hfma southern california educational webinar october 4, 2012 presented by: jamie cleverley cleverley...

HFMA SOUTHERN CALIFORNIA EDUCATIONAL WEBINAROctober 4, 2012

Presented by:

Jamie CleverleyCleverley + Associates

REGIONAL & OPERATIONAL EFFECTS ON HOSPITAL PRICING& STRATEGIC RESPONSES FOR PRICE DEFENSE

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Why pricing?

National Health Expenditures (top five areas – millions)

1 GROWTH IN HOSPITAL COSTS/CHARGES

| 3 |Source: CMS

Why pricing?

1980-1990 % Change 1990-2000 % Chg 2000-2009 % Chg

Drugs 12.8% Drugs 11.6% Drugs 8.4%

Physician 12.8% Admin Priv Hlth Ins 7.7% Admin Priv Hlth Ins 8.1%

Admin Priv Hlth Ins 12.4% Other 6.1% Hospital 6.9%

Nursing Home 11.4% Dental 7.0% Other 6.5%

Other 11.3% Nursing Home 6.6% Physician 6.4%

Hospital 9.6% Physician 6.2% Struct & Equip 6.3%

Struct & Equip 9.4% Struct & Equip 5.9% Dental 5.7%

Dental 9.0% Hospital 5.2% Nursing Home 5.4%

TOTAL ALL 11.0% TOTAL ALL 6.6% TOTAL ALL 6.8%


Annualized Change in National Health Expenditures by Area

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Why pricing?

Inflationary Changes by Metric & Year


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6.0%

Why pricing?


Rate Increase Median Limit Value

5.0%

5.0%

5.0%

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2 INCREASED GOVERNMENT/LEGAL ATTENTION

Why pricing?

Hospitals, SEIU-UHW Reach Visionary Agreement on Future of Health Care Policy, Relationships in California

May 2, 2012The California Hospital Association and SEIU-United Healthcare Workers West have reached a comprehensive, strategic agreement to jointly take on the many challenges facing the health care system, including rising costs, burgeoning levels of chronic disease, and the need to provide the highest quality of care for the people of California.

Reached after two months of meetings and conversations to discuss issues of mutual interest, the agreement calls for SEIU-UHW and CHA to work in good faith, along with other key stakeholders, to find practical solutions that can replace or improve the current hospital pricing system and protect the neediest patients by addressing uncompensated care in hospitals in a manner that accounts for low Medicare and Medi-Cal payments.

Issued jointly by CHA and SEIU-UHW

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What is driving the need for transparency?

2 INCREASED GOVERNMENT/LEGAL ATTENTION

Why pricing?

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Growth in HSA/HDHP Plans by Year (thousands)

Source: Center for Policy & Research, America’s Health Insurance Plans

3 GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE

Why pricing?

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Why pricing?

3 GROWTH IN HSA/HDHP AND CONSUMER-DIRECTED HEALTHCARE

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1) Understand the relationships of operating environment factors on hospital price through a national data studyWHAT INFLUENCES HOSPITAL PRICING?

2) Assess current price position with critical performance metrics for inpatient and outpatient areasHOW DO WE COMPARE PRICES?

3) Defend hospital pricing in light of unique operating environments by implementing appropriate policies and strategic modelsHOW DO WE DEFEND PRICES?

Today’s Objectives

WHAT INFLUENCES HOSPITAL PRICE?

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What influences hospital pricing?

Three spheres of influence on price

PRICE

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Who is likely to have the highest charges among hospitals that are:

-Urban vs Rural

-For-Profit vs Non-Profit

-Large vs Small

-High Market Share vs Low Market Share

-High Medicaid vs Low Medicaid

-High Cost vs Low Cost

Testing price variablesW

hat influences hospital pricing?

$

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Urban/Rural Status by Hospital Charge Index® Quartiles


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What influences hospital pricing?Organization Type by Hospital Charge Index® Quartiles

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What influences hospital pricing?Median Net Patient Revenue (millions) by Hospital Charge Index® Quartiles

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What influences hospital pricing?Median Market Share Percentage by Hospital Charge Index® Quartiles

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What influences hospital pricing?Median Medicaid Days Percentage by Hospital Charge Index® Quartiles

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What influences hospital pricing?Median Collection Percentage From Self-PayBy Year

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What influences hospital pricing?Median Hospital Cost Index® by Hospital Charge Index® Quartiles

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What influences hospital pricing?Median Operating Margin by Hospital Charge Index® Quartiles

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What influences hospital pricing?Median Payer Environment by Hospital Charge Index® Quartiles

Payer Environment: Markup Ratio/Deductions %

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Regional differences in hospital pricing

