What a 2% Medi­care cut is worth

Health sys­tems pre­pare for com­ing Medi­care cuts

Modern Healthcare - - FRONT PAGE - Me­lanie Evans

Health sys­tems are look­ing to slash mil­lions of dol­lars from their op­er­a­tions to pre­pare for up­com­ing Medi­care cuts and other ex­pected rev­enue re­duc­tions. Medi­care spend­ing is sched­uled to drop by 2%, start­ing in Jan­uary, un­der a deficit-re­duc­tion deal reached by Congress last year. The cuts, which would to­tal $123 bil­lion through 2021, went from pos­si­bil­ity to in­evitabil­ity—at least with­out fur­ther in­ter­ven­tion from law­mak­ers—last Novem­ber af­ter a con­gres­sional su­per­com­mit­tee failed to pro­pose $1.2 tril­lion in fed­eral cuts. That will trig­ger au­to­matic cuts, in­clud­ing the Medi­care re­duc­tion sched­uled for 2013.

Health­care ex­ec­u­tives, work­ing to draft and fi­nal­ize fis­cal year bud­gets that can start in July or Oc­to­ber, say they have built lost rev­enue from Medi­care’s cuts into their pro­jec­tions.

“We can’t put our heads in the sand on that,” says Jim Budzin­ski, ex­ec­u­tive vice pres­i­dent and chief fi­nan­cial of­fi­cer for five-hospi­tal Wel­ls­tar Health Sys­tem Ma­ri­etta, Ga. In re­cent meet­ings with Wel­ls­tar’s 12,000 em­ploy­ees, man­age­ment ex­plained the cuts would re­duce its yearly rev­enue by $8 mil­lion to $10 mil­lion a year.

“It’s not an easy thing to di­gest for our or­ga­ni­za­tion,” he says.

The cuts come as health­care ex­ec­u­tives have seen rev­enue growth slow and states that help to fi­nance safety net in­sur­ance strug­gle with bud­get stress. That has prompted some to plan for sig­nif­i­cant cuts to op­er­at­ing ex­penses, even as ex­ec­u­tives ac­knowl­edge they are not fully sure how to achieve pro­jected re­duc­tions.

Ex­ec­u­tives at health sys­tems in Florida, Illi­nois, Ohio and Texas say they al­ready have planned hun­dreds of mil­lions of dol­lars in ex­pense re­duc­tions over the next three to five years. To get there will re­quire sav­ings be­yond straight­for­ward re­duc­tions to sup­ply and la­bor costs, they say. Hos­pi­tals will need to find ways to treat pa­tients more ef­fi­ciently, a more dif­fi­cult and less cer­tain prospect for cut­ting costs.

Wil­liam San­tulli, ex­ec­u­tive vice pres­i­dent and chief op­er­at­ing of­fi­cer at Ad­vo­cate Health Care, says the nine-hospi­tal sys­tem based in Oak Brook, Ill., will cut $350 mil­lion from its op­er­a­tions through 2015. Ad­vo­cate ended its fis­cal year in De­cem­ber 2011 with op­er­at­ing in­come of $300.8 mil­lion on rev­enue of $4.4 bil­lion. That’s com­pared with op­er­at­ing in­come of $335 mil­lion in 2010 on rev­enue of $4.3 bil­lion. Ex­penses to­taled $4.1 bil­lion in 2011 and $4 bil­lion the prior year.

Pro­jected Medi­care re­duc­tions will trim $50 mil­lion in rev­enue dur­ing the pe­riod, San­tulli says.

Ad­vo­cate of­fi­cials say they al­ready are see­ing fall­ing de­mand for in­pa­tient ser­vices, and also ex­pect cuts in Med­i­caid pay­ments from the state of Illi­nois. The sys­tem has seen Medi­care pa­tients who pre­vi­ously were hos­pi­tal­ized are now treated un­der ob­ser­va­tion, a cat­e­gory of out­pa­tient care, he says.

In Illi­nois, where un­em­ploy­ment re­mains above the na­tional av­er­age, more pa­tients are also with­out in­sur­ance and strug­gle to pay med­i­cal bills, he says.

