As hospital leaders are already aware, 2014 is a big year for healthcare reform. Three items in particular have the potential to wreak financial havoc on hospitals. Starting Jan. 1, the following changes are scheduled to be implemented: Medicaid eligibility expansion, disproportionate share hospital payment reductions and health insurance exchanges.
Medicaid eligibility expansion
As of this writing, 25 states plus Washington, D.C. have elected to expand their Medicaid eligibility requirements in 2014, two states are working towards expansion after 2014, and 23 states are not moving forward with expansion at this time.
In the participating states, there is a strong likelihood hospitals will see a sharp increase in patients with Medicaid and the associated reimbursement level of that program. The specific number of new Medicaid enrollees is still in flux as states make their preparations; however, the final number will be at least several million new enrollees when benefits become effective in January.
If a hospital currently doesn't make money on procedures that utilize PPIs, such as knee or hip replacements, with Medicaid as the payer, a sharp increase in Medicaid patients can turn a bad financial situation into a full-blown disaster. Ensuring that the right cost structure is in place to handle the surge in Medicaid patients will be critical to hospitals' financial success.
Disproportionate share hospital payment reductions
As stated above, not all states have elected to participate in expanding their Medicaid eligibility rules. However, if a hospital is located in a non-participating state, it doesn't mean it is immune to the financial implications of the Medicaid expansion.
During the development of healthcare reform, expanding Medicaid was among the law's cornerstones. The underlying assumption was that all states would participate in the Medicaid expansion, thus dramatically increasing the number of insured people and significantly reducing the amount of uncompensated and/or undercompensated care hospitals would need to provide. As such, DSH payments would be reduced. The net result: Hospitals in all states saw significant reductions to Medicare and Medicaid DSH payments beginning in October 2013). What does "significant reductions" mean? Medicaid DSH payments will be cut by $1.1 billion in during the next two years. Medicare has also reduced its base DSH payment by 75 percent.
For hospitals in states that aren't expanding Medicaid, here is the scenario for 2014 and beyond: significantly reduced Medicare and Medicaid DSH payments with no additional volume (albeit Medicaid) coming through the door. Bear in mind, the DSH payment cuts are on top of the broader cut to Medicare reimbursements enacted earlier in 2013. It's already difficult to make money on PPI procedures with Medicare or Medicaid as the payer. Steep reductions to DSH payments will make it impossible unless aggressive measures are taken by hospitals to manage PPI costs.
Health insurance exchanges
The health insurance exchanges went live with their open enrollment process on Oct. 1, 2013, and many news headlines followed, chronicling the technical issues that have plagued the federal exchange enrollment website. As the issues get addressed in the coming months it is extremely important for hospitals to understand how the exchanges work and what impact they can have on their financial situation.
The theory behind the exchanges is to provide a simple and easy-to-understand one-stop shop for consumers to purchase health insurance. Consumers will be able to compare the costs and benefits of various health plans and choose the option that best suits them. It's far too early to know with any specificity how successful the exchanges will be. In fact there are many uncertainties which won't become clear for the next six to 12 months or beyond. How many people will actually obtain coverage via the exchanges? How many employers will shift their employees to the exchanges, thus creating an out-flow from traditional managed care plans? Will enough healthy people obtain coverage to offset the sick people who enroll? However, one thing is certain: Everyone who does obtain coverage through the exchanges will be price sensitive. As such, there is a strong likelihood the preponderance of plans purchased through the exchanges will reimburse at a lower rate than traditional managed care plans.
Some estimates put the number of people expected to obtain coverage at 24 million. Even if the number of people enrolling through the exchanges turns out to be a fraction of that estimate, it's still a lot of people. These patients will have an insurance plan which probably has a reimbursement level that cannot support a hospital's current cost structure, especially for PPI related procedures.
Mitigating financial risk
There are three specific steps hospitals can take to get the price and utilization of the implantable products, among the most expensive components of a PPI case, under control.
