Hospital Finance 101

Hospital Charges

Hospitals CHARGE everyone the same rates…BUT

• No two payers PAY the same rates• Government payers pay BELOW costs• Commercial payers NEGOTIATE rates based

on market share• Charity care and underpayment impacts

overall costs for everyone else

Payment for Iowa Hospital Services

Source: IHA Databank – 2010 Data

Medicare Background • Established as Title 18 in 1965 as Health

Insurance for the Aged – Expanded in 1972 to cover individuals under 65 with

permanent disabilities

• Today, the program covers 46 million beneficiaries

• Medicare’s diverse population includes: – 56% female/44% male beneficiaries – 39% over age 75 – 77% living at home – 32% with incomes below 150% of FPL

Source: CBO-The Budget and Economic Outlook: An Update (August 2007)

Medicare Spending by Type of Services

Legislative Action

• Balanced Budget Act of 1997 (BBA) – $116 billion cut nationally– $600+ million impact on Iowa hospitals over 6

years (1998-2002)

• Balanced Budget Refinement Act of 1999 (BBRA)– Restored $100 million to Iowa hospitals from

BBA

Legislative Action cont.

• Benefits Improvement Protection Act of 2000 (BIPA)– Restored $35 billion nationally from BBA– $86+ million over 5 years to Iowa hospitals

• Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)– $273 million to Iowa hospitals over 5 years– National impact $400 billion-$600 billion

Medicare Background

Medicare consists of 4 parts: • Part A, the Hospital Insurance program• Part B, Supplementary Medical insurance • Part C, Medicare Managed Care • Part D, the Outpatient Prescription Drug

Benefit

Medicare Part A• Covers inpatient hospital, skilled nursing

facility care, hospice and some home health. • Accounts for 39% of Medicare spending

(2007)• Financed largely (86%) by a 2.9% payroll tax

(1.45% paid by both employee and employer) • Also known as the Hospital Insurance Trust

Fund • Fund reserves projected to be exhausted by

2019, funds less and less of program each year

Medicare Part B• Covers physician and outpatient hospital care, lab tests, medical

supplies and some home health. • Financed by beneficiary premiums (24%), general revenue

(75%), income investments (2%)• Accounts for 33% of Medicare benefit spending

Medicare Part C

• Managed care plans that provide Part A and Part B benefits

• Formerly called “Medicare+Choice”; now called Medicare Advantage

• 10.3 million beneficiaries are enrolled in Medicare managed care plans

Medicare Part D• Outpatient prescription drug benefit, effective 1-1-06 • Accounts for 9% benefit payments• Benefit offered by private insurance plans • Financed through beneficiary premiums (8%),

payments from states (11%) and general revenues (81%)

• Estimates of average monthly Part D premium was be $35 in 2006, now in 2010 (in Iowa)

• Minimum Premium: $22.80 • Maximum Premium: $104.10• Weighted Average: $41.59

Medicare Payment Methodologies

• Costs/Charges • Fee Schedule• Prospective Payment System (PPS)

– Hospital inpatient (1983)– Home Health (1997/2000) – Skilled Nursing Facility (1998) – Hospital outpatient (2000)– Inpatient Rehabilitation (2001)– Long-Term Care Acute Hospitals (2002)– Inpatient Psychiatric (2004)

Structural Elements of a PPS• Classification System

– e.g. MS-DRGs for inpatient; APCs for outpatient• Base Rate

– Unadjusted national payment rate (standardized amount)• Must report on Quality measures to receive payment updates to rate (3.3% in 2008)• If do not report measures, receive cut to rate (-2% in 2008)

• Facility Adjustments – Differences in area wages – Urban versus rural setting– Medical education – Disproportionate share of low income patients

• Patient Adjustments – Intensity of service – Excessive case costs – outliers – Partial treatment – transfer cases

Medicare-Severity Diagnosis Related Groups (MS-DRGs)

• Identify patients with similar conditions who receive similar treatments

• Assignment is based on factors such as the patient’s diagnosis, complications, surgical procedure, age, sex

• New payment system beginning in 2008 (50-50 blend in 08)• Moves from 546 DRGs categories to 745 new severity adjusted

DRGs: 335 Base DRGs, 106 split into 2 subgroups, 152 spit into 3 subgroups

• Each MS-DRG is assigned a relative weight to compare its resource utilization to the average

– [DRG127, Heart Failure & Shock Weight 1.0490 (split into 3 MS-DRGS)]– MS-DRG 291 with MCC Weight 1.4850– MS-DRG 292 with CC Weight 1.0216– MS-DRG 293 without CC/MCC Weight .7317

DRG AssignmentPrincipal DiagnosisPrincipal Diagnosis

Heart Failure & ShockHeart Failure & Shock

Comorbidities and/or Comorbidities and/or ComplicationsComplications

(2ndary diagnosis codes)(2ndary diagnosis codes)

