Presented by: Jamie Cleverley Cleverley + Associates

1. COST REDUCTION: IDENTIFYING THE OPPORTUNITIES Southwestern Ohio HFMA May Institute May 17, 2012 Presented by: Jamie Cleverley Cleverley + Associates

2. Today’s Objectives • Confront national healthcare cost questions • Are we experiencing a national healthcare cost crisis? • If there is a crisis, do I have a role and responsibility to help change it? • Examine characteristics of low-cost providers through a national study of US acute-care hospitals • How big is the cost gap? • Are certain demographic factors associated with higher cost? • What areas do “low-cost” providers excel? • Does “lower-cost” necessitate “lower-quality?” • What is the impact on margin? • Determine a framework for cost assessment and management execution

3. CONFRONTING NATIONAL HEALTHCARE COST ISSUES

4. Are we experiencing a national healthcare cost crisis? ? Confronting national healthcare cost issues

5. What we know: Healthcare’s % of GDP is increasing 20% 18% Confronting national healthcare cost issues 6% 1966 2010 2020

6. What we know: All Healthcare segments are growing National Health Expenditures (top five areas) Confronting national healthcare cost issues Source: CMS Data Compendium 2011 Edition

7. What we know: All Healthcare segments are growing Annualized Change in National Health Expenditures by Area Confronting national healthcare cost issues Source: CMS Data Compendium 2011 Edition

8. What we know: Government’s responsibility is increasing Confronting national healthcare cost issues Source: CMS Data Compendium 2011 Edition

9. What we know: Government’s ability to pay is challenged Gross Public Debt as a Percentage of GDP Confronting national healthcare cost issues

10. What we know: Government’s ability to pay is challenged Context for Medicare payment policy Growing health care costs have a significant fiscal impact on federal, state, and local governments, as government payers directly sponsor nearly half of all health care spending. Furthermore, the federal government may be less able to provide financial support to fiscally strapped states as a result of its own long-term deficit picture. While the federal government’s short-term fiscal outlook could modestly improve as the economy recovers, the United States faces a long-term deficit that needs to be addressed by cutting spending, by increasing revenue, or by some combination of the two. Growth in health care spending in the Medicare and Medicaid programs contributes materially to that deficit. Confronting national healthcare cost issues Source: Medpac, “Medicare Payment Policy,” March 2012

11. What we know: The result has been deteriorating margins Overall Medicare Margins 2001-2010 Confronting national healthcare cost issues Source: Medpac, “Medicare Payment Policy,” March 2012

12. What we know: The result has been deteriorating margins Overall aggregate Medicare profit margins improved from −7.1 percent in 2008 to −4.5 percent in 2010 for two reasons: First, hospitals slowed their cost growth in reaction to the economic downturn, and second they made changes in documentation and coding that led to higher hospital payments. Although the average hospital Medicare margin is negative, we find that Medicare payments more than covered the fully allocated costs of the median efficient hospital, which operated with a 4 percent Medicare margin in 2010. We project overall aggregate margins of –7 percent in 2012. According to MedPac:Why margins improved Confronting national healthcare cost issues Source: Medpac, “Medicare Payment Policy,” March 2012

13. Are we experiencing a national healthcare cost crisis? While the reasonableness of our country’s healthcare cost structure can be debated – our ability to fund healthcare cost growth cannot. ? Confronting national healthcare cost issues

14. If there is a crisis, do I have a role and responsibility to help change it? ? Confronting national healthcare cost issues

15. If “yes,” I need to understand what I can control Cost/Unit & Utilization Considerations Confronting national healthcare cost issues

16. If “yes,” I need to understand what I can control Cost/Unit & Utilization Considerations “As important as it is to manage the cost of medical services and products, and eliminate wasteful utilization, there has been a strong recognition that ultimately healthier populations cost less,” said Dr. Ian Chuang, medical director at the Lockton Companies, advisers to many medium-size employers. His firm touts programs that encourage employees to shed pounds, get active or quit smoking. Ricardo Alonso-Zaldivar. “Obamacare Collapse Would Put Employers in Charge." US News & World Report. April 24, 2012. http://www.usnews.com/news/us/articles/2012/04/24/the-next-health-care-overhaul-look-to-employers Confronting national healthcare cost issues

