Financial Tests Before Additions, Renovations or New Construction
A frequent, recurring question that I field, especially for CCRCs and seniors housing providers is “what” financial feasibility tests are most important before a project is started or for that matter, financed. Given that capital is still relatively tight, project feasibility and key financial tests are today, critically important to assure the best financing terms available plus, project viability. Below, I’ve broken out the initial “best” feasibility tools/tests to work through once a scope and general cost is known.
- Revenue Efficiency: This is very simple: How much of the proposed project square footage produces revenue? The more square feet tied to revenue generating functions, the more revenue efficient the project is. For seniors housing, the factor or test is very important. Too often, I see proposed projects that allocate way too much space to commons and other areas that aren’t related to revenue production. While groups will argue that these spaces are necessary to attract prospective renters/residents, the reality is that smaller, more efficient is better from an operating standpoint and frankly, even from a marketing standpoint. Too much space can give the project a “vacant” feel while driving up costs related to heating/air conditioning, maintenance, furnishings, etc. Ratios of revenue producing square feet to common or non-revenue producing square feet of 70/30 or less, tend to work best from a feasibility standpoint. I’ll tie this point tighter in subsequent segments.
- Prospective Rate Test by Square Foot: While rate charged is a function for many providers of market or other perceived and financially tied projections, a first basic test should involve a simple equalization model based on project square feet. In fact, this test is an easily built model that can be used for many rate setting exercises and revenue pro formas. First, total the revenue producing square feet in the project. Next, determine the project’s projected or known, fixed costs, variable costs and desired margin. Finally, decide at what level, stabilized occupancy will occur (e.g, 85%, 90%, etc.). Hint: Amounts or levels greater than 95% are not realistic. Once the aforementioned data is determined, divide the total of fixed, variable and margin (annualized) by the total revenue producing square feet, divided by 12 for a monthly factor or 365 for a daily factor. Finally, multiply this result by the stabilized occupancy percentage. The result is the gross revenue per square foot required by the project to cover the fixed and variable costs plus generate the desired margin. To equate this number to prospective rates, multiply it by the unit square footage for each unit type in the project. Next, analyze the results compared to market. Are the rates calculated attainable? If the rates are ultimately not, can the revenue be picked-up elsewhere via a shift among unit types? Are the costs too high? Back to the first point, is too much of the project square footage not tied to revenue production?
- Occupancy Tests: Knowing what the projected gross revenue is on a square foot basis provides a basis for conducting some simple occupancy tests via adjusting fill-rates, overall occupancy rates, payer mix, etc. Using the same formula above but varying the occupancy, it become easy to see the relationships between square foot expenses, particularly those that are fixed and the revenue levels required to cover these expenses. I like to analyze the ratios between each or, how much occupancy do I need to cover fixed expenses (percentage) and where can I massage variable expenses based on occupancy levels or payer mix. Typically, once a simple spreadsheet with square foot costs and revenues is built, it is fairly easy to do assumptive modeling and analyses.
- Payback Testing: An important analysis or test too often ignored or, assumed to be tied to a debt service amortization schedule, is payback testing. Payback should be factored to occur on or before the point in the project’s useful life, when major improvements need to occur. The point here is that the project ideally is paid-for before major improvements occur, commonly known as the period of re-building. At this point, one shouldn’t look at a scenario of re-building when the original debt or expenditure (if equity is the source) isn’t already recovered or substantially defeased. If this doesn’t occur, the capital improvement process is akin to building the project twice (or major portions thereof). In simple theory, new buildings or new construction provides a window of time where capital infusion for improvements is minimal if almost non-existent. This period is where incremental cash (assuming proper pricing at sustainable occupancy levels) can accumulate, allocated for payback (either via faster current debt repayment or investment for future repayment when the arbitrage is positive). My preferred methodology for this analysis is to develop a cash flow analysis where revenue is netted against cash expenses, including debt service. I set my targeted payoff period as that time in the future where projected improvements via major system, structural, etc. upgrades will occur – typically by years 12 to 14. I also will net my annual cash flow by anticipated or projected capital improvement expenditures that use ”cash”. For inflation assumptions, or investment assumptions, I try to use actual or historic data and I err on the side of conservatism. Two methods can be used in this approach. One that negates principal repayment in “real-time” and one that incorporates incremental principal repayment. If debt is involved and on an amortization schedule with principal repayment incorporated, its easiest to assume a declining balance for the payback analysis. If the source of funds is equity or a combination of debt and equity, I assume equity repayment at a current cost of capital rate and while I may not create an amortization schedule with imputed principal payments (equity repayment), I will assume a “balloon” effect by imputing a cost of capital return assumption on the equity.
Ideally, this type of analysis is done sufficiently ahead of project finalization. If such is the case, the project can be adjusted to conform to a proper payback period, be optimally efficient, and have a rate/revenue structure that fits within the target market.
Medicare SNF Rate Outlook
Literally fresh off of a significant rate adjustment/reduction in October (2011), Medpac (the Medicare Payment Advisory Commission) releases a recommendation for complete SNF payment overhaul. In their assessment of the SNF payment system under Medicare, Medpac concludes the following;
- Medicare payments to SNFs represent 23% of all revenues. Medicare (payer) as a share of SNF patient days averages 12%.
- Provider supply and occupancy rates remain essentially flat year-over-year (2009-2010).
- Quality as determined through survey and other indicators remains unchanged.
- Average Medicare margin is 18.5%. The average margin for for-profit SNFs is 20.7% and for non-profits, 9.5%.
