iProtean—Governance Challenges in a Changing Health Care Environment

Blog submission by Anne McGeorge, national managing partner of Grant Thornton LLP’s Health Care Practice

 

Health care as a business is changing dramatically. Between health care reform, shrinking reimbursements, accountable care, electronic health records, new technologies, growing scrutiny from regulators and other transformative aspects of health care, hospitals and health care systems are under more pressure than ever to adapt for the future. Effective governance is more important than ever, but what are the best governance features at leading health care systems?

 

We can answer this question based on many of the findings cited from a recent study Governance in Large Nonprofit Health Systems and an earlier study, Governance in High-Performing Community Health Systems. Led by Principal Investigator Dr. Lawrence Prybil, both studies examine health system governance structures, practices, and culture in relation to contemporary benchmarks of good governance.

 

Here are some of the highlights about what we learned from these organizations and their leaders:

 

About leadership…
There is clear recognition that, because the environment is increasingly difficult and the challenges are becoming greater, establishing and maintaining a strong, values-based leadership team is absolutely imperative. Executive leadership and clinical leadership are working as a team like never before. A strong bond between the CEO and clinical leadership is essential — especially now as integrated delivery networks are emerging as the model for the provision of high quality, cost-efficient patient care.

 

About the changing role of physicians…

We have learned from talking to physicians, especially physicians new to the profession, that most don’t want to be in a stand-alone private practice. They see integration as their future. This is a distinct shift from what we saw 10 to 15 years ago. Now, it seems like there is a much more positive attitude about teaming with hospitals.

 

There also are more administrative leadership opportunities for physicians within health care systems than in the past. A growing number of physicians are rising to executive ranks within hospitals. For example, many health systems have physician CEOs. Also, we see more physician organizations where physicians have their own board and make their own decisions as a physician organization, but are still affiliated with the hospital organization. This has worked well as it gives the physicians independence, while still maintaining their alignment with the health system’s mission and strategy.

 

About the challenges to integration and coordination…

A shared vision and consolidation of systems and metrics are essential, but these can be a challenge for large health systems with many disparate systems. Trying to consolidate and streamline processes and information systems is a huge undertaking. For example, I was at a client yesterday, whose organization has 120 different financial systems alone. As they evaluate how to streamline their technology solutions, they are trying to create a common dashboard that will bring together all of their data into consistent metrics for decision making. The challenge is streamlining information systems in a cost-efficient manner.

 

About the need for boards to think strategically…

One of the striking findings from our current study of governance in these large health systems, Governance in USA’s Largest Nonprofit Health Systems, is the growth in attention and focus at the board level on strategy and strategic thinking. The boards of all these large systems recognize that they need to refocus how they spend their time, which is their most precious asset. Boards are making deliberate efforts to carve out more time for strategy and strategic thinking, and lessen the percentage of time they allocate to shorter-term, operational issues. Among these health systems, nearly 30 percent of board meeting time presently is being devoted to strategy and strategic thinking.

 

Most boards need more training in how to think strategically. Some organizations — and I applaud them — are holding strategy retreats, where they have outside speakers and strategy consultants who help them challenge the status quo. Another area that can be helpful for boards is training on how to identify big-picture, enterprise-wide risks that will affect the organization, such as competitors coming into marketplace, not integrating physicians quickly enough, not reacting to changes quickly enough, etc.

 

About the future of health care…

Boards recognize that the world and the health care environment have changed dramatically, and that their systems too must change. The health care delivery model is gradually changing from a fee-for-service model to a model of preventive wellness and payments for quality outcomes, more like an HMO or capitated environment. We cannot just focus on providing acute inpatient care to those who come to our doorsteps. Instead, we need to be asking questions about how to accommodate the needs of a changing population and new financial realities. Ultimately, health systems need to evolve, or they will not survive for the long haul.

