Connecting Finance and Quality: The Nuts and Bolts

1. Connecting Finance and Quality: The Nuts and Bolts South Carolina Hospital Association Ninth Annual Transforming Health Symposium – “Opening Doors” April 6-7, 2016 Columbia Metropolitan Convention Center Columbia, SC Eric K. Shell, CPA, MBA

2. The Challenge: Crossing the Shaky Bridge Fee for Service Payment System Population Based Payment System 2012 2013 2014 2015 2016 MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

3. The Premise • Provider Imperatives • F-F-S • Management of price, utilization, and costs • PBPS • Management of care for defined population • Providers assume insurance risk • Macro-economic Payment System • Government Payers • Changing from F-F-S to PBPS • Private Payers • Follow Government payers • Steerage to lower cost providers • Provider organization • Evolution from • Independent organizations competing with each other for market share based on volume to • Aligned organizations competing with other aligned organizations for covered lives based on quality and value • Network and care management organization • New competencies required • Network development • Care management • Risk contracting • Risk management MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

4. Implementation Framework – What Is It? MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

5. Delivery System Strategy • Delivery system must respond to at a similar pace to changing payment models in order to maintain financial viability • Getting too far ahead or lagging behind will be hazardous to their health MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

6. Operating Efficiencies, Patient Safety and Quality • Hospitals not operating at efficient levels are currently, or will be, struggling financially • “Efficient” is defined as • Appropriate patient volumes meeting needs of their service area • Revenue cycle practices operating with best practice processes • Expenses managed aggressively • Physician practices managed effectively • Effective organizational design Graphic: National Patient Safety Foundation MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

7. Operating Efficiencies, Patient Safety and Quality • Understand difference between contribution margin and profit on fully allocated costs • Variable Cost • Definition: Expenses that change with changes in activity • E.g.: Pharmaceuticals, reagents, film, food • Fixed Cost • Definition: Expenses that do not change with changes in activity • E.g.: Salaries and benefits (??), rent, utilities • Unit contribution margin • The amount from each unit of service available to cover fixed costs and provide operating profits • Example - If Department X's unit service price is $200 and its unit variable cost is $30, the unit contribution margin is $170 ($200 – $30) • A rural hospital is made up of 1000s of Unit Contribution Margins

8. Economic Model: Inpatient Total Costs • Hypothetical example (continued) • Acute Variable Costs = $250/day • Swing Bed Variable Costs = $150/day • Fixed Costs = $6,000,000

9. Economic Model: Inpatient Per Unit Costs • Hypothetical example (continued) • As volume increases, fixed costs are allocated over large base • Result  lower Unit Cost

10. Acute Per Unit Revenue • Hypothetical example (continued) • Non Cost-Based Per Diems > Cost-Based Per Diems once Acute unit cost falls below $1400 • Note: Slightly higher acute variable costs cause higher breakeven

11. Operating Efficiencies, Patient Safety and Quality • Grow FFS patient volume to meet community needs • “Catching to pitching” • Opportunities often include: • ER Admissions • Swing bed • Ancillary services (imaging, lab, ER, etc.) • Increase efficiency of revenue cycle function • Adopt revenue cycle best practices • Effective measurement system • “Super charging” front end processes including online insurance verification, point of service collections • Education on necessity for upfront collections • Ensure chargemaster is up to date and reflects market reality • Continue to seek additional community funds to support hospital mission • Increase millage tax base where appropriate • Ensure ad valorem tax renewal MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

12. Operating Efficiencies, Patient Safety and Quality • Develop LEAN production practices that consider the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful • Preserving value / quality with less processes • Workflow redesign • Inventory Levels / Standardization • Response Times • Replicating Successes among all hospitals • C-Suite training on LEAN / Six Sigma • Evaluate self funded health insurance plans for optimal plan design • Self funded health insurance plans offer often overlooked opportunity to develop accountable care strategies for a defined patient base through aligning employee incentives through improved benefits design and more effective care management processes • Evaluate 340B discount pharmacy program as an opportunity to both increase profit and reduce costs • Often 340B is only looked upon as an opportunity to save costs not considering profit potential MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

13. Operating Efficiencies, Patient Safety and Quality • Increase monitoring of staffing levels staffing to the “sweet spot” • Staffing education for DONs/Clinical managers • Salary Survey / Staffing Levels / Benchmarks that are relevant MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

14. Operating Efficiencies, Patient Safety and Quality • Develop physician practice expertise MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

15. Operating Efficiencies, Patient Safety and Quality • Have an effective organizational design that drives accountability into the organization • Decision Rights • Drive decision rights down to clinical/operation level • Education to department managers on business of healthcare • Avoid separation of clinical and financial functions • Performance Measurement • Department managers to be involved in developing annual budgets • Budget to actual reports to be sent to department managers monthly • Variance analysis to be performed through regularly scheduled meetings between CFO/CEO and department managers • Compensation • Recognize performance in line with organizational goals MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

