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HOSPITAL FINANCE 101

Ralph J. Llewellyn, CPA, CHFPPartnerHealth Care Servicesrllewellyn@eidebailly.comwww.linkedin.com/in/ralphllewellyn(701) 239-8594

INTRODUCTION

No other industry operates in the same manner as health care

Critical Access Hospitals operate differently than other health care providers

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REIMBURSEMENT THEORY

There are various methods of reimbursementFee schedule

Mostly large commercial payorsMost physician services (except Rural Health Clinics)

Charge basedOther commercial payors (more common for CAHs)

Cost basedMedicareMedicaid in some states

REIMBURSEMENT – FEE SCHEDULE

Diagnostic Related Groups (DRGs)•Inpatient reimbursement based on a fixed payment according to the diagnosis of the patient•Charges and length of stay are irrelevant •Focus on chart documentation and Health Information Management skills to improve reimbursement

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REIMBURSEMENT – FEE SCHEDULE

Common Procedure Terminology (CPT)•Payment made based on an established 5 alpha numeric identifier (CPT)•Codes for individual procedures•Typically lower of charge or fee schedule•Focus on documentation, Health Information Management skills, and charge capture process to improve reimbursement

REIMBURSEMENT THEORY - CHARGES

Full charges or percentage of charge•CAHs like these payors!•Dwindling number of payors•Critical Access Hospital may be treated more favorably•Allows facility to chart its financial course

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REIMBURSEMENT THEORY - COST

Reimbursement based on actual costs•Full cost•Partial cost•Blends•Submission of cost report•Profit??

MEDICARE REIMBURSEMENT THEORY

Cost BasedInpatientSwing BedOutpatient AncillariesRural Health ClinicsRetrospective

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MEDICARE REIMBURSEMENT THEORY

Reimbursable versus non-reimbursable services•Reimbursable – Medicare participates in cost•Non-reimbursable – Medicare does not participate in cost

MEDICARE REIMBURSEMENT THEORY

• Reimbursable examples

Medical/SurgicalOperating RoomLabRadiologyPhysical TherapyOccupational TherapySpeech TherapyRespiratory Therapy

Emergency RoomCardiologyPharmacySuppliesCardiac RehabSwing BedProvider Based ClinicRural Health Clinic

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MEDICARE REIMBURSEMENT THEORY

Prospective (non-reimbursable)Nursing Home

RUG per diemHome Health

HHRG 60 day episode of careAmbulance (most)

Fee scheduleHospice

ProspectiveSub-providers (psychiatric and rehabilitation)

ProspectiveFreestanding Clinics

Fee schedule

MEDICARE REIMBURSEMENT THEORY

•Allowable versus Unallowable CostsCosts are deemed unallowable if they are not related to patient care

•Patient phones/television•Advertising•Physician recruitment (except Rural Health Clinic)•Lobbying

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MEDICARE REIMBURSEMENT THEORY

•Allowable versus Unallowable CostsNon-patient revenues are offset against cost as a recovery of cost

•Interest income (to extent of interest expense)•Copies of medical records•Cafeteria

MEDICARE REIMBURSEMENT THEORY

•Medicare Cost Based ReimbursementMedicare reimburses costs based on Medicare utilization in the departments in which costs are reported

•Direct costs•Salary•Supplies

•Allocated costs (overhead)•Housekeeping•Laundry•Dietary•Administrative and General

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MEDICARE REIMBURSEMENT THEORY

•Overhead Allocation MethodologiesMethodologies determine how overhead costs will be allocated to various departments and subsequently determine Medicare’s reimbursement of costsMethodologies can be changed with approval from MedicareStrategy – analyze alternative methodologies!

MEDICARE REIMBURSEMENT THEORY

•Medicare Cost Based ReimbursementInterim payments made based on percentage of charges submitted and/or per diemInterim rates based on prior year cost to charge ratio/per diemFinal costs are calculated using departmental specific cost-to-charge ratioRoutine Med/Surg and Skilled Swing Bed costs calculated based on cost per day

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MEDICARE REIMBURSEMENT THEORY

•Medicare Cost Based ReimbursementExample

•Medicare will reimburse high percentage of direct costs incurred in Med/Surgdue to high Medicare utilization•Medicare will reimburse lower percentage of direct costs incurred in the departments with lower Medicare utilization (i.e., Emergency Room, Physical Therapy, etc.)•Medicare will provide no additional reimbursement for direct costs incurred in non-reimbursable cost centers•Overhead costs incurred by the entity will be reimbursed by Medicare based on the Medicare utilization in the departments in which the costs are subsequently allocated

MEDICARE REIMBURSEMENT THEORY – WHY IS IT SO DIFFICULT?

