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Reimbursement Overview & Industry Payment Trends For The Non Reimbursement Oriented Finance Professional Michael Klett, FHFMA, CPA April 22, 2014 Financial.

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Presentation on theme: "Reimbursement Overview & Industry Payment Trends For The Non Reimbursement Oriented Finance Professional Michael Klett, FHFMA, CPA April 22, 2014 Financial."— Presentation transcript:

1 Reimbursement Overview & Industry Payment Trends For The Non Reimbursement Oriented Finance Professional Michael Klett, FHFMA, CPA April 22, 2014 Financial Accounting & Reporting Committee

2 Goals for Presentation Provide an overview of Medicare facility reimbursement process to gain a basic understanding of today’s environment and the changing landscape with health reform Even though I have worked to get out of the detail as much as possible keep in mind most of the information is technical and not always intuitive so please stop to ask questions as we go along Where prudent I have tried to include a State of Michigan viewpoint and/or the views of several hospitals only to help visualize the order of magnitude of the payment issue being discussed and not to advance any individual health system such as UMHS; all relevant data is also publicly available 2

3 Agenda Medicare Part A general overview Summary of Hospital Specific Payment Adjustors Example DRG calculation Historical Medicare benchmark data and the impetus to change Health Reform Summary HFMA certification as part of a career development path for success 3

4 4 Medicare Overview

5 Insurance for the aged, also covers disabled and patients with ESRD. Four parts:  Part AInpatient hospital  Part BPhysician and outpatient hospital  Part CMedicare Advantage  Part DPrescription drugs Federally funded and managed, but ½ of cost paid by beneficiaries and third parties (mainly employer insurance) 5

6 Medicare Spending 6

7 Guiding Principles Playing field should be level for all hospitals  Valid differences in cost should yield differences in payment Hospitals should be able to break even (payment = cost)  For first 20 years Medicare payment was cost reimbursement  Medicare cross subsidization rule Incentives for improving efficiency, penalties for not improving  Last 25 years, focus on managing costs per episode  Direction Health Reform is taking us 7

8 Example Distribution of Payments Payment Component (in millions) Hospital A Hospital B Hospital C Routine Reimbursement I/P DRG - Operating $ % $ % $ % I/P DRG - Capital $ 265.3% $ 224.0% $ 183.4% Outpatient Fee for Service $ % $ % $ % Psych and Rehab $ 214.2% $ 91.7% $ -0.0% Routine Subtotal $ % $ % $ % Complex Reimbursement Indirect Medical Education $ 397.9% $ % $ 529.7% Disproportionate Share $ 122.4% $ 315.6% $ 376.9% Outlier Payment $ 163.2% $ 325.8% $ 101.9% Organ Acquisition $ 40.8% $ 163.0% $ 91.7% Graduate Medical Education $ 163.3% $ 234.2% $ 305.7% Bad Debts and Other $ 40.9% $ 40.8% $ 61.2% Nursing & Allied Health $ 40.8% $ 10.1% $ 10.2% Complex Subtotal $ % $ % $ % Grand Total Medicare Reimbursement $ % $ % $ % 8

9 What is a DRG? Diagnosis Related Group; MSDRG (MS = Medicare Severity; designed for elderly) A complex system that essentially classifies all hospital inpatient cases into 1 of approx. 750 DRGs DRGs are assigned by a grouper program based on ICD diagnoses, procedures, age, sex, and the presence of complications and comorbidities DRGs have been used since 1983 to determine how much Medicare pays a hospital, since patients within each category are similar clinically and are expected to use the same level of hospital resources Generally Speaking yields 1 bundled payment for all charges in an I/P episode of care DRGs are part of the Prospective Payment System (PPS) A Prospective Payment System means generally speaking your rates are set annually by CMS and there is no later retrospective settlement We will talk later about other items that are subject to a settlement like a tax return Outpatient uses a similar system as of year 2000 only DRGs are replaced by APC “ambulatory payment classification” 9

