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The Newsletter of the Massachusetts-Rhode Island Chapter Volume XXXIX • Number 5The Newsletter of Newsletter of Newsletter the of the of Massachusetts-Rhode Island Chapter Volume XXXIX • Number 5
MASS MEDIAENTERPRISE PERFORMANCE MANAGEMENT
• AcceleratingEffortstoMonitor andManagePerformance• EnterprisePerformance ManagementProgram
• 3StepstoAnalyzeYour Organization’sACOOpportunity
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Beacon Partners • Carter Business Service, Inc. • Citizens Bank • Healthcare Data Services LLCBeacon Partners • Carter Business Service, Inc. • Citizens Bank • Healthcare Data Services LLCMarcam Associates • MedAptus, Inc. • Meridian Leasing Corporation • NCO Healthcare ServicesMarcam Associates • MedAptus, Inc. • Meridian Leasing Corporation • NCO Healthcare Services
PowerHealth OnDemand • ProMedical, LLC • PV Kent & Associates • WiPowerHealth OnDemand • ProMedical, LLC • PV Kent & Associates • Withum Smith + Brown, CPAsthum Smith + Brown, CPAs
Ropes & Gray LRopes & Gray LLP • The Outsource GroupLP • The Outsource Group
SILVERSILVERArcadia SolutionsArcadia Solutions • ClaimAssist • CliftonLarsonAllen, LLP • Craneware InSight • • ClaimAssist • CliftonLarsonAllen, LLP • Craneware InSight • Dell SeDell Servicesrvices
Gragil Associates, Inc. • Healthcare Financial, Inc. • Health Management Associates, Inc.Gragil Associates, Inc. • Healthcare Financial, Inc. • Health Management Associates, Inc.Information Builders • KPMG, LLP • MDS (Medical Data Systems, Inc.) • Medical Bureau/ROI Information Builders • KPMG, LLP • MDS (Medical Data Systems, Inc.) • Medical Bureau/ROI
Phillips DiPisa • Public Financial Management • TriNPhillips DiPisa • Public Financial Management • TriNet Healthcare Consultants, Inc. • Ziegler Capital Marketset Healthcare Consultants, Inc. • Ziegler Capital Markets
BRONZEBRONZEAction ColleAction Collection Agency of Boston • Apollo Health Street • Baker Newman & Noyesction Agency of Boston • Apollo Health Street • Baker Newman & Noyes
Beacon Partners • Carter Business Service, Inc. • Citizens Bank • Healthcare Data Services LLCBeacon Partners • Carter Business Service, Inc. • Citizens Bank • Healthcare Data Services LLC
THE MASSACHUSETTS - RHODE ISLAND CHAPTER OF HFMAGRATEFULLY ACKNOWLEDGES THE 2011-2012 CORPORATE SPONSORS
PLATINUMPLATINUMAmerican Express • Bank of American Express • Bank of America Merrill Lynch • Beecher Carlson HealthcareAmerica Merrill Lynch • Beecher Carlson HealthcareBESLER Consulting • Deloitte • Dubraski & Associates Insurance Services, LLCBESLER Consulting • Deloitte • Dubraski & Associates Insurance Services, LLC
Feeley & Driscoll P.C. • HBCS • MPV/SearchAmerica/Experian • PricewaterhouseCoopers LLPFeeley & Driscoll P.C. • HBCS • MPV/SearchAmerica/Experian • PricewaterhouseCoopers LLP Siemens Medica Siemens Medical Solutions, USA, Inc. • TD Bank, N.A.l Solutions, USA, Inc. • TD Bank, N.A. Siemens Medica Siemens Medical Solutions, USA, Inc. • TD Bank, N.A.l Solutions, USA, Inc. • TD Bank, N.A.
