Compliance, the Courts and a Risk Reminder
In previous posts I’ve written about the need for providers in all industry sectors to fully understand the compliance and legal risks that are inherent to the appropriate industry sector, as well as to health care today in general. As someone who has been immersed in health care operations and health policy for the past quarter century, I can honestly say that I have not seen a period more perilous for providers and quite frankly, I perceive that it will remain risky and perhaps escalate in the near future. Consider the following;
- There is renewed vigor and funding in Washington to root out perceived waste and fraud, principally focused on Medicare. Every sector that I follow is a target for the OIG and/or Recovery Audit activity. In spite of GAO findings that Recovery Audits have fallen short of achieving their targeted goal of reducing $231 million in over-payments or improper payments, the action from CMS is to “improve” the system or in other words, increase the amount of personnel and resources devoted to this task. In July, the Department of Justice announced the results of a multistate Medicare fraud investigation implicating 90 individuals, tied to a total of $251 million in Medicare payments. The investigation involved doctors, nurses, therapy companies and others. The investigation was part of the new Health Care Fraud Prevention and Enforcement Action Team.
- According to a recent report from the Congressional Research Service the number of new agencies, commissions and boards created under the recently passed Health Care Reform law is “unknowable”. The Center for Health Transformation headed by former speaker Newt Gingrich estimates that 159 new agencies, offices and programs were created under the PPACA and the Joint Economic Committee claims 47 new bureaucratic entities were created. What this all means in brief is “more regulation”, not less and in most cases, regulations that haven’t even been written yet. Most troubling is that the PPACA seemingly creates bundles upon bundles of additional regulation but is virtually moot on any current regulatory relief or reform. Two interesting charts regarding the bureaucracies created under the PPACA are available at http://www.healthtransformation.net/
- Existing regulatory burdens are already steep and increasing, regardless of the PPACA. Take for example, the annual CMS rule making process regarding rates and payments. Wholesale changes in Medicare assessment requirements and payments are forthcoming this fall for the SNF industry. The home health industry has also seen its share of Medicare reimbursement changes and required assessment and documentation changes under Medicare imposed by CMS without any legislative activity. New HIPAA requirements regarding electronic communications came into play this year, new self-disclosure rules under Stark and the False Claims Act, as well as dozens of other agency regulations.
- Non-health care specific laws also change constantly and impact providers. Whether these laws are labor related, tax related, state laws, local laws, commerce laws, building codes, etc., all are in some way related to the general business conducted by providers.
- The court system (or more appropriately, the plaintiff’s bar) has become more actively focused on the provider side of the health care industry. In just the first seven months of this year, two significant class-action suits have laid new fertile ground that providers should both fear and understand. The first occurred in California where a jury awarded plaintiffs $613 million in statutory damages and $58 million in restitutionary damages (punitive damages not yet determined) against Skilled Healthcare Group, a proprietary nursing home chain. The award was predicated on a 4 year old complaint that the organization failed to staff its facilities to meet the State of California’s minimum staffing requirement of 3.2 nursing hours per patient day at 22 of its California facilities. The ”rub” in this case for providers is that no harm or actual damage theory was applied to the “class of patients” affected or in other words, the residents of the 22 facilities were never effectively damaged in total yet, the jury awarded the maximum damages allowed under California law. The result is that, even before punitive damages are assessed, the damage amount is larger than the value of the organization or more simply, if the damage amounts remain unaltered, Skilled Healthcare is bankrupt. A final piece of irony? The regulatory system that oversees nursing homes in the state took no specific action against Skilled Healthcare to prevent the “understaffing”. The second case comes from the home health industry where as of today, three class action suits have been filed against Amedysis, the industry’s largest proprietary home health company. The suits were born as a result of a Wall Street Journal article and a subsequent Senate Finance Committee inquiry into the Medicare billing practices of large, for-profit home health companies. The fundamental allegation is that Amedysis, along with other major for-profit companies, used the Medicare rules in-place to essentially increase their revenues. The fundamental issue pertains to therapy visits and a provision under Medicare two plus years ago that provided for incentive payments to be made to agencies based on the number of therapy visits (more visits, higher payments). The basis of the suit against Amedysis (clearly a target because of its size, its focus on Medicare patients and the Wall Street Journal article) is that the company overstated its revenues and once investigated or discovered, the same activity now disclosed caused shareholders to lose value as a result of falling stock prices. In a unique twist, the suits use Sarbanes-Oxley, a securities related law that requires senior corporate officers to avoid activity that would result in unethical conduct or malfeasance, harming shareholders. As in the Skilled Healthcare case, the irony here is thick. First, there is no allegation that patients were harmed or that care was rendered inappropriately. Second, the activity of Amedysis was not under investigation by CMS or the OIG concurrent to or before the filing of the suits. In other words, the government’s own enforcement activity was moot on this issue and there is considerable question as to whether what Amedysis did was even improper given the rules that were in effect at the time. Third, virtually all providers practice Medicare maximization or that time-honored practice of using Medicare’s own rules concerning reimbursements to maximize the amount of reimbursement available to them. If the Amedysis case is the standard, virtually every Medicare provider would in fact, be guilty of similar conduct dependent on the industry and the applicable reimbursement rules.
Taking the above into account, and it is truly an overview only, providers need to recognize the gravitas of the environment and the totality of legal and compliance risks that are present and mounting. Recognition and identification of the compliance requirements per applicable industry sector and the legal risks associated with the business and operations encompassed is where providers can begin to respond, not react, and develop the tools, processes, plans and ultimately culture, that mitigates risk and creates effectively compliant operations (“effectively” because totally compliant is improbable if not impossible). Below are some time-honored tips and approaches for creating an organizational environment that achieves high-levels of compliance and mitigates legal risks (I ran a very large, multi-site, complex organization for twenty plus years and never had a lawsuit).
- Within each industry sector there are tons of regulations that in theory, require daily compliance. Likewise, within each industry sector, there are compliance themes and “key” compliance requirements. Focus on the key compliance requirements as activities, tools, and systems that drive compliance in these areas mitigates 90 plus percent of the compliance risk and in all cases, the risk that is expensive and serious. I like to think about the core intent of compliance and create understanding and organizational capacity and systems around these intents. For example, in the areas of patient care, outcomes are the baseline of regulations. Regulations focus on documentation of outcomes, prevention of negative outcomes, and actual standards for outcomes. Systems which assure a close match with the regulatory expectations and are part of an organizational QI process (constantly) achieve the regulatory intent and create a “halo” of compliance. The same can be said for billing practices under Medicare and Medicaid, privacy requirements under HIPAA, etc. Polices are insufficient to achieve the requisite level of compliance required and quite often, do nothing more if not integrated within organizational practices and systems, than create more compliance risk.