The crux of the Medpac argument is that efficient providers have lower costs (about 10%) and higher quality as evidenced by higher rates of community discharges (38% higher) and lower rates of rehospitalizations (17% lower). Accordingly, Medpac believes that the current system, inclusive of recent adjustments to rates (October) is set to produce the same level of behavior and outcomes, plus account for a 14.6% average margin in 2012. The argument put forth by Medpac is that the Medicare SNF system must be re-based, principally due to the fact that margins have run consistently above 10% since 2000 and the correlation between margins and patient case-mix is non-existent. In summary, the Medpac recommendation, which will head to Congress in the upcoming months, is to revise the PPS system now and begin rebasing rates in 2014, in phases. In addition, Medpac is calling for a rehospitalization impact (negative) to rates for poor performing SNFs.
Ordinarily, Medpac recommendations such as this have more of a “frame the argument” impact than a real implementation objective. Congress has been reluctant to take steps this drastic to any Medicare provider group for fear of industry fall-out and political damage. Yet, as we have seen with the home health industry, greater movement is possible where rate cuts are concerned, particularly if the general tone is that the industry is too profitable and said profit is coming from gaming the system. Double digit margins seem to get even Congressional types’ attention.
Looking at the industry, how the rate reductions in 2011 transpired, the initial report/recommendations from Medpac, and the current public policy environment in Washington, my near term rate outlook for SNFs is as follows.
- All the evidence suggests PPS refinement is forthcoming. The system simply isn’t working adequately in terms of tying payment rates to care costs and rewarding quality. The “behavior” effect that CMS is looking for, namely a movement away from “rate ramping” focused on rehab case-mixes to rate equalization focused on a balanced book of Medicare patients (balanced case-mix) isn’t happening and apparently, isn’t properly incented in the current system.
- Rebasing isn’t far-fetched but it is aways off. CMS is prone to be exceptionally slow at devising payment systems and of course, equally inept at getting the infrastructure to work properly. If as I believe, the first step is PPS refinement, given the likely horizon of implementation, rebasing is farther away; certainly farther than 2014.
- There is no question that payments will become tied to certain quality indicators, especially rehospitalizations. This trend is foretold in the PPACA (Reform) and regardless of the law’s future (life or death or limbo), the payment tied to quality trend is here to stay.
- Politically, the will to champion what will be viewed as over-payments is far less than the will to find ways to rein in excess (or perceived excess). All this means, regardless of the upcoming political cycle and elections, is that lobbying for a system that continues to produce average margins north of 14% will fall on principally deaf ears on the Hill.
- Rates are trending down and I suspect another round of flat to modest decreases in rates forthcoming in October. The push will be system revision as opposed to just rate reductions, feeling that the best approach is to revamp the existing PPS and in so doing, create lower spending overall.
- Time tested arguments against cuts that won’t work or have run their course are as follows;
- Medicare margins are necessary to offset Medicaid losses. This one is good on its face but in reality, its tough to make the case for margins that have run in the 20% range and earnings that have been solid among the for-profit companies. The publicly traded guys need to show pain (in the form of earnings) before Congress will relent on the lack of merit for this argument (publicly traded SNFs tend to have higher MA census and higher Medicare census).
- Access will become an issue and facilities will close. Per Medpac and most industry observers, the supply today is adequate and slightly surplus so some continued shrinkage isn’t a big concern.
- Job losses will certainly occur. The latest cuts from October don’t support this argument by any magnitude. Additionally, the overall health care industry is growing so worker displacement isn’t really a grave concern – movement is easy between providers in most markets.
- Capital will be even more difficult to access with future negative rate outlooks. Again, this is a decent argument but in reality, capital access is provider specific and CMS and policy makers realize that well run, profitable providers will continue to have access to capital, even if the industry outlook is negative. A better argument is that negative industry outlooks make capital marginally more expensive and the number of outlets fewer. This is true only in the short-run however.
So in conclusion, here’s the take-away: Medicare rates are headed down in the near term and in the intermediate term. It is a virtual certainty that the present PPS system will be revised over the next three to five years. The future of the PPACA will impact this process as elements of reform shift the landscape for all providers. The debt discussions in Washington will have literally no direct impact on the future of Medicare SNF payments; the industry share of the overall spending pie is negligible enough to not be overly impacted by automatic cuts in federal spending. The future is one where providers must learn to balance their overall Medicare book/case-mix and focus on quality. Quality incentives/penalties are a certainty and there is no longer any room left to ignore outcomes such as discharges and rehospitalizations. Likewise, I believe bundled payments are forthcoming and the further development of ACOs will continue to shift SNFs to align their care and product/service offerings toward outcome oriented, bundled payments. Medicare as a payer source will remain profitable for many SNFs although not at the same margin levels seen over the past decade. Profitability ranges will trend into the high single digits or perhaps slightly more but only for providers with a well-balanced case-mix. As always however, the key to making money in this declining reimbursement environment stems from solid management, a well-balanced payer mix, and an operating infrastructure that is aligned with the incentives remaining in the industry.
Medicare Fraud and Why; Part II
Last week I published a post regarding Medicare fraud that is occurring in the post-acute industry. The post is available at http://wp.me/ptUlY-ak . At the end, I indicated that I would provide a follow-up post; a closer piece more succinct on why the fraud trend is heating up and what the drivers for this trend are. In short, while the two posts (this one and the one from last week) can stand-alone, readers with interest in this topic are advised to read both.
