on June 29, 2012 |
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Topics: Finance, Health Care Reform, Market Trends, Strategy
David Clain and Josh Gray
Yesterday morning the Supreme Court handed down its long-awaited ruling on the constitutionality of the Affordable Care Act (ACA), ending many months of speculation about the law’s fate.
The Court allowed the majority of the law—including the controversial individual mandate for health coverage—to stand as written. While the ruling provided clarity about the mandate and associated insurance reforms, it also added an unanticipated limitation: The Court restricted the federal government’s ability to enforce an expansion of Medicaid eligibility.
With the legal debate over, finance leaders around the country are now evaluating the implications for their health systems. In our view, the decision resolved several points:
- The individual mandate and related insurance reforms will stand.
- Payment reform will proceed.
- While health care reform remains a contentious political issue, there is no longer a clear path to overturn the ACA.
The fate of Medicaid expansion is less certain. Although the federal subsidies for Medicaid are substantial—funding 100% of coverage costs for newly eligible individuals through 2016 and at least 90% thereafter—it remains possible that some states may decline to expand eligibility, to the detriment of local providers.
With the constitutional questions now largely resolved, we urge finance leaders to prepare with seven key imperatives.
Articulate accountable care strategy
The Supreme Court ruling eliminated uncertainty about the Centers for Medicare and Medicaid Services’ (CMS) long term commitment to payment reform. In particular, the momentum we have seen in accountable payment models over the last 12 months will now likely accelerate.
As CMS pilots begin to take shape and private payer initiatives follow, risk-based contracting will predominate in more markets around the country. Sixty-five providers already hold shared savings contracts with CMS, covering 1.1 million lives. We also expect a large number of applicants for the Center for Medicaid and Medicare Innovation’s Bundled Payment for Care Improvement Initiative to be announced shortly.
Given these developments, most medium-sized to large hospitals and health systems in competitive markets can no longer afford to postpone decisions on whether and how to partner with physicians around bundled payment, shared savings, and other risk-based contracting structures. Finance will need to play a role in determining strategy, educating C-suite executives on accountable care economics, developing financial reports, and budgeting for investments required to execute on risk-based contracts.
Enhance sophistication of financial modeling
Increasing numbers of health systems will now enter a period during which they must concurrently manage different revenue streams with starkly conflicting incentives. This will likely force finance teams to restructure their financial reports and models.
For example, it will benefit health systems to understand and project margins for bundled payment, shared savings, capitated, and fee-for-service contracts. Part of that work will also involve scenario analysis to forecast margins under various assumptions on cost savings, infrastructure investments, cannibalization of fee-for-service business as a result of risk-based contracting, and so forth. This is unfamiliar territory for many systems, but gaining clarity on the profitability dynamics of these different contracting structures will be increasingly important.
Chart a course to Medicare breakeven
Yesterday’s Supreme Court ruling notwithstanding, Advisory Board analysis suggests a typical acute care hospital will face a perfect storm of crippling margin pressures over the next decade: slower reimbursement, deteriorating case mix, an aging patient population, and severe upward cost pressure.
Absent changes in current trend lines, a typical hospital could see almost 20 percentage points in margin erosion in the next 10 years. The Court’s ruling does little to change this calculus. In fact, for health systems in states that choose to forgo Medicaid funding—if there are any—the challenge will be even greater.
Consequently, finance executives need to redouble their efforts to guide their organizations toward Medicare breakeven. Finance will need to model and monitor improvements along multiple dimensions: cost growth, revenue cycle performance, throughput improvement, and case mix enhancement.
A number of health systems, including Mountain States Health Alliance, have made significant progress on creating robust financial plans to reach Medicare breakeven, which gives their colleagues a framework to pursue the difficult but achievable work of migrating to sustainable margins.
Enhance accountability for cost performance
As Advisory Board Chief Research Officer Chas Roades noted, “ Validation of the ACA only underscores the urgency of solving health care’s affordability problem.” Indeed, intensifying cost pressure, driven by the budget deficit and employers determined to control premium growth, will be a permanent feature of the health care industry moving forward. As a result, finance departments need to refine their approaches to hardwiring accountability and cost discipline across the health care system. Conversations across the last six months have yielded anecdotal but compelling evidence that systems are pursuing cost control with newfound focus and intensity.