- Legal risks are harder to quantify but in some cases, easier to generally address. Take the two legal cases I illustrated above. In the first case, if the staffing requirement in a state is 3.2 hours per patient day, any provider flirting with these levels consistently is asking for trouble – avoid the risk entirely. In the second case, as I pointed out, Medicare maximization is a time-honored tradition for providers. What is not time-honored or allowable, is any activity that suggests that the provider is routinely and consistently, seeking to “game” the system. I see too many therapy companies and SNF providers that merely “up-code” all residents into Ultra High therapy categories as a means of achieving the highest Medicare reimbursement per day. I see too many providers stress the justifications for additional days, manipulate the rules to extract additional benefit periods, and create care requirements and documentation that is not supported by the actual needs or conditions of the patient. These activities, when pervasive and constant, create a legal risk that is tough to impossible to defend. A better approach is to develop strategic and operational plans that maximize revenue the right way. The right way is by achieving high-levels of organizational capability in delivering the right care to the right patient at the most efficient cost levels possible. It also means developing marketing plans and programs that attract the ideal patient mix that produces the highest possible revenue profile for the organization. With respect to employment, avoiding significant legal risks means dealing with employees within the constructs of employment law. This doesn’t mean don’t fire or don’t discipline. It means fire and discipline effectively and only for consistent, documented and legally permissible activity. A core or key requirement is to effectively train and only employ, capable and competent management that know and understand the applicable labor laws and are capable of using effective hiring and supervision methods that produce organizational results without violating company policy or the law.
- Organizationally, the primary methodology to achieving a high level of compliance and to mitigate legal risks involves creating an organizational culture that focuses on compliant activity and solid risk management principles. While not exhaustive, here are some key elements that are part of the culture.
- Internal and external education and audits that identify risks and provide solutions. Developing organizational thought-leaders and subject matter experts provides key resources that can be deployed to solve problems, identify risks, and provide education.
- Encourage reporting and self-disclosure and reward the activity. Management must be open to hearing “what is not right” and providing reinforcement for this activity.
- Integrate compliance and risk management as part of strategic planning and allocate budgetary resources adequate to address the risks. While risk prevention always appears to be money with another use, it is far cheaper to prevent compliance and legal risks than it is to bear the costs after an event has occurred.
- Reward the concept and ideology of “doing the right things” first as opposed to those things which may be short-term, expedient or more profitable.
- Benchmark and test key indicators constantly. For example, if your Medicare census and revenue per day is higher than industry norms and/or market norms, make sure that such results are tied directly to organizational performance and activity, not to billing creativity.
- Provide ownership to compliance activities and outcomes to all staff, not just management. Engage the entirety of the workforce.
- Keep up with pending or new regulatory activity and legal activity and get “ahead” of the curve. Organizations that only respond to laws already passed and cases already decided tend to get caught trying to “react” rather than remain vigilant and prepared. Rarely do new compliance requirements and legal requirements come instantaneously on the radar screen – they have been there for a while. Providers that see and understand the trends can use the virtue of time to integrate new systems into existing systems, teach new knowledge requirements, and build new organizational capacity to manage effectively, the new requirements.
As the Home Health and Hospice World Turns: Part II
In Part I, I wrote about my last week’s conversations, etc. regarding the home health industry, specifically Amedysis, the Senate Finance Committee inquiry, the industry impact via the PPACA and the likely consolidation and merger trends that are approaching. Suffice to say, not all of last week’s news and conversations focused on the home health industry as over the last thirty days, much has happened in the hospice industry as well. The difference between the two industries is that in hospice, the major news involved a significant merger and in home health, the major news involved the legal and compliance issues of the largest provider entity – Amedysis.
The hospice industry saw, via the merger between Gentiva and Odyssey, the creation of the largest home hospice company in the industry. Gentiva, while also a provider of home health, clearly chose to direct more of its attention to the hospice industry, moving from a moderate player in the industry to the predominant player via the acquisition of Odyssey. Odyssey, while not as large as Vitas (the former largest hospice provider), held substantial market share and presence and in many regions and distinct market areas, competed head to head with Vitas for patients. For more information on the Gentiva/Odyssey transaction, see a related article in my company’s E-Newsletter at http://wp.me/pD9Ac-4Q .
Analyzing this merger leads me to a series of assumptions about where the hospice industry is at present and where it is likely headed.
- Hospice is now clearly a mature market or in other words, a market that is unlikely to grow significantly over the near to intermediate term horizon. Despite a fairly profound demographic shift occurring over the next twenty to thirty years (the maturation of the baby-boomers), there is no real indication even with this influx of older adults, that hospice as model of care, will gain in referral popularity. While seniors utilize hospice more in total numbers than any other age cohort, as a percentage of the total cohort, utilization trends show little forward growth. There are a number of reasons why;
- Culturally, U.S. medicine and the U.S. population still values the process of cure or health restoration far greater than the concept of natural death. As hospice is a downstream referral (the referral comes typically from non-palliative medicine trained physicians or via hospitals and/or long-term care providers), the hospice industry relies on the referral source to be; a) knowledgeable about the value of hospice and how it works for patients and their families, b) willing to forego potential incremental revenue for continued care by making the referral to a hospice, c) willing to engage the patient and the family in a difficult conversation regarding end-of-life and treatment futility. As long as these dynamics remain in place to the extent they presently are, the growth of utilization will remain fairly stagnant.
- Financially, the incentives for referrals to hospice don’t truly exist within the current U.S. system. There are no barriers in-place to reduce the reward (payment) for continued acute, diagnostic or curative care (choose your own verbiage) and as a matter of fact, the reimbursement systems (private and public) pay incrementally more for more intense care than palliative care, even if arguably, the care is futile. As only patients and their respective treating health professionals can conclude that continued curative care is futile or unreasonable, the process of garnering more money for more treatment remains intact as a perverse incentive.
- While not for hospice people or physicians trained in palliative medicine, terminality remains an uncomfortable and even disputed condition for many physicians. Patients and there families still wish to avoid discussions far too long and in some cases, avoid the discussion altogether. While in-roads are perhaps being made in some medical centers and in certain communities, these in-roads are miniscule and not evident of a ground-swell movement toward open discussions regarding end-of-life decisions.
- As with the home health industry, the movement in Washington is toward curtailing the growth of hospice spending. The prevailing feeling in Washington policy arenas, supported by Medpac, is that the hospice reimbursement under Medicare is too generous and the benefit itself, easily manipulated and poorly defined. While the PPACA did little to negatively impact the hospice benefit or payment, the recommendations directed to the Secretary of HHS in the language intones significant changes forthcoming.
- Reimbursement under Medicare will change such that early days in the initial benefit period will be paid more as will days at the end of the patient’s stay (proximal to death). Days during the interim, longer stays will be reimbursed with lower payments. The point here is supposedly a recognition that patients with long stays have periods of stability necessitating far less care from the hospice.
- More emphasis will be placed on denying stays for non-specific terminal conditions or denying portions of stays. CMS has determined that too many longer stays are related to diagnoses such as terminal dementia, failure to thrive, etc. In order for these stays to be covered, the onus will fall on the hospice to provide very detailed documentation supporting patient decline.
- More emphasis will be placed on physicians to document terminal conditions and to prognosticate length of likely survival, especially at recertification periods. More direct “hands-on” involvement of physicians will also be required (physically seeing the patient).
- Certain types of stays and relationships between hospices and nursing homes will be closely monitored and reviewed. CMS and Medpac have determined that hospice stays in nursing home environments on behalf of nursing home patients are considerably longer and possibly in many cases, in violation (the hospice) of the conditions of participation as hospices utilize nursing home residents as sources of revenue but often, fail to meet the care requirements (using the nursing home as the source of care and service) under the hospice federal code. Additionally, CMS and Medpac have placed the target for reform squarely on the large for-profit hospices such as Vitas, Gentiva and Odyssey which have typically used nursing homes as major sources of referrals for hospice patients.
