iProtean—Thoughts from Leading Governance Experts on Succession Planning

Note: Because of the Thanksgiving holiday, this week we are publishing an abbreviated version of the newsletter. Next week look for information on Moody’s Investors Service 2014 Outlook for U.S. Not-for-Profit Hospitals.

 

We wish you all a lovely Thanksgiving.

 

When a hospital or system board takes steps to downsize its board, the process can be fraught with challenges. iProtean governance experts Barry Bader and Pamela Knecht recently wrote about recommended practices for downsizing the board. They put forth what they consider to be effective practices in GreatBoards (Fall 2013).

 

Barry and Pam suggested eight practices . . . we introduce four here.

 

  1. Assign responsibility for developing downsizing recommendations to a board committee or task force with solid credibility.
  2. Base downsizing decisions on objective, competency-based criteria that identify the areas of knowledge, skills and personal attributes that will be needed on the new board.
  3. Assess the current board: consult with current members to ask for their confidential assessment of their peers’ competencies, and to ascertain their interest in serving on the new board.
  4. Decide on the ideal size or size range for the new board and whether to reach the ideal immediately or through a transitional process of one or more years.

 

We have more on efficient practices for board composition in iProtean’s upcoming advanced course on competency-based succession planning. It is scheduled to be released in January and features Barry Bader, Lisa Goldstein, Anne McGeorge and Monte Dube and covers best practices, ramp-up time for new board members, desirable competencies, term limits, evaluating for re-election, recruiting in small markets, and elected and appointed boards.

 

 

iProtean subscribers, Part Two of Making Difficult Decisions About Services and Programs: A Portfolio Approach featuring Lisa Goldstein, Marian Jennings and Nate Kaufman will be in your library soon!

 

 

For a complete list of iProtean courses, click here.

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iProtean—Hospitals Cut Back on Hiring in Response to Revenue Reductions

One of the few predictable employment sectors during and since the great recession has been the healthcare industry. Job reductions have been unlikely and for most organizations job growth has been stable or increased. In some subsectors of the healthcare industry, job growth has been significant. The industry has served as the bastion of stability.

 

But this changed at the beginning of 2013. Although healthcare continues to add jobs, the slowdown in growth has garnered attention both in the industry and in the cities and towns that have a significant number of their populace employed in hospitals and other provider organizations.

 

The Bureau of Labor Statistics recently released data showing that the healthcare sector has added an average of 19,000 per month during the first nine months of the year, a 30% drop from last year (the 2012 average was 27,000 per month).  The September drop in job growth was even more significant: 7,000 jobs added—an 84% drop from 44,000 jobs added in September 2012 and 2011.

 

This slowdown indicates hospitals continue to take cost-cutting steps to bring expenses in line with decreases in volume and cuts in reimbursement. Moody’s Investors Service sees the slowdown in job growth as a credit positive, noting that hospitals are being managed more efficiently.

 

“We maintain a negative outlook for the not-for-profit hospital sector, but the slowing employment growth is a credit positive as management seeks to lower labor costs in the face of declining revenue growth. In fiscal 2012, expense growth outpaced revenue growth for the first time since fiscal 2008.”(“Sector Comment: Slowdown in Healthcare Job Growth Helps Hospitals, Hurts Municipalities,” Moody’s Investors Service, October 2013)

 

As reported here in previous posts, hospitals/health systems face the challenges of reductions in payments from government and commercial payers, shrinking inpatient volume, hospital inflation and Affordable Care Act provisions as they strive to maintain their operating margins. To cut costs, hospitals/health systems have begun to reduce their workforces through layoffs and eliminating positions. Reductions also have been achieved through merger/consolidation activity.

 

A key example of a health system that has reduced its workforce is Cleveland Clinic. It is offering buyouts to 3,000 employees as part of an effort to cut expenses by $330 million.

 

Healthcare workforce reductions negatively effect employment in the cities the hospitals/systems serve. Many local governments count on the local hospital(s) to help anchor economic growth. The authors of the Moody’s comment on job growth noted that throughout the great recession and its long aftermath, “healthcare employment has been a stabilizing force that buffered many local governments from even more severe employment declines than they actually experienced.” (“Sector Comment: Slowdown in Healthcare Job Growth Helps Hospitals, Hurts Municipalities,” Moody’s Investors Service, October 2013)

 

 

iProtean subscribers, Part Two of Making Difficult Decisions About Services and Programs: A Portfolio Approach features Lisa Goldstein, Marian Jennings and Nate Kaufman. The Sector Comment on the decline of job growth in health care is one of the resources you can access through viewing this course. Look for it later this month!

 

 

For a complete list of iProtean courses, click here.

