Strategy « Reg's Blog

CCRC Marketing Reality Check-Up

Periodically, the source for a post on this site is the accumulation of thematically condensed questions that I receive regularly and with frequency; what I now call the “buzz”. While the “buzz” for me is fairly constant across the post-acute/seniors housing industry, the pitch does vary, sometimes daily but most often, weekly. I guess it just depends on what is trending and where people’s focus lands. If the buzz is steady enough and the sound-bites within the buzz repetitive, it spurs me to sit and write, perhaps defensively, to quiet the noise from Twitter and e-mails, and re-focus. This post is one of those defensive or perhaps, reactive posts.

Lately (last three to four weeks), I’ve been getting a steadily increasing series of questions regarding CCRC marketing, value (economic) propositions and to a lesser extent, repositioning. The sources of course anonymous, range from established communities to relatively new communities, seeking sales and occupancy improvements. In some form or fashion, I’ve likely addressed most of these issues in pieces via various posts and articles spanning the last two years but alas, I have been remiss in circling back with a condensed and consolidated version. Hopefully, this post will help.

Post recession and into a grinding period of almost unrecognizable economic improvement sprinkled with volatility, CCRCs need to come to grips with four key themes when it comes to marketing.

Reality has shifted permanently for the industry. This is not necessarily bad but it does mean that every aspect of the sales and marketing cycle once engrained, understood, and successful in terms of selling units has changed. Consider the following;
- Within the last four years, most seniors saw their incomes via investment returns, social security, pensions, etc., flatten and/or trend down. Some saw immediate and permanent reductions (permanent for their remaining lifetime).
- While investment portfolios principally consisting of equity securities have rebounded, the recoupment of loss only occurred for those that remained fundamentally steadfast and did not turn what were ”unrealized” losses into realized losses via reactionary selling during the market fall-off and bottom.
- Depending on the individual market, real estate prices fell precipitously or at least modestly and the liquidity of the real estate via a thriving residential market stagnated and declined. Some markets have recovered elements of liquidity and re-sale value (price) but not to the levels prior to the downturn.
- Seniors housing demand has always been elastic but as a result of the three points preceding, it is even more elastic today. Why? Simply, economic fortunes of the consumer shifted downward and thus their real and perceived purchasing capability moved accordingly down while the prices for seniors housing remained stable to modestly higher. We’ve seen a similar effect in new construction vs. existing housing. New construction per square foot costs have stayed relatively flat or slightly higher over the period while existing construction on per square foot basis fell. When the correlation between the two is tighter or even inverted slightly, the demand shifts accordingly. For seniors housing, this added price elasticity, created by a wider gap between the declined consumer’s economic purchasing capability (again, real or perceived) and flat to slightly higher seniors housing prices, creates a different value proposition and purchasing dynamic. For most CCRCs and other seniors housing providers, the best strategy to combat some of this impact in the near term is to hold prices or drop prices; a scenario for many that may be difficult.
The customer demography has shifted. While this shift has been subtly occurring over the past decade, the recession period sped the movement. Retirement is now more deferred and the economic need or desire to remain in the community for a longer period of time more developed. The customer today is de facto older and more driven by need, predominantly health related.
In light of number 2 above, even with the constant growth of age bands suitable for seniors housing and CCRCs, a percentage of the market evaporated. This percentage is folk whose economic fortunes changed so profoundly negative or were marginally positive enough to afford a seniors housing product but now no longer so as a result of wealth loss. This segment or percentage was at the normative market age, economically qualified at the time, but four or so years later, outside the age and health profile and/or economically incapable of affording the product. The bad news is, the replacement numbers generated from a cohort behind them are insufficient to make-up for their loss. The market has marginally shrunk, although unit numbers have not and in some markets, have increased during this period.
Given points 1-3 above, the sales cycle is now longer requiring new approaches, more touches, and revised pricing strategies and product features that realign the value proposition.

Circling back to where this post started, the compendium of current questions I am attempting to defer and answer lie in number 4 above. Specifically; “OK, I get 1-3 but how do I then develop the strategies, etc. dictated by this new sales cycle”. My summarized answer is below.

First, redefine your customer. I like an analytics approach. Who are they? What do they need? What is their economic profile? What are they shopping for (and it’s not the real estate)? What is their background at all (or as many) levels that you can ascertain (education, occupation, interests, locations, current living arrangements, health profile)? The more you know, the better.
What is your community’s economic value proposition? I’ve written on this before and it needs to be clear. Price it and benchmark it across the broadest market segments possible (compared to living in their current home, rental, condo, etc.). How does your product compare to competitors at all levels (features, services, care levels, etc.) on a price basis, quality basis, access basis, etc.? Again, the more detailed this information is, the better.
Generating leads once the above is complete becomes easer. The strategies that work the poorest on a cost per lead basis are newspaper and print media advertising, other media advertising, facility generated brochures, billboards, and events. Events can be helpful in getting people into the community to remove a barrier but in and of themselves, they do very little to turn attendance into prospects without other steps taking place. Strategies and tactics that work best in terms of numbers and on a cost basis are referrals (current residents, families, community members, from other providers, etc.), e-mail contacts and direct mail, website and social media marketing, and co-branding with other organizations where your target market is plentiful and frequent. In this latter strategy, I recommend being present and visible via human presence as well as building joint lists and joint value-added connections (education, support, referral development, resource sharing, sponsorships, etc.). A word of caution here: Make absolutely certain that in co-branding and co-marketing strategies that the other organization is as credible and solid as your organization - the relationship must be value-added not value-dilutive.
Incorporate new math into your thinking. The new math is all about how many touches and presentations are required to make a sale. For most CCRCs and market rate or above market rate projects, 20 or so touches to qualify and close a prospect is the new norm. In short, if you are working on a list of 100, expect five to ten sales (if the list is qualified) from that 100.
Marketing needs to focus on building “volume” thus, methods and analytics need to be at the forefront of strategy. To keep costs manageable and to build fluidity, I recommend strategies that utilize in revolving fashion, the following four elements. First, e-mail blasts and e-mail news letters that go out to target segments on specific interest levels. Second, simple events that are educational, again focused on target market interests. Third, internet and social media campaigns. For internet, I like to make certain that the web pages are clean, focused and have ample opportunities for people to request more information. Fourth, direct mail campaigns.
All campaigns and elements need to focus on a clear, direct distinction between your product and other options. In other words, the goal is to find as many ways as possible to reinforce what the value proposition is and how the same is directly correlated to the interests of your target markets. For CCRCs, the simplest concept is “continuum of care”. The vast majority of CCRC consumers are motivated by health and supportive care access.

The “new” CCRC marketing reality is all about analytics and alignment; narrowing the gap between what your customer wants and how your community is best suited to address the key issues. Touches have to go up to meet sales objectives and contacts need to be weeded through quickly. Building a qualified and fluid prospect list today is all about using multiple methods with fluidity. Finally, I can’t emphasize enough how critical and how granular the marketing analysis needs to be to push forward a successful strategy. Without a full analysis of market targets, customers, prices, product, etc., gaps remain that allow prospects to filter through, resulting in less than effective marketing activity.