Regional Divisions Used by the United States Census BureauNORTHEASTConnecticutMaineMassachusettsNew HampshireNew JerseyNew YorkPennsylvaniaRhode IslandVermont

MIDWESTIllinois MissouriIndiana NebraskaIowa North DakotaKansas OhioMichigan South DakotaMinnesota Wisconsin

SOUTHAlabama Georgia North Carolina TexasArkansas Kentucky Oklahoma VirginiaDelaware Louisiana South Carolina West VirginiaDist of Columbia Maryland TennesseeFlorida Mississippi

WESTAlaska NevadaArizona New MexicoCalifornia OregonColorado UtahHawaii WashingtonIdaho WyomingMontana

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What influences hospital pricing?Median Hospital Charge Index® by Regional Divisions

88.3

110.6

94.9119.7

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Urban/Rural Status by Regional Divisions


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What influences hospital pricing?Organization Type by Regional Divisions

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What influences hospital pricing?Median Net Patient Revenue (millions) by Regional Divisions

151

78

110121

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What influences hospital pricing?Median Market Share Percentage by Regional Divisions

18.6

50.7

41.513.6

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What influences hospital pricing?Median Medicaid Days Percentage by Regional Divisions

13.3

15.3

13.818.0

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What influences hospital pricing?Median Collection Percentage From Self-Pay byRegional Divisions

IP: 6.0OP: 7.6IP: 2.7

OP: 3.0

IP: 2.7OP: 2.9

IP: 5.0OP: 5.0

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What influences hospital pricing?Median Hospital Cost Index® by Regional Divisions

96.8

100.5

102.8101.8

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What influences hospital pricing?Median Operating Margin by Regional Divisions

-0.58

1.13

1.412.74

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What influences hospital pricing?Median Payer Environment by Regional Divisions

Payer Environment: Markup Ratio/Deductions %

4.20

4.48

4.264.84

PAYMENT IS KEY IN HOSPITAL PRICING

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PayerNumber of

PatientsNet Payment per

PatientTotal

PaymentTotal

CostMedicare 50 $92.50 $4,625 $5,000Medicaid 10 $75.00 $750 $1,000Uninsured 5 $5.00 $25 $500Managed Care 30 $125.00 $3,750 $3,000Other 5 ??? $500

Totals 100 $9,150 $10,000

less Total Cost $10,000 less Required Profit $500

Balance Remaining ($1,350)

Average Cost per Patient = $100

Required Payment from Five Remaining Patients = $270 ($1,350/5)

???

Analysis of Payer Environment & Hospital PricePaym

ent key in hospital pricing

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Average costs

Losses on patients who pay less than cost

Discounts to charge patients Uninsured Commercial

Reasonable return on investment Sustainable growth

Pricing Requirements



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Price =(NI + fixed pay loss)

(1 - charge discount)

Pricing Model

avg cost + charge volume

Average cost increases

Use this model for price-setting at facility level:

Net income requirementsincrease

Losses from fixed pay businessincreases

The percentage of charge paying patients decreases

Price must increase when:

The discount from charges increases



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Avg cost = $100NI = $4 (4%)

FP loss = $0Charge payers = 20%

Charge discount = 30%Required price = $171.43

Pricing Model – Payer Impact on Pricing



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MODEL

# 1 # 2 # 3

Profit margin 4% 4% 4%FP loss 0 2 0

% charge 50% 20% 100%Average discount % 15% 60% 5%

Mark-up required 127 325 109

Pricing Model – Pricing Sensitivity Analysis

HOW DO WE COMPARE HOSPITAL PRICES?

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CPT® is a registered trademark of the American Medical Association. All rights reserved.

How

do we com

pare prices?

Level of Comparison Metric

FACILITY Hospital Charge Index®

Medicare Charge per Discharge (CMI/WI adj)

Medicare Charge per Visit(RW/WI adj)

DEPARTMENT BETOS Analysis

INPATIENT CASE Charge by MS-DRG

OUTPATIENT CASE Charge by APC

PROCEDURE Price by CPT®/HCPCS Code

Levels of hospital price comparison

Bundling

Bundling

Leve

l of D

etai

l

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Facility-level charge measure:Hospital Charge Index®

Outpatient ChargesOutpatient Charge Index

Formula:Your Medicare Charge

per Visit (RW/WI adj)US Median Medicare Charge per

Visit (RW/WI adj)

Inpatient ChargesInpatient Charge IndexFormula:Your Medicare Charge per Discharge (CMI/WI adj)US Median Medicare Charge per Discharge (CMI/WI adj)

Facility-level price comparisonH

ow do w

e compare prices?

