Enterprise Board October 24, 2017 Department of Health Care Policy - - PowerPoint PPT Presentation

Colorado Healthcare Affordability and Sustainability Enterprise Board

October 24, 2017

Department of Health Care Policy and Financing

Our Mission

Improving health care access

and outcomes for the people we serve while demonstrating sound stewardship of financial

resources

Today’s Objectives

• Discuss how policymakers and the public can measure the

impact of the provider fee on hospitals’ financial position and the health care marketplace.

• Provide a high-level overview of hospital financial reporting

and analysis.

• Discuss available hospital financial data, what it can tell us,

what’s missing, how it can be improved upon and other potential sources of data.

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Legislative Intent

• Reduce the need of hospitals and other health care providers

to shift the cost of providing uncompensated care to other payers

• Consult with hospitals to improve cost efficiency, patient

safety, and clinical effectiveness

• Monitor impact of hospital fee on broader health care

marketplace

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Transparency

• “Analysis is necessary to understand and make more

transparent the main contributors to overhead costs (e.g., administrative and capital costs for all relevant providers) that affect the cost of providing care to Medicaid enrollees.” Colorado Commission on Affordable Healthcare

• “Demands for increased transparency about health care

quality and pricing are understandable, well-justified and reasonable, sought with a goal of better understanding the true costs and cost-drivers that now comprise 18 percent of the nation’s Gross Domestic Product (GDP) and nearly 10 percent of total household expenses”…”this report represents a step in the right direction but will not be the “be all, end all”

• f our commitment.”

Steven Summer, CHA

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CHA Transparency Initiative

• CHA recently released The Financial Health of Colorado Hospitals –

a report that presents primarily cost report derived financial and

• ther information on Colorado hospitals, individually and

statewide.

• Individual hospital information includes:
• Quality data – CMS Five-Star Rating and HQIP score
• Employment trends - including the number of full-time

equivalents employed and on contract

• Utilization Trends - including patient discharges, days, average

length of stay and hospital occupancy rate

• Financial Trends – including revenues, expenses, and margins
• Expenses by category
• Payer mix

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Hospital Financial Reporting - Overview

Colorado Healthcare Affordability and Sustainability Enterprise (CHASE) Board

October 24, 2017

HEALTH MANAGEMENT ASSOCIATES

Obje jective and Topics

• Objective: a high-level overview of hospital financial reporting and analysis, providing

a useful framework for the Chase Board’s review of Colorado hospital financial information.

• Topics:
• Overview of hospital financials
• Types of hospitals, services
• Hospital financial statement components
• Charges and net patient service revenue
• Reimbursement methods
• Hospital financial analysis
• Measuring performance and financial health
• Available information and shortcomings
• Colorado hospitals – recent data

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OVERVIEW OF HOSPITAL FINANCIALS

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If You’ve Seen One Hospital, You’ve Seen One

• Organization
• System vs Independent
• Tax-Exempt, Investor-Owned, Governmental
• Location – large urban, urban, rural
• Type
• Small to large
• Community, academic, other teaching, research
• General acute, specialty
• Service mix
• Inpatient – medical, surgical, other
• Emergency
• Clinics – medical, behavioral, dental
• Diagnostic – imaging, lab, cardiology, neurology
• Cancer, rehab, other outpatient treatments and therapies
• Ambulatory surgery
• Payer mix – Medicare, Medicaid, private insurance, uninsured

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Fin inancial Statements

• Balance Sheet *

* Massachusetts hospitals, 2013

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ASSETS LIABILITIES & NET ASSETS Cash 5% Current liabilities 15% Accounts receivable 17% Long-term debt 26% Investments 19% Other liabilities 12% Property and equipment 38% Unrestricted net assets 32% Other assets 21% Restricted net assets 15% Total Assets 100% Total Liabilities & Net Assets 100%

Fin inancial Statements

• Income Statement and Changes in Net Assets *

* Massachusetts hospitals, 2013

Health Management Associates 12 Percentage of Oper. Revenue

Net patient service revenue 92% Other operating revenue 8% Total operating revenue 100% Operating expenses 97% Operating margin 3% Investment income, other nonoperating revenue 2% Total margin, or revenue over expenses 5% Other changes in unrestricted net assets 4% Other changes in restricted net assets 1% Changes in net assets 10%

Hospital Patient Care Revenue by Type

Inpatient 59% Emergency 8% Amb Surgery 7% Cancer Center 5% Diagnostics 11% Clinics 5% Other 5%

MAJOR TEACHING

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Inpatient 25% Emergency 28% Amb Surgery 9% Diagnostics 18% Clinics 15% Other 5%

SMALL COMMUNITY

Hospital Patient Care Revenue by Source

Medicare 43% Medicaid 32% Private Insurance 20% No Insurance 5%

LARGE URBAN SAFETY NET

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Medicare 38% Medicaid 14% Private Insurance 46% No Insurance 2%

SUBURBAN COMMUNITY

Colorado, Average Payment to Cost, 2015 Medicare 0.72 Medicaid 0.75 Private Insurance 1.58

Hospital Expenses

Salaries/wages 41% Benefits 14% Supplies 15% Purchased services 12% Depreciation 10% Other 8%

BY TYPE

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Inpatient units 15% OR and related 4% Diagnostics 10% Supplies and drugs 20% Emergency 4% Clinic 8% Administrative 17% Depreciation 6% Other general 16%

BY FUNCTION

Hospital Revenue – Gross and Net

• Gross charges: a uniform charge is recorded for every discrete unit of patient care

service.