For more information about iProtean, click here. www.iprotean.com/index.php/iprotean/demo

 

iProtean—New Report from Moody’s Assesses Impact of Exchanges on Hospital Credit Ratings

In addition to the difficulties people continue to experience when trying to purchase health insurance via the federal exchange/marketplace, hospitals also can expect to weather some difficulties as more people become insured through the federal/state exchanges.

 

The health insurance exchanges resulted from a provision of the Affordable Care Act. It was anticipated that each state would establish a health exchange where health plans would have to compete for a pool of people they would not normally insure. Premium rates were supposed to be competitive so enrollees would have a wide range of options from which to choose. If a state opted not to establish its own health exchange, its residents could enroll in a federal health exchange. From what has been reported so far, the state-run exchanges have had a relatively smooth start compared to the federal exchange.

 

It is too soon to tell whether enrollment issues will diminish and people will sign up as expected and according to estimates. This will make budgeting for hospitals difficult for 2014, according to a new Special Comment from Moody’s Investors Service, “Health Insurance Exchanges Are a Modest Credit Negative for Not-for-Profit Hospitals in 2014.”

 

The Special Comment author, Lisa Goldstein, outlined the exchange-related risk that will strain hospitals’ revenues in 2014. These risks counter the upside benefit of more insured individuals. The risks include:

  1. Migration of commercially-insured patients to exchange-insured patients with anticipated lower reimbursement rates, uncertain terms and contracts between exchange plans and hospitals
  2. Expected growth in bad debt
  3. A timing mismatch between having fewer uninsured and the $155 billion in reduced payment updates and cuts to Medicare and Medicaid disproportionate share (DSH) agreed upon by the hospital industry and the federal government
  4. Shift in private employers’ practice of providing health insurance to employees: reducing health care benefits, raising premiums for employees, even discontinuing employer-sponsored coverage and requiring employees to purchase insurance through private exchanges (a trend Ms. Goldstein said Moody’s expects will continue).

 

“We do not anticipate rating downgrades solely due to the advent of the exchanges in 2014. We expect hospital revenue growth rates will come under pressure in 2014 and beyond as enrollment gains traction and exchange plans take a sharpened pencil to hospital reimbursement rates to ensure their profitability going forward. Budgeting and financial planning will be more difficult for hospitals and their boards going forward. Management teams that execute sustainable expense reductions that offset lower revenue growth will see stability or even improvement in their credit ratings.” (Special Comment: Health Insurance Exchanges Are a Modest Credit Negative for Not-for-Profit Hospitals in 2014, Moody’s Investors Service, October 2013)

 

Ms. Goldstein centered her remarks on what she notes as the two primary risks: the level and composition of enrollment levels and rates.

 

Enrollment

Enrollment levels and composition are difficult to predict. Enrollment was projected to be about seven million individuals in 2014, but given the initial difficulties it is projected that number may be lower due to general confusion, software glitches, variation in enrollment by state, a relatively low first year penalty for not purchasing insurance, and so forth. However, enrollment levels may be higher than anticipated because of the federal government’s decision to implement an income and coverage verification waiver, making the enrollment process less complicated. Also, open enrollment has been extended March 31, 2013. So, the best guess is that all projections are, well, not all that helpful.

 

The composition of the exchange enrollment will have an even greater impact than the number of enrollees. Moody’s anticipates that many of the exchange enrollees previously had private insurance, which negates the benefit that would have been realized if all seven million enrollees were uninsured prior to enrollment.

 

Adverse selection is another risk to enrollment composition. Younger, healthy people may opt out and choose to pay the penalty. This means a larger proportion of those enrolling will have chronic disease or pre-existing conditions. Pre-ACA, the result would have been higher hospital volumes, but not so today. Moody’s expects enrollees will be highly managed by their in-network physicians and hospitals through greater care coordination. Expectations of higher emergency room (ER) volumes may be diminished if ER coverage is not pre-authorized by the physician. Individuals may decline treatment because of high deductibles as well.

 

Exchange Plans May Pay Lower Rates

Insurance companies that participate in the exchange will likely have low profit margins because of ACA requirements. In fact, many of the larger national insurance companies are not participating at all. Moody’s expects reimbursement levels to hospitals will be lower relative to other commercial rates—a contributing factor to lower revenue growth in 2014 and into the foreseeable future, Ms. Goldstein noted in the Special Comment.

 

“We expect exchange product rates to range anywhere between Medicaid rates and commercial rates, depending on the market, the plans and the hospital’s market position. Beyond 2014, as enrollment grows and plans become more aggressive in their negotiations, we expect commercial rates and exchange rates will blend, reducing revenues from current levels. As we have seen for several years, pressure on revenue growth is inevitable when lower-paying payers consume more of a hospital’s payer mix.” (Special Comment: Health Insurance Exchanges Are a Modest Credit Negative for Not-for-Profit Hospitals in 2014, Moody’s Investors Service, October 2013)

 

Moody’s also expects bad debts to put increased pressure on hospital revenues in 2014. There may be significant co-pays and deductibles for new enrollees through the exchange—both for those who previously had private insurance and for those who are purchasing health insurance for the first time. The lowest premium on the exchange typically comes with a hefty deductible and co-pay. Without a clear understanding of this responsibility, it is likely that some will not want to/be able to pay the deductibles/co-pays, resulting in higher bad debts for the hospital/system.

