May 6, 2010 Presented By

RSM McGladrey Inc. and McGladrey & Pullen LLP are member firms of RSM International – an affiliation of separate and independent legal entities. RSM McGladrey and McGladrey & Pullen have an alternative practice structure. Though separate and independent legal entities, the two firms work together to serve clients’ business needs.

May 6, 2010Presented By: Peter R. Epp, CPA, Managing Director

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© 2009 RSM McGladrey / McGladrey & Pullen

OVERVIEW

• Massachusetts Community Health Centers – Where We Are Today and Preparing for Tomorrow

• Are The FQHC Medicaid Reimbursement Rates Adequate

• Health Reform and Its Impact on your Financial Operations

• Managing Global and PCMH Payment Models

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PREPARING FOR THE FUTURE

The FQHCs of Massachusetts find themselves “leading the charge” into Health Reform

The Commonwealth has already implemented coverage reforms, and now payment reforms are being planned

National Health Reform forms an overlay on top of what is already occurring in Massachusetts

Health Reform creates both opportunities and threats to the Community Health Center (CHC) movement; CHCs can be the leaders of this “new movement”

To take advantage of the many opportunities that are presenting themselves, CHCs must:

Strengthen their current financial and operational systems and create a base to embrace change

Stay “ahead of the curve” – understand the changes that are coming and strategically plan for success

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WHERE WE ARE TODAY

Based on a review of the financial trends of the Massachusetts CHCs over the past few years, CHC operations have been increasing steadily over time, however operating margins have been declining

CHC’s median bottom-line margins (total net income as a % of total operating revenue) have decreased in 2008, but operating margins (operating income as a % of operating revenue) have decreased to the point of break-even

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Year Bottom-line Margins Operating Margins2004 3.54% 1.12%2005 3.50% .57%2006 5.45% 1.61%2007 5.46% .87%2008 1.66% (.01)%

Source: Massachusetts Health Centers Financial Trends Analysis – FY 03 – 08, prepared by CapitalLink


WHERE WE ARE TODAY

Although operating margins have been slim, at best, the Massachusetts CHCs have been able to maintain a stable financial position

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Financial Measure 2007 2008Current Ratio 2.76:1 2.20:1Days Unrestricted Cash on Hand

29.32 days 30.32 days

Days in Patient Accounts Receivable

57.24 days 60.69 days

Days in Accounts Payable

34.78 days 34.60 days

Source: Massachusetts Health Centers Financial Trends Analysis – FY 03 – 08, prepared by CapitalLink


PREPARING FOR TOMORROW

To be successful, CHCs must manage a “delicate balance” of key cash flow and operating measures -

If one of these indicators strays from “the balance”, adverse financial impact may occur if not detected and addressed in a timely mannerIn preparing for Health Reform, CHCs must change their mind-set to “drive-change” and create a positive bottom-line and build a reserve!

Cash Flow Measures

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– Days unrestricted cash on hand– Days in accounts receivable– Days in working capital– Days in reserve

Operating Measures– Patient base (patients and visits)– Payor mix– Reimbursement rates and collection %– Subsidies for uncompensated care– Provider productivity– Cost per visit



To be successful in a global payment and PCMH environment in which CHCs will be “at risk” financially for services provided, it is imperative that adequate reserves be built to protect against unforeseen future hardshipOver and above what may be needed for cash flow reasons (e.g. minimum of 30 days), CHCs need to establish reserves for unexpected fluctuations in patient utilizationTypes of reserves to consider:

Days in Working Capital [(Current Assets – Current Liabilities) / Average Daily Operating Expenses]Days in Undesignated Net Assets [(Unrestricted Net Assets – Investments in Fixed Assets) / Average Daily Operating Expenses]

To establish reserves, CHCs will need to fine-tune operations, and become as efficient as possible to create operating surpluses

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Improving the financial operating performance of a CHC is a multi-faceted effort involving revenue enhancement and cost containmentRevenue enhancement opportunities

Are we monitoring trends in our patient base, ensuring that patients are seen when required?Are changes in payor mix being monitored, and internal systems reviewed to ensure that patients are being properly registered?Are we effectively managing the components of patient services revenue by payor?

