Meeting the challenge of site neutrality

The recent legislative changes related to off-campus provider based clinics makes the likelihood of site-neutral payments a major challenge that hospitals and health systems must address.

The federal budget is one contributing factor, with the likelihood that concerns about deficits will make provider rates an easy target. Longer term, the advance of accountable care makes it more likely as well.

Health systems have too much at stake to not actively assess the risks and act on that assessment. The current world includes provider based reimbursement, 340b, and incentives that relate to hospital based rates services. These issues at times distort provider decisions. For the purpose of this discussion, we are considering all vulnerable targets.

Additionally, the current environment allows payers to not fund the real cost of 24 hour services that are required to be provided by most hospitals but not free standing entities. If a service must be available around the clock, that group of costs are not directly considered. Simply, the costs of running an MRI 24/7 in a hospital is greater than the freestanding one that runs 60 hours a week.
Obviously the federal budget deficit and Medicare cost dynamic create risks. The drive to make providers accountable creates risks. How should your organization think about and plan for those risks?

Outpatient strategy. If outpatient service reimbursement is standardized, hospitals revenue will be reduced and margins will be squeezed. Six factors should be affecting your strategic decisions today.

1. Define which outpatient services are vulnerable to site neutral reimbursement. Create a plan of action now as to how you will deal with those, before you are faced with a crisis. You will likely make better decisions now rather than when you are under urgent pressure to act.
2. Creating lean and productive outpatient systems will be crucial. To do otherwise is to risk having a string of unprofitable ambulatory facilities as reimbursement lowers.
3. Well thought out economies of scale will be key. As hospitals diversify their geographic locations, they have been aided by favorable reimbursement. But when you are modeling these opportunities, create a worst case scenario around site neutral reimbursement. Depending on the population density of your target market, less aggressive expansion may be prudent.
4. Consider buying some services rather than making them. If your financial projections do not support building from scratch, it is at least worth considering outsourcing a capability. When doing that, it is important to focus on providers who can help you manage the total cost of care. Especially if controlling that part of the care process does not help you manage overall costs, it may be useful to divest that service.
5. Evaluate the rules to understand how to leverage services grandfathered in. In the most recent budget deal, site neutrality applied solely to off-campus new sites. Building or expanding on the old sites is an option to consider.
6. Through the 340b program, outpatient contract pharmacy has become a major revenue source. The scope of the program will undoubtedly be challenged, and scenarios about the impact to overall system profitability need to be considered.

Physician strategy. Provider based billing has been a boon to many health systems, although patient resistance has slowed its growth in some markets. As this was the focus of the change in late 2015, there is risk.

To prepare for that possibility, you should develop financial scenarios related to your physician group. There is nothing magic about the plan to deal with this challenge. You must aggregate practices to get economies. Align compensation to ensure you do not overpay. Build systems and support staff that maximize productivity. And build a culture that acts like an integrated multi-specialty group and understands and accepts the economics of medical practice. This will give you allies who understand the need should you have to cut costs.

Inpatient strategy. At the core of your inpatient challenge is understanding full costing and getting rates that cover full costs. Analysis and understanding of those costs is the first step. Depending on your circumstances, it may or may not be wise to discuss these issues with insurers. But you must understand the reality.

As must your board. This will require board education so they better understand the issue and the urgency. They must understand all the issues surrounding site neutrality.

Finally, make this issue a focus of your lobbying efforts. Do not just focus on preserving the rate differentials, explain that if some go away the rates for inpatient services will need to rise. Explain the underlying cost realities that justify the differentials.

Financial strategy. Throughout this discussion we have discussed financial scenarios that must be modeled. Building scenarios around possible federal actions is prudent. Building this thought process into business feasibility planning is likewise needed. That will aid you as you educate stakeholders on the risks faced as the landscape changes.

We recommend five analyses in particular.

1. Understand standby costs in your institutions.
2. Understand the real costs of your inpatient services.
3. Create scenarios around cuts in 340b.
4. Understand how the loss of provider based reimbursement will help impact physician networks and necessary remedial actions.
5. Understand the outpatient reimbursement bump you get vs. non-hospital services, and model how you will deal with reductions in that bump.

Conclusion

Addressing this challenge will take a mix of capabilities. Financial planning. Developing sustainable strategic initiatives. Building physician culture. Lobbying and education of stakeholders. Building systems to manage risk. Not a simple undertaking, but necessary if you are going to anticipate vs. react to the upcoming changes.

For more information, call David Miller, Managing Partner, Healthcare Strategy Group at (502) 727-1816 or email dmiller@healthcarestrategygroup.com. Or Michael Baker, Partner, Plante & Moran, PLLC at (231) 932-5612 or mike.baker@platemoran.com.

BIOS:

Healthcare Strategy Group Partner David W. Miller primarily focuses on strategy development, including strategic plans for hospitals & health systems and employed physician groups, affiliation/merger strategies, physician alignment strategies, primary care strategies, and service line planning. He also provides board and medical staff education and retreat facilitation. Before co-founding Healthcare Strategy Group in 1999, David spent four years as a Partner with the Galvagni-Miller Strategy Group and fifteen years as an executive with Norton Healthcare in Louisville.

David is a Fellow of the American College of Healthcare Executives (ACHE) and serves on the board of the organization's Kentucky chapter. He holds a Master's Degree in Health Administration from The Ohio State University and a Bachelor's Degree in Management from Virginia Tech.

Michael A. Baker, a partner with Plante Moran, specializes in the healthcare industry. He brings a unique perspective to the significant impacts of reimbursement changes to providers of all sizes, helping them optimize third-party reimbursement.

Mike is recognized for his ability to bring practical solutions to hospital and healthcare providers and his deep industry expertise. He has been serving healthcare clients at Plante Moran for more than 25 years, bringing his wealth of experience to his clients. Most recently, he has focused on healthcare reform and the significant merger and acquisition activity in the healthcare industry. Mike understands the impact these events will have on hospitals and their affiliates and brings that expertise to bear in his client interactions.

He has been assisting hospitals and healthcare systems for over 30 years with various matters spanning from reimbursement optimization to strategic and operational issues. Mike is a frequent speaker at various hospital and trade show conferences throughout the Midwest.

Mike has a B.A. in accounting from Ferris State University.

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