iProtean—Health Reform and Health Spending

Health spending growth through 2013 is expected to remain slow—3.8 percent—because of the sluggish economic recovery, continued increases in cost-sharing requirements for the privately insured and slow growth for public programs, according to federal actuaries and economists who published their projections in the September issue of Health Affairs.

 

They note, however, that “improving economic conditions, combined with the coverage expansions in the Affordable Care Act and the aging of the population” will drive faster projected growth in health spending in 2014 and beyond. Expected growth for 2014 is 6.1 percent, with an average projected growth of 6.2 percent per year thereafter. If you factor in the slower growth rate in 2012 and 2013, the average annual growth rate is 5.8 percent for 2012-2022. (“National Health Expenditure Projections, 2012–22: Slow Growth Until Coverage Expands And Economy Improves,” Health Affairs, September 2013.)

 

For reference, the average annual growth in spending between 1990 and 2006 was 7.4 percent.

 

The 5.8 percent average rate of spending growth is 1.0 percentage point faster than the projected average annual economic growth during the period. As a result, the share of GDP devoted to healthcare is projected to rise from 17.9 percent in 2012 to roughly 20 percent of GDP by 2022. (“National Health Expenditure Projections, 2012–22: Slow Growth Until Coverage Expands And Economy Improves,” Health Affairs, September 2013.)

 

As has been reported in earlier blogs, the actuaries dispute that health reform has been largely responsible for the slowing of the increase in health spending. In their report they noted there has been no evidence nor have there been credible projections that health reform will influence the way doctors, hospitals and others provide care, nor will the way they provide care significantly affect health spending. They noted they expect only “modest” savings from the changes put forth in the health reform law. (“Health Spending Over The Coming Decade Expected To Exceed Economic Growth,” Kaiser Health News, September 18, 2013)

 

The actuaries also said they are skeptical that the nation has entered a new era of lower health spending, a case that has been made by the Obama administration and many prominent economists. The report notes health spending will rise faster than economic growth as the business climate improves.

 

Modern Healthcare noted that soft spending growth has “provoked debate over how much of the slowdown could be a result of stagnant wages and unemployment and what might be more efficient care in response to new public policy.” It quoted

David Cutler, an economist at Harvard University: “The actuaries do not think the world has changed in any fundamental way. This puts them somewhat at odds with a number of recent papers.” Recent research by Cutler attributed about one-third of the slowdown to the economy. Greater efficiency, fewer brand name drugs and higher cost sharing for patients with private insurance drove the remaining 55 percent. (“Reform Update: Health spending for 2013 will be sluggish but will pick up in 2014,” ModernHealthcare.com, September 18, 2013)

 

Next year the actuaries expect about 11 million uninsured people will gain coverage through the new private insurance marketplaces and the expansion of Medicaid that starts under health reform. Most of the newly insured will be relatively young and healthy, the actuaries predict, so the 6.1 percent rise in spending will mostly result from increased use of physician/outpatient visits and higher prescription drug use rather than hospital/inpatient services. (“Health Spending Over The Coming Decade Expected To Exceed Economic Growth,” Kaiser Health News, September 18, 2013)

 

To read the Health Affairs report, click here.

 

 

 

iProtean subscribers, a new advanced Finance course—Making Difficult Decisions about Programs and Services, Part One—will be published in your course library in October. Marian Jennings, Lisa Goldstein and Nathan Kaufman discuss an objective process for evaluating program viability. Ms. Jennings describes using a portfolio approach when evaluating whether to expand, maintain, enhance, downsize or eliminate programs. She begins with asking four core questions:

  • Is there a real community need for the service
  • What is the nature of the market
  • D you have strong quality performance in the existing program
  • Is the program financially viable?

 

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Brian Wong, M.D. (The Bedside Project), Doug Mancino, Esq. (Hutton & Williams, LLC)  For more information, click here.

 

For more information about iProtean, click here.

 

iProtean—Inaccuracies, Skewed Incentives in RAC Program

The Recovery Audit Contractor (RAC) program, established in 2003 through the Medicare Modernization Act and implemented in 2010, has had wide ranging effects for both hospitals and patients. Its purpose is to identify and recover improper Medicare payments paid to healthcare providers under fee-for-service Medicare plans. But claims of skewed incentives—RACs are paid on a contingency fee basis on the overpayments and underpayments they identify—and of independent contractors’ opportunism, broad sweeps of data requests and inaccuracies have resulted in provider appeals. The American Hospital Association (AHA) has challenged the program, and efforts are underway to revise the legislation.

