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HEALTH CARE INDUSTRY PERSPECTIVES ON HEALTH CARE REFORM

Mississippi Chapter Healthcare Financial Management Association 2010 Ethics, Accounting & Auditing and PFS Workshop June 11, 2010 Hilton Hotel, Jackson MS. HEALTH CARE INDUSTRY PERSPECTIVES ON HEALTH CARE REFORM. STRATEGIC OPPORTUNITIES FOR HOSPITALS. Health Care Delivery System Reform.

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HEALTH CARE INDUSTRY PERSPECTIVES ON HEALTH CARE REFORM

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  1. Mississippi Chapter Healthcare Financial Management Association 2010 Ethics, Accounting & Auditing and PFS Workshop June 11, 2010 Hilton Hotel, Jackson MS HEALTH CARE INDUSTRY PERSPECTIVES ON HEALTH CARE REFORM

  2. STRATEGIC OPPORTUNITIES FOR HOSPITALS

  3. Health Care Delivery System Reform Increase Health Care “Value” Reduce Costs Improve Quality Value-Based Purchasing Reduce Preventable Readmissions Bundled Payments Accountable Care Organizations Manage Radiology Benefits Electronic Health Records The Senate Finance Committee Legislation Will Include Payment Reforms Aimed at Improving the Delivery System The Goal 1. Tactics 2. Prerequisite 3.

  4. A Roadmap to Reform Most of President Obama’s Ambitious Health Care Goals Depend on Bending the Cost Curve Causal Relationship Between the President’s Health Care Goals Primary Outcome Secondary Outcome Tertiary Outcome Catalyst Maintain Coverage During Job Transitions Protect Families from Medical Bankruptcy Reduce Cost Growth Assure Affordable Coverage Guarantee Choice of Docs and Health Plans End Barriers for Pre-Existing Conditions Invest in Prevention and Wellness Improve Safety and Patient Care Source: 1) http://www.whitehouse.gov/issues/health_care/

  5. Selected Provisions • Administrative Simplification • Moving to standardized processes by evaluation of systems every 3 years using input from the National Committee on Vital Statistics, the Health Information Technology Policy Committee, the Health Information Standards Committee, standard setting organizations and stakeholders -Public Health Services Act Sec. 399HH(a)), as added by Act Sec. 3011 of the Patient Protection and Affordable Care Act (P.L. 111-148)). • Delivery System Changes • Bundling – beginning 2013 pilots thru 2015 (Social Security Act Sec. 1866D, as added by Act Sec. 3023 of the Patient Protection and Affordable Care Act (P.L. 111-148)). • Readmissions – 2013 penalties for “excessive re-admissions” (SSA Sec. 1886(q)(3), as added by Act Sec. 3025 of the Affordable Care Act). • Hospital acquired conditions -Act Sec. 2702 • Accountable Care Organizations – 2012, allows hospitals and physicians to provide leadership in voluntary ACOs. Some savings to be shared Section 3022 of the Patient Protection and Affordable Care Act (P.L. 111-148) adds Social Security Act Sec. 1899 • Innovation Center – 2011 creates a Center for Medicare and Medicaid Innovation designed to improve quality and reduce program expenditures- Section 3021 of the Patient Protection and Affordable Care Act (P.L. 111-148) amends Title XI of the Social Security Act by adding the new SSA Sec. 1115A

  6. Physician Fee Schedule Home Health PPS Episode Readmission: MS-DRG Pmt MS-DRG Pmt - 3 Days Admit Discharge + 7 days + 14 days + 19 days + 27 days + 30 days MS-DRG + Avg. PAC Cost – “Efficiencies” Global Payments The Legislation Will Include Expanded Bundled Payment Demonstration Projects Sample Inpatient Stay 1: Current Payment Methodology: 30 Day Episode of Care 2: Proposed Bundled Payment System: MAC Payment Hospital Negotiated Pmts

