September 5, 2007
Since creation of the critical access hospital (CAH) designation in 1997, the number of CAHs has grown dramatically, from 884 in March 2004 to 1,284 as of June 2006. Unfortunately, leaders of some CAHs have struggled to successfully complete the transition to this cost-based payment system. Consequently, their organizations' financial performance has suffered. While the CAH designation presents a significant payment opportunity for a small, rural hospital, many CAHs are not taking full advantage of it.
The August 2007 issue of Big Business for Not-So-Big Hospitals newsletter offers 10 steps that CAH leaders should consider to improve operational results and financial margins.
1. Develop a Strategic Planning Process
A CAH's systematic, strategic planning process should focus on the critical elements of community needs and competition, service mix, medical staff, revenues and costs, and recruiting and retention. To navigate through this process, CAH leaders should assemble a strategic planning team to review and analyze financial, demographic, utilization, statistical, Medicare cost report, and other pertinent data. Once the strategies and the goals have been agreed upon and documented in a written, strategic plan, CAH executives should routinely monitor the plan to determine if the goals have been met.
2. Develop a Bed-Management Strategy
To improve financial performance, CAHs need to use acute care beds effectively. Strategies include recruiting new physicians, building replacement facilities, implementing aggressive marketing plans, and effectively using patient beds. CAH leaders should first evaluate historical trends and objectively determine whether the patients in their community need greater coverage and services. If so, the next step is to determine how to provide patients with the services to which they are entitled.
One of the top priorities: evaluate the hospital's swing-bed program, which is an effective strategy that can boost a CAH's occupancy and revenues. CAHs are paid for swing beds at 101 percent of cost. Unfortunately, some CAHs limit admissions to swing-bed programs, or limit the average length of stay of patients who qualify for swing-bed coverage. As a result, these hospitals lose valuable payments. The swing-bed program provides CAHs with a distinct advantage. The CAH swing-bed rate is the same rate that CAHs are paid for acute care beds, and is considerably more than the amount paid to hospitals in the prospective payment system.
3. Design a Revenue Cycle Management Program
An effective revenue cycle management program starts with reviewing and negotiating third-party payer contracts to ensure adequate payment rates. Information system requirements include:
- Patient registration and admitting systems that produce clean claims
- Health information management systems that facilitate effective management of patient documentation and accurate final code assignments
- Patient financial accounting systems that improve cash flow
4. Improve Medicare Payment
Many CAHs have a Medicare utilization rate of 70 percent or higher for inpatient acute services, and between 40 to 50 percent for outpatient services. Such levels of Medicare utilization underscore the financial importance of having an effective Medicare payment program. Examples of measures to improve and defend Medicare payment include:
- Reviewing cost allocation statistics (for example, square footage)
- Requesting cost-finding changes, if warranted
- Reviewing cost allocations to non-reimbursable cost centers
- Ensuring that all allowable costs that qualify for payment are claimed
- Identifying all costs that are not allowed and ensuring they are excluded
- Maintaining adequate documentation
- Assigning costs to appropriate cost centers
- Capturing all qualifying Medicare bad debts
5. Avoid the Medicare Cash Flow Trap
CAH leaders should closely monitor their organizations' Medicare interim rates to identify factors that could indicate problems with Medicare cash flow—particularly overpayments. This requires CAHs to be attentive to volume fluctuations, inpatient and outpatient shifts, price increases, cost increases and decreases, new cost centers, and non-reimbursable cost centers.
To effectively monitor their Medicare costs, CAH leaders should:
- Prepare interim cost reports
- Monitor interim rates on a monthly or quarterly basis
- Review financial statements for illogical or unreasonable trends
- Unfortunately, CAHs that are overpaid may find it extremely difficult to repay the overpayments to the Medicare program.
6. Develop Effective Pricing Strategies
Because CAHs also have nongovernmental payers, hospital leaders should have an effective pricing strategy. The first step in developing such a strategy is to evaluate department gains and losses. Second, CAH leaders should compare their hospitals' prices with those of competitors in their service areas. Third, CAH leaders should perform a strategic pricing analysis to determine appropriate pricing increases for departments that contribute the most to the bottom line. Finally, CAH leaders should review their chargemasters at least annually to verify that these systems are current and accurate.
7. Improve Clinic Performance
CAHs that own rural health clinics or physician clinics should periodically review the operations of these clinics. Because compensation is a major component of a physician clinic's costs, CAH leaders should evaluate how physicians are compensated and how their clinics are staffed, using benchmark resources that are widely available in the healthcare marketplace. In addition, CAH leaders should review the financial implications of converting freestanding physician clinics to provider-based outpatient clinics. Likewise, leaders should consider the financial implications of converting clinics to rural health clinic status (if the clinics qualify and are not yet designated as such). CAH leaders with specialty clinics in their hospitals should evaluate the arrangements with the physicians. In some instances, it may be beneficial to convert those clinics into provider-based clinics and to request that the physicians bill the professional component directly. In other instances, it may be more beneficial for the physicians to rent space from the hospital. The lease agreement, however, must be at fair market value and meet all requirements of Stark and anti-kickback laws.
8. Manage Labor and Nonlabor Resources
CAH leaders should continuously monitor labor costs and productivity data and compare their organizations' actual data to industry benchmarks. In addition, leaders should periodically perform salary surveys comparing their hospitals' salaries to state and regional peer hospitals. CAH leaders should carefully evaluate their nonlabor costs and policies, as well. Important policies they should consider include restricting who can sign contracts requiring competitive bidding on purchases, participating in group purchasing contracts, and entering cost-sharing arrangements with other hospitals. In addition, CAH leaders should routinely evaluate make-versus-buy decisions, lease-versus-purchase decisions, and the reasonableness of administrative operating spending, including payments to independent contractors.
9. Evaluate Capital Expenditures and Needs
Many CAH leaders are in the process of evaluating the age and condition of their physical plants. The fact that the Medicare program pays on a reasonable-cost basis and is typically the predominant payer is an enticing factor in the decision to build or renovate. However, building a new physical plant is a strategy that should emerge from the strategic plan. Before proceeding with the new hospital facility or renovation, CAH leaders should prepare a debt capacity study to determine how much debt they can afford to borrow for such a project.
10. Evaluate New Products and Services
Successful CAHs constantly evaluate their products and services and look to the future. When evaluating products and services, CAHs should consider the needs of their communities and patients and the services provided by their competitors. If CAHs lose a significant market share, they may not be offering the right products and services to meet their community's needs. Before offering new products and services, CAHs also should evaluate the resulting financial implications, including the effect on Medicare payment.
Take Steps Today
Successful CAHs are progressive, innovative, and efficient. Leaders of these CAHs employ effective business and management strategies and operate their hospitals as well-oiled machines. To evaluate a CAH's financial success, hospital leaders should determine how their CAH is performing then decide which strategies are important to improve financial performance.
SOURCE: Big Business for Not-So-Big Hospitals newsletter, August 2007
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If you have questions or comments about HFMA Wants You to Know, contact editor Maxine Harrison.
HFMA Wants You to Know ISSN: 1540-0697. Volume VI, Issue 18. Copyright 2007, Healthcare Financial Management Association. All rights reserved.