MS-DRG MS-DRG 291291

With MCCWith MCC

MS-DRG 293MS-DRG 293Without CCWithout CC

MS-DRG MS-DRG 292292With CCWith CC

Iowa Wage Values

Location FY 2010 Wage Index

FY 2009 Wage

Index

FY 2008 Wage Index

Rural IA (14) .8564 .8954 .8476

Ames (1) .9533 .9399 .9976

Cedar Rapids .8908 .8954 .8685

Council Bluffs/Omaha

.9541 .9329 .9474

Davenport .8564 .8954 .8894

Des Moines (5) .9521 .9442 .9158

Dubuque .8626 .8954 .8876

Iowa City .9407 .9319 .9424

Sioux City .8937 .8954 .9083

Waterloo/Cedar Falls (3)

.8564 .8954 .8720

ExampleExample

Wage-Adjusted Federal RateWage-Adjusted Federal Rate

for Hospital Inpatient Operating PPSfor Hospital Inpatient Operating PPS

Based on 2010 Final RuleBased on 2010 Final Rule

Des Moines Hospital Rural I A Hospital

Federal Rate $5,223.14 $5,223.14

Labor Share 62.0% 62.0%

Labor Share of Rate x $3,238.35 $3,238.35

Wage I ndex = 0.9521 0.8564

Adjusted Labor Share + $3,083.23 $2,773.32

Non Labor Share = $1,984.79 $1,984.79

Wage- Adjusted Rate $5,068.02 $4,758.11

Inpatient PPS Other Issues

• Disproportionate Share Hospitals (DSH) – Adjustment to partially offset losses from

uncompensated care – Based on hospital’s share of Medicare patients and

Medicare SSI patients – Hospital must meet 15% DSH threshold – Adjustment is capped for certain categories of hospitals

Inpatient PPS Other Issues

• Outliers – Additional payment for high cost cases

• Transfers – Reduced payments for short stay patients in selected

DRGs and transferred to post-acute care or other PPS hosptial.

• New Technology – Additional payment for new technology costs

Special Medicare Rural Status• Rural Referral Centers – 6 in Iowa

– Based on bed size, patient distance from hospital

• Sole Community Hospitals – 7 in Iowa– Criteria based on distance to other hospitals

• Medicare Dependent Hospitals – 6 in Iowa– Based on hospital’s share of Medicare patients

Outpatient PPS • Outpatient PPS replaced previous cost-based

system on August 1, 2000• Hospitals receive predetermined payments for

individual services or procedures• Payments are based on APC assignment which

divides outpatient services into 661 groups • Services within each APC are clinically similar and

require similar resources • Each APC is assigned a relative weight based on

the median cost of the services within the APC • No recognition of medical education or

disproportionate share

Cost Reimbursement • CAH program created by BBA of 1997 • 82 Iowa Hospitals • Criteria for designation:

– located in a rural area – Is more than 35 miles from a similar hospital– Provides 24 hour emergency services – Has no more than 25 beds, operated as either acute or

swing beds • MMA change allows 10 bed distinct part psych or rehab units

– Has an annual average length of stay less than 96 hours

Other Medicare issues on horizon

• Value-Based Purchasing• Pay 4 Performance• No payment for hospital acquired

conditions• No payment for Never events?

Medicaid Overview • Title 19 of the Social Security Act provides

medical assistance for low-income recipients

• Funded by a combination of State and federal funds. – Approximately 2 for 1 federal match

• Medicaid is an “entitlement” program – everyone who meets the eligibility criteria must be served.

• 470,000 Iowans Enrolled (2007)

Medicaid Overview

• Enrollees meet income limits + other criteria

• In general, Medicaid covers four groups:– Pregnant women and children.– Members of families with dependent children.– Age 65 and over.– Blind and Disabled.

Medicaid Overview

• Under Federal law, some eligibility categories and services are mandatory and some are optional.– Mandatory examples – Children, pregnant women,

disabled, hospital, physician, nursing home, early screening and treatment services for children.

– Optional examples – Eligibility at higher income levels than required (Medicaid expansion, people in institutions), working disabled, prescription drugs, chiropractor, podiatrist, durable medical equipment.

Iowa Medicaid Enrollment

Iowa Medicaid Expenditures

*May not total to 100.0% due to rounding.