GOLDGOLDAccelerated ReceivablAccelerated Receivables Management Solutions, LLC • es Management Solutions, LLC • EmdeonEmdeon
Ropes & Gray LRopes & Gray LLP • The Outsource GroupLP • The Outsource Group
THETHE MASSACHUSETTS MASSACHUSETTS - - RHODE RHODE ISLAND ISLAND CHAPTER CHAPTER OF OF CHAPTER CHAPTER OF CHAPTER CHAPTER HFMA HFMAGRATEFULLYGRATEFULLY ACKNOWLEDGES ACKNOWLEDGES THE THE 2011-2012 2011-2012 CORPORATE CORPORATE SPONSORS SPONSORS
2 Mass Media
AMEX 11
Arcadia Solutions 20
ARMS, LLC 31
Bank of America Merrill Lynch 7
Beecher Carlson Healthcare 14
BESLER Consulting 8
ClaimAssist 20
Deloitte 6
Dubraski & Associates Ins. Serv., LLC 18
Emdeon 21
Feeley & Driscoll, P.C. 19
HBCS 10
Healthcare Financial, Inc. 13
InformationBuilders 31
Medical Present Value (MPV) 23
PricewaterhouseCoopers LLP 16
Ropes & Gray, LLP 13
Siemens Medical Solutions, USA, Inc. 17
TD Bank 12
The Outsource Group 21
TriNet Healthcare Consultants, Inc. 22
Ziegler Capital Markets 22
On the Cover
Enterprise Performance Management Committee: (Left to Right) Rosemary Rotty, UMass Memorial Health Care, Inc. Roger Price, Siemens Health-Care, Krista Katsapetses, Solucient, Jim Barry, McKesson, Phil Moriarty, UMass Memorial Health Care, Anne Farmer, TriNet Healthcare Consultants, Karen Hart, Winchester Hospital, Steve Saudek, Kaufman Hall
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I’d like to start by welcoming the new HFMA Massachusetts-Rhode Island Chap-ter President, Roberta Zysman! I am writing my final letter to the MA-RI Chapter as its President while in attendance at ANI in Las Vegas. I am fortunate indeed to be able to attend this annual Conference. The keynote speakers have been inspirational. HFMA’s current Chair, Ralph Lawson, opened with a stirring speech outlining the theme for his tenure as 2013 HFMA Chair of “Leadership Matters.” Captain ‘Sully’ Sullenberger mesmerized the attendees with a presentation on leadership and the lessons learned from his years of flying including, most
notably, his remarkable landing of a US Airways flight in the Hudson River saving 155 lives. He stressed the value of teamwork noting that while he has received the lion’s share of the notoriety after the event, its amazingly suc-cessful outcome resulted from all members of the flight crew performing optimally under tremendous pressure and time constraints. David Walker, former Comptroller of United States, was passionate in his opinions about Wash-ington’s dysfunction and the deficit. He also proposed solutions to our financial issues. Much of the rest of the talk at the Conference centers on the pending Supreme Court ruling on the Affordable Care Act as well as the seemingly inexorable transition to both public and private value -based purchasing models of reimbursement and how organiza-tions are preparing for it.
Local leadership was certainly in abundance at our Chapter’s Enterprise Performance Management meeting held on February 17th, as well as at the Region One Conference. Co-chairs, Steve Saudek from Kaufman Hall and Roger Price from Siemens Healthcare ably assisted by Rose Rotty from UMMC, Board liaison, organized a memorable En-terprise Performance Management program titled: “Transparency, Turmoil, and Transitions!” The seminars focused on how different healthcare organizations measure success amid a constantly-changing healthcare business land-scape. With an able assist from our Region One executive, Marvin Berkowitz, the Region One Conference was again a resounding success. Ken Kaufman from Kaufman Hall delivered a memorable keynote. Greg Adams, 2012 HFMA Chair, also made the trip to Connecticut to personally address the Region One attendees.
Our annual Awards Banquet, which was held this year on May 24th, has truly become a signature event for the MA-RI Chapter. Many thanks to Garrett Gillespie from CVS/Caremark and Roger Boucher from Bank of America/ Mer-rill Lynch for organizing yet another memorable evening. Congratulations to all of the award winners.
I would also like to formally thank all the volunteers who have spent countless hours planning the value-added programs that have become the hallmark of MA-RI HFMA. Without your commitment of time, energy and exper-tise, MA-RI HFMA could not continue its core mission of providing timely education of the highest quality for the healthcare financial managers in our geography.
