs and resulting RUGs IV rates. In the meantime and until the Final Rule and rates are implemented on 10/1 of this year, I don’t see much in the way of political intercession to change (positively) the rate and spending scenario. Spending at the Federal level is a toxic subject and even with a potential debt ceiling deal looming, the microscope will remain directly on all areas of federal spending. Entitlement spending (Medicare, Medicaid, and Social Security) is rising substantially faster than discretionary or military spending and logically, presents a big target for deficit hawks. Logically, it will be difficult to gain the support of any Congressional industry sympathisers to push more money back into a system that most acknowledge, was unintentionally overpaying for care. Consider FY 2011 a bit of a windfall and the changes forthcoming, pretty darn modest; all things being equal.
Medicare SNF Cuts: Fact, Fiction, Probability
In early May, CMS released its proposed rule for FY 2012 concerning Medicare PPS reimbursement for SNFs. As most followers of the industry from investors, to operators to developers know by now, CMS dropped a “bomb” to the industry indicating bluntly, a warning of a parity adjustment (reimbursement or payment reduction) of 11.3% or $3.94 billion. In typical convoluted CMS fashion, the logic behind this foreboding news is scattered; an analysis of the agency’s inability to adequately anticipate provider behavior, utilization patterns, and to appropriately create a reimbursement mechanism that ties the cost of care required by current SNF patients with the costs and delivery systems necessary to provide the care.
Initially, the interpretation from many inside the industry was that CMS was overreacting, using only one-quarter’s worth of claims data to substantiate a “sky is falling” conclusion. More recently, six month’s worth of claims data became available and analysis proved the trend correct and even a shade worse or better stated, more prevalent than originally assumed. In short, the implementation of MDS 3.0 and RUGs IV missed the budget mark (budget or expenditure neutral) by $2.1 billion or 16%.
In the last week to ten days, the OIG (Office of Inspector General) for CMS stepped into the debate, stating its opinion that the overpayments must be stopped immediately. Interpreting the OIG’s qualification of “immediately”, the timeframe at issue is next fiscal year. In essence, the core of the problem continues to be the structural flaws within the RUGs system predominantly, that disproportionately pays more for rehabilitation therapy than for other primary care modalities. A major intent of CMS during the switch from RUGs III to IV was a reallocation of the incentives (higher payments) from therapy to other resident care requirements. Suffice to state, the methodology failed. Below is a simple illustration of how on a pure rate basis, the RUGs III to IV therapy categories compare.
| Table 1: Average Amount That Medicare Pays SNFs per Diem for Each Level of Therapy, FYs 2010 and 2011 | ||||
| Level of Therapy | Number of Therapy Minutes Provided During Assessment Period | Average per Diem Payment FY 2010 | Average per Diem Payment FY 2011 | Percentage Increase From FY 2010 toFY 2011 |
| Low | 45 to 149 | $288 | $430 | 49% |
| Medium | 150 to 324 | $369 | $488 | 32% |
| High | 325 to 499 | $364 | $532 | 46% |
| Very high | 500 to 719 | $418 | $594 | 42% |
| Ultra high | 720 or more | $528 | $699 | 32% |
| Source: OIG analysis of unadjusted per diem urban rates for FYs 2010 and 2011. See 74 Fed. Reg. 40288, 40298–40299 (Aug. 11, 2009) and 75 Fed. Reg. 42886, 42894–42895 (Jul. 22, 2010). | ||||
Reviewed on-the-face, it is logical to see how CMS could miss the targeted expenditure mark by the margin it has, even in-spite of the “methodology” changes that occurred in the conversion from 2.0 to 3.0 and RUGs III to IV. Providers, being logical creatures of certain habits, moved accordingly to grab the payments at the highest attainable levels or in short, fulfilled the economic axiom of, “what gets rewarded (paid for) gets done”. The expectation on the part of CMS that utilization trends would fall-off from the higher paying therapy categories, necessitating a higher re-balanced rate to negate a revenue “shock” to the SNFs was poorly thought through.
Quickly reviewing “what” occurred to produce such a variance from assumption to actual is easy. Getting to the core takes a bit more thought and digging. In summary fashion; CMS assumed that by restructuring how therapy minutes were calculated for concurrent therapy (therapy provided to two individuals) from a two-equals one basis to an equal half, would reduce the ability of providers to meet the higher per minute category qualifications, necessitating more one to one therapy sessions (the previous concurrent therapy rules allowed providers to have two people in the same therapy session with the total session time allocated to both participants equally). Similarly, CMS assumed that ending the look-back provision to establish reference dates and care requirements would more accurately stage the resident’s acuity and care needs to the point of admission (or proximally forward from admission) to the SNF. Additional tightening of the extensive services qualifier rules would also, as assumed, reduce higher RUG scores and thus, payments. Of these changes and assumptions, only the look-back period changes combined with the changes in qualification for extensive services provided any material classification changes (lower payments) though such changes were far less in total dollars than the dollar increase CMS imputed on the corresponding RUGs III to RUGs IV therapy payments. Providers however, merely switched to the remaining “open ground”, providing more therapy on an individual basis and most noticeably, on a group basis. On a group basis, minutes are counted collectively, not split in equal parts among the participants – a provision CMS did not change from RUGs III to RUGs IV. While the modifications made to the extensive services qualifier and the look-back period provision did impact providers, CMS completely misunderstood the application and prevalence within the provider community of these two provisions under RUGs III and as played-out, found that providers could still code residents into higher payment groups/categories in spite of the changes.
To understand what might happen next, one needs to look at how this mess occurred. As I’ve typically found, the answer lies in both camps; providers and CMS. In my recent work, its clear that many providers don’t understand the transition from RUGs III to RUGs IV and as I have looked at “oodles” of Medicare claims, I dare say a large number are still frought with ”up-coding” and questionable therapy-minute counting practices. This is not to say that the whole of the industry has behaved in this fashion but arguably, and CMS understands this as do both major trade associations, providers have not totally changed their business models to reflect the changes in payment systems. One needs only to look at how claims trended under RUGs III and how they now are trending under RUGs IV. The trend is too consistent to support an assumption of SNFs; a) staffing substantially more therapy personnel to capture the minute requirements via individual treatment or, b) SNFs moved a sizable share of their Medicare case-load into group therapy. The latter, while I’m certain it has occurred on a broad basis as the OIG report suggests, is problematic from a care delivery perspective for a large range of diagnoses that truly require individual therapy sessions.
