6 Ways Hospitals Can Survive the Onslaught of Medicare Cuts

Although healthcare leaders are concerned about major cuts in Medicare funding, many may not grasp the true scope and impact of these reductions on hospital operations and the delivery of care. Ken Perez, director of MedeAnalytics' healthcare policy team and the senior vice president of marketing, says hospitals need to understand the magnitude of potential losses so they can take measures to offset reduced revenue.

The numbers game
MedeAnalytics estimates that on average, hospitals will face a total reduction in Medicare Inpatient Prospective Payment System reimbursements of $5 million per year for ten years.

MedeAnalytics calculated this estimated $5 million reduction in hospital payments by considering the following:

•    The Patient Protection and Affordable Care Act plans to cut IPPS funding through decreases to the annual market basket updates (via reductions and productivity adjustments) by $112.6 billion from FY2010-FY2019.
•    Additionally, the federal government aims to reduce expenses by $1.2- $1.5 trillion over ten years through a committee created by the Budget Control Act of 2011.
•    As Medicare accounts for approximately 13 percent of the federal government's budget, the reduction to Medicare to meet the $1.2- $1.5 trillion goal would be approximately $150- $200 billion.
•    The IPPS is 32.7 percent of Medicare's budget; therefore, one would expect $50- $65 billion of the Medicare reductions would be cut from the IPPS.
•    Dividing the $50-$65 billion by the roughly 3,400 hospitals that participate in the IPPS indicates that the average hospital would lose $1.5-$1.9 million in IPPS funds per year for the next 10 years, or approximately 2.3-2.9 percent of its funds.
•    The $112.6 billion in cuts per the PPACA in addition to the estimated $50-$65 billion in possible cuts from the debt deal yields a total approximate reduction to IPPS reimbursements of $162-$177 billion, or an average of $5 million per hospital per year for 10 years.

These calculations do not take into account potential cuts to Medicare programs outside of the IPPS, including graduate medical education and Medicare's coverage of 70 percent of hospitals' Medicare bad debts, which would create additional losses for hospitals.

Improving care delivery
To manage the projected reductions in Medicare funding, hospitals will need to improve the way they deliver care instead of trying to achieve gains from cutting administrative costs alone. "Fifteen percent of the total income statement is administrative. You can't get much more efficiency out of the administrative bucket. The most promising area to offset reductions in Medicare reimbursement is the process and delivery of care — the core activity of the hospital," Mr. Perez says. He says this strategy benefits not only the hospital's finances, but also its efficiency.

The hospital's CFO is best positioned to champion this initiative because of his or her familiarity with the hospital's finances, according to Mr. Perez. In addition, Mr. Perez says successful strategies should be able to take effect within six months because "hospitals don't have five years or 10 years to sustain losses. There is a sense of urgency." 

MedeAnalytics recommends the following six strategies CFOs can use to combat Medicare losses quickly.

1. Partner with clinical leadership. CFOs should reach out to clinical leadership, such as the CMO, to solicit their support. "Explain the situation we're in and explain the dynamics associated with the financial model for the hospital. Many clinical leaders lack that financial information," Mr. Perez says. MedeAnalytics' white paper "Medicare Zero: A Comprehensive Analysis of the Impact of Health Reform and the Debt Deal on Medicare Funding of Hospitals and Strategies of Financial Survival," identifies CFOs' three goals for the first meeting with clinical leadership:

1. Provide an assessment of the current financial condition of the hospital.
2. Explain the impending increased financial pressures and their likely impact on the organization.
3. Solicit the support and assistance of the clinical leadership team.

2. Conduct a detailed margin analysis.
The CFO needs to understand where the hospital is making and losing money to make any meaningful changes. "Without the data, [a financial plan] is just a bumper sticker, a slogan," Mr. Perez says. Specifically, the CFO should analyze profit margins of MS-DRGs and service lines at the physician and patient level to target areas for improvement.

The MedeAnalytics white paper suggests that the hospital finance department focus cost-saving strategies on the MS-DRGs that have a higher cost than actual reimbursement. CFOs should also look closely at the five MS-DRGs/service lines with the highest volumes, highest profitability and greatest losses, respectively, to determine the causes of the profit or loss. Furthermore, the finance department should perform margin analyses on an ongoing basis with service line managers, physicians and the senior management team to develop strategies to capitalize on the high-performing areas and improve low-performing areas.

