CMS Reverses Course on Independent Consulting Pharmacists
In a move that most industry watchers including myself believed was unlikely to occur, CMS decided to reverse course on a proposal to require SNFs to have separate relationships for dispensing and consulting pharmacies/pharmacists. CMS publicized its decision yesterday.
About a month ago in a post I wrote regarding post-acute trends (http://wp.me/ptUlY-aO ), I indicated that my sources inside D.C. and CMS were all but certain that a final rule implementing the required separation as of January 2013 was forthcoming. In calls today, the prevailing news is that via the comment period and protracted industry pressure, CMS realized it needed to move away from this position. Perhaps more telling to “what” transpired is the directed two-tone sound flooding CMS. The first loud and repetitive sound drilled throughout CMS their inherently flawed and unsupported conclusion that the pharmacy relationships correlated directly to increases in antipsychotics and psychotropic drug regimes found in SNFs. As I mentioned in my earlier post, this conclusion was supported by no clinical or valid data. In short, from all clinical segments tied to the industry, CMS was bombarded with data refuting this assumption and demands to demonstrate this preposterous correlation. The second deafening sound regarded the financial implications for facilities, already stinging from significant Medicare cuts and insufficient Medicaid reimbursement. In my case, I provided directly, supporting financial and operating data for certain industry client groups illustrating the improbability of sourcing independent consultants, the costs that would be incurred to employ or engage an independent consultant, and the tangential costs the facility would bear in terms of software investment, time, and other resource utilization to implement “effectively” such a system.
The frank reality is that CMS wholly missed the mark initially. There is a clear shortage of pharmacists nationally and thus, a real acute shortage in certain regions and rural locations. There is a pronounced shortage of clinical expertise and geriatric pharmacologists, the back-bone of good consulting. Finally, only organizations sufficient in size and mass have made the necessary software and system investments to make consulting effective and efficient; most other organizations remaining lax in the tools necessary to undertake SNF clients on a consulting pharmacology engagement.
Finally a win for the an industry segment that has really taken hits from a regulatory and reimbursement prospective. SNFs needed this reprieve, if for no other reason than to continue to digest all of the other oft ill-conceived and illogical requirements already on their plates.
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: Perspectives on the Post-Acute Industry
What never ceases to amaze me is the amount of post-news discussion that occurs when certain issues rise to the front-page (or near the front page). Seemingly, industry side-liners awaken and look in disbelief that one major provider organization or another is again, embroiled in some OIG investigation, lawsuit or official inquiry concerning their Medicare billing and/or care provided to Medicare patients. The word “fraud” is tossed out quickly; the shock value of vulgarity at a cocktail party in polite company is expected. Statistics from qualified and unqualified sources burst forth claiming, some correct, that approximately 20 to 30% of care paid for by Medicare is inappropriate, unwarranted, unnecessary or down-right fraudulent. Truth be told, the unwarranted, inappropriate, and unnecessary talk is like Monday morning quarterbacking; an easy sport to engage in when all the facts are visible and the outcomes known. The real question that is rarely, if ever addressed, is “why” do these issues consistently arise and most often, among the same provider organizations.
The simplest answer as to “why” the issues of fraud and inappropriate care and billing arise (routinely) is Medicare itself. Any payment system that rewards via higher payment, greater or increasing levels of acuity and utilization is ripe for provider organizations to chase the greater reward, even if doing so stretches the limit on necessary or warranted care. Think pro sports. Higher dollars go to players that hit more home runs than singles or for average. In fact, less than a few years ago, the prize for the “long ball” was so good that players opted to cheat with chemistry as their true ability alone would not produce the highest return or largest pay days. In economic terms the old axiom of “what gets rewarded gets done” applies. Medicare has a long history of over-valuing certain types of patients, services, etc. while under-valuing others and thus, it is by its own rate and payment methodology, inducing a certain amount of “fraud”. When the rearview mirror test is applied or the hindsight test (that which is 20/20), its fairly easy to look at groupings of payments, diagnostic codes and outcomes and find structural flaws suggesting inappropriate or unnecessary care was provided. The remaining question then revolves around how to pre-examine each event or group of events to a level to assure that no inappropriate care or unnecessary care is rendered. Truth be told, I’m not sure that this question is completely solvable.
In some cases or circumstances notable of late, the word fraud is attached or overtly implied, to events that likely aren’t fraudulent; more indicative of gaming the system. For example, the Senate investigation of Amedysis, Gentiva, Almost Family, etc. was principally tied to an investigation completed by the Wall Street Journal involving therapy visits. At the core, the implication was that these companies “maxed” the number of visits to trigger the highest level of payment. Important to note is that the practice of “clustering” visits around the higher paying thresholds began when Congress created the higher paying threshold out of concern that “therapy” was being limited to home care patients. Of additional interest is the role MedPac played in this event, reporting average profit margins for these organizations approaching the upper teens to twenty percent range.
In the example above, the issue front and center is Medicare profit vs. appropriate level of profit (whatever level this is). With hindsight being 20/20, it is easy to see that perhaps, some therapy was over-provided or in some cases, some patients were selected intentionally because of their therapy or rehab potential. Did the agencies referenced intentionally seek to align their referral development practices and marketing approaches to attract certain patient types? Of course and doesn’t every business do the same? Personally, I have run organizations that did this and provided guidance to others on how to do this. The reality is that some patients are better paying than others and regardless of whether an organization is non-profit or for-profit, the goal of any business is to attract paying customers and preferably, the customers that pay the best. When the incentive is laid forth by Medicare that certain types of care and services come with higher rates of reimbursement, it is only logical that providers will seek to develop business models and systems that garner the highest rate of reimbursement. If unnecessary care was the sole issue of whether these agencies did wrong, I won’t attempt to defend them but alternatively offer the whole health care industry as an example of unnecessary care provided across the spectrum. By our nature and culture, we have come to believe that more is better. An analysis of “unnecessary” in any area from drugs to surgeries to diagnostic tests to hospital stays and physician visits, many of which are/were paid for by Medicare, would clearly show this to a be a systemic problem and as categorized by CMS/OIG and the Senate, fraud and violations of the FCA (False Claims Act).