April 19, 2012 Posted by Reg Hislop III | Senior Housing | CCRC, Economics, Industry Outlook, Management, Marketing, Senior Housing, Strategy, Trends | 7 Comments

Know Your Market, Know Your Value Proposition

Last October I wrote a post regarding the development of an Economic Value Analysis and how the same is important for marketing seniors housing and skilled nursing. A couple of weeks ago, I wrote a post regarding feasibility tests key to project success and targeted feasibility. Later this year, in October at Leading Age’s annual conference in Denver, I’ll again cover the concepts in a direct, interactive fashion. Until such time however, I continue to receive dozens upon dozens of inquiries as to how to construct an Economic Value Analysis and a corresponding value proposition. Last October’s post is instructive and can be found at http://wp.me/ptUlY-7G. In addition, and in concert with the post prior to this one on financial feasibility methodologies, I’ve provided below some additional “help points”.

Economic Value Analysis is a fairly simple process that centers on determining the ability or capability of a product or service to satisfy the core demands of a given market; the ability to quantify utility. Utility in this context, simply stated, is satisfaction at a given price. For seniors housing, the struggle always is “how” to demonstrate value to potential consumers in a way that is logical and meaningful. This is acutely problematic in a market that is competitive as the “noise” emanating from all the competitors regarding price and services is constant and at times, deafening. At its core, Economic Value Analysis creates a more tangible constant.

Given that seniors housing has a very elastic demand curve (a great many substitute products provide equal or proximally equal core utility), the devil is creating a comparison basis and this basis is not “stated price or features”. A place to start is completing a simple analysis that equates a seniors housing unit per square foot cost (cost = fixed costs, variable costs, and margin) to the comparable alternatives in the market. In this case, comparable alternatives equal rental housing, other competitors, community dwellings (housing units, condominiums, etc). Ignore your current pricing structure as unless the same is equalized on a square foot basis, this analysis won’t provide a true picture.

Taking the example to the next level, once the cost per square foot is known, determine the relevent market comparables. This does take some homework but it is fairly easy to complete. Via simple survey, one can generally gather enough information from realtors, friends, etc. to determine a community housing cost per square foot (utilities, taxes, rent costs, depreciation/maintenance, etc.). Gaining information from competitors is even easier as typically, they publish the information or a simple “blind shopping” trip gathers all the necessary information.

Once the information is gathered, populate a simple spreadsheet with the data. If the core cost per square foot for the seniors housing option is higher, and it typically is, the analysis must delve deeper. Usually, elements that drive costs for seniors housing come in the form of rate or price inclusions such as meals, cable television, maid/cleaning services, etc. Two approaches to deal with this issue are possible. First, back these costs out of the seniors housing number and re-analyze the comparables. Second, and my recommended method, gather data on these services and develop a square foot comparable. Between competitors, the key is to keep the data as apples to apples as possible so one must be clear that the costs include exactly (or as close as possible) the same features/amenities, etc.

Once all the information is known and “spread” and sorted, the picture should become clear. I like to look closest and hardest at the comparison between living at a seniors housing complex versus living in a market rate situation whether that is home, condominium or rental. The age-old belief among seniors is that a seniors housing community is too expensive. The analysis should detail where the true costs lie. Expect some price sensitivity issues where the seniors housing is a tad more expensive but the difference should be clearly and easily explained (24 hour services, access to care, transportation, etc.). The more than can be quantified in the form of dollars, the tighter the analysis becomes and the easier it is to explain where the salient benefits lies. If the gap between the seniors housing cost and the alternatives is too high, the issue may lie in the structural elements of the equation such as inordinately high fixed costs or variable costs. Becoming competitive may require changing, if possible, the financial drivers of the seniors housing project equation.

Concluding, the square foot model works exceptionally well in this analysis as it provides flexibility to model and to change any number of variables. It also is “non-unit” specific so its data and results aren’t skewed by less-than relevant unit pricing schemes. The difficulty simply lies in taking the time to build the model and to accurately gather solid data from the “universe” of housing alternatives. Assuming costs mirror most of the market, the value proposition thus becomes a powerful tool that can and should be used in market positioning.

April 3, 2012 Posted by Reg Hislop III | Assisted Living, Senior Housing | Assisted Living, CCRC, Development, Economics, Management, Marketing, real estate, Senior Housing, Strategy | 1 Comment

Hospice Census: Where’s It At?

A common question I am fielding has to do with the current “no growth” pattern of hospice census; in some cases, decline is more operative of the pattern. Briefly, there are a number of factors at play, some recurring themes and some driven by more aggressive CMS intervention.

The biggest culprit in the current no-growth situation is the economy. I’ve written about this issue before but it clearly bears repeating. In a down economy, paying patients are more scarce than in a healthy(ier) economy. Assuming as has been the case, provider growth or supply hasn’t declined substantially (if at all) during the recession to current level of stagnation; the same number of providers are chasing a lesser number of “paying” patients. The reality is such that each provider seeks patients that can pay and ranks or grades patient value by payer source; some patients are worth more than others. As hospice is primarily a “down stream” referral, generally coming from an acute environment, the base of referrals starts with the supply of paying patients within the hospital. For most if not all hospitals, patients with good private insurance are the most prized. Medicare comes next and Medicaid next and everything else well below. For hospice, the bulk of referrals are Medicare followed by Medicaid and private insurance to a far lesser degree. When the supply of patients with private insurance declines due to economic malaise for a prolonged period (as current with high unemployment) and the level of elective procedures dies rapidly, all other paying patients become more prized by the hospital; their value increases. As the value of these other patients rises and isn’t replaced quickly with private insureds, the realization of keeping Medicare and Medicaid patients within the system and the hospital as an economic necessity (paying the bills) trumps the value of referring down stream. In short, the demand from a supply of private insureds for beds and services isn’t great enough today to push these other patients out of the acute system. Economically speaking, if I am a hospital, I will maximize whatever revenue source is available to me such that doing so is better than nothing as no immediate alternative or replacement is available.
While overall census hasn’t grown much over the last few years (if at all), CMS’ concern regarding the composition of hospice census has. The primary focal point is around nursing home patients on hospice and their proclivity as a sub-group to account for longer lengths of stay. Not surprising, as the sources for non-nursing home patients have remained stagnant or declined, hospice activity in nursing homes has steadily increased. What CMS is concerned about today is the growth of the longest stays, principally where these stays occur and what diagnoses correlate to these stays. A notable aside and one that cannot be ignored is the type of hospice ownership that seems to drive the majority of long-length stays. The facts below combined with an OIG workplan emphasis that is focused on reviewing the business relationships between hospices and skilled nursing facilities correlates directly to a softer environment for census gains derived via nursing homes. If the term Hawthorne Effect (behavior modification that occurs as a result of being watched or monitored) comes to mind, I’ve made my point.

The longest stays occur on average, in nursing homes and assisted living environments.
The average length of stay in-service for a for-profit hospice is 30 days longer or 33% longer compared to a non-profit hospice.
The bulk of industry growth in terms of organizations providing hospice has been for-profit, free-standing hospices. The rest of the industry growth has remained essentially flat.
For-profit margins of free-standing hospices average 10 to 11% compared to non-profit margins of 3%.
A recent OIG report on hospice care provided in nursing homes found that 82% of the cases reviewed did not meet Medicare coverage requirements.