  7. Selected Provisions • Independent Payment Advisory Board (IPAB) Section 3403 of the Patient Protection and Affordable Care Act (P.L. 111-148) • Binding payment recommendations on Medicare and non-binding on private insurers payments to providers • Exclusion such as hospitals (except CAH) until 2019 • 340B drug program extended Act Sec. 7101(a) of the Patient Protection and Affordable Care Act (P.L. 111-148), amending Public Health Service Act Sec. 340B(a)(4) by adding subparagraphs (M) through (O) • Market basket update adjustments -Affordable Care Act Sec. 3401 • RAC expansion -Affordable Care Act Sec. 6411 • Graduate Medical Education – no reductions in IME payments but re-distributes 65 percent of unused residency to primary care and surgeons SSA Sec. 1886(h)(8)(B), as added by Act Sec. 5503(a)(4) of the Affordable Care Act

  8. Something To Think About Be proactive, explore how to make the new legislation work in your organization Ignoring the delivery and payment system changes will be detrimental Most importantly, understand totally where your revenue comes from and how this will change Tax Exemption

  9. Financially Positive or Negative for Health Care Providers • Modeling • Market Basket Update • DSH-UPL • Hospital Acquired Conditions • Physician Payment Revisions • Contracts with other payers

  10. Being Pro Active • Model impacts of Medicare and Medicaid • Estimate income/ volume levels of “new patients” • Evaluate service lines • Evaluate costs • Direct care • Support

  11. Know the margins – The Driving Forces

  12. Model of Governmental Payers

  13. Non Governmental Payers Impact of Health Insurance Exchanges on traditional insurance Impact of family coverage and shifts to employers Impact of “pay the penalty” un or under insured Remember – “bend the cost curve”

  14. Being Pro Active • Model impacts of Medicare and Medicaid • Estimate income/ volume levels of “new patients” • Evaluate service lines • Evaluate costs • Direct care • Support

  15. Reviewing Service lines • Outpatient Rehabilitation Services • Primarily two services – Occupational & Speech Therapy • Determined the payer mix was unable to sustain the current level of expense. • Due to the competition and availability in the service area, the Hospital elected to discontinue service. • Net increase to contribution margin $600,000 annually.

  16. Being Pro Active • Model impacts of Medicare and Medicaid • Estimate income/ volume levels of “new patients” • Evaluate service lines • Evaluate costs • Direct care • Support

  17. Analysis of Costs • The Cost structure • Direct patient care • Components of Overhead • Identified areas for cost savings • Invested in premier database to benchmark both cost and quality • Expended Information Technology funds for capturing data and developing standardized processes

  18. Labor Costs • Productivity standard which was an integration of standards established by a proprietary database and adapted Hospital’s culture • Review of standards began with a bi-weekly process which was historical and reactionary • Moved to a daily matrix which was successful due to the step transition (key – moving from reactionary to integrated) • Savings as a result of the intense use of standards • FTE’s decreased from 4.5 to 3.9 per adjusted occupied bed • Reduction of salary costs of $6.8 million • Other considerations including freezing merit increases and elimination of contract staffing

  19. Purchased Services • Retirement Plan – Hospital operated under a defined benefit • “Freeze” implemented with alternative retirement plan • With matching mechanism through 403(b) savings of $700k annually • Real Estate and other rental agreements • Negotiated through consolidations and space eliminations resulted in $270k savings • Management of professional services • Hired a director for key areas including IOP, BIO Med, Rehab and Housekeeping - savings of $1million

  20. Quality & Efficiency • Chief Medical Officer established a work group to evaluate the clinical effectiveness of the following programs: • Cardiology • Pediatrics • Orthopedics • Behavioral Health • Women’s Health Services – including Nursery • General medical – Surgical

  21. Key Finding • Length of Stay – too high • With 60% of total expense representing labor costs, the Hospital began an intense review of daily activities and labor hours • Greatest opportunity – Review standards and protocols for delivery of patient care • Intensified use of Hospitalist program • Indexed length of stay @ 100% of standard

