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Senior and Post-Acute Healthcare News and Topics

CMS Issues Proposed Home Health Rule for 2015

Just ahead of the Fourth of July holiday, CMS released its proposed home health rule changes for FY 2015.  As common, the proposal includes rate changes/modifications and clarifications and adjustments to Conditions of Participation.  The proposed rule continues a path for CMS and the industry of rate reduction/rate rebasing and movement toward greater emphasis on “pay for performance” or should I say, payment reductions for inadequate quality reporting.  Following is my summary analysis of key provisions in the proposed rule.

Rate/PPS Update: The target is a payment reduction/spending reduction of .3% or $58 million.  This is exclusive of the 2% sequestration cuts.  This proposal also includes the effect of year 2 of a 4 year rebasing effort to the HH PPS schedule.  The rate mechanics flow as such: A 2.2% increase/payment update less rebasing updates to the national 60 day episode payment rate, less the national per visit rate conversion, less the non-routine supplies conversion factor.  The 2.2% increase incorporates a market basket update of 2.6% less the productivity factor of .4%, totaling an increase of 2.2% prior to the adjustments. The Non-Routine Supply reduction is 2.8% and the national 60 day per episode payment includes a planned decrease of $80.95 to $2,922.76.

Face to Face Requirement: CMS is proposing a simplification to the current requirement, eliminating the current narrative note requirement from the encounter.  Physicians and/or the discharging facility must still document in the patient’s medical record the need for home-based care (skilled).  Re-certifications will still require a face-to-face encounter.  CMS also is proposing to eliminate payment to the physician for any face-to-face encounter if the such encounter occurs when the patient is NOT eligible for coverage under the HH Medicare benefit.

Wage Index Changes: Wage indexes inflate or deflate nationalized rates based on relevant location, labor costs.  CMS is proposing to update the Home Health Wage Index based on more current data from the Office of Management and Budget (data known as the CBSA or Core Based Statistical Area).  The proposed changes would phase-in over a one-year transition period, moving on a blended basis of 50% current Wage Index data and 50% 2015 (updated) data.  What we know so far is that providers feeling the biggest shifts are those that reside in the 37 counties presently considered part of an urban area shifting to rural and the 105 counties considered rural shifting to an urban area.  For further information on this topic, contact me (via the contact page on this site) or see the actual proposed rule.

Quality Reporting: CMS is proposing to set a minimum submission level of OASIS assessments for 2015 at 70% (less than this level imputes a 2% payment reduction to the provider) and then in subsequent years, move the percentage required for submission up by 10% (e.g., 80% in 2016).

Therapy Reassement Time Frames: The proposed rule would shift the requirement for a licensed therapist to re-assess the therapy plan of care and need from “as close to day 13 and day 19 as possible” to every calendar 14 days.

Coverage for Insulin: CMS is seeking clarification and input into the current list of coverage codes for insulin care (table 28) as to their adequacy in determining the need for skilled care for insulin management in the home. The program does not cover care for individuals capable of self-administration or who have another “person” willing to provide insulin administration as needed.

Revised Definitions for Speech Language Pathologists: Provides clarification that a Speech Language Pathologist is someone who has a graduate degree (accredited) in Speech/Language Pathology, or: is licensed by his/her state and has completed 350 hours of supervised clinical time, or; has at least 9 months experience unsupervised, or; has completed a national competency exam approved by the Secretary of HHS.

Value-Based Purchasing: CMS is offering for comment, a proposed Value Based Purchasing demonstration program in up to 8 states, similar to the hospital program.  In this approach, agencies would  receive a 5% to 8% adjustment in payment for  meeting performance criteria across a designate performance period.

July 9, 2014 Posted by | Home Health | , , , , , , , | Leave a comment

Medicaid Case-Mix States: A Reader Question

Recently, a reader asked me a question regarding which states still use RUGs III for their Medicaid case-mix payments. At the time, I honestly didn’t know the answer completely. Based on a little research, I’ve outlined the RUGs status as I currently know it, across the states that utilize Medicaid case-mix. Note: Not all states use a case-mix reimbursement methodology for their Medicaid SNF payments (eighteen don’t). Any readers that know more specifics about any of the states and their status as listed below, are free to comment with additional information.


  1. Washington
  2. Minnesota

Transitioning to RUGs IV (either upcoming, very recent or at this point in time)

  1. Vermont
  2. Wisconsin
  3. Illinois
  4. Maryland (last cost based state in the country, transition in July of 2014)
  5. Indiana (2015)

RUGs III (some may be in the process of developing a transition)

  1. Montana
  2. Idaho
  3. Nevada
  4. Utah
  5. Colorado
  6. North Dakota
  7. South Dakota
  8. Nebraska
  9. Kansas
  10. Texas
  11. Iowa
  12. Louisiana
  13. Mississippi
  14. Kentucky
  15. Ohio
  16. Maine
  17. New Hampshire
  18. New York
  19. Pennsylvania
  20. West Virginia
  21. Virginia
  22. North Carolina
  23. Georgia

Again, if anyone knows more specifics about any of the above mentioned states, please feel free to comment to this post.

April 7, 2014 Posted by | Skilled Nursing | , , , , , , , | Leave a comment

CMS Releases Home Health Final PPS Rules for 2014

Last Friday, CMS issued its final rules for 2014 Home Health PPS.  As is typical within these final rules, earlier proposals are clarified and additional direction for the future becomes clearer.  In this case, most people who follow the Home Health industry trends will find the continuation of prior year themes; rate reduction, episodic rebasing, additional reportable quality measures, etc.

In context, CMS and Medpac had unveiled a plan years ago to reduce the expansive growth in home health spending.  Essentially, as reported profit margins under Medicare rose for the largest agencies to the upper-teens, CMS via direction from Congress took notice.  The net result is a series of revisions to the home health PPS, primarily driven at reducing payments and reallocating resources away (re-basing) from certain highly reimbursed PPS categories.  Additionally, though not a trend unique to home health, CMS has integrated quality measures and a reporting structure as a means to encourage a pay for performance dynamic.

Below is the synopsis of the final rule.  Readers who wish to see the entire final rule can e-mail me (contact information on the Author page) or comment on this post with a contact e-mail address and will forward accordingly.

  • Overall outlays for home health will reduce year-over-year by $200 million.  To get there, CMS updates home health payments by 2.3% ($440 million), offset by a required rebasing element of $500 million further offset by an additional $120 million in HH PPS Grouper refinements.
  • CMS also plans to begin rebasing the 60 day episodic payment rate (the national per visit standard). This adjustment is mandated by the ACA and must occur over a four-year period during which, no year may adjust by more than 3.5%. The final rule calls for a 2.7% rebase (reduction) though CMS has targeted the amount to a fixed-dollar element of $80.95, rolled through 201.  Oddly enough, when we do the math the amount of $80.95 equates to 3.5% of the 2010 calendar year amount. The CY 2014 60 day episode rate is $2,860.20.
  • The net result of the adjustments above is a 1.5% decrease in Medicare payments to agencies.
  • Two new quality measures are added in the Final Rule – hospital readmissions (during the first 30 days of the home health stay) and preventable emergency room visits.
  • In terms of the HH PPS Grouper refinements, CMS is removing two categories of ICD-9-CM codes.  The first is related to “excess acuity” meaning that the patient’s condition does not warrant care in a home health environment (too acutely ill). The second elimination is regarding codes that would not change the plan of care or adjust the appropriateness of home health case.  CMS plans of converting to ICD-10 on October 1, 2014.