In the grand universe of all health care options, hospice care remains a decided niche’. For non-health care people, its tough to wrap your head around a care approach that by its nature, offers no “curative” option. For all too many individual patients and their families, this option is too often viewed as “giving up”.
Marketing has caused some erosion but marketing on behalf of non-hospice providers. Cancer remains the primary cause of a hospice referral yet for every hospice advertisement I encounter, I encounter a literal ten to one (if not more) advertisements for hospital-based cancer treatment programs or distinct hospitals (think Cancer Treatment Centers of America). While I know the overall survival numbers, costs, logistics, etc. as well as any one, the general patient and their family does not. The treatment approaches are phenomenally positive and reassuring regarding themes of “hope”, “cure”, etc., even for the most desperate of diagnoses. The hospice message is frankly trumped quickly as to the unitiated, it is still about death. The result: Referrals that should have come sooner perhaps are not coming at all or coming closer to the final days.

Taken the above into account and CMS data regarding a projected growth in outlays for FY 2012 of 2.8% (Medicare), an amount that is almost entirely rate driven, expect continued stagnation on the census side. Until the economy improves and more certainty is forward on the future of health care reform, growth in terms of new volume is not soon to arrive.

November 1, 2011 Posted by Reg Hislop III | Hospice | Census, CMS, Economics, Hospice, Industry Outlook, Market Trends, Medicare, Strategy, Trends | 2 Comments

Current Policy Trends to Watch

In response to a recent series of questions from multiple segments of the health care and post-acute industry plus my own experiences within the landscape of providers and policy makers, I’ve summarized a current list of policy trends “pay attention to”.

Medicare Cuts and the Super Committee: Nothing seems to loom larger or cast a bigger shadow than the prospect of outlay reductions from Medicare translating into rate cuts for providers. Here is the core everyone should focus on. First, the recurring “Doc Fix” issue that Congress has repeatedly kicked down the road time and time again. Let the current patch dissolve and voila, a big chunk of spending disappears (a 30% rate cut on January 1) - albeit with enormous likely consequences in terms of patient access, service reductions, etc. Fix the problem permanently or more likely substantially, and additional non-budgeted spending occurs – a problem. Presently “on the table” so to speak is a recommendation from MedPac to fix the problem via repeal of the Sustainable Growth Rate formula (the trigger for the current “cut” scenario) and replace the formula with a schedule of Physician Fee Schedule updates over a ten-year period. The updates would target primary care physicians at the expense of specialists who would experience a 5.9% cut across a three-year period, followed by a fee schedule freeze. Altogether, this is a fix but one that comes with new spending if no additional changes are made. Likewise, the probability of this being a workable compromise within the medical community is minimal. There remains a side problem to this whole mess and it relates to the number of other Med B services tied to the SGR such as outpatient therapies.

Back to the Super Committee and the prospect of triggered automatic cuts to Medicare. The Committee is charged via last summer’s debt ceiling deal, to arrive at a deficit reduction of $1.5 trillion to be implemented over 10 years, sourced either through spending cuts, new revenues or a combination of the two. Based on what we know today and have consistently experienced over the past year or better, Congress lacks the political will and capability to achieve a consensus on just about any subject. Given that we are also hip-deep in a political cycle with elections nearly one-year away, compromise on a plan is less and less likely. If such a plan cannot pass or isn’t available by the deadline, current law requires an automatic cut of $1.2 trillion to occur, balanced across domestic and military spending. Within the triggered cuts in domestic spending is a 2% cut to Medicare provider reimbursement. This cut would be automatically on-top of, any other current reductions or cuts to providers that occurred as a result of CMS normal-cycle rule making. For example, the 2% would be added to the 11% outlay reduction for SNFs. Interesting to note, Medicaid is unaffected by the automatic reduction trigger. Boiling this all down, here is what is likely “on the table” and could conceivably play out.

Medicaid is likely at greater risk for some kind of spending reduction package as Medicare and Social Security have the greatest political protection. My best guess, not that this will actually occur or pass, is direct discussions with regard to block grants as an expenditure reduction, broader waivers to States to eliminate current pressure for additional federal support, slow-down of health care reform Medicaid expansion to avoid the additional up-front federal support/funding required by current law.
Some levels of additional programmatic delays or even, defunding of the Health Care Reform act. Congress loves to think of “not funding” a future expenditure as a “cut”.
A Medicare realignment approach will be strongly considered. Under realignment, the Commission could conceivably adopt an approach similar to pieces advocated by Paul Ryan namely, higher retirement/eligibility age, premium support for privatization of health coverage (vouchers) or even some level of excess benefit taxation on wealthier retirees (in effect, an imputation of a premium cost for certain income levels). This approach is bolder than other less invasive options.

Medicaid: Notwithstanding my comments on Medicaid in the section above on Medicare and the Super Committee, states continue to wrestle with Medicaid deficits and the real prospects of flat or possibly shrinking, federal funding support. For most states, Medicaid represents the second largest expenditure item within their budgets, just behind education spending. Federal support levels average in the 50% to 60% range. Additionally, the majority of states continue to operate on a fee-for-service platform, bearing all of the direct program and care service cost plus the administrative burden. In a flat to down economic cycle, demand for Medicaid services rises for states as eligibility rolls swell with rising levels of unemployment. At the same time, down to flat economic periods reduce state income collected via taxation; the principal source of initial, core funding for Medicaid (the FMAP provisions require states to allocate first-dollar, the source of which is predominantly taxes). The three trends to watch with Medicaid, all of which I am seeing occur regularly, are;

A push toward privatization and managed care. States are looking at ways to better coordinate services, create some competitive bidding models, and reduce administrative burdens. Managed Medicaid programs have proven succesful in achieving these goals (some more than others).
Increasing numbers of programmatic waiver requests to the Federal government. A major issue with the enhanced FMAP funding that came via the Stimulus Bill is that the funds came with strings attached, primarily a requirement that the enhanced funding be used for eligibility expansion, program expansion, and expanded benefits. In July of this year, the enhanced funding disappeared leaving many states with an equal or greater structural Medicaid deficit and still lacking a sufficient economic recovery to garner the necessary “state grown” revenue to sustain not just former program levels but program and benefit expansion driven by the enhanced FMAP. States are increasingly looking to the Federal government today for relief or “waivers” that undo what was put in place to garner the enhanced FMAP.
Increased provider taxes and decreased payment levels are a given for the vast majority of states. I haven’t yet encountered a state Medicaid plan that wasn’t considering or already implementing, some form of provider tax increases and/or reduced payments to providers. Of most reductions, the target appears squarely focused on the HCBS (Home and Community-Based Services) segment, inclusive of Medicaid waiver programs for Assisted Living and Congregate Housing (Medicaid payments made for supportive, assisted care to a population at-risk of institutionalization).

