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Economic Value Analysis, Value Propositions and Marketing

Recently I gave a presentation on strategic pricing and senior housing (see Reports and Other Documents page on this site for the presentation power-point).  A key theme that I often refer to centers around the “value proposition” or in other words, the concept that pricing is both monetary and non-monetary and as such, the value proposition is about not only the price but also about the functional and psychological value of the service or product.  In short hand, the utility; how the product/service satisfies both functional and psychological needs at or for the given price.  During the presentation and since, I’ve received a fair number of questions regarding “how” a value proposition is determined and thus, how the same is correlated to price.  Knowing how complicated senior housing and all forms of long-term care (SNF, ALF, Senior Housing, etc.) are today to market, understanding the core concepts of pricing, economic value analysis, and value proposition can make a real difference in establishing an effective sales and marketing program.

Initially, the primary concept to understand is demand and how demand and price work together.  Demand, for purposes of this article and simplicity, is the ability and willingness on the part of an individual to buy something.  In general, demand and price have an inverse relationship such that the demand for a particular good or service (the quantity thereof) tends to increase as price decreases.  Of course, a variety of factors impact demand including the actual nature of the product or service.  Funeral services for example have a fairly steady level of demand and in actuality, the demand only changes by a change in supply of dead people (morbid as this thought is).  If for example, a major pandemic began to sharply increase the number of people dying, the demand for funeral services would increase.  Conversely, if a break-through in genetic research produced a series of cures for diseases such as diabetes, heart disease and cancer, the demand for funeral services would gradually decrease.  In the example of funeral services, price is less of an influencer on demand as once an individual has died, few alternatives exist (legally) to disposition of a corpse.  While there may be multiple options for pricing inside the range of possible mortuary services (cremation, caskets, size and style of services such as wakes, etc.), there remains a core price that is basically inelastic; doesn’t really change demand as it rises or falls.

For goods and services such as senior housing and to a lesser extent, other long-term care such as Assisted Living and SNF care, demand is more elastic as price changes.  The simple reason is that alternatives exist to each level of care that are available, supply or provide the same basic utility and range in cost (expressed as price).  In the case of senior living, many options exist at a great many price points.  With SNF care, fewer options exist but still, many providers exist and home care and even in some cases, Assisted Living present alternatives at different prices.  The net result is that demand is influenced by price as well as a host of other factors.

  • The service’s core price is a factor such that all products and or services have a “going rate” calculation.  When demand is highly elastic such as with senior housing, the safest presumption is that the core price is equal to living in one’s existing residence as normally, a move to a senior housing facility is equal to or more expensive per month.  If the costs associated with a senior housing option are rising, demand will taper off.
  • The price of related or alternative goods will impact demand, especially when substitution products or services are widely available.  For example, using the funeral home example, if prices for a particular line of wood caskets drop substantially below the prices of metal caskets, the demand for caskets stays essentially the same but the demand for wood versus metal rises substantially.  For senior housing, the demand can be widely impacted by the cost associated with alternatives such as market rate apartments, condominiums, or staying at home with certain services.
  • The ability of the consumer to buy in terms of economic resources changes demand.  If the consumer’s purchasing power changes as a result of loss of income, lower income or lower overall resource levels, the demand for particular goods and services at current price points declines, perhaps shifting to less expensive substitute products/services.
  • An increase or decrease in desire or preference on the part of a consumer can change demand positively or negatively.  The greatest mover here is consumer confidence.  A consumer with a more positive outlook on the economic condition of his/her situation is simply more motivated to consumer.  Consumer expectations about prices also impacts the decision to buy.  A consumer that believes that prices will rise in the near future is more likely to buy immediately and conversely, an expectation of falling prices triggers a delay in consumption.

Taking the above into account regarding demand, economic value analysis and the determination of a value proposition is fundamentally about determining the monetary value of the product or service as well as the functional and psychological value.  The monetary value is not the product/service price but the value, expressed in dollars, of the total cost of a product or service’s ownership.  In this regard, the monetary costs also produce monetary benefits.  For example, using senior housing, calculating the monetary costs requires an analysis of the following (minimally);

  • Rent or mortgage payment
  • Monthly amortized cost of any entry fee including interest cost and negative amortization costs (loss of refund as applicable)
  • Utilities
  • Taxes
  • Insurance
  • Other fees such as parking, etc.
  • Other cost intangibles such as free health care, reduced cost health care, delivery of medications, meals as part of rent, rent increase guarantees (limits), etc.

Calculating the monetary value thus becomes an exercise in quantifying the above elements over a reasonable period of time such as five years, etc.  Once this is complete, the result is used as a comparison against like or alternative options.  Below is an example for a non-profit, senior housing provider with a fully refundable entry fee compared to a person remaining in their home in the community, with no mortgage payment (a fairly typical situation).  The costs I’ve illustrated are over a five-year period (rent for example is monthly times 60 months).

  Sr. Housing Home          
Rent $72,000 $0.00          
Mortgage $0.00 $0.00          
Prop. Taxes $0.00 $25,000          
Insurance $3,000 $7,000          
Utilities $0.00 $18,000          
Depreciation $0.00 $6,250          
Repairs $0.00 $5,000          
Lawn Service $0.00 $1,200          
Parking $0.00 $0.00          
Meals (1 x day) $0.00 $6,400          
Entertainment $0.00 $2,500          
Healthcare (1) $0.00 $1,500          
Misc. Transport $0.00 $1,000          
Entry Fee (2) $18,924 $0.00          
Home Price +/- (3) $0.00 $5,400          
  $93,924 $79,250.00          
               
(1) Sr. Housing provides free wellness services such as flu shots, blood pressure monitoring,
medication assistance, setting appointments, education, screenings, etc.    
               
(2) Entry fee is fully refundable ($150,000) at no interest.  Interest yield is assumed at
2% compounded monthly            
               
(3) The home price increase or decrease reflects what the resident can safely assume
the home price will be in five years.  A negative number is an increase in value whereas 
a positive number reflects a decrease in selling price.  Price of the home is assumed  
to be $300,000 in current dollars.          

In this example, the monetary value of the senior housing option is greater (negative) than the monetary value of remaining at home or simply, it costs more to receive the same basic utility to move to the senior housing community.  The value essentially becomes negative with the inclusion of the entry fee interest loss or cost.  On the surface, this appears to be a negative value proposition for the senior housing community.  The key to achieving a balance or a higher proposition value for the senior housing option is to monetize the functional and psychological costs between the two options.  Ideally, the spread between the two is worth at least $14,674 or the present negative difference between the senior housing option and remaining at home.

In monetizing the functional and psychological costs and benefits between the two options, the trick or key is to have a clear understanding of the profiled consumer.  This means having a true handle on current customers and seniors living in the community.  For example, a psychological benefit to senior housing versus remaining at home is security.  It is possible to measure the value of security by talking to your current customers and imputing a value for a security service to the remain at home option.  A functional value is transportation and convenience.  If for example, the senior housing option provides shopping trips to local grocery stores or has an in-facility delicatessen and convenience store, the cost between the two options in terms of convenience and transportation is measurable.  Other examples such as activity, access (even at a cost) to prescription drug delivery, on-site medical care, check-in services, laundry, housekeeping, etc. are all items with a potential functional and psychological benefit.  Perhaps the most under-valued is the access to on-site, future health care such as an incorporated Assisted Living or Skilled Nursing Facility, even if such access is nothing more than guaranteed accommodation without a price reduction.  The important point here is that each functional and psychological benefit that is discernible and tangible to current customers has a value that is quantifiable and comparable across each option or living alternative.

The value proposition is the accumulation of the monetized values for the core product or service plus the functional and psychological factors.  Consumption activity incorporates all three elements and effective marketing strategy is grounded in communicating the value proposition of a product/service as compared to all other alternatives. Of course the largest difficulty arises in communicating values ascribed to psychological factors.  The key in doing so is the heavy use and reliance upon, current satisfied customers.  They are the source of input as well as the ground for determining monetary values associated with the related psychological factors.

As senior housing demand is highly elastic, creating and communicating a value proposition is critical in terms of developing potential customers.  I would argue that the same approach is as critical for SNFs that are looking to attract certain types of patients with certain payer sources.  In using the above approach, an SNF would complete its economic analysis against its competitors, again monetizing the core service, the functional and psychological factors.  In many regards, completing the analysis against existing competitors is an easier exercise as quantifiable data is far more plentiful.

Pricing strategy comes into play when the value proposition is imbalanced.  Pricing strategy re-weights variables and allows the value proposition to change favorably against key alternatives or competitors.  For example, in the senior housing analysis above, pricing change involving the entry fee instantly changes (positively or negatively) the initial calculated proposition.  For an SNF, adding amenities within service offerings or adding clinical competence improves the value proposition, even under a fixed-payment scenario such as Medicare.  The objective from a marketing strategy approach is to maximize all elements of the value proposition as compared to the competition or to the alternatives.  Taking this approach and then developing an effective sales and communication strategy dramatically improves the opportunities for successful new customer conversions – sales.

October 27, 2010 Posted by | Assisted Living, Senior Housing, Skilled Nursing | , , , , , , , , | 1 Comment

Presentation on Strategic Pricing for Senior Housing

I’ve posted a Power Point presentation one of my partners and I did at a trade show/conference last week.  The title is  “Strategic Pricing Strategies for Senior Housing” and it is available for viewing or download on the Reports and Other Documents page of the site (menu listing on the right).