 

As noted earlier, some of the national insurers have opted out of participation in the exchanges. This suggests that the lion share of insurers providing products will be smaller, newer and less experienced, and may not have the necessary systems to manage the new population of enrollees. They may not have established physician or hospital networks. As a result, hospitals may experience more delays in receiving payments or processing claims. Because it’s a new process, the exchange plans will likely encounter delays in being reimbursed by the federal government.

 

 

iProtean subscribers, Part Two of Making Difficult Decisions About Services and Programs: A Portfolio Approach features Lisa Goldstein, Marian Jennings and Nate Kaufman. The Special Comment on exchanges is one of the resources you can access through viewing this course. Look for it later this month!

 

 

For a complete list of iProtean courses, click here.

For more information about iProtean, click here.

iProtean—Proposal Surfaces In Congress to Repeal the SGR

We don’t often report on early proposals from federal lawmakers, but this one captured our attention. It seems the Senate Finance Committee and the House Ways and Means Committee have a bipartisan draft proposal to repeal the Medicare Sustainable Growth Rate (SGR) formula and freeze current payment levels for 10 years. (“Key Committees Release Bipartisan Proposal to Scrap SGR and Freeze Payment Rates,” Health Lawyers Weekly, November 1, 2013)

 

The SGR formula, enacted by Congress as part of the Balanced Budget Act of 1997, is a mechanism that ties physician payment updates to the relationship between overall fee schedule spending and growth in gross domestic product (GDP). Its purpose is to control spending by Medicare on physician services. The implementation of the physician fee schedule update to meet the target SGR can be suspended or adjusted by Congress, as has been done regularly in the past (the “doc fix”). For example, over the last 10 years, Congress has spent nearly $150 billion on short-term SGR overrides to prevent pending cuts.

 

The proposal would permanently repeal the SGR update mechanism, reform the fee-for-service payment system through greater focus on value over volume, and encourage participation in alternative payment models. The revised fee-for-service system would freeze current payment levels through the 10-year budget window, while allowing individual physicians and other healthcare professionals to earn performance-based incentive payments through a compulsory budget-neutral program. “By combining the current quality incentive programs into one comprehensive program, this proposal would further value-based purchasing within the overall Medicare program while maintaining and improving the efficiency of the underlying structure with which professionals are already familiar,” (Discussion Draft, SGR Repeal and Medicare Physician Payment Reform,” Report: House Ways and Means Committee, October 30, 2013)

 

The proposal would combine three current payment incentive programs into one program—the Value-Based Performance (VBP) Payment Program—and would begin adjusting physician payments in 2017. In that year, the funding available for VBP incentive payments would be equal to 8% of the total estimated spending for VBP eligible professionals, according to the proposal. (“Key Committees Release Bipartisan Proposal to Scrap SGR and Freeze Payment Rates,” Health Lawyers Weekly, November 1, 2013)

 

The three current payment incentive programs are:

  • Physician Quality Reporting System (PQRS)—failure to successfully report on quality measures results in a 2 percent penalty;
  • Value-Based Modifier— budget-neutral payment adjustment based on quality and resource use; and
  • EHR MU—Failure to demonstrate meaningful use (MU) of certified electronic health record (HER) technology results in a 3 percent penalty

 

Under the VBP program, these payment penalties would sunset at the end of 2016.

 

 

Update from HHS on Hospitals and the Exchanges

Hospitals can cover the insurance premiums of their disadvantaged patients and not violate the federal anti-kickback statute prohibiting assistance to patients covered by federal health programs, according to a recent letter from the Secretary of Health and Human Services to a lawmaker.

 

Some hospitals and health systems offer financial assistance to vulnerable or disadvantaged patients by paying their health insurance premiums. The opinion from the Secretary makes it clear that this practice can continue when those patients get their coverage through health exchanges/marketplaces.

 

However, there may be additional issues; for example, it isn’t clear whether some states’ anti-kickback statutes still would prohibit hospitals from providing insurance assistance. (“HHS: Hospitals Not Prohibited from Paying Insurance Costs,” HFMA Weekly News, October 31, 2013)

 

 

iProtean subscribers, we hope you have viewed the new advanced Finance course Making Difficult Decisions About Services and Programs: A Portfolio Approach, Part One. Experts Marian Jennings, Lisa Goldstein and Nate Kaufman continue their in-depth view of this difficult topic in Part Two—to be released at the end of this month

 

 

For a complete list of iProtean courses, click here.

For more information about iProtean, click here.