7 Strategies to Help Hospitals Break Even on Medicare

It's easy to say that Medicare matters to beneficiaries, hospitals, physicians and pretty much everyone else involved in the delivery of healthcare today, but just how important is the country's largest payor?

In fiscal year 2012, total gross Medicare spending is expected to top $575.7 billion across more than 47 million beneficiaries, which accounts for roughly 17.6 percent of the country's gross domestic product — and the aging baby boomer generation will only increase those figures. According to a March budget report from the Congressional Budget Office, Medicare spending is expected to jump to more than $1.058 trillion by FY 2022.


For hospitals, Medicare's impact is colossal, to say the least. Roughly four out of 10 hospital stays are financed by Medicare, and Medicare constitutes anywhere between 35 and 55 percent of the average hospital's revenue. Colin McCulloch, JD, associate at EpsteinBeckerGreen, adds that Medicare usually pays 70 to 80 cents on the dollar compared with commercial payors, leaving hospitals scrambling to break even. All of these figures are also amidst the upcoming 2 percent payment cuts to Medicare providers via sequestration, the annual Medicare merry-go-round with the sustainable growth rate and frequent talk of overhauling the Medicare program altogether.

Although finding 20 to 30 cents on the dollar in cost savings or revenue increases to break even on Medicare is not a simple endeavor, it is very plausible, and many hospitals get by on Medicare today. Mr. McCulloch says hospitals tend to be capital-intensive and, as such, are really slow at eliminating costs. Cutting off Medicare patients altogether is not a wise choice by hospitals, he says, because although that may eliminate 10 to 20 percent of the cost of treating the patient in the short term, that is a 100 percent loss of revenue. "That's going straight to the bottom line," he adds.

As Medicare becomes even more important in the healthcare sector, here are seven strategies that can help hospitals manage their Medicare-related financials and stay more solvent in the process.

1. Know your Medicare data. Although this appears to be too obvious, there is no such thing as "too obvious" in an industry as complex as healthcare.

Mr. McCulloch says before a hospital can jump into a strategy of salvaging or tweaking its Medicare business, hospital executives have to know how much money is actually coming in from Medicare and should produce frequent and updated reports on Medicare claims, revenue and per capita costs. While the statistic that four out of every 10 hospital stays is Medicare-funded provides a backdrop for the overall significance of the governmental healthcare program, it does not describe every hospital.

For example, Steve Bush, CFO of Tucson (Ariz.) Medical Center, says his hospital is very reliant on Medicare because his region and state have a higher population of older patients. Many hospitals in Florida are in similar situations. However, TMC is able to cope with the Medicare revenue because he and other executives track the important data, such as reimbursement rates, overall Medicare revenue and comparability data to commercial payors. "We do well on our Medicare population because we are living with the reality that many are going to see in a few years," Mr. Bush says.

For hospital executives looking for broader Medicare data, Medicare Provider Analysis and Review files, or MEDPAR, provide the most comprehensive far-reaching statistics. MEDPAR files currently contain information — such as total charges, covered charges, Medicare reimbursement, total days, number of discharges and average total days — for all Medicare beneficiaries using hospital inpatient services, and they are broken down by state, diagnosis-related group and DRG description.

2. Benchmark productivity metrics. Mr. Bush has handled CFO duties at TMC for the past two-and-a-half years, and he says one of the basic ways to offset the slimmer Medicare margins is by looking within the hospital and making sure all departments are reaching their productivity targets. These include average hourly labor rate, staff overtime pay and several others.

William Cleverley, PhD, president of Cleverley + Associates, points to several other financial metrics, including operating margin, total margin, per capita Medicare cost, net patient revenue per equivalent discharge and more. In total, he says there are 18 essential metrics that both appropriately display non-profit hospital accountability to the public and improve Medicare productivity tracking.

3. Reduce clinical variation through active partnership with physicians. Clinical variation is a key factor for driving up hospital healthcare delivery costs, and for a hospital's Medicare population, this may be especially true. Mark Dixon, former CEO of Abbott Northwestern Hospital in Minneapolis who is now a consultant, says clinical variation hammered his hospital's productivity and raised both the labor and supply costs of the specialties that affect Medicare patients the most. "One just needs to go to high-cost, high-volume specialties such as cardiology, orthopedics and spine to find significant variation in resource consumption — implants, average length of stay, pharmacy and others — between providers," Mr. Dixon says.

In order to reduce unnecessary or unwarranted clinical variation, Mr. Dixon says hospital executives, physicians and all other clinical leaders need to enter friendly, civil discussions on how the hospital's outcomes can be maximized, especially as value-based purchasing approaches this fall. This also positions physicians more competitively in the market. Ken Perez, director of healthcare policy and senior vice president of marketing at MedeAnalytics, says this means admitting there is a problem while attempting to work collaboratively toward a solution, which is not always the easiest topic to bring up.  

4. Look at "big bucket" operations savings. For hospital CFOs, operational buckets might be the most common areas to monitor in order to break even on Medicare. These "big buckets" — outside of labor — include strategic growth, revenue cycle, supply chain and other purchased services such as energy, service contracts, shipping, food and all other areas that keep the hospital going on a daily basis.