I have been honored to serve this Chapter as its President. I thank the Board of Directors and CAMI who have always been fully-engaged in the overall success of the Chapter. It has been a joy to work with all of them. I also thank my employer, Cape Cod Healthcare, for the support that allowed me to pursue the leadership track in the Chapter.
At this year’s Annual Meeting, I picked up awards on behalf of the Chapter for membership retention and for increases in educational hours. When I reflect on my tenure as President, I will not only think of these accomplish-ments, but also of the many lasting friendships, both old and new, that I have made through my association with the Chapter. These truly are the real rewards for participating in HFMA.
Best Regards,
Jeffrey Dykens, CPAChapter President
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2 0 1 1 - 2 0 1 2
OFFICERS & DIRECTORS
PresidentJeffrey Dykens, CPA
President ElectRoberta Zysman
SecretaryRoger Boucher
TreasurerDeborah Wilson, CPA
Immediate Past PresidentMichael Connelly, CPA
DirectorsKaren Bowden, RHIA
Paul Breslin David Dillon, FHFMA, CPA
Garrett Gillespie Linda Guerra, MBA
Timothy Hogan, FHFMA James Kelly, CPAJohn Minichiello
Gerald O’Neill, FHFMA Beth O’Toole
John Reardon, FHFMARosemary Rotty, FHFMA
Richard Wichmann
Ex OfficioAnne Farmer
Marc Proto, FHFMA, MBAJeanne Schuster
MASS MEDIA is a publication of the Massachusetts - Rhode Island Chapter of the Healthcare Financial Management Association devoted to keeping membership current on national & local healthcare financial topics. Opinions and views expressed in the articles and features of the publication are those of the author(s) and do not necessarily reflect the position of the Massachusetts-Rhode Island Chapter or The National Chapter of Healthcare Financial Management Association. Articles submitted are subject to editorial changes made by the committee. Article submissions, comments and requests for fur-ther information and advertising rates may be forwarded to: Anne Farmer and Jean Schuster, HFMA Massachusetts-Rhode Island Chapter, 411 Waverley Oaks Road, Suite 331B, Waltham, MA 02452, [email protected]
MASS MEDIAHEALTHCARE FINANCIAL MANAGEMENT ASSOCIATION
ContentsVolume XXXIX Number 5
N e w s l e t t e r C o m m i t t e e
Jeanne Schuster, Executive Director, Ernst & Young, LLPRosemary Rotty, FHFMA, Director of Service Line Finance, Umass Memorial Health Care, Inc.
President’sMessageI by: Jeff DykensWhen I reflect on my tenure as President, I will not only think of these accomplishments, but also of the many lasting friendships, both old and new, that I have made
through my association with the Chapter. These truly are the real rewards for partici-pating in HFMA.
EnterprisePerformanceManagementProgram“Transparency,TurmoilandTransitions!MeasuringSuccessUnderChangingBusinessModels”
The EPM program was a great success, attracting over 160 attendees from across the region.
AcceleratingEffortstoMonitorandManagePerformanceI by: Kenneth Kaufman Jason Sussman Debra Miller To succeed under the new value-focused business model, hospitals and health systems will need high-quality tools and technology that support monitoring and management of performance under chang-ing financial arrangements.
3StepstoAnalyzeYourOrganization’sACOOpportunitiesI by: John Harris Idette Elizondo Molly JohnsonDeciding whether a hospital or health system should establish a Medicare ACO is essentially a strategic question, requiring in-depth assessment of the hospital or health system’s market, the competitive landscape, and the organization’s position on the shift toward accountable care. It also requires a robust financial model.
NewMembersNew Massachusetts-Rhode Island Chapter Members April 1, 2012 - May 31, 2012
3
30
511
6
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The annual HFMA Massachusetts-Rhode Island Chapter hosted its Enterprise Performance Management meeting on Friday February 17, 2012 in Westborough, Massachusetts.