Managing gross charges by payor?Managing patient revenue net of contractual adjustments by payor?Managing bad debt rates by payor?

For managed care capitated arrangements, are we managing member utilization and performing roster reconciliations?Are we aware of the level of uncompensated care we are providing to the community and do we have the resources to subsidize this cost?

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Cost containment opportunitiesAre we monitoring provider productivity and staffing ratios versus patient demand?How are we monitoring cost? Are we monitoring expenses on a per visit basis? By expense category? By department?Do we have a cost-based charge structure and are we comparing it to rates negotiated with insurers or rates included in global payment rate structures?Are we preparing departmental profit and loss statements, and evaluating performance versus the mission of the CHC?Is your CHC considering the implementation of incentive compensation programs? For providers and/or staff? (Note: It takes time to establish an effective incentive compensation program and data reporting is imperative to its success. As you look towards payment reform, you may want to consider re-aligning your compensation program with that of a global payment system’s success factors.)

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FEDERALLY-MANDATED FQHC MEDICAID PPS RATES

Federal statute requires that State Medicaid agencies reimburse FQHCs under a Prospective Payment System (PPS) for FQHC “covered services”

For FQHCs in existence prior to 2001, the base payment rate was set in 2001 based on the average 1999 and 2000 “reasonable” cost per visit of providing “covered services”

A trend factor (Medicare Economic Index, MEI) will be applied to the FQHC’s base rate for each year following the base year

Federal statute provides for rate appeals for a “change in scope of services”.

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“Change in Scope of Services” per CMS Q&A DocumentA change in scope shall occur if :

The center has added or has dropped any service that meets the definition of FQHC/RHC services; and

The service is included as a covered Medicaid service under the Medicaid state plan.

A change in the “scope of services” is defined as a change in the type, intensity, duration and/or amount of services.In making such an adjustment, state agencies must add-on the cost of new services even if these services do not require a face-to-face visit with a provider.

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Alternative Payment Methodologies:

States may opt to pay FQHCs using a methodology other than PPS (“alternative payment methodology”) only if the methodology selected meets the following conditions:

Must be agreed to by the State and each individual FQHC to which the state wishes to apply the methodologyMust result in a payment to the FQHC that is at least equal to the amount to which it is entitled under PPSMust be described in the approved State plan.

States are required to make supplemental (“wraparound”) payments to FQHCs that subcontract (directly or indirectly) with managed care organizations (MCOs)Supplemental payment is the difference between the payment received by the FQHC for treating the MCO enrollee and the payment to which the FQHC is entitled under the PPS. Incentive payments (e.g. risk pool payments) are excluded from the wraparound calculation.FQHCs are entitled to be paid at least as much as any other provider for similar services.


FQHC MEDICAID PAYMENT RATE ADEQUACY

Cost per Visit Analysis –Comparison of 1999/2000 Trended to 2009 versus Actual – 2009:

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1999/2000 Trended to 2009 (A) Actual – 2009 (B)25th Percentile $ 140.38 $ 148.49Median $ 154.33 $ 158.9475th Percentile $ 187.74 $ 176.37

Average $ 173.54 $ 166.48

NOTES:

(A)Based on the “medical cost per visit” for 29 FQHCs who participated in MLCHC’s PPS rate analysis in 2002; trended based on MEI; ancillaries could add approximately $2-4 per visit.

(B)Based on the “medical cost per visit” for 23 FQHCs as per their 2009 FQHC Medicare cost reports.



2009 Per Visit Analysis –Comparison of Actual Cost per Visit versus Revenue per Visit:

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Actual Cost Per Visit (A)

Medicaid FFS Revenue per Visit (B)

Medicaid MC Revenue per Visit (B)

25th Percentile $ 148.49 $ 106.09 $ 66.01 - $ 120.40Median $ 158.94 $ 114.78 $ 95.02 - $136.8075th Percentile $ 176.37 $ 148.63 $ 132.04 - $ 203.05

Average $ 166.48 $ 143.27 $ 104.79 - $ 155.62

NOTES:

(A)Based on the “medical cost per visit” for 23 FQHCs as per their 2009 FQHC Medicare cost reports.