October 12, 2010 Posted by | Senior Housing | , , , , , , , | Leave a Comment

RUGs III to RUGs IV: The Core of “Need to Know”

In the past month with October 1 looming closer, I’ve been fielding lots of questions regarding the transition from RUGs III to RUGs IV.  Instead of listing the questions and trying to recap my answers (my memory is good but not that good), I’ve settled on an overview or “summary”; the core of what SNFs need to know or if nothing else, get up to speed on quickly.  To organize this post, I’ve used headlines for expediency.

Overview: Difference Between RUGs III and RUGs IV

Simply put, the major difference applies to therapy at the expense of nursing or clinical care needs.  CMS became concerned that changes in the SNF population and patient needs altered industry practices and the allocation of resources, principally away from clinical nursing to rehabilitation therapy.  Via the engagement of 205 nursing homes across 15 states, CMS completed a time study to analyze the required resources provided to patients versus the clinical needs of patients.  The end result was an update to RUGs III known as RUGs IV.  RUGs IV consists of 66 groups divided into 16 categories (two were added) versus 53 under RUGs III.  To utilize the RUGs IV groups for payment, CMS revised the standardized assessment tool known as the MDS to version 3.0.  The final implementation rule published by CMS includes assurance that in calculating RUGs IV, the goal of payment parity is maintained.  In other words, the historical distribution of total payments to SNFs, based on 2007 claims data applied to RUGs IV, creates the same level of total PPS expenditure for SNFs as would occur under RUGs III.  Of course, this is not an assurance to any particular SNF that upon transition, revenues under RUGs IV will be equal or greater than revenues received under RUGs III.  The average rate, per CMS under RUGs IV will be $431.71 compared to $420.42 under RUGs III.

Financial Impacts Under RUGs IV

As with all changes of this magnitude, there are or will be, winners and losers. The losers in terms of financial impact are facilities that have run high levels of non-clinically complex rehab patients, treating on a concurrent therapy model.  Clearly, the bias under RUGs IV is for facilities to provide one-to-one therapy.  Under the concurrent therapy rules, the total treatment minutes are divided between the two patients (max that can be treated concurrently is two).  For example, one hour of therapy equals 30 minutes per patient.  The clear impact is that overall treatment minutes are reduced, reducing the RUG level and/or the SNF will need to increase the overall amount of therapy provided to patients (not practical or clinically viable) concurrently.  For example, an ultra high rehab under RUGs IV is divided into three groups based on ADL scores;  RUC, RUB, and RUA. The requirement, regardless of the ADL score, is for the resident to have a rehab diagnosis requiring a minimum of 720 minutes per week, receive 1 discipline 5 days per week and a second discipline 3 days per week.  Doing the math, meeting this criteria with concurrent therapy is virtually impossible.  Via CMS’ own analysis, the predicted percentage of patients that fall into RUC, RUB, and RUA under RUGs IV vs. RUGs III declines from 17.8% of all days of stay (RUGs III) to 8.9% of all days of stay (RUGs IV).  Not surprising however, is that the rate does increase under RUGs IV for these groups by an average  of more than $100 per day.  While contract therapy companies will give me continued grief for saying this, facilities that have contract therapy providers fall predominantly into this risk category; much heavier emphasis on concurrent and group therapy treatment models as a means of maximizing staff resources and maintaining high levels of productivity (benefits to the contract therapy company).

Another clear category of losers is facilities that took significant advantage of the hospital look-back provisions under RUGs III to establish diagnoses, rehab and clinical care plans.  RUGs IV and MDS 3.0 eliminate this provision entirely ( an exception exists for ventilator patients).  I like to use the example of “former” treatments such as IVs for fluids or medications present in the hospital.  Facilities that used the presence of IVs while a patient was in the hospital under the “look-back” provision could justify an extensive services qualifier to a high rehab group, capturing a high rehab plus extensive services RUG under RUGs III, even if the IV was gone when the patient was admitted to the SNF.  Under RUGs IV, no IV present on admission becomes the assessment basis plus, IVs for nutrition/hydration and medications now qualify as Clinically Complex rather than Extensive Services.  Extensive Services qualifiers under RUGs IV only include ventilator care, tracheostomy care, or isolation for an active, infectious disease.  The patient must also have an ADL score of 2 or higher.

The clear winners under RUGs IV are facilities that care for clinically complex patients and patients that are more ADL dependent.   For example, and in follow-up to the paragraph above, SNFs that provide ventilator care, tracheostomy care, care for infectious diseases, etc., plus provide rehab, can win “big”.  For example, a ventilator patient receiving 325 minutes of therapy per week from 1 discipline 5 days per week (Speech and/or OT are the most common here) would be categorized as an RVX under RUGs IV with a corresponding urban federal rate (payment rates are by regions) of $786.66.  An RVX under RUGs III pays $467.62.  A similar relationship holds true across the categories for facilities that provide care to more ADL dependent patients.  Higher ADL dependency scores increase payments rather rapidly.  There is a note of caution here though as today, I routinely see ADL scoring that is speculative at best (typically upped) as the MDS 2.0 is less sensitive about ADL scores to generate a RUGs rate.  Under MDS 3.0, the ADL assessments are far more sensitive and detailed, designed to truly qualify ADL deficits.  I believe a fair number of facilities will find their ADL scores decreasing rather than increasing over time.

As I indicated previously, RUGs IV increases the nursing index weights at the expense of rehab.  Essentially, facilities that typically bill below average rehab utilization (days) under RUGs III stand to come out ahead under RUGs IV, provided their clinical complexity is average or higher.  For example, an SSB for wounds under RUGs III correlates under RUGs IV to HD1 or HD2, depending on the presence (lack of) depression.  The clinical weight index jumps by  .50 under HD1 or by 1.0 under HD2, creating a positive revenue impact of $90 to $140 per day respectively.  Fundamentally, facilities that provide more clinical nursing care to a population with higher ADL deficits, cognitive impairments, and maintain an average rehab profile as expressed through utilization, will fare better under RUGs IV than RUGs III.

Assessing the Impact of RUGs III to RUGs IV

In order to assess the financial impact or revenue impact of payment under RUGs III vs. RUGs IV, a provider needs to essentially map their current/historic Medicare case mix as determined under MDS 2.0 (paid under RUGs III) to RUGs IV.  To date, there are two ways to do this and neither are easy.  The first is to complete an MDS 3.0 for each current resident under Medicare.  I don’t advise doing this as it is cumbersome and in many cases, providers are still learning the nuances of 3.0 assessments.  The second option is to use a cheat sheet and a somewhat simplified method.  The method is as follows.

  • Pick a fairly consistent utilization period such as the last six months to a year.  Across that period, total the number of patients billed under each applicable RUGs III category, including the days billed.  Obviously, not every group will be used.  For example, if during a set period such as six months, the facility had 42 patients in RHA with respective lengths of stay ranging from 22 days to 36 days,  I’d list 42 RHA with a calculated average length of stay.
  • For each RUGs III group with billed patient days, pull the corresponding MDS’ for each patient.  Analyze the MDS’ to develop a consistent profile of the patients that fit into the corresponding categories.  The profile should be specific enough to cover typical ADL scores, significant clinical issues (wounds, IVs, etc.), therapy disciplines and minutes, etc.
  • Next, using a spreadsheet that I can provide (drop me a note at hislop3@msn.com including your e-mail address and I will send it out), map your RUGs III profiles as created in steps one and two to RUGs IV groups.  Note: An RVX under RUGs III will not likely correspond to an RVX under RUGs IV as to qualify,  a patient under a RUGs IV RVX must have a ventilator, require tracheostomy care or have an active infectious disease.  Also, be very conscious of the concurrent therapy minute changes under RUGs IV when mapping your therapy minutes.  Remember, under RUGs IV, concurrent therapy is divided equally among the two residents/patients (i.e., two residents in PT treated concurrently for an hour does not equal 60 minutes of therapy for each resident but 60 minutes total, 30 minutes allocated to each resident).
  • Once the facility has mapped each RUGs III profiled group  to corresponding RUGs IV groups, you can analyze the revenue impact.  Multiply the number of residents per RUGs III group times the average length of stay for the group times the applicable RUGs III rate.  This is your RUGs III revenue average.  Next, do the same calculation for the RUGs IV groups (if you need the RUGs IV rates, drop me a note at hislop3@msn.com and I can provide them to you).  Finally, compare the two sets of revenue numbers.

IMPORTANT: The second method gives you a good generalization of the revenue impact but it is not exact.  To be more precise, one would need to analyze each billed encounter under the RUGs III system and then, translate the same profile to RUGs IV.  Additionally, the only true exact method is to reassess each patient under MDS 3.0.  Because of the significant changes under RUGS IV to ADL scoring, look-back periods, and therapy minutes (concurrent vs. one on one vs. group) and the weighting of clinical issues (IVs no longer qualify as “extensive”, etc.), it is very difficult to map precisely, the financial impact of transitioning from RUGs III to RUGs IV.

Important Points to Consider/Remember

Based on my varied and numerous conversations with providers, I’ve created this brief list of issues and/or important points regarding the transition from RUGs III to RUGs IV.