Enterprise Performance Management Program
“Transparency, Turmoil and Transitions! Measuring Success Under
Changing Business Models”February 17, 2012
By:Rose Rotty
FHFMA, UMass Memorial Health Care, Inc.
(continued on page 28)
The EPM program was a great success, attracting over 160 attendees from across the region.
This year’s program, “Transparency, Turmoil and Transitions- Measuring Success under Changing Business Models,” focused on the ongoing payment models that are being discussed by providers and
payers such as ACO’s and Bundled payments, and the change in the annual budget process with Rolling Forecasts and Metrics. Other topics included Provider side quality and
modeling, and the Cape Cod Health system financial turnaround.
The morning session was kicked off by a presentation from Bob Kelley, Senior Vice President, Center for Healthcare Analytics, Thomson Reuters who provided an overview of the healthcare industry challenges and the appropriate solutions in the use of decision support applications. Michael K. Lauf, President and Chief Executive Officer of Cape Cod Healthcare discussed the steps that their organization put into place to improve the financial and operational turnaround. Michael was followed by Kathyrn Burke and John Hickman from Mount Auburn Hospital whose
Michael K. Lauf discusses the steps taken that led to Cape Cod Healthcare being named one of the top health systems in the country. Michael K.Michael K.Michael Lauf discusses Lauf discusses Lauf the steps the steps the taken that led that led that to led to led Cape Cod Cape Cod Cape Healthcare Cod Healthcare Cod
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To succeed under the new value-focused business model, hospitals and health systems will need high-quality tools and technology that support monitoring and management of performance under changing financial arrangements.
Hospital and health system executives should be focusing attention on positioning their organizations for success under a fundamentally different business model, with a payment system altered by healthcare reform and evolution of the insurance market. Reform legislation notwithstanding, provider payment based on best-practice levels of value—defined as desired patient health outcomes per dollar spent—has received extensive attention.
Bundled payments across episodes of care—with hospi-tals, physicians, home health agencies, rehab facilities, nursing facilities, and potentially other organizations sharing one payment—have been raised as the key mechanism to achieve such value. Major reductions in hospital readmission rates will be required of acute care providers, under any payment-revision scenario, and quality incentive payments are likely to be used to spur these and other improvements.
The quality and cost dimensions of payment based on value shift the focus of healthcare delivery organiza-tions from a service to an outcome orientation. Hospi-
(continued on page 7)
6 Mass Media
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ENTERPRISEPERFORMANCEMANAGEMENT
Accelerating Efforts to Monitor and Manage Performance
By: Kenneth Kaufman, Jason Sussman, and Debra Miller
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(continued on page 8)
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Issue 5 7
tal leaders need to thoroughly understand the require-ments for success under such a business model and organize to work with physicians, patients, payers, and other constituents in very different ways.
Requirements for SuccessThe strategic/operating requirements for hospital success under a new business model include:
• Highly integrated arrangements with physicians(hospitals and physicians aligned both clinically and financially)
• SophisticatedITsystems
• Extensive care management infrastructure andcapabilities
• Efficientservicedistribution
• Commandandcontrolofthecaredeliveryprocessfrom start to finish
In the clinical-IT domain, an electronic health record (EHR) must link hospitals, physicians, and other provid-
ers to ensure the presence of the information backbone critical to effective preventive care and disease manage-ment programs. The EHR will provide vital information as care systems are reengineered to maximize hospital performance.
Business requirements for success under the new model will focus on accountability to governmental and commercial payers and patients alike for deliver-ing best-practice levels of care. Best practice will be defined and measured through specific financial, qual-ity, and outcomes indicators. During the next few years, the Centers for Medicare and Medicaid Services and commercial payers will be testing numerous payment mechanisms and metrics to determine the most effec-tive means of getting high value for each dollar spent on patient care.
Finally, hospitals and health systems will need power-ful, practical, and effective IT systems and technology to integrate data from multiple sources. Such systems will be able to integrate financial planning, accounting, budgeting, cost management, operations control, and
ENTERPRISEPERFORMANCEMANAGEMENT
(continued from page 6)
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8 Mass Media
management reporting data and functions, as well as clinical data from the EHR.