CMS continues to remain fundamentally inept at developing reimbursement systems that provide adequate payment for the care and services required by SNF residents. I have yet to see, across my 25 years in the industry, any period or any system devised by CMS that didn’t under-support or over-support, one type or category of patient versus others. It is also illogical that CMS cannot develop the audit tools and claims management infrastructure that both educates providers and pre-emptively kicks-back claims clearly evidencing up-coding. I am consistently amazed at “what” gets paid and for how long. In short, CMS is apparently willing to consistently miss the mark, make wholesale adjustments and reallocation of dollars, only to over-correct past inconsistencies while producing new ones. Such will not doubt occur with this latest blunder.
While I won’t claim to have a crystal ball in terms of forecasting “what happens” next, experience and ongoing dialogue with individuals on Capital Hill and within CMS gives me some decent insights. With debt ceiling/deficit reduction talks mired in politics, it is unlikely any substantial cuts to entitlement spending are forthcoming. Senate Democrats and the President are sufficiently dug-in on cutting Medicare spending by any measurable amount thus the target on this issue (Medicare SNF spending) has moved away from the current political fracas. The remaining Washington impetus for cutting SNF reimbursement resides within CMS. In spite of the OIG’s report, enacting cuts of the magnitude suggested is a political issue. CMS can propose all the spending cuts its desires but Congress has the final say. Rarely if ever, although given today’s climate an exception may be possible, has Congress sustained reimbursement cuts of this magnitude. Synthesized, my view of what happens next, based on what I know to date, is:
- Providers and their trade association are willing to capitulate to a modest adjustment in the therapy categories. This symbolic give-back will play well politically. Net of a market-basket/inflation update, cuts of 2% to 4% are possible in a “cut scenario”.
- In a scenario that involves no real cuts, rates will be flat. CMS will institute additional refinements and perhaps, even re-calibrate or fine tune payments by RUGs category, moving dollars within the RUGs system, without reducing payments. In this scenario, the attempt on the part of CMS to is to “patch the potholes” and let the system itself reduce payments via tightening the requirements and re-allocating dollars within the RUGs categories.
- A most probable scenario involves, as is typical, a bit of both. CMS will cut the therapy rates using some language about re-basing. At the same time, a series of corrections will be made regarding the counting of minutes for group therapy, assessment windows, etc. Overall, payments to SNFs across all RUGs IV categories will be flat or targeted as a reduction equaling 2-4%. The pull-back on the therapy RUGs rates could be as steep as 8% to 10%. Even at this level, the remaining rate will be higher than the former RUG III rate.
Accountable Care Organizations: A Post-Acute Perspective
Suffice to say, I am behind in getting this post “out”. My best intentions of a month or so ago were quickly dashed by other more pressing commitments. Nonetheless, I did read the proposed regulations as produced by the Department of Health and Human Services/CMS on April 7 and worked through a stack of research on the subject of Accountable Care Organizations; loosely coined by me, the Good, the Bad and the Ugly.
In the purest of definitions, easily lost within the DHHS/CMS proposed regulations, Accountable Care Organizations (ACO) are about improving patient care outcomes and satisfaction while reducing cost or expenditures for care. At the core of the premise about “why” and “how” an ACO would work in achieving better care, higher satisfaction and lower costs are three key assumptions or “truisms”.
- Best practices via algorithms and care pathways exist in sufficient supply, tested and proven, to reduce the variability that drives higher cost and lower satisfaction for a large and growing number of common patient care issues.
- Satisfaction is directly correlated to increased patient knowledge and communication, reduced bureaucracy at the provider level (fewer redundant steps) and better outcomes, more directly delivered and/or attained.
- Providers, properly incentivized to focus on outcomes and satisfaction will gravitate toward any and all steps and measures that improve outcomes and satisfaction and resultingly, deliver better and cheaper (less costly) care. The key is developing the right level of incentives that drive provider behavior in the desired direction.
For years, I’ve written and lectured repeatedly that bending the cost curve or lowering the overall costs of health care in the U.S. system must first begin at the core of the issue; the system of reward. A simple economic axiom defines this best; “what gets rewarded gets done”. Fundamentally, the U.S. health system has rewarded in the form of payment, procedures, pills, tests, and surgical (or surgical-like) interventions at the expense of prevention and wellness/care management. In spite of an enormous and growing body of evidence that much of the escalation of costs (steepening of the “curve”) in the U.S. is driven by chronic conditions poorly managed and lacking in early detection and prevention strategies, funding has remained skewed toward treatment practices that are technical and predominantly surgical or interventional in nature. The result is poor to minimal access for Type II diabetics (as an example) to integrated chronic care programs designed to stave-off emergency room visits, loss of limbs, peripheral vascular disease, loss of vision, etc. while access to the latest imaging technology, interventional cardiac programs and surgery ranges from good to stellar and even drastically redundant in some markets.
Knowing the above and understanding that a fluid and flourishing economy has been built around this system, the belief or premise that one can design and make work effectively, a paradigm shift such as is intended with ACOs is curious at best. Suffice to say that while I know such a premise makes sense (Accountable Care Organizations), I’m less than certain from my read of the proposed regulations and knowledge of the current system, how incentive realignment will work to first, bend the “cost” curve and second, create a necessary body of invested, at-risk stakeholders willing to place their economic futures (such that they are) in the hands of a governmental half-and-half, moving payment system. Moreover, the initial investment capital is clearly all provider capital placed at first dollar risk and the shared-savings return proposed, provides a poor return on the capital invested. This is particularly true for the post-acute elements critical in the formation of a truly functional ACO.
For an ACO at is primordial core to work (achieve the desired outcomes), hospital utilization and the most expensive clinical utilization must be diminished. Diminution of such care is achieved primarily, via three methods/interventions/actions.
- Primary care available and accessible enough to create consistent early detection and provide low-cost interventions that arrest a progressing disease-state prior to an acute event that ordinarily would cause hospitalization. In the case of Type II diabetics for example, education and monitoring of insulin levels and Ha1c to create optimal therapy and patient knowledge and disease management efficacy that delays and avoids, hospitalization and interventions on a crisis basis. By simply deferring and/or avoiding, undetected and untreated peripheral leg and foot ulcers, thousands upon thousands of days of hospitalizations for amputations and/or intravenous therapy for infections can be avoided – annually.