“We do not yet have this … bo­gie fig­ured out,” San­tulli says. “It will take us the bet­ter part of this year to have a plan that will add up” to cover pro­posed ex­pense cuts.

That plan has ex­ec­u­tives comb­ing for cuts in costs for sup­plies and op­er­a­tions such as laun­dry, food and en­vi­ron­men­tal ser­vices.

Also un­der con­sid­er­a­tion: la­bor. “We’re tak­ing a hard look at pro­duc­tiv­ity and la­bor ex­penses,” he says.

He stresses that the sys­tem will seek to re­duce ex­penses through at­tri­tion.

Of­fi­cials are also look­ing to bet­ter man­age­ment of clin­i­cal re­sources—use of imag­ing and med­i­ca­tion man­age­ment—to re­duce costs.

At Catholic Health Part­ners, a Cincin­nat­i­based sys­tem with 29 hos­pi­tals, the 2% re­duc­tion to Medi­care will amount to a rev­enue hit of $23 mil­lion to $25 mil­lion a year, says James Grav­ell, se­nior vice pres­i­dent and CFO.

The sys­tem, which closed its books last De­cem­ber with op­er­at­ing in­come of $120 mil­lion on rev­enue of $3.6 bil­lion, has tar­geted ex­pense cuts of $250 mil­lion over five years to off­set an ex­pected drop in rev­enue and ad­di­tional cap­i­tal ex­penses, Grav­ell says. It re­ported op­er­at­ing in­come of $100 mil­lion on rev­enue of $3.4 bil­lion in 2010.

Sim­i­lar to other health sys­tem ex­ec­u­tives, Grav­ell says it’s not yet clear how the sys­tem, which re­ported $3.5 bil­lion in ex­penses for fis­cal 2011 com­pared with $3.3 bil­lion the prior year, will meet that tar­get.

“There’s noth­ing that’s a sa­cred cow,” he says, though of­fi­cials have ruled out across­the-board cuts to health­care pro­fes­sion­als.

In­vest­ments in in­for­ma­tion tech­nol­ogy, in­clud­ing com­put­ers sta­tioned in­side pa­tients’ rooms, have im­proved ef­fi­ciency, he says, as have other in­vest­ments that have re­duced the length of a pa­tient visit by 11% in the past five years.

That leaves the sys­tem with fewer ob­vi­ous op­tions to re­duce costs.

The sys­tem has launched an ef­fort with its em­ploy­ees to pro­mote well­ness and bet­ter man­age chronic dis­ease, with the aim of low­er­ing the sys­tem’s health ben­e­fit ex­pense.

“We’re not to­tally dis­cour­aged,” Grav­ell says. “We’re chal­lenged and con­cerned.”

At Bay­lor Health Care Sys­tem, where ex­ec­u­tives are in the mid­dle of bud­get plans, of­fi­cials have set a tar­get to cut $680 mil­lion over five years.

That in­cludes $150 mil­lion for the cur­rent fis­cal year, of which ex­ec­u­tives hope to squeeze $90 mil­lion from hospi­tal op­er­a­tions and $60 mil­lion from ad­min­is­tra­tion, says Gary Brock, COO for the 11-hospi­tal Dal­las­based sys­tem.

Bay­lor will scour la­bor and sup­ply bud­gets for sav­ings, but Brock says he be­lieves more ef­fi­cient care, through use of elec­tronic health records and ev­i­dence-based pro­to­cols, hold the great­est po­ten­tial for sav­ings.

Medi­care’s pro­posed re­duc­tions are pro­jected to re­duce Bay­lor’s rev­enue by $12.5 mil­lion a year. The sys­tem re­ported op­er­at­ing in­come of $285.7 mil­lion for the year ended June 30, 2011, on rev­enue of about $4 bil­lion com­pared with op­er­at­ing in­come of $305.1 mil­lion and rev­enue of $3.8 bil­lion in the prior year. Bay­lor’s ex­penses that year to­taled roughly $3.7 bil­lion in 2011 and $3.5 bil­lion the prior year.