Activities RequiredTo achieve value and accountability, provider organi-zations must be able to plan, monitor, and report on the outcomes and costs of care delivery. The systems that healthcare organizations need for such budgeting and operations control must be both nimble and flex-ible, enabling management to make necessary decisions related to the best level of operational effectiveness, find inefficiencies quickly, and optimize value-based payments as the payment system evolves.
Revenue management. Under a bundled-payment arrangement, hospitals are likely to be the party “orchestrating” the apportionment of payments, chiefly due to their ability to organize this effort. Information on how such payments are to be divided has not yet been clearly defined. But, whether based upon net revenue, gross revenue, or cost plus markup,
revenue and expenses will need to be closely projected, tracked, and monitored to ensure correct apportion-ing of payments to the hospital, physicians, and other participating providers.
Cost management. An entirely new and different look at costs will be required to complete the value equation under the new business model. Hospitals and health systems must be able to determine if they are delivering services at the lowest possible cost, in accordance with target benchmarks. Those with the technology and systems to accomplish integrated cost management will be well positioned to meet these challenges. Such hospitals and health systems will closely manage the budgeting, tracking, and reporting of expenses related to services in all organizational entities.
Use of human capital. Because labor costs typically comprise more than 50 percent of operating expenses, hospitals will be required to make highly effective and efficient use of staff under the new business model.
ENTERPRISEPERFORMANCEMANAGEMENT
(continued on page 9)
(continued from page 7)
MM ISSUE 5.cs5.5.indd 8 7/10/12 2:01 PM
Through effective productivity management, success-ful hospitals will ensure the right level of staffing to meet quality, outcomes, and cost benchmark targets—not too much and not too little. Managers must be able to “identify, diagnose, and treat” variances in budget-to-actual performance.
Physician revenue/compensation modeling and budgeting. As hospitals invest in physician strategies, the management of revenue, productivity, and costs related to integrated physician practices and employed physicians will be mandatory. Alignment of physician and hospital economic incentives is key to reducing costs and improving value.
Management reporting. Senior executives, trustees, physicians, and other clinicians should both receive and understand comprehensive data and analysis
related to organizational performance. The uninformed cannot accomplish the changes that will be required for success under the new business model.
For both planning and monitoring purposes, execu-tives will need to be able to dissect performance by key business segments, analyzing departmental and hospi-talwide “roll up” reports (see Figure 1). Sophisticated systems and tools that routinely generate such reports and analyses—and push them out to key managers—will enable high-quality decision making and give hospitals and health systems the “proof of performance” required for accountability.
Management ExpertiseTo deliver higher-quality care—with better outcomes, at lower costs—transformational change will be
(continued on page 10)
Issue 5 9
ENTERPRISEPERFORMANCEMANAGEMENT
(continued from page 8)
Figure 1. Summary Income Statement - Source: Budget Advisor®, Kaufman, Hall & Associates, Inc.
MM ISSUE 5.cs5.5.indd 9 7/10/12 2:01 PM
required of hospitals and health systems. IT systems that span the spectrum of clinical and non-clinical functions will facilitate such change (see Figure 2). But IT won’t provide the whole solution. Management expertise is required. Senior hospital leaders have the responsibility to “raise the financial IQ” of all managers, specifically the knowledge of what drives organizational performance. ❑
Partnering with hospitals to enhance their cash flow for more than 25 years, HBCS continually delivers the results that hospital executives and business offices require. HBCS provides the right people, the right processes, and the most comprehensive account follow-up and patient contact center technology in the industry. Our customers know firsthand that HBCS delivers a positive impact to their bottom line.
For more information about HBSC please contact:
Kathleen Maher, Regional Account Executive e-mail: [email protected]: 302-552-2000
10 Mass Media
ENTERPRISEPERFORMANCEMANAGEMENT
Kenneth Kaufman is CEO, Kaufman, Hall & Associ-ates, Inc., Skokie, Ill. ([email protected]).