  22. Other Considerations • Mindset review of expense • Formulary review of Pharmacy - $200k • Courier alignment with outpatient - $175k • Benefit plan sync with industry - $1.5 mil • Overall, everything is matched up with: • Board Policy and Mission • Rating Agency – Capital Access • Budget constraints

  23. Analysis of PPACA’s Impact on Employers

  24. September 23, 2010 Plan Changes • UNAVOIDABLE AND/OR NON-GRANDFATHERABLE PROVISIONS 1. No Lifetime Limits on “Essential Benefits” 2. Restrictions on Annual Limits for “Essential Benefits” 3. No Pre-Existing Conditions Exclusions for Children Under 19 4. If a child under 26 is not eligible for enrollment in a separate employer sponsored plan, then plan already providing coverage to children must extend coverage through age 25 regardless of student/marital/dependent status 5. Existing Coverage can’t be rescinded absent fraud 6. Large Employers (200 FTEs) must auto-enroll new employees 7. Non-prescription, over the counter drugs (excluding insulin) can’t be included in a Flexible Spending Account (“FSA”) deduction [For tax years beginning after 12/31/10]

  25. September 23, 2010 Plan Changes • AVOIDABLE AND/OR GRANDFATHERABLE PROVISIONS FOR PLANS EXISTING BEFORE MARCH 23, 2010 1. Certain Evidence-Based Preventive Care (Including Well-Child Care) and Immunizations Can’t Be Subject to Cost-Sharing 2. Insurance Based/Non-Self Funded Plans Must Comply with Requirements Preventing Favorable Treatment of Highly Compensated Employees 3. Internal/External Appeals Processes 4. Enrolled Employees May Select Any Participating Primary Care Doctor 5. No Pre-Authorization or Increased Out of Network Cost Sharing for emergency services 6. No Pre-Authorization or Mandatory Referral for OB-GYN Services

  26. Small Employer Tax Credit (2010-2013) • SMALL EMPLOYER (25 FTEs) TAX CREDIT FOR 35% OF HEALTH CARE COVERAGE COST • In order to receive, employer must subsidize at least 50% of employee premiums • 50% Credit Is Available for Tax Years 2014-2015 [Technically it’s available for any two years beginning after 12/31/13-presumably the 2014-15, but not necessarily.]

  27. 2011 Calendar Year Changes 1. Aggregate Value of Employer Sponsored Coverage Must Be Identified on 2011 W-2 2. Value of coverage to be identified on W-2 will be determined in the same manner as the 40% excise or “Cadillac” tax, namely, through use of current COBRA valuation and will include employee paid premiums and FSA contributions but exclude stand-alone dental/vision.

  28. 2013 Calendar Year Changes 1. Annual Employee Pre-Tax Contributions to FSA Capped at $2,500 2. Hire-Date/Annual Enrollment Distribution of Standardized Summary of Plan Benefits/Coverage 3. Mandatory Employee Notice of Rights to Health Insurance Exchange Subsidy (Including “Free Choice Voucher”)

  29. 2014 Calendar Year Changes 1. No Pre-Existing Conditions Exclusions or Limitations 2. No Coverage Waiting Period Greater Than 90 Days

  30. Grandfatherable/Avoidable Changes For Plans Existing Before January 1, 2014 1. Group Insurance Coverage Is Guaranteed for Issue and Renewal (Subject to Annual/Special Enrollment Periods) 2. Group Plans Became Subject to Modified Community Rating Rules: • Gender/Health Status Can’t Be Used for Premium Calculation • Age Premium Variations Limited to 3:1 • Tobacco Premium Variations Limited to 1.5:1 3. “Essential Health” Benefits Must Be Offered for small group plans [Does not apply to large groups or to self-insured plans] 4. Limits on Out of Pocket Expenses/Deductibles • Individual ($5,950) and $2,000 • Family ($11,900) and $4,000

