With President Obama's recent healthcare reform many in the healthcare industry are left scrutinizing the specifics and wondering what the legislation will mean for the industry. But what will these details mean for hospital CFOs and how can they best start preparing their organizations for these upcoming changes and potential challenges?
The Long and the Short of It
With the healthcare reform legislation so complex yet still in its infancy, CFOs are just beginning to explore the long- and short-term initiatives and consequences. For the long-term, hospital and health system CFOs will need to prepare an operating environment heavily impacted by payment reform initiatives. Greg Scarbrough, CFO/VP Finance Oconee Memorial Hospital believes this to be the calm before the storm. "Health care reform and models will be affected both in the short term and long term: short term because of the unknowns, and in the long term because of how the short term rulemaking will affect us. Our jobs have just become increasingly more difficult, and to prepare for them in terms of cost and budgets, we're going to have rising costs. Budgets will become much more difficult. Bottom lines will be harder to come by. We are in for challenging times over the next few years as the models evolve," he anticipates.
Year over year increases in both commercial and Medicare payment rates will also become highly regulated and constrained. "Beginning in roughly 2012, and accelerating throughout the decade, CFO's will have to navigate the many carrots and sticks associated with a wide-range of payment reform initiatives. These initiatives will initially relate to very specific clinical metrics and gradually expand to include broader populations of patients and annual payments," says Sg2's VP Strategic Planning Bill Woodson.
With Medicare reimbursement rates being adjusted in terms of reductions to their market basket updates, the main concern for CFOs is how will they be able to make up for Medicare revenue? However, they see both an advantage but also a risk to payment reform aspects related to accountable care organizations, bundled payments and value-based purchasing.
Greg DeBor, client partner of CSC Health Delivery, explains, "The upside they see is that hospitals and health systems that can figure out how to operate in the new payment environment are likely to prosper. The risks they see are that making the transition potentially forces cannibalizing their existing fee-for-service business by foregoing volume and revenue; that there may not be uniformity in such programs across Medicare, Medicare and private payers; and that if the payment reform experiment turns out like the last time they participated in capitation in the '90s, hospitals could lose their shirts."
However, in the short-term, with most commercial payers negotiating much more aggressively on year over year contract increases, most CFOs are going to have to start preparing by running payment scenarios that show the impact of more commercially insured and Medicaid patients, decreased bad debt post 2014 and decreased DSH payments.
Depending on the size of operations, some smaller organizations may need to look to bigger partners due to declining reimbursement, cost efficiencies, inability to obtain capital and lack of other necessary resources. In regards to the immediate impacts of the reform on EMR/EHR and technology, providers will need to get onboard now or be a victim of reimbursement cuts in the future.
Jeffrey Rooney, CFO Saint Agnes Medical Center, suggests that hospitals are going to have to achieve a more improved cost structure model in order to prepare for healthcare reform changes. "You need to know where you're making money and where you're losing money. There are a lot of hospitals out there that don't know that, and it's really up to finance, the CFO and the staff in finance, to put that information out there and provide it to the decision makers. We're talking about a level of accuracy and quality that needs to improve. I think having information such as 'well we're losing money in this area and we're making money in this area,' you have to be fairly confident in that information so that you can say, 'okay, maybe we're not going to have this program anymore'. Those are the kinds of tough decisions that people have avoided for a long time, because they don't want to give up something," he explains.
The Potentials and Answering to Your CEO & the Board
The healthcare reform holds the promise of reducing charity care and the bad debt normally reserved for both considering more Americans will likely have some form of health insurance. Payment reform also holds the promise of larger population-based contracting over time producing a more predictable revenue model. However, the benefits and challenges will vary depending on payer mix and the wealth of the commercial, Medicare and Medicaid payments. There is a potential for standardization of insurance benefits and contracting/reimbursement across the government and private payers once insurance gateways and payment reform pilots begin to take shape.
Scarbrough also sees potential benefits in the quality and focused improvement models of hospitals and organizations. "The benefits come in the quality side, and in the focus and improvements in quality in all organizations that will be the cornerstone of some of these models, and I think that's a pure, solid benefit for our patients, certainly, but our payers as well," he explains.
Over the next few years CFOs will be very busy figuring out changing volumes and payment mechanisms and explaining these health reform variables to their CEOs and hospital boards. According to DeBor, CFOs will have to address questions such as how much Medicaid expansion will actually take place and what will that mean? Will private payers follow the federal and state lead in payment reform and accountable care, etc., or will they take their own approaches and further confuse reimbursement? How will hospitals acquire the tools to operate in and understand how they are performing in the post-reform world? Will they have the right services mix and the right staff? Will they have enough staff to match increased demand? What new partnerships will they need to forge and what will the hospital's role be in a bundled or accountable care model?
"Complicating all this is that hospital CFOs are still trying to figure out what the Medicare and Medicaid incentives introduced for implementing Meaningful Use with electronic health records introduced in ARRA mean to their organizations. Now they'll need to figure out how the health reform changes relate to those, too," he says.
CFOs will most likely need to acquire additional capital or operating funds to set up new management organizations, potentially to obtain practices or new treatment capabilities and acquire more integrated information systems and business intelligence capabilities for managing performance of the new ACO. These are necessary steps in order to project how costs and revenues are changing and analyze their bottom lines.
However, this may lead to M&A discussions and potentially alternative staffing models with capacity and throughput being large considerations. A lean, but fully functioning personnel model will need to be established in order to handle the volume of increased care as well as an aging population.
Cost, Budgets, Bottom Lines: 10 Tips on How to Prepare
Christopher E. Rivard, Partner and Healthcare Group Chair at Moss Adams LLP, offers some tips on how CFOs can best prepare:
- CFOs should be running a model for their facility assuming payment at 100% Medicare rates. This is a "stress" test for the facility that will indicate ability to survive the coming changes and will highlight areas where improvements or cost reductions must be made.
- All entities must commit to a renewed focus on cost containment and efficiency. Decreases in revenue are surely coming and, regardless of quality improvements, will require a reduction in costs. This is important not only to improve the bottom line of the facility but also to make it an attractive partner to other organizations.
- All organizations should begin or expand processes to analyze opportunities for collaboration with other partners and/or integration strategies. The concepts of bundled charges and accountable care are real and planning needs to begin now.
- Providers should consider approaching insurers and proactively renewing contracts in order to prevent tough negotiations in the next year or two. Possibly offer reductions in pricing now to preempt larger cuts in the future. This might also result in more volume directed to the hospital.
- If an entity is tax-exempt, CFOs should begin establishing a methodology to meet the new reporting requirements which begin in 2010 and 2012 including a community health needs assessment. They should also plan for much tougher justification of tax exempt status.
- Be very frugal with spending and make sure the Board is clear regarding any revenue return for new capital investments.
- Management should assume their facility is over-bedded and that services will continue to be pushed to an outpatient setting. Plan for greater acuity in existing beds but possibly lower census.
- Develop a plan to create or maintain an image that draws others to your organization for integration opportunities.
- Plan for short-term increases in your own employee health care costs.
- Put incentives in your own health plan to promote wellness and prevention and plan for more government enforcement and intervention in your facility whether dealing with RACs, MCAID integrity audits, etc.
The worst thing that a CFO can do is to become complacent. Although the timing of many aspects of the reform are still uncertain, CFOs must take leadership among their hospital or organization in order to start quantifying and demonstrating value to purchasers and patients.
Publication Date: Wednesday, August 11, 2010