10 More on DRGs Blue Cross has its own proprietary system using unique “relative weights” (more on relative weights later…) For non Medicare populations industry is moving in future towards an APR DRG System (All Patient Refined)  APR-DRG count: 1,256; MS-DRG count: 746  APR-DRGs jointly developed by 3M & National Association of Children’s Hospitals and Related Institutions (NACHRI) – “The Pediatric portion of any severity illness system is critical if non- Medicare data is included in the provider comparisons. APR-DRGs have the most comprehensive and complete pediatric logic of any severity of illness system.” 10

11 Relative Weights & Case Mix Index (CMI) Each DRG is assigned a different “relative weight” which is multiplied by the DRG rate; the higher the relative weight the higher the payment Each year the relative weights are recalculated by Medicare after reviewing prior year data Case Mix Index (CMI) is the average DRG relative weight for all of a Hospital’s Medicare volume  Widely used in the industry to explain acuity differences between and among hospitals (as well as associated cost disparities)  National average is around 1.37 per Wikipedia  Generally speaking community hospital CMIs are lower than academic hospitals  Teaching Hospitals argue that CMI does not fully reflect relative differences in acuity and the difference could be greater  Community Hospitals argue that cost differentials between community and teaching are not proportional to differences in payment differentials 11

12 Impact of the Relative Weight to CMI & Payment COMMONLY PERFORMED TEACHING HOSPITAL DRGS & RELATIVE WEIGHTS FFY2013FFY2014Actual% DRGDRG DESCRIPTIONRELATIVE WEIGHT Diff HIGH ACUITY DRGS 1 HEART TRANSPLANT OR IMPLANT OF HEART ASSIST SYSTEM W MCC % 2 HEART TRANSPLANT OR IMPLANT OF HEART ASSIST SYSTEM W/O MCC % 652 KIDNEY TRANSPLANT % 3ECMO OR TRACH W MV 96+ HRS OR PDX EXC FACE, MOUTH & NECK W MAJ O.R % MORE ROUTINE/LOWER ACUITY DRGS 765CESAREAN SECTION W CC/MCC % 766CESAREAN SECTION W/O CC/MCC % 774NORMAL DELIVERY W COMPLICATING DIAGNOSES % 775NORMAL DELIVERY W/O COMPLICATING DIAGNOSES % 193SIMPLE PNEUMONIA & PLEURISY W MCC % 194SIMPLE PNEUMONIA & PLEURISY W CC % 195SIMPLE PNEUMONIA & PLEURISY W/O CC/MCC % CC = Complicating or Comorbid diagnosis MCC = Major Complicating or Comorbid diagnosis 12

13 13 Hospital specific payment adjusters

14 Inpatient Payment Overview DRG-based payment = adjusted rate x DRG relative weight  All services during the inpatient stay covered by one amount  Adjusted Rate = Medicare National Rate + impact of adjusters below  Psych and rehab units are separate Adjusters:  area wage index (AWI)  indirect medical education (IME)  disproportionate share (DSH) Additional payments:  outliers  direct graduate medical education (GME)  organ acquisition  bad debts 14

15 Wage Index What does it pay for?  Differences in cost of living (wage levels) impact cost Methodology:  Each hospital reports wage, benefit and worked hour data annually before audit by Medicare  Average compensation per hour computed for each metro area (uses MSA or CBSA approach)  Each metro area assigned an Area Wage Index value  Complicated Reclassification System at Individual and Group Level (section 412 & 508)  Medpac and Congress have considered small to massive changes to wage index system  Local Rates have suffered through recession due to inability to keep pace with rest of country Examples of Interest (national average = ): Ann Arbor.9987 Santa Cruz CA Detroit.9201 Rural AL Flint Chicago, IL Warren/Troy.9481 Grand Rapids.9169 AA reclassified.9459 Flint reclassified

16 Indirect Medical Education (IME) What does it pay for?  Teaching hospitals generally have higher costs  Patient severity and complexity not adequately addressed by DRGs (most misunderstood part of IME)  New technology and standby capacity  Inefficiencies, as residents provide much of the care Methodology  Ratio of residents to beds is used to measure teaching intensity  Current formula: ((1+R/B)^ ) x 1.35 = IME  Resident count is capped Differences of teaching adjustments in the same town  UM’s Resident to Bed ratio is about.84, IME add on is about 37% Medpac/Congress periodically reviews IME as significant savings opportunity 16