• Patient day, ER visit, 15 minutes in OR, lab test, supply item, drug unit/dose
• Typically several thousand items in the chargemaster
• In theory, charges should bear a reasonable relationship to cost, in practice – NOT
• Contractual adjustments: the difference between the charge and the amount the

hospital expects to receive for a given encounter

• Colorado average = 73% of charges
• Not atypical at all

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Colorado Hospitals in 2016 In millions Charges $56,415 Contractual adjustments ($41,381) Net patient service revenue $15,034

Hospital Revenue – Reimbursement Types

• Cost reimbursement
• Unit of service based:
• Percentage of charges
• Inpatient per diem (amount per patient day)
• Fee schedules (amount for each discrete procedure and test)
• Encounter based:
• Per discharge using diagnosis-related groups (DRGs)
• Per outpatient visit using ambulatory payment groups
• Episode based:
• Bundled payment – one rate for inpatient encounter covering all services from

admission date -3 to discharge date +30

• Episodes of care – one rate anchored to a surgical procedure or course of treatment

for a period of time

• Population based:
• Shared savings or loss: A traditional reimbursement model subject to a target spend

per person, difference between traditional reimbursement and target is shared by hospital and payer

• Capitation – a flat payment per person per month for all services, or a subset of

services

• Incentives

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Hospital Revenue – Reimbursement Concepts

• Risk continuum: to what extent is the hospital at risk for managing expenses?
• What is reimbursable?
• Traditional - services provided
• Value based – outcomes
• Equity (especially important in Medicare, Medicaid)

Reimbursement should recognize valid cost differences and differentiate payment accordingly

• Teaching hospitals may bear significant GME costs
• Hospitals with higher percentage of low-income patients incur more costs and need

more financial support

• Rural hospitals may bear significant costs to maintain essential services, even if

underutilized

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population LOW cost encounter units episode HIGH

HOSPITAL FINANCIAL ANALYSIS

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Measuring and Comparing Fin inancial Performance

• Many measures are used to compare hospitals across many domains:
• process of care
• outcomes
• safety
• patient experience
• financial

Focus here is financial.

• Two major challenges:
• 1. Accessing consistent financial information
• 2. Accounting for relevant differences between hospitals

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Measuring and Comparing Fin inancial Performance

Challenge 1: Accessing Consistent Data

• Publicly available sources:
• Medicare cost report
• Content
• Strengths and weaknesses
• Colorado’s all-payer claims database
• Additional information could be collected from hospitals:
• Who does this now:
• Associations
• Rating agencies
• Several states
• What additional information:
• Financial statements
• Surveys and custom reports
• Specific requests

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Measuring and Comparing Fin inancial Performance

Challenge 2: Accounting for relevant differences between hospitals

• Adjust for Volume (units of service):
• Inpatient: discharges or patient days
• Outpatient:
• May count units of services within an outpatient area
• Outpatient charges relative to inpatient charges used to drive an inpatient-

equivalent volume number

• Adjust for Case mix (resource variance within the unit of service):
• DRG case mix index typically used to recognize inpatient resource differences
• Charges are assumed to reflect resource differences in outpatient
• Adjust for Geography, cost of living: Medicare area wage index
• Grouping by cohort:
• Urban and rural
• Major teaching, teaching, non-teaching
• Variance analysis

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Common Measures

• Financial performance:
• Patient services margin / patient revenue
• Total margin / total revenue
• Cashflow margin (total margin + depreciation, interest)
• Revenue:
• Patient revenue per adjusted discharge
• Payment (revenue) to cost ratio
• Expense/efficiency:
• Cost per adjusted discharge
• FTEs per adjusted patient day
• Admin cost per adjusted discharge
• Financial stability:
• Days of cash on hand
• Current assets to current liabilities
• Debt to equity ratio
• Average age of property/equipment

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COLORADO HOSPITALS – RECENT DATA

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Overview

• Colorado hospitals make a significant amount of financial information

available, mainly through two sources:

• Medicare cost report
• All-Payer Claims Database (APCD)
• Recently, Colorado Hospital Association released an informative report

called “The Financial Health of Colorado Hospitals”, providing an extensive amount of financial information on its member hospitals, individually and

• statewide. Mainly derived from Medicare cost reports.
• HCPF has also been reviewing financial performance using Medicare cost

report data.

• Following, selected information on three metrics.

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Definitions

• Total margin:

Total margin = (net patient revenue - operating expenses + other income -

• ther expenses) / (net patient revenue + other income)

Includes other operating and non-operating revenues and expenses to represent overall hospital financial performance.