Miscellaneous/Other: This is a catch-all of five separates trends or issues that in some ways, are inter-related to the Medicare and Medicaid sections and in some ways, separate. To be sure, I could have expanded this section by a magnitude of ten and still not touched on every policy issue presently at play. I opted for the five I hear discussed routinely or I encounter frequently in my work.

Accountable Care Organizations (ACOs): The first release of draft rules from CMS in March of this year produced a non-starter response from providers. The initial draft implied a series of cumbersome and poorly defined steps for creation, sustainment, operating and quality measures (65 quality measures required for bonus payments) that chilled providers. Earlier this year when the draft was released, I wrote an analysis piece on the draft and the implications for post-acute providers ( http://wp.me/ptUlY-8H ). Clearly, my analysis paralleled the reactions that CMS received regarding the proposed rules. Just this week, CMS released a revised ACO set of rules and to a fairly large degree, softened and clarified the objectionable elements contained in the March draft. Summarized, here are the major changes. Time will tell whether these changes spur additional interest in ACO development.

Reduction in quality measures from 65 to 33.
Providers are not required to share in the down-side risk and will be able to access earlier, elements of revenue sharing. The initial version required all original savings returned to Medicare prior to any revenue sharing.
Community Health Centers and Rural Clinics will be permitted within the ACO model – originally excluded.
Providers will know up-front which patients are likely to be included within the ACO - originally, not known until after the ACO was formed – a removal or limitation on unknown adverse selection/population risk.
Inclusion of an Advanced Payment Provision for smaller ACOs, creating initial streams of payment or capital that allows infrastructure investments needed to formulate an ACO to effectively be funded by CMS. this provision only applies to non-institutional ACOs (physician practices) of $50 million or less or rural based ACOs with Critical Access Hospitals or low Medicare volume rural hospitals.
Removal of the mandatory anti-trust review procedure for new ACOs by the Department of Justice and the Federal Trade Commission. This was a significant gray-area issue in the March draft.

CMS Movement to Split Provider Pharmacies from Consulting Pharmacy Duties: In an effort to combat what it believes is a conflict of interest between quality and quantity in the SNF pharmacy delivery/provision process, CMS is proposing a requirement that would prohibit the dispensing pharmacy from also being the consulting pharmacy in the SNF. In short, one entity would be required to dispense the medication and the SNF would need to contract or employ, a separate consulting pharmacist or group to review and establish, clinical pharmaceutical plans of care. CMS assumes that this change will reduce the overall number of medications provided and improve care delivery. Perhaps but unlikely. The true outcome is likely about the same level of prescription use in SNFs and higher costs for the SNF. Consulting pharmacists and pharmacists in general are in short supply. For most SNFs, finding a consulting pharmacist separate from the providing organization will be difficult and expensive. Even more problematic will be finding an independent consulting pharmacist or group with sufficient long-term care and geriatric experience to be of any benefit at all; for residents and the facility. My take here is that CMS is wary of continued consolidation of institutional pharmacy providers such as Omnicare and PharMerica and is seeking a back-door method for constraining their growth across the post-acute spectrum.
Doc-Fix and Sustainable Growth Formula: I touched on this earlier but there is a real side issue to watch and it has nothing to do with the payment issue to physicians. The SGR and the physician payment formula also encapsulates a whole host of outpatient services tied to this element of Part B. For post-acute providers, the target to watch is outpatient or Part B therapy rules and payments. As goes the SGR debate, so goes the prospects for payments for other Part B services such as therapies. Frankly, any fix to the SGR and physician fee schedule issues needs to occur separate from the other Part B elements presently included within the SGR mess.
Home and Community Based Services: What once was a flourishing sub-industry is soon to be no longer. I touched on this briefly in the section on Medicaid. This element is at significant risk for post-acute providers as funding is tight and most states are looking at any opportunity possible to reduce their HCBS programs, reign in eligibility growth or receive waivers from the Feds for wholesale discontinuation of certain programs. The reason? Institutional care and medical care cannot by law be cut whereas these programs are waiver programs; not presently, expressly required by Federal law.
Tighter Regulatory Scrutiny: Somewhat parallel to the pharmacy issue above, CMS is foretelling a renewed vigilance on certain post-acute practices and relationships. I am reading and hearing all too many comments and stories regarding CMS closely watching and even planning to directly interject via probes and audits ( and perhaps rule-making), relationships between SNFs and contract therapy companies, pharmacies (see above) and SNFs, SNFs and Hospices, and ancillary medical equipment providers (wound vacs, specialized mattresses, fall prevention devices, etc) and SNFs. The tone here is that CMS believes these relationships exist to optimize profit for the parties and to capture larger elements of reimbursement, not to improve care outcomes or efficiencies.
Increasing Demands on Physician Engagement: For most post-acute providers, physician engagement such that the same was tied directly to reimbursement was never a major issue. This trend unfortunately, is here to stay and will increase. CMS believes that in Hospice and Home Health particularly, unneccessary services were provided without established medical necessity or justification. Both home health and hospice now have face-to-face requirements for physician certification of necessity for services/care. The next phase of this, and I guarantee this will happen in the next year or two, is direct engagement and oversight of CMS in the relationships between physicians and the organizations and the content of the documentation of medical necessity or justification. Providers need to be vigilant here or face claim denials in increasing numbers.

October 21, 2011 Posted by Reg Hislop III | Home Health, Hospice, Policy and Politics - Federal, Skilled Nursing | CMS, Congress, Economics, Health Care Reform, Industry Outlook, Medicaid, Medicare, Payment, Strategy, Trends, Washington | Leave a Comment

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.

October 12, 2011 Posted by Reg Hislop III | Home Health, Hospice, Senior Housing, Skilled Nursing | Economics, Home Health, Hospice, Industry Outlook, Management, Medicaid, Medicare, Money, Nursing Homes, Payment, Revenue, Strategy, Trends | Leave a Comment

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.

September 1, 2011 Posted by Reg Hislop III | Policy and Politics - Federal, Skilled Nursing | SNF, Industry Outlook, Nursing Homes, Strategy, Medicare, CMS, Payment, Health Care Reform, PPS, Market Trends, Management | 3 Comments

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.

August 26, 2011 Posted by Reg Hislop III | Assisted Living, Home Health, Hospice, Policy and Politics - Federal, Senior Housing, Skilled Nursing | Budget, CMS, Congress, Economics, Health Care Reform, Home Health, Hospice, Industry Outlook, Market Trends, Medicaid, Medicare, Money, Nursing Homes, OIG, Part B, Payment, PPS, SNF, Strategy, Trends, Washington | 4 Comments

Accountable Care Organizations: A Post-Acute Perspective

Suffice to say, I am behind in getting this post “out”. My best intentions of a month or so ago were quickly dashed by other more pressing commitments. Nonetheless, I did read the proposed regulations as produced by the Department of Health and Human Services/CMS on April 7 and worked through a stack of research on the subject of Accountable Care Organizations; loosely coined by me, the Good, the Bad and the Ugly.

In the purest of definitions, easily lost within the DHHS/CMS proposed regulations, Accountable Care Organizations (ACO) are about improving patient care outcomes and satisfaction while reducing cost or expenditures for care. At the core of the premise about “why” and “how” an ACO would work in achieving better care, higher satisfaction and lower costs are three key assumptions or “truisms”.