 

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Anne McGeorge is a featured expert in the iProtean courses Introduction to Governance, Compliance, Board Effectiveness, Board Culture, Recruitment and Orientation, CEO Selection and Compensation, and Tax-Exempt Status & Community Benefit.  She has worked extensively with large health systems, academic medical centers, managed care organizations, coalitions and purchasing organizations, health care private equity firms, and physician practices. She also focuses on helping clients with establishing community health needs assessments and board governance benchmarking.  Look for her comments on tax-exempt status of hospitals in next week’s blog.

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Monte Dube, Esq., Lisa Goldstein, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

For more information about iProtean, click here.

iProtean—States Given Time to Decide on Medicaid

“There is no deadline for a state to tell our Department [CMS] its plans on Medicaid eligibility expansion,” said Marilyn Tavenner, acting administrator for CMS in a letter to the Republican Governors Association last week.

 

Tavenner’s letter to the Republican Governors Association was in response to questions stemming from the U.S. Supreme Court’s recent decision that states are free to opt out of the expansion without being penalized.  Some states have been considering whether to participate in the program, and requested clarity about the time frame for making their decision and the expenses involved in delaying a decision.

 

In the program today, the federal government pays 50% to 80% of a state’s Medicaid costs, depending on the state’s average income. Under the new law, in 2014 Medicaid expands to a national floor of 133% of the federal poverty level. As an incentive for states to participate, the law provides that the federal government will pay for 100% of the cost of the expansion in the first three years of the program. However, beginning in 2017, the federal share will gradually taper off until it reaches 90% in 2020, where it will remain. (Scott Lenz, Esq., CMS Says No Deadline for States to Decide Whether to Expand Medicaid, American Health Lawyers Association Practice Group Email Alert, July 16, 2012)

 

Tavenner’s letter also covered questions about funding for health exchanges and IT costs.  She noted that “a state can receive extra funding for Medicaid IT costs and Exchange implementation costs even if it has not yet decided to expand Medicaid eligibility or to run its own Exchange.  And, if a state ultimately decides not to do so, it will not have to pay those resources back.”  (Marilyn Tavenner, Acting Administrator, CMS, Letter to Republican Governors Association, July 13, 2012)

 

Timing and financing of states’ participation in the Medicaid expansion and health exchanges have been a source of speculation for states since the Supreme Court decision.  Ms. Tavenner’s announcement to the Republican Governors Association appears to have clarified some of the major concerns facing lawmakers and policy makers in states that are still undecided about whether to participate.

 

In the iProtean courses Introduction to Finance, Managing Risk, Bonds Part One, Hospital/Physician Alignment and Compliance, healthcare experts Lisa Goldstein, Daniel Grauman, Robin Nagele, Esq. and Monte Dube, Esq. discuss the importance of Medicaid coverage for hospitals and their patients.

 

Lisa Goldstein, Moody’s Investors Service

When we look at revenues, revenues can be very complex.  What’s most important for a board member is an understanding of the payers that reimburse the hospital for the services that they provide, for the patients that walk in the front door or through the emergency room . . .

 

The second payer, usually about 10% of any hospital’s revenue base is Medicaid.  Medicaid is primarily for people who do not make a certain amount of income—who cannot afford healthcare insurance or their employer provides no healthcare insurance.  So if they qualify, they can sign up for Medicaid.  Medicaid is funded both by the federal government and by every state and as we all know, currently states are under tremendous fiscal pressure, so we are expecting Medicaid reimbursement to be cut to hospitals as well and, there’s no negotiating with Medicaid.  You get what you get and you have to adjust your costs accordingly.  So Medicaid and Medicare combined represent say 50 to 60% of any hospital’s revenue base and there’s no negotiating . . .

 

Negotiations with the commercial payers are very important because it’s the negotiations with the commercial payers that allow the hospitals to subsidize the losses under Medicare or Medicaid; sometimes the industry refers to this as cost shifting.  You’re able to shift your cost to the commercial payers, which in general, anecdotally pay more than Medicare rates and certainly Medicaid rates.  In the hierarchy of profitability under payers, usually hospitals earn the most margin under the commercial payers where they can negotiate, then Medicare and then Medicaid.