• Operating expense per adjusted discharge:

Total operating expense / adjusted discharges* Intended to measure efficiency of delivering patient care

• Administrative costs per adjusted discharge:

Administration expenses / adjusted discharges* Represents a measure of the part of the business directed to administration

* Adjusted discharges = total discharges x total gross charges / inpatient gross charges

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$20,000

Expenses per Adjusted Discharge

$18,000 $16,000

$16,489 $16,351 $15,981 $15,507 $15,182 $14,534

$14,000

$13,397 $13,205 $12,841

$12,000

Dollars in millions 2008-2010 2014-2016 Total % Annual % Average Average Change Change Total Expense $10,127 $13,029 29% 4%

$10,000

Adjusted Discharges 732,913 808,328 10% 2%

$8,000 2008 2009 2010 2011 2012 2013 2014 2015 2016

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$50,000

2016 Expenses per Adjusted Discharge

$45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 10 20 30 40 50 60

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$4,000

Admin Expense Per Adjusted Discharge

$3,638

$3,500 $3,000

$3,003 $2,907 $2,889 $2,677

$2,500

$2,430

$2,000

$2,161 $1,699 $1,708

$1,500

Dollars in millions 2008-2010 2014-2016 Total % Annual %

$1,000

Average Average Change Change Admin Expense $1,359 $2,355 73% 9%

$500

Adjusted Discharges 732,913 808,328 10% 2%

$0 2008 2009 2010 2011 2012 2013 2014 2015 2016

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14.0%

Total Margin Percentage

13.0%

12.0%

11.2% 11.1%

10.0%

10.5% 9.9% 9.9% 9.5% 9.5%

8.0% 6.0%

5.1%

Dollars in 2008-2010 2014-2016 Total % Annual %

4.0%

millions Average Average Change Change Total Margins $909 $1,711 88% 11%

2.0%

Total Revenue $11,162 $15,161 35% 5%

0.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016

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Im Improving Reliability – Utili ilize Available Data

• All Payer Claims Database can:
• Provide information on inpatient DRG case mix, an important measure
• f patient variation used to standardize some of the key indicators.
• For the more adventurous, the data is there to perform a more

comprehensive risk adjustment.

• Provide information on payer mix.
• Provider assessment: HCPF has information to determine the extent to

which the provider assessment is contributing to the increase in admin cost.

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Im Improving Reliability – Consider Additional Sources

• Financial statements
• Financial information that is not recorded in the hospital’s books.
• Corporate office or parent company
• Related provider organizations
• Foundation, medical school, etc.
• Answers to resolve inconsistencies and unusual variations

examples

• Revenue: hospitals reported $835 million of “other revenue” in 2016 including $538

million in one hospital. May represent inconsistency in classification between patient and other revenue.

• Expense:
• Admin may be reported on the admin line or as part of patient care cost centers

(lab admin, OR admin, etc.).

• One system reported an 84% increase in admin from 2015 to 2016. “Real” or an

aberration caused by a reporting change?

• Margins: One system consistently reports patient service margins that are several

times larger than the state average, and admin expenses well below the state

• average. There may be significant related party expenses not in the hospital books.

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Available Hospital Financial Data

Colorado

• Medicare Cost report
• Colorado All Payer Claims Database
• Colorado Hospital Financial Report (CHA, Oct. 2017) – This

report summarizes publicly available data with the Medicare Cost Report as the primary source.

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Available Hospital Financial Data

Oregon

• Medicare Cost Report
• Oregon All Payer Claims Database
• Hospital Payment Report - Annual reporting of median payments

from commercial insurers for common hospital procedures.

• DataBank - Contains monthly, aggregate data for each hospital,

including utilization and financial information by primary payer.

• Audited Financial Statements - If the hospital is part of a group,

additional information must be provided at the individual hospital level.

• Capital Project Reporting – Hospitals are required to report

information about capital projects including estimated cost and information on how the hospital determined the need for the project.

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Available Hospital Financial Data

Arizona

• Medicare Cost Report
• Audited Financial Statements including a Statement of Cash

Flows – If the hospital is part of a group, additional

information must be provided at the individual hospital level.

• Uniform Accounting Report – Hospitals report information on

beds, utilization, staffing, revenues, expenses, uncompensated care, assets, liabilities, and net assets.

• Hospital Charge Description Master – Hospitals report uniform

charges for each discreet unit of patient care service as well as a Rates and Charges Overview Form.

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Key Take-Aways

• It is important that policymakers and the public have the

information necessary to determine if the legislative intent of the provider fee is being met.

• Consistent and complete financial data is needed to

understand the impact of the provider fee on hospitals’ financial position and the health care marketplace.

• The hospital “business” is a complex one impacted by many

variables – the provider fee being one.

• While useful information can be derived from sources such as

the Medicare Cost Report, this information does have limits.

• There is consensus that hospital transparency is vital to

improving the cost and quality of care.

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Questions?

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Thank You

Nancy Dolson Director, Special Financing Division Department of Health Care Policy & Financing nancy.dolson@state.co.us