There isn’t a segment of the post-acute industry that I follow that remains honestly non-participative with regard to Medicare billing impropriety. There also isn’t a segment that isn’t constantly lobbying Congress to continue to shovel more money into Medicare and generally, skewed toward certain categories, diagnoses or patient-types where allegations of fraud routinely arise. Recently, CMS announced a rebasing of RUGs rates for SNFs, primarily targeted at certain therapy categories. A huge cry of doom erupted from the industry and the industry tag alongs, principally therapy companies. I read for days, prognostications of SNF margins turning negative, stock prices falling, layoffs, etc. What was the real issue? Medicare is being used by the industry to routinely subsidize revenue shortfalls that occur via Medicaid. In reality, as Medicare is a bit payer in the SNF world (less than 20% of all days of care), the admission that Medicare is subsidizing other shortfalls is the same as stating that Medicare is overpaying SNFs. For CMS, the issue was about another “miss” in the ongoing game of trying to tie reimbursement to care needs to patient populations. The industry was, as has always been the case, one step ahead in moving its practices to where the money is. No different than the home health industry events, the SNF industry targeted certain types of patients and unquestionably, a portion of the therapy provided may fit the hind-sight definition of “unnecessary” either by level coded or visits actually provided. Stretching the diagnosis, seeking certain referrals, building relationships that are economically advantageous to various parties, etc., is as common in the SNF industry as it is in hospice, home health, and hospitals.
The latest hospice industry news event concerning Vitas and inappropriate referrals of non-terminal patients is indicative of a twist on an old theme, nothing more. While this instance is truly creative by definition, involving an insurer and a provider, both potentially culpable in a scheme to shift costs and maximize reimbursement, it still only rises to the level of “old news”. For years, the hospice industry has been rife with a similar dance played between hospices and SNFs. Caught or most recently on display doing this dance is Aseracare. In this dance, hospices circulate among SNFs with high Medicaid census and patient profiles marked by long-term dementia and debility; custodial care by definition. The hospice, in need of additional patients, tells the SNF that it can qualify many of these types of patients for the Medicare hospice benefit and in exchange, the SNF will continue to keep the Medicaid daily rate but the hospice will assume drug costs, supply costs, even DME costs plus augment the staffing. As a kicker, the transition of the patient to the care of the hospice provides some regulatory relief to the SNF as now the overall care of this patient shifts to the hospice and documentation, assessments, and other paperwork otherwise required by the SNF no longer apply. As expected, a win-win of sorts appears. The hospice gets daily rate from Medicare, the SNF the daily rate from Medicaid, the hospice census improves, the SNF census remains the same, etc. The real winner here however is the hospice as an SNF patient is fairly inexpensive to care for as the SNF provides much of the care infrastructure. Visits to SNF patients are typically fewer than a comparable home-bound/community patient and by the nature of many of the patients qualified in this scenario, the length of stay on hospice is considerably longer – a nice stable, revenue stream. Using the 20/20 hindsight view however, shows that a preponderance of these SNF patients don’t fit much of the Medicare hospice criteria and in the acid test category of likely terminal in six months or less, a plausible argument can’t be made.
In the quest for higher reimbursement in an environment facing Medicare spending minimization, control and cuts. behaviors and tactics become irrational and by their very nature, borderline or outright fraudulent. The most rampant that I see is upcoding or creating phantom diagnoses and need where none truly exists. The hospice illustration above is one such example. Others that are common include “stretch-rugging” by therapy companies and SNFs, discharging dually-eligible Medicare SNF patients to hospitals when the medical needs (and supposed costs) increase, and back-dating orders. In some cases, the activity is subtle such as SNFs that are willing to take below fee-schedule discounts for laboratory and radiology services for Medicare residents, even though doing so could lead to a Stark violation for the SNF. The whole chase is about trying to maximize the net revenue under Medicare, either by increasing the volume or minimizing the costs associated with caring for these patients.
Still, the question begs as to “why” this level of fraudulent or inappropriate activity persists and, in-spite of well published examples of providers getting caught. As I wrote earlier, a portion is due to the fundamental flaws inherent with Medicare, how it pays and the program benefit structure. Chalking it all up however, to Medicare while easy, is like solving half of a crossword puzzle and calling it done. In my follow-up post, I’ll provide a bit more clarity as to what I see, are the reasons “why”.
A Rare Post
As much as I have focused on keeping this site free from any of my personal agenda, I have encountered a circumstance that bears a one-time exception to my rule. Please bear with me as this will be brief.
I have a colleague and true friend who was recently downsized from a deteriorating health system due to their financial and operational mismanagement. This gentleman was in charge of Marketing and P.R. for this organization. In spite of his best efforts and gifts, he was hamstrung by the financial condition and continued deterioration of the organization, literally unable to do his job due to the reputation and care problems, staff turnover, poor community reputation and consistent resource shortage. He became a victim of circumstances beyond his control.
As I said earlier, I rarely attest for anyone and never in writing of this sort. This is a first. The reason? This gentleman is gifted, a true professional and a consummate, stand-up guy. He became a victim of circumstances because he was too principled to walk when he should have, even in spite of my counsel. He finishes what he starts, even if not given the tools or support to do so.
This all said, here’s the inside information. His name is Steve (I’ll withhold further unless requested). He has thirty years of health care marketing and P.R. executive experience within hospital systems (one being the largest in the state) and in the post-acute environment (seniors housing, assisted living, SNFs, hospice, etc.). He comes from a journalism background originally; television principally. He knows media, public and community relations and can market and sell health care. He is a gifted writer and has worked all angles of health care P.R. and Marketing from spokesperson to damage control to mergers and acquisitions and new product launches. He’s even overseen philanthropy and fund development. Aside from me, his references are impeccable and he’s well-known in the health care community in his market areas. I have recruited him in past positions and would without reservation, hire him again.
