Rural Hospital Profitability

1. Similarities and Differences Module 4 – Cost Control Rural Hospital Profitability CAH PPS

2. Profit Formula CAH PPS Revenue per patient - Cost per patient Profit per patient • To increase profits a business must: • Increase revenues • Decrease expenses

3. Cost Benefits of a CAH CAH • Allowable on-call coverage in ER, including mid-level providers • Relief from Federal regulations of full-time coverage in dietary, pharmacy, lab and xray • HUD 242 Mortgage Insurance relaxed qualifications • Reduced JCAHO accreditation fees • Technical assistance from Bureau of Primary Care and Rural Health

4. Fixed Variable Types of costs

5. Cost Structure CAH PPS • Fixed Costs • Expenses that do not change with increases or decreases in census • Variable costs • Costs that increase or decrease as volume or services change

6. Fixed Costs CAH PPS • Examples: • Capital costs (Rent, depreciation, interest) • Utilities • Minimum staffing • Due to low volumes, rural hospitals usually have high fixed costs when compared to revenues.

7. Variable Costs CAH PPS • Some examples of variable costs are: • Supplies • Drugs • Meals • Services paid on a “per use” basis (MRI) • Variable costs generally are identified with specific patients.

8. Costs per patient day CAH PPS As census increases, variable costs per patient day will remain the same. Fixed cost per patient day will decrease. Patient Volume

9. CAH Break even point occurs when revenues cover fixed and variable costs. Profits will be generated after this point from payers who will pay in excess of costs. PPS PROFITS LOSS Patient Volume

10. CAH • Effect of Cost Reduction • Profitability will be achieved at a lower census. • CAH cost based payer revenue may drop. Former Break even Point Revised Break even Point Patient Volume

11. Reduce Expenses CAH • If reductions in expenses causes Medicare revenue per day to drop, why should we cut costs? • At a 60% Medicare / 40% Commercial utilization, a $1 drop in costs will net the hospital $. 40 in profit. $135 $225 $120 $200 $150 $150 Before After Total Rev. $285 $270 Costs $225 $200 Profit $ 60 $ 70

12. Cost Containment

13. 1. Share Services CAH PPS • Network when possible: • A relationship between a small and large hospital can create access to a wider array of support services and increases in efficiency. • Consolidation of certain functions • Purchasing • Human resources • Credentialing • Billing and collections • Finance • Legal services • Training • Obtaining pre-owned furniture and equipment • Consider contracting/consulting rather than employment

14. 1. Share Services CAH PPS • Other cost sharing approaches • Use group purchasing contracts • Convert fixed costs to variable costs • Use floating nurses to cover different units • Cross train employees to perform more than one job function • Continuously evaluate staffing levels to minimize non-essential capacities, overtime and other HR costs

15. 2. Evaluate Service Lines CAH PPS • Review the profitability of service lines • Collections v. cost of providing the service • Payer mix • Fixed cost contributions • Incremental costs • Use resources such as comparisons among hospital peers for costs and charges by service line.

16. 3. Bid and Negotiate CAH PPS • Possible cost reductions • Obtain bids for all equipment and supplies • Substitute less expensive products that do not compromise quality • Negotiate lower utility rates • Physician input to management is needed, however avoid direct contact between physician and supplier! Let hospital management negotiate without physician interference.

17. 3. Bid and Negotiate CAH PPS • High dollar supplies should be reviewed. • Concentrate on the big dollars • Identify the top 20 most expensive items • Negotiate for lower costs • Do not substitute quality for cost savings! It will cost more in the long run.

18. 3. Bid and Negotiate CAH PPS • Examples of high cost items • Xray film • Disposable items v. reusable items • Dietary dishes, bedside water pitchers, OR trays • IV Solutions • Medications (drug formularies) • Medical supplies • Disposable linens

19. 4. Renegotiate Contracts CAH PPS • Renegotiate service contracts • Accounting services • Oxygen suppliers • Rental agreements • Dues • Maintenance agreements • Housekeeping, Laundry and Dietary

20. 5. Purchase Options CAH • Capital policy • Increase capitalization policy to Medicare allowable • Up to $5000 can be expensed • Acquisitions (Prov. Reimb. Man., Part I, §108.1)If a depreciable asset has at the time of its acquisition an estimated useful life of at least 2 years and a historical cost of at least $5,000, its cost must be capitalized and written off ratably over the estimated useful life of the asset using one of the approved methods of depreciation. If a depreciable asset has a historical cost of less than $5,000, or if the asset has a useful life of less than 2 years, its cost is allowable in the year it is acquired, subject to the provisions of §106

21. 5. Purchase Options CAH • Is it better to sign an operating lease rather than to buy? • Capital lease v. operating lease • Capital leases are subject to the capitalization guidelines and may require a periodic expensing of depreciation • Current expenditures may be reimbursed in future years • Operating leases are deductible as the lease payments are made • Current expenditures are reimbursed in the current year

22. CAH Cost Reductions CAH • Cost reductions are good! • However a dollar saved does not necessarily mean a dollar of profits. • Cost-based payers only cover their portion of the COST. • Example: Cost based utilization is 60% • For every dollar saved, $. 40 goes to the bottom line.

23. Cost Reduction Caution CAH • Cost reductions will result in increased profitability however: • Interim reimbursement percentages and per diems must be monitored in relation to changes in current year costs. Monitor Cash Flow Impacts!

24. Cost Reductions CAH PPS • One more word of caution, sometimes you have to spend money to make money. • Don’t sacrifice patient perception by allowing facility to appear neglected. • Upgrade facility to increase marketability • Install new equipment to provide high quality services • Reinvest profits into capital upgrades

25. Related Compliance Issues • 2007 OIG Work Plan • We will review critical access hospital (CAH) cost reports to examine the administrative and other costs incurred by CAHs for inpatient and outpatient services before and after their conversion to CAH status. The Medicare Rural Hospital Flexibility Program, established in 1997, designated certain limited service hospitals as CAHs. The Medicare statute provides that CAHs be reimbursed reasonable costs for their inpatient and outpatient services. CAH

26. Related Compliance Issues • 2007 OIG Work Plan • Rebates Paid to Hospitals • OIG will determine whether hospitals are properly identifying purchase credits rebates as a separate line item in their Medicare cost reports. OIG will visit several large vendors and determine the amount of rebates paid to hospitals in a given year. It will then examine a sample of Medicare hospital cost reports to determine whether the rebates were properly credited on the Medicare cost reports. CAH PPS

27. Rural Hospital Profitability If you have any questions or concerns regarding this course, please contact Cindy Dupree at cdupree@draffin-tucker.com. Similarities and Differences PPS CAH Module 4 – Cost Control