Jason Sussman is a managing director, Kaufman, Hall & Associates, Inc., and a member of HFMA’s First Illinois chapter ([email protected]).
Debra Miller is vice president, Kaufman, Hall & Associates, Inc., and a member of HFMA’s Wisconsin chapter ([email protected]).
About the Author
Figure 2. IT System Requirements - Source: Kaufman, Hall & Associates, Inc.
(continued from page 9)
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Deciding whether a hospital or health system should establish a Medicare ACO is essentially a strategic question, requiring in-depth assessment of the hospital or health system’s market, the competitive landscape, and the organization’s position on the shift toward accountable care. It also requires a robust financial model.
This analysis builds on an article published in the Janu-ary 2012 issue of hfm, “A Better Outlook for ACOs?,” which considers the key strategic questions surround-
ing whether to establish an accountable care organiza-tion (ACO). Here, emphasis is placed on understand-ing the size of the financial opportunity and implica-tions on the hospital and physician partners using a baseline financial model. Working with this baseline model, the analysis illustrates the importance of hitting the required minimum savings rate (MSR) and quality reporting targets.
To understand this opportunity, we consider the finan-cial impact in three steps:
(continued on page 12)
Issue 5 11
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3 Steps to Analyze YourOrganization’s ACO Opportunity
By:John Harris
Idette ElizondoMolly Johnson
MM ISSUE 5.cs5.5.indd 11 7/10/12 2:01 PM
•Step1:AssesstheImpactofCMS’scalculationofACO shared savings
•Step2:AssessfactorsdeterminingtheACOreve-nue statement
•Step3:Assessthenetimpactonhospitalrevenuestatement
(continued on page 13)
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ENTERPRISEPERFORMANCEMANAGEMENT
(continued from page 11)
hfma.org JANUARY 2012 1
WEB EXTRA
3 steps to analyze your organization’s ACO opportunityDeciding whether a hospital or health system should establish a Medicare ACO is essentially a strategic question, requiring in-depth assessment of the hos-
pital or health system’s market, the competitive landscape, and the organization’s
position on the shift toward accountable care. It also requires a robust financial
model.
This analysis builds on an article published in the January 2012 issue of hfm, “A Better
Outlook for ACOs?,” which considers the key strategic questions surrounding
whether to establish an accountable care organization (ACO). Here, emphasis is
placed on understanding the size of the financial opportunity and implications on
the hospital and physician partners using a baseline financial model. Working with
this baseline model, the analysis illustrates the importance of hitting the required
minimum savings rate (MSR) and quality reporting targets.
To understand this opportunity, we consider the financial impact in three steps:
> Step 1: Assess the Impact of CMS’s calculation of ACO shared savings
> Step 2: Assess factors determining the ACO revenue statement
> Step 3: Assess the net impact on hospital revenue statement
John HarrisIdette ElizondoMolly Johnson
THREE-STEP ACO IMPACT ASSESSMENT
CMS Calculation of ACO Shared Savings
ACO Revenue Statement
Net Impact on Hospital Revenue Statement
Revenue “Revenue” = Medicare benchmark spending for
ACO population
Shared savings Patient servicesplus
share of ACO surplus/deficit
Expense “Expense” = Total spending for ACO
population (hospital/physician/other)
ACO operations Hospital operations
Surplus/Deficit Shared savings ACO surplus/deficit
Hospital surplus/deficit
PhysiciansCMS
$ $
MM ISSUE 5.cs5.5.indd 12 7/10/12 2:01 PM
Baseline ModelFor our baseline model, we assumed that a 30,000-member ACO, starting in July 2012 has opted to participate in Track 1 to avoid taking on risk for the first agreement period. We also assumed that the shared savings generated by the ACO are to be divided 50/50 between the physician participants and a hospital part-ner, after ACO operating costs have been covered. This approach allowed us to assess the impact on the hospital in the equation. Note, however, that a physi-cian-only ACO could operate without shared savings accruing to the hospital.