17 Disproportionate Share (DSH) What does it pay for?  Hospitals with high indigent patient volumes incur more costs, and incur more uncompensated care  DSH is a supplemental payment to help defer these higher costs and losses Methodology:  Based on ratio of indigent patient days to total patient days  “Indigent” includes Patients enrolled in Medicaid (Eligible is key criteria) Medicare patients in Supplemental Security Income (SSI)  15% all or nothing cut off; Enhanced or Super DSH when exceed 20.2%  Excludes uninsured  Major Changes to Hospital payouts due to Medicaid Expansion (In theory less need for DSH if less uninsured)  States that do not participate in Medicaid Expansion will take a larger step back on Federal DSH since you can’t keep pace Example:  UM ‘s DSH rate is about 36%, results in a 19% add on to rate 17

18 18 Sample DRG calculation & other adjustments

19 Sample DRG Calculation #1 DRG Calculation Example 1: Knee/Hip Replacement (MSDRG 470) Hospital AHospital BHospital C National DRG Rate $ 5,631 $ 5,621 DRG Weight Base Payment $ 11,750 $ 11,728 Area Wage adjustment $ 4 $ (241) Indirect Medical Education $ 4,387 $ 1,549 $ 3,713 Disproportionate Share $ 1,852 $ 12 $ 1,969 Adjusters Subtotal $ 6,242 $ 1,565 $ 5,441 Adjusted Payment $ 17,993 $ 13,315 $ 17,170 Note: Data taken from FFY2013 PPS Pricer File 19

20 Sample DRG Calculation # 2 DRG Calculation Example 2: Knee/Hip Replacement complications/comorbidities (MSDRG 469) Hospital AHospital BHospital C National DRG Rate $ 5,631 $ 5,621 DRG Weight Base Payment $ 19,382 $ 19,346 Area Wage adjustment $ 6 $ (397) Indirect Medical Education $ 7,235 $ 2,555 $ 6,125 Disproportionate Share $ 3,055 $ 20 $ 3,247 Adjusters Subtotal $ 10,296 $ 2,581 $ 8,975 Adjusted Payment $ 29,678 $ 21,963 $ 28,321 Note: Data taken from FFY2013 PPS Pricer File 20

21 Graduate Medical Education (GME) What does it pay for?  Intended to cover the direct operating costs of approved residency programs: resident salaries and benefits Physician supervision and teaching other direct costs and overhead allocable to GME Methodology:  hospitals receive a fixed amount per resident FTE, multiplied by Medicare % of patient days  Fixed amount is hospital specific, based on 1985 cost per resident plus some adjustments for inflation  Resident FTE is capped  Paid as a Pass Through, i.e. Not paid at patient level on DRG like IME 21

22 Outliers, Organ Acquisition, & Bad Debt Outliers  Individual cases may have very high costs  Outlier payment provides partial recovery of costs not covered by DRG payment  Payment = 80% of cost in excess of a loss threshold - Still a losing proposition Organ Acquisition  Supplemental payment for solid organ transplants  Based on cost of organ procurement and pre-transplant evaluation services  Paid as a Pass Through, i.e. Not paid at patient level on DRG like IME  Does not cover the I/P hospitalization (DRG) or follow up clinic visits (fee for service) and is commonly misunderstood Medicare Bad Debt (MBD)  If complex requirements are met hospitals can claim Medicare’s share of bad debt (limited to deductibles & coinsurance) and receive separate funding  BBA of 1997 first major hit; currently at 65% and falling! 22

23 Outpatient Payments Several reimbursement schedules  Ambulatory Payment Classification (APC) Most services (surgery, imaging, cardiology, infusion, ED, etc.) Procedures and tests generally paid piece-meal Supplies, implants, anesthesia, recovery – packaged Drugs: some paid separately, some are packaged  Separate fee schedules for clinical lab, rehab therapy, renal dialysis Adjustors:  Area wage index: yes  IME and DSH: no Additional payments  Graduate medical education  Bad debts 23