  31. 2014 Calendar Year Changes (cont.) HEALTH INSURANCE EXCHANGES • List of Qualified Plans becomes available through either state/federal Administrator • Four Levels of Plans Based on Actuarial Value Between 60-90% • Exchange Plans Must Offer Essential Benefits • Exchange-Based Subsidy Eligibility: • Household Incomes Between 100-400% FPL (88K for Family of Four) • Ineligible for government healthcare • Employer sponsored plan doesn’t pay at least 60% of actuarial value and premium exceeds 9.5% of annual household income • Exchange Based Employer Penalties • Employers With Over 50 FTEs incur $143/month or $2,000 (annually) per employee (after first 30) for failure to offer “minimum essential coverage” to all FTEs/dependents if ONE receives a subsidy through an Exchange • Employer with Over 50 FTEs incur $250/month or $3,000 annual tax for each employee who opts for Exchange due to “Unaffordable Minimum Essential Coverage” meaning premiums exceeding 9.5% of household income or plan has actuarial value of less than 60% Note: Mercer study says 38% of employees will meet this threshold

  32. Health Insurance Exchanges (cont.) FREE CHOICE VOUCHER ELIGIBILITY 1. Household Income Less Than 400% of FPL ($43,200-individual) ($88,200 – family of four) 2. Required to pay between 8 and 9.8% of household income for coverage Voucher Amount = $ cost of Coverage Under Employer-Based Plan Vouchers are Deductible by Employers Vouchers Are Excluded from Employee’s Income Vouchers Apply to All Employers, Regardless of Size

  33. 2014 Employer Reporting Duties IF 5O FTEs, THEN: a. declaration that employer does or does not offer minimum essential coverage to FTEs/dependents; b. disclosure of coverage waiting period length; c. disclosure of information on lowest-cost option in each enrollment category; d. disclosure of employer’s share of total plan costs; e. disclosure of number and names of employees receiving health care coverage

  34. Consequences • Very large employers may drop employer-sponsored coverage • AT&T could save $1.8b annually • CBO estimates that employers that drop coverage would substitute wages for premium benefits • Employees would buy in to the Exchange, where reimbursement rates will be lower than with employer group plans (not going well in MA)

  35. Consequences • 2010 average cost for family of 4 is $18k; 10k funded by employer • Other insurance reforms will result in increased premiums • Credits expire when industry fees escalate

  36. TAX IMPLICATIONS: TAX-EXEMPT HOSPITALS

  37. TAX-EXEMPT HOSPITAL IMPLICATIONS Section 9007 of the PPACA added yet another layer of requirements that must be met in order to maintain tax-exempt status and avoid excise tax penalties. Except for the community health needs assessment requirement and imposition of excise tax penalties, Section 9007 applies to taxable years beginning after March 23, 2010.

  38. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. Section 9007 has five primary components: §9007(a) adds new requirements for §501(c)(3) hospitals through the addition of Section 501(r)(1)-(7) to the IRC; §9007(b) amends IRS Section 4959 to impose an excise tax for noncompliance with §501(r)(3); §9007(c) provides for mandatory federal review of the community benefit activities of §501(c)(3) hospitals; §9007(d) adds reporting requirements; §9007(e) requires the Secretary of the Treasury to make annual reports to Congress.

  39. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. Section 9007(a) adds Section 501(r)(1)-(7) to the IRC and imposes significant new obligations on tax-exempt organizations. Applicability: Section 9007 applies to organizations that operate facilities required by the state to be licensed/registered/recognized as a hospital and to other organizations with hospital care as a principal function. Must be tax-exempt under §501(c)(3), so governmental facilities are not included. For multi-hospital systems, the rules apply separately to each facility.

  40. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. New Section 501(r) has four primary components: Community health needs assessment - §501(r)(3) Financial assistance policy - §501(r)(4) Limits on charges - §501(r)(5) Changes to billing and collection methods - § 501(r)(6) Treasury has requested comments on the §501(r) requirements.

