Translating Critical Access Hospital Finance Ralph Llewellyn Partner rllewellyn@eidebailly.com Introduction No other industry operates in the same manner as health care. Critical Access Hospitals operate differently than other health care providers. 1
Reimbursement Theory There are various methods of reimbursement Fee schedule Mostly large commercial payors Most physician services (except Rural Health Clinics) Charge based Other commercial payors (very common for CAHs in California) Cost based Medicare Medicaid in some states (including Montana) Reimbursement Fee Schedule Diagnostic Related Groups (DRGs) Inpatient reimbursement based on a fixed payment according to the diagnosis of the patient Charges and length of stay are irrelevant Focus on chart documentation and HIM skills to improve reimbursement 2
Reimbursement Fee Schedule Common Procedure Terminology (CPT) Payment made based on an established 5 alpha numeric identifier (CPT) Codes for individual procedures Typically lower of charge or fee schedule Focus on documentation, HIM skills, and charge capture process to improve reimbursement Reimbursement Theory Charges Full charges or percentage of charge CAHs like these payors! Dwindling number of payors Critical Access Hospital may be treated more favorably Allows facility to chart its financial course 3
Reimbursement Theory Cost Reimbursement based on actual costs Full cost Partial cost Blends Submission of cost report Profit?? Medicare Reimbursement Theory Reimbursable vs Non-reimbursable services Reimbursable Medicare participates in cost Non-Reimbursable Medicare does not participate in cost 4
Medicare Reimbursement Theory Reimbursable Examples Medical/Surgical Emergency Room Operating Room Cardiology Lab Pharmacy Radiology Supplies Physical Therapy Cardiac Rehab Occupational Therapy Swing Bed Speech Therapy Provider Based Clinic Respiratory Therapy Rural Health Clinic Medicare Reimbursement Theory Non-Reimbursable Examples Home Health Hospice Skilled Nursing Facility (Some states are exceptions) Assisted Living Meals on Wheels Day Care (Some costs may be reimbursable) Non-Provider Based Clinics Wellness Centers 5
Medicare Reimbursement Theory Allowable vs. Unallowable Costs Costs are deemed unallowable if they are not related to patient care Patient Phones/Television Advertising Physician Recruitment (except Rural Health Clinic) Lobbying Medicare Reimbursement Theory Allowable vs. Unallowable Costs Costs in excess of established limits are unallowable Contracted Physical Therapy Occupational Therapy Speech Therapy Respiratory Therapy Employee or Contract Provider-Based Physicians Reasonable cost limitations apply 6
Medicare Reimbursement Theory Allowable vs. Unallowable Costs Non-Patient Revenues are offset against cost as a recovery of cost Interest income (to extent of interest expense) Copies of Medical Records Cafeteria Medicare Reimbursement Theory Medicare Cost Based Reimbursement Medicare reimburses costs based on Medicare utilization in the departments in which costs are reported Direct Costs Salary Supplies Allocated Costs (Overhead) Housekeeping Laundry Dietary Administrative and General 7
Medicare Reimbursement Theory Overhead Allocation Methodologies Methodologies determine how overhead costs will be allocated to various departments and subsequently determine Medicare s reimbursement of costs Methodologies can be changed with approval from Medicare Strategy Analyze alternative methodologies! Medicare Reimbursement Theory Overhead Allocation Methodologies Buildings Square Footage Moveable Equipment Square Footage or Actual This is where IT capital is typically reported and allocated from. Results in costs being allocated to all hospital departments including non-reimbursable cost centers. Benefits Gross Salary 8
Medicare Reimbursement Theory Overhead Allocation Methodologies Administrative & General Accumulated Cost This is where IT ongoing operating costs are typically reported. Results in costs being allocated to all hospital departments including non-reimbursable cost centers. Maintenance & Repair Square Footage or Time Study Operation of Plant Square Footage Medicare Reimbursement Theory Overhead Allocation Methodologies Laundry Pounds or Patient Days Housekeeping Square Footage or Time Study Dietary Meals or Patient Days 9
Medicare Reimbursement Theory Overhead Allocation Methodologies Cafeteria Full Time Equivalents (FTEs) Nursing Administration Hours of Service Medical Records Gross Revenue or Time Study Medicare Reimbursement Theory Medicare Cost Based Reimbursement Interim payments made based on percentage of charges submitted and/or per diem Interim rates based on prior year cost to charge ratio / per diem 10
Medicare Reimbursement Theory Medicare Cost Based Reimbursement Final costs are calculated using departmental specific cost-to-charge ratio Routine Med/Surg and Skilled Swing Bed costs calculated based on cost per day Medicare Reimbursement Theory Medicare Cost Based Reimbursement Example Medicare will reimburse high percentage of direct costs incurred in Med/Surg due to high Medicare utilization. Medicare will reimburse lower percentage of direct costs incurred in the departments with lower Medicare utilization (i.e. Emergency Room, Physical Therapy, etc.). 11
