Although the healthcare industry got a reprieve when Congress delayed a 5.1 percent Medicare physician rate cut until next year, financial experts say reductions are inevitable and providers still need to think ahead about what they can do to withstand the hit when it comes.
Before adjourning for the year in December, Congress reportedly shelved the proposed Medicare fee cuts for physicians by one year. As a result, Medicare will continue physician payments at 2006 rates, with a 1.5 percent bonus if they report on quality measures. Even so, authorities believe the policy is only temporary and that Congress will resume action on a fee-cut measure in early 2007.
Concurrently, the Medicare Payment Advisory Committee is expected to issue a report to Congress in the spring containing recommendations on changing the physician payment formula, and it will likely include a pay-for-performance component, said HFMA Vice President Rick Gundling. Ultimately, he said, lower Medicare payments are going to catch up to the industry, which means providers should have some margin-preserving procedures in the works.
“As physician payments get pressured, providers need to look at ways to supplement income,” he said. “It could be partnering together to invest in outpatient facilities or new equipment. There are a lot of dynamics to it.”
Increased partnering between hospitals and physicians is already occurring in some markets, said Rick Wallace, financial specialist with Ernst & Young Health Science Advisory Services in Indianapolis.
“Many executives realize that clinical outcomes and economic performance now require close collaboration with the physician community,” he said. “We’re seeing more providers in a number of places around the country beginning to ‘team’ with their physicians. This doesn’t mean financially as much as it is more cooperation around care delivery and the way the entity presents itself to the marketplace. Many physicians are much more interested in teaming given the environment and the hospital’s willingness to make them part of the team.”
The “flattening” of revenue streams is coming from commercial payers as well as Medicare, which has caused provider organizations to shorten their long-term planning window considerably, Wallace said. While they must focus on immediate concerns around margins in current-year operating budgets, he said they also must consider the long-term implications that any revenue or cost reduction programs may have on their investment plans.
“In the ever-changing healthcare environment, long-term views are more to an 18-month to two-year window versus the old five-year plan that was common,” Wallace said. “The focus includes reducing cost where appropriate by creating efficiencies while maintaining a focus on always improving quality and patient satisfaction.”
Pressure’s still on
While Medicare’s physician payment cuts have been put on the back burner, other plans, such as changing DRG weights from charge-based to cost-based formulas, are moving forward. This measure has the potential to dramatically affect specific service lines such as cardiology, said consultant Jamie Cleverley of Worthington, Ohio-based Cleverley & Associates.
“A lot of infrastructure is built around the cardiology piece – a significant portion of business is there,” he said. “Specialty heart hospitals that rely on cardiac surgery have got to be wondering what it will look like for them.”
Healthcare facilities could sustain another hit if severity adjustments are included in the diagnosis-related group (DRG) payment equation, Cleverley said, though there are no current plans to include it. On the outpatient side, there is discussion about standardizing the payment for outpatient surgeries conducted in freestanding facilities as well as those in the hospital.
“This could, quite clearly, impact hospitals – many of which have already seen patient migration to these facilities,” Cleverley said.
The automation debate
For the past several years, hospitals have been investing heavily in IT systems to boost their clinical and operational efficiencies. All-digital facilities are no longer a pie-in-the-sky concept as a mounting number of administrators are jettisoning that symbol of convoluted manual processes – paper. How much of a financial difference this conversion has made, however, remains to be seen, authorities say.
“There is not a lot of good data on IT’s return on investment,” Cleverley said. “It’s hard to quantify. Hospitals are probably realizing some financial benefit from their investments, but generating a figure is difficult. There are challenges to assigning dollar amounts to quality enhancement. That said, it doesn’t mean it’s not worthwhile to do.”
Wallace agrees that measuring ROI is nebulous, but said removing paper from administrative processes should have “a huge impact” from a cost standpoint.
“Paper represents a huge administrative burden with regard to federal and state regulations, increasing pressures around pricing transparency and providing more and more information to the differing constituencies,” he said.