•Cost settlements

•Factors impacting year-to-year cost settlementsVolumeMedicare UtilizationChanges in chargesChanges in expenses

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MEDICARE REIMBURSEMENT THEORY – WHY IS IT SO DIFFICULT?

•VolumeSignificant increases in volume tend to lead to year-end payable to MedicareSignificant decreases in volume tend to lead to year-end receivable from Medicare

•Medicare utilization Changes in Medicare utilization impacts percentage of costs Medicare will reimburseDepartment specific

MEDICARE REIMBURSEMENT THEORY – WHY IS IT SO DIFFICULT?

•VolumeSignificant increases in volume tend to lead to year-end payable to MedicareSignificant decreases in volume tend to lead to year-end receivable from Medicare

•Medicare utilization Changes in Medicare utilization impacts percentage of costs Medicare will reimburseDepartment specific

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MEDICARE REIMBURSEMENT THEORY – WHY IS IT SO DIFFICULT?

•Cost plus 1% ≠ ProfitUnallowable costs

•Offset are frequently 5 – 10% of total costs•95% + 1% = 95.95% reimbursement•Sequestration?

Where does the profit come from?

MEDICARE REIMBURSEMENT THEORY – WHY IS IT SO DIFFICULT?

•Rules/interpretations changeLegislationMedicare Final RulesMedicare TransmittalsMedicare Audit Contractor interpretations (many retroactive)

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MEDICARE REIMBURSEMENT THEORY – WHY IS IT SO DIFFICULT?

•Challenges in managing costs as methodology to improve financial position

Example #1•Decrease $100,000 in salary in Med/Surg•Reduce Medicare reimbursement $90,000•$10,000 net impact

Example #2•Decrease $10,000 in cost in Assisted Living•No reduction in reimbursement•$10,000 net impact

MEDICARE REIMBURSEMENT THEORY – WHY IS IT SO DIFFICULT?

•Different rules in different statesCritical Access HospitalNursing Home

•Difficulty finding trained staffNot offered as a specific college program

•No reimbursement training for nurses and other clinical staff•No reimbursement training for Doctors

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MEDICAID – NORTH DAKOTA

CAH – Cost Based

Other – Prospective (Except Nursing Home)

COMMERCIAL

Blue Cross Blue Shield – Fee ScheduleSanford Health – VariesOther - Vary

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IMPACT OF CHARGES

Changes in gross charges have varying impactMedicare – Little (impacts utilization calculation on cost based)Medicaid – Little (impact utilization calculation on cost based)Blue Cross Blue Shield – No impact unless under outpatient and clinic fee schedulesOthers – Vary

Charges are still very important.North Dakota facilities frequently well below neighboring states

CAH - SUMMARY

Cost control still importantImpact of changes in costs varies by departmentImprove long term financial performance by controlling costs

Pricing can still have an impact

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NURSING HOME

Issues are state specific

North DakotaCost Based - prospectiveLimits appliedIncentivesOperating MarginRate equalization

NURSING HOME - CATEGORIES

DirectNursingTherapiesCase Mix Adjusted

Other DirectFood & DietaryLaundrySocial ServicesActivities

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NURSING HOME - CATEGORIES

IndirectAdministrationChaplainPharmacyPlantHousekeepingDietary SalaryMedical Records

Property

NURSING HOME – LONG TERM STRATEGIES

Direct / Other Direct CostsManage daily cost to level slightly below limit

IndirectManage indirect costs to maximize incentiveMore difficult for co-located providers

Private room rates

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NURSING HOME – LONG TERM STRATEGIES

Collocated facilitiesAllowable nursing home costs are included 100% in setting reimbursement rates for next year (assuming under the limits)

Allowable hospital and other cost based reimbursement costs are included in Medicare and Medicaid settlement (i.e. not other payors)

CLOSING

It is definitely true that no other industry operates in the same manner as health care and that Critical Access Hospitals has unique issues.

However, a strong understanding of the reimbursement methodologies can provide the necessary tools to guide to success.

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This presentation is presented with the understanding that the information contained does not constitute legal, accounting or other professional advice. It is not intended to be responsive to any individual situation or concerns, as the contents of this presentation are intended for general information purposes only. Viewers are urged not to act upon the information contained in this presentation without first consulting competent legal, accounting or other professional advice regarding implications of a particular factual situation. Questions and additional information can be submitted to your Eide Bailly representative, or to the presenter of this session.

QUESTIONS?