HFMA VIEWS

David A. Williams CPA, FHFMA
Partner, HORNE LLP, Jackson, Miss.

The status of today’s American healthcare system can best be described as dysfunctional. The healthcare payment and pricing systems are based on illogical systems that are grossly unfair, creating problems for all Americans. The budgetary constraints of federal and state governments have caused hospitals and primary healthcare delivery systems to experience payment shortfalls.  An emerging payment shortfall is being created by the growing number of uninsured Americans who do not have the ability to pay for health care (charity patients) or who are unwilling to pay for health care (bad debt patients). Although health systems continue to institute cost-control measures, they cannot make up the payment shortfalls. As such, the costs of shortfalls are generally passed through to commercial payers and consumers. In some instances more than one-third of the costs are shifted to commercial payers and consumers who pay for their services at healthcare providers. In an election year and with a new president in 2009, it will be difficult to determine whether or not this issue will be addressed, but let’s take a look at four drivers that will impact our healthcare system over the next three to five years: patient volumes, costs of care, pricing and payments, and cost of capital.

Patient volumes: Additional services will be needed by the aging baby-boom generation. This growing demand will overheat the current delivery system and require that some new and innovative approaches be developed. Consumers will see non-traditional settings for health care such as a clinic located at a local super center. Consolidation will occur as many small rural hospitals will become triage and treatment type centers supporting the larger regional centers. The safety net hospitals will experience additional financial stress with increased patient loads coming through the emergency rooms.

Costs of care: The most significant components of healthcare costs are labor and supplies. Five issues that will impact future costs include:

1. Accelerating regulatory requirements – the costs of meeting accreditation and quality measures
2. Labor costs – driven by nursing and other professional care worker shortages in addition to escalation of retirement and other benefits
3. Increased cost of supplies – physician preference items, new treatment items and impact of Medicare drug program
4. Ineffective tools impacting productivity
5. Slow development and resistance to pay for performance initiatives

Pricing and payments: It is important to recognize the difference between pricing and payments. Many consumers focus on the prices or charges that health care organizations bill for their services, but fail to recognize that on average 50 to 60 percent of the charge is written off as an adjustment. The result is that in many instances the payment rate is less than half of what was expected or billed. Stagnant Medicare payment rates, with payment increases barely covering healthcare inflation, will cause further financial stress in just about every health care organization. In addition, the Mississippi state health care program (MS Medicaid) is 100 percent at risk at the current time due to a looming deficit of approximately $150 million. This is due in part to the erosion of federal matching funds, where the Centers for Medicare and Medicaid Services mandated changes to restrict the funding mechanisms such as the Upper Payment Limit and Disproportionate Share Hospital programs. Finally, as health care consumers become savvier with their spending there is an indication of a movement towards package pricing. The result of the package pricing may be good for the consumer in the short run, but look for other areas to see corresponding increases as a result.

Costs of capital: Continued aging of facilities, rapid development of new technology, increased consumerism, and a national focus on patient safety are the primary drivers of the capital spending boom today. The following factors will influence health systems access to capital over the next three to five years:

• Cost of capital - operating margin slippage and quality indicators for debt issues will drive up the cost of borrowing
• The increasing threat to health care providers' tax-exempt status resulting from scrutiny over charity care and community benefit
• Increased private equity investments in health care will force up the costs of capital overall as investors seek to participate in profitable service lines
• Surplus in bed capacity in some markets will require conversion of excess bed space to areas of other patient care activities. This renovation cost will be in addition to the routine capital improvements health care organizations are required to make to keep pace with rapid technological and medical practice changes.

The future of the American healthcare system can be impacted most by the consumers. Today, we often take for granted the associated cost of the services we receive. In many organizations, the costs are borne by the employer, and those unable to afford health insurance either qualifies for government or charity programs while a segment of users simply won’t pay for care. We must ask ourselves is health care a right or privilege? Secondly, if it is a right, how much are you willing to pay for the care of others? Once we as consumers resolve those questions, we might be able to positively influence the future of health care.

Reprinted with permission from Mississippi Medical News.

Scott Downing
Group Senior Vice President of Supply Chain Services, VHA Inc.

If Magellan had seen a satellite view of the earth, sailing around the world wouldn’t have been so scary. Okay, it still would have been a challenge, but at least he would have felt confident that he wouldn’t fall off the edge of the earth. With the right approach, you don’t have to fear uncharted territory in the complex world of health care logistics.

We’ve seen what happens when hospitals go it alone. Billions of dollars are wasted each year because hospitals overpay for supplies, haven't standardized expensive physician preference items, allow some supplies to expire, or pay more in rush charges because they don't know what's on their shelves. Industry collaboration is the solution — and it’s going to save everyone a lot of money.