- Delivering care in lower-cost settings or alternative settings, non-hospital based, nets enormous savings. As payment today is skewed toward hospitalization and hospital-based care, patients disproportionately receive care, tests, procedures in hospital settings. A primary example of how skewed the system has been is the artificial and unnecessary three-day prior hospital stay qualifier in order to receive Medicare coverage in a nursing home. Equally as non-sensical are the present Part B outpatient therapy caps for any non-hospital based and provided therapy. I could literally list hundreds of payment and care provision inequities but my point is made.
- True integration and data sharing among providers must occur and each provider must bear an incremental reward benefit and/or downside risk. If providers cannot access data fluidly on a patient population and share best practices encompassing steerage to the most cost-effective, best-outcome sources for care without fear of system reprisal, holes and gaps to effective care delivery at the best price/cost will remain too plentiful.
Taking the above into account, two major obstacles still remain in terms of successful development of an ACO. The first is patients, now indoctrinated into a system where pills, brands, certain tests, and other non-proven care modalities are expected, nay demanded. Simultaneous, this same group is famous for varying elements of non-compliance born out of a belief (though untrue) that most anything has a “medical fix” component. All the best practices and lower-cost alternative settings can’t overcome patient behavior unless and until, patients are part of the risk-benefit system.
The second obstacle, touched on earlier, is the system of reward or the model of risk-benefit. The ACO core model is one of risk-sharing; gains in the form of varying levels of saving returned to the providers willing to bear “risk” in the form of higher than desired utilization, costs, etc., or outcomes including satisfaction that are below certain pre-determined and desirable levels. The inherent fallacy within this concept is multifaceted to say the least.
- As indicated, patients are a true wild-card; both in terms of behavior and health status. As the patient remains effectively detached from the risk-benefit equation, behavior is left to chance. Additionally, health status going into the population on behalf of patients is effectively unknown. In short, a “ticking coronary time-bomb” may be present (or similarly present) creating a cost and outcome explosion that defeats the opportunity of an ACO to truly deliver effective savings. The inability in the present regulations to set a path for securitizing against this risk and for truly integrating patients into the risk-reward equation (some element of cost-share broader than present) makes the attainment of long-term savings at a significant level, illusory.
- For many providers (or perhaps all) the up-front investments in terms of technology and service accessibility are steep. This is dramatically so for post-acute providers as the Federal Government refuses to offer any resources for technology investment – not the case with physicians and hospitals. This is fundamentally illogical as a major element to delivering true savings is via the full use of alternative care settings – lower cost options for care such as therapy/rehabilitation, chronic disease clinics, etc. What occurs as a result of this enormous “up front” investment is a return on investment profile that is marginal to poor; in most cases (and in all that I have analyzed) below the organization’s cost of capital. Additionally, the prospective savings return is not fluid or rapid leaving providers with a self-funding equation of producing results, subsidization of investment and cash flow, netting a return that is below any other reasonable and readily available alternatives.
- The sharing of incentives is impractically aligned such that the largest sources of current costs stand to lose the most while the post-acute elements stand to gain the least, though as the above occurs, the distribution is far from quid-pro-quo. Briefly: ACOs begin fundamentally with physician groups and hospitals. To fully achieve functionality and to meet the objective of better care provided cheaper, other providers core to the care continuum must be brought into the ACO. Hospitals primarily have invested heavily in the current system of fee-for-service reimbursement, building environments that return the most on investment when heavily utilized on an in-patient and procedural basis. It is illogical to assume that for most hospitals, voluntarily steering utilization elsewhere to lower cost settings or abating certain levels of utilization altogether in exchange for “shared savings” spread across the ACO players is a winning proposition. On a similar plane, the same is true for physician specialists. Interventional cardiologists will be hard-pressed to forego any elements of business financially and in honest reflection, Medicare-age patients are a major (if not the primary) source of patients. For post-acute providers, utilization should likely increase as their services are more cost-effective but as established, these providers are bit players in the ACO game and while perhaps the most effective element in controlling costs and utilization, not proportionately rewarded. Their participation for example, is all down-streamed through the ACO.
Forming a post-acute synopsis of the current ACO landscape is as simple as this: Play at your own risk. There is little for most post-acute providers to gain within the present ACO framework, financially. All gains are more market and patient-flow related. The investments in terms of technology are steep and unsupported via government funding. Similarly, the net margin attainable via an ACO that is at “risk” or participating in shared savings is less than adequate to support a return on capital investment scenario that justifies the up-front costs. Personally, I would treat ACO participation at this stage as exploratory only; a devotion of only a small investment on-par and an expectation that minimal financial gain will occur, if any.
It stands to reason that some provider elements within the post-acute industry will stand to benefit better than others if for no other reason that they are already aligned from a business perspective to do so. LTACHs could reap significant market share if they can pose as legitimate first-admit options to an acute hospital. SNFs that are and have been, operating as true transitional care providers with in-house, integrated services could become major partner players within the ACO landscape. Key however to an SNF’s viability is some reform from three-day prior hospitalization requirements and relaxation/elimination of the Part B therapy caps. Home health agencies that already have an infrastructure for electronic charting, referrals and a strong physician partnerships and hospital referral/discharge relationships are the most logical post-acute, ACO partners. The ability of a home health agency to manage a more complicated patient directly discharged from a hospital as well as bring into the home, core chronic disease management services adjunct to physician care is an ACO necessity. As today and for the foreseeable future, ACO realization or not, Hospice will remain only a bit player, if that. While Hospice is an effective alternative to more costly inpatient care when continued inpatient care and/or other procedural steps are unwarranted, getting patients, their families/significant others, and the physician community in general to openly embrace Hospice early and frequently is not going to occur simply because of an ACO. Hospice, as I have written before, is a niche’ in the post-acute continuum and nothing within current trends suggest to me that the U.S. health system and patient expectations are moving to a deeper appreciation for or understanding of, the role hospice can and should play.
When and Why Projects Go Bad: Traps and Pitfalls to Avoid
Creeping slowly out of a period of recession where financing was nearly impossible to get, providers, operators and developers are starting to look favorably at new development and refreshment of existing properties and infrastructure. Though capital is less than free flowing, money is entering back into the long-term care and seniors housing world fluidly enough that projects once parked in the “back of the lot” are edging closer to the front. Having watched significant failures occur over the past three to four years and/or counseled organizations through some of the rough times, now is an appropriate time to pass along some “learnings” from the failures and struggles that I have seen. Importantly, as the industry and the methods for financing have fundamentally and permanently changed, so have the markers for assuring project (new, redevelopment and remodeling) success.