 

The final bucket of reimbursement where there’s really no negotiating, there’s no one to negotiate with or receive rates from are the people that have no insurance and do not qualify for Medicaid, what we sometimes call self pay, which are people that usually pay their hospital bills out of pocket and that can be anywhere from say one to seven percent of the average hospitals payer mix, the balance of the payers.  So it’s important for board members not to get into the nitty gritty of the negotiations or to understand the detail of the rates and the negotiations.  It’s important for board members to understand how the rates are set, who they can negotiate with and understand that when it comes to the governmental payers, Medicare and Medicaid, there is no negotiating and the hospital really has to focus on cost in order to reduce the losses under these two big governmental payers, which we expect there to be more pressure coming when it comes to rates every year for the foreseeable future.

 

Robin Nagele, Esq., Post Schell

Hospitals are very highly regulated at the federal level, the state level, local level and through the accreditation process.  In the broadest terms each of these sets of agencies and organizations has a stake in ensuring that the care that’s provided within the hospital setting is safe, appropriate, efficient.

 

At the federal level, the genesis of the regulation of hospitals really comes through their participation in the Medicare program and the other federal healthcare reimbursement programs.  The federal government is the largest purchaser of healthcare in our country, and as such, they have a very significant stake in ensuring that what they’re purchasing with their healthcare dollars is safe, quality, appropriate care.

 

The federal government regulates hospitals through primarily through the Centers for Medicare and Medicaid services, CMS, which has Conditions of Participation that hospitals must agree to in order to participate in the Medicare program.  The Medicare Conditions of Participation for hospitals regulate all kinds of things: the governance structure, the relationships with the medical staff, what services are provided and how they’re provided.

 

The federal government then actually defers to a large extent to the state governments for regulating the nitty gritty of the way in which services are provided.  State governments have a variety of interests in regulating hospitals.  Every state has a department of health, which provides the regulatory standards by which hospitals operate.  Now this isn’t by virtue of participating in Medicaid or any other program.  It simply is through the licensure process.  If a hospital is going to operate as a hospital they have to get a license from the state and that gives the state then the authority to regulate the hows, whys and wherefores of how services are provided.  And most state regulations go on for in some cases hundreds of pages that dictate very, very minutely every aspect in which care is provided.

 

They also have independent obligations under state law by virtue of their participation in the Medicaid program, which is governed through state welfare departments, working in partnership with the federal government.  Medicaid dollars, as you probably know, initiate as federal healthcare dollars but they are administered through the state welfare agencies and there are conditions of participation and contracts and contractual requirements by which hospitals access those Medicaid dollars that provide another set of standards that they need to adhere to.

 

Hospitals are also subject to IRS regulations and requirements by virtue of being tax exempt.

 

In addition to all of that there are the comprehensive accreditation guidelines which the vast majority of hospitals who choose to be accredited by The Joint Commission, which is the major accrediting agency, are subject to by virtue of that accreditation and they are surveyed and monitored by The Joint Commission which is not a federal or state agency, but an independent entity, but holds hospitals that are accredited accountable through the accrediting process.

 

Daniel Grauman, DGA Partners

Over the years, physicians and hospitals are working closer and closer together.  More than ever the hospitals are employing physicians.  That’s a clear upward growing trend and at the same time hospitals and physicians are working closer together and more interesting contractual arrangements, co-management agreements, medical directorships, joint ventures where they actually both own something together and are becoming more closely aligned.  The economic pressures have resulted in that kind of activity as well as a call by various payers—Medicare, states through their Medicaid programs and commercial insurers—that hospitals and physicians figure out a way to do what they do in a better, more integrated way.