My sole comment on the above relates to “no news”.  CMS had foretold as much and perhaps the only take-away clarity is that more is forthcoming.  Expect no additional spending from Medicare on home health payments for the upcoming years.  Flat will be good but personally, I think 1% to !.5% reductions are the new “norm” for the next four or so years.  In a conference call back mid-summer with some investment folks and industry followers, I and my firm called this result (on the head) when many were saying flat to a positive 2%.  With the ACA impacts and the stated objectives from CMS to realign home health spending, flat was never in the cards.

November 25, 2013 Posted by | Home Health, Policy and Politics - Federal | , , , , , , | Leave a comment

Medicare Advantage Plans and HIPPS (SNF PPS) Codes

A topic that I receive queries about from time to time concerns the payment practices of Medicare Advantage (MA) plans as the same relates to traditional Med A coverage under the PPS system.  Recently (earlier this year and then again in October, CMS issued some fairly vague guidance to the MA world regarding a requirement to include the HIPPS codes (PPS codes) for any SNF stays utilized by enrollees.  The same communication was scare to SNFs.  Initially, CMS targeted implementation for July of this year, then backed-off in October to December implementation.  This week, CMS postponed this requirement until July 2014.

The take-away and caution for SNFs with MA contracts is this.  Regardless of how the contract is structured for payment between the SNF and the MA (groups, levels, per diem, etc.), the CMS requirement for MA plans to report HIPPS will alter the SNF’s billing cycle, now encompassing an assessment schedule (MDS) identical to the cycle for traditional Part A covered residents.  My firm has many SNF clients with MA patients that presently aren’t required via their contracts to follow the traditional PPS/RUG and assessment schedule for this payer type.

On the same theme, this impact is separate from how the MA plan pays the SNF.  It will clearly be less onerous for MA contracts that are paying the SNF per diem rates, though this type is less typical than the group or level payment schedule.  My advice to SNFs is as follows;

  • Open dialogue ASAP with your MA contracts, letting them know you are aware of this upcoming requirement.  You have time as the requirement is now delayed to July of next year.  December implementation was clearly unrealistic.
  • If possible, I recommend working with your MA contract to negotiate a different payment methodology.  My firm has had success in re-negotiating these agreements.  The desire methodology is per diem and going forward, per diem following the RUGs determined via the MDS.  SNFs will have to report this data to the MA plan regardless come July.  It is to the MA’s advantage and the SNF to align payment systems accordingly.
  • For SNFs with therapy contracts (outsourced), make sure your therapy provider is aware of this forthcoming change.  Such a change, especially if the SNF seeks to modify its payment agreement with the MA, will alter how therapy is billed to the SNF.  Further, your therapy contractor will need to know that MA patients must soon be included in your reporting to the MA plan (EOTs, COTs, etc.).

While we know July 2014 seems distant, don’t expect much guidance or heads-up from your MA contractors or CMS.

November 8, 2013 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , | 2 Comments

Post-Acute Issues Worth Watching

In my recent work and across recent discussions, phone conferences, etc., I’ve encountered a thematic trend; a circle of issues or as in reference to geese, perhaps a gaggle. Doing a bit of research and sifting through notes written over the past few weeks, here is what is trending.

Pharmacy: In October of last year, CMS issued a proposed rule with a provision inserted which, if published within a final rule, would prohibit consulting pharmacists in SNFs to be employed by or contracted with, the dispensing pharmacy.  The theory is that when consultations are performed by pharmacists employed by or affiliated with, the dispensing pharmacy, there exists a greater potential for SNF residents to have as part of their medication regime, higher levels of anti-psychotic drugs, psychoactive drugs, and an increased level of unnecessary or unwarranted drugs.  Of concern to most of us working in the post-acute/healthcare arena is that CMS can point to no specific data or research to support this theory, save a well-known fact (historically) that seniors in SNFs use far more anti-psychotic and psychoactive medications that seniors in non-instiutional settings.  Drawing a bright-line conclusion that consulting pharmacists related to dispensing pharmacies are the cause is boneheaded to say the least. 

Despite this flawed view on the part of CMS and the comments generated during the comment period, my sources inside the D.C. beltway are saying that CMS will publish a final rule soon including a provision requiring SNFs to use independent consultant pharmacists, effective January 1, 2013.  Assuming this does occur as I am hearing, SNFs today should begin to work to develop a plan to source possible options ASAP.  The inherent difficulty of course is;

  • Insufficient supplies of pharmacists, particularly those that have current clinical consulting experience.
  • In light of the point above, pharmacists with access to clinical consultation software applications.
  • Knowledge – Geriatrics and chronic disease is a specialized field.
  • Time and efficiency – getting to know the residents and their respective drug regimens will take a non-affiliated consultant longer.
  • Cost – finding a source will not come cheap.

Some options do exist for SNFs in the right market areas.  My best advice is to approach hospital systems, work with universities with pharmacy schools, band together with other SNFs, and start now to build a consultant’s package with your current consulting pharmacist, assuming he/she is working with your dispensing pharmacy.  It is likely the dispensing pharmacy will work with its SNF clients to a great degree, trying as best possible not to lose the current dispensing business as a result of being a barrier in a transition period.

Hospice and Fraud: Most people who are close to the hospice industry either foresaw or should have seen, the current investigative and crack-down activity from OIG and CMS. The industry in terms of providers and benefit utilization, grew substantially over the past decade, despite overall health care utilization remaining on a relatively slow-growth to no-growth plane. For people like me who watch the industry closely, it was illogical to assume that a growth of terminally ill individuals suddenly sprouted and maintained the growth rate recently evident.  The same logic concerns were expressed by Medpac and the OIG with the OIG specifically warning of forthcoming investigations where the bulk of a hospice’s patient encounters arose from nursing home contracts.  Just last July, the HHS OIG indicated that it found that hundreds of hospice agencies relied on nursing homes for over two-thirds of their case load. Other reports from Medpac and the OIG found that literally half if not more of these proto-typical nursing home patients under the hospice benefit, did not meet one or more of the qualifying criteria for coverage/certification.

While the large agencies, predominantly investor-owned will be on the radar, even smaller and regional agencies are coming under scrutiny. CMS reports, and I have encountered this first-hand, that claim denials are up, particularly at re-cert periods.  Diagnoses are being scrutinized carefully, with CMS looking at re-certs and probing for some evidence of deterioration or movement toward death.  CMS knows that certain diagnoses and patient locations correlate to longer stays and as such, the audit focus is squarely on this relationship.

For hospices, the direction is clear – be wary and cautious of certain patient types and the “nursing home/assisted living” patient flow.  Nursing homes and assisted living facilities are not necessarily gold-mines of potential referrals,  In fact, the true number of organically terminal patients that would/will fit the hospice benefit criteria is not much greater from an overall ratio perspective, than the number found in the general population.  While the business relationships between a hospice and a SNF or assisted living facility appear attractive, it is the attractiveness that also makes the same perilous today unless smartly coordinated and managed.

For the past couple of years or so, the hospice growth trend in terms of referrals has been slow to flat.  Nothing regarding the recent fraud cases in the industry suggests this trend to arrest.  If anything, I expect to see the trend marginally down for a period with the industry actually contracting in terms of the number of providers.  Some will simply call it quits while others will sell or merge.  Either way, expect fewer total providers and a stable to decreasing referral pattern shift.