Best practices via algorithms and care pathways exist in sufficient supply, tested and proven, to reduce the variability that drives higher cost and lower satisfaction for a large and growing number of common patient care issues.
Satisfaction is directly correlated to increased patient knowledge and communication, reduced bureaucracy at the provider level (fewer redundant steps) and better outcomes, more directly delivered and/or attained.
Providers, properly incentivized to focus on outcomes and satisfaction will gravitate toward any and all steps and measures that improve outcomes and satisfaction and resultingly, deliver better and cheaper (less costly) care. The key is developing the right level of incentives that drive provider behavior in the desired direction.

For years, I’ve written and lectured repeatedly that bending the cost curve or lowering the overall costs of health care in the U.S. system must first begin at the core of the issue; the system of reward. A simple economic axiom defines this best; “what gets rewarded gets done”. Fundamentally, the U.S. health system has rewarded in the form of payment, procedures, pills, tests, and surgical (or surgical-like) interventions at the expense of prevention and wellness/care management. In spite of an enormous and growing body of evidence that much of the escalation of costs (steepening of the “curve”) in the U.S. is driven by chronic conditions poorly managed and lacking in early detection and prevention strategies, funding has remained skewed toward treatment practices that are technical and predominantly surgical or interventional in nature. The result is poor to minimal access for Type II diabetics (as an example) to integrated chronic care programs designed to stave-off emergency room visits, loss of limbs, peripheral vascular disease, loss of vision, etc. while access to the latest imaging technology, interventional cardiac programs and surgery ranges from good to stellar and even drastically redundant in some markets.

Knowing the above and understanding that a fluid and flourishing economy has been built around this system, the belief or premise that one can design and make work effectively, a paradigm shift such as is intended with ACOs is curious at best. Suffice to say that while I know such a premise makes sense (Accountable Care Organizations), I’m less than certain from my read of the proposed regulations and knowledge of the current system, how incentive realignment will work to first, bend the “cost” curve and second, create a necessary body of invested, at-risk stakeholders willing to place their economic futures (such that they are) in the hands of a governmental half-and-half, moving payment system. Moreover, the initial investment capital is clearly all provider capital placed at first dollar risk and the shared-savings return proposed, provides a poor return on the capital invested. This is particularly true for the post-acute elements critical in the formation of a truly functional ACO.

For an ACO at is primordial core to work (achieve the desired outcomes), hospital utilization and the most expensive clinical utilization must be diminished. Diminution of such care is achieved primarily, via three methods/interventions/actions.

Primary care available and accessible enough to create consistent early detection and provide low-cost interventions that arrest a progressing disease-state prior to an acute event that ordinarily would cause hospitalization. In the case of Type II diabetics for example, education and monitoring of insulin levels and Ha1c to create optimal therapy and patient knowledge and disease management efficacy that delays and avoids, hospitalization and interventions on a crisis basis. By simply deferring and/or avoiding, undetected and untreated peripheral leg and foot ulcers, thousands upon thousands of days of hospitalizations for amputations and/or intravenous therapy for infections can be avoided – annually.
Delivering care in lower-cost settings or alternative settings, non-hospital based, nets enormous savings. As payment today is skewed toward hospitalization and hospital-based care, patients disproportionately receive care, tests, procedures in hospital settings. A primary example of how skewed the system has been is the artificial and unnecessary three-day prior hospital stay qualifier in order to receive Medicare coverage in a nursing home. Equally as non-sensical are the present Part B outpatient therapy caps for any non-hospital based and provided therapy. I could literally list hundreds of payment and care provision inequities but my point is made.
True integration and data sharing among providers must occur and each provider must bear an incremental reward benefit and/or downside risk. If providers cannot access data fluidly on a patient population and share best practices encompassing steerage to the most cost-effective, best-outcome sources for care without fear of system reprisal, holes and gaps to effective care delivery at the best price/cost will remain too plentiful.

Taking the above into account, two major obstacles still remain in terms of successful development of an ACO. The first is patients, now indoctrinated into a system where pills, brands, certain tests, and other non-proven care modalities are expected, nay demanded. Simultaneous, this same group is famous for varying elements of non-compliance born out of a belief (though untrue) that most anything has a “medical fix” component. All the best practices and lower-cost alternative settings can’t overcome patient behavior unless and until, patients are part of the risk-benefit system.

The second obstacle, touched on earlier, is the system of reward or the model of risk-benefit. The ACO core model is one of risk-sharing; gains in the form of varying levels of saving returned to the providers willing to bear “risk” in the form of higher than desired utilization, costs, etc., or outcomes including satisfaction that are below certain pre-determined and desirable levels. The inherent fallacy within this concept is multifaceted to say the least.

As indicated, patients are a true wild-card; both in terms of behavior and health status. As the patient remains effectively detached from the risk-benefit equation, behavior is left to chance. Additionally, health status going into the population on behalf of patients is effectively unknown. In short, a “ticking coronary time-bomb” may be present (or similarly present) creating a cost and outcome explosion that defeats the opportunity of an ACO to truly deliver effective savings. The inability in the present regulations to set a path for securitizing against this risk and for truly integrating patients into the risk-reward equation (some element of cost-share broader than present) makes the attainment of long-term savings at a significant level, illusory.
For many providers (or perhaps all) the up-front investments in terms of technology and service accessibility are steep. This is dramatically so for post-acute providers as the Federal Government refuses to offer any resources for technology investment – not the case with physicians and hospitals. This is fundamentally illogical as a major element to delivering true savings is via the full use of alternative care settings – lower cost options for care such as therapy/rehabilitation, chronic disease clinics, etc. What occurs as a result of this enormous “up front” investment is a return on investment profile that is marginal to poor; in most cases (and in all that I have analyzed) below the organization’s cost of capital. Additionally, the prospective savings return is not fluid or rapid leaving providers with a self-funding equation of producing results, subsidization of investment and cash flow, netting a return that is below any other reasonable and readily available alternatives.
The sharing of incentives is impractically aligned such that the largest sources of current costs stand to lose the most while the post-acute elements stand to gain the least, though as the above occurs, the distribution is far from quid-pro-quo. Briefly: ACOs begin fundamentally with physician groups and hospitals. To fully achieve functionality and to meet the objective of better care provided cheaper, other providers core to the care continuum must be brought into the ACO. Hospitals primarily have invested heavily in the current system of fee-for-service reimbursement, building environments that return the most on investment when heavily utilized on an in-patient and procedural basis. It is illogical to assume that for most hospitals, voluntarily steering utilization elsewhere to lower cost settings or abating certain levels of utilization altogether in exchange for “shared savings” spread across the ACO players is a winning proposition. On a similar plane, the same is true for physician specialists. Interventional cardiologists will be hard-pressed to forego any elements of business financially and in honest reflection, Medicare-age patients are a major (if not the primary) source of patients. For post-acute providers, utilization should likely increase as their services are more cost-effective but as established, these providers are bit players in the ACO game and while perhaps the most effective element in controlling costs and utilization, not proportionately rewarded. Their participation for example, is all down-streamed through the ACO.