 

Monte Dube, Esq., Proskauer

Local, state and federal laws of so many types apply to the operation of your hospital, whether it’s the EPA overseeing your underground storage tanks, to the Federal Communications Commission on your helipad radio, all the way to the Stark and fraud and abuse laws, your board needs to be generally aware of this regulatory milieu.  But some regulations are more important than others.  While you have to comply with all, non-compliance with some pose great risks to your organization.

 

Anything that touches on Medicare and Medicaid are areas of high risk to your organization.  It is essential that you have in place compliance programs which are enforced by management to ensure number one that all bills that go out from your organization to the Medicare and Medicaid program are accurate, complete and correct, and that you have no financial relationships with any physicians or other referral sources which could in any way be attacked as inappropriate.

 

Lisa Goldstein, Moody’s Investors Service

There are many risks that not-for-profit hospitals face.  There could be investment risk, so how the hospital invests its resources or its cash position can be full of risk.  So for example, if the hospital has invested a portion of its cash in say a hedge fund, there can be risk in the returns of the hedge fund being very high or very low or negative returns as we’ve seen during the credit crisis.  And certainly the ability to get those monies back out of the hedge fund can be a risk.  So there are all types of risk when it comes to investment allocation.

 

There can be financial risk with any hospital . . . There’s risk with the governmental payers such as Medicare and Medicaid, that Medicare and Medicaid rates will be reduced.  Certainly historically they have been reduced and all indications point to future reductions in Medicare rates to hospitals and certainly Medicaid rates to hospitals from each of the states as states go through fiscal crisis . . .

 

We use financial performance as a way of measuring the ability of management teams to execute; hospital board members and senior management may look at other benchmarks to test how they did on short-term strategies and long-term strategies.  We also look for senior management and board members to have good government relations, usually with their state government at the state capital.  Medicaid is a program funded both by the federal government but also by the state government.  It’s important that senior management and hospital trustees have an influence, have a voice, either directly at their state capital or maybe, for example, through their state hospital association or even through national hospital associations to make sure that not-for-profit hospitals have a voice when it comes to future regulation and future policies regarding the industry.

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Monte Dube, Esq., Lisa Goldstein, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

For more information about iProtean, click here.

iProtean—More ACOs Approved by CMS

U.S. Department of Health and Human Services Secretary Kathleen Sebelius last week announced the approval of 89 new Accountable Care Organizations (ACOs) for participation in the Medicare Shared Savings Program (MSSP). The 89 ACOs will serve Medicare beneficiaries in forty states and Washington, DC.  This brings the total number of ACOs to 154, including the 32 ACOs participating in the Center for Medicare & Medicaid Innovation’s Pioneer ACO model announced last December, and six Physician Group Practice Transition Demonstration organizations that began operations in January 2011.

 

Nearly half of the organizations approved in this second wave of the MSSP serve fewer than 10,000 beneficiaries. Like the first ACOs approved in April, many of the new ACOs are physician-driven organizations.

 

Beginning this year, new ACO applications will be accepted annually. The application period for organizations that desire to participate in the MSSP beginning in January 2013 runs from August 1 through September 6.  CMS has noted that 400 organizations have submitted a notice of intent to apply next month.

(Scott Lenz, Jr., “HHS Approves Eighty-Nine New Accountable Care Organizations,” AHLA Practice Group Email Alert, Regulation, Accreditation, and Payment Practice Group Members, July 10, 2012.)

 

One of the key structural features of an ACO is its governance, and CMS wants to ensure that ACOs are provider-driven rather than entrepreneur controlled.  It requires that an ACO must have at least 75% control of its governing body composed of ACO participants, reserving the remaining for non-provider, non-Medicare enrolled entities and small provider groups.  To illustrate the 75% control requirement, if a hospital, two physician groups and a health plan formed an ACO, the hospital and two physician groups must control at least 75% of the ACO governing body. However, CMS does not prescribe how voting control of the hospital and two physician groups is allocated—CMS has said it wants to ensure flexibility among participants.  (John R. Washlick, Esq., “Governance and Management,” The ACO Handbook. American Health Lawyers Association. 2012.)