Qui Tam, Me Too: The latest round of major fraud actions and False Claims Act identified violations arose out of Qui Tam actions or more commonly, Whistleblower actions.  While the Federal government is clearly targeting certain post-acute segments (see OIG 2012 workplan), equally as profound an impact on the industry is the proliferation of former employees and/or contractors willing to disclose less than scrupulous provider behavior.  While this element of the law always existed (enforcement and recovery via a private citizen for a portion of the recovery settlement), it has clearly grown to a new level in recent years. The reasons?  First, down economies bring forth certain behaviors on the part of businesses pressured to generate earnings and revenue growth.  If no organic growth exists within the business sector or market(s) a business occupies, it is incumbent upon the business to find new ways to mine potential market niches.  This is very apparent within the hospice sector and in the Medicare component of the SNF industry.  The pressure to build revenues in non-growth periods inherently leads to some corner-cutting or machinations that run afoul of the False Claims Act.  Shrinking or saving to a profit while a short-run strategy, is nearly impossible to maintain over a longer term horizon without shedding fixed costs as well; very difficult.

The problem inherent with manipulation of Medicare coding, billing, referral requirements, etc., is that what seems good or plausible at a 20,000 foot level must also seem good and plausible at the ten foot level; a level where multiple people must buy-in to the same structural arguments, beliefs and incentives.  As the folks existing at the ten foot level rarely see the same level of incentive nor have perhaps, the same level of “skin” in the game, any level of apprehension arising on their part or disgruntlement can be quickly structured into a Qui Tam action. Mix equal parts news coverage with employees disgruntled by certain practices with a growing element of the bar (lawyers) seeking Qui Tam actions with a government willing to pursue these actions and you have a fairly fertile tract of ground for more Qui Tam events.

The moral of this story is that organizations need to be very vigilant concerning their compliance activity, removing any incentives tied to new revenue growth without some counter-balance of audit and scrutiny.  Too many times I have heard providers tout abnormally good results in segments or sectors that are flat to under-performing.  This is a red flag simply from the standpoint of “why you and not everyone else” logic.  If for example, an SNF has an inordinately strong, high paying rehab case-mix and therapy productivity, my counsel is always around “red flag”.  Any facility’s profile should match close to the national case-mix distribution and when it doesn’t, either abnormally low or high, its time to delve deeper.  The same is true with hospice growth, nursing home days, length of stay and percentage of continuous care designations.  Remember the age-old economic axiom – “what gets rewarded or paid for, gets done”.  Incentives perversely aligned within the boundaries of False Claims Act risk areas are ripe for peril and thus, someone within the organization or tangentially connected to this process, to cry foul with today, the expectation of a decent future pay-day.

Revenue and Earnings Cautions: In light of some of my comments regarding Qui Tam above, certain post-acute sectors are seeing revenue reductions and thus, earnings shortfalls resulting from Medicare payment reductions and fraud/probe activity.  Hospice is a segment that I predict will continue to under-perform as growth is truly non-existent and where growth was attainable via SNF relationships, clearly constrained by federal oversight. Additionally, the SNF industry will suffer as well.  Kindred’s recent earnings announcement showed this quite clearly.  Medicare cuts impacting therapy RUGs primarily will impact SNF organizations that relied on “mining” certain RUG categories for revenue and margin.  Without a more streamlined and balanced revenue model, the Medicare reduction comes faster than the trailing operational improvements possible via rebalancing the business enterprise. Kindred announced as much as it intends to shrink its facility holdings via non-lease renewals and concentrate on building a more efficient revenue/expense equation. Remember, fixed costs are the most difficult to shed and variable costs, tough to align in tight labor markets and markets where patient populations flux daily.  In short, only so much can be gained via trimming variable expenses and typically, the amounts are less than adequate to offset revenue reductions and protect margin.

Quality or Quit: The final issue and one that has been lurking in the shadows and unfortunately, ignored by too many providers, is the issue building around “quality”.  The frank reality is that from all my sources in Washington and around the various policy arenas is that quality is what matters.  There is a prevailing and growing belief that payment must be tied to quality and that government must do everything within its power, regulatory and otherwise, to push providers to deliver better outcomes, more efficiently.  This is the genesis of the ACO movement.  I have heard directly from important policy and political figures, directed at provider organizations and industry segments, produce “Quality or Quit” the business.  Providers have longed believed that quality was the furthest thing linked directly to payment, even though lip service was given to the subject.  For post-acute providers and industry segments, the recent release of proposed outcome measures by the National Quality Forum (anyone wishing a copy, e-mail me and I will forward) is a good place to start grasping what is coming, and in a big hurry.  Providers across the post-acute spectrum that are not presently, directly and seriously engaged in measuring key care outcomes, need to get up to speed quickly.  Reimbursement will be tied to quality measures and more important, providers that are not jointly participating up-stream and down-stream in quality improvement across industry segments, will not see the level or quality of referrals necessary to stay in business.

March 6, 2012 Posted by | Home Health, Hospice, Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , | 3 Comments

Medicare SNF Rate Outlook

Literally fresh off of a significant rate adjustment/reduction in October (2011), Medpac (the Medicare Payment Advisory Commission) releases a recommendation for complete SNF payment overhaul.  In their assessment of the SNF payment system under Medicare, Medpac concludes the following;

  • Medicare payments to SNFs represent 23% of all revenues.  Medicare (payer) as a share of SNF patient days averages 12%.
  • Provider supply and occupancy rates remain essentially flat year-over-year (2009-2010).
  • Quality as determined through survey and other indicators remains unchanged.
  • Average Medicare margin is 18.5%.  The average margin for for-profit SNFs is 20.7% and for non-profits, 9.5%.

The crux of the Medpac argument is that efficient providers have lower costs (about 10%) and higher quality as evidenced by higher rates of community discharges (38% higher) and lower rates of rehospitalizations (17% lower).  Accordingly, Medpac believes that the current system, inclusive of recent adjustments to rates (October) is set to produce the same level of behavior and outcomes, plus account for a 14.6% average margin in 2012.  The argument put forth by Medpac is that the Medicare SNF system must be re-based, principally due to the fact that margins have run consistently above 10% since 2000 and the correlation between margins and patient case-mix is non-existent.  In summary, the Medpac recommendation, which will head to Congress in the upcoming months, is to revise the PPS system now and begin rebasing rates in 2014, in phases.  In addition, Medpac is calling for a rehospitalization impact (negative) to rates for poor performing SNFs.

Ordinarily, Medpac recommendations such as this have more of a “frame the argument” impact than a real implementation objective.  Congress has been reluctant to take steps this drastic to any Medicare provider group for fear of industry fall-out and political damage.  Yet, as we have seen with the home health industry, greater movement is possible where rate cuts are concerned, particularly if the general tone is that the industry is too profitable and said profit is coming from gaming the system.  Double digit margins seem to get even Congressional types’ attention.

Looking at the industry, how the rate reductions in 2011 transpired, the initial report/recommendations from Medpac, and the current public policy environment in Washington, my near term rate outlook for SNFs is as follows.