To accomplish this, health systems will require aggressive cost reduction and productivity targets for each service line, nursing unit, and department. In many cases, the process of setting benchmarks is more prescriptive, top down, and demanding than in the past. Successful implementation will require greater visibility into financial performance in the form of timely and actionable cost and productivity reporting and total transparency, with managers held accountable for addressing negative variances. As accountability pressures increase, finance should provide greater levels of support to midlevel managers to help them achieve their objectives.
For example, one health system in the midst of a major transformation effort, for example, assigned 14 staff to work closely with line managers to understand financial data and identify cost savings opportunities more effectively. The system has seen a favorable return on this investment.
Finance will also need to establish more effective partnerships with clinicians. Part of this effort will require finance staff to present clinicians with accurate cost information to determine how clinical process flows can be reengineered to safely remove expense from the system. In some cases, existing care models may need to be redefined to lower baseline operating expense while maintaining or improving patient care standards.
We are actively involved in a research effort looking at accountability. If you would like to be apprised of our work or are engaged in such efforts, please contact us.
Facilitate access to Medicaid coverage
Under yesterday’s ruling, the federal government may fund all or part of Medicaid coverage for individuals with incomes up to 133% of the poverty level, but it may not compel states to expand eligibility. Yet while the Court answered the legal questions, only time will tell which states, if any, decline to expand Medicaid. Although the federal government will pay for the vast majority of coverage costs for newly eligible individuals, the budget impact for some states will nonetheless be meaningful. Political pressure in some quarters may be hard to resist; some Republican leaders are indicating at least skepticism about expanding their Medicaid rolls.
For health systems in states that expand eligibility, it is important to remember that many individuals who are eligible for Medicaid fail to enroll. In order to receive reimbursement for treating these patients, health systems will need to take measures to identify and enroll eligible individuals.
For example, one inner city health system with a large Medicaid-eligible population provides a valuable case study. This system increased Medicaid enrollment by 130% over a four-year period by placing financial counselors at major patient access points, pre-screening self-pay patients with scheduled visits, and distributing Medicaid enrollment forms in the ED. Each newly enrolled patient accounted for about $1,700 in incremental revenue, providing a strong financial return for the health system while benefitting newly covered individuals.
Prepare to respond to exchange-based health plans
In the wake of the Supreme Court ruling, many states that have done little to implement health exchanges to date will be compelled to proceed. The ACA stipulates that state-run exchanges, which provide a marketplace for health insurance coupled with federal premium support for individuals between 100 and 400% of the poverty level, must be operational by January 1, 2014. The Congressional Budget Office projects that by 2016 over 20 million Americans will be enrolled in health plans provided through exchanges.
These new health plans will challenge health system finance departments, which will need to prepare IT systems and refine internal processes to verify insurance and authorization, estimate patient obligations, and manage contract terms for a greater variety of plans than they currently encounter. Incremental staffing may be required.
Strong patient education and collection practices are also critical, since patients enrolled in exchange-based coverage may lack an accurate understanding of the terms and obligations of their coverage. In some cases, patients will be responsible for as much as 40% of the total cost of care, up to a significant deductible limit. We expect preparing for the exchanges will be a major undertaking for finance teams across 2013.
Engage finance staff
With greater clarity on reform, it is hard to escape the reality that finance staff will be asked to take on an increasingly complex workload, very likely with minimal additional headcount. Doing so will require that finance staff be fully engaged in their work, rather than merely satisfied.
Our recent survey of almost 10,000 finance department employees provides some comforting news on this front: Finance staff are more engaged than health system employees overall.
However, the factors that drive their engagement are somewhat different from the rest of the organization. Two factors in particular—a sense that individual contributions are appreciated by executives and an understanding of how daily work contributes to the overall mission—are especially important for finance staff. Maintaining staff engagement is critical if health systems are to survive the challenges of the next few years and should be a top priority for the CFO and his or her senior team.
Although the Supreme Court decision marked the apparent end of the legal dispute over the ACA, the work for health systems is now beginning in earnest. In particular, finance will be challenged to adapt to radically different payment mechanisms even as margins on their established businesses continue to erode.
For More Information
We will continue to monitor important developments in the industry, provide strategic guidance for members, and share best practices. We look forward to working with you through what promises to be a challenging but transformative time.
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Josh Gray
grayj@advisory.com
Twitter: @JoshGray_dc