16. Operating Efficiencies, Patient Safety and Quality • Focus on Quality and Patient Safety • As a strategic imperative • As a competitive advantage MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

17. Operating Efficiencies, Patient Safety and Quality • Publicly report quality measures • All CAHs to begin reporting to Medicare Beneficiary Quality Improvement Program (MBQIP) • Increase internal awareness of internet based, publicly available, quality scores • Develop internal monitor systems to “move the needle” • Monitor data submissions to ensure reflect true operations • Consider reporting quality information on hospital website or direct patient to Hospital Compare • Staying current with industry trends and future measures • Educate staff on impact of how actual or perceived quality affects the hospital image • Must develop paradigm shift from quality being something in an office down the hall to something all hospital staff responsible for • Shift from being busy work to being integrated in business plan MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

18. Operating Efficiencies, Patient Safety and Quality • Partner with Medical Staff to improve quality • Restructure physician compensation agreements to build quality measures into incentive based contracts • Modify Medical Staff bylaws tying incentives around quality and outcomes into them • Ensure most appropriate methods are used to capture HCAHPS survey data • Consider transitioning from paper survey to phone call survey to ensure that method has increased statistical validity • Electronic Health Record (EHR) to be used as backbone of quality improvement initiative • Meaningful Use – Should not be the end rather the means to improving performance • Increase Board members understanding of quality as a market differentiator • Move from reporting to Board to engaging them (i.e. placing board member on Hospital Based Quality Council) • Quality = Performance Excellence MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

19. Primary Care Alignment • Understand that revenue streams of the future will be tied to primary care physicians, which often comprise a majority of the rural and small hospital healthcare delivery network • Thus small and rural hospitals, through alignment with PCPs, will have extraordinary value relative to costs • Physician Relationships • Hospital align with employed and independent providers to enable interdependence with medical staff and support clinical integration efforts • Contract (e.g., employ, management agreements) • Functional (share medical records, joint development of evidence based protocols) • Governance (Board, executive leadership, planning committees, etc.) • Potential Model for Rural: • New PHO MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

20. The Physician Hospital Organization • What is a PHO? • A joint venture or partnership between a hospital or hospitals and a group of physicians either as individuals or as a group • Both parties bring value and obligations to the partnership (Governance Alignment) • Both parties maintain their independence and are bound by the PHO services and contracts to which the PHO has agreed (Contractual & Functional Alignment) • Neither gives up its sovereignty to the PHO • Provides a forum of care coordination, collaboration, and reducing unwarranted variations, financial management • Common vision MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

21. Rationalize Service Network • Develop system integration strategy • Evaluate wide range of affiliation options ranging from network relationships, to interdependence models, to full asset ownership models • Interdependence models through alignment on contractual, functional, and governance levels, may be option for rural hospitals that want to remain “independent” • Explore / Seek to establish interdependent relationships among small and rural hospitals understanding their unique value relative to future revenue streams • Identify the number of providers needed in the service area based on population and the impact of an integrated regional healthcare system • Conduct focused analysis of procedures leaving the market • Understand real value to hospitals • Under F-F-S • Under PBPS (Cost of out of network claims) MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

22. Rationalize Service Network • Affiliation Value Curve MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

23. Payment System Strategy • Providers have opportunities to “shorten” and “stabilize” the shaky bridge by: • Working with payers to create transitional payment models • Initiating development with payers of full-capitation payment models MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

24. Payment System Strategy • Develop self-funded employer health plan • Hospital is already 100% at risk for medical claims thus no risk for improving health of employee “population” • Change benefits to encourage greater “consumerism” • Differential premium for elective “risky” behavior • “Enroll” employee population in health programs – health coaches, chronic disease programs, etc. • FFS Quality and Utilization Incentives • Maximize FFS incentives for improving quality or reducing inappropriate utilization (e.g., inappropriate ER visits, re-admissions, etc.) MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

25. Payment System Strategy – Initiatives II and III • Initiative II: Implementation planning for transitional payment models • Transitional payment models include: • FFS against capitation benchmark w/ shared savings • Shared savings model Medicare ACOs • Shared savings models with other governmental and commercial insurers • Partial capitation and sub-capitation options with shared savings • Prioritize insurance market opportunities • Take the initiative with insurers to gauge interest and opportunities for collaborating on transitional payment models • Explore direct contracting opportunities with self-funded employers • Initiative III: Develop strategy for full risk capitated plans MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

26. Population Health Strategies • A narrow rural/urban provider network focused on patient value • Aggregates multiple rural/CAH populations for critical mass • Restricted to payers willing to commit to population health and payment • On CCO’s terms • NOT for existing fee-for-service or cost contracts • Legal entity with corporate powers • Governance structure for setting strategy, policy, accountability • Actively secures and manages risk/reward-based payer contracts • Supports PCP-focused quality & care coordination across the network • Retains local hospital independence, but with contractual accountability • Houses care management infrastructure MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

