iProtean—Negative Outlook Continues for 2013

The outlook for U.S. not-for-profit hospitals remains negative for 2013 according to Moody’s Investors Service.  Its recent Industry Outlook (January 22, 2013) cites continued erosion of hospital revenue and a “tepid economy that dampens demand” as the primary factors in its assessment.  Revenue growth will remain positive but will continue to decelerate because of Federal cuts to healthcare spending and limited reimbursement increases from commercial healthcare insurers, according to the authors of the report.


Moody’s went into detail with three categories of reimbursement cuts:  cuts per unit of service, methodological changes and supplemental payment cuts:


Reductions in rates per unit of service:  Hospitals have historically managed reduction in reimbursement rates by controlling expenses and increasing rates in other higher value services.  But over the next several years Moody’s expects smaller annual increases from Medicare as well as reductions in commercial fee-for-service rates that will not/cannot be offset by other increases.


Methodological changes:  These are broad changes in how hospitals are reimbursed; for example, bundled payments, value-based purchasing and reclassification of short stay admissions to observation stays.  While these programs seek to increase efficiency, reward quality and avoid over utilization of services, the end result is “lower revenue growth and, in many cases, lower absolute revenue.”


Supplemental payments:  These payments rely on volumes of patients meeting certain criteria rather than actual services provided.  The most notable are disproportionate share payments (DSH) from Medicare and Medicaid to hospitals with larger than average numbers of uninsured patients.  DSH payments will be reduced significantly over the next several years:  Medicare DSH by 75% beginning October 1, 2013 (additional funding from CMS may be available, however) and Medicaid DSH by 50% by 2019, with the first cuts beginning October 1, 2013.


Hospitals have begun to experiment with new reimbursement methodologies in an effort to mitigate the negative pull on revenue.  New reimbursement methodologies share the common theme of tying reimbursement to factors other than volume and discouraging readmissions and over utilization of services/procedures.   Moody’s notes significant risk when transitioning to new reimbursement methodologies:

  • Improperly priced contracts that do not provide sufficient reimbursement
  • Overinvestment in vertical integration through acquisition of physician practices and insurance companies
  • Insufficient patient education and risk of declining patient satisfaction as care modalities change
  • Managing two very different payment methodologies simultaneously


There will be positive trends that reduce the impact of the negative credit factors.  These include the ability of hospital management to “actively generate favorable financial performance over the last several years” and the strategic decisions by hospital board and management teams to “engage in mergers, affiliations, and other collaborations” that may improve operating performance in the future.


(“U.S. Not-For-Profit Healthcare Outlook Remains Negative for 2013: Ongoing Challenges Outweigh Stable Operating Performance,” Moody’s Industry Outlook, Moody’s Investors Service, January 22, 2013.)


iProtean experts Lisa Goldstein (Moody’s Investors Service), Daniel Grauman (DGA Partners), Marian Jennings (M. Jennings Consulting) and Nathan Kaufman (Kaufman Strategic Advisors) discuss the reimbursement implications under the new payment systems in two upcoming advanced courses:  Transforming Your Organization to an Integrated Delivery System (released in January) and Financing Considerations for Integrated Delivery Systems (will be released in February).  iProtean subscribers will find new courses in their library as courses are released.


For a complete list of iProtean courses, click here. www.iprotean.com/index.php/iprotean/onlineCourses/Available_courses


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iProtean—CMS Announces More Shared Savings ACOs

In January, the Centers for Medicare & Medicaid Services (CMS) selected an additional 106 accountable care organizations (ACOs) to participate in the Medicare shared savings program. (Health Lawyers Weekly, January 11, 2013)


CMS noted that about half of the new ACOs are physician-led organizations that serve fewer than 10,000 beneficiaries.  Approximately 20 percent are community health centers, rural health centers or critical access hospitals serving low-income and rural communities.  Fifteen of the 106 new ACOs have opted for the advance payment model where some payments are provided upfront to help defray start-up costs.