In the previous post, I indicated that Medicare in and of itself is an instigator of some of the recent fraud activity. The very nature of the program, how it pays, what it pays for and how its claim adjudication processes and benefit structures are configured establishes an environment that is a veritable Petri dish for providers looking to “game the system”. By design, Medicare itself is uniquely flawed as it creates an incentive environment for ramping-up procedures, utilization and acuity thus leaving wide interpretive room retrospectively about the necessity of the care provided to any one or any group of patients. Similarly, as the predominant payment methodology under Medicare is prospective, not based on a series of medical necessity tests, any third-party utilization review administered by qualified individuals will invariably find payments made for procedures, care, diagnostics, medications, et.al., that proved, knowing the final outcome of the care provided to a patient or group of patients, to be unnecessary or perhaps, greater in amount than what was truly required. The assessment tools and tools of predetermination of need or necessity that drive prospective payments under Medicare, while lengthy, bureaucratic and ill-defined, rely extensively on human judgement and input that is subjective in many regards. The playing field thus is truly wide-open and when combined with the implied incentive that more achieves higher payment, a clear or even abstract environment is present for fraud.
Behind the process of payment and the benefit administration elements of Medicare lies a whole series of laws and agency administrative codes that seek to define what is fraudulent behavior where Medicare is concerned. Truly, this body of work is the purview of lawyers. In my years of travel throughout the healthcare industry, rare do I encounter folks at the operations levels, administrative levels, clinical levels or financial levels of healthcare organizations that completely grasp the depth and nuances of these laws. In fact, because the topic and information is arcane and uniquely legal, I often encounter multiple consultants and even lawyers, that don’t understand it. Frankly, I have spent time with consultants from large, well established practices whose content knowledge in this subject area is poor to non-existent and thus, outright wrong.
Taking the foregoing and placing it into an evolving conclusion, the puzzle starts to become clearer as to why “fraud” is spreading as rapidly as it is. First, Medicare itself begets a certain level of activity that is specious. Second, the laws that define fraud are convoluted and constantly evolving. Third, the people at the organization level rarely understand the laws and to be honest, their jobs are not charged with “knowing” the depths of what Medicare and its associated agencies, consider as fraud. Finally, all too many third parties that organizations rely on routinely for expertise are no more versed in compliance and the fraud laws than the organizations themselves.
In its most simplified form (lawyers please hold the laughs as my role is to employ wherever possible the KISS principle), fraud under Medicare can be boiled down as follows.
- Anti-Kickback: Forbids any individual or organization that is involved in the provision of care reimbursed or covered under Medicare or Medicaid from receiving a financial incentive or inducement associated with a referral, the provision of service, utilization or marketing of a service. The Anti-Kickback provision has been broadly employed to cover contractors, lease arrangements, referral arrangements, purchasing arrangements, etc. A growing and today, somewhat common use of the Anti-Kickback laws are the relationships between SNFs and Hospices, vendor relationships with SNFs, pharmaceutical and equipment suppliers, provider organizations, and lease arrangements between Medicare providers. Most interesting to note is the after-practice or after-violation OIG activity where Anti-Kickback language arises following a Whistleblower action of some form. In short, I am seeing more activity here not as a de novo action started by CMS but following after, a Qui Tam suit. Because of the breadth of activity that falls under Anti-Kickback, it isn’t surprising that this area is the most misunderstood by providers. For example, I routinely see situations where SNFs enter into or seek, agreements with diagnostic providers (radiology, laboratory, etc.) for fee levels below Medicare fee-screens or allowable levels. Equally not surprising, I’ve watched this activity escalate concurrent with reimbursement cuts under Part A.
- False Claims Act: Defines as a violation, any activity where a person or organization, intentionally and/or knowingly, causes payment to be made or seeks to cause payment to me made under Medicare or Medicaid for care that is improperly provided, provided illegally, unneccessary, etc. Common applications or violations include upcoding, services not rendered, bundling or unbundling, services rendered illegally or unprofessional (not within a prescribed professional practice standard), phantom patients, kickbacks or inducements (see Anti-Kickback), and improper certifications or false certifications. In most recent periods, like application under Anti-Kickback laws, the False Claims Act violations of significant magnitude seem to arise from Qui Tam actions. Again, this areas of fraud is broadening rapidly as the methodology used by providers to create additional patient volume can and has run afoul of the False Claims Act (reference AseraCare’s most recent Qui Tam suit). This area is a literal mine field for many post-acute providers and rapidly becoming an extremely hot interest area within the Medicare Hospice arena and the SNF arena. What I see that is most disturbing for providers is their near complete failure to understand that a contract arrangement for services provided under Part A imputes False Claim Act liability to both parties. Case in point: SNFs and therapy contract agreements. Even though the therapy company may be completely at fault for upcoding therapy RUGs and thereby creating a scenario for violation under the False Claims Act, the SNF cannot escape the liability and culpability for the same violation under the Act as it is the Part A provider and the entity that generated the fraudulent claim to Medicare. I am seeing the same application of False Claim Act provisions in the relationships between SNFs and Hospices where both parties were overtly engaged in certifying a resident as terminal when no such terminal condition truly existed. In these situations, there is often dual application as the reimbursement crosses Medicare and Medicaid.
- Stark Laws (collective): Created and then adapted via a series of additional laws, Stark fundamentally covers physician self-referral for Medicare and Medicaid patients. At the core is a theme of separating physician interests where, given a physician’s ability to direct patient flow, ownership or financial benefit arising out of a referral is a prohibited activity. Stark governs ownership, investment and beneficial compensation arrangements between physicians and other Medicare and Medicaid providers. As is true with all Medicare/Medicaid fraud related laws, Stark is complicated. The law is loaded with nuances that arose across Stark’s three phases (Stark I, II and III) that cover an inordinately wide range of activities that are part and parcel to physician practices and their relationships under Medicare and Medicaid. Stark also has a series of “safe harbors”; practices that on their face may be violations but when conducted in certain ways and manners, the practice is not a violation. The establishment of these safe harbors principally arose to deal with issues where certain practices crossed between Stark and the Anti-Kickback laws. Examples of existing safe harbors are physician investments in joint-ventures in underserved areas, practitioner recruitment in underserved areas, physician investments in their own group practices (provided the practice group meets Stark definitions), and specialty referral relationships where the referral from a primary care physician to a specialist includes a fundamental understanding that the specialists will refer the patient back to the original primary care physician for continued care (money or other inducements cannot be a part of this referral process). Within the post-acute industry, the most common Stark violations I see are the relationships between contracted physicians serving as Medical Directors in Hospices, Home Health Agencies and Nursing Homes where the compensation relationships are not properly structured to avoid compensation ties to referrals or to avoid improper compensation limits (inducements) above and beyond market and Medicare norms.