  • RUGs IV and MDS 3.0 will change “how” SNFs do business or it should, unless the SNF wants to see Medicare revenue shrink.  Extremely key to remember and plan for;
    • No look-back period
    • Concurrent therapy rules
    • Highest Rehab groups (extensive services)  require the patient to be on a ventilator or require tracheostomy care or have an infectious disease.
    • Next  highest rehab groups will be difficult to meet the minute and discipline requirements if your current standard for rehab relies heavily on concurrent therapy.
    • Emphasis on ADL scoring is key in terms of attaining higher groups within categories as is the documentation of depression (if present).
    • Assessments under MDS 3.0 are longer and meeting dates is critical to avoid default rates – more work, more staff time and time sensitive dates.
  • If an SNF is using a contract therapy provider or company, the time to review and gain understanding about the transition to RUGs IV is NOW.  The SNF needs to make certain that the therapy company is capable of providing the necessary staff resources to principally deliver one to one therapy.  The SNF also needs to understand the financial impact to its operations that occurs when the therapy company adds staff (if required).  Further, and this point can’t be ignored: Medicare billing liability for all claims under Part A and B follows or stays with the owner of the provider number.  In a relationship between an SNF and a therapy company, the SNF is the Part A and predominantly, the Part B provider – not the therapy company.  Under the law, the requirement to assure accurate and timely billing falls to the SNF.  Any OIG enforcement, RAC activity, etc., will focus all fines, penalties, recovery, etc. on the SNF, not the therapy company as the SNF is the owner of the Part A provider number.  Implication: Don’t let your therapy contractor “drive the bus” on the transition to RUGs IV.  This needs to be a partnership and one where each party knows the rules, knows the impacts and has clear duties spelled out in the contract with clear remedies.  SNFs should not rely on standard therapy company indemnity clauses as the clauses I have seen typically limit the damage to the SNF for claims rejections, etc. to the “charges” the therapy company passed on to the SNF for providing services under the contract as applicable to the specific claim.  In short, the SNF bears the loss of the revenue for the claim plus if applicable, any fines or penalties, even if the therapy company personnel and their actions were the primary reasons the Medicare claim was denied, rejected, and/or deemed fraudulent.
  • The weighting within RUGs IV and thus the dollars, skew to the nursing side of things, away from rehab.  The weighting has shifted to clinical from therapy and as a result, gaining dollars and better reimbursement will come from a) changing your patient profile to one that has more clinically complex patients, and/or b) capturing the true clinical needs of your patients and their depression, ADL dependency, etc., on the MDS 3.0.  I always urge caution about (b) as the daily documentation better support the picture portrayed under the MDS or the implication is that the MDS was created to take advantage of payment which, if not matched by a patient with those needs, is Medicare fraud. 
    • Providers that wish to alter their patient profile need to explore the full ramifications of doing so financially and operationally.  More clinically complex and dependent patients may generate more Medicare revenue under RUGs IV but they also come with a cost.  The cost is typically in higher medication use, supply use, and staff resources.  Suffice to say, this population requires more nursing staff and perhaps, different nursing staff in terms of qualifications and training.  Additionally,  more clinically complex and dependent patients require more Social Service time and are more potentially problematic from a survey standpoint as there is more “stuff” going on with them.  An SNF moving in this direction needs to evaluate fully, the risks, costs and benefits associated with such a strategy.
  • While CMS says that overall Medicare spending on SNF care remains the same under RUGs IV and RUGs III, don’t believe it.  The distribution as forecasted is clearly toward a particular patient profile that is different than current or, a RUGs IV profile patient is different than the current RUGs III profile patient.  MDS 3.0 is a lot of work and will require facilities to adapt how and when they do their assessments and what resources they allocate to the assessment process.  In short, to make a smooth transition between RUGs III and RUGs IV requires planning – a lot of it.  It is less about groups and assessments and more about “how” the SNF does business.  Understanding the core concepts behind MDS 3.0 and RUGs IV is akin to understanding the rules of the game.  No game can be played successfully and efficiently without first, fully understanding the rules.

September 3, 2010 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , | 15 Comments

Due Diligence and Acquisitions: A Review of Common Pitfalls

A regular, although not necessarily routine, exercise that I go through is a re-evaluation of recent acquisitions in the senior housing/long-term care industry to see “how they are doing or performing” post transaction.  Perhaps the primary reason that I do this is my curiosity regarding the effectiveness of the due diligence process and the accuracy of the valuation or economic value proposition created by the acquirer as translated into purchase price.  In short, I’m always curious as to whether the buyer got what he/she/they expected at the anticipated cost (purchase price plus other investments required over the first year or so) he/she/they expected to pay.  As the mechanics and theory behind valuations and due diligence vary between deal to deal (from what I have observed), it is interesting to look at “how things are turning out” once the feeling of accomplishment and the haze of the deal  have passed.

When things don’t go well or aren’t going well at the one year mark, something I find more common in health care transactions (SNFs, Home Care, Hospice, etc.) and less so in Assisted Living or Senior Housing, it nearly always seems to a be a flawed due diligence process that led to an over-estimation of value.  More succinct: Because the due diligence process missed too many issues the price became over-stated as the costs associated with achieving stable operations were under-estimated or the classic, “he/she/they paid too much for what they got”.  Where I notice the largest number of errors occurring during due diligence is when the due diligence is treated as a justification for the purchase price or, a process of validation rather than a process to quantify the economic risks and benefits that are modifiers to the valuation and ultimately, to the negotiated price.  Proof of a what a friend of mine always says; “It doesn’t take a rocket scientist to overpay”.

Separating the issues a bit, valuation is effectively a financial quantification of the relative worth of the business as it stands today, including business/commercial value (cash flow, revenues, expenses, etc.) and tangible and intangible asset value (bricks and mortar, equipment, trademarks, name, etc).  When Buyers capably test the values against their own business models and the available universe of comparable values, the Buyer has established a range of possible purchase price points.  Ideally, within this range lies a number that the Seller will accept or that matches closely, the Seller’s asking price.  At this stage, I would argue that a Buyer should never impute any assumptions on a go-forward basis about “how much” expenses could be lowered or revenues increased to massage an improved value.  A wise Buyer would best assume that upon acquisition, almost all aspects of the business “as is” are set as constant and these same constants are the financial constraints that place the boundaries on the project’s range of values.  This is not to suggest that a pro forma assumption about “go forward” operations that assumes lower debt costs (if applicable), some efficiencies via scale and some reduction in overhead may not be applicable (if in fact they are real and quantifiable).  It is however, a caution based on too many valuations completed at the behest of or by Buyers, that include unrealistic assumptions of census increases, revenue increases, expense reductions, etc., that are hardly quantifiable or even in fact, justified for the particular transaction.  To illustrate: A few years ago I helped an out-of-state buyer get into a particular nursing home transaction (nursing home was for sale).  The buyer owned nursing homes in other locations so the industry was not totally foreign.  The location of the facility was decent but the plant was old and the facility’s reputation marginal.  The asking price had yet to be set “in stone”.  The buyer, accustomed to paying higher prices in other areas, began talking numbers that were far too high for the project, justifying the price with claims of significant improvements in Medicare census and Medicare revenue per day that were unrealistic for the facility (never happened at this location before) and were beyond the norms of the market area.  While I tried to counsel the buyer to be more judicious, the buyer went ahead and acquired the facility.  Within two years, the buyer abandoned the site, having substantially over-paid, never achieving the projections for revenue and census “touted” for the facility. 

Due diligence encompasses the financial valuation but extends the tasks into a level of greater detail that adds or subtracts (creation of debits and credits) from the range of possible values/prices.  In the best of due diligence processes, the methodology also incorporates a review of risks and assists in quantifying costs associated with these risks.  In reality, due diligence should attempt to paint a complete picture of all elements of the transaction, providing final quantification of the price and qualifications to the transaction that must be accounted for by the buyer.  Thought of or approached this way and using the example I presented above, the buyer would never have paid what they paid for the facility and would have realized that achieving a stable, successfully operating SNF in that location would take them years and significant financial and human capital investments.

While buyers tend to approach due diligence and valuation different, each varying upon a theme and using their own methodology and checklists, I’ve found that the problem transactions that I follow each tend to miss one or more of the following elements.  Some of these elements are absolutely critical if the buyer is out-of-state or out of the area and the acquisition represents his/her/their first foray into a given market area.