24 HOPD Issues To qualify for APC payments, sites must be designated as hospital-based outpatient departments (HOPD) Criteria and requirements for HOPD status:  Must be under same ownership and control as hospital  Integrated financials, clinical services, medical records, admin  Medical staff at site have privileges at the hospital  Must hold itself out to the public as part of the hospital  Cannot be more than 35 miles from the main campus  Must meet federal EMTALA, anti-dumping, non-discrimination rules If HOPD, hospital reimbursed the facility fee and physician receives professional fee. Sum of these payments > free standing physician fees Congress frequently reviews HOPD as savings opportunity 24

25 Example Distribution of Payments Payment Component (in millions) Hospital A Hospital B Hospital C Routine Reimbursement I/P DRG - Operating $ % $ % $ % I/P DRG - Capital $ 265.3% $ 224.0% $ 183.4% Outpatient Fee for Service $ % $ % $ % Psych and Rehab $ 214.2% $ 91.7% $ -0.0% Routine Subtotal $ % $ % $ % Complex Reimbursement Indirect Medical Education $ 397.9% $ % $ 529.7% Disproportionate Share $ 122.4% $ 315.6% $ 376.9% Outlier Payment $ 163.2% $ 325.8% $ 101.9% Organ Acquisition $ 40.8% $ 163.0% $ 91.7% Graduate Medical Education $ 163.3% $ 234.2% $ 305.7% Bad Debts and Other $ 40.9% $ 40.8% $ 61.2% Nursing & Allied Health $ 40.8% $ 10.1% $ 10.2% Complex Subtotal $ % $ % $ % Grand Total Medicare Reimbursement $ % $ % $ % 25

26 26 Medicare Benchmark Slides

27 Government Payments to Cost vs. Private Insurance 27

28 Medicare Historical Rate of Spending 28

29 Medicare Projected Rate of Spending before ACA cuts 29

30 30 Health Reform Changes

31 Health Reform – Where are we now? Paradigm shift  Last 25 years: focus on cost per episode  Next: manage cost per beneficiary & Population Health Per episode cost (more) Quality and utilization We need to change our thinking from fee for service to fee for value Already in the law (PPACA)  Productivity adjustments  Value based purchasing – pay for performance  Accountable care organizations – new incentives  Readmission and complication rates – new penalties  Insurance Exchange  Medicaid Expansion Is it enough to “bend the cost curve”? 31

32 Accountable Care Organization (ACO) An ACO is a group or providers often affiliated with a hospital that are jointly responsible for the cost and quality of health care provided to Medicare beneficiaries because they receive bonuses when they provide exceptional or low- cost care and are penalized for low-quality or high-cost care ACA created the Medicare Shared Savings Program to “promote accountability on part of providers, coordination of items and services under Parts A & B, and investment in new processes to bring about high quality and efficient service” First 3 in MI were UMHS, DMC, and Genesys and started Jan 1, 2012 as part of the CMS Pioneer ACO program (nationwide total was 32; now down to 23) Many other groups have since formed under the second wave of ACOs called the MSSP ACO program. SE MI includes Oakwood, Beaumont, St.John/Providence, Henry Ford Health System, and Physician Organization of Michigan (POM) First major glimpse of population health management policy (far different than fee for service) 32

33 Medicaid Expansion According to Advisory Board study 26 states + D.C. expanded Politically Charged Hot Potato Law of the Land in Michigan effective 4/1/14; “Healthy Michigan” is our state name for the program Intended to cover 400,000 MI residents Initial additional funding from Federal Government for 3 years to States to cover additional insured Medicaid eligibility now 133% of Federal Poverty Level (“FPL”)  $15,000 Individual; $34,000 family of 4 Every self pay patient under 250% FPL is entitled to a discount such that payment expectation will not require 115% of Medicare – Compliance with this is causing signification resources to operationalize – IRS has issued proposed rules to regulate self pay billing practices too 33

34 Health Insurance Exchange(HIE)/Marketplace What do we know so far? Started 1/1/14 8 million enrollees so far; 35% under the age of 35 Expected that roughly half received a subsidy on the exchange Estimated 3 million young adults under 26 were able to sign up under their family benefits that were previously uncovered Catastrophic, Bronze, Silver, Gold plans available and differences are generally % of patient responsibility Early Market Intelligence Market turning to consumer driven and more retail oriented Public vs. Private Exchanges Blue Cross EPO/Narrow Network starting 1/1/15 to target those previously uninsured and will generally be paid at Medicare like rates  Sign of the Future? 34