3. Engage with service line managers and physicians.
MedeAnalytics' white paper also recommends CFOs create a clinical performance improvement action team comprised of service line managers and physicians to address metrics such as supply utilization, length of stay, drug costs, readmissions within 30 days of discharge, and ancillary testing usage.

Mr. Perez says CFOs should provide the service line managers and physicians with scorecards that include these metrics so they can compare their performance to the hospital's objectives, their peers and national benchmarks. "You need to have data to be part of the solution and not part of the problem," he says. He suggests hospitals identify high-performing physicians and use them as role models for best practices.

The CFO, in partnership with the service line managers and physicians, should also review Medicare and Medicaid clinical denials and work to prevent future denials, according to Mr. Perez. Strategies to avoid claim denials include creating a clinical documentation improvement program for special care areas and surgical floors and emphasizing accurate and complete coding to physicians.

Improving clinical documentation for coding purposes will be particularly important as hospitals move from the ICD-9 to ICD-10 code set, as ICD-10 includes significantly more codes and requires more detail. Correct documentation is important not only for assigning the appropriate codes, but also for justifying medical necessity. In fact, the American Hospital Association's May 2011 RACTrac survey found that 84 percent of participating hospitals with complex denials cited medical necessity as a reason for denial. Medicare recovery audit contractors have collected more than $575 million in overpayments since Oct. 2009. Investing in documentation training could yield significant returns in savings from avoiding claim denials and appeals.

Another way the CFO, service line managers and physicians can benefit from a partnership is by establishing financial-clinical grand rounds to review cases of costs, care and outcomes that can be used to create standards of care.

4. Revamp care coordination.
Ensuring successful care coordination is essential to saving costs. "It's critical because if it's not coordinated, then handoffs are poor and there are duplicative tests and delays, which add to the length of stay and cost," Mr. Perez says. By improving care coordination policies, such as the discharge process, hospitals can avoid readmissions, which will be penalized by CMS.

There are multiple models designed to improve care coordination, including accountable care organizations, patient-centered medical homes and private payor-provider relationships. While hospitals may want to consider these long-term projects to significantly change the coordination of care, there are also short-term options that can produce savings and improve patient safety.

For example, the MedeAnalytics white paper suggests using checklists and auditing to verify medication information, follow-up appointments, the primary caregiver at home, diet and exercise parameters, need for home healthcare visits and notifications for calling the physician. In addition, discharge summaries should be sent to primary care physicians so the transition from the hospital to home is error-free.

Mr. Perez suggests hospitals join a health information exchange to better coordinate patient care, as HIEs allow providers within a region to communicate effectively. Other health IT projects, while not as easy to implement as checklists, can also help hospitals improve care coordination and save money. CMS offers incentives for meaningful use of electronic health records, for instance.

5. Optimize operating room efficiency.
"ORs are major sources of revenue, but also of cost, labor and consumption of supplies," Mr. Perez says. CFOs can increase OR efficiency by improving scheduling, standardizing processes and considering process improvement events, all of which can reduce delays and their associated costs. Other metrics to track and improve include start time, operating time, turnover time and post-anesthesia care unit admission delays. Hospitals should use data analytics to identify top performers who can share best practices with colleagues, according to the MedeAnalytics white paper.

6. Improve emergency room operations. "This is an entry point that is very abused in terms of appropriate versus inappropriate usage," Mr. Perez says. Hospitals should perform data analyses to review ER supply and drug utilization, ancillary testing and inappropriate usage. Mr. Perez suggests hospitals consider what alternatives, such as urgent care or retail clinics, might be more appropriate for certain patients and less costly for the hospital.

In some markets retail clinics have gained ground because they increase patient access to non-emergent care, decreasing inappropriate ER use. Diverting crowds from the hospital ER can save the hospital money by allowing physicians to spend emergency resources on the patients who need them most. Urgent care clinics also preserve ER use for patients with emergency needs but provide care beyond the typical hours of retail clinics or primary care physicians.

Learn more about MedeAnalytics.

Related Articles Featuring MedeAnalytics:

MedeAnalytics Releases Report on How to Minimize Impact of Medicare-Related "Perfect Storm"
Debt-Ceiling Law Could Reduce Medicare Payments to Hospitals by $1.4M Per Year

Big Changes Ahead: Medicare IPPS 2012 and What It Means for Hospitals

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