Creativity is needed to maximize savings in operations. Operational savings can be found by cutting food waste by weighing it, reassessing administrative costs, renegotiating inbound shipping rates and more.

Energy management is another area within operations that could lead to savings. Mr. Dixon was also the South Region president of Fairview Health Services in Minneapolis. While there, he says he challenged his team and health system to reduce their energy expenses by 30 percent over a five-to-seven year span. He focused on energy because reducing costs in the energy bucket was an area most integrated delivery networks had not fully explored. In an age when several energy initiatives are becoming more environmentally friendly and more cost-effective, energy-reducing opportunities could be seen as directly helping out all hospital margins, Medicare especially. "We were buying more expensive machines that used more energy," Mr. Dixon says. "You have to ask, 'What can we do to reduce energy, both in the price we pay and the amount we use?'"

The supply chain, perhaps more than any other outside of labor, is an area that offers some of the most significant savings. Mr. Bush tackles the supply costs by initiating service line agreements with TMC's physicians. For the past two-plus years, TMC has established service line agreements in cardiology, orthopedics and neuroscience, giving physicians the ability to oversee and manage those specialties. However, because Mr. Bush established a solid working partnership with the clinical staff (which was mentioned earlier), he and the physicians have worked together to choose more cost-effective supplies and implants, saving $10 million over that span. "We really have an active focus on supply costs in partnership with our physicians," Mr. Bush says. "They are incentivized financially for both the financial performance of the service line as well as quality, and it has reduced our supply costs."

5. Explore bundled payments. CMS' Bundled Payments for Care Improvement initiative is under way, and hospitals may want to explore the option of bundled payments as a way to save money on Medicare DRGs that involve a lot of variation, Mr. McCulloch says.

There are several best practices hospitals should consider for bundled payment success, including deciding which DRGs to bundle, analyzing the Medicare data set, designing the gainsharing model and others. In the end, bundled payments will allow hospitals to look at a single DRG, such as hip replacements, and find ways it can deliver quality care to those Medicare beneficiaries while reducing the Medicare overhead in the process.

"The great thing about bundled payments is that hospitals are able to try and get that one DRG right before [they] take on too many," Mr. McCulloch says. "It gives hospitals a chance to show they are good at something before they have to do it all."

The "all" that Mr. McCulloch is referring to is the accountable care organization design. He says only the most sophisticated providers should be in the ACO environment right now because that involves the assumption of significant patient risk. "The ACO concept is not for the faint of heart," he adds. "Bundled payments are that evolutionary step for hospitals to practice before they have to take it on as their entire business."

TMC has been developing its ACO, the Southern Arizona ACO, for several years, and it includes independent physicians and federally qualified health plans. Operations began early in 2012 with a commercial contract for Medicare Advantage beneficiaries and received approval to participate in the Medicare Shared Savings Program. In addition to the ACO, Mr. Bush said TMC is also considering bundled payment initiatives as a step to control its Medicare profits even further.

6. Improve operating room and emergency room operations. Hospitals looking to improve their Medicare margins can immediately look at two of the most important departments of the hospital: the operating room and the emergency room. The OR is the valuable, high-revenue and high-cost center of a hospital, while the ER is usually considered to be a "money loser" due to its high rate of uninsured patients and expensive care. However, Mr. Dixon says those two departments can be improved to offset dwindling Medicare payments. "Generally, there is a lot of waste inside an OR," Mr. Dixon says. "You typically have more available time, so you have to find ways to use staff [better]."

Mr. Perez says there several ways a hospital's OR can reduce delays and costs, such as improved scheduling, standardization of processes, operational reporting, throughput, first case percent on-time start and overall OR utilization. For example, variances in OR turnover time, delay incidence rate by surgeon and OR cycle time by procedure are some of the metrics that could be measured and gauged to improve the OR.

In addition, data analytics can be used in the ER to find out where the biggest staffing, space and other cost-absorbing inefficiencies are. "Data analytics can help assess the ER's supply and drug utilization, use of ancillary testing and perhaps most important, inappropriate usage," Mr. Perez says. Mr. Dixon adds there are numerous initiatives — such as improving ER throughput, visit coding and staffing — that can allow the ER to run much more efficiently and effectively.

7. Consider affiliations and partnerships with other hospitals. The hospital merger and acquisition market has picked up — in 2011, hospital and health system transactions were up 12 percent from 2010 — indicating that some hospitals that rely heavily on Medicare, and Medicaid, patients cannot stomach all the financial hurdles.

While some hospitals look to full ownership transitions, Mr. McCulloch says others may look at strategic affiliations and partnerships — for example, with certain business and backend operations — to help reduce the administrative costs associated with managing claims of Medicare and other large payors. "When hospitals can no longer fill beds, they will look at strategic partners," Mr. McCulloch says. "They may outsource the business office to cut their overhead. You're going to see a lot of unique partnerships."

More Articles on Medicare:

Pay for Performance May Not Improve Mortality Rates

Top 10 States With Highest Inpatient Medicare Payments

Pursuing Hospital Mastery: Q&A With Experienced Hospital CEO Mark Dixon

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