Real Examples of the Real Costs of Reimbursement Reform

1. Real Examples of the Real Costs of Reimbursement Reform

2. Introductions Chris Walski, CPA • Consulting Manager • 231.932.5664 • Christopher.Walski@plantemoran.com Jon Lanczak, MBA • Associate • 248.223.3569 • Jon.Lanczak@plantemoran.com

3. Acute Care Reimbursement Changes

4. Hospital Rate Update Medicare IPPS • Medicare updates rates based primarily on a standard “Market Basket” update with other adjustments, such as adjustments mandated by the Affordable Care Act and coding related adjustments • The following illustrates historical and projected IPPS update percentages. The table excludes the impact of the 2% sequester and Hospital Readmission Reductions)

5. Hospital Rate Update

6. MS-DRGs • No Major changes made for FY 2014. CMS proposes to maintain the current MS-DRG’s • See Table 5 in final rule for file containing weights

7. Sequestration Cut of 2% • 2% cut was applied to Medicare payments beginning for dates of service on/after April 1, 2013 • Effective 2013 – 2021 • Mandated by the Budget Control Act of 2011 • The 2% reduction is after coinsurance and deductibles • May apply to Medicare Advantage payments depending upon hospital contractual agreement with plans

8. Medicare Dependent Hospital Status • The MDH program had been extended through September 30, 2013 • The 2014 final rule does not extend the program • Current MDH hospitals will have until August 31, 2013 to apply for Sole Community status (if they meet the SCH criteria) in order to have that be effective upon termination of the MDH program

9. DSH Overview • CMS is required by the ACA to reduce hospital DSH payments based on the expectation that there will be a smaller uninsured population • Based on the 2014 final rule: • Hospitals will receive 25% of the DSH amount calculated under the original methodology (empirically justified amount) • The remaining 75% under the original calculation will be pooled with other hospitals receiving DSH (Factor 1). The total pool will be reduced by the estimated reduction of uninsured minus 0.1 percentage point (Factor 2 - .943 for 2014) and then redistributed back out to the hospitals based on their relative level of uncompensated care (Factor 3)

10. DSH Payments • CMS was considering a policy change to make DSH Payments via interim payments rather than a per discharge add-on. This was eliminated in the final rule. • CMS confirmed their policy of counting the days of patients enrolled in Medicare Advantage plans in the Medicare fraction of the traditional disproportionate payment percentage (DPP) • The treatment of the Medicare Advantage days benefits some hospitals and has a detrimental effect on others. The Medicare fraction is Medicare SSI Days / (Medicare + Medicare Advantage Days). • CMS is appealing a recent Allina Court ruling that disallowed the inclusion of the Medicare Advantage days

11. Medicare SSI Category • MSA recently announced that data is now available for hospitals to validate their SSI ratio data provided by CMS and used for Medicare DSH payment calculations • Potential to increase Medicare DSH payments. • CMS allows providers to choose either their fiscal year or the federal fiscal year (10/1 to 9/30) for SSI days purposes…whichever is more advantageous to the provider

12. Medicare DSH Reductions • Dollars Available: • Estimated total DSH funding for FY 2014 = $12.8 billion ($12.2 billion after uninsured reduction) compared to $11.8 billion in FY 2013 • Estimated 25% rate-based and paid under traditional formula = $3.2 billion • Estimated 75% for uncompensated care payments = $9.6 billion ($9 billion after uninsured reduction) • Proposal for reducing funding dedicated to uncompensated care payment: • Use CBO’s March 2010 and February 2013 uninsured rate estimates which are 18% for FY 2013 and 16% for FY 2014

13. Medicare DSH ProposalsRedistributions • Final Rule for distributingfunding dedicated to uncompensated care payment: Use low-income patient days as proxy • Medicaid days and Medicare SSI days • Numerators of current DSH % calculation CMS may use cost report worksheet S-10 in future years • CMS cites unreliable data as hospitals still are not consistent in reporting bad debt and charity care in terms of hospitals costs (% of charges) vs. payment from government or other payors. Therefore, the S-10 will not be used for 2014 Calculate uncompensated care payment factor • Hospital's low-income patient days relative to all DSH hospital low-income patient days