To the point, he’s networking and available, including possible relocation. I know of few other health care marketing people with his breadth of experience and track record of success. To my readers, all of whom I appreciate, and my professional colleagues whom I equally appreciate, your leads or insights on Steve’s behalf would be deeply appreciated. If you have any ideas or interests you would like to share and/or learn more about Steve (resume, etc.) or talk directly with him, drop me an e-mail and I will make it happen. My e-mail is Hislop3@msn.com.
Thanks for indulging my deviation in content and again to all, thanks for reading!
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.
SNFs: What to do Now for October 1
As known by now, a lot of change is occurring with Medicare effective 10/1. Daily, I field questions from around the country regarding what exactly is happening and what if anything an SNF should do to “minimize” the impact. To a certain extent, at least as far as reimbursement reductions go, it is difficult and ill-advised to adjust too hastily or rapidly. Longer-term planning is required to fundamentally, re-balance a payer mix. This said however, all SNFs should be looking at their business models realizing that the long-term rate outlook on Medicare is best case flat, most probable declining.
Below I’ve accumulated and summarized, my top five recommendations/answers to the most common “what do we do next” questions. For reality purposes, I assume (as it will happen) that rate reductions as called-for in the CMS final PPS rule will occur. I understand that Congress may choose to intercede but given my sense of the current political climate and the economic issues at hand, I think it ill-conceived not to assume reduction and bet on “lobbying” to reinvent higher rates.
- Begin Balancing Your Payer Mix: Out of all of the SNFs I have analyzed recently, those that have a truly balanced payer mix with appropriate revenue sources will fare well to fairly well, even with the pending Medicare cuts. Balanced looks different to different SNFs but in reality, they all share common traits. First, Medicare isn’t their sole source of margin. Second, their Medicare case-mix is well mixed with rehab and clinical qualifiers, perhaps a shade more clinically complex than rehab only. Third, they have strong overall clinical competencies and thus, attract patients with other payer sources such as private insurance. Finally, Medicaid is equal to or less than a third (no more) of their payer mix. To balance an SNF payer mix, the facility/organization must undertake a strategy to define service/product mix, add clinical competency, build referral sources for different patients, and improve overall operating efficiencies aligning staffing and service delivery with effective care outcomes. This strategy is not about optimizing Medicare reimbursement (though it does that), it’s about building a care engine that performs across payer sources.
- Develop a Solid Understanding of Medicare Reimbursement: Many providers I talk with have only a rudimentary understanding of the current PPS system and most of what they have learned comes from the wrong sources; sources that are partial to a particular bent or issue. Even with the cuts, providers who understand how to take advantage of caring for a more clinically complex patient profile and get reimbursed for their work, aren’t horribly at-risk for major revenue swings. They have developed internal core competency in coding, in managing the length of stay, and in capturing the true care needs of the patient. They bring in the necessary training resources and have staff resources that help maximize their productivity and care delivery. They know how the system works, don’t try to deny the changes, and develop the systems and the people necessary to be current, use the MDS effectively and capture the dollars in the form of reimbursement, correctly.
- Analyze the Impact: If reimbursement cuts are forthcoming, and they are, I hear too many vague generalities about how much and “the sky is falling” rhetoric. Frankly, most providers I talk with haven’t modeled the financial impact as of yet and as the old adage goes, “you can’t begin to fix what you don’t know is broken”. In some cases, simple tweaks to operations can improve the actual impact. In other cases, changes to internal delivery systems, coding, etc. can improve the revenue impact (positively). Suffice to say, knowing what the impact is today can help a provider hone in on what options are available to mitigate the “pending” damage.
- Understand the Totality of What is Changing: It is easy to reflect solely on one element of the Medicare equation that is changing in October; revenue or reimbursement. The problem most providers also face is that certain systemic changes are occurring such as the allocation of treatment time for group therapy, the requirements for End of Therapy OMRAs and the Assessment Reference Date windows. As October 1 is 30 days away, providers should have already gotten up-to-speed on these changes and begun implementing policy, procedure and systemic internal changes to address the new requirements. As change requires education, adjustment, audits and then additional education and/or adjustments, starting too late equates to getting claims wrong. Ask any provider that has gone through a probe or had claims rejected what that revenue impact is; far worse and impactful than a rate cut.
- Focus on Therapy: When I encounter SNFs with major Medicare issues, I see three common problematic themes. First, for facilities that use outside therapy or contract therapy providers, the facility has “washed” their hands of the Medicare therapy issues. This is a problem on so many levels. As I have written before, the therapy company is not the provider, the SNF is. Under Part A, the SNF is always the provider and as a result, any problems caused by incorrect billing, improper care, improper coding, etc., perpetuated by a contractor is a problem for the Part A provider. Basically, the liability cannot be ceded to a contractor. The SNF must know as much about the provision of therapy under Part A as it does the provision of nursing care or any other discipline. And most important, while therapy companies claim that they develop partnerships with SNFs, the reality is far from a true partnership. For a partnership to actually occur, the risks and benefits must be equally shared. Such is not the case in these relationships. In this relationship, each (the SNF and the therapy company) have different business and profit motivations such that at times, the interests may compete in ways deleterious to the SNF, left unabated. Second, if a provider has its own program and staff, the therapy component is rarely fully integrated with all other care disciplines. In short, all too often therapy is looked at as purely a profit center rather than an integral part of the clinical care delivery an SNF provides. Therapy involvement, assessment, and integration into the total care plan of all residents/patients prevents problems in terms of care outcomes, helps capture additional revenue via reimbursement, and improves the overall clinical competency of the care team. Third, all too many administrators have no idea the role therapy provides in their Medicare or general care delivery. Suffice to say that if an Administrator wants higher per diems, better care outcomes, better compliance results, its time to learn the overall MDS and understand where therapy integrates in Medicare, how this system works (not just the revenue generated) and how therapy can improve the overall operating performance of an SNF (revenue and expense).