Forming a post-acute synopsis of the current ACO landscape is as simple as this: Play at your own risk. There is little for most post-acute providers to gain within the present ACO framework, financially. All gains are more market and patient-flow related. The investments in terms of technology are steep and unsupported via government funding. Similarly, the net margin attainable via an ACO that is at “risk” or participating in shared savings is less than adequate to support a return on capital investment scenario that justifies the up-front costs. Personally, I would treat ACO participation at this stage as exploratory only; a devotion of only a small investment on-par and an expectation that minimal financial gain will occur, if any.

It stands to reason that some provider elements within the post-acute industry will stand to benefit better than others if for no other reason that they are already aligned from a business perspective to do so. LTACHs could reap significant market share if they can pose as legitimate first-admit options to an acute hospital. SNFs that are and have been, operating as true transitional care providers with in-house, integrated services could become major partner players within the ACO landscape. Key however to an SNF’s viability is some reform from three-day prior hospitalization requirements and relaxation/elimination of the Part B therapy caps. Home health agencies that already have an infrastructure for electronic charting, referrals and a strong physician partnerships and hospital referral/discharge relationships are the most logical post-acute, ACO partners. The ability of a home health agency to manage a more complicated patient directly discharged from a hospital as well as bring into the home, core chronic disease management services adjunct to physician care is an ACO necessity. As today and for the foreseeable future, ACO realization or not, Hospice will remain only a bit player, if that. While Hospice is an effective alternative to more costly inpatient care when continued inpatient care and/or other procedural steps are unwarranted, getting patients, their families/significant others, and the physician community in general to openly embrace Hospice early and frequently is not going to occur simply because of an ACO. Hospice, as I have written before, is a niche’ in the post-acute continuum and nothing within current trends suggest to me that the U.S. health system and patient expectations are moving to a deeper appreciation for or understanding of, the role hospice can and should play.

June 6, 2011 Posted by Reg Hislop III | Home Health, Hospice, Policy and Politics - Federal, Skilled Nursing | ACOs, CMS, Congress, Economics, Health Care Reform, Home Health, Hospice, Hospitals, Industry Outlook, Medicare, Nursing Homes, Part B, Payment, Quality, SNF, Strategy, Washington | 2 Comments

When and Why Projects Go Bad: Traps and Pitfalls to Avoid

Creeping slowly out of a period of recession where financing was nearly impossible to get, providers, operators and developers are starting to look favorably at new development and refreshment of existing properties and infrastructure. Though capital is less than free flowing, money is entering back into the long-term care and seniors housing world fluidly enough that projects once parked in the “back of the lot” are edging closer to the front. Having watched significant failures occur over the past three to four years and/or counseled organizations through some of the rough times, now is an appropriate time to pass along some “learnings” from the failures and struggles that I have seen. Importantly, as the industry and the methods for financing have fundamentally and permanently changed, so have the markers for assuring project (new, redevelopment and remodeling) success.

As a primer or if you prefer place to start, there are three basic elements critical to project (new construction or renovation) success: Market demand, cash flow margins, and project cost. Too many new projects failed to meet occupancy projections simply by misunderstanding market demand dynamics (market demand is not demography). While not universal or sacred to only non-profits, misunderstanding regarding cash flow margins is a common failure item. For example, I don’t know how many projects I’ve looked at, especially on the substantial remodeling side, that incorporated no expectation of new revenue or improved operating margins (either this element was missed or worse, not present/expected as a result of the project). Finally, project cost should always be less a function of funds available but more a function of payback. I’ve seen too many projects that suffer from “scope creep” simply because funds, either via debt or equity, were available. Being able to afford something doesn’t necessarily make it “affordable”, especially when the long range economics of a project are critically analyzed.

Avoiding the common traps, pitfalls, etc. that lead to project failure or in some cases, poor performance, is a function of being clear and knowledgeable about the core feasibility requirements. Being clear up front means not just “knowing or providing lip-service to” but actually investigating and working through each element.

Market Demand: The presence of age and income qualified individuals is not demand; it is supply. The supply of potential customers only assures that potentially, a large enough universe of people exists that meet the broadest elements of “potential consumers”. Recognition that only so many of this universe will be actual consumers of any long-term care or seniors housing product at a given time is critical to developing the initial framework for market demand. For example, less than 10% of all seniors reside at a nursing home at any given time, whether for short or long-term care purposes. If occupancy rates within the existing supply of facilities are average to low, building more units within such a market is a big step toward potential failure. Simply adding units, even if they are different in size, amenities, etc., doesn’t change the core demand for the product. Success of such a project in such a market is thus fundamentally hinged on “taking existing customers” from an established facility; a risky proposition at best. Even in markets with good demographics (customer supply) and minimal to average supplies of like products doesn’t guarantee that demand is present. This is particularly true for seniors housing where demand is very price elastic. The same is true, though not as directly, for SNFs when demand is correlated to payer source (e.g., a private-pay only facility in a market with primarily a Medicaid demand). Without factoring in price and overall costs plus location and unit features and benefits, demand cannot be truly gauged or determined. The mere presence of a suitable supply of age and income qualified individuals doesn’t guarantee any occupancy of a new project, save that the new project at a given price, given location, with given features and benefits fits an unfulfilled need or want within the universe (supply) of qualified customers. Summarily, no matter how much money someone has or how age appropriate someone is, if that person (or persons) does not possess or find a need for a given product at a given price with desired features and benefits, the mere presence of the product within the market will not promote consumption (or occupancy).
Financial Feasibility: Interconnected with a fundamental understanding of demand is pricing. Pricing, as I have written before, has two key components. The first is the derivation of price based on the formula of Fixed Costs + Variable Costs + Margin = Price. The second component is strategic, tied to market. In any given market, the supply of like products and programs will dictate the amount of elasticity that exists across the pricing continuum. No longer is “me too”or matching the market a viable strategy for pricing. This said, true financial feasibility is mostly tied to the first pricing component. Where projects tend to struggle is when three core elements are misinterpreted or, over (or in some cases under) estimated. The first core element is fixed cost. Feasibility which doesn’t properly capture the key fixed cost elements of debt, debt repayment and depreciation has the potential for quickly turning a project from possible to impractical. Specifically, I recommend the following approach to structuring the fixed cost portion of the feasibility.
- Debt assumptions, especially those involving floating rate scenarios, need to be conservative and reflective of the true interest rate risk across as lengthy a horizon as possible. Fixed rate scenarios are ideal but terms for the fixed period are generally less than the amortization schedule for the debt.
- Following the point above, debt repayment on a schedule that is more aggressive than the amortization schedule is a must. New projects or substantial remodeling projects carry the mindset that depreciation is a non-event in the initial years; minimal cash outlays. While this may be true, depreciation picks-up rather quickly in terms of cash needs by year 5 and becomes more acute by year 10. By year 15, substantial repairs and upgrades to major elements are a common theme. Carrying debt across a normative amortization cycle without more aggressive repayment means that by year 10, the project is being substantially replaced by the need for upgrades and repairs, all while the first phase is still being paid for at a premium cost (interest on the original debt). I have seen all too often, providers struggle with competing cash needs; debt service vs. capital maintenance. Once maintenance becomes deferred, the ability to compete successfully is hampered. Cardinal rule here: Work the feasibility numbers in terms of pricing to include a debt repayment plan no longer than fifteen years, regardless of the amortization terms, and incorporate a laddered assumption of cash needed (reserves) to replace equipment, upgrade units, etc. within the fixed costs assumptions (cash funding depreciation).
- Margin is the devil in the details. Too much fixed cost and/or too much variable cost eats at needed margins or stresses occupancy assumptions to unrealistic and/or unsustainable levels. Ideally, a forty percent or higher “top line” margin is the target for Assisted Living and Independent Living (marginally higher for Independent). When debt and depreciation (cash funded) is added below the line at stabilized occupancy, the project can create sustainable cash earnings/returns on equity. Lower leverage (debt) levels and lower interest costs can aid in thinning top line margin levels but remember, equity contributions instead of debt still bear a cost in the form of opportunity cost. Repayment of equity infusions need to be factored with an opportunity cost (interest factor). Depending on current interest rate environments, the arbitrage on equity cash can be positive (debt cost is higher) or negative (debt cost is lower). Not always does the provider get to pick the amount of equity participation required as lenders today are far pickier on leverage levels and loan to value relationships.
Project Costs: Project costs should always be built around the assumption of revenue required to substantiate the project. Renovations that do not incorporate opportunities for new revenue or enhanced revenue (new product/service lines, better payer mix, etc.) will almost exclusively be paid-back through depreciation funding and life cycle cost assumptions. In short, no new money, the project scope needs to be tight. Rarely have I ever seen the purported “efficiencies” used in renovation justifications materialize to the extent that the gains justified the project scope. I also am always wary of renovations that incorporate enhanced or improved occupancy levels. Again, rarely does the cost justify the outcome and almost always, the adage of “we are not marketable” is more a function of other organizational issues (bad reputation, pricing, average care, etc.) than it is a justification for an expensive renovation project. In new projects/new development, building efficiency is the key to adequate payback. Allocating too much space to common areas and non-revenue producing areas increases project costs in terms of building and furnishing (not to mention heating, air conditioning, maintenance, upkeep, etc.) and places more “dead space cost” burden into the pricing equation. Objectively, a building that maximizes the majority of square footage for revenue production pays back investment far faster. In an Assisted Living project or Independent Living project, I think a 65% revenue allocation vs. 35% common allocation is reasonable. Higher allocations to common space strain pricing and definitely, require higher occupancy levels to create break-even and payback targets. Similarly, more common space consumes more “furnishings”, often minimally used. Good focal space done right and space with a multi-purpose use is preferrable over space with singular use or no real defined use at all (i.e., lounge

