Becker's Hospital Review

Sign up for the COMPLIMENTARY Becker's Hospital Review CEO Report & CFO Report E-Weeklies at www.BeckersHospitalReview.com or call (800) 417-2035 other formula that uses Medicare rates as a baseline figure. Therefore, cuts to Medicare rates may have a larger impact on hospital finances than just among Medicare patients. 27. The majority of patients treated by hospitals are covered by Medicare (40.9 percent of patients treated in U.S. hospitals). The average payer mix of a U.S. hospital is as follows: • edicare: 40.9 percent M • edicaid: 17.2 percent M • lue Cross Blue Shield, other private insurB ance: 16.5 percent • MO or PPO: 14 percent H • elf-pay: 4.9 percent S • orker's compensation and other governW ment programs: 2 percent13 28. Nonprofit health systems receive tax-exempt status because of the benefits they provide to their communities. However, there has been greater scrutiny by lawmakers and the public in the past two to three years as to whether the tax breaks are equivalent to the level of charity care or other benefits provided by the hospitals. As part of the PPACA, the Internal Revenue Service has implemented stricter reporting requirements, and many state and local governments are currently evaluating hospital tax breaks. (See: "Health Reform's New Charity Care Requirements for Hospitals: Achieving Compliance to Avoid Penalties " and "Charity Care and Property Taxes: Why They Are Now Inseparable.") Here is a breakdown on average level of total charity care at U.S. hospitals, as a percentage of total hospital expenses, according to an IRS analysis of hospitals' 2009 Schedule H forms. • mall hospitals (less than $100 million exS pense): 7.3 percent • edium hospitals ($100 million to $299 M million expense): 8.0 percent • arge hospitals ($300 million or more exL pense): 9.8 percent • ystems (more than one licensed hospital): S 9.3 percent 29. As part of the PPACA, hospitals agreed to roughly $155 billion in payment cuts from Medicare and Medicaid over 10 years. Further, the American Taxpayer Relief Act of 2012, better known as the fiscal cliff deal, brought on further cuts to hospital payment rates. Together, these adjustments will slow the growth of Medicare spending. However, hospitals will not actually be reimbursed a lower rate year-to-year. Instead, growth in Medicare payments will be slowed; they are expected to fall significantly under the inflation rate for the next decade. CMS' proposed rule for 2014 payments provides just a 0.8 percent increase in Medicare inpatient payment rates over 2013. 30. Various reforms under the PPACA are slowly increasing the percentage of Medicare payment rates, under the formula CMS uses, that are tied to hospital performance. The PPACA implemented the hospital Value-Based Purchasing program, which in FY 2014 will tie 1.25 percent of hospital payments to their performance on various quality and patient experience indicators. Under the Hospital Readmissions Reduction program, hospitals will concede a maximum of 2 percent of Medicare payments for excessive readmissions in FY 2014. And, as the adage goes: "where Medicare goes, so goes private payers." Many private payers have entered into various types of value-based contracts with providers. Recently UnitedHealthcare said it plans to double the number of its value-based contracts. 31. The financial impact of these value-based reforms is expected to have a significant impact on low-performing hospitals. For example, a 300-bed hospital with poor quality metrics would be penalized approximately $1.3 million a year, beginning in 2015, under CMS value-based reforms.14 32. The impetus for value-based care is driven by two core forces: 1) the rising cost of medical care and 2) the lack of predictable quality. In regard to the latter force, medical errors and healthcare-associated infections continue to occur at alarming rates in U.S. hospitals. According to a 2007 study by the CDC15 that examined hospital data from 2002, approximately 1.7 million HAIs occur annually. The estimated number of deaths associated with HAIs in U.S. hospitals was 98,987. Of these, 35,967 were from pneumonia, 30,665 from bloodstream infections, 13,088 from urinary tract infections, 8,205 from surgical site infections and 11,062 from infections of other sites. According to the CDC's analysis of the study, "HAIs in hospitals are a significant cause of morbidity and mortality in the United States." 33. Hospitals and health systems are entering into a variety of value-based payment models with CMS and private payers. Many value-based agreements with private payers are similar to CMS' VBP program where there are incentives for providing high-quality care that meets certain benchmarks. Others are more complex and may include accountable care organization arrangements, capitated payments for a patient over a set period of time or bundled payments for certain medical and surgical services. 34. Accountable care organizations have proven a popular value-based model, at least in terms of systems willing to test their viability. ACOs were one of several programs created by the Center for Medicare & Medicaid Innovation, a center created and funded by the PPACA to pilot new patient care models intended to reduce costs and improve quality. CMS created several programs for ACOs, including the Medicare Shared Savings Program and the Pioneer ACO program. The CMMI also launched the Bundled Payments for Care Improve- 13 ment Program, which will pay hospitals a bundled rate for certain hospital-based and outpatient services associated with selected DRGs. 35. ACOs are also now being operated by private payers. In February 2013, Leavitt Partners estimated there were a total of 428 ACO programs across 49 states and 32 such arrangements created within 22 different health plans. 36. Because of demands to lower costs, improve quality, coordinate care and improve population health, hospitals are concerned with their alignment with physicians. Physicians, after all, control most testing and treatment decisions, and their goals must be aligned with those of the health system for success. To achieve this, health systems look to clinically integrate with physicians, which can be achieved through a variety of models ranging from employment to operating a management service organization for independent physicians. 37. Despite the variety of models available to achieve clinical integration, physician employment has risen in popularity, likely because it eliminates many legal hurdles associated with hospital-physician relationships. According to the AHA, 45 percent of physicians were employed in 2012. 38. Employment varies greatly by physician specialty. For example, only 25 percent of specialists were employed in 2012, according to The Advisory Board. However, that was a significant increase from the 5 percent employed in 2000. A physician's decision to accept employment seems largely driven by a sense of independence (something apparently more common among surgeons) and an ability to maintain income in a private practice setting. That is, specialties are much more willing to accept employment, and even seek it (in the case of many cardiologists), after receiving significant physician fee payment cuts from Medicare. 39. Anticipated physician shortages in certain areas of the country are also driving hospitals' efforts to align with physicians. The Association of American Medical Colleges estimates the U.S. will have a shortage of 150,000 physicians by 2025. 40. When hospitals employ physicians, they often do so to prepare for managed care and other business purposes. However, hospital leaders should keep in mind physicians are quite expensive to employ, and in fact, increased regulations have made operating physician practices more expensive than in the past. Physician practice operating costs per full-time equivalent physician rose 63 percent from 1998 to 2008, according to the Medical Group Management Association. However, physicians often generate significant revenue for a hospital when employed. For example, an orthopedic surgeon generates a median revenue of $2.7 million for a hospital over the course of a year; median orthopedic surgeon compensation is $519,000 for the same time period, according to data from Merritt Hawkins. (See "51 Statistics on Physician Salaries vs. Hospital Revenue Generated.")

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