(B)Based on revenue and visits from 13-16 FQHCs provided to MLCHC as part of the PCMH initiative.



Based on the limited data currently available, it appears that current reimbursement rates received by the Massachusetts CHCs is less than that which is mandated by Federal statute

Current, median reimbursement rates appear to range between $95 to $135 per visit, including both Medicaid FFS and Managed Care

The median “medical cost per visit” is approximately $155 per visit, whether you use the 1999/2000 average cost per visit, trended forward using the MEI, or using the current 2009 medical cost per visit from the FQHC Medicare cost reports

“Change in Scope of Services” appeals may be available given the effects of Health Reform

Under National Health Reform, carriers in health insurance exchanges are required to pay CHCs their FQHC Medicaid PPS rate

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OVERVIEW – NATIONAL HEALTH REFORM

$11B in new, dedicated funding for Community Health Centers over the next 5 years

$9.5B to expand operational capacity to serve nearly 20 million new patients

Total annual CHC funding, in addition to existing discretionary funding, to increase from $2.19B to $5.79B

$1.5B dedicated to capital needs of the CHCs

Medicaid coverage expansion 133% of FPL

Creation of health insurance exchanges with the requirement that FQHCs get paid no less than their FQHC Medicaid PPS rates

Creation of a “new” FQHC Medicare Prospective Payment System

Funding for CHC-based teaching/residency programs

Medicare and Medicaid Accountable Care Organization (ACO) and Patient-Centered Medical Home (PCMH) demonstration projects

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OVERVIEW – NATIONAL HEALTH REFORM

National Health Reform will require CHCs to strengthen internal systems and processes to be successful in this changing world

Strategic/Business Planning

Improve clinical documentation and coding

Improve practice management system utilization and reporting

Electronic health record implementation and health information exchange

Enhanced competition for patients

Must understand your cost of doing business, on a per unit and per patient basisImportance of improved operational efficiencies and monitoring patient utilization

Heightened emphasis on corporate compliance programs and activities

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OVERVIEW – COMMONWEALTH’S PAYMENT REFORM

Recommendations of Special Commission on the Health Care Payment System – Global payments with adjustments to reward provision of accessible and high quality care to be implemented over a period of five (5) yearsDevelopment of Accountable Care Organizations (ACOs) – composed of hospitals, CHCs, physicians and/or other providers that accept responsibility for all of most of the care that enrollees need

Patient-Centered Medicaid Home (PCMH) – ACOs to undergo the necessary practice redesign to become effective PCMHs

Patient’s selection of a primary care provider will direct insurer payments to the ACO with which the patient’s primary care physician is affiliated

Use of Pay-For-Performance (P4P) incentives to ensure appropriate access to care, and encourage quality improvement and care coordination among providers

Global payments will be adjusted to reflect patient demographics and health conditions

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MANAGING GLOBAL PAYMENTS

Global payments prospectively compensate providers for all or most of the care that their patients require over a contract period, usually estimated from past cost experience and an actuarial assessment of future risk

Providers are at ‘financial risk” for their clinical performance and coordination of care (“performance risk”) for patient-level health care for a specified period of time

“Insurance risk” (the occurrence of health problems over which providers do not have control) to be covered through ) to be covered through ––

RiskRisk--adjustments to global payments to reflect the underlying health adjustments to global payments to reflect the underlying health conditions of patientsconditions of patients

Carriers might also develop stopCarriers might also develop stop--loss or risk corridor arrangements with providersloss or risk corridor arrangements with providers

In the global payment environment, CHCs will need to manage the health budget of services for which they have assumed the responsibility and are “at-risk”

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MANAGING GLOBAL PAYMENTS

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Service Description Expected Utilization

Unit Cost Cost Per Patient Per Year

Inpatient Care 1 $320 per discharge $ 320Specialty Care 1 $100 per visit 100Primary Care 3 $65 per visit 195Laboratory 8 $10 per lab test 80Radiology 4 $25 per xray 100Pharmacy 5 $25 per script 125PCMH Services 120Patient Transportation 6 $10 per trip 60Administration/HIT 100TOTAL $1,200

Sample Construct of a Global Payment Rate:

In this example, the ACO would be paid $100 PMPM to cover all health care services provided to the patient!