April 5, 2011 Posted by Reg Hislop III | Assisted Living, Senior Housing, Skilled Nursing | Assisted Living, Development, Economics, Management, Market Trends, Marketing, Nursing Homes, Strategy, Supply and 'Demand | Leave a Comment

The Unraveling of the PPACA

OK readers and requesters, I haven’t gone, as Robert Frost wrote, into the “woods lovely, dark and deep” but I have been preoccupied by work and things familial. Sadly, energy wanes as one focuses intently on the delicate balance that is juggling a frenetic work schedule, a mile of other professional commitments, travel, and family. Returning slowly to regularity in life will allow me to re-connect and be once again, more “informationally” fluid.

A major emphasis of my work has been translating health policy into actionable strategies for clients. Some efforts are rather profound and deep and others are rather functional and tactile. The latter was the case with the Medicare RUGs III, MDS 3.0, RUGs Hybrid, RUGs IV debacle, partially created by the PPACA and partially due to the lack of foresight on the part of Congress. In the end, this mess evolved to where it should have been all along – a grouper and an assessment tool that actually matched. Today, we are simply left gazing forward at what might be once CMS figures out how the RUGs IV payments are flowing and whether providers are using the system correctly. I fully expect CMS, as they historically have, to go through a series of gyrations to fine tune the payment categories, equating the new system to that which was originally intended – something that is expense neutral (or close to) for the Medicare program. History being what it is (a reasonably good predictor of future behavior), we saw and lived through a similar dance with previous PPS system versions.

Turning to the title of this post and topically, a question(s) I am asked all too often: What can we expect or not expect to happen next under the current phase-in process of the PPACA? Following the law as written would provide an answer but clearly, the law as written is unraveling as we move seemingly, day by day. Consider the following events of recent weeks/months.