27. Population Health Strategies – Phase I • Phase I: Develop Population Health building blocks • Goal: Infrastructure to manage self insured lives and maximize FFS Utilization and quality incentives • Initiatives: • PCMH or like structure • Care management • Discharge planning across the continuum • Transportation, PCP, meds, home support, etc. • Transitions of care (checking in on treatment plan) • Medication reconciliation • Post discharge follow-up calls (instructions, teach back, medication check-in) • Identifying community resources • Maintain patient contact for 30 days • Develop claims analysis capabilities/infrastructure • Develop evidenced based protocols MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

28. Value Attribution Model – Initial Concepts Health System ACO Value Matrix Mission and Margin Success Factors for Population Health Model Health Healthier patients who access care at the right time with the right provider Value is created when health system-attributed patients minimize utilization of healthcare services through effective prevention, care management, site of service and elimination of unnecessary care. In-In Network Providers owned, managed or employed by system In-Network Providers operating under negotiated contracts Out-of-Network Unaffiliated providers operating outside the system network Cost Variable costs to the system ACO Plan are managed to achieve margin Variable costs are based on the marginal direct cost of providing a unit of care and deliberately exclude step-fixed costs such as staffing Variable costs are the prices established through a negotiated fee schedule with providers outside the network Variable costs are retail/market-based prices for services charged by providers outside the network For Medicare ACOs, the variable costs become the Medicare DRG or APC fee schedule and equal the costs charged to the ACO budget. In-Network costs are significantly lower than the retail/market based claims costs charges to the ACO budget. System marginal direct costs are significantly lower than all other non In-In Network claims cost charges to the ACO budget. MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

29. Value Attribution Model – Initial Concepts Health System ACO Value Creation Strategies for Aligning Mission with Business Performance Balance the distribution of care where increased utilization of routine/prevention clinic-based services and decreased utilization of specialty procedure and hospital-based services are viewed as interdependent and mutually beneficial strategies. A Health Healthier patients who access care at the right time with the right provider Assign patient panels to all primary care providers (Physicians, NPs, PAs) to enable care teams to manage the health of attributed patients and establish the basis for value attribution, accountability and ultimately compensation. B In-In Network Providers owned, managed or employed by PHS In-Network Providers operating under negotiated contracts with PHS Out-of-Network Unaffiliated providers operating outside the PHS network Cost Variable costs to the system ACO Plan are managed to achieve margin C D When clinically indicated, patients should receive care In- Network as opposed to Out-of-Network When clinically indicated, patients should receive care In-In Network as opposed to In-Network The fundamental economic goal for the ACO is to reduce variable costs or providing services relative to the cost charged to the ACO budget. MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

30. Value Attribution Model – Initial Concepts Health System ACO Provider Scorecard Reporting for Employed Primary Care Providers Dr. NAME HERE Sample ACO Scorecard Metrics focused on the provider’s panel size, utilization, prevention and health status; Data come from EMR and PQRS reporting program. Health To what extent are providers managing full panels and what efforts are being made to reduce utilization? In-In-Network In-Network Out-of-Network PMPM When patients require care, where are they receiving it, are they being referred by system providers, and what are the cost implications for medical decision making? Metrics focused on the site of service for all care provided to PHS attributed patients divided into three major network-type categories; Data come from Medicare claims data, Employer Health Plan claims data, PHS billing systems and PHS Financial Statements. Quality For the providers’ attributed patients, to what extent are they receiving evidence-based care resulting in positive clinical outcomes? Metrics focused on the provider’s panel related to clinical processes, outcomes and a subset of meaningful use indicators; Data come from EMR and PQRS reporting program. Satisfaction To what extent is the provider offering services that meet their patients’ expectations? Metrics focused on patient experience in the primary care setting; Data come from Healthstream (CG-CAHPS program). MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

31. Implementation Framework – In Review MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

32. Conclusions/Recommendations • For decades, rural hospitals have dealt with many challenges including low volumes, declining populations, difficulties with provider recruitment, limited capital constraining necessary investments, etc. • The current environment driven by healthcare reform and market realities now offers a new set of challenges. Many rural healthcare providers have not yet considered either the magnitude of the changes or the required strategies to appropriately address the changes • “Shaky Bridge” crossing will required planned, proactive approach • Finance will lead function and form • Maintain alignment between delivery system models and payment systems building flexibility into the delivery system model for the changing payment system • Hospitals must operate at highly efficient level as fee-for-service volume declines and payment drops • Quality measurement has become industry wide competitive advantage MARKET OVERVIEW TRANSITION FRAMEWORK STRATEGIES

33. Eric K. Shell, CPA, MBA Eshell@stroudwater.com 50 Sewall Street, Suite 102 Portland, Maine 04102 (207) 221-8252 www.stroudwater.com