  • All the evidence suggests PPS refinement is forthcoming.  The system simply isn’t working adequately in terms of tying payment rates to care costs and rewarding quality.  The “behavior” effect that CMS is looking for, namely a movement away from “rate ramping” focused on rehab case-mixes to rate equalization focused on a balanced book of Medicare patients (balanced case-mix) isn’t happening and apparently, isn’t properly incented in the current system. 
  • Rebasing isn’t far-fetched but it is aways off.  CMS is prone to be exceptionally slow at devising payment systems and of course, equally inept at getting the infrastructure to work properly.  If as I believe, the first step is PPS refinement, given the likely horizon of implementation, rebasing is farther away; certainly farther than 2014.
  • There is no question that payments will become tied to certain quality indicators, especially rehospitalizations.  This trend is foretold in the PPACA (Reform) and regardless of the law’s future (life or death or limbo), the payment tied to quality trend is here to stay.
  • Politically, the will to champion what will be viewed as over-payments is far less than the will to find ways to rein in excess (or perceived excess).  All this means, regardless of the upcoming political cycle and elections, is that lobbying for a system that continues to produce average margins north of 14% will fall on principally deaf ears on the Hill. 
  • Rates are trending down and I suspect another round of flat to modest decreases in rates forthcoming in October.  The push will be system revision as opposed to just rate reductions, feeling that the best approach is to revamp the existing PPS and in so doing, create lower spending overall.
  • Time tested arguments against cuts that won’t work or have run their course are as follows;
    • Medicare margins are necessary to offset Medicaid losses.  This one is good on its face but in reality, its tough to make the case for margins that have run in the 20% range and earnings that have been solid among the for-profit companies.  The publicly traded guys need to show pain (in the form of earnings) before Congress will relent on the lack of merit for this argument (publicly traded SNFs tend to have higher MA census and higher Medicare census).
    • Access will become an issue and facilities will close.  Per Medpac and most industry observers, the supply today is adequate and slightly surplus so some continued shrinkage isn’t a big concern.
    • Job losses will certainly occur.  The latest cuts from October don’t support this argument by any magnitude.  Additionally, the overall health care industry is growing so worker displacement isn’t really a grave concern – movement is easy between providers in most markets.
    • Capital will be even more difficult to access with future negative rate outlooks.  Again, this is a decent argument but in reality, capital access is provider specific and CMS and policy makers realize that well run, profitable providers will continue to have access to capital, even if the industry outlook is negative.  A better argument is that negative industry outlooks make capital marginally more expensive and the number of outlets fewer.  This is true only in the short-run however.

So in conclusion, here’s the take-away: Medicare rates are headed down in the near term and in the intermediate term.  It is a virtual certainty that the present PPS system will be revised over the next three to five years.  The future of the PPACA will impact this process as elements of reform shift the landscape for all providers.  The debt discussions in Washington will have literally no direct impact on the future of Medicare SNF payments; the industry share of the overall spending pie is negligible enough to not be overly impacted by automatic cuts in federal spending.  The future is one where providers must learn to balance their overall Medicare book/case-mix and focus on quality.  Quality incentives/penalties are a certainty and there is no longer any room left to ignore outcomes such as discharges and rehospitalizations.  Likewise, I believe bundled payments are forthcoming and the further development of ACOs will continue to shift SNFs to align their care and product/service offerings toward outcome oriented, bundled payments.  Medicare as a payer source will remain profitable for many SNFs although not at the same margin levels seen over the past decade.  Profitability ranges will trend into the high single digits or perhaps slightly more but only for providers with a well-balanced case-mix.  As always however, the key to making money in this declining reimbursement environment stems from solid management, a well-balanced payer mix, and an operating infrastructure that is aligned with the incentives remaining in the industry.

January 31, 2012 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , | Leave a comment

SNFs: What to do Now for October 1

As known by now, a lot of change is occurring with Medicare effective 10/1.  Daily, I field questions from around the country regarding what exactly is happening and what if anything an SNF should do to “minimize” the impact.  To a certain extent, at least as far as reimbursement reductions go, it is difficult and ill-advised to adjust too hastily or rapidly.  Longer-term planning is required to fundamentally, re-balance a payer mix.  This said however, all SNFs should be looking at their business models realizing that the long-term rate outlook on Medicare is best case flat, most probable declining.

Below I’ve accumulated and summarized, my top five recommendations/answers to the most common “what do we do next” questions.  For reality purposes, I assume (as it will happen) that rate reductions as called-for in the CMS final PPS rule will occur.  I understand that Congress may choose to intercede but given my sense of the current political climate and the economic issues at hand, I think it ill-conceived not to assume reduction and bet on “lobbying” to reinvent higher rates.

  1. Begin Balancing Your Payer Mix: Out of all of the SNFs I have analyzed recently, those that have a truly balanced payer mix with appropriate revenue sources will fare well to fairly well, even with the pending Medicare cuts.  Balanced looks different to different SNFs but in reality, they all share common traits.  First, Medicare isn’t their sole source of margin.  Second, their Medicare case-mix is well mixed with rehab and clinical qualifiers, perhaps a shade more clinically complex than rehab only.  Third, they have strong overall clinical competencies and thus, attract patients with other payer sources such as private insurance.  Finally, Medicaid is equal to or less than a third (no more) of their payer mix.  To balance an SNF payer mix, the facility/organization must undertake a strategy to define service/product mix, add clinical competency, build referral sources for different patients, and improve overall operating efficiencies aligning staffing and service delivery with effective care outcomes.  This strategy is not about optimizing Medicare reimbursement (though it does that), it’s about building a care engine that performs across payer sources.
  2. Develop a Solid Understanding of Medicare Reimbursement: Many providers I talk with have only a rudimentary understanding of the current PPS system and most of what they have learned comes from the wrong sources; sources that are partial to a particular bent or issue.  Even with the cuts, providers who understand how to take advantage of caring for a more clinically complex patient profile and get reimbursed for their work, aren’t horribly at-risk for major revenue swings.  They have developed internal core competency in coding, in managing the length of stay, and in capturing the true care needs of the patient.  They bring in the necessary training resources and have staff resources that help maximize their productivity and care delivery.  They know how the system works, don’t try to deny the changes, and develop the systems and the people necessary to be current, use the MDS effectively and capture the dollars in the form of reimbursement, correctly.
  3. Analyze the Impact: If reimbursement cuts are forthcoming, and they are, I hear too many vague generalities about how much and “the sky is falling” rhetoric.  Frankly, most providers I talk with haven’t modeled the financial impact as of yet and as the old adage goes, “you can’t begin to fix what you don’t know is broken”.  In some cases, simple tweaks to operations can improve the actual impact.  In other cases, changes to internal delivery systems, coding, etc. can improve the revenue impact (positively).  Suffice to say, knowing what the impact is today can help a provider hone in on what options are available to mitigate the “pending” damage.
  4. Understand the Totality of What is Changing: It is easy to reflect solely on one element of the Medicare equation that is changing in October; revenue or reimbursement.  The problem most providers also face is that certain systemic changes are occurring such as the allocation of treatment time for group therapy, the requirements for End of Therapy OMRAs and the Assessment Reference Date windows.  As October 1 is 30 days away, providers should have already gotten up-to-speed on these changes and begun implementing policy, procedure and systemic internal changes to address the new requirements.  As change requires education, adjustment, audits and then additional education and/or adjustments, starting too late equates to getting claims wrong.  Ask any provider that has gone through a probe or had claims rejected what that revenue impact is; far worse and impactful than a rate cut.
  5. Focus on Therapy: When I encounter SNFs with major Medicare issues, I see three common problematic themes.  First, for facilities that use outside therapy or contract therapy providers, the facility has “washed” their hands of the Medicare therapy issues.  This is a problem on so many levels.  As I have written before, the therapy company is not the  provider, the SNF is.  Under Part A, the SNF is always the provider and as a result, any problems caused by incorrect billing, improper care, improper coding, etc., perpetuated by a contractor is a problem for the Part A provider.  Basically, the liability cannot be ceded to a contractor.  The SNF must know as much about the provision of therapy under Part A as it does the provision of nursing care or any other discipline.  And most important, while therapy companies claim that they develop partnerships with SNFs, the reality is far from a true partnership.  For a partnership to actually occur, the risks and benefits must be equally shared.  Such is not the case in these relationships.  In this relationship,  each (the SNF and the therapy company) have different business and profit motivations such that at times, the interests may compete in ways deleterious to the SNF, left unabated.  Second, if a provider has its own program and staff, the therapy component is rarely fully integrated with all other care disciplines.  In short, all too often therapy is looked at as purely a profit center rather than an integral part of the clinical care delivery an SNF provides.  Therapy involvement, assessment, and integration into the total care plan of all residents/patients prevents problems in terms of care outcomes, helps capture additional revenue via reimbursement, and improves the overall clinical competency of the care team.  Third, all too many administrators have no idea the role therapy provides in their Medicare or general care delivery.  Suffice to say that if an Administrator wants higher per diems, better care outcomes, better compliance results, its time to learn the overall MDS and understand where therapy integrates in Medicare, how this system works (not just the revenue generated) and how therapy can improve the overall operating performance of an SNF (revenue and expense).