Before I conclude, I have three remaining suggestions to issues that I commonly address in the SNF world. These suggestions are pertinent at all times for an SNF that is seeking to improve its operations, regardless of the reimbursement issues that are “at-play”.
- Develop Centers of Excellence: Trying to be all things to all patient types, etc. in an industry segment as wide as the SNF arena is a recipe for failure or at best, average to below average results (operating and other). Not every SNF will excel in a post-acute, transitional care environment. Markets are different, referral source needs are different, etc. By developing an acute awareness of market needs, referral source needs, etc., an SNF can focus-in and develop, centers or “lines’ of care excellence. Three things happen or should with this approach. First, occupancy issues are less prevalent. The SNF knows its flow of patients and can set aside the right amount of capacity for the length of stay and volume requirements dictated by a group of patients. Second, efficiency in terms of staffing, supplies, programs, care plans, etc. can truly be developed. Third, building a true revenue model is far easier. A revenue model is driven by an expectation of certain occupancy, revenue streams from each patient type, and pricing/reimbursement models that accentuate revenue. Expenses can then be matched accordingly.
- Suppress and Evaporate “Stupid Money”: Stupid money is dollars that are spent on things that can be controlled by an SNF or any business. It saps resources and margin. Common locations of stupid money are Worker’s Comp, agency use, over-time, supply waste, improper coding, fines, forfeitures, billing errors, staff turnover, and compliance/legal issues. Minimizing the dollar flow and/or eliminating it for “stupid money” immediately improves the bottom-line. I don’t know how many dollars over the years I have seen across all of the facilities I have been in that get wasted repeatedly, on stupid money issues.
- Develop Care Systems/Algorithms: SNFs that really excel financially and from a care/outcome perspective, have gotten very good at developing common protocols and algorithms for common admission diagnoses. They have become efficient and effective at delivering high quality, lower cost care by reducing the variances and treatment fluctuations that arise when care is unplanned or uncoordinated. They have developed formularies, treatment protocols, and outcome-based algorithms for the most common types of admissions and issues faced by patients within their settings. Some have gone as far as to coordinate this work within their upstream and downstream referral networks (home health on discharge, hospital on admission/re-admission). These SNFs make solid, repeat margins, have balanced payer mixes and are positioned appropriately for the next foray into healthcare reform; namely bundled payments, competitive bidding, ACOs and quality-based incentive payments.
Post-Acute Outlook Post Debt Ceiling, Post Medicare Rate Adjustments, Etc.
OK, the title is a bit wordy and trust me, I could have included more “posts” but I think I got the point across. First, I’ll admit to having a crystal ball however, the picture I see is a bit like the first (and only) television set I remember having as a kid: Not in color, lines running vertically and horizontally, snow, and an antenna that required frequent manipulation and tin foil to get any kind of reception. And of course, there were only three channels available. The same today is true about my crystal ball on health policy and what to expect in the post-acute industry.
My crystal ball’s three channels are Medicare, Medicaid and the Economy. Reviewing each, here’s the programming I see for the fall lineup or if you prefer, the period post October 1 (fiscal year 2012) through early next year.
The Economy: The debt ceiling discussion and the actions taken by S&P and the Fed in the last couple of weeks are a reminder via a cold slap, of how mired in dysfunction Washington remains and how moribund the economy truly is. While technically not in a recession, the economy is not really growing either; a growth rate of less than 2% in GDP is like treading water. For unemployment to change, consumers to return and capital to re-enter the business investment side, GDP growth needs to be above 2% and ideally north of 4% for a sustained period. Unfortunately, in order for this to occur, fiscal policy in Washington needs to develop some semblance of coherency and consistency.
What I know from my economics training and background and my last twenty-five years plus in the healthcare industry boils down to some fairly simple concepts. These concepts are I believe, a solid framework for providers to use in terms of planning for the near future and even somewhat beyond.
- The U.S. debt level is fueled to a great degree by entitlement spending, less so by discretionary spending. If the prevailing wind is about debt reduction and balance in the federal budget (or getting closer to balance), two things must occur. First, spending constraint where spending primarily occurs, namely entitlements. Second, revenue increases in some fashion, namely taxes. The devil as we know it today, is how and where on both sides of the ledger (revenue and expenses). Spending reductions alone are insufficient, unless dramatic, to significantly lower the debt level or balance the budget; particularly in a period of near zero economic growth. Dramatic spending reductions are clearly unwise and potentially, deleterious to an industry sector (healthcare) that continues to provide steady employment. Similarly, for spending reductions on entitlements to truly have a positive impact and make sense, program reform must be at the forefront of “why” less spending is needed or warranted. Program reform, ala the health care reform bill which didn’t really reform Medicare or Medicaid but added new layers of entitlements, is far from the answer. For providers, there is no immediate or for that matter, longer-range future that doesn’t entail less spending on Medicare or Medicaid. As the only “trick” in Washington’s bag or the bags contained in the statehouses is rate cuts, anticipate and plan for the same.
- A lackluster, no growth economy with high unemployment levels fuels provider competition wars over paying patients. As fewer paying patients are available and/or fewer “good” paying patients are available, providers will compete for the same market share within and across the industry levels. What this means is that providers will seek to acquire market share within industry segments (home health, hospice, SNF, etc.) and across industry levels (hospitals seeking to maintain patient days versus referring to post-acute providers). The end result is more or similar levels of M&A activity, if capital remains available, and thus, consolidation that is driven primarily by market share motives.
