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Issue #8-1 | January 10, 2013

How hospitals can cope with fiscal cliff deal fallout

The last-minute deal in Washington to avert the fiscal cliff has thrown salt in the wounds of hospitals already grappling with cuts in Medicare payments. The deal has put in place even more Medicare payment cuts. So now’s the time to prepare for even tougher financial challenges ahead.

In a nutshell: Under the fiscal cliff deal, hospital reimbursements from Medicare will be cut about $15 billion over the next 10 years to help pay for the “doc fix,” which delays a 26.5% payment cut for Medicare physicians. This large cut in payments for doctors is the result of years of delaying smaller annual cuts dictated by a 1997 deficit reduction law, which, naturally, has now snowballed.

The Medicare payment cuts to hospitals are made up of two components: 1) $10.5 billion from inpatient or overnight care through a downward adjustment in annual base payment increases; and 2) $4.2 billion from a reduction in disproportionate share payments. These cuts are over and above those made to hospitals as part of the 2010 healthcare reform.

What to do: Hospitals can make the hard choice to limit the number of Medicare patients they treat. This can be done by deciding not to accept new Medicare patients—or to stop treating them altogether. Some hospitals, most notably the Mayo Clinic, have already begun to implement such limits.

The other approach is to attack costs, both staff costs and operational costs. Many hospitals have already gone through layoffs, so there may not be much more to cut. Look to operational efficiencies that can be gained in areas such as the supply chain, clinical operations, back-office processes, and the front and back ends of the revenue cycle (billing and collections). Be aware, however, that to determine potential gains, you will need the support of data analytics.

Also, take advantage of the healthcare reform law’s incentives for implementing electronic health record (EHR) systems. Medicare-eligible providers will continue to receive subsidies for installing certified EHR systems through 2014. These systems will also increase efficiencies in the long run.

Finally, explore the feasibility of becoming part of an accountable care organization (ACO). This type of setup is key to transitioning from a fee-for-service environment to the new landscape of fees based on the quality of patient care. Moving to the ACO model can also improve profitability and market share.

Financial woes for hospitals in states that nix Medicaid expansion

A financial crisis looms for hospitals in states that choose to opt out of Medicaid expansion, according to a recent article in the New England Journal of Medicine (NEJM).

Here’s the story: The Affordable Care Act provides for a series of drastic payment reductions to hospitals under the Medicare and Medicaid Disproportionate Share Hospital (DSH) programs starting in 2014. DSH payments, which total about $22 billion annually, partially reimburse nearly three-quarters of U.S. hospitals for the uncompensated care they provide to low-income patients. But these payment reductions would be offset by the expansion of Medicaid for more uninsured patients. The trouble is, the Supreme Court ruled in June that Medicaid expansion is optional for states.

Currently, nine states have said that they will not participate in Medicaid expansion, according to an analysis by The Advisory Board Co. Some states are undecided, so more could follow suit. Hospitals in states that opt out of Medicaid expansion will not only see cuts to DSH payments, but may also see higher costs for uncompensated care, says the NEJM article.

Trouble spots: The states that have announced they will not expand Medicaid are Alabama, Georgia, Louisiana, Maine, Mississippi, Oklahoma, South Carolina, South Dakota, and Texas.

The article states: “Without further changes, these DSH reductions could create a substantial financial shortfall for hospitals in states that forgo Medicaid expansion.”

Hospitals jump on PHO bandwagon

Under healthcare reform, new reimbursement models will financially reward clinical integration and improved quality of patient care. One strategy hospitals are using to align themselves with this new setup is to form a physician hospital organization (PHO).

PHOs have their roots in the early 1990s. They were created by hospitals that wanted to establish a close relationship with physicians to offer a full-service provider product in a managed-care environment. A PHO is not created by merger or acquisition. Rather, it is a new entity created and jointly owned by physicians and a hospital. This new entity is established either as a for-profit corporation, a partnership, or a limited liability company (LLC).