As a primer or if you prefer place to start, there are three basic elements critical to project (new construction or renovation) success: Market demand, cash flow margins, and project cost. Too many new projects failed to meet occupancy projections simply by misunderstanding market demand dynamics (market demand is not demography). While not universal or sacred to only non-profits, misunderstanding regarding cash flow margins is a common failure item. For example, I don’t know how many projects I’ve looked at, especially on the substantial remodeling side, that incorporated no expectation of new revenue or improved operating margins (either this element was missed or worse, not present/expected as a result of the project). Finally, project cost should always be less a function of funds available but more a function of payback. I’ve seen too many projects that suffer from “scope creep” simply because funds, either via debt or equity, were available. Being able to afford something doesn’t necessarily make it “affordable”, especially when the long range economics of a project are critically analyzed.
Avoiding the common traps, pitfalls, etc. that lead to project failure or in some cases, poor performance, is a function of being clear and knowledgeable about the core feasibility requirements. Being clear up front means not just “knowing or providing lip-service to” but actually investigating and working through each element.
- Market Demand: The presence of age and income qualified individuals is not demand; it is supply. The supply of potential customers only assures that potentially, a large enough universe of people exists that meet the broadest elements of “potential consumers”. Recognition that only so many of this universe will be actual consumers of any long-term care or seniors housing product at a given time is critical to developing the initial framework for market demand. For example, less than 10% of all seniors reside at a nursing home at any given time, whether for short or long-term care purposes. If occupancy rates within the existing supply of facilities are average to low, building more units within such a market is a big step toward potential failure. Simply adding units, even if they are different in size, amenities, etc., doesn’t change the core demand for the product. Success of such a project in such a market is thus fundamentally hinged on “taking existing customers” from an established facility; a risky proposition at best. Even in markets with good demographics (customer supply) and minimal to average supplies of like products doesn’t guarantee that demand is present. This is particularly true for seniors housing where demand is very price elastic. The same is true, though not as directly, for SNFs when demand is correlated to payer source (e.g., a private-pay only facility in a market with primarily a Medicaid demand). Without factoring in price and overall costs plus location and unit features and benefits, demand cannot be truly gauged or determined. The mere presence of a suitable supply of age and income qualified individuals doesn’t guarantee any occupancy of a new project, save that the new project at a given price, given location, with given features and benefits fits an unfulfilled need or want within the universe (supply) of qualified customers. Summarily, no matter how much money someone has or how age appropriate someone is, if that person (or persons) does not possess or find a need for a given product at a given price with desired features and benefits, the mere presence of the product within the market will not promote consumption (or occupancy).
- Financial Feasibility: Interconnected with a fundamental understanding of demand is pricing. Pricing, as I have written before, has two key components. The first is the derivation of price based on the formula of Fixed Costs + Variable Costs + Margin = Price. The second component is strategic, tied to market. In any given market, the supply of like products and programs will dictate the amount of elasticity that exists across the pricing continuum. No longer is “me too”or matching the market a viable strategy for pricing. This said, true financial feasibility is mostly tied to the first pricing component. Where projects tend to struggle is when three core elements are misinterpreted or, over (or in some cases under) estimated. The first core element is fixed cost. Feasibility which doesn’t properly capture the key fixed cost elements of debt, debt repayment and depreciation has the potential for quickly turning a project from possible to impractical. Specifically, I recommend the following approach to structuring the fixed cost portion of the feasibility.
- Debt assumptions, especially those involving floating rate scenarios, need to be conservative and reflective of the true interest rate risk across as lengthy a horizon as possible. Fixed rate scenarios are ideal but terms for the fixed period are generally less than the amortization schedule for the debt.
- Following the point above, debt repayment on a schedule that is more aggressive than the amortization schedule is a must. New projects or substantial remodeling projects carry the mindset that depreciation is a non-event in the initial years; minimal cash outlays. While this may be true, depreciation picks-up rather quickly in terms of cash needs by year 5 and becomes more acute by year 10. By year 15, substantial repairs and upgrades to major elements are a common theme. Carrying debt across a normative amortization cycle without more aggressive repayment means that by year 10, the project is being substantially replaced by the need for upgrades and repairs, all while the first phase is still being paid for at a premium cost (interest on the original debt). I have seen all too often, providers struggle with competing cash needs; debt service vs. capital maintenance. Once maintenance becomes deferred, the ability to compete successfully is hampered. Cardinal rule here: Work the feasibility numbers in terms of pricing to include a debt repayment plan no longer than fifteen years, regardless of the amortization terms, and incorporate a laddered assumption of cash needed (reserves) to replace equipment, upgrade units, etc. within the fixed costs assumptions (cash funding depreciation).
- Margin is the devil in the details. Too much fixed cost and/or too much variable cost eats at needed margins or stresses occupancy assumptions to unrealistic and/or unsustainable levels. Ideally, a forty percent or higher “top line” margin is the target for Assisted Living and Independent Living (marginally higher for Independent). When debt and depreciation (cash funded) is added below the line at stabilized occupancy, the project can create sustainable cash earnings/returns on equity. Lower leverage (debt) levels and lower interest costs can aid in thinning top line margin levels but remember, equity contributions instead of debt still bear a cost in the form of opportunity cost. Repayment of equity infusions need to be factored with an opportunity cost (interest factor). Depending on current interest rate environments, the arbitrage on equity cash can be positive (debt cost is higher) or negative (debt cost is lower). Not always does the provider get to pick the amount of equity participation required as lenders today are far pickier on leverage levels and loan to value relationships.