Before I conclude, I have three remaining suggestions to issues that I commonly address in the SNF world.  These suggestions are pertinent at all times for an SNF that is seeking to improve its operations, regardless of the reimbursement issues that are “at-play”.

  1. Develop Centers of Excellence: Trying to be all things to all patient types, etc. in an industry segment as wide as the SNF arena is a recipe for failure or at best, average to below average results (operating and other).  Not every SNF will excel in a post-acute, transitional care environment.  Markets are different, referral source needs are different, etc.  By developing an acute awareness of market needs, referral source needs, etc., an SNF can focus-in and develop, centers or “lines’ of care excellence.  Three things happen or should with this approach.  First, occupancy issues are less prevalent.  The SNF knows its flow of patients and can set aside the right amount of capacity for the length of stay and volume requirements dictated by a group of patients.  Second, efficiency in terms of staffing, supplies, programs, care plans, etc. can truly be developed.  Third, building a true revenue model is far easier.  A revenue model is driven by an expectation of certain occupancy, revenue streams from each patient type, and pricing/reimbursement models that accentuate revenue.  Expenses can then be matched accordingly.
  2. Suppress and Evaporate “Stupid Money”: Stupid money is dollars that are spent on things that can be controlled by an SNF or any business.  It saps resources and margin.  Common locations of stupid money are Worker’s Comp, agency use, over-time, supply waste, improper coding, fines, forfeitures, billing errors, staff turnover, and compliance/legal issues.  Minimizing the dollar flow and/or eliminating it for “stupid money” immediately improves the bottom-line.  I don’t know how many dollars over the years I have seen across all of the facilities I have been in that get wasted repeatedly, on stupid money issues.
  3. Develop Care Systems/Algorithms: SNFs that really excel financially and from a care/outcome perspective, have gotten very good at developing common protocols and algorithms for common admission diagnoses.  They have become efficient and effective at delivering high quality, lower cost care by reducing the variances and treatment fluctuations that arise when care is unplanned or uncoordinated.  They have developed formularies, treatment protocols, and outcome-based algorithms for the most common types of admissions and issues faced by patients within their settings.  Some have gone as far as to coordinate this work within their upstream and downstream referral networks (home health on discharge, hospital on admission/re-admission).  These SNFs make solid, repeat margins, have balanced payer mixes and are positioned appropriately for the next foray into healthcare reform; namely bundled payments, competitive bidding, ACOs and quality-based incentive payments.

September 1, 2011 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , | 3 Comments

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

OK, the title is a bit wordy and trust me, I could have included more “posts” but I think I got the point across.  First, I’ll admit to having a crystal ball however, the picture I see is a bit like the first (and only) television set I remember having as a kid: Not in color, lines running vertically and horizontally, snow, and an antenna that required frequent manipulation and tin foil to get any kind of reception.  And of course, there were only three channels available.  The same today is true about my crystal ball on health policy and what to expect in the post-acute industry. 

My crystal ball’s three channels are Medicare, Medicaid and the Economy.  Reviewing each, here’s the programming I see for the fall lineup or if you prefer, the period post October 1 (fiscal year 2012) through early next year.

The Economy: The debt ceiling discussion and the actions taken by S&P and the Fed in the last couple of weeks are a reminder via a cold slap, of how mired in dysfunction Washington remains and how moribund the economy truly is.  While technically not in a recession, the economy is not really growing either; a growth rate of less than 2% in GDP is like treading water.  For unemployment to change, consumers to return and capital to re-enter the business investment side, GDP growth needs to be above 2% and ideally north of 4% for a sustained period.  Unfortunately, in order for this to occur, fiscal policy in Washington needs to develop some semblance of coherency and consistency.

What I know from my economics training and background and my last twenty-five years plus in the healthcare industry boils down to some fairly simple concepts.  These concepts are I believe, a solid framework for providers to use in terms of planning for the near future and even somewhat beyond.

  • The U.S. debt level is fueled to a great degree by entitlement spending, less so by discretionary spending.  If the prevailing wind is about debt reduction and balance in the federal budget (or getting closer to balance), two things must occur.  First, spending constraint where spending primarily occurs, namely entitlements.  Second, revenue increases in some fashion, namely taxes.  The devil as we know it today, is how and where on both sides of the ledger (revenue and expenses).  Spending reductions alone are insufficient, unless dramatic, to significantly lower the debt level or balance the budget; particularly in a period of near zero economic growth.  Dramatic spending reductions are clearly unwise and potentially, deleterious to an industry sector (healthcare) that continues to provide steady employment.  Similarly, for spending reductions on entitlements to truly have a positive impact and make sense, program reform must be at the forefront of “why” less spending is needed or warranted.  Program reform, ala the health care reform bill which didn’t really reform Medicare or Medicaid but added new layers of entitlements, is far from the answer.  For providers, there is no immediate or for that matter, longer-range future that doesn’t entail less spending on Medicare or Medicaid.  As the only “trick” in Washington’s bag or the bags contained in the statehouses is rate cuts, anticipate and plan for the same.
  • A lackluster, no growth economy with high unemployment levels fuels provider competition wars over paying patients.  As fewer paying patients are available and/or fewer “good” paying patients are available, providers will compete for the same market share within and across the industry levels.  What this means is that providers will seek to acquire market share within industry segments (home health, hospice, SNF, etc.) and across industry levels (hospitals seeking to maintain patient days versus referring to post-acute providers).  The end result is more or similar levels of M&A activity, if capital remains available, and thus, consolidation that is driven primarily by market share motives.
  • According to a recent healthcare expenditure outlook released by CMS, healthcare spending is projected to reach $4.6 trillion by the end of the decade, representing nearly 20% of GDP.  The primary contributor to this projected level of growth is the Affordable Care Act, principally due to the expansion of Medicaid and the requirements for private insurance coverage (Medicaid growth of 20.3%).  While CMS notes that Medicare spending may slow somewhat, this assumption is predicated upon the continuation of spending cuts and a 29.4% reduction in physician payment rates required under the current Sustainable Growth Rate (SGR) formula.  Assuming, as has historically occurred, Congress evacuates the cuts called for under the SGR and as has been discussed, moves to a formula tying payment to the Medicare Economic Index, Medicare spending accelerates to a 6.6% growth rate (1.7% projected for 2012 with continuation of the SGR).  Summarized, health spending is the two ton gorilla in the room and it will continue to have a heavy, significant influence on economic policy discussions at the federal level and beyond.  Though I don’t agree with the recent rating action taken by S&P, it is impossible to ignore the consensus opinions of allof the rating agencies: Entitlement spending, namely driven by healthcare spending, is unsustainable at its present level with the present level of income support (taxation) and as long as the status quo remains fundamentally unchanged, the U.S. economy is not fundamentally stable.
  • Current economic realities and the rating agencies actions and statements foreshadow a stormy, near term future for the healthcare industry.  As is always the case, there will be winners and losers or more on-point, those more directly impacted and those less so. On the post-acute side, excluding reimbursement impacts, I’ve summarized my views on what I see in terms of economic impacts for the near term (below).
    • The credit rating side will remain pessimistic for most of the industry “brick and mortar” providers.  Moody’s, Fitch, will continue to have negative outlooks on CCRCs, SNFs, etc. primarily due to the economic realities of the housing market, investment markets, and reimbursement outlook.  Within this group of brick and mortar providers, Assisted Living Facilities will fair the best as they are the least impacted by the housing market and for all intents and purposes, minimally impacted by reimbursement issues (save the providers that choose to play in the HCBS/Medicaid-waiver arena).
    • The publicly traded companies (primarily SNFs but home health and LTACHs as well) will continue to see stock price suppression due to the unfavorable outlooks and credit downgrades provided by the rating agencies.  This will occur regardless of the favorable earnings posted by some of the companies.  Reimbursement trends (down) are the primary driver combined with the hard reality that Medicaid is in serious financial trouble, even more so going forward as enrollment jumps due to continued healthcare reform phase-in schedules.
    • Capital market access will continue to be tight to inaccessible for some providers.  Reimbursement, negative rating agency outlooks, lending/banking reform, above historic levels of failures/bankruptcies, etc. all continue and will remain as an overhang to the lending environment.  Problems with potential continued stable to increasing funding levels at Fannie, HUD, etc. create additional credit negativity and tighter funding flow.  Capital access, when available, will continue to have a credit premium attached, in-spite of low base rates.  I expect to see continued development and demand for private equity participation.
    • Given the above, financially driven mergers and acquisitions will remain somewhat higher as organizations seek to use the M&A arena to create financially stable partnerships and bigger or larger platforms from which to derive credit/capital access.