  • Economic Location Analysis: Not to be confused with market research principally relying on demographics, this analysis looks deeper into the key economic location elements that are critical to the success or failure of the transaction at the given purchase price.  For example, location analysis would quantify labor resources and costs – key elements for a healthcare provider.  Location analysis would also quantify the strength and depth of referral patterns and the quality of such referrals by desired economic value (payer sources, etc.).  Location analysis also examines the market economy and the up or downward trends that are present.  Too many providers over-estimate the value of a particular location without understanding the economic factors that create or detract from the project’s value.
  • Provider Status Assumption Risks: Buyers that are acquiring healthcare projects with existing Medicare business and expecting to assume the former provider’s Medicare number (most common in acquisitions) need to understand that the assumption of the Medicare number brings the assumption of risk.  While it is true that lawyers will create indemnities and warranties that seek to limit the buyer’s assumption of risk, using these clauses to enforce terms when risks are present or encountered is often an expensive and fruitless exercise.  In other words, the seller may no longer exist or as is often the case, will require the buyer to use an expensive legal process to enforce the indemnity and warranty provisions, all while the compliance requirements are inescapable to the current owner. Preferably, although not an expeditious process, buyers should obtain a new provider number and status for the project from CMS, targeted effective on the change of ownership – for Part A and Part B as applicable.  It can be done as I have done it with each of my “former” acquisitions.  By not assuming an existing provider number, the buyer avoids a whole host of issues and compliance problems that may or may not be disclosed or even known by the seller.  CMS, as one would suspect, will only chase the “owner” of the existing provider number when problems arise or are detected and if that is the new owner, regardless of whether the issues pertained to a former operator/owner, the new owner is expected by CMS to be the sole source of remedy.  CMS does not care about the terms of the deal between private parties.
  • Billing Risks and Revenue Accuracy: This is a problem area that I see all to frequent.  The buyer relies on the seller’s representation of revenues and does no further testing.  I lost count of how many times buyers relied on accountant prepared or audited statements as being “gospel” only to find upon ownership that the revenues were over-stated.  Why?  First, even during an audit, accountants do not devote sufficient time or have often, sufficient expertise to analyze, the accuracy of the Medicare claims submitted by the seller.  The typical tests are for basic paper-trail elements such as RUGs groups in SNFs matching the billing, matching the revenue postings.  What needs to occur is a much more in-depth, technical review to determine if the Medicare claims that correlate to patients are in fact, correct.  Again, I have seen circumstances where the Medicare revenue per day is grossly incorrect as the seller had no idea how to properly bill Medicare claims.  Last, I rarely see buyers benchmark the revenue and occupancy numbers against area comparables.  Payer mix and revenue per day numbers across the industry tend to fit pretty narrow ranges and when, in any transaction, they are out of this normative range, a red flag should rise.
  • Compliance Risks: Another area that I see cause buyers problems time and time again.  Compliance with certification, survey and accreditation standards is a function of past and yet to be.  Acquiring a provider with past problems in these areas requires very careful analysis and discussions with regulatory authorities.  Regulators need to be queried extensively and even, negotiated with when the buyer is acquiring a provider with a record of moderate to serious non-compliance.  Don’t have the discussions or do the additional analysis and assuredly, run into compliance problems that cannot be deemed as “owned” by the prior owner/operator.  Likewise, acquiring a provider with a reasonable or decent history doesn’t mean that the current status of compliance is clean.  Sellers tend to wane on their commitments to compliance the closer the time comes to deal “certainty” or closing.  A fair amount of time may also have passed since the current owner was re-accredited or surveyed.  Complaints may be pending requiring regulatory review.  What is certain is that once the acquisition is complete, regulators/surveyors will descend on the new owner in fairly short order.  Take the time necessary to thoroughly review the past and current status of compliance.
  • Market and Reputation Risks: Simply stated: How is the current provider viewed within the market?  New ownership doesn’t mean new perceptions about the quality of the current operation.  If the current operation is viewed marginally or even negatively, a new owner will have a great deal of work ahead to establish an improved or new reputation.  If the business relies heavily on referrals (and most health care provider organizations do), it pays to check referral sources and other common influencers to understand the “market” perception that is in place.
  • Environment and Infrastructure Risks: Assuming that acquiring an existing provider means that existing brick and mortar and equipment doesn’t require improvements immediately can be a false assumption.  Existing providers may operate under waivers or as in some states, new ownership necessitates that the entirety of the project be brought to current code with the issue of a new license.  Such is the case in Wisconsin.  A thorough review of the environment and the infrastructure tied to building code requirements, completed by qualified individuals/organizations will minimize this risk.
  • Employment Related Risk: Here I am not talking about the legal risks associated with handling employment issues during the closing processes.  The risk that I am talking about occurs when buyers make one of two (or both) assumptions about the quality and stability of existing management personnel and/or, their own management personnel.    The error I see too often made occurs with out-of-state buyers not acquiring sufficient local or area expertise and/or, having enough local support available via contractors (consultants, etc.) to ease the transition.  Each market area and certainly, each state brings forth nuances and issues that require stable management and unique knowledge requirements.  I’ve seen too many new owners underestimate the resources needed and over-estimate the ability of their management to handle new areas and states foreign to them.

August 10, 2010 Posted by | Assisted Living, Home Health, Hospice, Senior Housing, Skilled Nursing | , , , , , , , , , , | 10 Comments

Compliance, the Courts and a Risk Reminder

In previous posts I’ve written about the need for providers in all industry sectors to fully understand the compliance and legal risks that are inherent to the appropriate industry sector, as well as to health care today in general.  As someone who has been immersed in health care operations and health policy for the past quarter century, I can honestly say that I have not seen a period more perilous for providers and quite frankly, I perceive that it will remain risky and perhaps escalate in the near future.  Consider the following;

  • There is renewed vigor and funding in Washington to root out perceived waste and fraud, principally focused on Medicare.  Every sector that I follow is a target for the OIG and/or Recovery Audit activity.  In spite of GAO findings that Recovery Audits have fallen short of achieving their targeted goal of reducing $231 million in over-payments or improper payments, the action from CMS is to “improve” the system or in other words, increase the amount of personnel and resources devoted to this task.  In July, the Department of Justice announced the results of a multistate Medicare fraud investigation implicating 90 individuals, tied to a total of $251 million in Medicare payments.  The investigation involved doctors, nurses, therapy companies and others.  The investigation was part of the new Health Care Fraud Prevention and Enforcement Action Team.
  • According to a recent report from the Congressional Research Service the number of new agencies, commissions and boards created under the recently passed Health Care Reform law is “unknowable”.  The Center for Health Transformation headed by former speaker Newt Gingrich estimates that 159 new agencies, offices and programs were created under the PPACA and the Joint Economic Committee claims 47 new bureaucratic entities were created.  What this all means in brief is “more regulation”, not less and in most cases, regulations that haven’t even been written yet.  Most troubling is that the PPACA seemingly creates bundles upon bundles of additional regulation but is virtually moot on any current regulatory relief or reform.  Two interesting charts regarding the bureaucracies created under the PPACA are available at http://www.healthtransformation.net/
  • Existing regulatory burdens are already steep and increasing, regardless of the PPACA.  Take for example, the annual CMS rule making process regarding rates and payments.  Wholesale changes in Medicare assessment requirements and payments are forthcoming this fall for the SNF industry.  The home health industry has also seen its share of Medicare reimbursement changes and required assessment and documentation changes under Medicare imposed by CMS without any legislative activity.  New HIPAA requirements regarding electronic communications came into play this year, new self-disclosure rules under Stark and the False Claims Act, as well as dozens of other agency regulations.
  • Non-health care specific laws also change constantly and impact providers.  Whether these laws are labor related, tax related, state laws, local laws, commerce laws, building codes, etc., all are in some way related to the general business conducted by providers.
  • The court system (or more appropriately, the plaintiff’s bar) has become more actively focused on the provider side of the health care industry.  In just the first seven months of this year, two significant class-action suits have laid new fertile ground that providers should both fear and understand.  The first occurred in California where a jury awarded plaintiffs $613 million in statutory damages and $58 million in restitutionary damages (punitive damages not yet determined) against Skilled Healthcare Group, a proprietary nursing home chain.  The award was predicated on a 4 year old complaint that the organization failed to staff its facilities to meet the State of California’s minimum staffing requirement of 3.2 nursing hours per patient day at 22 of its California facilities.  The ”rub” in this case for providers is that no harm or actual damage theory was applied to the “class of patients” affected or in other words, the residents of the 22 facilities were never effectively damaged in total yet, the jury awarded the maximum damages allowed under California law.  The result is that, even before punitive damages are assessed, the damage amount is larger than the value of the organization or more simply, if the damage amounts remain unaltered, Skilled Healthcare is bankrupt.  A final piece of irony?  The regulatory system that oversees nursing homes in the state took no specific action against Skilled Healthcare to prevent the “understaffing”.  The second case comes from the home health industry where as of today, three class action suits have been filed against Amedysis, the industry’s largest proprietary home health company.  The suits were born as a result of a Wall Street Journal article and a subsequent Senate Finance Committee inquiry into the Medicare billing practices of large, for-profit home health companies.  The fundamental allegation is that Amedysis, along with other major for-profit companies, used the Medicare rules in-place to essentially increase their revenues.  The fundamental issue pertains to therapy visits and a provision under Medicare two plus years ago that provided for incentive payments to be made to agencies based on the number of therapy visits (more visits, higher payments).  The basis of the suit against Amedysis (clearly a target because of its size, its focus on Medicare patients and the Wall Street Journal article) is that the company overstated its revenues and once investigated or discovered, the same activity now disclosed caused shareholders to lose value as a result of falling stock prices.  In a unique twist, the suits use Sarbanes-Oxley, a securities related law that requires senior corporate officers to avoid activity that would result in unethical conduct or malfeasance, harming shareholders.  As in the Skilled Healthcare case, the irony here is thick. First, there is no allegation that patients were harmed or that care was rendered inappropriately.  Second, the activity of Amedysis was not under investigation by CMS or the OIG concurrent to or before the filing of the suits.  In other words, the government’s own enforcement activity was moot on this issue and there is considerable question as to whether what Amedysis did was even improper given the rules that were in effect at the time.  Third, virtually all providers practice Medicare maximization or that time-honored practice of using Medicare’s own rules concerning reimbursements to maximize the amount of reimbursement available to them.  If the Amedysis case is the standard, virtually every Medicare provider would in fact, be guilty of similar conduct dependent on the industry and the applicable reimbursement rules.