35 Value-Based Purchasing A percentage of Hospital payment is tied to performance on quality measures related to common and high-cost conditions such as cardiac, surgical and pneumonia care  Started 10/1/12  Designed to transform Medicare from a passive payer of claims to an “active purchaser of care”  VBP makes a portion of the hospital payment contingent on actual performance of specified measures, rather than simply on the hospital’s reporting data for these same measures (former system)  Zero Sum Game (winners and losers but budget neutral for Medicare)  Medicare started funding the incentive pool by withholding 1% of DRG rate (grows to 2% in 2017) Initial measures cover following specific conditions or procedures:  Acute Myocardial Infarction (AMI)  Heart Failure  Pneumonia  Surgeries (as measured by SCIP)  Healthcare-associated infections 35

36 Readmissions Reduction Program 10/1/12 Medicare implemented the readmission penalty A Hospital’s adjustment factor is applied to the DRG rate and is calculated as follows: Hospital’s aggregate payments for excess readmits Hospital’s aggregate payments for all discharges  Cap was 1% first year and grows to 3% in year three  Payment cut is applied to DRG price for all cases and not individual readmissions (often misunderstood) Readmission is defined as being admitted at the same or different hospital within a time period prescribed for the applicable  Hospitals can be penalized by care provided previously at other facility  Significant industry feedback to CMS on how they should allow for expected readmissions Year 1 impact to MI Hospitals was approx. $14 Million Program is a revenue generator for government (not budget neutral) 36

37 “Never events” & Hospital-Acquired Conditions (HAC) Medicare will deny payment for HACs or “never” events Original list of HACs: 1) Foreign object retained after surgery, 2) Air embolism, 3) Blood incompatibility, 4) Pressure ulcer, 5) Falls and Trauma, 6) Manifestations of poor glycemic control, 7) Vascular catheter associated infection, 8) Catheter-associated urinary tract infection, 9) Surgical site infection, 10) Deep vein thrombosis/pulmonary embolism Present on Admission (POA) indicator is mandatory for all I/P Acute Care Cases (based on time order for admission occurs) Unless documented Medicare will assume above list was an acquired condition while hospitalized and will not pay the higher DRG that is coded Starting in 2015 (10/1/14) Medicare will provide an incentive to reduce HACs Year 1 max reduction is 1%; penalty is either nothing (targeted to be top 75% of hospitals) or 1% payment cut 50% of teaching hospitals are expected to be hit by reduction Program is a revenue generator for government (not budget neutral) 37

38 Summary comments about Health Reform Unsustainability of cost trends led us to the need for a dramatic change to the status quo Providers, physicians, and suppliers are forced to do more with less  Unparalleled pressure on expense management Healthcare system continues to get more complex to manage Lots of change already but more to come including  Fix needed to Sustainable Growth Rate and impact to physician payments  Medicare’s 2 midnight rule in the infancy stage  Declining Medicare DSH payments due to decreased uninsured  How will Commercial Payers react to Medicare Payment Reform  Aging Population with retirement of Baby Boomer generation  Sequestration hanging around until at least 2021 (effective 2% across the board cut)  Additional Productivity Adjustments  Uninsured patients addressed from policy perspective however there is still anticipated to be an uninsured population albeit at much lower level  Solvency of Medicare trust funds and social security 38

39 What have we learned about health reform already? Our Industry is clearly tasked to do more with less We are forced to operate in an era of heightened regulation/oversight Price transparency pressure Decreasing reimbursement and change from fee for service to fee for value (utilization becomes key) Hospital merger & activity at unprecedented levels  Administrative jobs in theory more scarce as such services are consolidated Employers are reviewing our performance through our payers  Is it worth it to us and our employees to have Hospital X in our network?  Proliferation of referenced pricing models and “carve outs”  Employers and payers will work to push down hospital payer rates 39