Medicare: The problems with Medicare are too deep and lengthy to rehash here and thus, I’ll move to brevity.  Medicare is, as I have written before, horribly inefficient, bureaucratic, and inadequately funded to remain or be, viable.  As a result, only two real scenarios exist today: Cut outlays or increase revenues.  Arguably, a third that involves portions of each scenario is the most probable solution.  Real reform is light-years away as the current and forseeable political future foretells no scenario that includes a Ryanesque option (Paul Ryan plan from the Republican Congressional Budget and/or Roadmap for America).  Viewed in this light, the Medicare outlook for post-acute providers is as follows.

  • For SNFs and Home Health Agencies, reimbursement levels are on the decline.  The OIG for CMS and MedPac have each weighed-in that providers are being overpaid.  Profit margins as a result of Medicare payments or attributable to Medicare, are deemed too high (mid to upper teens) and as such, the prevailing wind is payment or outlay reductions.  The bright-side if such exists, and as I have written before, this “cutting” trend will impact some providers far more than others.  The providers that have relied heavily and primarily on certain patient types for reimbursement gains will be more negatively impacted than providers with a more “balanced” book – a more diverse clinical case mix.  The movement is toward a more balanced level and thus lower level, of reimbursement theoretically closer aligned with the actual clinical care needs of patients.  Providers with more diverse revenue streams and more overall case-mix balance will not be as adversely impacted although, the Medicare revenue stream will be lower or less profitable.
  • Hospice has remained relatively unharmed, principally due to its lower overall outlay from the program.  It remains a less-costly level of care than other institutional alternatives.  A note of caution here is important.  While rates have not been cut, program reform is occurring on the fringes and I suspect a wholesale re-design of the Medicare Hospice benefit is forthcoming.  In such a fashion, payment reform rather than rate reform or reduction will occur.  The obvious trend is to restructure payments away from a reward for lengthier stays and to require more precise determinations of terminality, tied to a tighter or imminent expectation of death.  OIG and MedPac have issued a number of papers and memos regarding the relationships between Hospice and SNFs that correlate to longer stays for certain diagnoses.  Summarized, payment reductions via rate are less of an issue but utilization reform is forthcoming via additional regulation designed to reduce overall payments to Hospices or as CMS would say, to more closely align payments to the real necessity of care for qualified, terminally ill patients.  Without question, the largest impact (negative) going forward will be on hospices that have sizable revenue flows tied to nursing home patients.
  • LTACHs are in a similar reimbursement boat as hospice; small overall outlay within the program and for the past few years, minimal expenditure growth.  The industry is from a cost perspective, fundamentally flat.  What will be interesting to watch is whether under certain aspects of healthcare reform, this niche’ takes on a growth spurt.  Bundled payments, ACOs (Accountable Care Organizations), and shifts in SNF reimbursement away from higher acuity, rehab patients may lead toward more utilization of the LTACH product.  This being said, the prevailing Medicare reimbursement profile is fundamentally flat.  Given a bit more creativity on the part of the LTACH provider community, this segment may be poised for some growth, although not directly via increasing payments.
  • The most uncertainty lies on the Part B provider side, particularly providers that are reimbursement “connected” to the Physician Fee Schedule (therapy for example).  As of today, the required change to the fee schedule as a result of the Sustainable Growth Rate formula is a fee cut of 29.4%.  It is quite possible, due to the current negative or flat growth trajectory of the economy, and sans any change in the law, for fees to be cut again in 2013, barring Congressional action.  Most acutely impacted in this scenario are physicians and predominantly, primary care physicians.  I have yet to see a Congress that fails to intercede and repair cuts this draconian but the political times and the budget deficit debates are markedly different than during any prior period.  Critical to whether this cut or some level less than this is implemented is the issue of access, already a hot topic for physicians.  Physicians, particularly primary care specialists, are already in short-supply nationally, woefully short in certain markets.  If cuts of this magnitude or perhaps any magnitude roll forward, I suspect many physicians will curtail or close their practice to new Medicare patients.  On the other side represented by non-physician providers, Part B cuts of this magnitude will no doubt limit service and access.  Fixing the formula and the law has been difficult for Congress as the dollar implications are substantial.  I foresee another round of patches, etc., occurring close to the “cut” date, especially since 2012 is an election year.

 Medicaid: For as many reasons as Medicare is a mess, Medicaid is as well, though magnified by a factor of two or more.  Medicaid’s biggest problem now is rapid growing enrollment, primarily due to high unemployment and upcoming federal eligibility changes mandated via the Accountable Care Act (healthcare reform). Given Medicaid’s current funding structure, this issue poses huge problems in flat to negative growth economies.  States simply due not have the revenue to create a higher matching threshold or level, necessary to achieve more federal dollars.  In July, the enhanced federal match provided via the Recovery Act (stimulus) sunsetted leaving states with huge structural deficits and the prospect of deficit growth due to increasing enrollment.  In virtually every state, rate cuts have been discussed and in half-again as many, implemented.  States continue to move to the federal government seeking relief from required or imputed service provision requirements and/or relief from eligibility requirements (waivers).  The inherent difficulty with balancing Medicaid funding is that the same is directly tied to stable to growing state revenues and a clear picture of population risk or need.  Changing (increasing) populations often present adverse-risk scenarios, creating higher than normative utilization.  For obvious reasons, lower than market reimbursement levels, access is a big issue.  Not all providers willingly and openly desire Medicaid patients and those that do are not on the increase. Without additional funding assistance at a level beyond what is called for in the Accountable Care Act, regulatory relief and an improving economy, the reimbursement prospects under Medicaid are all bleak.

