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When evaluating a healthcare organization for cost-containment opportunities, you would definitely want to look at the areas that are growing most quickly—as outpatient lines are for many hospitals. However, you would also want to focus on the area with the greatest cost—and that is unquestionably the inpatient area.
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For every $1 spent on outpatient care, Medicare will spend $3.56 on inpatient care, according to the Medicare Payment Advisory Commission’s (MedPAC’s) 2014 report to Congress.
If we were to consider Medicare inpatient care as a singular business, what would we learn about our largest service lines and greatest cost-containment opportunities? Further, what could we do with that information to create efficiencies for our country’s delivery system—beginning with your facility?
Our recent analysis helps healthcare finance leaders answer these questions by pinpointing the top 10 MS-DRGs in terms of highest costs and highest cost growth.
To determine the greatest inpatient cost-containment opportunities, we began with the 2012 MEDPAR inpatient claims data that represent every inpatient claim Medicare received during the federal FY. We then filtered out Medicare HMO claims to focus attention on cost control of traditional Medicare claims. To have a point of comparison, we also took the 2008 MEDPAR file to evaluate how costs have changed over time. We used 2008 data because this was the first full year after the MS-DRG structural change.
We need to make one distinction clear: We evaluated the hospital cost of care as opposed to Medicare cost, which would be payment. For many cases, those numbers are nearly equivalent because many hospitals are close to breakeven for Medicare inpatient services. We focus on cost because that is the area providers can more directly control.
Our broad conclusions are in line with what MedPAC described in its March 2014 analysis: Medicare inpatient discharges are declining. At more than 10 million discharges, we show about 5 percent fewer discharges in 2012 than in 2008.
We also show a modest increase (10 percent) in average cost per case. This increase is much smaller (3 percent) when accounting for national inflation less medical care inflation. We did this to see how much higher hospital costs are when excluding the inflation they contribute.
However, adjusting for medical service inflation (the inflation that hospitals and other providers directly contribute to national cost growth), average cost per discharge was actually 4 percent less in 2012 than it was in 2008. This means that hospital inpatient services were able to achieve a lower cost growth than other medical service areas. While that news is encouraging, there was still more than $4 billion in unadjusted cost that was added during the time period. To give some perspective, that would represent 10 percent of all Medicare outpatient payments in 2012.
While there are fewer inpatient discharges, there is more cost—and that added cost, which is growing more slowly than in the past, is still a very sizable figure.
This exhibit lists the top 10 total cost MS-DRGs in 2012, as compared with 2008.
Several interesting observations emerge from this analysis:
Our highest-cost areas haven’t changed much. Eight of the 10 highest-cost inpatient areas in 2008 are also our highest-cost areas in 2012. The only two MS-DRGs that made the top 10 in 2008 but not in 2012 were 194 (simple pneumonia) and 004 (tracheostomy without major procedure).
We’re spending more on top cases. In 2008, 19 percent of total inpatient costs were in 10 areas. In 2012, that figure was nearly 21 percent. The provider costs for these top 10 areas represent approximately two-thirds of all Medicare outpatient spending.
Hips and knees are huge. As most hospitals know, MS-DRG 470—major joint replacement without major complication or comorbidity (MCC)—is by far the largest cost area. In 2012, costs for MS-DRG 470 were nearly 50 percent higher than the next highest cost MS-DRG (871, or septicemia without mechanical ventilation 96+ hours with MCC).
Medical rules the list. Six of the top 10 highest-cost MS-DRGs were medical in 2008 and 2012. While surgical care can be costly because of operating room (OR) time and implants, the most extreme medical cases become costly because of long length of stays (LOSs), which may involve time in high-intensity nursing units.
Digging into more detail, we examined which MS-DRGs experienced the greatest cost growth from 2008 to 2012. We created this list based on total cost difference, meaning total provider cost in 2012 less total provider cost in 2008 (as opposed to percentage growth).
Highlights include the following:
Our highest cost areas are also our highest growth areas. In 2012, five of the top 10 cost growth MS-DRGs were also among the top 10 highest-cost cases:
Family drivers. Two MS-DRG families comprise half of the top 10 highest-growth areas: septicemia (MS-DRGs 870, 871, 872) and cardiac valve/cardiothoracic procedures (MS-DRGs 219-220).
Increased volume is the primary driver. Bucking the national trend of declining inpatient discharges, the top 10 growth areas are experiencing large increases in expenses because of significant increases in patient volume. The “percentage change in average cost” is up for all of these MS-DRGs; however, the percentage change would be lower in 2012 than in 2008, if adjusted for medical care inflation. Still, unadjusted cost growth is huge, and there may be some things worth learning with one final deeper dive into the numbers.
One MS-DRG family appears to be an ideal candidate to explore for cost-containment opportunities: septicemia (MS-DRGs 870, 871, 872). Every MS-DRG in the sepsis family is on the top 10 cost growth list (871 being the highest), and all are among the top 25 largest total cost cases (871 being number two on that list). Unadjusted costs of care for this family increased by more than $2.25 billion from 2008 to 2012.