Medicare Reimbursement Theory Medicare Cost Based Reimbursement Example Medicare will provide no additional reimbursement for direct costs incurred in non-reimbursable cost centers Overhead costs incurred by the entity will be reimbursed by Medicare based on the Medicare utilization in the departments in which the costs are subsequently allocated Why is it so difficult? Cost Settlements Factors impacting year-to-year cost settlements Volume Medicare Utilization Changes in charges Changes in expenses 12
Why is it so difficult? Volume Significant increases in volume tend to lead to year-end payable to Medicare Significant decreases in volume tend to lead to year-end receivable from Medicare Medicare utilization Changes in Medicare utilization impacts percentage of costs Medicare will reimburse Department specific Why is it so difficult? Changes in charges Increases in charges that exceed increases in expenses can result in overpayment on interim basis Results in payable at final settlement Decreases in charges can result in opposite effect 13
Why is it so difficult? Changes in expenses Increases in expenses that exceed increases in revenues can result in underpayment on interim basis Results in receivable at final settlement Decreases in expenses can result in opposite effect Why is it so difficult? Cost plus 1% Profit Unallowable costs Where does the profit come from? Rules/Interpretations Change Legislation Medicare Final Rules Medicare Transmittals Medicare Audit Contractor interpretations (many retroactive) 14
Why is it so difficult? Challenges in managing costs as methodology to improve financial position Example #1 Decrease $100,000 in salary in Med/Surg Reduce Medicare reimbursement $90,000. $10,000 net impact. Example #2 Decrease $10,000 in cost in Assisted Living No reduction in reimbursement $10,000 net impact. Why is it so difficult? Different rules in different states Critical Access Hospital Nursing Home Difficulty finding trained staff Not offered as a specific college program No reimbursement training for nurses and other clinical staff No reimbursement training for Doctors 15
Strategies Financial success is not easy nor guaranteed PPS CAH Long term success is typically due to two factors Location Development of best practices Location is difficult to change, but best practices can be addressed by all providers Strategies Revenue recognition Emergency Room Charge Capture/Coding Timely Filing Denial Management Precollection Efforts Benchmarking Physicians Other services 16
Revenue Recognition Emergency Room Emergency rooms often account for a significant amount of lost revenues E/M Levels Charges Procedures Revenue Recognition Emergency Room Medicare allows providers to establish internal methodology for assignment of E/M levels 1 5 (CPT codes 99281 99285) Providers should continue to apply their current internal guidelines to the existing CPT codes. Each hospital s internal guidelines should follow the intent of the CPT code descriptors, in that the guidelines should be designed to reasonably relate the intensity of hospital resources to the different levels of effort represented by the codes. Hospitals should ensure that their guidelines accurately reflect resource distinctions between the five levels of codes. (Pub. 100-04 Chapter 4 Section 160.) 17
Revenue Recognition Emergency Room These internally designed methodologies are frequently flawed Originally developed in 2000 without change Incorrectly include other reportable services in the determination of levels (i.e., laceration repair, injections, etc.) Frequently result in an E/M assignment and overall distribution that is not reflective of the services rendered Revenue Recognition Emergency Room 18
Revenue Recognition Emergency Room While all facilities will vary, one would anticipate facilities would have a distribution somewhat similar to that of a Bell Curve unless there are explanations for a difference Emergency Room has a higher than normal usage for non-emergent clinic type services The number of points typically required to reach a specific level usually has little scientific background Revenue Recognition Emergency Room A review of the resources and points to reach each level can allow the facility to report levels that are more accurately reflecting the services rendered 19
Revenue Recognition Emergency Room Revenue Recognition Emergency Room Potential Gross Revenue Impact of Level Corrections Original Volume New Volume Charge Impact Level 1 1,000 250 $ 107 $ (80,250) 2 2,000 1,250 $ 156 $ (117,000) 3 1,000 2,000 $ 253 $ 253,000 4 750 1,250 $ 409 $ 204,500 5 250 250 $ 653 $ - Total $ 260,250 20
Revenue Recognition Emergency Room $260,250 or 23% increase! Revenue Recognition Emergency Room Charges for rural services frequently is well below that of larger counterparts for the exact same services Lack of appropriate pricing strategy may caused by numerous issues Restraints placed on Management by Board Lack of understanding of reimbursement impact Inability to access market based data 21