Supply costs are a hospital’s second-largest expense, representing more than 30 percent of its annual budget. However, research shows that wasted supplies cost U.S. hospitals $11 billion annually. How much is yours?

Hospitals’ analytics experts have been trying to chip away at this amount. While individual health care companies each own a piece of the complex supply chain puzzle, no one can solve it alone. It would be foolish to keep your piece to yourself because you would never be able to see the bigger picture.

Key industry players are collaborating to explore cost-saving supply chain solutions and create measurable changes in healthcare logistics. VHA Inc. has joined forces with Wal-Mart, Proctor & Gamble and Blue Cross Blue Shield of Arkansas, Alabama and Illinois to become part of the University of Arkansas’ Center for Innovation in Healthcare Logistics. This partnership’s goal is to increase the health care supply chain's efficiency to ensure that the right materials are in the right hands where and when medical professionals need them.

Scott MacStravic, PhD

Employers in general, at least those who see their workforce as a key asset and source of great actual plus potential value, have come a long way in terms of measuring and managing that value. While most lack a formal system for measuring workforce productivity, they have widespread and strong confidence that improving worker health will improve their productivity as well. It has become common for employers and the suppliers they hire for the purpose to label their efforts “Health & Productivity Management,” which is already the title of a journal devoted to this subject, and an organization devoted to the cause.

But in healthcare, productivity is neither the sole nor main focus of efforts to get more out of employees – performance is far more important. For example, a recent study found that medical residents who are depressed are about six times more likely to make medications errors than those who are not depressed. [“Depression in Young Doctors Tied to Medication Errors” WashingtonPost.com Feb 8, 2008] Making errors or any risk to patient safety is properly a far greater concern than pure output – among physicians, nurses, technicians, and professionals of all kinds in the HCO workforce.

Performance is also meaningful when it is explicitly measured, and publicly reported – by the HCO, itself, or by a wide range of private and public organizations that feel publishing HCO performance information is essential to creating an informed public, and thereby improving healthcare. Generally speaking, it is the workforce that most immediately affects the HCO’s performance, which can make large differences in HCO revenue, and ultimately survival.

The direct effects may include significant amounts of revenue, depending on which and how many pay-for-performance (P4P) programs the HCO participates in, and how generous the payers involved are in their performance-based bonuses. The indirect effects may be even greater, when published performance comparisons affect which HCOs insurers, employers, and consumers choose to do business with. While such comparisons have not had dramatic effects as yet, there are signs they will in future.

In many ways, measuring performance is no more difficult, though not much easier either, than measuring productivity. In HCOs, however, especially those that operate 24/7/365, it may be quite difficult to gauge the performance of individuals. If the only systems in place to do so are annual performance reviews, where individual employees are rated on some standard verbal or numerical scale, these metrics rarely serve well for managing performance or for measuring the financial impact of health & performance management efforts.

On the other hand, measuring workforce performance – at individual or perhaps shift, team, or unit levels, can lead to a number of benefits for the HCO, as well as for its workforce. The most obvious is that if it isn’t measured well, how can it be managed optimally? Next is the vast potential for P4P systems to be used directly with employees, not merely physicians, but all whose performance is worth measuring, can be significantly improved through P4P.

Considering the dramatic improvements in productivity achieved merely through paying directly for performance (a 44% increase for a 10% increase in pay, in one case), the potential for improving performance is likely to be at least as great. Moreover, paying for performance is known to help retain more high-performers, while encouraging low performers to go elsewhere.

When paying for performance can lead to explicit improvements in the very performance dimensions that the HCO received bonus payments for, the financial benefits of P4P or HPM can both be measured fairly easily, once performance is reliably and credibly measured. Once workforce performance is measured, it is both easier to manage, and can easily be linked to one of the most effective ways of improving it, namely paying for it. This synergy is too good to ignore. And HPM will be dramatically facilitated if managers have both performance data and performance pay to work with.

Performance measures may very well include productivity metrics, particularly where these are known to link directly to revenue, costs, or other financial value – e.g. productivity-based payment for employed physicians in hospitals or medical groups. Depending on the job of each person whose performance is measured, output metrics may be an important component, or relatively modest in importance compared to clinical quality, patient safety, customer satisfaction, market share gains, and similar measures that depend more on performance quality.

Each HCO can choose the kinds of performance measures that make the most sense for the organization and personnel involved. But the merits in measuring as well as managing performance, and in measuring and managing employees’ health as one of the mechanisms found useful and a wise investment, are too great to be ignored.