Unlike elements of the Patient Protection and Affordable Care Act that will not be implemented for several years, and even then initially on a pilot basis, Medicare market basket productivity adjustments have already begun, and will have a significant impact on every hospital. These adjustments, which reduce reimbursement based on prospective improved productivity, will affect hospitals and health systems, as well as skilled nursing facilities, long term care hospitals, inpatient rehabilitation facilities and other ancillary care facilities. The Congressional Budget Office projects the adjustments will save Medicare an estimated $157 billion over 10 years. Healthcare organizations that are currently in a good financial position will have to continue to improve just to maintain their position. Organizations whose financial position is currently unstable will need to take action right away to reduce expenses, increase revenue, or both. Healthcare executives can determine the impact of these reimbursement reductions on their organizations by using calculators available through the American Hospital Association or state hospital associations. The number that results from this calculation should then be used as a target for improvement within the next 6-12 months. Basic "blocking and tackling work" (improvements in revenue cycle, reductions in labor, non-labor and supply chain expenses) can create short term benefits, and buy an organization some time. But healthcare leaders should also be planning beyond that for permanent changes - clinical, operational, and financial - to be able to provide care at Medicare rates or below, while meeting the future demands of reform.
George Whetsell "These Medicare cuts are coming at a time when the ability to cost-shift is becoming a thing of the past. It is going to be very difficult, if not impossible, to offset the Medicare adjustments by increasing the charges or payment rates for commercial payers. This creates additional urgency for hospitals to look deep and hard at how they will create fundamental improvements in performance that will allow them to operate at Medicare prices or below."
Ken Saitow "This is the tip of the iceberg - there are a lot of other changes that healthcare providers need to be bracing for. Medicare is a substantial payer source for most of the organizations we work with, oftentimes accounting for 45% or more of payments. We know that most organizations already experience a negative operating margin on Medicare patients, so these reimbursement cuts are intensifying the efforts many organizations already have underway to determine how to, at least, break even on Medicare. Down the road, coming up with durable processes for driving revenue increases and expense reductions by way of transformational change will be crucial."
Sean Angert "These immediate cuts will force health systems to look long and hard at all areas in which they can better manage operational expense including supplies and purchased services. Since these cuts will come right off the top line, it's going to immediately reduce net income unless an organization can off-set these on the expense side. These cuts, in addition to other upcoming changes, are equiring a deeper understanding and evaluation of supply and drug utilization improvement opportunities in particular." Judith Thorp "Faith-based organizations are looking at these Medicare reimbursement cuts - in conjunction with additional reform initiatives on the way - and asking what the impact will be on their ability to provide charity care, which of course would have a major impact on their mission, values and culture." Curt Whelan "If a hospital is doing okay making 3-5% on their bottom line, they will see that margin erode with these productivity adjustments. Places that were shaky are going to get even shakier. Hospitals ought to deal with this as quickly as they can, with the goal of getting an improvement in their bottom line right way. It will be imperative to improve revenue cycle functions to maximize net revenues and get paid for every penny, while at the same time reducing operating expenses, and trying to get as big a bottom line in the short run as possible. This will give them a little bit of a cash flow cushion over the next 12-18 months so they can focus on getting in front of other reform initiatives."
BOTTOM LINE Within the next 6-12 months, healthcare organizations will need to find a way to reduce their expenses or increase revenue by 3-5% to offset Medicare productivity adjustments. This will give them some breathing room to work on the transformational clinical and operational changes that reform will demand.
This is a multi-part briefing series aimed at providing hospitals and health systems with the best practices for success in a post-healthcare reform reality. Access the series at www.huronconsultinggroup.com/healthcarereformbriefings.
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healthcare strategy: healthcare planning
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