 

CMS has additional governance requirements for ACOs:  an ACO must include a representative from the Medicare beneficiary population it serves; and, the ACO governing body must have a conflict of interest policy and certain safeguards that apply to all members of the governing body, including any Medicare beneficiaries who serve on that body.  (John R. Washlick, Esq., “Governance and Management,” The ACO Handbook. American Health Lawyers Association. 2012.)

 

Look for the new iProtean course, Governance of ACOs, in the next quarter.

 

ACO participation remains voluntary for providers. “The reform law does not change the way hospitals and physicians will get paid for the day-to-day care they provide.  So even within an ACO, hospitals will continue to bill and get paid under part A and physicians will continue to bill and get paid under part B.  What the ACO model does at this point is if they work in a coordinated fashion, then they are each eligible to receive a bonus payment, a single payment that’s made to the ACO and then the ACO participants split up that payment within the group.” (Anjana Patel , Esq., The New Healthcare Business Model, iProtean)

 

Participating providers can share in savings if certain quality metrics are achieved and if the ACO’s expenditures are less than a predetermined threshold established by CMS based on historical cost data related to the ACO’s Medicare beneficiary population.

 

Each ACO may choose between two payment models during their first agreement period: (1) a one-sided model, in which providers share only in savings (and not losses); or (2) a two-sided model, in which providers share in both savings and losses. CMS Deputy Administrator Jonathan Blum announced Monday that the majority of the eighty-nine organizations chose to participate in the one-sided model, while only five of the newly approved ACOs applied for the two-sided model.  (Scott Lenz, Jr., “HHS Approves Eighty-Nine New Accountable Care Organizations,” AHLA Practice Group Email Alert, Regulation, Accreditation, and Payment Practice Group Members, July 10, 2012.)

 

More detailed information on ACOs appears in the iProtean courses New Delivery/Payment Systems and The New Healthcare Business Model  featuring Robin Nagele, Esq., Todd Sagin M.D., J.D., Anjana Patel, Esq., Dan Grauman, Lisa Goldstein, Kenneth Kaufman and Jeffrey Bauer, Ph.D.

 

Robin Nagele, Esq.

An accountable care organization is formed when a group of providers from across the healthcare spectrum come together and become accountable for the overall care of particular patients.

 

For example, hospitals and physician groups will come together and agree to form an ACO.  They need to cover at least 5,000 lives between them.  For those lives that they agree to cover, they will take full responsibility for managing those lives, at least for the particular disease processes that are covered by the Shared Savings program . . . The concept is that by working together, they will develop savings for the Medicare program because of more efficient and safer care.  Ultimately, there is a mechanism for Medicare to share the savings with the ACO and then the ACO will distribute those savings to all the providers that participate in the network . . .

 

Anjana Patel, Esq., Sills Cummis& Gross

Under the reform law, the statute provides that an ACO can be set up by physicians, by networks of physicians, by joint ventures of hospital with physicians, by hospitals that employ physicians and by any other provider or supplier that CMS decides should participate.  With respect to the hospital, it seems to me that a hospital would want to be proactive and take the lead so to speak in setting these up.  The reason for this is if the ACO is successful, it will result in a decline in inpatient volume, and that’s something that is a big concern for many hospitals, especially the ones who have invested a lot in acute care services.  So I think taking control of the situation is probably a good thing for a hospital . . .

 

The other thing that the board needs to be aware of is this potential that if an ACO, for example, is successful, there is a potential for decline in inpatient revenues because by the nature of the ACO we want to prevent inpatient admissions.  We want to have better outcomes on an outpatient basis and in the home setting.  So the board needs to keep in mind that while substantial investment has to made in order to implement reform, and this could be financially a huge outlet of cash, there is also this balance of trying to decide what to do with inpatient services, how to phase out certain things and prepare or convert beds and services to others, whether it’s on an outpatient setting or another type of service.  From a strategic perspective, what may look like an acute care hospital today may look very different five years from now if it’s been successful implementing an ACO.  So I think that as the board prepares a readiness assessment plan, it should keep in mind this potential for declining inpatient revenues, as well as substantial cost to implement reform.