- The PPACA, while not bending the cost curve or reducing the overall level of national expenditures on health care, does change in the interim, the overall health care economy. Providers are re-positioning and re-grouping to combat what they perceive, and in some cases know, will be negative changes to how they presently do business. Providers which rely heaviest on Medicare as the bulk of their overall revenues will move the fastest and the most aggressively to alter their current business practices, knowing that regardless of the overall status of the PPACA (repeal, restore Medicare cuts, etc.), the health care economy is entering a long period of fiscal constraint – payments will never be as high or as fluid as they once were.
- Because of points 1, 2 and 3 above, the industry will head into a period of consolidation and even, contraction. The Gentiva/Odyssey merger is a signal of the maturity of the industry and the trend toward tighter regulation of hospice stays under Medicare (the bulk of the hospice revenue) and less economic value per each stay. Lower future revenues per stay, either via reimbursement cuts or regulatory constraints placed on the length of stay, means more overall stays are required to equal the same or greater revenues going forward. As the growth curve of new “potential” referrals is flat, the only real source of new business or referrals for a provider is acquisition of existing market share (buying someone else’s referrals). In order to maximize profitability in an environment where the market is mature and the total revenue per each case is flat to shrinking, providers will have to adopt one of the three strategies below.
- Acquire other providers to build more referrals or volume. While each patient stay will be economically less valuable, increasing the total number for a provider while maintaining expenses on a ratio basis, lower than revenue, will provide a method to achieving overall net income targets - critical for publicly traded provider organizations.
- Shrink the organization to fit the new revenue and length of stay realities that are in place and forthcoming. An organization that can right-size its operations to fit the new business paradigm will be smaller but potentially equally or perhaps, more profitable. The risk here is that provider organizations that are acquiring market share may marginalize some markets such that a shrinking provider (by choice) loses desirable market share.
- Expand non-Medicare business and add complementary businesses that may provide incrementally equal or more revenue than that which is lost under Medicare. Arguably, this strategy may only work for regional or single market providers and those that have strong system ties (hospital owned, etc.).
One final point to note concerns the economy. Absent from the above factors I laid out influencing the hospice industry is the stagnant economy. With recovery a daily discussion regarding likelihood and timing, current uncertainties persist that impact hospice providers rather dramatically.
- The overall number of paying patients available to all providers within the health care economy has shrunk in recent years. This shrinkage is primarily due to job losses and benefit losses. Until employment rebounds and jobs with benefits become more plentiful, consumers for health care in the form of paying patients will remain down.
- When fewer paying patients are in the queue, those patients that do have a payer source, even a less than optimal government payer source, are prized commodities. Each provider wants a piece of the same paying patient.
- Hospice is as I pointed out, a downstream referral. When the upstream referral source, principally hospitals, lacks sufficient paying patients in the queue to replace current patients it “may” customarily refer downstream, it holds the paying patient longer, either delaying the referral and the portion of revenue that comes with a longer stay or avoiding the referral all-together. Similarly, all downstream referral sources such as nursing homes compete aggressively for the referrals even though a referral of a terminal patient (or potentially terminal patient) is ordinarily, not a prize catch for most nursing homes. This competition erodes the number of total possible referrals available to a hospice.
- Each patient has an economic value to a provider. When a patient with a higher economic value (a better payer source) are lacking, providers sort down to the next patient level. This sorting process occurs as a result of too few patients with payment sources available to match the supply or capacity within the existing provider universe. Some markets hit hardest by the downturn will evidence this reality in greater depth and unfortunately, with greater persistency. For hospices (and all downstream providers) in these heaviest hit markets, referrals have trended down and will stay down until the supply of patients with payment sources increases and specifically, the supply of patients with better payment sources and today, deferred health care needs (e.g., elective surgeries such as joint replacements, etc.).
As the Home Health and Hospice World Turns: Part I
Sorry for borrowing (piece of) a soap opera title for this post but it is rather appropriate given the news that occurred over the past 30 days. Just this past week, I’ve been interviewed by two business newspapers and on the phone with an investment banking firm I consult with from time to time regarding Amedysis, Gentiva and Odyssey’s merger, the pending impacts of the PPACA on the home health and hospice industry, mergers in the industry in general and using a “catch-all”, what the “heck” is going on in the home health and hospice sectors. With a chance to recoup over the long 4th of July weekend (and organize my notes from last week’s conversations), a post on what all the conversations were about seemed appropriate.
Amedysis: A month ago, on my company’s E-News site (http://apexhealthcareconsultants.info), I edited an article regarding the Senate Finance Committee’s inquiry into the Medicare billing practices of a handful of very large home health agencies (Amedysis, Gentiva, LHC Group etc.). The inquiry is a result of an article that appeared earlier in the year in the Wall Street Journal, focused quite intently on Amedysis’ billing practices; principally as applicable to therapy visits. The fall-out since the Wall Street Journal article and the Senate Finance Committee article is two-fold. First, the class action suit (I’ll touch on it in a bit) and the hefty drop in Amedysis stock price.
In brief, the class-action suits (there are three) focus primarily on the perspective of shareholders (the “class”) and alleges that the questionable Medicare billing practices (none of which at this point, CMS or the OIG has taken specific issue with) served to artificially increase the share price of Amedysis stock. The allegation of abuse of the Medicare system, prior to any action taken by the federal regulatory system in the form of a fraudulent billing investigation or claims investigation, is a bit different in-so-much that it essentially accuses the company of manipulating its earnings as opposed to causing harm to any patients or group (class) of patients. The “harm” for shareholders is the drop in price that would/did occur as a result of the alleged fraudulent billing practices. To add a twist, the suits also allege Sarbanes-Oxley violations which require the corporate officers of publicly traded companies to abide by a code of ethics. Amedysis settled an allegation of fraudulent Medicare billing practices in 2003 (for Medicare activity between 1994 and 1999) and as part of the settlement, expanded its corporate compliance activity/program. Additionally, since 2003, Amedysis has had notable turnover of the key financial executives (CFOs primarily) with active rumor-mill chatter focusing on the cause related to overly-aggressive Medicare billing practices. Medicare represents 87% of Amedysis annual revenues, by far the largest percentage for any home health provider in the industry.
As Paul Harvey (famous radio newsman now deceased) was famous for; “Now, for the rest of the story”. There are a number of different and integral factors in play that are unique to Amedysis but also, symptoms of an industry, a payment system and a flawed health care reform law.
- The issues regarding possible Medicare over-billing or at least, aggressive billing are not new for Amedysis. Their growth has been remarkable and unique for an agency so fully immersed in a government revenue stream. What is unique at this point in time is that the Senate Finance Committee inquiry, Wall Street Journal article and now the class-action suits come in advance of any customary federal regulatory actions. I do suspect that CMS and the OIG will enter the fray in the near future.
- Medpac has reported to Congress repeatedly that the Medicare payments to home health agencies were “lavish”, producing double digit profit margins on average, for most Medicare home health encounters. The PPACA (reform law) effectively cut Medicare payments to home health agencies and increased the documentation requirements for agencies to justify the necessity of continued visits.