The shared savings program, mandated by the Affordable Care Act, now has 205 ACOs serving about four million beneficiaries.  Federal savings from the shared savings program could approach $940 million over four years, according to CMS.  (Health Lawyers Weekly, January 11, 2013)


The Department of Health and Human Services (HHS) also released a report in January detailing Medicare cost per beneficiary in 2012.  The report noted that “Medicare spending per beneficiary grew just 0.4% per capita in FY 2012, continuing a pattern of very low growth in 2010 and 2011 . . . Over the three year period from 2010-2012, Medicare spending per beneficiary grew an average of 1.9% annually—more than one percentage point more slowly than the average annual growth of 3.2% in per capita GDP.”  (“Growth in Medicare Spending per Beneficiary Continues to Hit Historic Lows,” ASPE Issue Brief, DHHS, January 7, 2013)


The Congressional Budget Office projects growth of GDP minus 0.3 percentage points over the period 2013 to 2022, assuming an adjustment to the physician payment formula.  Compare that to Medicare spending from 1970 to 2010, when per beneficiary cost grew at approximately GDP plus 2.7 percentage points.


HHS conceded in its report that the economic recession may have contributed to the 2010-2012 decrease in growth in per beneficiary spending, but noted that “it seems unlikely that consumer behavior alone is responsible for the slow growth in Medicare spending.”  It also noted that changing demography contributed to the slowing growth trends for Medicare: the average age of Medicare beneficiaries is beginning to decline and this will continue over the coming decade.  However, according to HHS, “this marginal difference does not account for the very large difference between projected annual spending growth over the next decade of approximately GDP+0 and the historical experience of GDP+2.7.”


The slow growth in spending per beneficiary from 2010 to 2012 is unprecedented in the history of the Medicare program, according to HHS.  It credits the Affordable Care Act as an important factor contributing to slow growth in Medicare spending, noting that ACA:

  • Restrains the rate of growth of payments to Medicare Advantage plans
  • Restrains the rate of growth in unit payments to hospitals and other providers
  • Promotes value-based payment systems
  • Makes major investments to reduce fraud and abuse
  • Provides CMS the flexibility to implement a wide range of innovations to transform the delivery system by paying for value not volume (e.g., ACOs, primary care medical homes, bundled payments, reducing the frequency of readmissions and reducing hospital acquired infections)


(Read the full report from HHS, “Growth in Medicare Spending Per Beneficiary Continues to Hit Historic Lows,” here.)


Cuts in Medicare spending necessarily mean cuts in hospital reimbursement for Medicare patients.  In the iProtean advanced course, Value-Based Purchasing & Accountable Care Organizations, Dan Grauman and Nate Kaufman discuss effective approaches for hospitals/health systems when implementing the delivery system changes mandated by the Affordable Care Act.  iProtean subscribers can access this new course in their library.


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iProtean—Population Health Management

A large health system has jump-started its efforts to link its financing and delivery system by adopting a population health management strategy for its own employees.  Population health management is one of the triple aims of healthcare reform, along with high quality and low cost.



All payers will continue to pressure top line revenue growth for hospitals, but when CMS launched value-based purchasing and the readmissions reduction program in August 2012 (see iProtean blog October 3, 2012), it took a large step towards linking quality and payment.  The rationale behind the 30-day readmission penalty focuses on providing adequate post-discharge care management to avoid a patient’s readmission to the hospital.  Avoiding readmissions can be considered a component of population health management because “it focuses on a defined group of people (patients with certain diagnoses who have been treated in acute care facilities), a set time period (30 days post-discharge) and at least one clearly defined goal (keeping them healthy enough to stay out of the hospital).  Both providers and patients assume responsibility for maintaining the population’s health.” (Sanford, “Population Health Management: A ‘Start Small’ Strategy,” hfm, January 2013.)


The large health system designed a pilot program for its population health management strategy, using its employees and families as the base for the new system.  The model includes a health plan, wellness programs and incentives to encourage healthy behaviors.  It uses the medical home model to coordinate individuals’ care.  IT will be implemented system wide to ensure that each person’s records can be shared among various caregivers.  Early intervention for specific conditions—lower back pain, diabetes, high blood pressure, high cholesterol and obesity—will be the initial focus.


“We expect to gain valuable experience managing the health of chronic care populations, which can be applied to risk-based contracts with private and government payers in the future,” said Kathleen Sanford, senior vice president of nursing at Catholic Health Initiatives, Denver and author of the January 2013 hfm article.  The system expects to reduce employee healthcare costs by 10 to 14 percent.