Taking the above into account, and it is truly an overview only,  providers need to recognize the gravitas of the environment and the totality of legal and compliance risks that are present and mounting.  Recognition and identification of the compliance requirements per applicable industry sector and the legal risks associated with the business and operations encompassed is where providers can begin to respond, not react, and develop the tools, processes, plans and ultimately culture, that mitigates risk and creates effectively compliant operations (“effectively” because totally compliant is improbable if not impossible). Below are some time-honored tips and approaches for creating an organizational environment that achieves high-levels of compliance and mitigates legal risks (I ran a very large, multi-site, complex organization for twenty plus years and never had a lawsuit).

  • Within each industry sector there are tons of regulations that in theory, require daily compliance.  Likewise, within each industry sector, there are compliance themes and “key” compliance requirements.  Focus on the key compliance requirements as activities, tools, and systems that drive compliance in these areas mitigates 90 plus percent of the compliance risk and in all cases, the risk that is expensive and serious.  I like to think about the core intent of compliance and create understanding and organizational capacity and systems around these intents.  For example, in the areas of patient care, outcomes are the baseline of regulations.  Regulations focus on documentation of outcomes, prevention of negative outcomes, and actual standards for outcomes.  Systems which assure a close match with the regulatory expectations and are part of an organizational QI process (constantly) achieve the regulatory intent and create a “halo” of compliance.  The same can be said for billing practices under Medicare and Medicaid, privacy requirements under HIPAA, etc.  Polices are insufficient to achieve the requisite level of compliance required and quite often, do nothing more if not integrated within organizational practices and systems, than create more compliance risk.
  • Legal risks are harder to quantify but in some cases, easier to generally address.  Take the two legal cases I illustrated above.  In the first case, if the staffing requirement in a state is 3.2 hours per patient day, any provider flirting with these levels consistently is asking for trouble – avoid the risk entirely.  In the second case, as I pointed out, Medicare maximization is a time-honored tradition for providers.  What is not time-honored or allowable, is any activity that suggests that the provider is routinely and consistently, seeking to “game” the system.  I see too many therapy companies and SNF providers that merely “up-code” all residents into Ultra High therapy categories as a means of achieving the highest Medicare reimbursement per day.  I see too many providers stress the justifications for additional days, manipulate the rules to extract additional benefit periods, and create care requirements and documentation that is not supported by the actual needs or conditions of the patient.  These activities, when pervasive and constant, create a legal risk that is tough to impossible to defend.  A better approach is to develop strategic and operational plans that maximize revenue the right way.  The right way is by achieving high-levels of organizational capability in delivering the right care to the right patient at the most efficient cost levels possible.  It also means developing marketing plans and programs that attract the ideal patient mix that produces the highest possible revenue profile for the organization.  With respect to employment, avoiding significant legal risks means dealing with employees within the constructs of employment law.  This doesn’t mean don’t fire or don’t discipline.  It means fire and discipline effectively and only for consistent, documented and legally permissible activity.  A core or key requirement is to effectively train and only employ, capable and competent management that know and understand the applicable labor laws and are capable of using effective hiring and supervision methods that produce organizational results without violating company policy or the law.
  • Organizationally, the primary methodology to achieving a high level of compliance and to mitigate legal risks involves creating an organizational culture that focuses on compliant activity and solid risk management principles.  While not exhaustive, here are some key elements that are part of the culture.
    • Internal and external education and audits that identify risks and provide solutions.  Developing organizational thought-leaders and subject matter experts provides key resources that can be deployed to solve problems, identify risks, and provide education.
    • Encourage reporting and self-disclosure and reward the activity.  Management must be open to hearing “what is not right” and providing reinforcement for this activity.
    • Integrate compliance and risk management as part of strategic planning and allocate budgetary resources adequate to address the risks.  While risk prevention always appears to be money with another use, it is far cheaper to prevent compliance and legal risks than it is to bear the costs after an event has occurred.
    • Reward the concept and ideology of “doing the right things” first as opposed to those things which may be short-term, expedient or more profitable.
    • Benchmark and test key indicators constantly.  For example, if your Medicare census and revenue per day is higher than industry norms and/or market norms, make sure that such results are tied directly to organizational performance and activity, not to billing creativity.
    • Provide ownership to compliance activities and outcomes to all staff, not just management.  Engage the entirety of the workforce.
    • Keep up with pending or new regulatory activity and legal activity and get “ahead” of the curve.  Organizations that only respond to laws already passed and cases already decided tend to get caught trying to “react” rather than remain vigilant and prepared.  Rarely do new compliance requirements and legal requirements come instantaneously on the radar screen – they have been there for a while.  Providers that see and understand the trends can use the virtue of time to integrate new systems into existing systems, teach new knowledge requirements, and build new organizational capacity to manage effectively, the new requirements.

August 4, 2010 Posted by | Assisted Living, Home Health, Hospice, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , , , | Leave a Comment

As the Home Health and Hospice World Turns: Part II

In Part I, I wrote about my last week’s conversations, etc. regarding the home health industry, specifically Amedysis, the Senate Finance Committee inquiry, the industry impact via the PPACA and the likely consolidation and merger trends that are approaching.  Suffice to say, not all of last week’s news and conversations focused on the home health industry as over the last thirty days, much has happened in the hospice industry as well.  The difference between the two industries is that in hospice, the major news involved a significant merger and in home health, the major news involved the legal and compliance issues of the largest provider entity – Amedysis.

The hospice industry saw, via the merger between Gentiva and Odyssey, the creation of the largest home hospice company in the industry.  Gentiva, while also a provider of home health, clearly chose to direct more of its attention to the hospice industry, moving from a moderate player in the industry to the predominant player via the acquisition of Odyssey.  Odyssey, while not as large as Vitas (the former largest hospice provider), held substantial market share and presence and in many regions and distinct market areas, competed head to head with Vitas for patients.  For more information on the Gentiva/Odyssey transaction, see a related article in my company’s E-Newsletter at http://wp.me/pD9Ac-4Q .

Analyzing  this merger leads me to a series of assumptions about where the hospice industry is at present and where it is likely headed. 