14. Medicare DSH ProposalsRedistributions The below is an excerpt from the final rule “Medicare DSH Supplemental Data File

15. Medicare DSH - Michigan SummaryREVISED • Most Michigan hospitals will gain under the program for 2014 • Total increase of $8.9 million state wide • 37 Hospitals are estimated to benefit with total gains of $34.3 million (highest projected winner $4.9 million) • 29 hospitals are estimated to lose a combined $25.3 million (highest projected loser $5.7 million)

16. Medicare DSH - Michigan Summary Below is a listing of some of the larger shifts in DSH reimbursement All information compiled from publically available data

17. Medicaid Expansion • Expands Coverage to an estimated 470,000 people • The Medicaid expansion will have an impact on several programs: • Medicare DSH (likely positive) • 340B Eligibility (likely positive) • Medicaid DSH Ceiling Computations (likely negative) • Medicaid UPL computations (likely positive)

18. Announced Hospital Mergers and Acquisitions, 1998 – 2012 (1) Sources: Irving Levin Associates, Inc., The Health Care Acquisition Report, Eighteenth Edition, 2012 and Modern Healthcare, Mergers & Acquisition Report, 19th Annual (1) In 2006, the privatization of HCA, Inc. affected 176 acute-care hospitals. The acquisition was the largest health care transaction ever announced.

19. Number of Hospitals in Health Systems, 2000 – 2011(1) Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2011, for community hospitals. (1) Hospitals that are part of a corporate body that may own and/or manage health provider facilities orhealth-related subsidiaries as well as non-health-related facilities including freestanding and/or subsidiary corporations.

20. Drivers Behind Mergers and Acquisitions

21. Drivers Behind Mergers and Acquisitions

22. Drivers Behind Mergers and Acquisitions

23. Drivers Behind Mergers and Acquisitions

24. Drivers Behind Mergers and Acquisitions

25. Drivers Behind Mergers and Acquisitions

26. Drivers Behind Mergers and Acquisitions

27. Drivers Behind Mergers and Acquisitions

28. Long-term Care Reimbursement Changes

29. Topics for Discussion • Healthcare Reform Initiatives on… • Private Pay • Medicare • Medicaid • Impact on Skilled Nursing Facilities and other LTC Providers • Strategies for Success 2

30. Impact of Healthcare Reform on SNFs Case Management Care Coordination Cost Efficiency

31. Opportunity Healthcare Reform will create significant opportunities for aging services providers Growth in All Senior Service Lines Significant Growth in HCBS Need for Strong Case Management Managing Health vs. Treating Illness 30

32. Threat Providers will be at greater financial risk Payment reductions at most sites of care Increased pay for performance and outcomes Increased risk for managing an episode of care Providers becoming Insurers Insurers becoming Providers 31

33. Who is Paying for SNF Services

34. Trends in Private Pay…. • More Discerning Consumers • Growth of Private Insurance Products • Enhanced Coverage of HCBS • Return of Premium to Beneficiary • Joint Policies • CCRC At Home Products • Other Membership/Affinity/Constituency Average rate is $210 for semi private. Newer facilities mostly private room and charging $300 per day

35. Healthcare ReformThe Triple Aim Manage Population Health Coordinate Care and Reduce Redundancy

36. Moving to Insurance Models - Medicare Under Insurance Models of Care, there will be incentives for community based organizations to play a greater role in the triple aim INCLUDING PACE

37. On the SNF Medicare Horizon… • Rate Increases for FY 2014 • Offset by Continued Sequestration • Shift Toward Managed Care/Risk • Penalties for Readmissions – FY 14? • Bundled Payments for Certain Procedures • Pressure to decrease rates related to SNF Operating Margins – Medpac – 20-24% • Focus on Therapy and Medical Necessity Average Medicare Rate for 2012 = $455.62