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Monte Dube, Esq., Lisa Goldstein, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

For more information about iProtean, click here.

iProtean—Philanthropy

The uncertainty in the minds of some donors about what is coming next is creating a pause. (William McGinly, Ph.D., Association for Healthcare Philanthropy)

 

We know that the Supreme Court decision on healthcare reform did not eliminate uncertainty about our system of healthcare.  We know we need to cut costs further.  We need to put the most effective network structures in place and significantly enhance IT.  “Society’s explicit message may just be to bring down costs.  But the message, now a scream, may prick our sector to change the way we deliver and manage our care.  Our providers may do so to save costs, but a more rational delivery of care may come along with it,” said Michael Connelly of Catholic Healthcare Partners in a recent article.  (Philip Betbeze, “CEOs:  Now It’s Time to Address Affordability,” HealthLeaders Media, June 29, 2012)

 

Not only must hospitals and systems focus on structural changes.  They also must deal with the uncertainty surrounding Medicaid. In the article cited above, Michael Connelly noted, “Unless payments change, we can’t afford costs of expanded coverage.”  We need to move from our traditional payment structures to value-based payment.  And we can’t forget the possibility of additional Medicare and Medicaid cuts looming on the horizon due to the federal budget deficit.

 

Imagine how this uncertainty spills over into the donor world.

 

In the iProtean course Philanthropy, William McGinly, Ph.D., Marian Jennings and Elizabeth Mills, Esq., discuss the impact of the health reform law on philanthropy, as well as the importance of philanthropy for today’s hospitals, different fund development models, the role of trustees, the role of physicians, fundraising strategies, restricted versus unrestricted funds, and how tax reform may affect your organization’s philanthropic efforts.

 

William McGinly, Ph.D., Association for Healthcare Philanthropy

Healthcare reform is presenting a lot of challenges for healthcare and philanthropy as well.  The positive about this is that one of the intentions of healthcare reform is to cover a lot more people . . . it has also introduced uncertainty in the minds of donors about the changes that are going to take place.  How will it be different? How will it affect me?  Will the hospital in my community still be there?  Will it be delivering care the way it is now?  Is what I’m supporting now through my philanthropy going to grow?  Is that crucial to the community?  How will that affect us?

 

Elizabeth Mills, Esq., Proskauer

Some people will say that because we now have healthcare reform we won’t have any uninsured people—any people who need financial assistance—and we won’t need philanthropy.  I think we can all foresee that that is not precisely what is going to happen.  We will still have those who can’t afford insurance, still have those who don’t buy insurance and those who aren’t required to buy insurance, as well as undocumented persons who may not be able to obtain insurance.  So there will always be a role for hospital philanthropy, both to serve the people who can’t pay and to enhance hospital services.

 

In addition, the health reform act has many exciting opportunities for demonstration projects, for trying new ways of doing things.  And some of these require that in addition to getting government money, you must put up some of your own money as well.  So that is another role for philanthropy, specifically in relation to the health reform process.

 

Marian Jennings, M. Jennings Consulting

We may see a resurgence of the importance of philanthropy for hospital financial viability and, specifically, for major projects for the hospital.  When hospitals first started as non-profit organizations they often had benefactors.  We then got into the world of complex payment—Medicare and Blue Cross and many different insurance companies—and we started relying appropriately on those who used our services to pay for the hospital and allowed us to flourish.