Ex­ec­u­tives also are ex­pect­ing cuts to Med­i­caid pay­ments from Texas.

“We think we know where the puck is go­ing,” Brock says, “and ob­vi­ously things con­tinue to shift and change. I think the big word is flex­i­bil­ity.”

Brock says the sys­tem has also al­ready pruned the most straight­for­ward ex­penses and now will work to ad­mit, care for and dis­charge pa­tients as ef­fi­ciently as pos­si­ble to re­duce a pa­tient’s length of stay and the ma­te­ri­als used dur­ing pa­tient vis­its.

In Florida, ef­forts be­gan last Oc­to­ber at Lee Me­mo­rial Health Sys­tem to off­set an ex­pected $125 mil­lion squeeze on rev­enue over five years, ahead of the su­per­com­mit­tee’s fail­ure to bro­ker a deficit-re­duc­tion deal, says James Nathan, the sys­tem’s pres­i­dent and CEO. That’s be­cause ex­ec­u­tives ex­pected cuts re­gard­less of whether the su­per­com­mit­tee suc­ceeded or failed, he says. The sys­tem’s bud­get calls for $35 mil­lion in cuts to ex­penses or new rev­enue dur­ing the first year.

How­ever, cuts alone won’t be suf­fi­cient, says CFO Mike Ger­man. Lee Me­mo­rial will look for op­por­tu­ni­ties to ex­pand its post-acute and out­pa­tient ser­vices to gen­er­ate rev­enue even as it seeks to more ef­fi­ciently move pa­tients from ad­mit­tance to dis­charge. Ad­min­is­tra­tion may also face re­duc­tions, he says. “Ev­ery­thing is be­ing looked at.”

Lee Me­mo­rial re­ported $59.6 mil­lion in op­er­at­ing in­come on rev­enue of about $1 bil­lion for the year that ended last Septem­ber, com­pared with op­er­at­ing in­come of $65.8 mil­lion on rev­enue of $1.1 bil­lion the prior year.

Nathan says the Fort My­ers, Fla.-based sys­tem has fo­cused on the role of hospitalists, who are cen­tral to co­or­di­na­tion of care be­tween pri­mary-care doc­tors, spe­cial­ists and nurses, as one way to im­prove the qual­ity and ef­fi­ciency of pa­tient care.

In Char­lotte, N.C., mean­while, Caroli­nas Health­care Sys­tem has asked em­ploy­ees to share ideas for how to curb costs across the sys­tem, which owns and man­ages 23 hos­pi­tals, says Greg Gom­bar, its ex­ec­u­tive vice pres­i­dent of ad­min­is­tra­tive ser­vices and CFO.

Caroli­nas ex­pects to see its rev­enue drop by $25 mil­lion over four years with an up to 2% Medi­care cut, he says. The sys­tem re­ported $154.2 mil­lion in op­er­at­ing in­come on rev­enue of $3.7 bil­lion for the year ended in De­cem­ber, com­pared with op­er­at­ing in­come of $129.2 mil­lion on rev­enue of $3.4 bil­lion the prior year.

Em­ploy­ees have sub­mit­ted ideas to re­duce costs, in­clud­ing one that man­age­ment al­ready has adopted: lower co­pay­ments for generic drugs as an in­cen­tive to stay away from more ex­pen­sive brand-name drugs, he says.

The sys­tem will seek to cut $80 mil­lion from ex­penses over four years to off­set Medi­care cuts and other ex­pected bud­get pres­sures.

“Our as­sump­tion is that we’re go­ing to see re­duc­tion” to rev­enue, Gom­bar says. “We’re not as­sum­ing we’re go­ing to get more. You have to op­er­ate un­der that sce­nario.”

Catholic Health Part­ners’ use of IT has helped boost over­all ef­fi­ciency, mak­ing it more dif­fi­cult for the sys­tem to find fur­ther im­prove­ments as it seeks to cut $250 mil­lion over five years, a CHP ex­ec­u­tive says.

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