  1. Hospice is now clearly a mature market or in other words, a market that is unlikely to grow significantly over the near to intermediate term horizon.  Despite a fairly profound demographic shift occurring over the next twenty to thirty years (the maturation of the baby-boomers), there is no real indication even with this influx of older adults, that hospice as model of care, will gain in referral popularity.  While seniors utilize hospice more in total numbers than any other age cohort, as a percentage of the total cohort, utilization trends show little forward growth.  There are a number of reasons why;
    • Culturally, U.S. medicine and the U.S. population still values the process of cure or health restoration far greater than the concept of natural death.  As hospice is a downstream referral (the referral comes typically from non-palliative medicine trained physicians or via hospitals and/or long-term care providers), the hospice industry relies on the referral source to be; a) knowledgeable about the value of hospice and how it works for patients and their families, b) willing to forego potential incremental revenue for continued care by making the referral to a hospice, c) willing to engage the patient and the family in a difficult conversation regarding end-of-life and treatment futility.  As long as these dynamics remain in place to the extent they presently are, the growth of utilization will remain fairly stagnant.
    • Financially, the incentives for referrals to hospice don’t truly exist within the current U.S. system.  There are no barriers in-place to reduce the reward (payment) for continued acute, diagnostic or curative care (choose your own verbiage) and as a matter of fact, the reimbursement systems (private and public) pay incrementally more for more intense care than palliative care, even if arguably, the care is futile.  As only patients and their respective treating health professionals can conclude that continued curative care is futile or unreasonable, the process of garnering more money for more treatment remains intact as a perverse incentive.
    • While not for hospice people or physicians trained in palliative medicine, terminality remains an uncomfortable and even disputed condition for many physicians.  Patients and there families still wish to avoid discussions far too long and in some cases, avoid the discussion altogether.  While in-roads are perhaps being made in some medical centers and in certain communities, these in-roads are miniscule and not evident of a ground-swell movement toward open discussions regarding end-of-life decisions.
  2. As with the home health industry, the movement in Washington is toward curtailing the growth of hospice spending.  The prevailing feeling in Washington policy arenas, supported by Medpac, is that the hospice reimbursement under Medicare is too generous and the benefit itself, easily manipulated and poorly defined.  While the PPACA did little to negatively impact the hospice benefit or payment, the recommendations directed to the Secretary of HHS in the language intones significant changes forthcoming.
    • Reimbursement under Medicare will change such that early days in the initial benefit period will be paid more as will days at the end of the patient’s stay (proximal to death).  Days during the interim, longer stays will be reimbursed with lower payments.  The point here is supposedly a recognition that patients with long stays have periods of stability necessitating far less care from the hospice.
    • More emphasis will be placed on denying stays for non-specific terminal conditions or denying portions of stays.  CMS has determined that too many longer stays are related to diagnoses such as terminal dementia, failure to thrive, etc.  In order for these stays to be covered, the onus will fall on the hospice to provide very detailed documentation supporting patient decline.
    • More emphasis will be placed on physicians to document terminal conditions and to prognosticate length of likely survival, especially at recertification periods.  More direct “hands-on” involvement of physicians will also be required (physically seeing the patient).
    • Certain types of stays and relationships between hospices and nursing homes will be closely monitored and reviewed.  CMS and Medpac have determined that hospice stays in nursing home environments on behalf of nursing home patients are considerably longer and possibly in many cases, in violation (the hospice) of the conditions of participation as hospices utilize nursing home residents as sources of revenue but often, fail to meet the care requirements (using the nursing home as the source of care and service) under the hospice federal code.  Additionally, CMS and Medpac have placed the target for reform squarely on the large for-profit hospices such as Vitas, Gentiva and Odyssey which have typically used nursing homes as major sources of referrals for hospice patients.
  3. The PPACA, while not bending the cost curve or reducing the overall level of national expenditures on health care, does change in the interim, the overall health care economy.  Providers are re-positioning and re-grouping to combat what they perceive, and in some cases know, will be negative changes to how they presently do business.  Providers which rely heaviest on Medicare as the bulk of their overall revenues will move the fastest and the most aggressively to alter their current business practices, knowing that regardless of the overall status of the PPACA (repeal, restore Medicare cuts, etc.), the health care economy is entering a long period of fiscal constraint – payments will never be as high or as fluid as they once were.
  4. Because of points 1, 2 and 3 above, the industry will head into a period of consolidation and even, contraction.  The Gentiva/Odyssey merger is a signal of the maturity of the industry and the trend toward tighter regulation of hospice stays under Medicare (the bulk of the hospice revenue) and less economic value per each stay.  Lower future revenues per stay, either via reimbursement cuts or regulatory constraints placed on the length of stay, means more overall stays are required to equal the same or greater revenues going forward.  As the growth curve of new “potential” referrals is flat, the only real source of new business or referrals for a provider is acquisition of existing market share (buying someone else’s referrals).  In order to maximize profitability in an environment where the market is mature and the total revenue per each case is flat to shrinking, providers will have to adopt one of the three strategies below.
    • Acquire other providers to build more referrals or volume.  While each patient stay will be economically less valuable, increasing the total number for a provider while maintaining expenses on a ratio basis, lower than revenue, will provide a method to achieving overall net income targets - critical for publicly traded provider organizations.
    • Shrink the organization to fit the new revenue and length of stay realities that are in place and forthcoming.  An organization that can right-size its operations to fit the new business paradigm will be smaller but potentially equally or perhaps, more profitable.  The risk here is that provider organizations that are acquiring market share may marginalize some markets such that a shrinking provider (by choice) loses desirable market share.
    • Expand non-Medicare business and add complementary businesses that may provide incrementally equal or more revenue than that which is lost under Medicare.  Arguably, this strategy may only work for regional or single market providers and those that have strong system ties (hospital owned, etc.).

One final point to note concerns the economy.  Absent from the above factors  I laid out influencing the hospice industry is the stagnant economy.  With recovery a daily discussion regarding likelihood and timing, current uncertainties persist that impact hospice providers rather dramatically.

  1. The overall number of paying patients available to all providers within the health care economy has shrunk in recent years.  This shrinkage is primarily due to job losses and benefit losses.  Until employment rebounds and jobs with benefits become more plentiful, consumers for health care in the form of paying patients will remain down.
  2. When fewer paying patients are in the queue, those patients that do have a payer source, even a less than optimal government payer source, are prized commodities.  Each provider wants a piece of the same paying patient.
  3. Hospice is as I pointed out, a downstream referral.  When the upstream referral source, principally hospitals, lacks sufficient paying patients in the queue to replace current patients it “may” customarily refer downstream, it holds the paying patient longer, either delaying the referral and the portion of revenue that comes with a longer stay or avoiding the referral all-together.  Similarly, all downstream referral sources such as nursing homes compete aggressively for the referrals even though a referral of a terminal patient (or potentially terminal patient) is ordinarily, not a prize catch for most nursing homes.  This competition erodes the number of total possible referrals available to a hospice.
  4. Each patient has an economic value to a provider.  When a patient with a higher economic value (a better payer source) are lacking, providers sort down to the next patient level.  This sorting process occurs as a result of too few patients with payment sources available to match the supply or capacity within the existing provider universe.  Some markets hit hardest by the downturn will evidence this reality in greater depth and unfortunately, with greater persistency.  For hospices (and all downstream providers) in these heaviest hit markets, referrals have trended down and will stay down until the supply of patients with payment sources increases and specifically, the supply of patients with better payment sources and today, deferred health care needs (e.g., elective surgeries such as joint replacements, etc.).

July 9, 2010 Posted by | Home Health, Hospice | , , , , , , , , , , , , , , , | 4 Comments

Health Care Reform Implications: SNFs

The following is a summary of the major provisions in the recently passed health care reform bill.  Please note: I have not attempted to cover every nuance in detail but to provide a highlight for a point of reference.  If any reader has additional questions or wants additional insight on any particular provision, please let me know.  You can find my contact information in the page titled “Author”.

  • No targeted elimination or reduction in the market basket for 2010 and 2011.
  • Incorporation of a Productivity Adjustment (offset to the market basket) – 2012 (Fiscal year begins Oct. 1, 2011). Estimated payment impact of minus 1% to update.
  • Implementation of RUG-IV pushed back to Oct. 1, 2011 but  concurrent therapy requirements and MDS 3.0 take effect Oct. 1, 2010.
  • Implementation of new transparency requirements (disclosure of ownership) and compliance plan requirements.
  • Extension of therapy cap exception process to Dec. 31, 2010.
  • Creation of a new Independent Medicare Advisory Board charged with recommending to Congress, payment and spending reforms for Medicare.  SNFs, unlike Hospitals (exempt to 2019) are not exempt.  The Board will make recommendations to Congress for approval or disapproval.
  • By 2013, the Secretary of HHS is charged with developing a bundled payment pilot program for post-acute services.  Essentially, all providers within the episode of care (hospitals, physicians, SNFs, home health, etc. as applicable) will received one payment for all care services provided per episode covering a period three-days prior to hospitalization through 30 days post hospital discharge.  Participation in the program is voluntary.
  • Additional background check requirements for employees and contractors with access to direct patient contact.
  • Establishment of a new GAO study on the Five Star Quality Rating system.
  • Required reporting of nursing home staffing levels including use of contract/agency staff.

Medicaid

  • Inclusion of the Wyden MedPac language requiring that Medicaid must be taken into account during the analysis of provider reimbursements for SNFs (impacts Medicare payments, theoretically)
  • Requires states to implement the Medicaid expansion requirements under the law with respect to provider payment changes (physicians), quality improvement, benefit enhancement, eligibility, etc. as a condition of continuing to receive federal Medicaid matching payments. * The reason I included this provision is that states are already burdened within their Medicaid programs for determining eligibility, etc. and additional burdens may negatively impact SNFs waiting for eligibility determinations on Medicaid status. Longer waits for determination and pre-certifications mean longer waits for payment and more billing work for the SNF.
  • Coverage expansions under Medicaid and enhanced payments are financed 100% through 2014 and 91% in 2015 (begins Jan. 1, 2013).  Optional coverage expansions are not fully financed.  * The reason I included this provision is states are already balking at the amount of additional expense Medicaid expansion is adding to their already under-funded Medicaid programs.  Even with an extension of the enhanced FMAP, states are still in the hole as the enhanced FMAP could not be used for CHIP expansion costs and had to be gained principally through additional state spending.  See my post on Medicaid and Health Care Reform at http://wp.me/ptUlY-2T or alternatively, the Health Reform Updates page on my firm’s E-News site as there is a blurb on Medicaid http://wp.me/PD9Ac-3A

Miscellaneous/Other

  • Separate reporting on Medicare cost reports of spending on direct care.
  • Independence at “home” demonstration project which coordinates long-term expenditures with support services in the home.
  • Expansion of funding for home and community based services/programs.
  • Creates three years of new funding for additional training programs for direct care workers providing long-term care services.
  • Establishes funding for geriatric education centers for training in chronic care management and geriatrics.
  • Increases nursing education loan repayments and removes the caps on funding for nurses working on advanced degrees in nursing.
  • Provides for the Community First Choice option allowing for coverage of personal attendant (non-skilled) services in the home plus provides equal spousal income protection provisions under Medicaid for persons receiving Medicaid covered, home-and-community based services.
  • Provides a $250 payment for seniors covered under Medicare D who hit the “donut hole” in 2010.  Completely eliminates the “donut hole” under Medicare D for brand and generic drugs by 2020.
  • Establishes the Elder Justice Act which provides grants for additional protection of nursing home residents and establishes incentives for persons to work in SNF setting.
  • CLASS Act provision adopted.  Creates the Community Living Assistance and Support Services program that allows individuals to voluntarily purchase a form of long-term care insurance that provides daily payment of $50 to $100 per day for community based support services, in-home care, etc. in the event the individual becomes disabled.  Benefits can only be paid if disability occurs five years or more post the start of premium payments.  Premiums will be deducted from the individual’s pay-check.
  • Eliminates the cost-share under Medicare D for dual eligible (Medicare and Medicaid) individuals receiving Medicaid covered home-and-community based services.  Dual eligible individuals in a nursing home are already exempt from paying the Medicare D cost share.