Idea in action: The year 2012 saw a resurgence of interest in the PHO concept because of so much activity surrounding the formation of new PHOs. Here are some recent examples:

  • St. Vincent's Medical Center (Bridgeport, Conn.) launched a new PHO that is equally owned by over 150 regional physicians and the medical center. The governing board for the PHO is also a 50-50 split between the medical center and physician owners.
  • Providence Health Care and Group Health Cooperative (Spokane, Wash.) formed a new LLC with nearly 400 physicians and advanced practitioners to “work together in innovative ways to improve the overall delivery of health care services.”

Shared savings: A key element of a PHO is a shared savings agreement designed to move physician compensation away from being based on productivity and toward pay for performance. To do this, incentives are created that reward clinical quality and delivery of cost-effective care in a collaborative clinical model.

For example, health insurer Cigna and Health Choice, a PHO affiliated with Methodist Le Bonheur Healthcare (Memphis, Tenn.), launched an accountable care program involving a group of independent medical practices and a health plan. Physicians will be paid as usual for the medical services they provide. But they also will be rewarded through a pay-for-performance structure if they meet targets for improving quality and lowering medical costs.

Learn more: Participate in a 45-minute webinar, “Physician Hospital Organizations: Developing a Collaborative Structure for Shared Savings Agreements,” on January 23 that will explore the key contractual elements to consider when creating a PHO for the purpose of participating in value-based payment models. You will also get details on how to navigate safe harbor and Stark regulations when designing a PHO and how to develop a compensation model that is a win-win for both the physicians and the hospital.

New case illustrates need to guard against invoice fraud

The typical organization loses 5% of its revenue to “occupational” fraud each year, according to the latest study from the Association of Certified Fraud Examiners (ACFE).

Occupational fraud is any fraud committed by individuals who use their occupation as the means to do their dirty work. Of course, hospitals are not immune to such fraud, as a new case illustrates.

New case: SSM Health Care is an organization that operates hospitals, nursing homes, and physical practices in the Midwest. A billing supervisor who submitted phony invoices scammed SSM out of $100,000, according to a report in the St. Louis Business Journal.

Pamela Hoernschemeyer worked as a supervisor with St. Louis-based Healthcare Strategic Initiatives, which operated as NextGen Healthcare. The company contracted with SSM for patient billing and collections, claims submissions, payment posting, and account management, according to the U.S. Attorney’s Office for the Eastern District of Missouri. Hoernschemeyer was in charge of the SSM account.

According to court documents, she submitted fraudulent check request forms to SSM for what appeared to be refunds to patients. But for the patient names, she used variations of her own name and the names of her husband and daughter. After the checks were issued, she deposited them into several personal accounts, according to the authorities.

Using this scheme, she swindled the healthcare system out of more than $100,000, which she used for personal spending, according to the U.S. Attorney’s Office. She pleaded guilty to three felony counts of bank fraud and was sentenced to 37 months in prison and also must pay restitution.

Fraud facts: Fraudulent invoicing, what the ACFE calls “billing” fraud, involves any scheme in which a person causes his or her employer or client to issue a payment by submitting invoices or check requests for fictitious goods or services, inflated amounts, or for personal purchases. Typically, an employee will create a shell company and then bill for nonexistent services. Of the cases the ACFE studied, the median loss attributed to an invoicing scheme is $140,000.

The ACFE study also reveals that occupational fraud schemes frequently continue for years before they are detected. Further, they are most often perpetrated by someone in the accounting department or in upper management.

What to do: Put in a hotline mechanism for tipsters to blow the whistle. That’s because when occupational fraud is detected, it is more likely to come to light via tips than by any other means, according to the ACFE. Tips account for 43% of the initial detection of occupational fraud. Other ways fraud is discovered are by management review (15%), internal audit (14%), accident (7%), and through account reconciliations (5%).



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