A quick review of the above laws and their simplified descriptions suggests that conducting or continuing certain practices is a proverbial “dance with the devil”. The question posed thus, is why does fraud rise to the level that it does and seemingly, on a broad basis within organizations that have the resources to understand the laws and their implications? The answer is: Market and Economics. Consider the following;
- Literally today in the U.S., there are more providers and capacity than true organic demand, when demand is correlated to “paying demand”. Arguably, demand is probably sufficient enough to fill all capacity but when placed into the context of demand that pays in amounts equal or greater than the fixed and variable cost of providing the service, the “desired demand” is less than the current provider capacity. If one were to re-frame demand to include payment equal to or greater than the fixed and variable costs of service plus a margin, the remaining demand is shaved lower yet again. It is this level of demand that produces considerable competition among providers, often to levels where provider survival is at stake unless new sources of paying patients can be developed. When cases such as the recent Qui Tams involving Vitas and Asercare arise, one can quickly understand the inherent pressure within these organizations of developing new sources of patients, even if doing so runs afoul of Medicare anti-fraud laws. In essence, the risk of organizational failure, poor performance, reduction in corporate value, etc. is greater than the risk of being inviolate of one or Medicare anti-fraud laws. Taken marginally deeper, the truth is that there are simply not enough core (by definition under the Medicare hospice benefit) hospice patients at any one point in time, with adequate payment, to meet the overall capacity in the industry. The same holds true for home health and is becoming more apparent in the SNF sector.
- Market areas and their demographics and economic conditions change faster than healthcare providers can react and thus, what was at one point a good market may no longer be (one need only look at Michigan and in particular the Detroit area and corridor areas). Operationally, even for remote office agencies such as found in home health and hospice, healthcare service provision involves a certain level of fixed investment and for certain, infrastructure investment. Providers that have witnessed market fortunes change and thus, paying volumes shift, are stressed to replace dying or dwindling volumes with other volumes. All too often, I watch once unthought of marketing practices, taboo relationships, referral relationships, and specious coding practices develop almost in concert with market changes. The alternative? Shutter offices, lay-off people, write down investments or abandon buildings. For providers that have gone this route, the pain can be almost unbearable as trying to exit a now dead or severely decayed market is far from fluid; potential users or buyers of infrastructure don’t tend to relish the opportunity to enter a decaying or impaired environment.
- While in former periods of economic decline, healthcare remained mostly immune from too much spill-over impact, the latest decline and continued stagnation violated past experience. The reason is less one-side economically and more about a wider incorporation of elements that are causes and effects of the current economic circumstances. Simply stated: This current period of recession and stagnation contains more elements of public policy causes than market forces. This is particularly true for healthcare. Though past economic periods evidenced rise and fall, recovering for market purposes in almost predictable fashion post fall, such is not the current case, fundamentally due to the public policy issues that are dogging a normative recovery. What this recession showed clearer than any other is that our economy is structurally unsound and our core time-held ideologies regarding the role of entitlements in a first-world leading society awash in smoke and mirrors; promises that are unsustainable and moreover, fiscally impossible to fund. Thus, for providers, two forces are at work today (and for the immediate future) to constrain any real growth in payments and volume. First, without a more robust growth in employment (non-governmental) and overall economic activity, those without health insurance will remain greater in number than historic (a payer source reduction) and programs reliant on tax revenues for funding, facing mounting deficits (Medicaid and Medicare). In economic periods when unemployment remains high, pressure mounts on governments to take-on a greater responsibility of social welfare, during a period where revenues via taxation sources are declining or on-balance, stable but lower than normal levels. As the burden falls on entitlements, deficits increase to shift resources toward these programs. Different in this period is that the balance sheet room to simply create more “credit” or “dollars” ( deficits) to shift toward entitlements is functionally non-existent. The recipe today that on the economic front drives an element of fraudulent behavior is this. One part fewer paying patients as benefit levels for health coverage have evaporated or waned. Another part diminished resources from patients to pay for services, even where some level of benefit may still be intact. Two parts an outlook of Medicare cuts and reductions. One part current cuts to Medicaid payments, a program that already under-compensates providers for their costs of care. And finally, three parts Washington policy makers awash in dysfunction, lacking fiscal clarity at each turn and an inability to generate traction on any programmatic plans of common sense that would create some level of stability and reassurance (the three parts are the House, the Senate, and White House). To weather the malaise and compensate for what is and likely what will be, providers turn to paths creative. The paths I too often see are by destination, a road to fraud. Whether the activity is upcoding for patients that do not fit a higher level of reimbursement to engaging in contract negotiations at rates below Medicare allowable amounts to help offset reimbursement reductions, to billing at certain levels and providing care below the level billed to create a margin, each activity (and I could list many others) is at least in major part, a direct reflection on the current economy that is overlaid on healthcare.