March 26, 2010 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , | 1 Comment

Strategies for Accomplishing New Development or Major Capital Projects

One of the focal areas of my consulting practice/work is assisting health care organizations in accessing sources of funding (securing financing basically) for major projects and/or new development.  Given the state of the economy, most specifically the capital markets over the past eighteen months, getting funding for capital projects and/or development has been challenging, though not impossible.  Terms are definitely not as good (rates, covenant restrictions, and length or term of the obligation) and lending sources are far more credit adverse than two years ago.  Health care, although the defaults have been low, is an eclectic industry for most traditional lenders and their lack of specialization or knowledge makes them deal “shy”.  Even lenders with health care technical experience are more cautious and requiring far more information and deal due-diligence than say, two years or so ago.

Approaching a major capital project (expansion, remodeling, equipment replacement, etc.) or a new development (addition or new facility) is a daunting task and if any of the cost involves securing financing, below are some strategies or tips for project analysis and due diligence that I have found are virtual necessities to secure financing.  Obviously, this information does not supplant the credit worthiness of the organization doing the borrowing or in other words, bad financial ratios equals bad terms or today, no credit.

  • Completion of an Internal Rate of Return analysis at “current” market cost’s of capital.  The analysis needs to include sensitivity adjustments/tests as well.  If the project is such that the expenditure will not add revenue (major equipment or even some remodeling projects), the Internal Rate of Return analysis uses assumptions of savings and depreciation expense as the source of “revenues”.  In other words, you begin the first phase by using a life-cycle cost analysis as the means to produce the “net inflow” assumptions (savings, etc.) for the IRR. 
    • Much of health care, especially the reimbursed and clinical segments is very much a fixed-revenue prospect.  I see providers get caught all the time trying to justify remodeling and even down-sizing projects as “revenue improvements” and it doesn’t fly.  It is possible to produce or to generate new or improved “cash inflows” from these types of projects but creating assumptions for this improvement and the resulting new inflows requires careful thought and impartial analysis.  Suffice to say that if the project involves remodeling or down-sizing, getting to the point of improved net inflows as a result of the project means something had to change on the expense side (especially again, if the bulk of the revenue related to the project is fixed reimbursement), efficiencies have to be clear and demonstrable, and/or the use of the remodeled or down-sized space is for a new product or service line that will generate incrementally higher revenues or reimbursements per patient day.
    • On new developments or expansion projects, the largest mistake I see made is around the assumptions of occupancy and revenue generation.  The assumptions used need careful analysis and should be weighed against comparable provider/market experiences whenever possible.  This is critical in the sensitivity testing portion of the IRR – stressing and testing the new revenue assumptions.  Some very important revenue assumptions cues are;
      • Reimbursement rates and the corresponding revenue assumptions need to fit the current legislative and policy trends.  For example, health care reform just passed and Medicare is looking at $500 plus billion in cuts.  Medicaid is another issue and state budgets and forecasts of rate cuts or rate stability are an issue.  Don’t use assumptions that don’t follow the present health policy issues.
      • Dramatic changes in payer mix and product line mix are unlikely to occur as rapidly as I see providers try to project.  If for example, your payer mix has been predominantly Medicare, some Medicaid and some private insurance (65/25/10),  it may change dramatically for a new development in a new market location but not for an addition to an existing location.  In reality, just by “building it”, they won’t “naturally come”.  Marketing strategy is the key to this change but in the analysis, the assumptions of any major revenue changes as a result of a project need to be smoothed.
  • Capital Budgeting techniques and analysis need to be performed for major equipment replacement or infrastructure improvements.  Alternatives to the project need to be reviewed and financial analysis of the costs and operating impacts of each alternative need to be completed.  Again, interest rate/cost of capital assumptions, even a cost of cash assumption (investments of internal cash v. cost of debt), need to be integrated into the analysis.  Lenders want to see that the provider has thoroughly evaluated analytically, the alternatives for each proposed capital project.
  • Benchmark your project against like projects and your numbers against industry ratios.  There are a number of sources for industry ratios by health care segment from Fitch, to trade associations, Ziegler, BB&T, etc.  I typically will add comments and a brief discussion of salient differences when the ratios and results are positive or negative to industry standards.  I also like to incorporate a pre and post project re-cap.
  • Discussion and information on Market and Industry Trends is important for lenders to understand how the project fits into the overall market, into your organization’s position within the market and where the organization views the project in light of current industry trends.  Remember, the policy landscape is quite volatile and lenders are aware of the volatility.  Explanations of a thorough understanding of this volatility and how the project and organization plan fits in light of this trend is imperative in order for lenders to have a grasp of  the organization’s project management and financial and strategic management capacity. 
    • Market discussions should focus on where the organization ranks competitively within a market area, where the organization’s target market is, how that market is changing, and how the project responds to the market needs, its market position, and to the changing demands within the market location.  I also like to incorporate sales advantages, competitive advantages, quality information (as pertinent), customer satisfaction information, and any commentary on competitors.
    • Industry trend discussions focus on what is happening in the industry and how the project relates to these trends and why.  If the project is for example, an infrastructure improvement (roofs, mechanical systems, etc.), it is entirely appropriate to discuss the average age of physical plants in the industry, deferred maintenance and or average capital spending trends, etc.  If the project is an addition, the discussion should focus around meeting customer needs, new products and services that will be delivered and how completing the project either keeps the organization up-to-date with industry advances or propels it ahead of the pack. Other industry information that is important to discuss is;
      • Major health policy trends such as reimbursement rates, new regulations or requirements (e.g., mandates for sprinkler systems in SNFs), and as applicable, changing patient/customer needs.  It is important to relate these trends to the project and as much as possible, across the anticipated horizon that covers the length of the credit.  For example, if reimbursement changes may positively or negatively impact the organization’s cash flow, a frank discussion of this impact is necessary along with how the organization is planning to address the impact.  The impact, of course, plus the organization’s assumptions of impact on the project and the organization should be incorporated in the financial analysis.
      • Industry information regarding payer mix trends, length of stay, service utilization, labor costs, etc. may or may not relate to the project but whenever it does, I like to point it out and moreover, discuss briefly the relevance and the distinctions.
  • For New Developments market and demand studies are critical.  I like to see demand studies that test demand at given prices, not just global demand.  Global demand assumes price doesn’t matter or location and service-depth is less relevant and in reality, it may be the difference between success or lack of success.  Although a bit esoteric, I am even in-favor of incorporating a bit of “central place” or “location” theory in my market and demand analyses.  This type of analysis looks at key project characteristics or specifications and analyzes how strongly they are met or reinforced by the development location.  For example, if proximity to a certain referral source is a key project specification, I’d analyze this in relationship to market size and perhaps, existing referral patterns. I’d then look at the cost of development and location (site) in relationship to the requirement that the location is proximal to a referral source.  In some cases, the cost of development may be to such a degree greater that an alternative location actually becomes preferrable from a financial feasibility stand-point.  Finally, market analysis needs to define the primary markets, the competitors within the markets, the socio-economic condition of the market location (population growth, income/wealth, age,education, etc.) and the market trend.  I will also address factors that may positively or negatively affect the project’s completion and revenue assumptions (occupancy/lease-up, etc.).

 As daunting as the above may sound, it is nearly a pre-requisite to access capital for large capital projects and/or new developments at acceptable terms (again, assuming the general financial profile of the organization is solid).  While each project is different necessitating more analysis in one area and less in another and each organization is different, I’ve found that lenders today prefer more on-point discussions, even if they seem trivial, than less.  Building a solid case, financially and strategically, for the project is critical in order to achieve success in the capital markets and frankly, in order for the project to achieve the organizational objectives.

March 24, 2010 Posted by | Assisted Living, Hospice, Senior Housing, Skilled Nursing, Uncategorized | , , , , , , , , , , | Leave a Comment

Health Care Reform Implications: Medical Device and DME

Over the next few days I’ll be pushing out a series of posts as my schedule permits, on the implications of health care reform for various industry segments.  These are not meant as in-depth analyses, more of a “summary” of the key points.

Reconciliation Act: This Bill has yet to pass the Senate and as a result, it is possible amendments could change these provisions.

The biggest implication is a 2.3% excise tax that goes into effect in 2013. The tax is on manufacturers of devices but exempts Class I devices such as canes, eyeglasses, and hearing aids. Oddly enough, the tax is tax-deductible and applies to all Class II and Class III devices sold beginning Jan 1, 2013. Clearly, the tax impact will be passed along in pricing, assuming price increases will be wholly or partially absorbed via reimbursement. If not, the clear implication is a reduction in margin for device manufacturers.

Other provisions less onerous but still potentially burdensome include a 90 day waiting period for approval of new DME claims to allow the Secretary to conduct analysis of potentially fraudulent claims. This provision assumes the Secretary will identify potential areas of risk and potential categories of supplies that are prone to fraud. I can’t tell from the language whether this will be a “universally applied” wait for all new claims or just certain claims for certain suppliers.

