Becker's Hospital Review

Becker's Hospital Review June 2014

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15 Financial Management The total margins for hospitals increased to 6.5 percent in 2012, meaning hospitals posted solid operating profits thanks in part to higher reim- bursements from commercial payers. But the days of cushy pay from private insurers may be coming to gradual end. More insurers are moving toward capitated payments and shared savings contracts, which put greater pressure on reimbursement. Analysts at Moody's Investors Ser- vice have also said rate increases from commercial payers, from a broad perspective, have been lack- luster the past few years, which have contributed to slow revenue growth. Hospital executives may not want to admit it, but Medicare is becoming an even more important baseline than ever before. Whether the U.S. healthcare system is heading to- ward a Medicare-for-all, single-payer type of de- sign — that's a different conversation for another day. But right now, for the most progressive and financially attuned hospitals, it's worth asking: Would I survive if Medicare were my only payer? The power of Medicare breakeven For executives like John Goodnow, CEO of Benefis Health System in Great Falls, Mont., that question has been top-of-mind for the past half decade. "Hospitals have traditionally cost-shifted from payers that are worse than Medicare and from people that don't pay onto commercial payers," Mr. Goodnow says. "But the days of being able to cost-shift are rapidly coming to a close. Those strategies that worked in days past aren't going to work in the future." So what strategies will work? "It's important to get to Medicare breakeven," he says. Benefis is a two-hospital system and includes the only tertiary hospital for a 37,800-square-mile area, which is a shade bigger than Indiana. Most of its service area is in Montana, a relatively poor state, and the system mostly treats patients with government insurance: 53 percent Medicare, 11 percent Medicaid and 6 percent TRICARE, Indian Health Service and other government programs. With almost 70 percent of Benefis' payer mix coming from the government, Mr. Goodnow and his team knew the system had to fundamentally change its fiscal structure. In 2009, Benefis made Medicare breakeven a long- term goal, if for nothing else to stabilize that half of its revenue base. Every year since then, Benefis has maintained an operating margin of at least 3.6 per- cent (in 2013, it was 4.1 percent). Perhaps most strik- ingly, the health system has already achieved Medi- care breakeven: In 2012, Benefis posted a positive 2.6 percent margin on its Medicare services, which was vetted and confirmed by financial advisers. How can hospitals actually record a profit on their Medicare business? It's not a mirage, Mr. Good- now says, and the strategy generally requires the same starting point. Why labor strategies rule the day "The big dog in the room for almost any organi- zation, particularly at the beginning of the pro- cess, is you need to look at it as a marathon and not a little sprint race," Mr. Goodnow says. "At the beginning of the marathon, the biggest opportu- nities typically lie in productivity improvement." According to Fitch Ratings, personnel costs repre- sented 54.2 percent of hospital operating revenue on average in fiscal year 2012, one of the highest figures of the past several years. Benefis has about 2,800 employees, and Mr. Goodnow says their personnel-to-revenue ratio is running at about 48 percent, well below average. If Benefis had been at the Fitch median, Mr. Goodnow says the sys- tem's $13 million operating profit would've been completely wiped out — and the system would've been deep into the red. "Most hospitals are fairly heavily staffed, at least not-for-profit hospitals," Mr. Goodnow says. "If you put in place a very good productivity track- ing and monitoring system, and you're pretty ada- mant about achieving productivity standards and holding people accountable, that's where you're going to get the single biggest improvement in cost reduction." Jason Barrett agrees that labor costs must be handled to have a shot at earning a margin on Medicare. Mr. Barrett serves as chief integration officer and executive vice president of strategy at Flagler Hospital in St. Augustine, Fla. He says Fla- gler — which is one of 15 hospitals most exposed to Medicare in Moody's portfolio — just started its Medicare breakeven project in 2012. The ex- ecutive team found that from 2012 through 2019, the hospital would have to shave $30 million in operating costs to maintain a 2 percent operat- ing margin. About one-fifth of the savings had to come from the labor side. Mr. Barrett says one of the major initiatives was finding a way to make overtime pay for nurses more sustainable. "We worked with our nursing ranks to say we want to make sure we are able to [reduce premium pay], and they came up with the restructuring of schedules to get it," Mr. Barrett says. "That's the thing I'm most proud of. It was the nurses championing the effort. It wasn't an edict from administration." However, controlling labor does not necessarily mean hospitals and health systems have to resort to layoffs. Under Mr. Goodnow, Benefis has nev- er laid off anyone. In fact, in each of the past 12 years, Mr. Goodnow has promised raises to every- one across the system. The key, he says, is making sure the organization is right-sized to a level that ensures quality care. "We have lots of quality accolades, so [labor strategies] haven't made quality suffer here," Mr. Goodnow says, noting Benefis has received sev- eral awards from Healthgrades. "And you might think, yeah, but well, you're going to really hurt employee satisfaction. No, actually not. Employee satisfaction has gone up every year. We've tight- ened productivity dramatically without having employee satisfaction or quality suffer." "I have those personal promises to employees that you're getting raises and won't be laid off," Mr. Goodnow adds. "The tie-in I make: There is no way we could make those kinds of assurances if we weren't focused on, and good at, cost reduction." The pertinent components beyond labor Labor costs continually present areas of improve- ment for hospitals and health systems. While la- bor is an essential area of emphasis, it's still a mere piece in the Medicare profit puzzle. At Flagler, executives knew they had to get per- sonnel costs in line, but of the $30 million they had to save, half actually had to come from a dif- ferent source: physician alignment. Specifically, Flagler had to start reducing varia- tion and length of stay. The hospital also created a clinically integrated network and invested more in accountable care contracts. "We recognized if we're going to still have Flagler on the front of the building in the future, we'll have to be more economically integrated with our physician partners," Mr. Barrett says. "We have 200 physicians who now participate in our clini- cally integrated network. Our message to get them to join was that it is always about quality. It sounds like mom and apple pie, but we said if we don't do this, your access to patients will be compromised, as will your way of practicing medicine." Shelly Hunter, CFO of Mercy Joplin/Kansas, a five- hospital division of Mercy, agrees. She says if her system's commercial payers went to Medicare rates, the system would lose between $6 million and $12 million in net revenue every year. Preparing for the worst, Mercy Joplin/Kansas has drilled down into care path management to find out how its Medicare cases can become profitable. For example, executives What if Medicare Were the Only Payer? (continued from cover) Benefis East Campus

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