Post-Payment Reductions: Build a Revenue Model for Success
Not too long ago I wrote a post for SNFs regarding “what to do” in preparation for October 1 rate reductions. Since then, I’ve fielded inquiries galore from all kinds of providers looking into a future that likely includes Medicare and certainly, Medicaid rate/payment reductions. In most cases, the answer that I provide is clearly more confusing and complex than many want to hear. In an attempt to provide additional clarity across the board, regardless of provider type (SNF, Hospice, Home Health, etc.), I decided to write what I hope, is a simplified approach to creating a level of revenue stability in a tight to declining environment.
The typical reaction from most providers I work with is a quick turn to expense reduction as a means of combatting reducing revenues. Often times, the immediate actions taken provide only a short-term respite to margin erosion followed closely by a steady erosion of margin. The reason? The most apparent and easiest places to cut such as staffing reduce service and quality. Consistent reductions in care are followed by consistent erosion in revenue via occupancy or alternatively, higher expenses in the form of staff turnover, compliance problems, etc. The plain fact of health care life and frankly, business life in general is that a company cannot save itself to a consistent profit.
The alternative approach that I recommend providers adapt is a more fundamental, less variable expense focused model; certainly one that doesn’t quibble with incrementalism as a means of dealing with margin via expense reductions. The start of this approach focuses on three key axioms.
- Price = Fixed Cost + Variable Cost + Margin. In this case, price isn’t truly at the control of the provider. Substitute Per Diem Net Revenue for price.
- Net Per Diem Revenue is driven up by productivity, especially billable productivity and case mix. If the equation doesn’t work to produce the margin desired, focus more on productivity and issues such as occupancy and case-mix before attempting to drive down variable costs, unless the variable cost reductions consist of “low hanging fruit” (e.g., too much overtime, agency use, supply and food waste, etc.). Most providers believe wrongly that a Medicare expenditure reduction translates equally for all providers in the form of rate. The reality is that some providers, even in spite of rate or expenditure reductions, can make wholesale gains in their Net Per Diem by improving their productivity and case-mix. Simply put, improving case-mix to higher paying categories, even those impacted by rate cuts, can improve per diem revenue. While Medicare and Medicaid may provide uniformity in the form of rate reductions, providers and their patient mix are far from uniform. The proof is in the impact initially to per diem revenue and then what changes can be implemented from a revenue enhancement strategy that still, even with cuts, increases net per diem revenue.
- Begin to think of expenses as an investment in revenue or sales, not compartmentalized as a separate unrelated item. From this view, room may exist to make “investments” that drive more revenue and thus, in proportion, more margin. Commonly put, this is an ROI approach.
Building a revenue model is fundamentally about maximizing the elements of the business that are tied to sales and tied to payments. It is less about the concept of “more is better” and all about the concept that “better is better”. For example, and employing a bit of algebra, the equation in point one above affords me the opportunity to eliminate any of the four item variables and determine what “each” unknown variable should be. Typically, that means that I start with Fixed Costs as by their nature, they are known and fixed. I equate these to a per diem. From this point, I will add-in a margin and my current or anticipated Price expressed as my Net Per Diem Revenue (this number should approximate very closely, a cash value per diem, before expenses). For example, assuming a fixed cost per diem of $75.00, a net per diem revenue number of $400 and a desired margin (I prefer operating margin, removing non-cash expenses from the calculation) of 20% or $80.00, my variable expenses per diem can equal no more than $245.00.
Using the above example, if my current variable expenses are running higher than $245.00, I will look first, and directly, at ways that I can improve the net per diem revenue number, not at cutting the variable expenses to achieve my margin. Why? The simplest answer is that my variable expenses at a certain volume become somewhat fixed and cutting can become an indiscriminate process that is less tied to revenue and margin and more tied to “ease” that ultimately, erodes revenue and margin. Specifically, I’ll look at five elements that directly correlate to net revenue.
- Occupancy or Census – how productive are my variable expenses? In certain instances, improving net revenue involves right-sizing operations to the proper level. In this view, the focus is less about cutting variable expenses but more about making sure that my expense levels are tied to the actual volume that the business organically generates.
- Marketing/Sales – can I increase my volume, occupancy, census, etc via a more effective marketing/sales effort? In this case, I will likely make investments but I will match my investments against an expected return that is substantially greater than the outlay, accretive to my net revenue.
- Case-Mix Productivity/Payer Mix – do my current level of variable expenses support a higher acuity or a greater level of case-mix acuity? Productivity is not just about everyone being busy. It is also about the core competency of the staff and the ability of the organization to do more with the same level of staff. I recognize that incremental expenses in terms of supplies, drugs, etc. will likely increase but as long as the increase is less than the net revenue increase at the desired margin level (net revenue increase minus incremental expense increase = desired margin), it is worth the investment.
- Investment in Variable Expenses – can I improve my staff levels, hire additional people, to increase volume or case-mix acuity? At certain points, the best answer isn’t reducing variable expenses but actually increasing them if doing so improves my organization’s ability to handle more volume or a different, better paying volume. I have seen all too many organizations shy away from taking certain, better paying cases simply because the investment in different, more expensive staff seemed out of the question from a budgetary standpoint. In reality, if a market exists such that the investment can be productive and the volume sustained, the ROI calculation may in fact, support the investment. Again, as long as the net incremental increase in revenue is greater than the net incremental increase in variable expenses at a level equal to or greater than the desire margin, the investment is worth it.
- Investment in Fixed Costs – can I make a plant, property or equipment investment that improves my marketing, my positioning, or increases my productivity and volume/census? Fixed cost investments can sometimes be the most obvious and the easiest to justify. Their impact on the per diem side is typically nominal unless the investment was tied to debt and a major project. Likewise, the ROI is easier to calculate as it can be two-sided; improve revenue or improve efficiency by reducing other expenses or improving productivity.