  41. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. New Section 501(r) components: Component One: Community health needs assessment (§501(r)(3)): Effective date: taxable years beginning after March 23, 2012. Requirements: Must conduct a community health needs assessment in the taxable year or either of the two prior taxable years. Must have adopted a strategy to implement the identified needs. The assessment must take into account the input of a broad spectrum of stakeholders in the community served by the facility and it must be made “widely available to the public”.

  42. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. …and, for not complying with Section 501(r)(3), Section 9007(b) imposes an excise tax. • Section 9007(b) imposes an excise tax of $50,000 for failing to meet the CHNA requirements in Section 501(r)(3). • Effective Date: The excise tax technically applies for failures to comply occuring after March 23, 2010, but the CHNA requirement doesn’t become effective until taxable years after March 23, 2012.

  43. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. New Section 501(r) components: Component two: Financial assistance policy (§501(r)(4)): The organization must have a written financial assistance policy and “widely publicize” the policy within the community served. Policy requirements: Eligibility criteria, including whether financial assistance offered includes free or discounted care; The basis for calculating patient charges; If the organization does not have a separate billing and collections policy, the actions that may be taken in the event of non-payment (i.e., collections actions, credit reporting, etc.). Additionally, the organization must have a written policy requiring the organization to provide, without discrimination, care for emergency medical conditions to individuals regardless of their eligibility for financial assistance.

  44. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. New Section 501(r) components: Component three: Limits on charges (§501(r)(5)): If a person meets the requirements of the financial assistance policy, then their charges for emergency or other medically necessary care must be limited to not more than amounts generally billed to individuals with insurance coverage. The use of gross charges is prohibited.

  45. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. New Section 501(r) components: Component four: Changes to billing and collection methods (§501(r)(6)): The hospital cannot engage in ”extraordinary” collection actions until it has made “reasonable efforts” to determine if the individual is eligible for financial assistance under its policy. Regulations are to be issued to define “reasonable efforts”.

  46. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. Section 9007(c) provides for mandatory federal review: Section 9007(c) requires that the Secretary of the Treasury review the community benefit activities of each hospital subject to §501(r) at least once every 3 years. Schedule H implications and a new definition of “community benefit”???

  47. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. …and Section 9007(d) provides for additional reporting requirements: Section 9007(d) addresses several issues of recent legislative concern by adding to the reporting requirements for §501(c)(3) hospitals. This section amends the Form 990 reporting requirements to include the following: a description of how the hospital is addressing the needs identified in the CHNA, a description of any needs not being addressed, and an explanation as to “why not”; the audited financial statements of the hospital or the consolidated financial statement, if applicable. Implications

  48. TAX-EXEMPT HOSPITAL IMPLICATIONS, cont. To complete the circle, Section 9007(e) requires the Secretary of the Treasury to provide annual reports to Congress. Section 9007(e) reports will include information for private, tax-exempt, and governmental hospitals regarding: levels of charity care provided; bad debt expenses; and unreimbursed costs for services provided with respect to non-means tested programs. Additionally, §9007(e) reports will include information regarding costs incurred by tax-exempt hospitals for community benefit activities. Morever, §9007(e) requires that this information will be compiled into a study on trends and submitted to Congress within 5 years.

  49. OTHER NOTABLE TAX CHANGES

  50. OTHER NOTABLE TAX CHANGES Section 9001: Excise tax on “Cadillac” plans Section 9002: Inclusion of cost of employer-sponsored health coverage on W2 Section 9003 and 9004: “Qualified” distributions/reimbursements from HSAs, FSAs, HRAs and Archer MSAs and increases in taxes on non-qualified distributions Section 9005: Limits on health flex spending arrangements under cafeteria plans Section 9012: Elimination of deduction for expenses allocable to Medicare Part D subsidy Section 9013: Modifies the itemized deduction for medical expenses Section 9015: Changes to FICA Section 9017: (nullified and replaced with §10907(b)): Tax on indoor tanning Section 1402: Tax on net investment income

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