17. If “no,” Medicare believes you should because they don’t see additional value in higher cost providers Efficient providers—While Medicare payments are currently less than costs for the average hospital, a key question is whether current Medicare payments are adequate to cover the costs of efficient providers. To explore this question, we have examined financial outcomes for a set of hospitals that consistently perform relatively well on cost, mortality, and readmission measures. We find that Medicare payments more than covered the costs of the median efficient hospital, with the median efficient hospital generating a 4 percent Medicare margin in 2010. Confronting national healthcare cost issues Source: Medpac, “Medicare Payment Policy,” March 2012

18. IS THERE A COST DIFFERENCE AMONG HOSPITALS?

19. How extreme are the cost differences among hospitals? Hospital Cost Index® Medians by Group – 2010 Cost differences among hospitals 48% Difference b/t Low & High

20. Median Net Patient Revenue (millions) by Hospital Cost Index® Quartiles Cost differences among hospitals

21. Urban/Rural Status by Hospital Cost Index® Quartiles Cost differences among hospitals

22. Organization Type by Hospital Cost Index® Quartiles Cost differences among hospitals

23. Teaching Status by Hospital Cost Index® Quartiles Cost differences among hospitals

24. Median Medicaid Days % by Hospital Cost Index® Quartiles Cost differences among hospitals

25. Regional differences in hospital costs Regional Divisions Used by the United States Census Bureau Cost differences among hospitals

26. Median Hospital Cost Index® by Regional Divisions Cost differences among hospitals 98.3 102.8 100.4 101.7

27. In what areas do low cost hospitals excel? Revenue Areas Cost differences among hospitals *wage index adjusted

28. In what areas do low cost hospitals excel? Cost Areas Cost differences among hospitals *wage index adjusted

29. In what areas do low cost hospitals excel? Cost Areas Cost differences among hospitals *wage index adjusted

30. In what areas do low cost hospitals excel? Financial Areas Cost differences among hospitals *wage index adjusted

31. In what areas do low cost hospitals excel? Financial Areas Cost differences among hospitals *wage index adjusted

32. Does “lower-cost” necessitate “lower-quality?” Examination of quality performance through CMS’ Hospital Compare Database is grouped into two areas: Cost differences among hospitals • Process of Care Metrics • Hospital performance relative to best practices in five clinical areas • Outcome of Care Metrics • Thirty-day risk adjusted mortality and readmission rates

33. Does “lower-cost” necessitate “lower-quality?” The Hospital Quality Index™ (HQI) takes the information available in CMS’ Hospital Compare database and provides a single score for hospital performance. The HQI includes three assessment points for process of care and two assessment points for outcome of care. The combination of these five assessment points results in the HQI score. A higher score is desirable for all components, including the overall HQI score. Areas of Evaluation Cost differences among hospitals • Outcome of Care Metrics • Thirty-day risk adjusted mortality and readmission rates for heart attack, heart failure, and pneumonia • Process of Care Metrics • Twenty-five metrics used in the areas of Heart Attack, Heart Failure, Pneumonia, and Surgical Infection Prevention Five Assessment Points % Natl Avg (% the hosp is above or below the natl avg for process of care) % Reporting(% of process of care metrics reported by hosp) % Top Ptile(% hosp scores at highest level for process of care metrics) Natl Mort Scr(Thirty-day risk adjusted mortality rate for hosp) Natl Readm Scr(Thirty-day risk adjusted readmission rate for hosp) Hospital Quality Index™ *A higher score is desirable in each area

34. Does “lower-cost” necessitate “lower-quality?” Quality Areas Cost differences among hospitals HIGHER SCORES ARE DESIRABLE IN ALL AREAS