While I can’t use current or former work examples with specifics without violating certain privacy expectations, the following are three simple “real world” cases or scenarios that I worked through with organizations that illustrate the principles above.
- For a home care/hospice organization that consistently missed referral opportunities and experienced fairly large case-mix and volume fluctuations, we simply added two staff positions that served as “intake coordinators” (not the actual titles). The primary responsibility of these positions was being in the hospitals, nursing homes, etc. where the referrals came from. Being proactive and working directly with discharge planners, physicians, etc. allowed the organization to develop a more stable pipeline of referrals, better case-mix, and frankly, better care and service. The return on this investment in short-order was a significantly greater revenue multiple.
- For an SNF that was traditionally in the mid-ninety percent occupied, we looked at the complement of payers and the allocation of rooms from a revenue perspective. The room mix was approximately two-third private and one-third semi-private. To stay full and meet occupancy targets, the SNF relied on poorer quality payers (Medicaid primarily and some hospice) to keep the semi-privates full. The solution was simple: Right size the room mix to all private which could be occupied by a higher paying mix while increasing slightly, acuity and re-organizing staff. The fixed-cost investment was fairly minimal as turning the semi-private rooms to privates involved initially, removing a bed, rearranging furniture, and centering the over-bed light into a single position. The building became more efficient, stayed full with a waiting list, and the overall revenue per room and the net revenue per diem jumped by 30%.
- For another SNF that was traditionally mid-ninety percent occupied, primarily with private pay and Medicare (virtually no Medicaid), the issue was all about low acuity and insufficient staff capability and infrastructure to support a stronger payer mix. In this instance, we worked to bring therapy in-house from a contract provider, increased RN staffing and decreased CMA and CNA staffing, expanded therapy services to six days, started taking admissions six days per week and increased acuity and thus, even with pending/current Medicare rate cuts, we were able to jump per diem from less than $400 per day to nearly $450 per day, increasing overall Medicare census and improving staff productivity. We also jumped Med B utilization which was non-existent and moved the overall revenue level current and pro forma (forward), up by nearly 20%. The additional expense in new staffing, etc. increase variable expenses per diem by 11%. The overall change was a positive increase in margin of just shy of 9% which when added to the current margin (cash margin) of 13%, pushed the level above 20%…a level this organization believed, for a non-profit, was unattainable without sacrificing “quality or service”. In the end, both improved along with the margin.
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.
Enhanced FMAP Funding Moving Through the Senate
On December 31st of this year, enhancements made to the Medicaid FMAP (Federal matching dollars) via the ARRA (Stimulus or American Recovery and Reinvestment Act) are set to evaporate. In a series of bills and other legislative initiatives throughout the spring and early summer, Congress has failed to extend funding to prevent the evaporation of the additional FMAP funding. See my related posts below for more information on Medicaid, the FMAP provisions, and the legislative activity to extend the enhanced match provided under the ARRA.
Yesterday, on a procedural vote to end debate in the Senate, another version of a “jobs” bill containing a slimmed down extension of the enhanced FMAP crept forward. The vote to end debate and send the bill forward for a final vote was 61-38. With such a definitive margin in support of a vote, it is all but certain the bill will pass on a final vote. The measure then must go to the House, presently in recess, where it will be either voted upon “as is” or modified and returned to the Senate. Speaker Pelosi has indicated that she will call the House back to session in order to produce a final bill for President Obama’s signature, prior to the re-opening of schools in late August/early September.
The bill provides $26 billion in additional funding with $10 billion targeted toward education and public service employment and $16 billion for extension of the enhanced FMAP. The $10 billion is designed to prevent the lay-offs of teachers, firefighters, police and other municipal service worker jobs that are purportedly “at-risk” once continued funding provided in the ARRA evaporates. Communities, states, and civil service employee unions have been pressuring Congress to extend some levels of Stimulus funding, claiming that without additional dollars, budget cuts would cause lay-offs of key positions such as teachers. Republicans have effectively stalled previous legislative attempts to extend additional funding claiming that the dollars will add to the deficit and are effectively federal bail-outs for the teacher’s union and other municipal service employee unions. In this round, Senate Majority Leader Reid brought forth additional cuts in other programs plus tax increases to generate a revenue offset to the new spending. The resultant funding shift caused Republicans Snowe and Collins to vote in favor of ending debate (a show of support for the bill).
The $16 billion targeted toward additional Medicaid funding was heavily lobbied for by states and health care trade associations as critical to prevent reimbursement cuts and benefit reductions for seniors, the poor and the disabled. With 48 out of 50 states having moderate to severe budget deficits and current Medicaid structural deficits, loss of the enhanced match would necessitate programmatic cuts. In some cases, states that were in a July 1 fiscal year budget process and/or December 31 fiscal year budget process already installed programmatic cuts and reimbursement changes as the timing of their budgets required an assumption of lost Medicaid funding coming at the end of the year.
While the probability of an extension to the additional FMAP provided under the ARRA appears strong, the House must still approve the bill prior to the funding becoming an actuality. The timing will clearly assist most states but in some cases, a portion of the cuts already enacted in certain states will remain. Additionally, the added funding is not without an early 2011 sunset date or in other words, the $16 billion is only a temporary “stay” of execution for state Medicaid budget problems. In all likelihood, unless Congress consistently re-ups with more funding for continued FMAP support, states will need to significantly restructure their Medicaid programs over the next twelve to eighteen months in order to maintain basic solvency. With the economy still in a very slow recovery mode, most states won’t see economic growth and resulting revenues from taxes sufficient over the next year to avoid cuts in their Medicaid programs.
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.