- According to a recent healthcare expenditure outlook released by CMS, healthcare spending is projected to reach $4.6 trillion by the end of the decade, representing nearly 20% of GDP. The primary contributor to this projected level of growth is the Affordable Care Act, principally due to the expansion of Medicaid and the requirements for private insurance coverage (Medicaid growth of 20.3%). While CMS notes that Medicare spending may slow somewhat, this assumption is predicated upon the continuation of spending cuts and a 29.4% reduction in physician payment rates required under the current Sustainable Growth Rate (SGR) formula. Assuming, as has historically occurred, Congress evacuates the cuts called for under the SGR and as has been discussed, moves to a formula tying payment to the Medicare Economic Index, Medicare spending accelerates to a 6.6% growth rate (1.7% projected for 2012 with continuation of the SGR). Summarized, health spending is the two ton gorilla in the room and it will continue to have a heavy, significant influence on economic policy discussions at the federal level and beyond. Though I don’t agree with the recent rating action taken by S&P, it is impossible to ignore the consensus opinions of allof the rating agencies: Entitlement spending, namely driven by healthcare spending, is unsustainable at its present level with the present level of income support (taxation) and as long as the status quo remains fundamentally unchanged, the U.S. economy is not fundamentally stable.
- Current economic realities and the rating agencies actions and statements foreshadow a stormy, near term future for the healthcare industry. As is always the case, there will be winners and losers or more on-point, those more directly impacted and those less so. On the post-acute side, excluding reimbursement impacts, I’ve summarized my views on what I see in terms of economic impacts for the near term (below).
- The credit rating side will remain pessimistic for most of the industry “brick and mortar” providers. Moody’s, Fitch, et.al. will continue to have negative outlooks on CCRCs, SNFs, etc. primarily due to the economic realities of the housing market, investment markets, and reimbursement outlook. Within this group of brick and mortar providers, Assisted Living Facilities will fair the best as they are the least impacted by the housing market and for all intents and purposes, minimally impacted by reimbursement issues (save the providers that choose to play in the HCBS/Medicaid-waiver arena).
- The publicly traded companies (primarily SNFs but home health and LTACHs as well) will continue to see stock price suppression due to the unfavorable outlooks and credit downgrades provided by the rating agencies. This will occur regardless of the favorable earnings posted by some of the companies. Reimbursement trends (down) are the primary driver combined with the hard reality that Medicaid is in serious financial trouble, even more so going forward as enrollment jumps due to continued healthcare reform phase-in schedules.
- Capital market access will continue to be tight to inaccessible for some providers. Reimbursement, negative rating agency outlooks, lending/banking reform, above historic levels of failures/bankruptcies, etc. all continue and will remain as an overhang to the lending environment. Problems with potential continued stable to increasing funding levels at Fannie, HUD, etc. create additional credit negativity and tighter funding flow. Capital access, when available, will continue to have a credit premium attached, in-spite of low base rates. I expect to see continued development and demand for private equity participation.
- Given the above, financially driven mergers and acquisitions will remain somewhat higher as organizations seek to use the M&A arena to create financially stable partnerships and bigger or larger platforms from which to derive credit/capital access.
Medicare: The problems with Medicare are too deep and lengthy to rehash here and thus, I’ll move to brevity. Medicare is, as I have written before, horribly inefficient, bureaucratic, and inadequately funded to remain or be, viable. As a result, only two real scenarios exist today: Cut outlays or increase revenues. Arguably, a third that involves portions of each scenario is the most probable solution. Real reform is light-years away as the current and forseeable political future foretells no scenario that includes a Ryanesque option (Paul Ryan plan from the Republican Congressional Budget and/or Roadmap for America). Viewed in this light, the Medicare outlook for post-acute providers is as follows.
- For SNFs and Home Health Agencies, reimbursement levels are on the decline. The OIG for CMS and MedPac have each weighed-in that providers are being overpaid. Profit margins as a result of Medicare payments or attributable to Medicare, are deemed too high (mid to upper teens) and as such, the prevailing wind is payment or outlay reductions. The bright-side if such exists, and as I have written before, this “cutting” trend will impact some providers far more than others. The providers that have relied heavily and primarily on certain patient types for reimbursement gains will be more negatively impacted than providers with a more “balanced” book – a more diverse clinical case mix. The movement is toward a more balanced level and thus lower level, of reimbursement theoretically closer aligned with the actual clinical care needs of patients. Providers with more diverse revenue streams and more overall case-mix balance will not be as adversely impacted although, the Medicare revenue stream will be lower or less profitable.
- Hospice has remained relatively unharmed, principally due to its lower overall outlay from the program. It remains a less-costly level of care than other institutional alternatives. A note of caution here is important. While rates have not been cut, program reform is occurring on the fringes and I suspect a wholesale re-design of the Medicare Hospice benefit is forthcoming. In such a fashion, payment reform rather than rate reform or reduction will occur. The obvious trend is to restructure payments away from a reward for lengthier stays and to require more precise determinations of terminality, tied to a tighter or imminent expectation of death. OIG and MedPac have issued a number of papers and memos regarding the relationships between Hospice and SNFs that correlate to longer stays for certain diagnoses. Summarized, payment reductions via rate are less of an issue but utilization reform is forthcoming via additional regulation designed to reduce overall payments to Hospices or as CMS would say, to more closely align payments to the real necessity of care for qualified, terminally ill patients. Without question, the largest impact (negative) going forward will be on hospices that have sizable revenue flows tied to nursing home patients.
- LTACHs are in a similar reimbursement boat as hospice; small overall outlay within the program and for the past few years, minimal expenditure growth. The industry is from a cost perspective, fundamentally flat. What will be interesting to watch is whether under certain aspects of healthcare reform, this niche’ takes on a growth spurt. Bundled payments, ACOs (Accountable Care Organizations), and shifts in SNF reimbursement away from higher acuity, rehab patients may lead toward more utilization of the LTACH product. This being said, the prevailing Medicare reimbursement profile is fundamentally flat. Given a bit more creativity on the part of the LTACH provider community, this segment may be poised for some growth, although not directly via increasing payments.