We further assumed that inpatient utilization could be decreased by 10 percent over the contract period and that the ACO would achieve strong quality reporting (90 percent) and meet required benchmark perfor-mance on most measures (75 percent). Finally, we created a breakeven scenario for the hospital, in which any losses in utilization would be offset by a combi-
nation of gains in the share of ACO admissions that occur at the sponsoring hospital and shared savings from the ACO.
Step 1: Assess the Impact of CMS’s Calculation Of ACO Shared SavingsThe Center for Medicare & Medicaid Services (CMS) benefits when an ACO effectively reduces its annual expenditures relative to past expenditures. If an ACO does not meet its MSR, CMS retains all of the savings. However, if the ACO meets its MSR, CMS shares some of the savings with the ACO. In our baseline model, we assumed that the ACO surpasses its MSR, prompt-ing CMS to share savings. The following discussion outlines each step in the shared savings calculation.
Revenue. To estimate benchmark spending, we multi-plied the average annual Medicare payment per benefi-ciary by the number of members in the ACO. This
(continued on page 14)
Issue 5 13
ENTERPRISEPERFORMANCEMANAGEMENT
(continued from page 12)
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calculation points to benchmark spending of over $250 million annually (see exhibit above).
Expense. Next, we determined how much CMS spends on our 30,000 members during a performance year. Expenses for CMS will be less if the ACO can effectively reduce utilization. The likeliest way for an ACO to generate savings is through reduced inpa-tient utilization as a result of increased care coordina-
tion. Other factors, such as decreases in ancillary and specialist visits and increases in primary care visits, are important, but may be offset by increases in some of these services, possibly creating a net neutral effect. Therefore, for our baseline case, we estimated CMS would pay about $10 million less on hospital expenses each year, assuming a benchmark of 10,380 inpa-tient admissions among the ACO’s members and a 10
(continued on page 15)
(continued from page 13)
14 Mass Media
ENTERPRISEPERFORMANCEMANAGEMENT
2 JANUARY 2012 healthcare financial management
Baseline ModelFor our baseline model, we assumed that a
30,000-member ACO, starting in July 2012 has
opted to participate in Track 1 to avoid taking on risk
for the first agreement period. We also assumed that
the shared savings generated by the ACO are to be
divided 50/50 between the physician participants
and a hospital partner, after ACO operating costs
have been covered. This approach allowed us to as-
sess the impact on the hospital in the equation. Note,
however, that a physician-only ACO could operate
without shared savings accruing to the hospital.
We further assumed that inpatient utilization could be
decreased by 10 percent over the contract period and
that the ACO would achieve strong quality report-
ing (90 percent) and meet required benchmark
performance on most measures (75 percent). Finally,
we created a breakeven scenario for the hospital,
in which any losses in utilization would be offset by a
combination of gains in the share of ACO admissions
that occur at the sponsoring hospital and shared
savings from the ACO.
Step 1: Assess the Impact of CMS’s Calculation Of ACO Shared Savings The Center for Medicare & Medicaid Services
(CMS) benefits when an ACO effectively reduces
its annual expenditures relative to past expenditures.
If an ACO does not meet its MSR, CMS retains all
of the savings. However, if the ACO meets its MSR,
CMS shares some of the savings with the ACO. In our
baseline model, we assumed that the ACO surpasses
its MSR, prompting CMS to share savings. The follow-
ing discussion outlines each step in the shared savings
calculation.
ACO BENCHMARK EXPENDITURES
2012* 2013 2014 2015 2012-2015
Average annual Medicare payment per beneficiary
$8,400 $8,600 $8,900 $9,200
ACO Members 30,000 30,000 30,000 30,000
Benchmark expenditures (millions) $126 $259 $267 $275 $927
* Amount for 2012 represents only six months of benchmark expenditures, given the ACO’s July 2012 start.
Revenue. To estimate benchmark spending, we
multiplied the average annual Medicare payment per
beneficiary by the number of members in the ACO.
This calculation points to benchmark spending of over
$250 million annually (see exhibit below).