- Project Costs: Project costs should always be built around the assumption of revenue required to substantiate the project. Renovations that do not incorporate opportunities for new revenue or enhanced revenue (new product/service lines, better payer mix, etc.) will almost exclusively be paid-back through depreciation funding and life cycle cost assumptions. In short, no new money, the project scope needs to be tight. Rarely have I ever seen the purported “efficiencies” used in renovation justifications materialize to the extent that the gains justified the project scope. I also am always wary of renovations that incorporate enhanced or improved occupancy levels. Again, rarely does the cost justify the outcome and almost always, the adage of “we are not marketable” is more a function of other organizational issues (bad reputation, pricing, average care, etc.) than it is a justification for an expensive renovation project. In new projects/new development, building efficiency is the key to adequate payback. Allocating too much space to common areas and non-revenue producing areas increases project costs in terms of building and furnishing (not to mention heating, air conditioning, maintenance, upkeep, etc.) and places more “dead space cost” burden into the pricing equation. Objectively, a building that maximizes the majority of square footage for revenue production pays back investment far faster. In an Assisted Living project or Independent Living project, I think a 65% revenue allocation vs. 35% common allocation is reasonable. Higher allocations to common space strain pricing and definitely, require higher occupancy levels to create break-even and payback targets. Similarly, more common space consumes more “furnishings”, often minimally used. Good focal space done right and space with a multi-purpose use is preferrable over space with singular use or no real defined use at all (i.e., lounge
RUGs IV Here to Stay!
The news we all hoped for came forth this afternoon, wrapped with a big bow just in time for the Holiday season – RUGs IV is here to stay. The House this afternoon passed a companion version of the bill passed in the Senate yesterday. President Obama is expected to sign the bill into law shortly.
The legislation calls for $19.2 billion in appropriations to make RUGs IV effective retroactively to October 1, 2010. In addition, the legislation extends the Medicare Part B therapy cap exception provision presently in place, until the end of 2011. Without such an extension to the exception process, the Part B therapy caps were set to be automatically reinstated with no exception on January 1, 2011. As part of the extension of therapy cap exception process, the legislation also staves off pending cuts of approximately 25% in Medicare payments to physicians required by the current sustainable growth formula which drives the physician fee schedule (and related Part B services such as outpatient therapies) under Part B. Without such a correction to the physician fee schedule, physician fees were set for the significant reduction on December 18 (Congress had already moved the date back to the 18th from the 1st of December).
The implementation of RUGs IV back to October 1 solves significant headaches for SNFs and CMS. As difficult as it has been for providers to get up to speed on MDS 3.0 and RUGs IV, the process was significantly complicated by the unknown of how the planned RUGs Hybrid would work and whether CMS would seek to recoup potential overpayments from providers as a result of RUGs IV being used temporarily. Many providers sought to establish liability accounts on their balance sheets for just such an event, even though estimating the liability was somewhat complex due to the lack of solid information regarding the Hybrid groups coming from CMS.
Having spoken to a number of people within CMS, the implementation of RUGs IV back to October 1 is a true gift. There were consistent difficulties in getting the Hybrid grouper to function in conjunction with MDS 3.0 and as such, a growing number of inquiries from the industry bombarded the agency expecting more information. Even more troubling was the prospect of having to deal with payment recapture; a procedural boondoggle CMS was hoping to avoid. In the end, I am confident that a number of people at CMS are rejoicing this evening.
On a final note, I wish to offer my personal congratulations to my industry colleagues and the trade associations who lobbied for this victory and to my readers, clients and business partners who required that I kept them informed and in many cases, helped me with additional information and of course, thoughtful inquiries that made me stay on top of this important issue. This policy victory was long overdue but as the saying goes, “better late than never”.
MDS 3.0, RUGs IV, RUGs III, Hybrid: A 45 Day Review
Forty- five days past the October 1 conversion to MDS 3.0 and the interim RUGS IV payment groups and I still am getting a great deal of requests for analysis tools, questions on payments, liabilities, dates and rates for the Hybrid (RUGs III) groups, maps between RUGs III and RUGs IV, etc. While I lost track of how many spreadsheets I have e-mailed and how many questions I’ve tried to answer, I have managed to keep track thematically of the issues and ongoing needs of the folks that contact me. To that end, it seems appropriate to consolidate the information I have, the questions I’ve gotten (and continue to get) and the issues as I hear them and provide my readers, colleagues and clients with a forty-five day recap. Many thanks to Brett Seekins at Baker Newman Noyes who has passed along his insights based on ongoing conversations with principals at CMS.
RUGs III Hybrid
As of today, the Hybrid grouper is still not functional and CMS states that it is still undergoing development and testing. I have confirmed this from numerous sources and CMS still is providing no hard date or date range when the Hybrid grouper may be functional. Per a contact that Brett Seekins from Baker Newman has at CMS, a crosswalk between RUGs III and RUGs III Hybrid was supposed to be posted on the CMS SNF web page by today. As of now, it is still not posted but when it does become available, I will get it, analyze it and make it available to anyone who requests it. NOTE: There is no crosswalk document between RUGs IV and RUGs Hybrid although there is a crosswalk between RUGs III and RUGs IV which I have and continue to make available to anyone who requests it. Based on what I see when I gain access to the RUGs III to Hybrid crosswalk, I may be able to make some sense of a crosswalk strategy between RUGs IV and Hybrid.
Retroactive Adjustments/Overpayment Collections
This is a hot topic and one that remains very much in limbo. First, CMS has made no definitive statements on how and if, repayments or retroactive adjustments will be handled when the switch is ultimately made between RUGs IV and Hybrid. Recall that when MDS 3.0 went into effect on October 1, RUGs IV was the only grouper system that worked with 3.0 and thus, is being used to pay providers. The issue that remains is for CMS to construct the Hybrid grouper and then, to determine how and if, overpayments occurred in the interim while RUGs IV was used. The “how” and “if” determination will drive what CMS does with respect to retroactive adjustments or recoupment of overpayments. My take on this subject is that CMS is a bit politically stuck at the moment as it, like the provider side of the business, is waiting to see if Congress steps forward and retroactively implements RUGs IV as law effective October 1, 2010. This step would be huge and eliminate a ton of complications. As to how likely this is, my guess is a shade better than 50/50. Despite the present “lame-duck” session where historically, little of great significance is accomplished legislatively, a Medicare ticking time bomb exists. This time bomb has to do with the pending cuts to the physician fee schedule, an issue I wrote extensively about in late spring and early summer. Recall, that Congress created a temporary series of patches, the last creating a modest increase in the fee schedule (and related Part B services such as rehabilitation therapies) while pushing the scheduled cuts back to November 30. The cuts are a result of a law passed by Congress years ago tying the increase or decrease in physician fees (and related Part B services) to a sustainable growth formula or more simple, a formula that is based on economic growth and overall program spending in Medicare. Due to a languishing economy, the formula in-place calls for cuts in physician fees by 21% in 2010 with another forecast for additional cuts in 2011 (the current fiscal year).