Revenue Recognition Emergency Room Successful providers have strong pricing strategies Use of market based data Commercial sources MedPar 75th percentile pricing Annual updates to pricing Revenue Recognition Emergency Room Potential Gross Revenue Impact of Market Pricing Level Volume Original Charge Update Charge Impact 1 250` $ 107 $ 91 $ (4,000) 2 1,250 $ 156 $ 198 $ 52,500 3 2,000 $ 253 $ 376 $ 246,000 4 1,250 $ 409 $ 601 $ 240,000 5 250 $ 653 $ 873 $ 55,000 Total $ 589,500 22
Revenue Recognition Emergency Room $589,500 or 42% increase! Revenue Recognition Emergency Room Don t forget the procedures! Procedure charges (lacerations, IVs, injections, etc.) are frequently missed in the CAH Emergency Room Incorrectly included in E/M assignment Belief that assignment of CPT codes during coding process with capture reimbursement 23
Revenue Recognition Emergency Room Only way to ensure there is an opportunity to capture revenue is to capture the charge Charges for additional procedures in the Emergency Room can range from $50 to over $1,000 Average $100 - $200 Reimbursed based on charges or fee schedules Revenue Recognition Emergency Room Example: 5,000 annual visits 25% of visits qualify for additional procedure charge Average procedure charge of $150 Total gross revenue opportunity = $187,500 24
Revenue Recognition Emergency Room Total gross revenue opportunity E/M Levels = $ 260,250 Pricing = $ 589,500 Procedures = $ 187,500 Total = $1,037,250 Net opportunity assuming 60% non-medicare and 75% payment level = $$466,800 annually Revenue Recognition Charge Capture Best practice facility s capture the revenues for services they are rendering Significant area of opportunity for most facilities Common areas of confusion/lost revenues Outpatient nursing procedures Pharmacy 25
Revenue Recognition Charge Capture Outpatient nursing procedures Facilities miss these opportunities IV therapy, injections, Foley catheter insertions, etc. Revenue Recognition Charge Capture Outpatient nursing procedures Lost charges occur due to a lack of understanding of what is actually separately reportable Nursing documentation can affect ability to capture charges Start times Stop times Site Drugs 26
Revenue Recognition Charge Capture Outpatient nursing procedures Recommend a team from nursing and HIM meet frequently to discuss documentation and charge capture opportunities Revenue Recognition Charge Capture Pharmacy Pharmacy charges are often missing from claims Totally missing Errors in proper reporting of units Overreliance on systems Dispensing units Unit conversion factors Need to develop processes to review and update processes 27
Revenue Recognition Timely Filing Why capture the charges and then not file them timely? All Medicare claims must be filed within 1 year of service Other payors may vary Many facilities still missing the deadlines! Monitor write-off s Separate account for tracking Revenue Recognition Denials Advanced Beneficiary Notices / Medical Necessity Need to manage denials ABNs are not an option This is an issue of liability not a determination of proper care 28
Revenue Recognition Denials Advanced Beneficiary Notices / Medical Necessity Track Denials Service Physician Staff performing service Etc. Emergency Room services are not exempt Monitor Follow up with providers Revenue Recognition Precollection Large increase in uninsured and those with large coinsurance and deductibles Precollection necessary Time of scheduling Time of service Based on estimates if necessary Charity Care determinations Application Presumptive methods 29
Benchmarking / Physicians Best practice facilities develop strategies for benchmarking and physicians Addressed in Session #2 Overhead Allocations - CAHs Proper cost report reimbursement can only occur if overhead allocations are properly monitored Addressed in Session #2 30
Other Services Less is often times more Overall financial performance can be significantly impacted by the addition of non-hospital services Home health Hospice Physicians Ambulance Nursing Homes Assisted Living Etc. Other Services The reimbursement methodology for many of these other services is not intended for smaller organizations/volumes Difficult to make ends meet for larger organizations 31
Other Services Rural providers frequently lack management time, commitment, or expertise to operate these other services Have seen many home health agencies sold by CAH to freestanding entities Staffing levels improve Compensation levels managed to more appropriate levels Closing The more successful rural providers have developed ongoing strategies to take advantage of opportunities while minimizing the financial threats These strategies are not all inclusive and are continuously developing. Don t be afraid to challenge past decisions and to reverse course when appropriate 32
Questions? Ralph J. Llewellyn, CPA, CHFP Partner Eide Bailly, LLP rllewellyn@eidebailly.com 701-239-8594 33