Inpatient Charge Index

Outpatient Charge Index

Hospital Charge Index®

Sample Hospital 136.1 119.4 128.9

Peer Average 96.6 65.9 85.2

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Sample Hospital

Peer Average

% of Peer Average

Evaluation & Management – selected detail Office Visits 126.58 111.74 113.28%

Emergency Room 406.53 323.20 125.78%Evaluation & Management Total 298.09 213.27 139.77%

Procedures – selected detail

Major Procedures – Cardiovascular 193.56 113.00 171.30%Eye Procedures - Cataract/Lens 130.76 196.93 66.40%

Procedures Total 287.50 185.65 154.86%

Imaging – selected detail Standard Imaging - Nuclear Medicine 230.29 281.86 81.70%

Advanced Imaging - CT/CTA Scan Brain/Head/Neck 569.35 396.29 143.67%Imaging Total 467.71 343.16 136.29%

Tests – selected detail Lab tests - Pathology 358.81 368.38 97.40%

Lab tests - Routine venipuncture 1,854.80 705.90 262.76%Tests Total 495.30 297.09 166.72%

Department-level price comparison

CPT® Description87075 Culture specimen, bacteria

87076 Bacteria identification

87077 Culture Aerobic Identify


Department/Family Analysis“Lab Tests – Microbiology”

How

do we com

pare prices?

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DRG Description

Sample Hospital Volume

Sample Hospital Average Charge

Peer Average Charge

470 Major joint replacement or reattachment of lower extremity w/o MCC 795 52,246 45,870

652 Kidney transplant 55 183,983 147,994

871 Septicemia w/o MV 96+ hours w MCC 162 54,714 31,379

460 Spinal fusion except cervical w/o MCC 54 128,559 92,961

468 Revision of hip or knee replacement w/o CC/MCC 72 73,391 55,107

Inpatient/Outpatient/Procedure-level price comparison

APC Description



Peer Average Charge

0301 Level II Radiation Therapy 8,680 1,481 1,146

0412 IMRT Treatment Delivery 2,635 4,642 2,820

0310 Level III Therapeutic Radiation Treatment Preparation 367 24,955 11,648

0615 Level 4 Emergency Visits 2,698 2,988 2,102

0616 Level 5 Emergency Visits 1,265 5,210 4,272CPT® Description



Peer Average Charge

77418 Intensity modulated treatment deliver 2,652 3,354 2,213

77414 Radiation treatment delivery 4,981 991 851

77334 Radiation treatment aid(s) 2,954 1,650 1,026

99284 Emergency dept visit 2,945 1,331 1,027

77413 Radiation treatment delivery 3,896 991 808


How

do we com

pare prices?

HOW DO WE DEFEND HOSPITAL PRICES?

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How

do we defend prices?

Three approaches to hospital price defense

1 2 3ROI Model Peer Position Cost Markup

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(volume x price) - (volume x cost) investment

ROI FormulaROI =

Relating pricing to ROI: the public-utility approach

Public utilities have used a Return on Investment (ROI) model to justify price increases to rate regulatory boards. The approach isolates the price variable from the ROI formula (below) and “tests” the remaining elements. If it can be proved that ROI, Cost, and Investment are not excessive, then price must also not be excessive. In the following pages, we present these tests.

Tests

1. Is ROI excessive?

2. Is cost excessive?

3. Is investment excessive?

If “no” to all three, price is not excessive.

Return on Investment ModelH

ow do w

e defend prices?1

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Group Median Return on Equity

Los Angeles-Long Beach-Santa Ana 13.6

Riverside-San Bernardino-Ontario 11.6

San Diego-Carlsbad-San Marcos 17.5

San Francisco-Oakland-Fremont 14.4

Sacramento-Arden-Arcade-Roseville 14.0

California 12.2

US 9.0

Tests Is ROI excessive? Is investment excessive? Is cost excessive?

How


Return on Investment Model1

ROE: Excess of Revenue over Expenses/Net Assets

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How



Average Age of Plant: Accumulated Depreciation/Depreciation ExpenseFixed Asset Turnover: Total Revenue/Net Fixed Assets


Group Median AAP FAT

Los Angeles-Long Beach-Santa Ana 7.8 3.82

Riverside-San Bernardino-Ontario 8.8 4.42

San Diego-Carlsbad-San Marcos 9.9 3.94

San Francisco-Oakland-Fremont 13.0 3.37

Sacramento-Arden-Arcade-Roseville 12.1 3.17

California 9.5 3.39

US 9.6 2.55

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Facility-level cost measure:Hospital Cost Index®

Outpatient CostsOutpatient Cost Index

Formula:Your Medicare Cost

per Visit (RW/WI adj)US Median Medicare Cost per

Visit (RW/WI adj)