Doc Fix Survives, Medicaid Ehanced Match Doesn’t
In another procedural vote on the revamped Jobs bill in the Senate, Democrats fell short of mustering 60 votes to end a Republican filibuster, effectively ending for now, legislative efforts to extend unemployment benefits. The vote count was 57 to 41 to continue debate. Dying with the extension of unemployment benefits are a series of pro-business tax cuts, tax increases on domestically produced oil and on investment fund managers as well as the extension of the enhanced Medicaid match provided in the Stimulus bill, set to end December 31 of this year.
In an attempt to keep the bill alive, Senate democrats removed the provision related to Part B/physician fee schedule cuts and crafted a smaller, temporary fix (see my posts from last week on this same subject). This separate “temporary” patch provides for a 2.2% increase in the Part B fee schedule and delays any cuts to physician fees until November 30. Prior legislative efforts deferred the fee schedule cuts, pegged at 21%, until June 1 of this year. This past week, CMS began paying claims incurred after June 1 at the reduced fee schedule rate. In response to an enormous push-back from physicians and the health care community in general, the House passed this temporary Senate measure, sending the bill to the President for signature. Assuming the President signs the bill, providers that have submitted claims for services provided after June 1, will have to re-submit their claims to assure correct payment, including the modest increase of 2.2%.
What’s next (as I have been asked routinely over the past two-weeks)? Is the enhanced Medicaid match extension dead? Legitimate questions, no doubt. In brief, here’s my take or EWAG (educated, wild-assed guess).
- Typically, when legislation such as this stalls, there is a single, two-ton elephant that needs to be circumnavigated or removed from the room in order for things to proceed. In this case, there are three elephants in the room. First, and larger in size than the other two, is the upcoming mid-term elections. The current “tone” in electoral politics is not good for Democrats and decidedly, anti-incumbent, anti-big government, and bail-out weary. Any legislation that looks-like and feels-like a bail-out is perceived as poisonous by incumbents headed toward a November election date. Even seats once believed safe, are up for grabs and some, such as Sen. Boxer in California and Sen. Reid in Nevada, are considered bell-weather contests marking a shift in electorate sentiment (assuming losses on the part of Boxer and Reid). The second elephant is the rising federal debt, now at $13 trillion and climbing. This elephant is a cousin of the first and the Democrats are beginning to feel ownership, correctly or incorrectly, of this elephant. With the EU struggling with an enormous debt load, principally due to burgeoning social welfare programs and a slow economy, economists, the Fed, and investment rating agencies such as Moody’s, are warning that the U.S. debt load could pose the same level of risk to the economy as is present across much of the EU. In fact, the U.S. debt load is perilously close to the value of the GDP; an indicator of a level of negative economic wealth (more debt than assets). Saving an economic lesson for later, the rising debt load is potentially crippling in so many ways to a recovering economy (enough said for now). The third elephant is the moribund U.S. economy, incapable of soaking up large additional amounts of debt and virtually non-responsive to the government’s deficit spending in the form of targeted stimulus. Simply put: The Stimulus and the continued bail-out packages coming from Washington have done virtually nothing to stimulate recovery while adding billions to the debt level. Arguably, the instability and the spending levels have hurt the recovery more than helped. With these three elephants present today in the House and in the Senate chambers, very little prior to November (mid-term elections) can get done and what will get done will be temporary in nature (the doc-fix for example).
- I’m not sure that the enhanced or extension of the enhanced Medicaid match is dead but it is definitely, on life-support in its current form. It seems that the tone of this Congress now is to avoid issues that include big price tags unless such an issue is immediately pressing (the doc-fix) and can be pushed every so slightly, down the road, but just by a bit. The problem here is that many states are stuck with June 30 fiscal years and/or balanced budget requirements. For these states, the uncertainty of additional Medicaid match dollars from the Feds requires establishing a plan that includes cuts, reimbursement and benefit levels combined. The real devil in some cases, is for states that have expanded their Medicaid programs via the use of added match funds through the Stimulus, as the expansion components cannot be cut by law. The additional funds via the Stimulus bill came with “golden handcuffs”, requiring states that used the funds via expansion, to maintain these services. In short, Medicaid is a real mess but frankly, that is nothing new given how ridiculous its financing provisions are and how “federal” money hungry the states have become, selling their fiscal stability souls for additional federal funds and then shifting budget problems elsewhere, hoping new or additional federal money would continue, bailing out their current spending sins.
- The logic of once again deferring the Part B cuts, now to November, is to buy Congress time to craft a permanent solution. Anyone who buys this rhetoric needs professional counseling. This issue is nowhere close to a permanent fix as such a fix requires political willpower (non-existent today), a revisit to the recently passed PPACA where the budget numbers are already out of whack, and finally, a commitment to spend new money as part of the solution. Fixing the problem means abandoning the flawed sustainable growth formula, recasting the actual costs associated with the PPACA (estimates of deficit reduction relied heavily on unsustainable and impractical Medicare cuts), and finding new money within the budget, deficit or not, to create parity and stability within the Part B fee “world”.
Senate Sets Roadblock on Jobs Bill: Impact is Felt for Doc Fix and Medicaid Funding
Yesterday the Senate, via a procedural vote, set a roadblock on the continued track toward passage for the American Jobs and Closing Tax Loopholes Act. The original version, re-crafted by the House to lower the price tag and then sent to the Senate, found limited traction on Wednesday. Oddly enough, the House version effectively trimmed the original Senate version and yet, even when fiscally re-shaped, it could not garner support in the Senate, the source from which it originated. My read is that Senators, since the shaping of the original bill, have watched political winds shifting away from support for government bailouts, subsidies, and deficit spending initiatives.