 

An example of the program’s effect on patients made the news recently: an elderly patient had been in the hospital four days and was then transferred to a nursing home. During the transfer process, the caseworker told the patient’s daughter that her mother had been on “observation status” in the hospital. It didn’t register with the woman at the time, but she subsequently found out she had to pay for the nursing home stay. Medicare doesn’t cover follow-up treatment unless someone has been an inpatient for at least three days. These incidents occur with increasing frequency, and the financial consequences for patients and their families can be significant.

 

Increasingly, hospitals are placing older patients on “observation status,” and justify this practice because of RACs. Since the program’s inception, audit contractors have cited hospitals time and time again for what they consider improper inpatient classification, and hospitals have had to return the funding they received up to three years earlier. They often get little or no reimbursement for these cases, “even though there is no dispute whatsoever that the care the patient received was reasonable and necessary,” said an executive from AHA.

 

Two Studies with Conflicting Results

The Office of the Inspector General (OIG) released a report in early September on recovery audit contractors. While it didn’t dispute hospitals concerns that the auditors are usually inaccurate, it did report lower claims and appeals rates than an ongoing AHA study of the contractors. (HFMA Weekly News, September 6, 2013)

 

The OIG study covered the early years of the program (2010 and 2011) and reported that providers appealed only six percent of the 1.1 million claims in which recovery audit contractors found they overbilled Medicare. Forty-four (44) percent of those appeals resulted in overturning the audit findings. The AHA’s survey of 2,300 hospitals (RACTrac reports—ongoing through 2013) has found that hospitals appeal about 41 percent of all Medicare claims denied by a RAC and that hospitals were successful in overturning 72 percent of challenged RAC denials.

 

The discrepancies in the two reports may be attributed to differing timeframes, providers and treatments involved. AHA stands by its appeals numbers; the implication is that the RAC program is not achieving its waste control goals.
Others note that the sheer numbers of claims denials suggests little discrimination on the part of the contractors who, it is said, have nothing to lose by denying claims arbitrarily. Hospitals bear the cost burden of appeals of these questionable denials, and the appeals process is lengthy.

 

HFMA weighed in on the OIG report; its vice president of healthcare financial practices noted, “The Centers for Medicare & Medicaid Services needs to address the fundamentally flawed incentives in the RAC program’s design. It costs RAC auditors little to request and review medical records from providers and to subsequently deny claims. The cost burden of questionable denials will continue to be borne by providers.” (HFMA Weekly News, September 6, 2013)

 

Hospital representatives have urged passage of the Medicare Audit Improvement Act, which would establish a limit on medical record requests, impose financial penalties on RACs that fail to comply with program requirements and require the public release of RAC performance evaluations. Others are calling for a moratorium to allow time to clear a huge backlog of hospital appeals.

 

 

iProtean subscribers, a new advanced Finance course—Making Difficult Decisions about Programs and Services, Part One—will be published in your course library in October. Marian Jennings, Lisa Goldstein and Nathan Kaufman discuss an objective process for evaluating program viability.

 

For a complete list of iProtean courses, click here.

 

iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Brian Wong, M.D. (The Bedside Project), Doug Mancino, Esq. (Hutton & Williams, LLC)  For more information, click here.

 

For more information about iProtean, click here.

iProtean—More Ratings Downgrades Due to Decline in Admissions

New special publications from Moody’s Investors Service highlight the continuing deterioration of patient volume in not-for-profit hospitals and the impact of that decline on overall performance. As hospitals transition from a fee-for-service to a value-based model they will experience significant disruption that will continue to impact performance in 2013 and in the coming years. Admissions are expected to continue to fall. (Moody’s Investors Service, August 22, 2013)

 

Quarterly Ratings

In its Special Comment on quarterly ratings, Moody’s noted that ratings downgrades outpaced upgrades by a two to one margin for the second consecutive quarter in 2013. The common driver behind a majority of the downgrades was “material admissions declines” ranging from 1 percent to nearly 10 percent from 2011 to 2012.