Considering the physician fee schedule issue, Congress now must address this problem or face an enormous potential crisis with physicians and other providers reducing their services to Medicare beneficiaries. The good news here for RUGs IV is that legislation regarding Medicare will be drafted if for no other significant purpose than to address the fee schedule problems, leaving room for other program changes to slip in such as those involving the implementation of RUGs IV. In any other lame-duck session scenario, I would say that the chances of the RUGs IV issue being addressed would be “slim and none”.
On a final note, CMS has their hands full with getting the hybrid system in-place and therefore, retroactive adjustments are a far distant priority. Remember, RUGs III and RUGs IV are pegged at budget neutral or in other words, RUGs IV is not supposed to cost Medicare any more dollars than the cumulative outlays under RUGs III. In reality, because of the complexities of the new MDS assessment and the resultant changes to the case-mix weights that drive payments under RUGs IV, I believe CMS will spend less money initially under a RUGs IV system. It will take providers a year or two to learn the intricacies of the new system and to adjust their operations, coding and billing practices accordingly. This means that CMS will be under minimal pressure to recoup overpayments as few will likely exist. I believe a greater probability is that CMS will make a technical adjustment in their annual rate setting for SNFs in July/August next year, reducing potential increases by a small factor for overpayments during the transition period. Again, this only occurs if Congress fails to address the implementation date of RUGs IV back to October 1, 2010.
Establishing a Liability for Overpayments
Given the above discussion on retroactive adjustments, I have advised providers to prudently establish a liability for overpayment based on their Medicare utilization since October 1. Here is what I am advising people to do regarding this transition and hybrid period. First, obtain a calculator with RUGs III hybrid rates and use it to establish a liability on the balance sheet for overpayments. The calculator allows you to enter your utilization by RUGs III and/or RUGs IV claims and produces results for each payment system. I have a calculator tool that I make available. Second, run a month end manual test on your claims by using the published hybrid rates. CMS released these in August. The manual test is as easy as a quick sample of claims for the month, mapped against the hybrid categories. Where a hybrid category does not exist, use the RUGs IV category – CMS has said it will use RUGs IV categories where no RUGs III hybrid exists. Third, compare your results and adjust your liability up or down by the error percentage (how much your sample said you were over or under) for the next month and error on the side of being conservative. If in fact, Congress acts or CMS chooses not to recoup payments from individual providers, the liability simply evaporates to income once the issue is resolved. The sole side-effect temporarily, is that income is slightly understated by the effect of the liability.
Monitor Performance and Progress
Regardless of where an SNF feels it is on the journey post October 1, the number of questions I am still getting plus the number of tools that I still send out suggest that providers are still transitioning. This is to be expected given the enormity of change and the ordinary bumps in the road caused by CMS and its intermediaries. My advice is that SNFs check their progress on the transition by doing the following.
- For any SNF that is using a therapy contractor or rehab company, audit your contractor/rehab company. The largest change that occurred under the switch to MDS 3.0 and ultimately RUGs IV is in the provision of and payment for therapy. Recall that the therapy company is not the Medicare Part A provider; the SNF is. Any liabilities that arise from billing problems, overpayments, etc. are ultimately the responsibility of the provider with the agreement with CMS or in other words, the SNF. I have seen tons of therapy company contracts with very limited indemnity clauses, typically not worth much in the event of a major billing probe, upcoding issues, fraud investigations or recoupment of overpayments. In virtually all of these clauses, the indemnification back to the SNF from the therapy company is for the cost of the therapy charged by the therapy company to the SNF; not for the lost revenue and/or fines and penalties that can occur. It is the SNF’s responsibility to assure that Medicare is appropriately billed and care is correctly provided and documented as assessed on the MDS. The simplest way for an SNF to assure that such is the case is to audit the therapy company’s performance. I have an outstanding partnership relationship with a therapy management firm (not a therapy company) that can provide such a service, cost-effectively and efficiently. The principals are all MDS 3.0 certified and have decades of experience as therapists in the long-term care industry. I advise any SNF that hasn’t audited their therapy provider to do so ASAP. Even for SNFs that provide their therapies via employees, it makes sense to have an expert come-in, review current practices and to provide guidance where improvements can be made. Feel free to contact me for a referral.
- Periodically, check your utilization patterns as occurred under RUGs III and now, under RUGs IV. Use a crosswalk tool to see exactly how your claims under RUGs IV are trending compared to what they were under RUGs III. In 45 days, a significant change should not occur as for most providers, case-mix evolves rather slowly. If you are seeing big jumps or changes, something is amiss (for example, Ultra High rehab patients should still conform accordingly under the RUGs III method and then group accordingly under RUGs IV).
- Monitor your MDS completions and the time it is taking to complete the assessment. MDS 3.0 is heavily driven by interviews and accordingly, a provider should see a shift in time taken with direct patient interviews. Likewise, the ultimate shift under RUGs IV significantly changes therapy minute counting, especially concerning concurrent therapy. Provider should see movements toward more individualized therapy time and elimination of look-back assessments.
- Sample some new admissions looking for a match between clinical charting and MDS coding. What is being coded on the MDS should correlate tightly with what is reflected in the resident clinical record. If there is a gap, time for re-training.
Tools
I have a number of tools that I can forward to make the analysis, budgeting, forecasting, checking, etc. easier. For example, I have current Hybrid rates, RUGs IV rates by region/location, a RUGs III, Hybrid and RUGs IV calculator by region/location, a RUGs III to RUGs IV crosswalk and hopefully soon, a RUGs III to Hybrid crosswalk. Feel free to e-mail me and request any or all of these tools or comment to this post with a valid e-mail address and I will get them to you ASAP. My e-mail is Hislop3@msn.com. Likewise, feel free to drop me a question and I will do the best I can to answer it or point you in the right direction.
Economic Value Analysis, Value Propositions and Marketing
Recently I gave a presentation on strategic pricing and senior housing (see Reports and Other Documents page on this site for the presentation power-point). A key theme that I often refer to centers around the “value proposition” or in other words, the concept that pricing is both monetary and non-monetary and as such, the value proposition is about not only the price but also about the functional and psychological value of the service or product. In short hand, the utility; how the product/service satisfies both functional and psychological needs at or for the given price. During the presentation and since, I’ve received a fair number of questions regarding “how” a value proposition is determined and thus, how the same is correlated to price. Knowing how complicated senior housing and all forms of long-term care (SNF, ALF, Senior Housing, etc.) are today to market, understanding the core concepts of pricing, economic value analysis, and value proposition can make a real difference in establishing an effective sales and marketing program.