- The feds have aggressively stepped-up their search via Recovery Audits and targeted billing inquiries for Medicare over-payments or more appropriate, Medicare fraud activity. This activity is two years old and growing each year with additional force. The writing is/was “on the wall”.
- To fully understand “what” is at the core of the Amedysis issue is to understand the age-old economic axiom that states, “what gets paid for (rewarded) gets done”. Medicare provided a utilization incentive tied to a certain number of therapy visits ($2,200 for 10 visits). Agencies thus targeted patients and developed care practices that maximized the opportunity to garner the incentive payments. In a typical government move, CMS rescinded the incentive payment as it became obvious that agencies were “gobbling-up” the requisite visits and conforming patients to achieve the incentive. A more meager incentive of a few hundred dollars is now provided at six visits, fourteen visits and twenty visits. Oddly enough, companies today seem to provide far more “six visit” encounters than twenty visit encounters (profitability vs. cost for twenty visits as well as a likely evident decline in medical necessity by the twentieth visit). Amedysis of course, is not alone in seeking to tie care provided to reimbursement nor is the home health industry alone in gaming the Medicare reimbursement system for additional dollars. For-profit hospitals, nursing homes and hospice agencies (and non-profits) alike are skilled at “Medicare maximization”, effectively matching what Medicare will pay with certain types of referrals, matched against the costs incurred to care for certain types of patients. This game goes on year-in and year-out with CMS constantly tweaking PPS categories to incent providers to take certain patient types (payment was too low) and to reduce the profitability of other patient types. In short, what gets paid for gets done.
- The PPACA did nothing to reform the system and arguably, it made it worse by attempting to extract funds via reimbursement cuts from Medicare. Of course, it is unlikely these cuts will be fully made or sustained as Congress has never shown the political will required to cut provider payments. By not truly reforming how Medicare reimburses providers for care, the PPACA only served to layer on huge amounts of bureaucracy to an already antiquated reimbursement system. In the end, nothing changed in terms of how Part A and Part B of Medicare pays providers; only the amounts “theoretically” changed. As a system, Medicare pays more for more care and higher acuity care. Providers will naturally gravitate their referral gathering efforts and marshall their care delivery systems toward the patient encounters that create the most “spread” (cost vs. payment). As the overall universe of these “profitable” patients is somewhat fixed, the provider universe is forced to unnaturally stretch the definitional boundaries of patient types (upcoding in plain health care vernacular). In other words, there are not enough truly “organically” existing patients that fit the best (most profitable) reimbursement categories but there enough that are perhaps, at the fringes. Add the fringe patients with a bit of creative tweaking via assessment and documentation to those that organically exist (fit the exact patient type) and presto, sufficient current volume for all providers. The difficulty for regulators and others who would charge that the fringe patients are not truly members of the organic group (those whose care requirements exactly match a certain reimbursement category or categories) is “proof”. The provider and medical communities are far better versed in assessment techniques and documentation requirements and as such, little can be done to reign in this reimbursement “three-card Monty” game. Until the reimbursement is reformed to reward better, more appropriate and efficient care versus “more” care, the over-reimbursement problem will remain, as it has for decades dating back to when providers ballooned certain costs to receive higher per diem rates from Medicare (under the cost-based reimbursement system).
What comes next in this paradigmatic shift in the home health world is merger/consolidation. As the profitability of one element of Medicare business shifts, larger agencies will acquire smaller to medium-sized agencies in order to increase market-share, lever infrastructure, and to supplement lost incremental margins with volume. Simply put, if the relative margin for one type of encounter shrinks, recouping that lost margin (or at the least the majority of it) becomes a function of incurring more encounters with smaller margins. As long as the incremental costs of additional capacity to handle greater volume remains in a ratio, lower than the net revenue received from the greater number of “less profitable” encounters, it is possible to generate a similar level of organization-wide, net operating income. The fastest and arguably most efficient way to create incrementally more encounters is to acquire someone else’s encounters at a price-point that is sufficiently low enough to create virtually (virtually to mean within a short time-frame) instant margin via the increased volume/market-share.
In effect, smaller agencies with less volume to spread the reimbursement loss/risk become attractive targets in this environment. A smaller agency’s value drops as its revenue/margins shrink and with limited geographic presence and referral markets to spread the lost revenue risk across, the entity price declines. The decline in entity price is attractive for a large acquirer seeking solely market share and/or incremental volume. In short, the acquirer is capable of paying less for the economic value of the entity (it has declined or will declined) which it really doesn’t want, save the referral market or incremental patient volume which it desires. The value is purely found in the market share or referral base, not in the economic metrics or financial value of the entity. For a larger provider, acquiring smaller agencies within areas that the larger provider presently doesn’t serve or undeserves is the goal. The “merger” is almost protectionist; protecting profit margins or revenue streams that are shrinking by increasing volume and thus (hopefully), more overall revenue, equalizing the lost revenue once gained per encounter during periods of higher reimbursement.
In the next post, Part II, I’ll review what is going on in the hospice industry and why the Gentiva/Odyssey transaction is significant in terms of a harbinger of activity yet to come.
Stark, Health Care Reform and Updated Compliance Requirements
When the Patient Protection and Affordable Care Act (PPACA) became law, a provision within adds a new dimension to the rules on self-referral and refund requirements of overpayment (Medicare) contained within the Stark Law. Specifically, the PPACA requires the Secretary of HHS to develop a new self-disclosure protocol whereby health care providers can disclose known (or found) violations of the Stark Law. The PPACA also gives new authority to HHS to settle claims on a “compromise” basis, creating more reasonable terms and conditions when violations occur and are disclosed.
Stark was created to prohibit a physician from referring patients to entities with which the physician (or physician’s family members) had a financial relationship. Broadly, Stark sought to control business relationships between referring physicians and other providers furnishing services (inpatient and outpatient hospitals, etc.) when such relationships involved financial gains applicable to the referral for the physician or, when compensation associated with such a relationship for the physician was beyond the normal and customary payment the physician would receive within his/her primary practice. Over time, Stark’s realm has expanded to include the OIG’s interpretation of applicability with the Anti-Kickback Act (prohibits payments made in exchange for referrals or recommending the purchase of supplies or services reimburseable under a government health program) where provisions exist in strikingly similar context to the language and intents found in Stark. The OIG at least realized the problems facing providers and allowed for (actually encouraged) self-disclosure under its Self Disclosure Protocol. While disclosure to the OIG did not relieve providers of the burden of Medicare refunds, it did provide for a methodology to avoid the imposition of Civil Money Penalties and exclusion from continued participation in the Medicare program.