 

Though the industry is in transition, most payer arrangements are still based on fee-for-service methodologies that underscore the need for volumes to cover costs and produce positive cash flow, the authors said. Significant declines in volumes lead to weaker performance and debt coverage measures, and this factored into many of the downgrades in the second quarter of 2013. They noted that most of the downgraded hospitals were small (less than $500 million in operating revenue) and may have been unable to respond quickly to the volume declines. (Moody’s Investors Service, August 15, 2013)

 

2012 Median Report

The Moody’s FY 2012 Median Report released on August 22 highlighted the triple challenges of operating with lower volumes and lower revenue growth, higher exposure to government payers and increased expenses. Some of its key findings include:

  • Weaker operating performance after three years of stability
  • Decline in median operating cash flow margin
  • Operating performance either flat or down across all rating categories
  • Stable balance sheets
  • Expense growth that exceeded revenue growth
  • Favorable liquidity and leverage ratios

 

Expense Growth, Revenue Decline

For the first time since FY 2008, the expense growth rate exceeded the revenue growth rate. Both median total operating revenue and net patient revenue growth rates declined, but median expense growth rate increased. “The reappearance of expense growth exceeding revenue growth is unsustainable,” the authors noted.

 

Moody’s analysts said they expect revenue growth will remain pressured in FY 2014 because of a variety of factors:

  • Medicare payment rates increasing by only 0.7%
  • Sequestration
  • DSH reductions
  • Historically low rate increases from commercial payers
  • Uncertain reimbursement rates and enrollment levels from health exchanges
  • For hospitals in states that are not expanding Medicaid, no enhanced federal funding

 

On the expense side, it will be difficult to make additional expense reductions, at least in the short term. Hospital management teams have been cost cutting since the beginning of the recession. They have reduced staff and benefits, improved productivity levels, cut supply costs, and downsized or closed unprofitable services and programs. The next level of cost reductions undoubtedly involve more challenging process and cultural changes while the benefits may not be immediately realized, the authors noted. (Moody’s Investors Service, August 22, 2013)

 

Median Data Trends Summary

Moody’s summarized both the positive and negative 2012 median data trends.

 

Positive Median Data Trends

  • Balance sheets remained healthy in FY 2012. Favorable investment returns and low capital spending led to growth in absolute unrestricted cash and investments and improved median cash- to-direct debt. Median days cash on hand remained stable.
  • Debt coverage measures remained favorable and on par with the prior year.
  • Median growth rates of outpatient volumes continued to trend upwards.
  • Revenue growth in FY 2012 was aided by external funding sources including information technology meaningful use payments and state provider fee programs.
  • The median rate of growth in direct debt continued a negative multi-year trend reflecting normal principal amortization despite growth in the aggregate level of direct debt for the portfolio.

 

Negative Median Data Trends

  • Median operating margin and median operating cash flow margin declined. Absolute median operating income was down and absolute median operating cash flow generation was flat compared to FY 2011. Operating margins were either flat or showed some decline across all rating categories.
  • Expenses grew faster than revenues, which contributed to weaker operating performance. Median annual revenue growth rate slowed to 5.2% in FY 2012 from 5.4% in FY 2011, while the median annual expense growth rate increased to 5.5% in FY 2012 from 5.0% in FY 2011. Median growth rate of net patient revenues slowed noticeably to 4.7% from 5.3%.
  • Median growth rate of inpatient admissions was a decline of -0.6% in FY 2012 after flat growth of 0.0% in FY 2011. Meanwhile the median observation stay growth rate increased to 9.0% in FY 2012 compared to 8.8% in FY 2011. The shift from inpatient admissions to observation stays has been a major contributing factor to the lower revenue growth trends in recent years.
  • Payer mix continues to shift toward government payers and away from commercial payers.
  • The median rate of growth of comprehensive debt for the portfolio increased due to higher unfunded pension liabilities from a lower discount rate.

 

 

Information for this publication is from two Moody’s reports, both with lengthy titles.