Also within the Reconciliation language is additional funding to fight fraud, waste and abuse. I suspect some allocation of these dollars will be for additional enforcement activity in the Medical Device/DME industry.

Senate Reform Bill: In the Senate Bill the reform bill that will become law today), there are a number of provisions that will impact the industry.

First, there is an imposition of an annual fee on manufacturers and importers of medical devices. The fee is based on 2010 annual sales and will be allocated across the industry based on market share. Best guesses suggest the fee will be in the range of $2 billion. The fee (tax) is non-deductible and doesn’t apply to Class I or Class II device sales or basically any devices sold via retail direct to consumers. Small manufacturers ($5 million or less) will be exempt and manufacturers with sales between $5 million and $25 million will pay 50% of the fee. The Secretary is charged with analyzing the sales of manufacturers and determining the relevant market share of sales for allocation. Again, this applies to non-domestic manufacturers and domestic importers of foreign devices.

The Senate bill expands competitive bidding for DME to 21 additional metro areas and requires the Secretary to nationalize the process and standardize bids by 2018.

Under Medicare, the Senate bill eliminates the 2% add-on payment for DME (above CPI) that Congress provided last year, effective 2014. Instead, the Senate bill incorporates a productivity improvement feature that effectively reduces the DME fee schedule by 1%, applied to the annual update factor for DME.

Finally, the Senate bill eliminates the option for patients to elect Medicare to purchase a power wheelchair within the first month of medical need approval. Instead, Medicare will pay rental on the chair for 13 months, incorporating a portion of the purchase price in its payments to the DME supplier. Effectively, Medicare pays for the chair to the DME supplier over the 13 months at the end of the period, transferring the ownership of the chair to the beneficiary.

In my opinion, the immediate and near-term questions center on whether the Senate will make adjustments to the Reconciliation Bill and will Congress maintain the taxes and fees outlined. Historically, the Congress post-passage of major entitlements and legislation that raises taxes and/or cuts payments has balked to lobbying pressure and ultimately, restored cuts and enhanced payments. In this scenario, anyone’s guess is as good as mine in terms of what could happen.

March 23, 2010 Posted by | Home Health, Policy and Politics - Federal, Uncategorized | , , , , , , , , | 2 Comments

Hospice Census Issues: A Possible Trend with a Twist?

Lately I’ve been running across intermittent publications/blog posts, etc. regarding a general decline in hospice census.  At the end of this post, I’ve attached a couple of links for anyone who wishes to see some examples of what I’ve been reading.  Naturally, being the curious consultant and health policy junkie that I am, I started to do a bit of digging.  What I found was rather interesting and perhaps, indicative of another trend that may soon emerge.

In my prior career as a health system CEO, I first became seriously interested in hospice in the mid-eighties.  The impetus for this was my VP of Religion and Pastoral Care who happened to train with Dr. Elizabeth Kubler-Ross and was (still is actually) a highly respected expert in the field of spirituality, bio-ethics and end-of-life care.  Over the years, he often engaged me in debate regarding the high cost of institutional care at the end of life.  He also pointed out how inefficient and somewhat demeaning it was for individuals to die in an institutional environment.  In our system at the time, we experienced hundreds of deaths annually, the majority in SNFs.  With the enormity and complexity of all the SNF regulations, it was extremely difficult to provide lower cost, more creative and thus, more humane end-of-life care in a nursing home.  To further complicate matters, like most SNFs at the time (and even still today), our beds were generally configured as semi-private; hardly ideal to accommodate visitors, guests, and privacy.

To resolve the above issue, we started a hospice in the early nineties.  We took a different tack however, developing a place of residence and a site for inpatient care initially.  As our focus was principally geriatric, we saw the greatest market need as an alternative site to hospitals or SNFs; a hospice site that would provide a lower cost of care, a private room and incorporate all of the latest knowledge in palliative care.  We knew at the time that the majority of our patients died in SNFs and hospitals simply because there was no real alternative and given the age of the patient and the lack of willing or able caregivers to accommodate death at home, home hospice was not the solution.  To make a long story short, we quickly expanded to a second location and incorporated a home program within our hospice division.  Oddly enough, at the time, we became the first free-standing, inpatient and residential hospice in Wisconsin and the sole “geriatric only” hospice in the State and the in the nation.  Also at the time, there was one inpatient hospital unit and one free-standing residence.  When I left my position as CEO to form my consulting partnership, there were five additional inpatient/residential hospice options and nearly a dozen home hospice options (some related to the inpatient/residential options). 

To the point of this post and my observation: Hospice census is getting soft for a number of reasons but the primary driver of the decline that I can verify is too much supply for what is truly, an undeveloped demand.  The primary payer for hospice care is Medicare and as I have written in numerous other posts, Medpac and CMS both have targeted hospice as an industry in need of reform.  Their scrutiny is born out of a steady increase in the benefit utilization, rapidly increasing lengths of stay, and an increase in the number of hospices that have SNF contracts.  To Medpac and CMS, this means potential abuse and to me it means too much supply chasing too little “real” demand. This is particularly true in a down economy where potential demand ( the universe of all terminally ill individuals at any one point) is somewhat disconnected with the health system due to unemployment related job losses and lack of insurance and other providers compete for a scarcer share of patient days.

The difficulty of gauging the true demand for hospice in the U.S. is that the health system presently in place, somewhat restricts the growth of legitimate patient referrals.  Combine this with a traditional cultural and religious predilection which values life and technical advancements focused on  the restoration of life and hospice becomes relegated to a choice paired with futility.  Physicians, the gatekeepers of hospice referrals, are fundamentally incented to do everything (financially, legally, etc.) other than to make the referral.  Patients and their families, ignorant about hospice, often know nothing about the benefits available under Medicare, the care that is delivered in a hospice setting, or that a referral to hospice can occur (and should) significantly in advance of imminent death.  Without sufficient information about hospice, save the stereotypes, patients and their families must rely on a health system that actually competes against making referrals. While I know this sounds rather harsh, the reality is that most hospitals and physicians are pushed by economic factors, especially of late, to maximize treatment, to maximize tests, and to maximize patient contact that correlates to higher reimbursement, even if the same will in all probability, not change the ultimate outcome: death.  A phenomenal source of data on this very subject is available from the Dartmouth Atlas (http://dartmouthatlas.org/).

While I cannot universally verify a trend of softer census, I can verify that census issues are occurring in a variety of hospices, particularly in larger urban and fully developed suburban areas.  From the limited research I did conduct, this issue is not new and in fact, has likely been going on for some time. Where census trends are up or a bit more stable is typically in rural areas, fast growing areas or as a result of new or expanded nursing home and assisted living contracts (the latter a somewhat new but growing phenomenon).  Areas that have been hit the hardest in the economic downturn are logically, areas with the greatest number of hospices struggling to capture census.  Areas that are truly over-bedded in terms of SNFs and hospital capacity are the areas where the “soft census” trend is evident back to late 2008 and early 2009.  Not too surprising, these over-bedded areas will not recover any time soon, if at all.

A new trend that is likely to emerge in the immediate future is consolidation or renewed merger/acquisition activity.  Industries that have reached a growth plateau or stage of maturation provide marginally higher opportunities for businesses within the industry to consolidate, especially if the overall, longer-term growth prospects remain solid.  I like to think of this phase or stage as a period of digestion.  Hospice has grown markedly in the last decade, so rapidly in certain areas that the market area is or was saturated and the recent downturn in the economy served to illuminate, how saturated the market really was.  In the period or time when the economy was advancing, a hospice could survive on the margins; the leakage that hospitals, physicians and other providers were willing to forego as other business or patient encounter opportunities were perceived as more valuable.  As the economy tightened and reversed, the queue of “other more valuable” business evaporated and all remaining revenue generating patients became valuable again, closing the gaps that once leaked patients deemed “played-out”.  This cohort of marginal patients (marginal only from the perspective of revenue opportunities) was a few years ago, the life-blood of a number of hospices in an over-developed market.  As all providers are now willing to utilize even the most marginal patient encounters today, marketing or census development activities alone will not generate sufficient new referrals (they simply don’t exist) and the remaining strategy is to merge or be acquired.

I would not be surprised to see a steady growth pattern of hospices affiliating with other hospices, either via merger or outright acquisition.  The general prospects for the industry are solid but the intermediate future with likely Medicare payment reform, greater OIG scrutiny and new referral and relationship regulations means that marginal hospice providers probably can’t survive sans an affiliation of some sort.  Additionally, while the market will grow slightly year over year, I believe hospice has reached a point of maturity as a service or product line.  It is truly a niche’ product, one not fully embraced by physicians or for that matter, the general market of patients and their families.  As long as the economic incentives remain heaviest on “cures” and the cultural trend continues to embrace life-elongation at all cost, hospice will remain a secondary option for care, offered too late in the end-journey to a population, woefully uneducated and unaware of how valuable a care option it truly is.

The following are a few links to articles I read, prompting this post.

http://www.kaiserhealthnews.org/Columns/2010/February/021810Gleckman.aspx

http://growthhouse.typepad.com/larry_beresford/2010/03/are-hospice-enrollments-declining.html

http://palliativemedicine.blogspot.com/2010/02/can-hospice-and-palliative-care-escape.html

March 11, 2010 Posted by | Hospice | , , , , , , , | 1 Comment

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