The key driver for this growth was increased volume; sepsis discharges increased by 36 percent over the period. However, cost per case also increased as is evident by looking at the cost-per-case growth percentages; the three septicemia MS-DRGs were among the highest in terms of total cost growth.
To drill deeper into cost drivers, we selected the highest-cost growth and largest-cost area MS-DRG among the family: MS-DRG 871. What we found was very interesting. While more than $1.5 billion in unadjusted cost was added during the period, there was a sizable group of hospitals (more than 1,000 providers) that were able to decrease costs—without accounting for inflation.
While a modest portion of this decrease was volume-related, the key driver was actually cost per case.
Positive margins for sepsis care are possible but require significant cost reduction. Average cost per case declined by an average of $1,616 per case for hospitals that were able to decrease total MS-DRG 871 cost. This contrasts with an average increase of $2,069 for hospitals that added cost during the period. Profitability did improve among both groups; however, the hospitals that decreased costs had a small margin in 2012 as a result of their reductions.
Large LOS reductions among hospitals that reduced costs do not appear to be related to acuity. Both groups were able to decrease average LOS. However, the group that decreased costs started with a much higher value (8.51 days) and ended with a level that was well below the group that increased costs (7.08 days).
Acuity does not appear to be the driver because both groups documented increases in secondary diagnoses among patients, and 2012 levels were similar among both groups. Intensity also does not appear to be a factor because the average number of procedures is similar among the groups.
Both groups were able to achieve reductions in mortality. However, the hospitals that increased costs began with higher mortality rates and reduced these rates to levels that were, on average, below the rates of hospitals that decreased costs.
In sum, there appears to be contrasting elements at work: The hospitals that decreased costs were able to achieve quality improvements and dramatic cost/financial improvements. Conversely, the hospitals that increased costs were able to achieve dramatic quality improvements and more modest profit improvements—but still, negative margins. Certainly, there could be a debate about which strategy is appropriate.
Individual hospitals likely have high-performing physicians that are providing high-quality and efficient sepsis care that can serve as a benchmark within the organization for performance improvement and excellence. To evaluate this, we examined a case study hospital with more than $1 million in annualized MS-DRG 871 cost-savings potential when benchmarked against the national average. Within that case hospital, we reviewed the two highest-volume physicians.
Both physicians have significantly different total average-cost-per-case values, which are driven by LOS and resource utilization. Note, in particular, the difference between routine nursing care and intensive care (ICU/CCU). We ruled out differences in acuity and procedure intensity. We also evaluated outlier impact to see if a single claim (or small number of claims) was responsible for the difference. None were present for these cases.
With this information, the hospital is able to have an informed dialogue about clinical efficiency in the context of quality care. This conversation could lead to significant savings for the provider that will improve profitability while maintaining high-quality care standards.
An evaluation of our country’s highest-cost and highest cost growth inpatient cases has shown us the magnitude of savings potential with modest improvements. As seen, these improvements do not have to come at the expense of less favorable patient outcomes.
We found that our country’s largest savings opportunity could be in sepsis care through an evaluation of LOS and resource-intensity levels. However, these opportunities will not be realized without the hard work of hospital administrators and clinicians. These leaders will need to review performance levels—similar to our case study—and, subsequently, have conversations around clinical efficiency and outcomes. These conversations could yield significant financial gains for the hospital and, in turn, sizable savings for our national healthcare delivery system.
James O. Cleverley, MHA, is president, Cleverley & Associates Inc., and a member of HFMA's Central Ohio Chapter.
Publication Date: Tuesday, June 10, 2014
TriMedx helps health systems control costs and uncover savings opportunities by optimizing the clinical engineering function.
Patient financial engagement is more challenging than ever – and more critical. With patient responsibility as a percentage of revenue on the rise, providers have seen their billing-related costs and accounts receivable levels increase. If increasing collection yield and reducing costs are a priority for your organization, the metrics outlined in this presentation will provide the framework you need to understand what’s working and what’s not, in order to guide your overall patient financial engagement initiatives and optimize results.
A leader from McKesson discusses how healthcare reform is forcing hospitals and health systems to take a different approach to capacity management and patient flow.
No two patients are the same. Each has a very personal healthcare experience, and each has distinct financial needs and preferences that have an impact on how, when and if they chose to pay their healthcare bill. It’s no longer effective to apply static billing techniques to solve the complex challenge of collecting balances from patients. The need to tailor financial conversations and payment options to individual needs and preferences is critical. This presentation provides 10 recommendations that will not only help you improve payment performance through a more tailored approach, but take control of rising collection costs.
Emad Rizk, MD, president and CEO of Accretive Health, discusses the uncertainty facing hospitals and the transitions affecting revenue cycle management.