 

But in the world we are facing, with cutbacks on payment from the federal and state level, Blue Cross plans, other private insurance plans, many hospitals will not be able to generate internally or through borrowing sufficient capital to meet their needs for growth and development to invest in new technology, to put in that new information system, to go to a more modern emergency room.  They will have to rely on philanthropy.

 

William McGinly, Ph.D., Association for Healthcare Philanthropy

Tax reform is an area that both hospital trustees and foundation trustees need to be aware of and they need to keep a constant focus on what is happening.  One element that we see occurring consistently is the proposal to reduce the deductibility of gifts from 33 or 35 percent to 28 percent.  We find that this proposal will have a broad impact across all not-for-profit arenas.  We know that people will give to a hospital or the charity of their choice based on their interests and their experience.  They are not going to give because of the tax deduction, but they will give more [when donations are tax deductible] because that is an incentive the government is providing.  We have estimated that reducing that deductibility in the healthcare arena may result in a loss of nearly a billion dollars.

 

What you have to remember is that this isn’t a benefit for those who are making the gift.  It is a benefit for those who are receiving services.  If I’m giving less at one level, there will be fewer dollars available to support the services of the needy and those programs that are essential in communities, and that is the key element. So I would suggest as a hospital executive, as a hospital board member and a foundation board member, you keep your eye on the ball about what is going on with tax reform.  Let’s not introduce disincentives for donors.  Let’s keep it positive.

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Monte Dube, Esq., Lisa Goldstein, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

For more information about iProtean, click here.

 

iProtean—Implications of the Supreme Court Decision

Last week the Supreme Court ruled that the Patient Protection and Affordable Care Act (ACA) is constitutional.  The ruling should reduce some uncertainty among hospitals as they plan for the structural reforms in the law.  But the ruling on Medicaid expansion, allowing states to opt out, may put hospitals in some states at risk for large pools of people who will not qualify for Medicaid and also may not qualify for subsidies in health exchanges.

 

The ruling on Medicaid also affects hospitals that have disproportionate share adjustments.  ACA phases out DSH adjustments, in part because of the Medicaid expansion provision of the law, but for states that opt out of the Medicaid expansion, it is not clear how this adjustment will be handled.

 

The healthcare reform law has many positive features for hospitals: insurance coverage for groups of people that have not able to purchase affordable health plans (dependent children up to age 26, people with pre-existing conditions), the individual mandate that requires people to purchase insurance or pay a tax, employers with 50+ employees must offer health insurance, the Medicaid expansion to 133% of the poverty level in states that opt for this program).

 

Moody’s Investors Service notes, however, that even though the positive features of the law “should result in a material reduction in uncompensated care provided by not-for- profit hospitals,” reimbursement pressures as a result of the law will remain—$150 billion reduction in Medicare over 10 years—as well as $14 billion in Medicaid disproportionate share funding cuts.   The onus is on hospitals to implement the structural changes  and further reduce their costs to offset the reductions inherent in the law.  (Moody’s Investors Service Special Comment:  U.S Supreme Court Ruling That the Healthcare Reform Law is Constitutional is a Credit Neutral Action for Not-for-Profit Hospitals, June 28, 2012.)

 

And hospitals should expect even more pressure from the government.  The federal budget deficit is driving lawmakers to find additional savings in Medicare and Medicaid (beyond the healthcare reform law) to help reduce the deficit.

 

“Despite the Supreme Court’s decision that PPACA is constitutional, the credit profile of the not-for- profit healthcare sector will change further in the coming years as the sector must contend with mounting pressures for policymakers to address the steep federal budget deficit . . .Given the scope of the federal budget deficit, there is considerable pressure on the federal government to reduce Medicare spending, or at a minimum ‘bend the cost curve’ to limit future growth in spending. Regardless of the results of the November 2012 elections, policymakers, regulators, and the healthcare industry will face the need to reform, which we expect will result in considerable Medicare and Medicaid funding changes.  (Moody’s Investors Service Special Comment:  U.S Supreme Court Ruling That the Healthcare Reform Law is Constitutional is a Credit Neutral Action for Not-for-Profit Hospitals, June 28, 2012.)