40 40 HFMA Certification & career development discussion

41 How can the healthcare finance professional best succeed in the new era… Sometimes strong competencies and seniority are not enough We need to adjust with the times and technology Stay on top of industry trends/changes and refine skill set Unique skillsets and certifications are highly desirable (HFMA certification, lean certifications, service excellence, etc.) Partner with operations becomes key and need to remove barriers Meet & exceed transparency expectations that have been set higher than ever (especially centered around the use of judgment calls) Become more skilled in PowerPoint as it has become the expected tool for story telling 41

42 More impacts to the finance professional Budgets are tight like never before with strong FTE controls In order to better manage staffing issues some hospitals are asking employees to cross train where priorities & competencies of staff align Lines between departments and roles will likely be blurred based on the market demand for more efficiency Some firms are having finance oriented work being performed overseas at substantial savings Building and maintaining professional networks is likely more important than ever and HFMA involvement facilitates this 42

43 What have we learned from other industries? Auto, Airline, Real Estate, & Book industries have undergone dramatic changes and have taught us many things  Need to reset/change with the times & simultaneously be able to meet demand for future in an era of constant change  New market demands efficiency  Be prepared for heightened regulation/government oversight  Not everyone was left standing We are likely in the early to middle stages of healthcare’s transformation even though it may feel further along 43

44 Why Become HFMA Certified (CHFP)? Validate your skills and knowledge Enhance your credibility in the industry Support your professional development Demonstrate a high level of commitment to the field Peer Pressure!  Is there alignment between the reason why current certified members sat for the exam and your own career development path? 44

45 What HFMA certification can do for you Becoming certified distinguishes you as a leader and high-level professional in the healthcare finance industry. It reflects a deep personal commitment and sense of accountability that inspires credibility and confidence in your professional knowledge. Through HFMA Certification Programs, you can show your dedication to high standards in the industry. 45

46 More on certification HFMA CHFP is intended for mid-level healthcare professionals with a minimum of 3-5 years experience. CHFP certification demonstrates your qualifications to senior management, co- workers, and the industry highlighting your commitment to the profession and to maintaining up-to-date skills and knowledge. 46

47 Candidate requirements Recommended: 3-5 years, hospital/healthcare system operations management experience including financial responsibility or senior accountant/analyst with knowledge (not expertise) of revenue cycle operations Current full HFMA membership to hold the designation Student members ineligible to hold designation 47

48 Certification Exam Overview Online exam offered at Castle Worldwide sites 150 multiple choice questions in a 4 hour window (yes there are calculations! This is a finance exam) Fee to sit for exam is approx. $400 for more information including terrific 9 page FAQ guide Scoring is similar to ACT & results known immediately HFMA online study materials cost approx. $200 (not required) Our HFMA chapter offers a rebate for passing candidates for select # of candidates (as budget allows; unknown amount for FY4/30/15) 48

49 Exam Content 1.Revenue Cycle Functions 21-25% 2.Disbursement Functions 4-8% 3.Budgeting/Forecasting Functions 18-22% 4.Internal Control Functions 15-19% 5.Financial Reporting Functions 16-20% 6.Contract Management Functions 13-17% 49

50 50 Appendix

51 Assumptions Large 750 bed teaching hospital Hospital operating at full capacity and often not able to service all of its demand Increase in 250 licensed beds approved through Certificate of Need No material change in number of residents trained No material change in Medicare payer mix Outcomes Does this bed change impact existing Mcr reimbursement on a per case basis with no change in payer mix? If so, is it favorable or unfavorable? Impacts to cash flow and interim rates? Impacts to reimbursement upon settlement on cost report? Financial Reporting issues? 51 Case Study 1 Medicare IME

52 Assumptions Large teaching hospital Relocation of its Children and Women’s services from a nearly fully depreciated facility to a new $750 million facility Medicaid Payer Mix for impacted Children and Women’s services is roughly 3 to 1 the overall institutional Medicaid payer mix Assume initial volumes are similar to historical levels Outcomes Does this impact Medicaid Reimbursement? If so, does it impact standard operating DRG payments and/or Capital payments? What impact would there be to a hospital that uses the minimal number of CMS provided capital cost centers? What impact would there be to the hospital if it had a unique cost center established to record all capital costs relative to the new facility? 52 Case Study 2 Medicaid Capital


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