MANAGING PCMH PAYMENTS

There are various payment models currently in demonstration across the country reimbursing providers for the PCMH including Enhanced Fee-for-service payment rates, Monthly Per Member Per Month (PMPM) payments, P4Ppayments, Bonus payments or a combination thereofRegardless of the payment model, CHCs participating in PCMHs need to understand the “true” cost of operating a PCMHThis cost analysis must include the practice’s service capability (e.g. based on the NCQA PPC-PCMH recognition process)

Physician and non-physician work that falls outside of a face-to-face visitSystem infrastructure (e.g. health information technologies)

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Basic PCMH Rate Equation:

Basic steps in the construction of a reimbursement rateDefinition of the “covered services”, or the services to be included in the rate (e.g. PCMH Services)Determination of the total cost of “covered services”Determination of “billable” units of service (e.g. Member Months)Monthly PMPM rate equation:

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Total Cost of PCMH ServicesMonthly PCMH Payment = Total Billable Member Months



Defining PCMH “Covered Services”:

“Covered Services” identified in the “Joint Principles of the PCMH” for payment are as follows:

Value of physician/non-physician care management work that falls outside the face-to-face visitCoordination of care for both within and outside the practiceEnhanced communication accessUse of health information technology for quality improvementPhysician work associated with remote monitoring of clinical data using technology

PCMH payment rates may also take into consideration case mix differences of the patients

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Components of PCMH “Covered Services”:

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Resource Element DescriptionPhysician Work Physician care management and care coordination work

that falls outside of the face-to-face visitClinical Staff Work Additional staff required to provide care coordination

and other services required by the NCQA-PCMHMedical Supplies Cost of health education brochures to patientsMedical Equipment (HIT) Operating costs of required health information

technology including staff timeMalpractice Insurance Cost of additional malpractice, if appropriate

NOTE: The “Resource Elements” are consistent with those utilized by the American Medical Association/Specialty Society RVS Update Committee (RUC) for consideration with the development of the Medicare Medical Home

Demonstration.


KEYS TO SUCCESS IN GLOBAL AND PCMH PAYMENTS

Must completely understand the “inputs” into the construction of the rates, by first understanding “covered services:

Global payments – primary care services, PCMH services, specialty services, administration/health information technology, other ?PCMH payments – care management services, additional clinical staff, health information technology

Then must understand the cost drivers for these services:Global payments – utilization monitoring, cost per unit managementPCMH payments – drivers of care coordination services, cost per unit management

Design management reporting capabilities to manage utilization and costs as financial success will be managed by patient utilization management and improved cost efficienciesHealth information technology will be critical to success in this new environment!

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KEYS TO SUCCESS IN GLOBAL AND PCMH PAYMENTS

Shift from a visit maximization model to a care coordination model.Manage patient utilization, by type of service, on a PMPY basis

Still need to manage provider productivity levels, but new focus will be to manage a patient panel

Need to expand the cost per unit systems we have in place:Use of a cost-based charge structure!

Managing cost on a PMPY basis

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IS YOUR CENTER READY?

CHC’s are in a position to be a leader in Health Reform$2B in ARRA funding and now $11B in “new” Health Reform funding for expansion efforts and funding for teaching health centers

PPS rate protections in Medicaid, CHIP and the “new” health insurance exchanges

Medicaid and Medicare funding for HIT implementation and operation

PCMH and ACO demonstration projects

CHC’s must:Improve their health information technology platform for the new world

Change their financial management and reporting systems to succeed in the impending global payment/PCMH environment

Consider accelerating into the PCMH initiatives (you’re already halfway there, or more) as they should very well be the cornerstone of ACOs

PLAN! PLAN! PLAN!27


QUESTIONS???


CONTACT INFORMATION

www.mcgladrey.com

Peter R. Epp, CPA, Managing Director212.372.1602

[email protected]

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http://www.mcgladrey.com/

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May 6, 2010 Presented By