Adding an additional complication to the provisions for disclosure under Stark is the interpretation on the part of CMS of its obligation to collect 100% of all Medicare payments made in conjunction with the disclosed violation. According to CMS, it is limited in its authority to compromise the government’s right to full recovery of any and all payments made in conjunction with a Stark violation. Prior to the passage of the PPACA, CMS claimed that the Federal Claims Collection Act provided that an executive agency may only compromise collection of claims that do not exceed $100,000. Claims in excess of $100,000 could only be compromised by the Justice Department. Inserting the provisions found in the False Claims Act and the matter of recovery becomes even more complex. Under interpretations of the False Claims Act, the government and certain courts, state that it is a violation of the Act for a provider not to disclose Medicare overpayments. Briefly, the logic is as follows. It is a violation of the act for any person who “knowingly and improperly avoids or decreases an obligation to pay or transmit money to the Government”. The penalty for such a violation is triple damages. In effect, a violation of Stark creates a potential violation of the False Claims Act and as such, a de facto requirement that any Medicare payments be refunded. A False Claims Act violation, if determined as a result of a Stark disclosure, carries the imposition of signficant damages due to the treble damages provision. The risk therefore, to a provider that reports a Stark violation, is the determination that a violation of the False Claims Act also occurred bringing forth not only the obligation to reimburse the Government for all related Medicare payments but the imposition of the higher damages provided for under the False Claims Act; totals which could be extreme. Medicare participating providers have always faced the risk that any illegal act involving self-referral or unwarranted excess compensation or benefits could trigger a circumstance where the activity nullifies the right of the provider to receive Medicare reimbursement (Medicare is legally bound to not pay for services provided when the provision of such service is connected to a violation or is a violation, of federal law).
With the passage of the PPACA, providers receive some additional potential relief while remaining subject to many of the same risks and obligations associated with reporting a Stark violation (as discussed above). For example, the PPACA requires the Secretary along with the OIG, to establish a new self-disclosure protocol. The purpose of this new protocol is to assist providers and suppliers with disclosure of an actual or potential Stark violation. Establishment of the protocol is to occur within six months of passage of the PPACA (late-September 2010) and identify a specific official or office where disclosures are directed. The PPACA also provides the Secretary with an exception to the False Claims Collection Act, allowing the Secretary to take into account certain factors such as the nature of the illegal practice, the duration of the practice, the timeliness of disclosure, etc., when determining the government’s claim. Providers should note however that the PPACA also requires potential or known disclosures to occur within sixty (60) days of discovery of the violation. Failure to disclose within 60 days correlates to a False Claims Act violation and as such, the remedies available under the False Claim Act are triggered.
In application, providers today should consider the following.
- The predominant cause for a violation is sloppy administration of contractual relationships between a providers and physicians. Examples include discounted office space, leases for space that are not at fair-market value, leases that are not signed by the parties, provisions for physicians to use free staff resources, overpayments for services under Medical Director agreements, Medical Director agreements that aren’t signed, etc. Each of these examples is a potential Stark violation requiring disclosure.
- In light of the point above and the requirements in the PPACA for disclosure of actual or potential violations within 60 days, providers should be fully engaged in routine QA activities to identify, correct and disclose any violations. Ideally, implementation of solid education, preventative QA activity, and effective use of counsel is already in-place, mitigating the occurence of a violation or at the worst, mitigating the extent of a violation.
- Providers should not wait for the completion of the new disclosure protocol as doing so creates undue peril that a violation extends beyond the 60 day disclosure requirement in the PPACA and results in a False Claims Act violation. Providers can and should continue to disclose actual or potential violations to CMS even though it is likely that CMS will not resolve any disclosures until implementation of the Secretary’s new protocol. The best case is that CMS will allow providers to update disclosures made prior to the implementation of the protocol and avail themselves of the new claims resolution system created by CMS and the OIG (an updated disclosure providing more detail sufficient to reduce the liability due to the government).
Health Care Reform Implications: Home Health Care
I’m a tad behind where I hoped to be in terms of getting these posts out. Its been a bit busy over the last ten days or so but headed into the Holiday weekend, a break in the schedule affords me the opportunity to “maybe” get caught up.
Of all of the industry sectors touched by health care reform, the two most dramatically impacted from an operating perspective are DME and home care (see my earlier post on Medical Devices and DME). Over the last two years, home care or home health has become the target for payment reform, principally due to MedPac’s reports to Congress and CMS on the rising profitability of the industry, the year-over-year growth in agencies and utilization, and the percentage growth in Medicare spending. Justifiable or not, the Feds never like to see any sector perform well or grow rapidly whenever Medicare and Medicaid are the dominant payer sources. To this end, health care reform, those elements focused on home health, focused-in on realigning the trends of growing utilization, Medicare spending, and rising profitability.
- Beginning in 2011, cap outliers at 2.5% and impose a 10% outlier cap on individual agencies. The cap per agency is 10% of anticipated current year revenues.
- Reduce the market basket by 1% for fiscal years 2011, 2012, and 2013.
- Incorporate a productivity adjustment factor (offset) to the market basket beginning in 2015 (anticipated 1% average reduction).
- Rebase the PPS starting in 2014, fully phased in by 2017. Rebasing is meant to take into account the costs of treating more severely ill patients as found typically in efficient, high performing agencies. In so doing, the Secretary of HHS is charged to look at case mix, the number of visits per episode, the resources used in each visit, the cost of providing care, etc. The Secretary is also supposed to analyze the differences between agencies such as those that are free-standing, non-profit, and institution based (hospital typically). The Bill does provide that the Secretary cannot reduce or adjust (reduction is what is intended) reimbursement by more than 3.5% per year. MedPac is supposed to monitor this process and issue reports reflecting changes in utilization, changes in the number of agencies, changes in access, etc. NOTE: MedPac is the principal advocate for these changes so anticipate rebasing to mean “cuts” and MedPac to issue only favorable reports on the implications/outcomes of rebasing.
- Develop a voluntary system that seeks to create a bundled payment for certain post-acute episodes of care (yet unspecified). Under this system starting in 2013 and continuing for five years, CMS will pay one fee to hospitals, SNFs, physicians and home health agencies (as applicable) per a post-acute discharge, covering the care provided for a period of up to five days prior to hospital admission through the period ending thirty days post hospital discharge. Participation in the program is “voluntary” and the Secretary is charged with providing an analysis of the program’s impact and effectiveness in creating efficiency and improving care coordination to Congress by January 1, 2016. At such time, the Secretary shall also determine whether an expansion of the pilot is warranted. NOTE: In this pilot, the goal is to reduce costs nothing more. Hospitals and physicians are the only potential winners here and for home health agencies, the implications (negative) primarily impact fee-standing, non-hospital affiliated agencies.
- The Secretary is required to conduct a study and submit a report for possible legislative and administrative action on home health agency costs for providing care to low-income individuals, particularly those in under-served areas with high levels of disease complexity and/or disability. Medicare may conduct a pilot program worth $500 million to provide incentives to agencies in certain under-served areas, to expand services to care for these “targeted” individuals.
- 3% add-on for rural visits/episodes occurring during the period beginning April 1, 2010 and ending prior to January 1, 2016.
- Establish a center for Medicare/Medicaid Innovation in CMS that would provide some funding opportunities to agencies that implement chronic care management programs for targeted individuals.
- Require face-to-face encounter by the physician (or applicable extender such as NP, advance-practice nurse clinician, physician assistant) within a reasonable time-frame as determined by the Secretary.
- Physician must keep open records and documentation of Medicare home health referrals.
- Require that physicians participate in care plan certification.
- Require background screening and credentialing of provider, suppliers, owners and managers and require compliance plans. Also gives CMS the authority to place a moratorium on the creation of new agencies.
- Establishes spousal impoverishment protection for home care eligibility under Medicaid.
