Hospital Finance 101 :

1. Hospital Finance 101: Making sense of cost and payment issues in the hospital marketplace Andrew Busz, WSHA Policy Director, FinanceMary Kay Clunies-Ross, WSHA VP Communications & Public Affairs September 19, 2014

2. Takeaways From This Presentation • There are a huge variety of interconnected factors that influence hospital finances, costs, and access to care. • That variety can translate into consumer choice, but it can also translate into consumer confusion. • Cost shifts between patients and payers have a significant impacton hospital finances and access to services. • The ACA and health care reform continue to drive changeat the national and state level.

3. Presentation Outline • Background: The Unplanned American Marketplace • Patients • Hospitals • Insurers • Types of payers • Payer mix • Payment structures • Charity care, community benefits, margins • Patients • Moving to the Future • Payment models • Health care in rural areas • Transparency in cost and quality

4. The Unplanned American Health Care Marketplace

5. Patients: Infinite Variety

6. Patients: Treatment Variety

7. Hospitals Variety and Choice

8. 99 Washington State Hospitals: Variety and Choice • Academic medical centers • Critical Access Hospitals (<25 beds; Rural) • Most beds in non-profit hospitals • Long-term care facilities • Children’s hospitals • 45 are rural

9. Washington Hospitals: Quick Stats Hospitals by bed size Hospitals by trauma level

10. Hospitals: Average Expenses Professional Fees, 9.1% Utilities, 2.4% Professional Liability Insurance, 1.4% All Other: Labor Intensive, 3.7% All Other: Non-labor Intensive, 3.7%(2) Source: AHA analysis of Centers for Medicare and Medicaid Services data, using base year 2006 weights. (1) Does not include capital. (2) Includes postage and telephone expenses.

11. Hospitals: Margins Table 1 Notes: Adjusted revenue is the total hospital revenue minus Medicare and Medicaid charges. Operating margin is the total hospital operating revenue minus operating expenses expressed as a percent. http://www.doh.wa.gov/Portals/1/Documents/5300/2012CharityCareReport.pdf

12. Payment Variety Government Payers Commercial Payers None of the Above: Charity Care and More Payer Mix Payment Structures

13. Payment Variety: Government Medicaid • Joint state/federal program for enrollees who meet income guidelines (<138% of federal poverty level) • Enrollment is expanding due to increased income threshold and removal of other requirements • Pays significantly less than the cost of care

14. Payment Variety: Government Medicare • Federal program for patients who are over age 65 or have a qualifying disability • Includes both “Original Medicare,” Medicare supplemental plans and Medicare Advantage Plans • Typically pays significantly less than the cost of care

15. Chart 4.7: Hospital Payment Shortfall Relative to Costs for Medicare, Medicaid, and Other Government, 1997 – 2011(1) Medicare Medicaid Other Government Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2011, for community hospitals. (1) Costs reflect a cap of 1.0 on the cost-to-charge ratio.

16. Payment Variety: Commercial Three types: Commercial, Individual, and Exchange Plans

17. Payment Variety: None of the Above Emergency Treatment and Active Labor Act (EMTALA): Hospitals must assess and provide care regardless of patient’s ability to pay Charity care: Care provided with little or no payment. • 2007: $590M in charity care, 2.16% of revenue • 2012: $1.24B in charity care, 2.87% of revenue Bad debt: Patient is responsible for, but doesn’t pay

18. Charity Care Bad Debt Payment Shortfalls + Community Services = Community Benefits

19. www.wahospitalpricing.org Individual hospital payer mix Average service provided by each insurer type Uncompensated care totals Insurer/Payer Variety

20. Payer Mix: Changing Over Time

21. Payer Mix

22. Payment and the Cost of Care

23. Payment Structures Prospective Payment System (PPS) Cost-Based Payment Percent of Charges

24. Payment Structures: Prospective Payment System (PPS) • Adjusted flat fee payment for similar cases • Provides incentive for cost effective care • Most common type- Diagnosis Related Groups (DRGs) • Assumes high volumes of services to minimize hospital financial risk

25. Payment Structures: Cost-Based • Payment reconciled to allowable expenses incurred in the provision of care • Primarily used for Critical Access Hospitals (small hospitals in remote areas with less than 25 beds and limited services) • Reasons: • Smaller volumes than urban hospitals/ higher proportion of fixed costs • Greater variability risk than urban hospitals

26. Payment Structures: Percent of Charges • Agreement to pay a negotiated percent of the billed amount • Reasons: • Easier to negotiate than PPS agreements • Provides greater risk protection to smaller hospitals and payers • Limits hospitals’ ability to adjust chargemasters (up or down)

27. The Public and the Prices The struggle for predictability in health care costs

28. Patients Why Do Charges Vary? Charge amount is the sum of many components, which can vary dramatically by patient-- even for similar services in similar hospitals • Type of inpatient service (acute, intensive) • Length of stay • Surgery duration, supplies, and drugs needed • Patient’s age and other health conditions Differences can be more pronounced between hospitals because of patient and payer mix

29. Patients: Why Do Hospitals Cost So Much? Overhead costs to support service availability • 24/7 availability for Emergency Department • Trauma capability • High levels of emergency preparedness • Medical education cost at teaching hospitals Personnel costs are high for highly skilled personnel and 24/7 coverage Support for needed but low-revenue services

30. Moving to the Future

31. The Future: Payment Models Accountable Care Organizations Affiliations • Enhanced Clinical Integration across the continuum of care • Enhanced Data sharing Risk-Sharing Arrangements • Pay For Performance • Bundled Payment • Capitation • Additional Concerns • Protecting and sharing patient information • Environment that fostersintegration

32. The Future: Rural Health Care Rural hospitals are innovating in health care delivery • Integrating physical and behavioral health • Using paramedics to visit patients and follow up on care • Using telemedicine to bring experts to patients • Visit www.wsha.org/rural Changing payment models may have big effects on small hospitals, so there is some uncertainty Many rural hospitals already active in population health

33. Transparency in Cost and Quality Hospitals "are absolutely in favor of price transparency,” says AHA president Rich Umbdenstock…. He also says hospitals would like to end the confusing chargemaster and cost-shifting practices, but they can't do it without big changes in payment practices by both the government and the insurance industry. "If this were in our power to solve, we would have done it a long time ago… But it's not something we can do on our own.” (Wall Street Journal, 2/24/14) “Transparency means how good is the care really and how much does this care cost? The Washington State Hospital Association has come out fully supportive of transparency, both of quality and of price…. We understand in health care, that we have to do our part to be as efficient and as effective as possible. Transparency is an important part of that.” (Scott Bond, WSHA President and CEO) www.wahospitalpricing.orgwww.wahospitalquality.org

34. Questions?

35. Resources www.wahospitalpricing.org www.wahospitalquality.org www.wsha.org/rural http://www.staysmartstayhealthy.com/healthcare_history http://www.npr.org/templates/story/story.php?storyId=114045132 http://www.nejm.org/doi/full/10.1056/NEJMp1200478 Andrew Busz, WSHA Policy Director, Finance 206-216-2533; andrewb@wsha.org WSHA Website: www.wsha.org