1. Clean and organize data. If hospitals and health systems don't have clean, concise and actionable data for implantable usage, they are flying blind in terms of managing cost. The relevant data points exist somewhere in the hospital. The trick is finding the data, mining it and electronically cataloging it so meaningful analysis can be conducted.
Chances are the needed data points are scattered among multiple computer systems and paper files. However, once the data is compiled, the hospital will have an electronic, clean, and concise report that can sort and/or aggregate the relevant data elements by surgeon, by procedure type and by case. The task is slow and tedious but is absolutely a critical building block in identifying, managing and reducing PPI costs on an on-going basis.
2. Benchmark costs. Acquiring strong, robust competitive intelligence on the price of these products is a "must have" when negotiating.The manufacturer knows their pricing in a hospital's region, and it's highly likely they know the competition's pricing in the region as well. By not knowing what other hospitals are paying for these same implants, a hospital is ceding far too much control of the negotiation to the manufacturer. In this scenario, as the saying goes, the manufacturer is "holding all the cards."
Providers must level the playing field by knowing what other hospitals are paying for the implants they use so they can create a specific and targeted cost reduction plan. Lastly, price benchmarking should not occur only during the negotiation. The pricing for these products is very fluid in the marketplace. Hospitals should continuously benchmark these products to ensure they are always getting the best possible price.
3. Proactively monitor and manage utilization. Many hospitals make the mistake of assuming the projected savings of a PPI project will equal the actual savings. Converting projected savings to actual savings in PPI is notoriously difficult. The point of entry into the hospital for PPI is exponentially more difficult to control as compared to medical, surgical and pharmacy products.
Furthermore, hospital procedural areas are very dynamic and fluid. PPI utilization can and will shift. Very often, small utilization shifts can have a negative financial impact that builds over time. I call this a "leaking contract." A hospital might have the best capitated knee price in the country, but if the cap price is not being used due to a utilization shift, that cap price is not benefiting the hospital and costs will go up, erasing the savings potential.
Leaking contracts are always a consequence of not consistently having robust data to analyze in real time so corrective action can be taken. Hospitals need to mine and compile the PPI usage and cost data each and every month to ensure that all projected savings turn into actual savings. As mentioned before, the procedural areas are very dynamic. Things can and will change quickly.
This is a challenging time for hospitals. In addition to the financial pressures discussed above, the reimbursement landscape is transitioning from fee-for-service to value-based reimbursements. This is a huge paradigm shift for U.S. hospitals. It's clear that public and private payers are attempting to reduce the cost of healthcare via reduced reimbursements. This process is largely out of a hospital's control. However, a hospital can directly influence the internal costs of their organization. The demand for PPI implants — total joints, spine, trauma, stents and cardiac rhythm devices — is growing exponentially, given the aging population combined with the newly insured.
Combining the financial risks outlined above, the growing demand for PPI, and the value-based reimbursement structures of the future, such as bundled payments, the time for hospitals to get their PPI related costs restructured isnow.
Joseph A. Jackson is a managing director at Strategic Healthcare Services (SHS). SHS is a financial consulting firm with a specialization in implant expense management for hospitals. SHS offers PPI data cleansing and enrichment, robust PPI price benchmarking and PPI utilization tracking and management services. The firm can be found on the web at http://shs.us.com.
Mr. Jackson has spent 16 years in various hospital supply chain and financial roles. He has spent the last 11 years focusing on reducing hospital costs for total joint, spine, trauma and cardiac implantable devices. Mr. Jackson has worked with numerous surgeons and manufacturers to achieve and sustain PPI cost reductions. He can be reached at (404) 664-2719 or jjackson@shs.us.com.
More Articles on Hospital Finance:
Staying Strong Under Pressure: Nonprofit Hospitals Discuss the Challenges and Opportunities of 2014
President Obama Signs 2014 Budget Bill: What It Means for Hospitals
10 Top Hospital Finance Stories of 2013