- The most uncertainty lies on the Part B provider side, particularly providers that are reimbursement “connected” to the Physician Fee Schedule (therapy for example). As of today, the required change to the fee schedule as a result of the Sustainable Growth Rate formula is a fee cut of 29.4%. It is quite possible, due to the current negative or flat growth trajectory of the economy, and sans any change in the law, for fees to be cut again in 2013, barring Congressional action. Most acutely impacted in this scenario are physicians and predominantly, primary care physicians. I have yet to see a Congress that fails to intercede and repair cuts this draconian but the political times and the budget deficit debates are markedly different than during any prior period. Critical to whether this cut or some level less than this is implemented is the issue of access, already a hot topic for physicians. Physicians, particularly primary care specialists, are already in short-supply nationally, woefully short in certain markets. If cuts of this magnitude or perhaps any magnitude roll forward, I suspect many physicians will curtail or close their practice to new Medicare patients. On the other side represented by non-physician providers, Part B cuts of this magnitude will no doubt limit service and access. Fixing the formula and the law has been difficult for Congress as the dollar implications are substantial. I foresee another round of patches, etc., occurring close to the “cut” date, especially since 2012 is an election year.
Medicaid: For as many reasons as Medicare is a mess, Medicaid is as well, though magnified by a factor of two or more. Medicaid’s biggest problem now is rapid growing enrollment, primarily due to high unemployment and upcoming federal eligibility changes mandated via the Accountable Care Act (healthcare reform). Given Medicaid’s current funding structure, this issue poses huge problems in flat to negative growth economies. States simply due not have the revenue to create a higher matching threshold or level, necessary to achieve more federal dollars. In July, the enhanced federal match provided via the Recovery Act (stimulus) sunsetted leaving states with huge structural deficits and the prospect of deficit growth due to increasing enrollment. In virtually every state, rate cuts have been discussed and in half-again as many, implemented. States continue to move to the federal government seeking relief from required or imputed service provision requirements and/or relief from eligibility requirements (waivers). The inherent difficulty with balancing Medicaid funding is that the same is directly tied to stable to growing state revenues and a clear picture of population risk or need. Changing (increasing) populations often present adverse-risk scenarios, creating higher than normative utilization. For obvious reasons, lower than market reimbursement levels, access is a big issue. Not all providers willingly and openly desire Medicaid patients and those that do are not on the increase. Without additional funding assistance at a level beyond what is called for in the Accountable Care Act, regulatory relief and an improving economy, the reimbursement prospects under Medicaid are all bleak.
- In the post-acute environment, the biggest impact of this continued ugly Medicaid scenario will fall directly on SNFs. Matching prospective or real Medicaid cuts with Medicare cuts forthcoming is a true “negative” Perfect Storm. For most SNFs, Medicaid is the largest payer source and until recent, Medicare was used as a make-up funding source for Medicaid reimbursement shortfalls. Adding fuel to an already smoldering fire, the suppressed earnings available to seniors, no growth in Social Security payments, and a stock market that presently produces only a flat return trajectory limits the pool of private paying and privately insured patients. In short, there is no additional room on the revenue side to make-up an SNFs Medicaid losses. For SNFs, only the few that have limited leverage, high occupancy, an extremely balanced payer mix, and stable staffing will weather the Medicaid near term future; a future of no rate increases or likely cuts.
- While not a huge segment of the post-acute environment, HCBs providers will feel the Medicaid pinch as well. As a result of needing to reign in Medicaid spending, states are rapidly curtailing their funding and payment levels for HCBs programs. While most states still claim that HCBs expansion would help soften their Medicaid deficit, states that bit a big bullet in this arena early on (California for one), now realize that waiver programs produce massive new levels of beneficiaries who want and need access to community support services. SNF access was already somewhat limited as the industry has truly shrunk but the demand for services in this growing eligibility pool has expanded. Funding these services is becoming a real problem for states and as such, support payments will remain flat, decline and program growth will be capped.
- Home Health will also feel a bite from declining Medicaid funding although its Medicaid utilization levels are modest at best. For Home Health, Medicare is the big dog and Medicaid a minor element. Staffing costs are on the rise for Home Health as the competition for home health aides in many markets is brutal or getting rough. Competition, even in a high unemployment environment, for certain categories of employees, raises wages and benefit costs. Staffing is the largest expense for a home health agency and as such, a scenario with rising employment costs and flat to declining reimbursement negatively impacts margins. I don’t see this scenario changing any time soon.
Concluding, this may be one of my most depressing posts, if for no other reason than the current external view is dreary and nothing foreshadows improving weather. For brick and mortar providers, capital access is critical, especially for SNFs who have as a profile, some of the oldest physical plants. SNFs are capital-intensive operations and without an ability to fluidly and reasonably, access modest cost funds, deferred maintenance (already high) will increase. With so much revenue tied to reimbursement and a reimbursement outlook that is negative, it is unlikely that capital will flood back to the post-acute industry. Critically important to the viability of this sector is an improving economy combined with regulatory reform that, if reimbursement remains flat, allows providers to become truly more efficient. In short, increased program revenues under Medicare and Medicaid due to economic growth, will ease a lot of the immediate crunch and perhaps, buy sufficient time for absolutely critical, health policy reform.
CMS Announces Medicare SNF Cuts: The Implication
On Friday, CMS released its Final Rule regarding FY 2012 SNF PPS reimbursement. The Final Rule implements a reduction or “cut” in SNF PPS payments equal to 11.1% or $3.87 billion. The 11.1% reduction is based on 2011 rates and spending/outlays. In their proposed final rule published in May, CMS alluded to the real possibility that it would seek to reduce SNF payments via some element of program/technical correction as well as rate reductions. Their reasoning stemmed from claim and resulting outlay experience that was significantly greater in dollar amounts than originally forecasted when MDS 3.0 and RUGs IV was devised and implemented. Summarized, CMS had intended the conversion from RUGs III to RUGs IV to be expenditure neutral for Medicare. Per recent figures and analysis from the OIG, expenditures under RUGs IV are running 16% higher than the “neutral” target. For more information, see my recent post on this same topic at http://wp.me/ptUlY-8Q .