What happened is a bit confusing for people unfamiliar with the parliamentarian rules and procedural machinations of the Senate. In order for the Bill to come to the floor for a vote, sufficient votes (60) are required to close debate on the legislation. Without the 60 vote total, debate can continue endlessly and lead into filibuster, effectively killing the Bill as it stands. Yesterday’s vote showed a suprising lack of support among key Democrats such as Wisconsin Senators Feingold and Kohl. Republicans were effectively unified in opposition. As of late yesterday, Senate Democrats scrambled to re-craft yet another, scaled down version that at a minimum, would contain an extension of unemployment benefits and certain key tax measures.
Analyzing the issues, the Bill in its present shape has significant fiscal problems. First, the diversity of the issues and spending priorities within the legislation create a lack of transparency which today, is politically repugnant to voters. Second, much of the Bill appears politically as a continuation of federal bail-out spending. Third, health care reform remains unpopular politically and Senators, wary of the “doc fix” price tag and its ties to an unresolved health care reform matter, don’t want to get any more negative fall-out regarding the costs of health care reform.
The implications for health care at this point are a bit unnerving. Many states have already laid budgets assuming a continuation of the Medicaid stimulus support, set to end December 31. Without continuation of the expanded Medicaid match, many states will need to recast budgets, integrating major spending reductions. Second, the “doc fix” issue also impacts a number of other health care services such as Part B therapy rates which are tied to the physician fee schedule. (See my related posts regarding Part B cuts and the American Jobs and Closing Tax Loopholes Act). Without a fix or another delay of the pending cut (21%), physician fees and other Part B services such as therapy will be cut.
My impression is that Congress will scramble for the next week, attempting to unravel the bill and take on certain issues ala carte. For example, I believe that unemployment benefits will get extended as in Washington, especially for Democrats and their union supporters, failing to do so is political suicide. I believe Medicaid and the states will get their extended match but perhaps, more incrementally, maybe with an initial extension end date of March 30, 2011. Finally, I think the “doc fix” issue will get delayed once again; another temporary stay of execution. The doc fix may be the most politically difficult issue to deal with as its price tag is large and nearly every policy analyst and health care economist point to the need to address the underlying problem of the sustainable growth formula versus the current approach of pushing the inevitable to future dates via current infusions of new deficit dollars.
Part B Therapy Cuts Delayed to June 1
As a follow-up to a post from last week regarding pending cuts in Part B therapy rates, last evening the House passed a bill that the Senate had passed earlier in the day, included within is a provision to delay the pending cuts to the physician fee schedule until June 1. The provision is tucked within a broader bill that extends COBRA subsidies and unemployment benefits to long-term unemployed individuals. The provision covers the period from April 1 to June 1. A prior measure, tucked into a jobs bill, delayed the cuts until April 1. Congress was on recess for the Easter Holiday, returning this week. It was expected that upon return, Congress would institute another temporary fix, pushing the reduction out for at least another month; in this case, two months.
The rates for Part B therapy are tied to the physician fee schedule which is targeted by law, for a 21% reduction. The fee schedule formula is a sore issue for Congress and physicians both, at times for opposite reasons. In periods of economic expansion, the annual inflation mechanism built into the formula can adjust the fee schedule dramatically upward, in excess of consumer inflation. In periods of economic contraction, the formula produces dramatic cuts, such as the case set for 2010. (1) Congress has sought for years to amend the economically contrived formula that produces such wild swings but has failed to find a middle ground approach that physicians can agree upon. During the debate over health care reform legislation, fixes to the fee schedule problem were imbedded within inital legislation passed by the House as a permanent solution and manipulated by the Senate in a more limited method in its version. The real crux of the issue boiled down to the costs associated with a permanent solution, estimated at $250 billion or more. With little price-tag wiggle room as reform became final in the Patient Protection and Affordable Care Act, the fixes to the physician fee schedule dilemma moved to a side issue. Given that the Part B therapy rates are mired within the fee schedule issue, the same fate of potential cuts also remained unaddressed at the time the President signed the final reform legislation into law.
The temporary delay in cuts, now set to sunset on May 31 only moves forward the same damning set of political issues. Congress and the President are trying to commit to a reform mantra that is “savings” driven. As the political landscape is clearly divided and mid-term elections loom closer, additional unfunded spending is the last element any “up for re-election” politician wants to come close to. Congressional Democrats have crafted a middle-ground approach that would delay the cuts to October 1 (the start of the new federal fiscal year) or perhaps out into 2015, freezing Medicare rates for the duration. Physicians, preferring a complete revision to the formula and deficit hawks, preferring to let the reductions occur in large part, oppose the Democrats approach.
Tackling the funding and the fee schedule/Part B issue separately as a single new piece of legislation, in my estimation, won’t occur this year. What I believe is likely to happen is that a longer term fix, perhaps until the end of the year, will get tucked into another broader spending bill, delaying once again, the core problems associated with the fee schedule and Part B.
(1) The physician fee schedule increases are tied to an economic sustainability formula that applies the Medicare Economic Index to a target called the Sustainable Growth Rate. Essentially, the Index is a measure of inflation designed to reflect the costs physicians face with respect to their practice and to wage levels. The Growth Rate is calculated based on medical inflation, the projected growth in the economy and the projected growth in the number of Medicare fee-for-service beneficiaries plus any changes in rules, laws or regulations as applicable. Congress has tinkered with the application of this formula, freezing the implementation of cuts at 0% , most recently through March 31, 2010.
-
Archives
- April 2012 (3)
- March 2012 (2)
- January 2012 (3)
- December 2011 (1)
- November 2011 (2)
- October 2011 (2)
- September 2011 (1)
- August 2011 (1)
- July 2011 (3)
- June 2011 (1)
- April 2011 (2)
- March 2011 (2)
-
Categories
-
RSS
Entries RSS
Comments RSS