  1. Median Report, US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance: Revenue Growth Falls Below Expense Growth for the First Time Since FY 2008; Liquidity and Leverage Ratios Remain Favorable, Moody’s Investors Service, August 22, 2013; and
  2. Median Report, US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance: Revenue Growth Falls Below Expense Growth for the First Time Since FY 2008; Liquidity and Leverage Ratios Remain Favorable, Moody’s Investors Service, August 22, 2013.

 

 

iProtean subscribers, have you viewed the new advanced Governance course in your library? Physicians and Governance features Barry Bader, Lisa Goldstein and Monte Dube who discuss the current debate surrounding physicians on the board of directors. They provide suggestions and considerations about the various challenges associated with physician board membership.

 

For a complete list of iProtean courses, click here.

 

 

iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Brian Wong, M.D. (The Bedside Project), Doug Mancino, Esq. (Hutton & Williams, LLC)  For more information, click here.

 

For more information about iProtean, click here.

iProtean—Virtual Mergers

The pace of consolidations will likely increase over the next several years, and an attractive consolidation model has surfaced—virtual mergers—according to the authors of a new Special Comment by Moody’s Investors Service.

 

Moody’s comment focuses on two broad types of virtual merger structures; in each, debt is separately secured by each partner:

  • Parent-subsidiary model: one partner (the parent), usually larger, acquires or merges with a smaller hospital partner (the subsidiary). The parent becomes the sole corporate member of the hospital.
  • “Newco” model: a new “super-parent” is created as the sole corporate member controlling both of the hospital partners.

(“Special Comment—Joined at the Hip: Not-for-Profit Hospitals Pursue Virtual Mergers; High Integration Links Bond Ratings Even When Debt Separately Secured,” Moody’s Investors Service, August 27, 2013)

 

Virtual mergers combine all or many strategic and operating functions of the consolidating hospital partners. Management, governance and operations are largely combined. However, debt obligations remain separately secured by the individual merger partners rather than consolidated, as in traditional merger or acquisition transactions. These virtual merger structures are typically considered legal mergers for anti-trust purposes because of the change in control, even though debt obligations are not merged.

 

Virtual mergers appears to be an attractive model for hospitals constrained from full consolidation by:

  • Economic disadvantages; i.e., the existing debt structures
  • Ownership structures; e.g., mergers between county-owned and private 501(c)(3) hospitals
  • State regulations; i.e., legal restrictions regarding asset transfers to an out-of-state partner

 

Virtual mergers created to avoid the high costs of combining debt will likely become full mergers when a debt restructuring is economically beneficial. Those related to differences in ownership structures or state regulatory restrictions will retain their virtual model.

 

The Special Comment authors noted that virtual mergers are credit positive for smaller hospitals that join larger healthcare systems and that benefit from the reduced costs and higher revenue attained through a parent- subsidiary model. “The debt obligations and ratings are distinct, but a high degree of integration between the parent and subsidiary can result in a higher rating for the subsidiary than would have been assigned independently.”

 

They also said that larger hospitals are becoming similarly challenged by lower revenue growth and will seek growth through virtual mergers with similarly sized hospitals. “The impact on the separate ratings of larger partners is not a clear positive as it is with smaller hospitals joining larger systems, but rather driven by the individual credit positions of the partners and degree of integration.”

(“Special Comment—Joined at the Hip: Not-for-Profit Hospitals Pursue Virtual Mergers; High Integration Links Bond Ratings Even When Debt Separately Secured,” Moody’s Investors Service, August 27, 2013)

 

 

iProtean subscribers, you can read the full Special Comment from Moody’s Investors Service by going to either of the advanced Mission & Strategy courses, Affiliation and Consolidation Strategies Part 1 or Part 2, and clicking on the Resources tab, where a link to the article appears.

 

iProtean subscribers, you have a new course in your library . . . Physicians and Governance featuring Barry Bader, Lisa Goldstein and Monte Dube. These experts cover the importance of having physicians on the board of directors, how to involve physicians in leadership roles, physicians leaders on the board, physician conflict of interest, having employed physicians on the board, criteria for physician board members, ex officio positions and best practices.

 

For a complete list of iProtean courses, click here.

 

 

iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Brian Wong, M.D. (The Bedside Project), Doug Mancino, Esq. (Hutton & Williams, LLC)  For more information, click here.

 

For more information about iProtean, click here.