A power-shift in Congress overloaded the House with Republicans and structurally, fiscal conservatives that swept into the majority on a platform of “anti-health care reform and anti-deficit spending”. As the House fundamentally controls the majority of appropriations and budget policy, funding barriers to continue the roll-out of the PPACA are certain.
Over 1,000 waivers to certain elements of the PPACA have been granted, with more forthcoming, principally targeted at giving insurers, major corporations (multi-state businesses) and recently, labor unions relief from the mandated coverage limits imposed under the law. Secondarily, states have sought relief from various Medicaid provisions that came part and parcel with the enhanced FMAP provided under the Stimulus bill (corollary to additional elements required under th PPACA). From some vantage points, Medicaid may be the 10 ton gorilla in the room when all is said and done regarding the future of the PPACA.
A series of court cases and resulting decisions have established the framework of a constitutional challenge to the law. Opinions/decisions affirming constitutionality were rendered by Democratic judicial appointees and opinions/decisions affirming unconstitutionally rendered by Republican judicial appointees. Clearly, the matter of constitutionality of the key requirement of universal insurance purchase/participation for every American will be settled only by the Supreme Court. The remaining question is “when”. If the key provision of universal (everyone must) purchase/participation is found unconstitutional, the PPACA is functionally dead.
Within the past week or so, Secretary Sebelius of HHS publicly went on the “record” in Congressional committee testimony that the financing of the PPACA included effective double-use (double counting) of the projected $500 billion in Medicare savings that is projected within the law. This, while newsworthy, is not news to anyone who read the CBO scoring, read earlier testimony from Medicare’s Chief Actuary, or fundamentally, could follow basic arithmetic logic and principles. The Medicare savings argument was flawed when first proffered on so many levels. First, the savings was phantom money in so much that it required Congress to sustain actual rate cuts while relying on finding and stopping “fraud and abuse” thereby creating savings. If in fact, the fraud and abuse savings were or are known, a 2,000 page piece of legislation surely wasn’t necessary to end the fraudulent and abusive practices (the same being already illegal) and render the savings. Similarly, Congress has no known history of sustaining meaningful spending controls on entitlements, particularly Medicare. Finally, the physician fee-schedule fix was never incorporated into the PPACA or its financial projections regarding Medicare spending – this tally alone evaporates all if not the majority of the projected savings. Suffice to say, in order to net $500 billion in Medicare savings as foretold by the PPACA and its proponents, a perfect storm unlike any ever seen in Washington would need to occur, not to mention a real current spending reduction of close to $900 billion (adding in the Medicare physician fee schedule “fix” costs of approximately $400 billion as unaccounted spending, netted against the savings to achieve a net savings of $500 billion). For those who would argue that the physician fee schedule fix won’t cost $400 billion, I humbly reply “do the math”. Congress continues to avoid this issue in real time by creating temporary patches as the real numbers inclusive of a formulaic change in the law (change away from the sustainable growth algorithm) that prevents significant fee schedule cuts for physicians will require approximately $300 billion in “new” spending. Add another $100 billion or so for the programs such as outpatient therapies that are tied to the fee schedule and $400 billion is conservatively, a solid figure. The double-counting occurs as a result of creating the phony $500 billion and using the “dollars” to create new benefits and expanded eligibility levels and programs within the PPACA (primarily Medicaid expansion). The costs of these new benefits greatly exceeds $500 billion in reality and thus, no savings will occur.
President Obama during a speech at the National Governor’s Association publicly announced his willingness to offer states greater flexibility and an accelerated date to file alternative plans to meet the PPACA requirements pertaining to exchanges and Medicaid expansion. In effect, President Obama stated that the law was still a “work in progress” and states could devise their own alternatives, provided the alternatives were as comprehensive and provided the same level of benefits as required under the PPACA. Until this revelation, states were operating under the premise that PPACA requirements dictating how Medicaid expansion would work, the exchange plan mandates for coverages, etc. were immovable objects, at least until 2014 by when, each state would have incurred enormous costs associated with implementation. The conclusion: More unraveling about to occur.
Arizona became the first state in what promises to be a growing list, to apply to the federal government for a waiver allowing 300,000 people to be removed from its Medicaid program (disenrolled). Arizona, like multiple states, saw its Medicaid enrollment explode due to the economic recession and provisions within the Stimulus Bill which provided enhanced Medicaid matches conditioned upon the creation of certain new programs of benefits and coverages under Medicaid. The “rub” today is the sunset date of June 30 which ends the enhanced Medicaid funding. By law, the money goes away but the programs and benefits it funded must be maintained by the state; hence, the need for a waiver. The evaporating Medicaid enhancement exposes the enormity of state Medicaid and other budget deficits – in Arizona, $1.1 billion total deficit and potential savings of $541 million if the waiver is granted (fully half of the state’s deficit). From a PPACA perspective, the next move in Washington regarding a request such as that from Arizona will be fascinating. A core element within reform used to achieve the coverage objectives is an expansion of Medicaid. A waiver granted to Arizona is a virtual submission on the part of Washington that state Medicaid plans and budgets are incapable of meeting the financial requirements concurrent with expansion, absent significant cash infusions from Washington (not wholly provided with the PPACA). For those of us who closely follow health policy, we’ve warned loudly and frequently that Medicaid as presently configured, is the worst vehicle to use to expand coverage. The PPACA did nothing to alter the maniacal constructs of Medicaid, its funding, and its bureaucratic programmatic tenets. It further did nothing to allocate sufficient resources to the states to support expansion thus leaving states to bear an enormous primarily unfunded mandate within their existing and growing, bankrupt Medicaid programs. Aside from a Supreme Court ruling finding the PPACA universal participation/purchase requirements unconstitutional, the Medicaid issues are a strong and close second that could cause the PPACA to completely unravel.

The above notwithstanding, the PPACA gives us a glimpse into the future of health policy and ultimately, health care financing and delivery in the U.S. Regardless of whether the law survives in whole or in part, certain elements I believe, are new realities and I have counseled clients to begin to plan accordingly.

Money is an issue and the goal of the PPACA while inherently flawed in the form finished, was to slow the growth of entitlement spending and “bend the cost curve”. This need or goal is pressing for the U.S. as entitlement spending cannot be sustained at is present level. This simply means that Medicare and Medicaid are fundamentally and completely exhausted (financially and programmatically). Regardless of form and resultant policy, reimbursement levels will remain fundamentally flat to trending down – no other way for them to go unless new tax revenues are allocated to each program (not feasible). Kicking the issue down the road as Washington and states have done is no longer an option as the “road” has ended or its end is clearly in sight. The best providers can hope for is flat reimbursement with a recognition on the part of legislators that greater flexibility from overbearing regulations is needed to help offset the revenue loss (if I can’t pay you more I can at least make it cheaper for you to operate).
Greater emphasis will be placed on finding and eliminating waste and fraud – already happening but ramped up to an even higher level. Realize that Medicaid and Medicare are self-wasting disasters by design in terms of how modern health care is delivered and financed but vigilance and enforcement is feel-good activity; results often are minimal in comparison to costs to obtain the results. Providers thus will contend with more questions, more rules for disclosure, more reporting, more probes and more audits. Clearly, the costs borne by providers to monitor and justify their billing practices to Medicare and Medicaid will rise.
Infrastructure investments in terms of technology will rise as providers will need to justify more directly, their care vs. their bills. Simultaneous (or at least proximal), PPACA provisions and other federal provisions regarding privacy, electronic billing, health information exchanges, etc., will not evaporate entirely. Providers will need to be able to communicate across functions and across related and unrelated provider organizations, patient information, quality measures, and care information (treatments plans, history, orders, etc.).
Terms and concepts brought forth under the PPACA such as Accountable Care Organizations, Competitive Bidding and Bundled Payments are here to stay, regardless of the life or death of the PPACA. They make too much sense intuitively even if the same translates poorly in federal policy. Organizations that take the “conceptual elements and goals” of things like Accountable Care Organizations and begin to develop programs and structural changes in “how” they do business will be far better off than those who believe that these concepts will die as the PPACA continues to unravel. A future where reimbursement is more closely tied to outcomes and penalties for events such as avoidable re-hospitalization, repeat hospitalizations, avoidable institutional infections, etc. is virtually certain.
A renewed focus on primary and community based medical care, prevention, and chronic care management is forthcoming – soon. Philosophically, although wrongly implemented and structured, the PPACA was Washington’s politicized attempt to create this focus. There is solid logic behind such a focus as diminution in each of these areas (or in some cases, failure to fully launch) directly correlate to rapidly rising health costs (and correspondingly high rates of expensive, preventable chronic illness such as diabetes, obesity, heart disease, etc.). Even Washington knows that ultimately, funding and enhanced payment for better primary, community and chronic disease care is necessary and smart. The problem is, as has always been the case with policy elements measured in the billions or trillions of expenditures, politics gets in the way of functionality – hence the PPACA.

March 9, 2011 Posted by Reg Hislop III | Policy and Politics - Federal | Budget, CMS, Congress, Health Care Reform, Industry Outlook, Medicaid, PPS, Senate, Strategy, Trends, Washington | Leave a Comment

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Reg's Blog

Senior and Post-Acute Healthcare News and Topics

CCRC Marketing Reality Check-Up

Know Your Market, Know Your Value Proposition

Hospice Census: Where’s It At?

Current Policy Trends to Watch

Post-Payment Reductions: Build a Revenue Model for Success

SNFs: What to do Now for October 1

Post-Acute Outlook Post Debt Ceiling, Post Medicare Rate Adjustments, Etc.

Accountable Care Organizations: A Post-Acute Perspective

When and Why Projects Go Bad: Traps and Pitfalls to Avoid

The Unraveling of the PPACA

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