  • In the post-acute environment, the biggest impact of this continued ugly Medicaid scenario will fall directly on SNFs.  Matching prospective or real Medicaid cuts with Medicare cuts forthcoming is a true “negative” Perfect Storm.  For most SNFs, Medicaid is the largest payer source and until recent, Medicare was used as a make-up funding source for Medicaid reimbursement shortfalls.  Adding fuel to an already smoldering fire, the suppressed earnings available to seniors, no growth in Social Security payments, and a stock market that presently produces only a flat return trajectory limits the pool of private paying and privately insured patients.  In short, there is no additional room on the revenue side to make-up an SNFs Medicaid losses.  For SNFs, only the few that have limited leverage, high occupancy, an extremely balanced payer mix, and stable staffing will weather the Medicaid near term future; a future of no rate increases or likely cuts.
  • While not a huge segment of the post-acute environment, HCBs providers will feel the Medicaid pinch as well.  As a result of needing to reign in Medicaid spending, states are rapidly curtailing their funding and payment levels for HCBs programs.  While most states still claim that HCBs expansion would help soften their Medicaid deficit, states that bit a big bullet in this arena early on (California for one), now realize that waiver programs produce massive new levels of beneficiaries who want and need access to community support services.  SNF access was already somewhat limited as the industry has truly shrunk but the demand for services in this growing eligibility pool has expanded.  Funding these services is becoming a real problem for states and as such, support payments will remain flat, decline and program growth will be capped.
  • Home Health will also feel a bite from declining Medicaid funding although its Medicaid utilization levels are modest at best.  For Home Health, Medicare is the big dog and Medicaid a minor element.  Staffing costs are on the rise for Home Health as the competition for home health aides in many markets is brutal or getting rough.  Competition, even in a high unemployment environment, for certain categories of employees, raises wages and benefit costs.  Staffing is the largest expense for a home health agency and as such, a scenario with rising employment costs and flat to declining reimbursement negatively impacts margins.  I don’t see this scenario changing any time soon.

Concluding, this may be one of my most depressing posts, if for no other reason than the current external view is dreary and nothing foreshadows improving weather.  For brick and mortar providers, capital access is critical, especially for SNFs who have as a profile, some of the oldest physical plants.  SNFs are capital-intensive operations and without an ability to fluidly and reasonably, access modest cost funds, deferred maintenance (already high) will increase.  With so much revenue tied to reimbursement and a reimbursement outlook that is negative, it is unlikely that capital will flood back to the post-acute industry.  Critically important to the viability of this sector is an improving economy combined with regulatory reform that, if reimbursement remains flat, allows providers to become truly more efficient. In short, increased program revenues under Medicare and Medicaid due to economic growth, will ease a lot of the immediate crunch and perhaps, buy sufficient time for absolutely critical, health policy reform.

August 26, 2011 Posted by | Assisted Living, Home Health, Hospice, Policy and Politics - Federal, Senior Housing, Skilled Nursing | , , , , , , , , , , , , , , , , , , , , | 4 Comments

CMS Announces Medicare SNF Cuts: The Implication

On Friday, CMS released its Final Rule regarding FY 2012 SNF PPS reimbursement.  The Final Rule implements a reduction or “cut” in SNF PPS payments equal to 11.1% or $3.87 billion.  The 11.1% reduction is based on 2011 rates and spending/outlays.  In their proposed final rule published in May, CMS alluded to the real possibility that it would seek to reduce SNF payments via some element of program/technical correction as well as rate reductions.  Their reasoning stemmed from claim and resulting outlay experience that was significantly greater in dollar amounts than originally forecasted when MDS 3.0 and RUGs IV was devised and implemented.  Summarized, CMS had intended the conversion from RUGs III to RUGs IV to be expenditure neutral for Medicare.  Per recent figures and analysis from the OIG, expenditures under RUGs IV are running 16% higher than the “neutral” target.  For more information, see my recent post on this same topic at .

Given that the text of the Final Rule won’t be published until August 8 and as of Friday, CMS was still working on recalibrating the CMIs under RUGs IV, it isn’t possible to provide direct analysis of the actual rate scenario for FY 2012.  What I do know however, is that the “bark” in this case is definitely worse than the “bite”.  While overall spending is set for reduction, this doesn’t necessarily correlate directly to rate.  Briefly, here’s why:

  • CMS has factored into their projections of lower spending levels, a series of technical corrections such as changes in how minutes are allocated among participants in group therapy.  This change closes a loophole or as I have said, an area of oversight in the transition from III to IV.  Going forward, group therapy minutes must be divided in equal increments among all participants (e.g., one hour of therapy provided to a group of four equals four 15 minute therapy sessions; not an hour allocated to each participant as the system presently allows).  Additionally, CMS is tightening the Change of Therapy assessment requirements to more specifically, capture any changes in a patient’s therapy needs that would preclude re-classification to a different (presumably lower) RUG category.  This change is separate from any Change of Condition assessment.
  • Recalibration of RUGs categories via adjustment to the CMIs will occur based-off of 2011 utilization and projections.  The net result is change in category payments that will remain higher than experienced under RUGs III levels.  In short, the net “cut” will not be 11% across the board.  SNFs need to be astute as to how the CMIs work and translate into payments under each RUG.  Recalibration is designed to restore parity to the overall expenditure profile.  In order for CMS to do this, it will overlay utilization trends and patterns across the CMI continuum and adjust rates within the scope of its technical corrections, to forecast an overall program expenditure target that agrees (theoretically) with its original intentions in converting to RUGs IV.  In short, this doesn’t mean an 11% direct rate reduction.  If CMS were to impose and 11% cut to each category, overall outlays would reduce by more than 30% – that is not the target.
  • Based on what I see from most providers with a fairly balanced Medicare book of business (mix of clinical/nursing and rehab cases on par with 40% clinical, 60% therapy), the net to their per diem will be flat to a reduction of 2 to 5%.  This means that a facility with an average per diem today of $450 per day will see a 2012 per diem between $425 and $450 per day.  Providers that took advantage of the group therapy option to escalate or maintain their high rehab payments under IV will likely see a greater revenue shock.  In virtually all cases, providers that have a fairly balanced Medicare book should see a 2012 Medicare per diem that falls 6% to 8% higher than their FY 2010 per diem.

I will have a better idea of the actual impact when I see the final CMIs and resulting RUGs IV rates.  In the meantime and until the Final Rule and rates are implemented on 10/1 of this year, I don’t see much in the way of political intercession to change (positively) the rate and spending scenario.  Spending at the Federal level is a toxic subject and even with a potential debt ceiling deal looming, the microscope will remain directly on all areas of federal spending.  Entitlement spending (Medicare, Medicaid, and Social Security) is rising substantially faster than discretionary or military spending and logically, presents a big target for deficit hawks.  Logically, it will be difficult to gain the support of any Congressional industry sympathisers to push more money back into a system that most acknowledge, was unintentionally overpaying for care.  Consider FY 2011 a bit of a windfall and the changes forthcoming, pretty darn modest; all things being equal.

July 31, 2011 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , | 2 Comments

Medicare SNF Cuts: Fact, Fiction, Probability

In early May, CMS released its proposed rule for FY 2012 concerning Medicare PPS reimbursement for SNFs.  As most followers of the industry from investors, to operators to developers know by now, CMS dropped a “bomb” to the industry indicating bluntly, a warning of a parity adjustment (reimbursement or payment reduction) of 11.3% or $3.94 billion.  In typical convoluted CMS fashion, the logic behind this foreboding news is scattered; an analysis of the agency’s inability to adequately anticipate provider behavior, utilization patterns, and to appropriately create a reimbursement mechanism that ties the cost of care required by current SNF patients with the costs and delivery systems necessary to provide the care.