Medicaid Hospital Payment• Inpatient Services – DRGs• Outpatient Services – APGs

– First in the nation outpatient PPS – Moved to APCs in 2008

• Critical Access Hospitals – retrospective cost-based reimbursement at 100% for inpatient, outpatient and swing bed care

• Inflation factor determined by legislation • PPS rebasing and recalibration occurs every 3

years

Other Iowa Payers • Wellmark

– State’s largest insurer offering indemnity, PPO, HMO, Medicare supplemental and products to over 1.2 million Iowans

– Contracts with providers for service– Contracts modeled after Medicare rates– Has approximately 70% business in Iowa

• United Healthcare• Coventry• Principal

Employer Based Health Coverage

• Largest Employer 1964: General Motors– Covered all employees, families, retirees

• Largest Employer 1974: AT&T– Covered all employees, families, retirees

• Largest Employer Today: Wal-Mart– 1/3 employees on Medicaid, etc.– 1/3 employees have no coverage– 1/3 employees have high deductible plans

The Uninsured

• 7-9% of Iowans (one of lowest in nation)• 97% of Children Covered• 250,000 – 270,000 People• Generally Speaking

– 1/3 Are Self Insured– 1/3 Have Access to Insurance– 1/3 Truly Without Access to Coverage

Uninsured Are Not “Self Pay”

• All Iowa Hospitals Share IHA Principles• Care Not Denied Based Upon Resources• Written Financial Aid Policies

– Discounts Up To 1000% of Poverty Level

• Refrain From Aggressive Collection Policies– No Sale of Home– No body Liens– No Bankruptcies

Iowa Hospital Losses (Cost)

• - $115 Million annually in Medicare• - $196 Million annually in Medicaid

(Medicaid pays below Medicare rates)• - $231 Million annually in Charity Care• - $326 Million in Bad Debt• -$39 Million in Community Health

Improvement Services

Iowa PPS Hospital Total Medicare Margins (%)

Hospital Bad Debt/Charity (charges)

2003 2004 2005 2006 2007 2008 2009

Charity 153.3 181.6 227.9 274.1 328.1 400.1 470.3Bad Debt 192.4 226.7 236.8 234 284.7 309.2 326.1

0100200300400500600700800900

Axi

s Titl

e

2001 2002 2003 2004 2005 2006 2007

RN Salaries

Medicare PPS

Medicaid

Comparison of Cumulative Iowa Hospital Salary Increases v. Medicare & Medicaid Payments, 2001- 2007

(6.5%)

(5.8%)

(5.5%)

(3.5%)

(3.3%)(3%)

(4%)

(2.8%)(3%)

(3.4%)

(3.3%)

(3.7%)(3.4%)

(2.4%)

(3%)

(-3%)

(0%) (0%)

(3%)

(3%) (0%)

Impact of Shortfalls/Losses• Impacts ability to attract physicians• Impacts ability to retain nurses, clinical staff• Impacts health care costs for private sector• Impacts ability to provide charity care and

to support IowaCare program• Impacts technology/infrastructure• Impacts wellness/preventive programs• Impacts communities—diminishes hospital

economic impact

Iowa Hospitals Economic Impact

• Conducted annually by IHA since 2003• Main Objective: Derive the direct economic

impact and total economic impact of the five health sectors and the total health sector

• Use data system derived by Oklahoma State University using existing data sets

Health Sector Components

• Hospitals• Doctors and Dentists (all practitioners and staff)• Nursing Homes & Assisted Living• Other Medical and Health Services (includes home

health care, county health departments, hospice, durable medical equipment suppliers, etc.)

• Pharmacies (Includes all pharmacy personnel)

Economic Impact Is Measured In Terms Of:

• Employment• Income (Salary & Benefits)• Taxable Retail Sales (Please note it does not

include total retail sales)• Sales Tax Collections (6% Statewide Sales

Tax)

Secondary Impact Is Measured Through Use of Multipliers:

• Employment Multiplier: Indicates total jobs created due to one job in the health sector.

• Income Multiplier: Indicates total income generated in the county due to one dollar worth of income in the health sector.

Iowa Health Care:What Does It Mean For Our State Economy?

• Health care is more than clinics, the hospital and doctors– 3,007,856 - Iowa 2009 population– 1,671,900 – Iowa 2009 employment

• Iowa health care is:– 189,318 health care jobs (11.3% of all employment in Iowa!)– $8.9 billion in worker income

• These health jobs fuel the local economy through:– 354,307 total jobs (21.2% of all employment in Iowa!)– $14.3 billion in total economic impact– $4.6 billion in taxable retail sales– $273 million in state sales tax paid to State of Iowa

Iowa Hospital Economic Impact

• Iowa hospitals provide:– 74,027 direct jobs with 147,980 total jobs

either directly or indirectly tied to hospitals– $3.7 billion in direct worker income with $6.1

billion in worker income directly or indirectly tied to hospitals

– $2.0 billion in retail sales, generating $117.1 million in state sales tax revenue

Life Without Hospitals?

• Health Care, Education, & Workers Are the Keys to Economic Development

• No Hospitals = No Physicians• No Hospitals = No New Business• Payment issues are critical to specialists

and access to diverse services