35. Does “lower-cost” necessitate “lower-quality?” Quality Areas Cost differences among hospitals

36. What does the data reveal? • Various demographic factors are moderately associated with higher cost • In general, high cost hospitals can exist in any region, organization type or structure • Low cost hospitals excel in numerous operational areas. Length of stay and quality do not show significant differences across groups. • Low cost hospitals are more profitable in Medicare, but, have only slightly higher operating margins. Relatively speaking, high cost hospitals must be generating more revenue. Cost differences among hospitals

37. MEASURING HOSPITAL COST

38. Why one facility metric of comparison? H • Evaluates complete hospital cost position • Permits trending over time • Allows for comparative benchmarking • Traditional facility-level hospital cost metrics: • Cost per adjusted patient day (with or without CMI adjustment) • Cost per adjusted discharge (with or without CMI adjustment) Measuring hospital cost

39. Issues with traditional ‘adjusted’ metrics Measuring hospital cost Adjusted Patient Days Formula:IP Patient Days X [1+(Gross OP Rev/Gross IP Rev)]

40. The ultimate goal in understanding and addressing cost issues Measuring hospital cost CREATE LOW COST PATIENT ENCOUNTERS Inpatient CostsCost per Discharge Outpatient CostsCost per Visit Patient Encounter Cost: Cost = (Q1 X C1) + (Q2 X C2) + … + (Qn X Cn) Where Q = quantity of units and C = cost per unit

41. Facility-level cost comparison through one metric Facility-level cost measure: Hospital Cost Index® Measuring hospital cost Outpatient Costs Outpatient Cost Index Formula: Your Medicare Cost per Visit (RW/WI adj) US Median Medicare Cost per Visit (RW/WI adj) Inpatient Costs Inpatient Cost Index Formula: Your Medicare Cost per Discharge (CMI/WI adj) US Median Medicare Costper Discharge (CMI/WI adj)

42. What about volume? Equivalent Discharges™(Equivalent Patient Units™) Measuring hospital cost Inpatient Volume Formula: Total Gross Inpatient Charges Hospital Average Medicare Charge per Discharge (CMI adj) Outpatient Volume Formula: Total Gross Outpatient Charges Hospital Average Medicare Charge per Visit (RW adj) = = # OF EQUIVALENT IP DISCHARGES # OF EQUIVALENT OP VISITS + # OF EQUIVALENT OP DISCHARGES Multiply by Medicare payment conversion factor = # EQUIVALENT DISCHARGES

43. IDENTIFYING AND ACTING ON COST OPPORTUNITIES

44. Two approaches to cost reduction 2 1 Identifying and acting on cost opportunities Strategic ATB • Target set (5% reduction) and all areas must comply • Allows whole organization to be involved • Can jeopardize high-performing (lean) areas • Targeted areas identified for cost reduction • Can cause identified areas to feel ‘singled out’ • Permits cost efficiency only in areas that are most weak

45. Understanding the three spheres of influence on cost • Intensity of Services • The mix and quantity of services/procedures • Nursing days(LOS) Identifying and acting on cost opportunities • Productivityor Efficiency • Cost incurred to producea specific procedure • Nursing hours • ResourcePrices • Price per unit • Nursing salaries COST

46. Evaluating cost at multiple levels to determine action areas Survey Survey Identifying and acting on cost opportunities Survey Focus Focus Action Action Action

47. Creating strategic comparisons Regional/Best Practice Hospital Market WHO?? Identifying and acting on cost opportunities Core HospitalMarket SERVICES?? IS IT ACTIONABLE??

48. Case example 1: Intensity issue HOSPITAL COST INDEX® Identifying and acting on cost opportunities

49. Case example 1: Intensity issue MEDICARE LOS Identifying and acting on cost opportunities

50. Case example 1: Intensity issue TOP INPATIENT OPPORTUNITIES – CASE 1 Identifying and acting on cost opportunities