- Removes barriers for access for additional home health care under Home and Community Based waiver programs.
- Implements the Community First Choice program under Medicaid, expanding access to home care services.
One final note. The Bill provides for the creation of an Independent Payment Advisory Board tasked with submitting legislative proposals further limiting program growth and spending under Medicare if the per capita growth in Medicare exceeds targeted spending levels. Beginning in January of 2014, the Board’s proposals become law unless Congress has taken alternative action to curb program growth and spending. The Board cannot raise taxes, raise Part B premiums, change eligibility standards or increase beneficiary cost-share levels – essentially limiting the Board to relying on spending reductions. Hospitals and hospices are not subject to any Board proposals through 2019.
Health Care Reform Implications: Medical Device and DME
Over the next few days I’ll be pushing out a series of posts as my schedule permits, on the implications of health care reform for various industry segments. These are not meant as in-depth analyses, more of a “summary” of the key points.
Reconciliation Act: This Bill has yet to pass the Senate and as a result, it is possible amendments could change these provisions.
The biggest implication is a 2.3% excise tax that goes into effect in 2013. The tax is on manufacturers of devices but exempts Class I devices such as canes, eyeglasses, and hearing aids. Oddly enough, the tax is tax-deductible and applies to all Class II and Class III devices sold beginning Jan 1, 2013. Clearly, the tax impact will be passed along in pricing, assuming price increases will be wholly or partially absorbed via reimbursement. If not, the clear implication is a reduction in margin for device manufacturers.
Other provisions less onerous but still potentially burdensome include a 90 day waiting period for approval of new DME claims to allow the Secretary to conduct analysis of potentially fraudulent claims. This provision assumes the Secretary will identify potential areas of risk and potential categories of supplies that are prone to fraud. I can’t tell from the language whether this will be a “universally applied” wait for all new claims or just certain claims for certain suppliers.
Also within the Reconciliation language is additional funding to fight fraud, waste and abuse. I suspect some allocation of these dollars will be for additional enforcement activity in the Medical Device/DME industry.
Senate Reform Bill: In the Senate Bill the reform bill that will become law today), there are a number of provisions that will impact the industry.
First, there is an imposition of an annual fee on manufacturers and importers of medical devices. The fee is based on 2010 annual sales and will be allocated across the industry based on market share. Best guesses suggest the fee will be in the range of $2 billion. The fee (tax) is non-deductible and doesn’t apply to Class I or Class II device sales or basically any devices sold via retail direct to consumers. Small manufacturers ($5 million or less) will be exempt and manufacturers with sales between $5 million and $25 million will pay 50% of the fee. The Secretary is charged with analyzing the sales of manufacturers and determining the relevant market share of sales for allocation. Again, this applies to non-domestic manufacturers and domestic importers of foreign devices.
The Senate bill expands competitive bidding for DME to 21 additional metro areas and requires the Secretary to nationalize the process and standardize bids by 2018.
Under Medicare, the Senate bill eliminates the 2% add-on payment for DME (above CPI) that Congress provided last year, effective 2014. Instead, the Senate bill incorporates a productivity improvement feature that effectively reduces the DME fee schedule by 1%, applied to the annual update factor for DME.
Finally, the Senate bill eliminates the option for patients to elect Medicare to purchase a power wheelchair within the first month of medical need approval. Instead, Medicare will pay rental on the chair for 13 months, incorporating a portion of the purchase price in its payments to the DME supplier. Effectively, Medicare pays for the chair to the DME supplier over the 13 months at the end of the period, transferring the ownership of the chair to the beneficiary.
In my opinion, the immediate and near-term questions center on whether the Senate will make adjustments to the Reconciliation Bill and will Congress maintain the taxes and fees outlined. Historically, the Congress post-passage of major entitlements and legislation that raises taxes and/or cuts payments has balked to lobbying pressure and ultimately, restored cuts and enhanced payments. In this scenario, anyone’s guess is as good as mine in terms of what could happen.
Hospital Re-Admissions: Update to an Earlier Post
Last week I wrote about hospitals using “observation stays” as a means of dealing with the potential risk of reimbursement penalties imposed by CMS for certain re-admissions. The focus of my post was on how the trend of hospitals using observation stays to avoid CMS scrutiny (and penalties) was impacting Medicare admissions at SNFs. I concluded my post with a few strategies that SNFs could use to deal with this growing phenomenon.
Today while reviewing my always copious amounts of industry e-mails, I ran across a story about a non-profit coalition in Alabama called AQAF that is working on addressing the issue of hospital readmissions. This group comprised of home health providers, hospitals and SNFs is one of 14 groups contracted with CMS in a pilot program known as “care transitions”. The objective of the groups is to develop strategies and processes to reduce what CMS considers to be, avoidable hospital re-admissions.
Knowing many of you read (and some commented) on my post regarding observation stays, I thought you may enjoy the story on the Alabama project. The link to the story is here: http://blog.al.com/living-news/2010/02/project_aims_to_reduce_hospita.html
New HIPAA Provision Now in Effect
In August of 2009, the Department of Health and Human Services issued an interim final rule requiring that all HIPAA covered entities and their business associates develop notification requirements for a breach of unsecured protected health information (PHI). These new requirements are part of the Health Information Technology for Economic and Clinical Health Act (HITECH). In order to comply with the provisions, covered entities need to develop revised policies, assessment tools and notification processes specific to a breach of unsecured PHI.
The new regulations are designed to expand the coverage scope of HIPAA to the increased use of electronic communication. Under the new provisions, a breach that occurs requires the covered entity to notify the individuals affected by the breach, the Secretary of HHS and in certain circumstances, the media.
The fundamental issue in the new provisions centers on the difference between unsecured and secured PHI. PHI that is secured by encryption or has otherwise been rendered unreadable or unusable and is ultimately disclosed, does not require notification. PHI that is unsecured and may be readable or useable and is subsequently disclosed, requires notification as specified in the Act. A breach is defined as the acquisition, use or disclosure of PHI which compromises the security and/or privacy of the information.
According to the rules, if a breach of unsecured PHI occurs, the covered entity must notify the individuals affected no later than 60 days from when the breach was discovered. The notification must include a description of what occurred, a description of what information was disclosed (social security numbers, addresses, etc.), steps the affected individuals should take to protect themselves, a description of what the covered entity is doing to reduce harm to the individuals and to prevent further disclosures and finally, relevant contact information for the covered entity (including toll-free telephone numbers) so that individuals may ask questions. The notification is required to be written.
In addition to notifying the affected individuals, covered entities are required to notify the Secretary of HHS. If the breach affected less than 500 individuals, the covered entity is required to maintain a log of the breach and any prior or subsequent breaches (for the prior year) and submit the information to the Secretary within 60 days of the end of the calendar year. If the breach affected more than 500 individuals, the covered entity must notify the Secretary within 60 days of discovery of the breach. HHS will post the names of covered entities involved in breaches affecting more than 500 individuals on its website.
If the breach involves more than 500 individuals, the covered entity is also required to notify the media outlets within the region or area where the breach occurred. The notice must contain the same information as provided in the notice to individuals. The notification also must occur within 60 days of discovery of the breach.