Initially, the primary concept to understand is demand and how demand and price work together. Demand, for purposes of this article and simplicity, is the ability and willingness on the part of an individual to buy something. In general, demand and price have an inverse relationship such that the demand for a particular good or service (the quantity thereof) tends to increase as price decreases. Of course, a variety of factors impact demand including the actual nature of the product or service. Funeral services for example have a fairly steady level of demand and in actuality, the demand only changes by a change in supply of dead people (morbid as this thought is). If for example, a major pandemic began to sharply increase the number of people dying, the demand for funeral services would increase. Conversely, if a break-through in genetic research produced a series of cures for diseases such as diabetes, heart disease and cancer, the demand for funeral services would gradually decrease. In the example of funeral services, price is less of an influencer on demand as once an individual has died, few alternatives exist (legally) to disposition of a corpse. While there may be multiple options for pricing inside the range of possible mortuary services (cremation, caskets, size and style of services such as wakes, etc.), there remains a core price that is basically inelastic; doesn’t really change demand as it rises or falls.
For goods and services such as senior housing and to a lesser extent, other long-term care such as Assisted Living and SNF care, demand is more elastic as price changes. The simple reason is that alternatives exist to each level of care that are available, supply or provide the same basic utility and range in cost (expressed as price). In the case of senior living, many options exist at a great many price points. With SNF care, fewer options exist but still, many providers exist and home care and even in some cases, Assisted Living present alternatives at different prices. The net result is that demand is influenced by price as well as a host of other factors.
- The service’s core price is a factor such that all products and or services have a “going rate” calculation. When demand is highly elastic such as with senior housing, the safest presumption is that the core price is equal to living in one’s existing residence as normally, a move to a senior housing facility is equal to or more expensive per month. If the costs associated with a senior housing option are rising, demand will taper off.
- The price of related or alternative goods will impact demand, especially when substitution products or services are widely available. For example, using the funeral home example, if prices for a particular line of wood caskets drop substantially below the prices of metal caskets, the demand for caskets stays essentially the same but the demand for wood versus metal rises substantially. For senior housing, the demand can be widely impacted by the cost associated with alternatives such as market rate apartments, condominiums, or staying at home with certain services.
- The ability of the consumer to buy in terms of economic resources changes demand. If the consumer’s purchasing power changes as a result of loss of income, lower income or lower overall resource levels, the demand for particular goods and services at current price points declines, perhaps shifting to less expensive substitute products/services.
- An increase or decrease in desire or preference on the part of a consumer can change demand positively or negatively. The greatest mover here is consumer confidence. A consumer with a more positive outlook on the economic condition of his/her situation is simply more motivated to consumer. Consumer expectations about prices also impacts the decision to buy. A consumer that believes that prices will rise in the near future is more likely to buy immediately and conversely, an expectation of falling prices triggers a delay in consumption.
Taking the above into account regarding demand, economic value analysis and the determination of a value proposition is fundamentally about determining the monetary value of the product or service as well as the functional and psychological value. The monetary value is not the product/service price but the value, expressed in dollars, of the total cost of a product or service’s ownership. In this regard, the monetary costs also produce monetary benefits. For example, using senior housing, calculating the monetary costs requires an analysis of the following (minimally);
- Rent or mortgage payment
- Monthly amortized cost of any entry fee including interest cost and negative amortization costs (loss of refund as applicable)
- Utilities
- Taxes
- Insurance
- Other fees such as parking, etc.
- Other cost intangibles such as free health care, reduced cost health care, delivery of medications, meals as part of rent, rent increase guarantees (limits), etc.
Calculating the monetary value thus becomes an exercise in quantifying the above elements over a reasonable period of time such as five years, etc. Once this is complete, the result is used as a comparison against like or alternative options. Below is an example for a non-profit, senior housing provider with a fully refundable entry fee compared to a person remaining in their home in the community, with no mortgage payment (a fairly typical situation). The costs I’ve illustrated are over a five-year period (rent for example is monthly times 60 months).
| Sr. Housing | Home | ||||||
| Rent | $72,000 | $0.00 | |||||
| Mortgage | $0.00 | $0.00 | |||||
| Prop. Taxes | $0.00 | $25,000 | |||||
| Insurance | $3,000 | $7,000 | |||||
| Utilities | $0.00 | $18,000 | |||||
| Depreciation | $0.00 | $6,250 | |||||
| Repairs | $0.00 | $5,000 | |||||
| Lawn Service | $0.00 | $1,200 | |||||
| Parking | $0.00 | $0.00 | |||||
| Meals (1 x day) | $0.00 | $6,400 | |||||
| Entertainment | $0.00 | $2,500 | |||||
| Healthcare (1) | $0.00 | $1,500 | |||||
| Misc. Transport | $0.00 | $1,000 | |||||
| Entry Fee (2) | $18,924 | $0.00 | |||||
| Home Price +/- (3) | $0.00 | $5,400 | |||||
| $93,924 | $79,250.00 | ||||||
| (1) Sr. Housing provides free wellness services such as flu shots, blood pressure monitoring, | |||||||
| medication assistance, setting appointments, education, screenings, etc. | |||||||
| (2) Entry fee is fully refundable ($150,000) at no interest. Interest yield is assumed at | |||||||
| 2% compounded monthly | |||||||
| (3) The home price increase or decrease reflects what the resident can safely assume | |||||||
| the home price will be in five years. A negative number is an increase in value whereas | |||||||
| a positive number reflects a decrease in selling price. Price of the home is assumed | |||||||
| to be $300,000 in current dollars. | |||||||
In this example, the monetary value of the senior housing option is greater (negative) than the monetary value of remaining at home or simply, it costs more to receive the same basic utility to move to the senior housing community. The value essentially becomes negative with the inclusion of the entry fee interest loss or cost. On the surface, this appears to be a negative value proposition for the senior housing community. The key to achieving a balance or a higher proposition value for the senior housing option is to monetize the functional and psychological costs between the two options. Ideally, the spread between the two is worth at least $14,674 or the present negative difference between the senior housing option and remaining at home.