 

So, considerable uncertainty remains.

 

Eric Jordahl (Kaufman, Hall & Associates) and Anjana Patel, Esq. (Sills Cummis & Gross, LLP) address these uncertainties in the iProtean courses Managing Risk and The New Healthcare Business Model.  They discuss the evolution of a new business model and the risks inherent in the structural changes in the reform law.

 

Eric Jordahl, Kaufman, Hall & Associates

I’ve been working in healthcare finance for about 26 years and I can’t think of another time when we had this level of risk within the industry.

 

A lot of that hinges on the uncertainty that healthcare organizations are confronting about their core operations and their core strategy.  What is the business model that’s going to come out?  What is healthcare reform going to produce, and there is very much a push pull between taking action today . . . based on your best estimations about it, versus the risks of doing that.  And that really does ripple through thinking about tax-exempt debt or debt and capital structure management activities.

 

So we’ve seen organizations reducing risk.  We’ve seen them changing the amount of floating rate debt that they have in place.  We’ve seen them changing their derivative structures.  We’ve seen them doing all sorts of things to basically offload or reduce the amount of risk that they hold in their debt structures.  All of it I think is related to trying to position the organization to best respond to those much bigger risks that they see on the horizon in the form of changing operations, changing strategy, are they going to need to do merger transactions, acquisition transactions, are they going to need to increase the amount of partnering with physicians.  If so, what form is that going to take.  Are they going to have to spend dollars in the form of hiring more physicians, employment, different employment models?  Point being, that’s where an awful lot of the focus is right now and I think appropriately so.

 

We do live in uncertain times and part of what that means or what that requires from our standpoint is boards and management that are very thoughtful about the different risks that they own across their organization and are very careful and prudent about which risks they take on.

 

Anjana Patel, Sills Cummis & Gross

There are two or three major things that the board should be considering at this point.  One is whether the organization has a readiness assessment plan.  By that I mean whether from a strategic perspective the organization is prepared to implement all or parts of the reform law.

 

One example is the IT infrastructure.  How advanced is the organization’s infrastructure because as you know, a lot of the reform measures will only be successful if there is substantial IT infrastructure in place.

 

The other thing that the board needs to be aware of is this potential that if an ACO, for example, is successful, there is a potential for decline in inpatient revenues because by the nature of the ACO we want to prevent inpatient admissions.  We want to have better outcomes on an outpatient basis and in the home setting.  So the board needs to keep in mind that while substantial investment has to made in order to implement reform, and this could be financially a huge outlet of cash, there’s also this balance of trying to decide what to do with inpatient services, how to phase out certain things and prepare or convert beds and services to others whether it’s on an outpatient setting or another type of service.  From a strategic perspective, what may look like an acute care hospital today may look very different five years from now if it’s been successful implementing an ACO.  So I think the board has to as part of this readiness assessment plan, has to keep in mind that there is this potential for declining inpatient revenues, at the same time, substantial cost to implement reform.

 

The other thing that the board has to keep in mind, as part of the readiness assessment plan is how well your organization works with its medical staff, with other community providers.  What kinds of relationships does your organization have with these potential stakeholders?  That’s an important question because if you’re a small hospital competing within a region with many other hospitals, the better your relationships with your medical staff, with your other community stakeholders, the more likely you are going to have a successful ACO, the more collaborative your approach can be.  So that’s another thing that a board should ask when they’re reviewing their organization’s readiness assessment plan.

 

And then the last thing to keep in mind for board members is the legal issues.  There are substantial legal issues in implementing healthcare reform, from antitrust laws, the Stark law, the fraud and abuse laws, the IRS.  And the board has to keep in mind that implementing certain strategic initiatives there’s always that compliance issue to deal with and how much risk should be taken.

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Monte Dube, Esq., Lisa Goldstein, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.

 

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