Given that the text of the Final Rule won’t be published until August 8 and as of Friday, CMS was still working on recalibrating the CMIs under RUGs IV, it isn’t possible to provide direct analysis of the actual rate scenario for FY 2012. What I do know however, is that the “bark” in this case is definitely worse than the “bite”. While overall spending is set for reduction, this doesn’t necessarily correlate directly to rate. Briefly, here’s why:
- CMS has factored into their projections of lower spending levels, a series of technical corrections such as changes in how minutes are allocated among participants in group therapy. This change closes a loophole or as I have said, an area of oversight in the transition from III to IV. Going forward, group therapy minutes must be divided in equal increments among all participants (e.g., one hour of therapy provided to a group of four equals four 15 minute therapy sessions; not an hour allocated to each participant as the system presently allows). Additionally, CMS is tightening the Change of Therapy assessment requirements to more specifically, capture any changes in a patient’s therapy needs that would preclude re-classification to a different (presumably lower) RUG category. This change is separate from any Change of Condition assessment.
- Recalibration of RUGs categories via adjustment to the CMIs will occur based-off of 2011 utilization and projections. The net result is change in category payments that will remain higher than experienced under RUGs III levels. In short, the net “cut” will not be 11% across the board. SNFs need to be astute as to how the CMIs work and translate into payments under each RUG. Recalibration is designed to restore parity to the overall expenditure profile. In order for CMS to do this, it will overlay utilization trends and patterns across the CMI continuum and adjust rates within the scope of its technical corrections, to forecast an overall program expenditure target that agrees (theoretically) with its original intentions in converting to RUGs IV. In short, this doesn’t mean an 11% direct rate reduction. If CMS were to impose and 11% cut to each category, overall outlays would reduce by more than 30% – that is not the target.
- Based on what I see from most providers with a fairly balanced Medicare book of business (mix of clinical/nursing and rehab cases on par with 40% clinical, 60% therapy), the net to their per diem will be flat to a reduction of 2 to 5%. This means that a facility with an average per diem today of $450 per day will see a 2012 per diem between $425 and $450 per day. Providers that took advantage of the group therapy option to escalate or maintain their high rehab payments under IV will likely see a greater revenue shock. In virtually all cases, providers that have a fairly balanced Medicare book should see a 2012 Medicare per diem that falls 6% to 8% higher than their FY 2010 per diem.
I will have a better idea of the actual impact when I see the final CMIs and resulting RUGs IV rates. In the meantime and until the Final Rule and rates are implemented on 10/1 of this year, I don’t see much in the way of political intercession to change (positively) the rate and spending scenario. Spending at the Federal level is a toxic subject and even with a potential debt ceiling deal looming, the microscope will remain directly on all areas of federal spending. Entitlement spending (Medicare, Medicaid, and Social Security) is rising substantially faster than discretionary or military spending and logically, presents a big target for deficit hawks. Logically, it will be difficult to gain the support of any Congressional industry sympathisers to push more money back into a system that most acknowledge, was unintentionally overpaying for care. Consider FY 2011 a bit of a windfall and the changes forthcoming, pretty darn modest; all things being equal.
Medicare SNF Cuts: Fact, Fiction, Probability
In early May, CMS released its proposed rule for FY 2012 concerning Medicare PPS reimbursement for SNFs. As most followers of the industry from investors, to operators to developers know by now, CMS dropped a “bomb” to the industry indicating bluntly, a warning of a parity adjustment (reimbursement or payment reduction) of 11.3% or $3.94 billion. In typical convoluted CMS fashion, the logic behind this foreboding news is scattered; an analysis of the agency’s inability to adequately anticipate provider behavior, utilization patterns, and to appropriately create a reimbursement mechanism that ties the cost of care required by current SNF patients with the costs and delivery systems necessary to provide the care.
Initially, the interpretation from many inside the industry was that CMS was overreacting, using only one-quarter’s worth of claims data to substantiate a “sky is falling” conclusion. More recently, six month’s worth of claims data became available and analysis proved the trend correct and even a shade worse or better stated, more prevalent than originally assumed. In short, the implementation of MDS 3.0 and RUGs IV missed the budget mark (budget or expenditure neutral) by $2.1 billion or 16%.
In the last week to ten days, the OIG (Office of Inspector General) for CMS stepped into the debate, stating its opinion that the overpayments must be stopped immediately. Interpreting the OIG’s qualification of “immediately”, the timeframe at issue is next fiscal year. In essence, the core of the problem continues to be the structural flaws within the RUGs system predominantly, that disproportionately pays more for rehabilitation therapy than for other primary care modalities. A major intent of CMS during the switch from RUGs III to IV was a reallocation of the incentives (higher payments) from therapy to other resident care requirements. Suffice to state, the methodology failed. Below is a simple illustration of how on a pure rate basis, the RUGs III to IV therapy categories compare.
| Table 1: Average Amount That Medicare Pays SNFs per Diem for Each Level of Therapy, FYs 2010 and 2011 | ||||
| Level of Therapy | Number of Therapy Minutes Provided During Assessment Period | Average per Diem Payment FY 2010 | Average per Diem Payment FY 2011 | Percentage Increase From FY 2010 toFY 2011 |
| Low | 45 to 149 | $288 | $430 | 49% |
| Medium | 150 to 324 | $369 | $488 | 32% |
| High | 325 to 499 | $364 | $532 | 46% |
| Very high | 500 to 719 | $418 | $594 | 42% |
| Ultra high | 720 or more | $528 | $699 | 32% |
| Source: OIG analysis of unadjusted per diem urban rates for FYs 2010 and 2011. See 74 Fed. Reg. 40288, 40298–40299 (Aug. 11, 2009) and 75 Fed. Reg. 42886, 42894–42895 (Jul. 22, 2010). | ||||
Reviewed on-the-face, it is logical to see how CMS could miss the targeted expenditure mark by the margin it has, even in-spite of the “methodology” changes that occurred in the conversion from 2.0 to 3.0 and RUGs III to IV. Providers, being logical creatures of certain habits, moved accordingly to grab the payments at the highest attainable levels or in short, fulfilled the economic axiom of, “what gets rewarded (paid for) gets done”. The expectation on the part of CMS that utilization trends would fall-off from the higher paying therapy categories, necessitating a higher re-balanced rate to negate a revenue “shock” to the SNFs was poorly thought through.