For Business Associates, the discovery of a breach on their part must be disclosed to the covered entity within 60 days after discovery. If the breach involves multiple covered entities, the business associate is required to notify each covered entity. Notification requirements on the part of the covered entity to affected individuals still apply however, the time frames for providing such notice depend on whether the business associate was an agent or an independent contractor of the covered entity. For example, if the business associate is an agent of the covered entity, the discovery of the breach on its part is viewed in the rules as discovery on the part of the covered entity. In summary, in this case, the rules for notification apply as if the covered entity discovered the breach (60 days from the date of discovery), even if the business associate/agent did not immediately communicate the discovery to the covered entity.
For health care providers who haven’t yet sought to comply with the new regulations, there is a bit of a breather. HHS will not enforce the sanctions provisions for any breaches that occurred prior to February 22, 2010. Complying with the “intent” of the new provisions will require health care providers to obtain new or updated Business Associate agreements with all related parties. The new agreements need to spell out the new notification requirements and the roles and responsibilities of the entities. In addition, providers should review and update their policies to conform with the notification requirements and the time frames as specified for notification. Annual HIPAA training should reflect the new requirements and it is advisable that some form of interim training should occur to alert key staff to the new requirements.
Hospice Contract Reminders for SNFs
On a fairly routine basis, I run across SNF Administrators and Directors of Nursing that continue to have issues with hospice patients in their facilities but not from the standpoint of the patient typically; from the standpoint of dealing with the Hospice and the terms of the contract between the Hospice and the SNF. In fact, because this issue continues to rise frequently enough, a “primer” post on the relationship between a Hospice and an SNF and how these contracts work, by federal code, seemed timely. Below, I’ve arranged the concepts topically, perhaps even useful as a cheat sheet.
- Is an SNF Required to Contract with a Hospice? The answer is no. Regardless of what a surveyor, patient, family, or hospice tells you, there is no requirement for an SNF to establish a contract with a Hospice. While patients have “choice” under Medicare of providers, the SNF is a “provider” and so is the hospice. SNF care is treated entirely separate from a hospice level of care and even the Medicare benefit for Hospice requires a different benefit election. Bottom line: While it likely will make sense for the SNF to have a contract with a Hospice, there is no legal or regulatory requirement for the SNF to do so, if it chooses not to.
- If an SNF Has a Hospice Contract with One Hospice, Must it Contract with Other Hospices as Well?: Again the answer is not and in many cases, not advisable as I will discuss later. Once an SNF has decided to contract with a Hospice, it can choose to limit its contract to just that one and no more. It is possible that changes being discussed around the Hospice Medicare COP (Conditions of Participation) will modify this a bit but as of right now, an SNF can choose to contract with as many or as few (or none) Hospices as it desires. The rule interpretation that is analogous here involves physicians. Even if a patient has a right to choose his or her own provider, the law does not require that an SNF allow “any” provider. Most SNFs limit the number of credentialed physicians they will permit “on-staff” just as hospitals do. The patient retains the right to use a different hospice, just not within the walls of the SNF.
- The Patient Resides in the SNF but is Under the Service of the Hospice. Who is Responsible for the Patient?: Under Federal law, the Hospice is responsible for developing and coordinating the plan of care, providing physician care, medications and supplies related to the terminal diagnoses, and any and all other core services that are required under law for the Hospice to be certified and in business. Essentially, any care related to the terminal diagnoses is the purview of the Hospice and the SNF becomes by definition, the “home” of the patient. This does not alleviate the SNF of certain levels of responsibility for the basic care of the patient such as nutrition, activities, medication administration, ADL care, etc. The Hospice assumes the overall responsibility of managing these “non-core” services and assures that the same are performed according to the plan of care and according to hospice policy. It also surprisingly, doesn’t mean that a negative outcome caused by the SNF to the patient can’t be cited under the SNF code – it can (such as in the case of a life safety code violation, a medication administration violation or an allegation of abuse on the part of an SNF employee).
- What Must be or Should be in a Contract Between a Hospice and an SNF?: Fundamentally, all of the following need to be clearly addressed. Note: This is not an exhaustive list and each provider should refer to the specific governing Federal and State code as a final reference.
- The services provided by the Hospice
- The services provided by the SNF. The SNF cannot provide, even under contract, the core required hospice services (Physician Services, Nursing, Social Services and Counseling/Bereavement).
- Hospice policies and philosophy in writing (as pertinent and applicable)
- Statements that specify that the Hospice takes full responsibility for the professional management of the patient’s hospice care and that the SNF provides room and board.
- Statements spelling out that the Hospice provides the same level of care and service within the SNF that it does for its home-bound patients including necessary medical care and inpatient care.
- Statement prohibiting the Hospice to discharge the patient from its service even if the care becomes costly or inconvenient.
- Statement requiring the Hospice to continue care for a Medicare beneficiary, even if the beneficiary cannot pay.
- Definition of admission criteria and requirements and necessary statements that the same apply for all payer sources and types.
- The Agreement should clearly define that roles and duties of each provider separately as well as in coordination with each other.
- The Agreement should specify all of the reimbursement and billing requirements and understandings between both parties. This is particularly critical when a patient is dually eligible (Medicaid and Medicare) and may be using Medicaid to cover the cost of room and board in the SNF and Medicare for the hospice benefit. Bed hold requirements also need to be addressed.
- What Duties are Joint Between the Hospice and the SNF?: Both providers must jointly develop the plan of care and share the responsibilities for completion of the MDS. Each must also establish a communication plan for changes of condition or other events but it is the responsibility of the Hospice to change the plan of care (SNF may not alter the plan of care). Medication changes (terminal condition related), lab reports and action/in-action, etc., are all the responsibility of the Hospice and the SNF may not take action without the approval of the Hospice. An example that occurs all too frequently concerns the responsibilities between the providers when a patient falls or has frequent falls. SNFs are accustomed to addressing falls almost instantaneously, developing new interventions and care plans. In the case where the patient is under the care of the Hospice, this is the responsibility of the Hospice. The SNF needs to be aggressive in getting the Hospice involved and responsive, timely but it (the SNF) cannot alter the care plan without Hospice involvement and approval.
- Which Provider Has to Deal with Difficult Patients or Difficult Families?: For the most part, this is the responsibility of the Hospice, not the SNF. Clearly, because difficult circumstances arise with patients when the Hospice is not present, the SNF will bear a large portion of the burden but all negative interactions or difficulties need to be shared with the Hospice. For example, the Hospice is required to provide counseling and social service to patients and their families and SNFs need to hold the Hospice accountable for this. Even a difficult family situation in the middle of the night needs to be handled by the Hospice and the SNF should not expect to wait until morning for the Hospice to intervene. If the patient is restless or needs more attention than the SNF can directly provide because the patient is dying, the Hospice must provide the adjunct staff, including Volunteers. Hospice staffing issues, etc. are not the concern of the SNF. The Hospice is required by law to have its personnel available to the SNF and their patient, twenty-four hours per day, 365 days per year.