In monetizing the functional and psychological costs and benefits between the two options, the trick or key is to have a clear understanding of the profiled consumer. This means having a true handle on current customers and seniors living in the community. For example, a psychological benefit to senior housing versus remaining at home is security. It is possible to measure the value of security by talking to your current customers and imputing a value for a security service to the remain at home option. A functional value is transportation and convenience. If for example, the senior housing option provides shopping trips to local grocery stores or has an in-facility delicatessen and convenience store, the cost between the two options in terms of convenience and transportation is measurable. Other examples such as activity, access (even at a cost) to prescription drug delivery, on-site medical care, check-in services, laundry, housekeeping, etc. are all items with a potential functional and psychological benefit. Perhaps the most under-valued is the access to on-site, future health care such as an incorporated Assisted Living or Skilled Nursing Facility, even if such access is nothing more than guaranteed accommodation without a price reduction. The important point here is that each functional and psychological benefit that is discernible and tangible to current customers has a value that is quantifiable and comparable across each option or living alternative.
The value proposition is the accumulation of the monetized values for the core product or service plus the functional and psychological factors. Consumption activity incorporates all three elements and effective marketing strategy is grounded in communicating the value proposition of a product/service as compared to all other alternatives. Of course the largest difficulty arises in communicating values ascribed to psychological factors. The key in doing so is the heavy use and reliance upon, current satisfied customers. They are the source of input as well as the ground for determining monetary values associated with the related psychological factors.
As senior housing demand is highly elastic, creating and communicating a value proposition is critical in terms of developing potential customers. I would argue that the same approach is as critical for SNFs that are looking to attract certain types of patients with certain payer sources. In using the above approach, an SNF would complete its economic analysis against its competitors, again monetizing the core service, the functional and psychological factors. In many regards, completing the analysis against existing competitors is an easier exercise as quantifiable data is far more plentiful.
Pricing strategy comes into play when the value proposition is imbalanced. Pricing strategy re-weights variables and allows the value proposition to change favorably against key alternatives or competitors. For example, in the senior housing analysis above, pricing change involving the entry fee instantly changes (positively or negatively) the initial calculated proposition. For an SNF, adding amenities within service offerings or adding clinical competence improves the value proposition, even under a fixed-payment scenario such as Medicare. The objective from a marketing strategy approach is to maximize all elements of the value proposition as compared to the competition or to the alternatives. Taking this approach and then developing an effective sales and communication strategy dramatically improves the opportunities for successful new customer conversions – sales.
September E-News
My firm’s E-Newsletter for clients and friends was posted on-line today at http://apexhealthcareconsultants.info/2010/10/01/ In this issue;
- October 1: SNFs, MDS 3.0 and RUGs
- Economic Outlook
- Compliance Updates
- Fourth Quarter: Trends to Watch
Hospice Contracts in SNFs: Survey Reminders for the SNF
Due to a fair amount of travel recently, I’m a tad behind in pushing out updates, etc. Despite my rather harried schedule, I have kept track of questions, issues, etc. and in the next week to ten days, I will endeavor to get caught up. Please know that I do appreciate the comments and questions from readers and colleagues.
A theme that I get queried on quite a bit involves the relationship between Hospices and Nursing Homes, particularly when the SNF enters into a contract with a Hospice for the provision of hospice care to its residents. Suffice to say that I frequently, and I have written on this subject before ( http://wp.me/ptUlY-3W ), hear concerns and misunderstandings among both providers (Hospices and SNFs) about contractual issues, care issues, documentation issues and compliance issues. The most recent set of questions or issues comes via my wife who is a clinical consultant (RN) in long-term care. While working with a client SNF on pre-survey preparations, she saw a number of things wrong from a compliance perspective that the SNF simply missed or misunderstood in regard to its responsibilities for its residents placed on hospice service with one or more of its hospice contractors.
Below I’ve outline the required compliance elements for SNFs when they have residents in their facilities that are on service with a Hospice agency (of course, via a contract). These elements are taken right from the federal Conditions of Participation for SNFs and represent the essential requirements that surveyors are tasked to review. NOTE: For SNFs it is imperative to remember that even though the primary responsibility for the careplan for a hospice patient in an SNF belongs to the Hospice, the SNF cannot transfer any compliance requirements that are its responsibility under the law to the Hospice. The all too common theme that I hear of “he/she is now on hospice and therefore, is no longer an SNF resident” is false.
- The Hospice and SNF must communicate, establish, and agree upon a coordinated plan of care for both providers that reflects the hospice philosophy, the individual’s needs, and the unique living circumstances of the individual in the SNF. The plan must address pain and symptom management and be revised and updated as necessary to reflect changes in the individual’s care needs. The plan must also identify the services that each provider will deliver in order to meet the needs of the patient and his/her desire for hospice care. NOTE: Regardless of this requirement, the Hospice is still required to provide the core hospice services (nursing, social service, bereavement, etc.) as stipulated under federal law. The subtleties lie in the definitions of duties as delineated in the plan of care.
- The Plan of Care must reflect the following:
- The participation of the hospice, the SNF and the resident and/or responsible party
- The plan of care provides for pain and symptom management and clearly provides for (or has) updates reflecting the changing needs of the resident
- Medications and medical supplies are provided for by the Hospice as required to care for the patient’s/resident’s terminal illness (requirement that the Hospice provides (or pays for) the supplies and meds related to the care of the terminal condition).
- The Hospice and SNF communicate with each other when changes to the plan of care are required.
- The Hospice and SNF are aware of each other’s duties and responsibilities in meeting the plan of care.
- The SNF’s services are consistent with the plan of care and in coordination with the Hospice. The SNF resident/patient should not experience any reduction in SNF services due to his/her hospice status.
- The SNF offers the same services to its hospice residents as it does to all other SNF residents not on a hospice service. The resident retains the right to accept or decline services offered by the SNF.
- If the SNF has concerns with the provision of service from the Hospice and the same is not satisfactorily addressed by the Hospice, it is the responsibility of the SNF to inform the appropriate licensing authority that has oversight of Hospice’s in the state.
The biggest key to take away from the above is that the SNF and Hospice need to develop a very clear plan of care, hold each other accountable for the delivery of services as outlined under the plan of care, and clearly understand each other’s duties and responsibilities under the law and as detailed in the plan of care.
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