This white paper, written by Apex Vice President of Solutions and Services, Carrie Romandine, discusses the importance of patient segmentation and messaging specifically related to the patient revenue cycle. Applying strategic messaging that is tailored to each patient type will not only better educate consumers on payment options specific to their billing needs, but it will maximize the amount collected before sending to collections. Further, targeted messaging should be applied across all points of patient interaction (i.e. point of service, customer service, patient statements) and analyzed regularly for maximized results.
Jim Bohnsack, vice president, solution & corporate development for Conifer Health Solutions, explains how the company helps healthcare providers leverage data to deliver better outcomes while optimizing reimbursement for all payment arrangements.
This white paper, written by Apex President Patrick Maurer, discusses methods to increase patient adoption of online payments. Providers are now seeking ways to incrementally collect more payments due from patients as well as speeding up the rate of collections. This white paper shows why patient-centric approaches to online payment portals are important complements to traditional provider-centric approaches.
Steve Scibetta, senior director of channel sales for Ontario Systems' healthcare product line, shares insights into effectively managing receivables.
Increased electronic engagement between healthcare providers and patients provides significant opportunities for improving revenue cycle metrics and encouraging patients to access EHRs. This article, written by Apex Founder and CEO Brian Kueppers, explores a number of strategies to create synergy between patient billing, online payment portals and electronic health record (EHR) software to realize a high ROI in speed to payment, patient satisfaction and portal adoption for meaningful use.
Elena White, vice president of risk, quality, and network solutions for Optum, discusses how healthcare providers can leverage data and technology as they enable risk in their organization.
Faced with a rising tide of bad debt, a large Southeastern healthcare system was seeing a sharp decline in net patient revenues. The need to improve collections was dire. By integrating critical tools and processes, the health system was able to increase online payments and improve its financial position. Taking a holistic approach increased overall collection yield by 10% while costs came down because the number of statements sent to patients fell by 10%, which equated to a $1.3M annualized improvement in patient cash over a six-month period. This case study explains how.
Somnia President and CEO Marc Koch, MD, MBA, explains how hospitals can drive transformative change in the perioperative experience for outstanding clinical and financial outcomes.
With the ICD10 deadline quickly approaching and daily responsibilities not slowing down, final preparations for October 1 require strategic prioritization and laser focus.
PMMC President Roger L. Shaul discusses the effects of healthcare reform on revenue cycle management and how PMMC's products help clients adapt to a changing financial environment.
Read how Gwinnett Medical Center provides clear connections to financial information, offers multiple payment options for patients, and gives onsite staff the ability to collect payments at multiple points throughout the care process.
Greg Burgess, Founder and Chief Product Officer at Burgess Group shares insights and opportunities for payment integrity in the rapidly changing healthcare IT landscape.
Read how Orlando Health was able to perform deeper dives into claims data to help the health system see claim rejections more quickly–even on the front end–and reduce A/R days.
To maintain fiscal fitness and boost patient satisfaction and loyalty, healthcare providers need visibility into when and how much they will be paid–by whom–and the ability to better navigate obstacles to payment. They need payment clarity. This whitepaper illuminates this concept that is winning fans at forward-thinking hospitals.
Financial services staff are always looking for ways to improve the verification, billing and collections processes, and Munson Healthcare is no different. Read about how they streamlined the billing process to produce cleaner bills on the front end and helped financial services staff collect more than $1 million in additional upfront annual revenue in one year.
Effective revenue cycle management can be a challenge for any hospital, but for smaller providers it is even tougher. Read how Wallace Thomson identified unreimbursed procedures, streamlined claims management, and improved its ability to determine charity eligibility.
Before launching an energy-efficiency initiative, it’s important to build a solid business case and understand the funding options and potential incentives that are available. Healthcare leaders should consider taking the steps outlined in the whitepaper to ease the process of gaining approval, piloting, implementing, and supporting sustainability projects. You will find that investing in sustainability and energy efficiency helps hospitals add cash to their bottom line. Discover how hospitals and health systems have various options for funding energy-efficient and renewable-energy initiatives, depending on their current financial structure and strategy.
Health care is a dynamic mergers and acquisitions market with numerous hospitals and health systems contemplating or pursuing formal arrangements with other entities. These relationships often pose a strategic benefit, such as enhancing competencies across the continuum, facilitating economies of scale, or giving the participants a competitive advantage in a crowded market. Underpinning any profitable acquisition is a robust capital planning strategy that ensures an organization reserves sufficient funds and efficiently onboards partners that advance the enterprise mission and values.
The success of healthcare mergers, acquisitions, and other affiliations is predicated in part on available capital, and the need for and sources of funding are considerations present throughout the partnering process, from choosing a partner to evaluating an arrangement’s capital needs to selecting an integration model to finding the right money source to finance the deal. This whitepaper offers several strategies that health system leaders have used to assess and manage capital needs for their growing networks.
Copyright 2016, Healthcare Financial Management Association.
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