- What Happens with Hospice Patients in the SNF During Survey and How are Surveyors Required to Review the Care Provided to these Patients?: Essentially, the plan of care and the direction of the care for the Hospice patient in an SNF is the responsibility of the Hospice and surveyors may not take issue with the SNF for adequacy of the care plan, etc. The SNF must still be responsible for the legal requirements of its scope of duties as spelled out in the Hospice/SNF contract. Surveyors may not however, take issue with an SNF because of the actions of a Hospice employee (or the lack of action, etc.). The surveyor can and is only legally bound, to take actions with an SNF regarding the role and responsibility of the SNF as the patient’s “room and board”. All of this said however, it is very important for an SNF to remember that it is responsible for holding the Hospice accountable for the Hospice’s responsibilities under the contract and as set forth by law. An SNF runs the risk of having severe regulatory problems if it chooses not to hold a Hospice accountable for providing required care as needed by the patient or for addressing serious issues in a timely fashion such as a change of condition or adverse, unplanned event that occurred with the patient or his/her family.
- Why Not Have Contracts with Multiple Hospices?: Developing one good, functioning and workable contract takes time and energy. Mutliple contracts take twice as much (if not more) time and frankly, for an SNF already limited in resources and responsible for a house-full (hopefully) of patients, more work in this case is not warranted or advised. Multiple contracts lead to more opportunities for error, confusion and a burden on staff to have to think-through another set of players and nuances. I have never seen an instance where having multiple contracts is beneficial for an SNF and to be quite honest, presents more opporunities for problems than what the extra contracts are worth. My advice: Find a good Hospice, develop a contract, and take the time and energy to work and build a very solid program within the SNF. If the relationship turns sour and issues can’t be resolved, don’t add another contract without eliminating the one that isn’t working.
Non-Profit Health Care Outlook for 2010
Moody’s Investor Service released their annual sector outlook today for not-for-profit health care organizations, stating that they (Moody’s) continue to maintain a “negative” outlook on the industry. Important to note in this report is that the focus is principally on hospitals and since the report is produced by Moody’s, its primary perspective is on credit and investment. That said, even with the predominant focus being on hospitals, there is quite a bit of take-away information for non-profit health care providers in general, including those in the post-acute sectors.
The emphasis Moody’s places on their negative or dim outlook is economic related primarily and public policy weighted secondarily. They point to the continued weak economy as the cause for slack patient volumes and concerns regarding provider debt levels, particularly those providers that may be facing an expiring Letter of Credit (LOC) situation over the next twelve to eighteen months. With regard to public policy issues, Moody’s points to budget insufficiency issues in Medicare and Medicaid foreshadowing tighter or declining reimbursements and uncertainty of the outcome of health reform although, as they indicate, the legislation today, is effectively in limbo.
According to Moody’s, the weaknesses inherent for non-profits are their reliance on governmental sources for payment more so than proprietary operators and their need to be cautious of their tax-exempt status in terms of a political culture requiring more and more justification of expenditures made on behalf of the uninsured or under-insured population. I would also add that other forces such as unions are today, targeting non-profits more so than ever and the result is higher labor costs and higher legal defense costs (to abate organizing campaigns). Similarly, the plaintiff’s bar is far more active today and for non-profits, their fair-haired status once given due to religious affiliations primarily, is all but gone. It is not uncommon any longer for attorneys to seek damages against large or for that matter, even small to medium-sized non-profit providers.
The report cites the following reasons as the primary factors contributing to Moody’s negative outlook.
- Sluggish patient volumes due to high levels of unemployment combined with the loss of health insurance.
- Pressure on revenue streams, particularly Medicare and Medicaid combined with intensified recovery activity (RACs and Probes).
- Greater difficulty in cutting costs due to the cost-cutting measures already undertaken in 2009 and late 2008. There is little room remaining for significant expense reductions.
- Increasing bad-debt exposure.
- Debt structure and liquidity risks driven by high bank exposure, potentially expiring LOCs and less than a full recovery of investment losses.
- Greater or increasing capital needs after a year or more of deferred capital spending.
- Expiration of the federal stimulus program at year-end 2010.
In addition to the above negatives, Moody’s cites three positive factors.
- For some providers, strong management capability that allows the provider to respond quickly to negative operating changes and positive improvements as they occur.
- Partial recovery of investment losses adding back some liquidity.
- Likely increase in merger and acquisition activity which Moody’s believes is good for the market.
As I reviewed the report, my conclusions are as follows. These conclusions I believe, are universal for all non-profit health care providers.
- The pace of economic recovery will push forward or hold back, the recovery of non-profit health care provider’s fortunes. A quickening pace including job growth will help providers recover quicker although a lag in terms of patient volume increases will clearly be present. A slow, mixed recovery with equally elongated new job creation will hurt providers and potentially, lead to insolvencies and failures. The key to remaining solvent in the event of a slow recovery is debt structure, depth of product/service mix and generally low non-wage related labor costs (turnover, legal issues, compliance problems, supplemental staffing costs, etc.).
- Access to capital at reasonable terms will remain an issue for the sector throughout the bulk of 2010. While I see some softening, the present stance the Feds are taking on taxing the banking industry could very quickly, chill any warmth that has softened the credit markets. Within the next twelve to eighteen months, a very large ($19 billion) amount of Letters of Credit will come due. Providers with struggling balance sheets or under-performing newer projects may struggle to meet new conditions and terms to enhance their credit. Without question, debt costs and the related costs associated with debt issuance will continue to be higher than any period over the last five plus years. The significant question remaining about access to capital is what role the Feds will play and will they continue to bolster lending activities via HUD to help stabilize some of the credit/lending markets.
- Of particular concern to me and in concert with the point immediately above is the growth in deferred capital investing that is occurring, particularly in the SNF industry. This industry is already dominated by aging physical plants and as providers have been forced to defer capital investment due to the economy and due to the reimbursement climate, the industry continues to shed asset wealth via depreciation and become more functionally obsolete. With growing regulatory pressure for SNFs in terms of environmental standards and new mandates on fire suppression systems, access to reasonable cost capital will be imperative for this industry to modernize and recapture at least a portion of its physical plant asset wealth.
- With health reform on the Washington back-burner for the moment, I believe providers will tend to breath a collective sigh of relief – prematurely. While I believe that a reform conflagration is not imminent, the fiscal woes of Medicare and Medicaid trudge on and as a result, the reimbursement outlook from my perspective, remains rather bleak. There will be continued financial pressure at the federal and state levels to reduce or reign in the trajectory of entitlement spending and as a result, I believe providers need to be vigilant about the prospects of flat to declining reimbursement rates. Of particular concern to providers should be Medicaid which today, is heavily bolstered by federal stimulus dollars set to evaporate in December. With state budgets remaining in the “tank” due to the slow recovering economy, states are going to be looking for Medicaid savings with a vengeance unless the feds continue additional matching provisions or add new dollars.
- In the merger and acquisition area I’m less of a believer that this market will heat-up than Moody’s is. I think that the time is certainly ripe for some increase in activity but I believe that the credit markets will have more to say about the volume than the desire of providers to acquire or be acquired. I do believe however that this is an opportune time for non-profits to look at merger and affiliation arrangements as opportunities are plentiful, the benefits of consolidating balance-sheets are obvious, synergies can be maximized across and within markets, and the costs of mergers/affiliations are far less and can be completed with minimal to no need for new debt.
Any readers that would like a PDF copy of the Moody’s report can go to the Author page and send me an e-mail request. In your request, please provide me with your full name and a working e-mail address that I can use to forward the document.
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