Population health management necessarily requires a large population base, and this large health system has sufficient numbers of employees/families to conduct the pilot and gain the needed experience.  If a hospital/system doesn’t have the employee numbers to pilot a population health management program, it can and should adopt delivery strategies that focus on clinical integration and the upcoming payment changes.  The value-based purchasing program and readmission penalty program set organizations on this path by focusing on managing the care of patients with a select panel of diagnoses.


iProtean recently published an advanced course, Value-Based Purchasing & Accountable Care Organizations, and will publish several additional courses that address population health management.  iProtean subscribers, look for Transforming Your Organization into an Integrated Delivery System and Financing Considerations for Integrated Delivery Systems—featuring Marian Jennings, Lisa Goldstein, Dan Grauman and Nate Kaufman—in January and February.  Future courses that expand on population health management, Affiliation and Consolidation Strategies parts 1 and 2, will appear in your library of courses in March/April.


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iProtean—Hospitals Bear Brunt of Impact of “Doc Fix”

When Congress passed the American Taxpayers Relief Act to avoid the “fiscal cliff” on New Year’s Day, it included a remedy for the anticipated 26.5% cut in payments to physicians who treat Medicare patients—shifting the financial impact of that “doc fix” to hospitals and other healthcare programs.


Hospitals will bear nearly half of the $30 billion cost of stopping the payment cut to physicians.   The reductions will come in two ways:  first, a $10.5 billion cut from projected Medicare hospital payments over 10 years for inpatient or overnight care through a downward adjustment in annual base payment increases.  Second, Medicaid disproportionate care payments to hospitals will be reduced by an additional $4.2 billion over the next 10 years.  The cuts are in addition to the cuts under the Affordable Care Act. (Kaiser Health News Blog, January 1)


Some media project that “the biggest chunk of trims falls in the five-year period from 2014 to 2018 . . .”  (Philadelphia Inquirer, January 3)


The remainder of the $30 billion “doc fix” includes repricing bundled payments for end stage renal disease ($4.9 billion), competitive bidding for diabetic test strips purchased in retail pharmacies ($600 million), increased cuts (from 25% to 50%) to provider payments for multiple therapy services provided on the same day ($1.8 billion), and reducing risk-adjusted payments to Medicare Advantage plans ($2 billion).  (Kaiser Health News Blog, January 1; AHLA Practice Group, January 4)


The rationale behind the hospital cuts focuses on what CMS considers to be overpayments to hospitals caused by a new system of diagnosing patients.  The system, implemented by CMS in late 2007, resulted in billing trends that suggested hospital patients “suddenly were deemed sicker and warranted higher payments.”  The Medicare Payment Advisory Commission (MedPAC) noted that “the improved coding increased payments by $6.9 billion in 2008-2009,” and estimated that during the time period 2010 and 2012, hospitals had received $11 billion in overpayments.


The new fiscal cliff legislation gives Medicare the power to recoup $10.5 billion of those overpayments over the next few years. (Jordan Rau, “Behind the Fiscal Cliff Deal,” a Prolonged Hospital Finance Fight, Kaiser Health News, January 3)

The payment reduction is substantial, and hospitals disagree with MedPAC’s assessment of overpayment.  However, policy analysts note that this legislation is better than other options that were on the table.


iProtean subscribers, please note the new advanced course in your course library. Value-Based Purchasing & Accountable Care Organizations features Daniel Grauman, Nathan Kaufman and Monte Dube for in-depth look at what trustees need to know about how value-based purchasing works. Topics include the positive and negative effects; implementation; and engaging physicians.  They also examine governance issues that may arise as organizations consider establishing an Accountable Care Organization under the ACA.


This is the first in a series of new healthcare issues and topics that iProtean will explore in 2013.  Throughout the year we will be releasing advanced courses in the four domains:  Finance, Quality, Mission & Strategy and Governance.  Subject matter includes transforming your organization into an Integrated Delivery System; affiliation and consolidation strategies; employing physicians; making difficult decisions about services and programs; physicians and governance and many others.



For a complete list of iProtean courses, click here.


For more information about iProtean, click here.