38. Post-Acute Care Delivery How Do Medicare Patients Use Post-Acute Care? INPATIENT REHAB HOME HEALTH CARE OUTPATIENT REHAB SHORT-TERM ACUTE CARE HOSPITALS LONG-TERM ACUTE CARE HOSPITALS SKILLED NURSING FACILITIES Intensity of Service Lower Higher 37% 61% 2% 2% 9% 21% 10% 11% 41% 52% Healthcare reform will be focused on placing patients in the least costly venue that provides the best outcomes and will seek to eliminate utilization of multiple care sites on the continuum Patients’ use of site during a 90 day episode Patients’ first site of discharge after acute care hospital stay (1) RTI, 2009: Examining Post Acute Relationships in an integrated Hospital System 36

39. Managing SNF Services Longer Term Stays Manage Population Health Case Management Focus Minimize Hospitalizations Manage End of Life Person Directed Planning Short Term Stays Manage Episode of Care Case Management Focus Reduce Re-Hospitalizations 38

40. Medicaid Fee For Service Updates • Regular Re-basing of Cost at 10/1/13 • Cost Reports Ending in Calendar Year 2012 • Continuation of Quality Assurance Assessment Program • Plant Cost Reimbursement • Tenure Method Class I • Cost Method Class III 10/1/13 rates will utilize 2012 cost reports. Anticipate Full rebasing

41. MichiganFacility Specific Medicaid Rates • Operating Reimbursement (Variable Cost) • Costs defined as Base or Support • Support cost limited in relation to base cost • Limits on owner/administrator compensation • Total limit set at 80th percentile of Medicaid days • No acuity adjustments • No adjustment for differences in wages by geography • No incentive to keep cost under the limit • Capital Reimbursement (Plant Cost) • Asset measurement based on depreciated reproduction cost drives reimbursement • Significant restrictions related to whether debt is allowable • Equity not recognized in reimbursement rate • Property taxes reimbursed as pass through • Quality Assurance Add-on • Payment based only on variable cost

42. Base vs. Support Costs

43. Medicaid Reimbursement Limits

44. Provider Tax Portion of Rate is Significant Under Managed Care for Duals, it is believed that CMS will NOT permit the pass through of Provider Tax Funds with this methodology but will require that the funds be rolled into provider rates • Approximately 18% of the Total Rate • Significantly Influences Profitability • Provider Tax Payments • $2, $23, $11 • Provider Monthly Receipts • 22% of Variable Cost Component - $35 to $41 for Average or Higher Provider

45. Summary of Current Rates – 10/1/12Source VCL Info and Rate Letters

46. Moving to Managed Care for Dual Eligibles

47. ICO - RFQ • Issued previous to the date intended • Many questions that providers might have, however, providers cannot submit questions. • When is someone considered a “dual eligible”? • 4 Demonstration Areas – 3 year pilot program • NO provision to contract with everyone • Uncertainty Over what the “Medicaid rate” includes – with or without QAS (Make sure your private pay rate is more than Medicaid rate plus QAS)

48. ICO - RFQ • Nursing Facility Payments page 51 • In addition to the Medicare payment for skilled care, the Contractor must pay the per diem coinsurance for days 21 up to 100 of a skilled nursing facility stay. Once Medicare reimbursement days are exhausted, the Contractor must reimburse Class 1 nursing facilities at not less than the established Medicaid daily rate; Class 3 nursing facilities must be reimbursed at not less than the Class 1 nursing facility average Medicaid daily rate in the region. • What type of average – Medicaid weighted or straight average Medicaid rate? What does this do to the Class 3 providers? Are they able to recoup lost reimbursement as lost cost under the certified public expenditure rules? What about MOE?

49. Macomb County – Pilot AreaWhere are you on this chart?

50. Average Rates in Pilot Areas • Upper Peninsula - $154.09 without QAS $185.18 with QAS • Southwest Michigan $165.53 without QAS $198.95 with QAS • Macomb $179.30 without QAS $215.98 with QAS • Wayne $185.73 without QAS $222.63 with QAS