Quickly reviewing “what” occurred to produce such a variance from assumption to actual is easy. Getting to the core takes a bit more thought and digging. In summary fashion; CMS assumed that by restructuring how therapy minutes were calculated for concurrent therapy (therapy provided to two individuals) from a two-equals one basis to an equal half, would reduce the ability of providers to meet the higher per minute category qualifications, necessitating more one to one therapy sessions (the previous concurrent therapy rules allowed providers to have two people in the same therapy session with the total session time allocated to both participants equally). Similarly, CMS assumed that ending the look-back provision to establish reference dates and care requirements would more accurately stage the resident’s acuity and care needs to the point of admission (or proximally forward from admission) to the SNF. Additional tightening of the extensive services qualifier rules would also, as assumed, reduce higher RUG scores and thus, payments. Of these changes and assumptions, only the look-back period changes combined with the changes in qualification for extensive services provided any material classification changes (lower payments) though such changes were far less in total dollars than the dollar increase CMS imputed on the corresponding RUGs III to RUGs IV therapy payments. Providers however, merely switched to the remaining “open ground”, providing more therapy on an individual basis and most noticeably, on a group basis. On a group basis, minutes are counted collectively, not split in equal parts among the participants – a provision CMS did not change from RUGs III to RUGs IV. While the modifications made to the extensive services qualifier and the look-back period provision did impact providers, CMS completely misunderstood the application and prevalence within the provider community of these two provisions under RUGs III and as played-out, found that providers could still code residents into higher payment groups/categories in spite of the changes.
To understand what might happen next, one needs to look at how this mess occurred. As I’ve typically found, the answer lies in both camps; providers and CMS. In my recent work, its clear that many providers don’t understand the transition from RUGs III to RUGs IV and as I have looked at “oodles” of Medicare claims, I dare say a large number are still frought with ”up-coding” and questionable therapy-minute counting practices. This is not to say that the whole of the industry has behaved in this fashion but arguably, and CMS understands this as do both major trade associations, providers have not totally changed their business models to reflect the changes in payment systems. One needs only to look at how claims trended under RUGs III and how they now are trending under RUGs IV. The trend is too consistent to support an assumption of SNFs; a) staffing substantially more therapy personnel to capture the minute requirements via individual treatment or, b) SNFs moved a sizable share of their Medicare case-load into group therapy. The latter, while I’m certain it has occurred on a broad basis as the OIG report suggests, is problematic from a care delivery perspective for a large range of diagnoses that truly require individual therapy sessions.
CMS continues to remain fundamentally inept at developing reimbursement systems that provide adequate payment for the care and services required by SNF residents. I have yet to see, across my 25 years in the industry, any period or any system devised by CMS that didn’t under-support or over-support, one type or category of patient versus others. It is also illogical that CMS cannot develop the audit tools and claims management infrastructure that both educates providers and pre-emptively kicks-back claims clearly evidencing up-coding. I am consistently amazed at “what” gets paid and for how long. In short, CMS is apparently willing to consistently miss the mark, make wholesale adjustments and reallocation of dollars, only to over-correct past inconsistencies while producing new ones. Such will not doubt occur with this latest blunder.
While I won’t claim to have a crystal ball in terms of forecasting “what happens” next, experience and ongoing dialogue with individuals on Capital Hill and within CMS gives me some decent insights. With debt ceiling/deficit reduction talks mired in politics, it is unlikely any substantial cuts to entitlement spending are forthcoming. Senate Democrats and the President are sufficiently dug-in on cutting Medicare spending by any measurable amount thus the target on this issue (Medicare SNF spending) has moved away from the current political fracas. The remaining Washington impetus for cutting SNF reimbursement resides within CMS. In spite of the OIG’s report, enacting cuts of the magnitude suggested is a political issue. CMS can propose all the spending cuts its desires but Congress has the final say. Rarely if ever, although given today’s climate an exception may be possible, has Congress sustained reimbursement cuts of this magnitude. Synthesized, my view of what happens next, based on what I know to date, is:
- Providers and their trade association are willing to capitulate to a modest adjustment in the therapy categories. This symbolic give-back will play well politically. Net of a market-basket/inflation update, cuts of 2% to 4% are possible in a “cut scenario”.
- In a scenario that involves no real cuts, rates will be flat. CMS will institute additional refinements and perhaps, even re-calibrate or fine tune payments by RUGs category, moving dollars within the RUGs system, without reducing payments. In this scenario, the attempt on the part of CMS to is to “patch the potholes” and let the system itself reduce payments via tightening the requirements and re-allocating dollars within the RUGs categories.
- A most probable scenario involves, as is typical, a bit of both. CMS will cut the therapy rates using some language about re-basing. At the same time, a series of corrections will be made regarding the counting of minutes for group therapy, assessment windows, etc. Overall, payments to SNFs across all RUGs IV categories will be flat or targeted as a reduction equaling 2-4%. The pull-back on the therapy RUGs rates could be as steep as 8% to 10%. Even at this level, the remaining rate will be higher than the former RUG III rate.
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