Hospital Pricing Mike Del Trecco, Senior Vice President of Finance, Finance and Operations Senate Finance Committee February 9, 2017

Agenda Hospital Finance Terminology Medicare Hospital Designations Gross Revenue, Net Revenue, Total Operating Expenses, Excess or Loss Medicare Hospital Designations How Hospitals are Paid Defining Payment Variation Factors Contributing to Payment Variation VAHHS’s Position on Payment Variation Questions

Hospital Finance Terminology Net Patient Revenues Gross Patient Revenues (what providers charge for services regardless of payer) - Bad Debt (unpaid patient bills) - Free Care (provided under charitable care policy) - Deductions from Gross Revenues (payers discount off gross charges) + Disproportionate Share Payments (DSH) + Graduate Medical Education Payments (academic medical centers only) = Net Patient Revenue (What hospitals are paid for patient care services)

Hospital Finance Terminology (Cont.) Variables that can Impact Net Patient Revenues Increases or decreases in hospital services provided to patients due to: Access to insurance (ACA), Physician acquisition or replacement Patient severity or change in service mix These changes increase net patient revenue, but do not necessarily increase profit or cash. Net patient revenues are hospital dollars used to pay operating expense (i.e. Pharmacy, Medical Supplies) related to the delivery of patient care. Net Patient revenue is not “Surplus” as it does not account for patient care expenses.

Hospital Finance Terminology (cont.) Net Operating and Total Operating Income or loss Net patient revenue (what hospitals are paid for patient care services) + Other Operating Revenue (cafeteria, parking etc.) = Total Operating Revenue - Total Operating Expense (Nurses, pharmaceuticals, medical supplies etc.) = Net Operating Income or loss (Margin from operations) + Non-Operating Revenue (Interest on investments) = Total Operating Income or Loss (Total Margin)

Medicare Hospital Designations: Academic Medical Center – University of Vermont Medical Center Critical Access Hospital (CAH) – 25 or fewer beds. Copley Hospital, Gifford Medical Center, Grace Cottage, Mt. Ascutney, North Country Hospital, Northeastern Vermont Regional, Porter Medical Center, Springfield Hospital Prospective Payment Hospital – Brattleboro Memorial, Central Vermont, Northwestern Medical Center, Rutland Regional Medical Center, Southwestern Vermont Unlike in other states, all Vermont hospitals are not-for-profit and considered community hospitals.

Common Ways in which Hospitals are Paid: Inpatient Diagnostic Related Group (DRG) Payments – A predetermined payment adjusted for patient severity. This is an all inclusive payment for all services provided within the discharge. Medicare, Medicaid and commercial payers utilize this payment method. Gross Patient charges have no impact on these payments. Outpatient Prospective Payment (OPPS) – A predetermined payment for outpatient services. Similar to DRG payments these payments are all inclusive. Medicare, Medicaid and commercial payers utilize this payment method. Cost Based - Medicare pays critical access hospitals 99% of allowable costs. Percent of Charge – Contractual arrangement where payment is based on a percent of gross charges. Commercial payers utilize this payment method. Fee Schedule – Most often used for physician service, each procedure has an assigned payment amount. Medicare, Medicaid and commercial payers utilize this payment method.

Defining Payment Variation: The difference in the amount paid to providers for a particular health care service or group of services. Variation is not isolated to independent and employed physicians, but also includes hospitals. Variation can impact out-of-pocket expenditures for patients.

Factors Contributing to Payment Variation: Medicare specific billing rules - Provider Based Billing or “Facility Fees” – a payment differential that Medicare created to compensate hospitals for professional and facility costs for services that are delivered in hospital outpatient departments. Effective January 1, 2017 any hospital outpatient department not billing facility fees prior to November 2, 2015 will now be reimbursed at 50%. BCBS, MVP and Medicaid as of 7/1/2016 do not pay for facility fees. Physician Fee Schedules - In most Vermont communities there is little distinction between commercial rates for employed physician and commercial rates for independent physicians. However, BCBS does have a community and tertiary fee schedule. Public Payer Cost Shift -The cost shift continues to effect hospitals and is an important driver in higher commercial payments. Commercial Contracts - payment differentials that can exist amongst providers.

VAHHS’s Position on Payment Variation: 1) Hospitals did not create the current system, but are leading the way in reforming how care is paid for and delivered. 2) Payment variation should be addressed in the broader context of health care reform: Three fundamental aspects of health care reform: 1) Access, 2) Payment and 3) Delivery system redesign. The All Payer Model (APM) has the ability to: Create the incentives to connect all aspects of health care reform Improve the continuity of care across providers Correct for payment variation Keys to success will be: ACO and provider engagement, the appropriate funding by public and private payers and the time necessary to test the model. 3) The payment reform aspect contained in the APM is the fast way to achieving the goals of lower health care cost and improving the health of Vermonters.

Questions?