Initially, the interpretation from many inside the industry was that CMS was overreacting, using only one-quarter’s worth of claims data to substantiate a “sky is falling” conclusion.  More recently, six month’s worth of claims data became available and analysis proved the trend correct and even a shade worse or better stated, more prevalent than originally assumed.  In short, the implementation of MDS 3.0 and RUGs IV missed the budget mark (budget or expenditure neutral) by $2.1 billion or 16%.

In the last week to ten days, the OIG (Office of Inspector General) for CMS stepped into the debate, stating its opinion that the overpayments must be stopped immediately.  Interpreting the OIG’s qualification of “immediately”, the timeframe at issue is next fiscal year.  In essence, the core of the problem continues to be the structural flaws within the RUGs system predominantly, that disproportionately pays more for rehabilitation therapy than for other primary care modalities.  A major intent of CMS during the switch from RUGs III to IV was a reallocation of the incentives (higher payments) from therapy to other resident care requirements.  Suffice to state, the methodology failed.  Below is a simple illustration of how on a pure rate basis, the RUGs III to IV therapy categories compare.

Table 1: Average Amount That Medicare Pays SNFs per Diem for Each Level of Therapy, FYs 2010 and 2011
Level of Therapy Number of Therapy Minutes Provided During Assessment Period Average per Diem Payment FY 2010 Average per Diem Payment FY 2011 Percentage Increase From FY 2010 toFY 2011
Low 45 to 149 $288 $430 49%
Medium 150 to 324 $369 $488 32%
High 325 to 499 $364 $532 46%
Very high 500 to 719 $418 $594 42%
Ultra high 720 or more $528 $699 32%
Source: OIG analysis of unadjusted per diem urban rates for FYs 2010 and 2011. See 74 Fed. Reg. 40288, 40298–40299 (Aug. 11, 2009) and 75 Fed. Reg. 42886, 42894–42895 (Jul. 22, 2010).

Reviewed on-the-face, it is logical to see how CMS could miss the targeted expenditure mark by the margin it has, even in-spite of the “methodology” changes that occurred in the conversion from 2.0 to 3.0 and RUGs III to IV.  Providers, being logical creatures of certain habits, moved accordingly to grab the payments at the highest attainable levels or in short, fulfilled the economic axiom of, “what gets rewarded (paid for) gets done”.  The expectation on the part of CMS that utilization trends would fall-off from the higher paying therapy categories, necessitating a higher re-balanced rate to negate a revenue “shock” to the SNFs was poorly thought through.

Quickly reviewing “what” occurred to produce such a variance from assumption to actual is easy. Getting to the core takes a bit more thought and digging.  In summary fashion; CMS assumed that by restructuring how therapy minutes were calculated for concurrent therapy (therapy provided to two individuals) from a two-equals one basis to an equal half, would reduce the ability of providers to meet the higher per minute category qualifications, necessitating more one to one therapy sessions (the previous concurrent therapy rules allowed providers to have two people in the same therapy session with the total session time allocated to both participants equally).  Similarly, CMS assumed that ending the look-back provision to establish reference dates and care requirements would more accurately stage the resident’s acuity and care needs to the point of admission (or proximally forward from admission) to the SNF.  Additional tightening of the extensive services qualifier rules would also, as assumed, reduce higher RUG scores and thus, payments.  Of these changes and assumptions, only the look-back period changes combined with the changes in qualification for extensive services provided any material classification changes (lower payments) though such changes were far less in total dollars than the dollar increase CMS imputed on the corresponding RUGs III to RUGs IV therapy payments. Providers however, merely switched to the remaining “open ground”, providing more therapy on an individual basis and most noticeably, on a group basis.  On a group basis, minutes are counted collectively, not split in equal parts among the participants – a provision CMS did not change from RUGs III to RUGs IV.  While the modifications made to the extensive services qualifier and the look-back period provision did impact providers, CMS completely misunderstood the application and prevalence within the provider community of these two provisions under RUGs III and as played-out, found that providers could still code residents into higher payment groups/categories in spite of the changes.

To understand what might happen next, one needs to look at how this mess occurred.  As I’ve typically found, the answer lies in both camps; providers and CMS.  In my recent work, its clear that many providers don’t understand the transition from RUGs III to RUGs IV and as I have looked at “oodles” of Medicare claims, I dare say a large number are still frought with “up-coding” and questionable therapy-minute counting practices.  This is not to say that the whole of the industry has behaved in this fashion but arguably, and CMS understands this as do both major trade associations, providers have not totally changed their business models to reflect the changes in payment systems.  One needs only to look at how claims trended under RUGs III and how they now are trending under RUGs IV.  The trend is too consistent to support an assumption of SNFs; a) staffing substantially more therapy personnel to capture the minute requirements via individual treatment or, b) SNFs moved a sizable share of their Medicare case-load into group therapy.  The latter, while I’m certain it has occurred on a broad basis as the OIG report suggests, is problematic from a care delivery perspective for a large range of diagnoses that truly require individual therapy sessions.

CMS continues to remain fundamentally inept at developing reimbursement systems that provide adequate payment for the care and services required by SNF residents.  I have yet to see, across my 25 years in the industry, any period or any system devised by CMS that didn’t under-support or over-support, one type or category of patient versus others.  It is also illogical that CMS cannot develop the audit tools and claims management infrastructure that both educates providers and pre-emptively kicks-back claims clearly evidencing up-coding.  I am consistently amazed at “what” gets paid and for how long.  In short, CMS is apparently willing to consistently miss the mark, make wholesale adjustments and reallocation of dollars, only to over-correct past inconsistencies while producing new ones.  Such will not doubt occur with this latest blunder.

While I won’t claim to have a crystal ball in terms of forecasting “what happens” next, experience and ongoing dialogue with individuals on Capital Hill and within CMS gives me some decent insights.  With debt ceiling/deficit reduction talks mired in politics, it is unlikely any substantial cuts to entitlement spending are forthcoming.  Senate Democrats and the President are sufficiently dug-in on cutting Medicare spending by any measurable amount thus the target on this issue (Medicare SNF spending) has moved away from the current political fracas.  The remaining Washington impetus for cutting SNF reimbursement  resides within CMS.  In spite of the OIG’s report,  enacting cuts of the magnitude suggested is a political issue.  CMS can propose all the spending cuts its desires but Congress has the final say.  Rarely if ever, although given today’s climate an exception may be possible, has Congress sustained reimbursement cuts of this magnitude.  Synthesized, my view of what happens next, based on what I know to date, is:

  • Providers and their trade association are willing to capitulate to a modest adjustment in the therapy categories.  This symbolic give-back will play well politically.  Net of a market-basket/inflation update, cuts of 2% to 4% are possible in a “cut scenario”.
  • In a scenario that involves no real cuts, rates will be flat.  CMS will institute additional refinements and perhaps, even re-calibrate or fine tune payments by RUGs category, moving dollars within the RUGs system, without reducing payments.  In this scenario, the attempt on the part of CMS to is to “patch the potholes” and let the system itself reduce payments via tightening the requirements and re-allocating dollars within the RUGs categories.
  • A most probable scenario involves, as is typical, a bit of both.  CMS will cut the therapy rates using some language about re-basing.  At the same time, a series of corrections will be made regarding the counting of minutes for group therapy, assessment windows, etc.  Overall, payments to SNFs across all RUGs IV categories will be flat or targeted as a reduction equaling 2-4%.  The pull-back on the therapy RUGs rates could be as steep as 8% to 10%.  Even at this level, the remaining rate will be higher than the former RUG III rate.

July 24, 2011 Posted by | Policy and Politics - Federal, Skilled Nursing | , , , , , , , , , , , , | Leave a comment