Inpatient CostsInpatient Cost IndexFormula:Your Medicare Cost per Discharge (CMI/WI adj)US Median Medicare Cost per Discharge (CMI/WI adj)

How



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How


Return on Investment Model1Group Median Hospital Cost Index®






California 95.9

US 101.3

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Comparing your pricing to pricing at peer facilities

The second method used to assess the defensibility of your pricing is direct comparison with peers. Data at these levels is useful:

1) Facility level

2) Departmental level

3) Inpatient-case level

4) Outpatient-case level

5) CPT®/procedure level

How


Peer Position Model2

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Facility-level

How



Group Median Hospital Charge Index®






California 143.7

US 103.7

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Facility-level

How



Group Median Medicare Charge per Discharge (CMI/WI adj)

Los Angeles-Long Beach-Santa Ana 29,718

Riverside-San Bernardino-Ontario 24,912

San Diego-Carlsbad-San Marcos 27,859

San Francisco-Oakland-Fremont 27,954

Sacramento-Arden-Arcade-Roseville 28,722

California 28,177

US 19,858

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Facility-level

How



Group Median Medicare Charge per Visit (RW/WI adj)

Los Angeles-Long Beach-Santa Ana 422

Riverside-San Bernardino-Ontario 417

San Diego-Carlsbad-San Marcos 357

San Francisco-Oakland-Fremont 377

Sacramento-Arden-Arcade-Roseville 373

California 391

US 331

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Facility-level

How



Group Median Medicaid Days %






California 21.0

US 16.4

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Relating pricing to cost:Sources of Cost Data

Hospital cost-accounting system

Direct Cost

Fully allocated cost

RCCs

How


Cost/Markup Model3

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1. Reduced net patient revenue, e.g., $5.1 million vs. $9.6 million in ATB

2. Major pricing changes, e.g., -99% to 3,580%

Relating pricing to cost:Two Usual Outcomes

How


Cost/Markup Model3

CREATING AN APPROPRIATE PRICING STRATEGY

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Secondary/Tertiary Hospital Market

Understand your market positionCreating appropriate prices

Core HospitalMarket

Non- HospitalMarket

WHO??

SERVICES??

PRICE COMPARE??

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Critical Areas of Contract NegotiationContract languagePayment terms

Understand and manage payment

Contract Language Areas Clean claims definition Most favored nation clauses Appeal-process fairness Payment arrangements after

termination Silent PPO arrangements Price-increase limits

Creating appropriate prices

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* 80 comparison plansPayer Z

Average Value*Sample Hospital

All services % of Billed Charges 81%

DRG Base Rate $6,125 $4,806

Per-Diem Rates

Medical $1,659

Surgical $1,921

TCU/Telemtry $2,036

ICU/CCU $3,314

PTCA $4,091

Psych $711 $485

Alcohol/ Chemical Dependency $637 $485

Rehab $1,293

Payment terms – Inpatient (payer Z & hospital)

Understand and manage paymentCreating appropriate prices

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* 80 comparison plans Payer ZAverage Value*

Sample Hospital

All services % of Billed Charges 72%

Radiology (% BC) 75%

38.6% (except case rates for SPECT, MRI/MRA, &

CT Scan)

Laboratory (% BC) 76% Fee Schedule

Emergency Department (% BC) 73% 38.6%

Level 1 $93

Level 2 $141

Level 3 $339

Level 4 $600

Level 5 $1,212

Payment terms – Outpatient (payer Z & hospital)

Understand and manage paymentCreating appropriate prices

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Set the desired profit target Establish initial rate-increase limits and parameters Use the right data to estimate rate-increase impact Model your contract terms Assess fee-schedule pricing Incorporate cost data Examine competitive pricing comparisons Review pharmacy / medical-supply issues Evaluate impact by case categories Evaluate impact by payer Adjust parameters as necessary and implement final CDM changes

Critical steps in a hospital’s rate-setting strategy

Developing a rate strategyCreating appropriate prices

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Meet net income requirements?

Maintain or enhance competitive position?

Maintain related pricing relationships?

Establish equitable distribution to case categories?

Establish equitable distribution to payers?

Developing a rate strategyCreating appropriate prices

Does the pricing strategy:

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Summary

• Hospital pricing is impacted by various demographic and operating factors

• Payment is critical in rate establishment

• Price comparison can change significantly based on the level of comparison

• Defensibility and required net revenue production can be attained through strategic pricing assessments

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Jamie CleverleyPrincipalCleverley + AssociatesEmail: [email protected] Phone: (614) 543-7777

Thank you. Questions?

hfma southern california educational webinar october 4, 2012 presented by: jamie cleverley cleverley...

Documents

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