Expense. Next, we determined how much CMS
spends on our 30,000 members during a perfor-
mance year. Expenses for CMS will be less if the ACO
can effectively reduce utilization. The likeliest way
for an ACO to generate savings is through reduced
inpatient utilization as a result of increased care coor-
dination. Other factors, such as decreases in ancillary
and specialist visits and increases in primary care
visits, are important, but may be offset by increases in
some of these services, possibly creating a net neutral
effect. Therefore, for our baseline case, we estimated
CMS would pay about $10 million less on hospital
expenses each year, assuming a benchmark of 10,380
inpatient admissions among the ACO’s members
and a 10 percent reduction in inpatient admissions
relative to the benchmark. Based on this estimate, for
example, payments for inpatient care would decrease
from about $113 million to roughly $102 million in
2014 (see exhibit at top of page 3).
Surplus/deficit. By reducing payments for inpatient
admissions, a surplus is created. Under our baseline
scenario, savings generated by the ACO total $33.8
million over the 3.5-year contract period (see upper
exhibit at bottom of page 3).
The ACO starts in July 2012; 2012 therefore repre-
sents just six months of savings generated. Therefore,
for the remainder of this analysis, the ACO’s results
for 2012 will be summed with those of 2013, so that
WEB EXTRA
MM ISSUE 5.cs5.5.indd 14 7/10/12 2:01 PM
Issue 5
percent reduction in inpatient admissions relative to the benchmark. Based on this estimate, for example, payments for inpatient care would decrease from about $113 million to roughly $102 million in 2014 (see exhibit above).
Surplus/deficit. By reducing payments for inpatient admissions, a surplus is created. Under our baseline scenario, savings generated by the ACO total $33.8 million over the 3.5-year contract period (see upper exhibit at bottom of page).
The ACO starts in July 2012; 2012 therefore repre-sents just six months of savings generated. Therefore, for the remainder of this analysis, the ACO’s results for 2012 will be summed with those of 2013, so thatthe first performance period represents the ACO’s first 18 months. The total estimated savings for this period, therefore, is $10.9 million ($2.7 million + $8.2 million).
Any year that an ACO is able to generate a surplus, CMS will benefit by keeping at least 50 percent of the savings. In this case, CMS keeps at least $17 million over the contract period.
Step 2: Assess Factors Determining the ACO Revenue StatementThe shared savings the ACO receives from CMS are its sole revenue source. In the case of our baseline scenario, the ACO is eligible for up to $17 million in revenues. However, the revenues are dependent on two things:
•TheACO’sabilitytomeettheMSR
•The ACO’s ability to successfully report and/orachieve quality measures
If an ACO does not meet the MSR and/or does not achieve required levels for quality reporting and/or performance, then CMS retains this additional share of the savings.
Ability to meet the MSR. An ACO that does not meet the MSR will not be eligible to sharing in savings in that performance year. Therefore, to share in any of the savings generated, the ACO must meet or surpass its MSR. Depending on an organization’s size, the MSR varies between 2.0 percent to 3.9 percent. Larger
(continued on page 16)
(continued from page 14)
15
ENTERPRISEPERFORMANCEMANAGEMENT
hfma.org JANUARY 2012 3
WEB EXTRA
CALCULATION OF SAVINGS: ESTIMATED CHANGE IN ACO EXPENDITURES, 2014
Benchmark Target Change
Admissions per 1,000 346 311 (35)
ACO members 30,000 30,000
Inpatient admissions for ACO members 10,380 9,342 (1,038)
Average Medicare payment per admission $10,879 $10,879
Payments for inpatient admissions (millions) $112.9 $101.6 $(11.3)
the first performance period represents the ACO’s
first 18 months. The total estimated savings for this
period, therefore, is $10.9 million ($2.7 million + $8.2
million).
Any year that an ACO is able to generate a surplus,
CMS will benefit by keeping at least 50 percent of the
savings. In this case, CMS keeps at least $17 million
over the contract period.
Step 2: Assess Factors Determining the ACO Revenue StatementThe shared savings the ACO receives from CMS are
its sole revenue source. In the case of our baseline
scenario, the ACO is eligible for up to $17 million in
revenues. However, the revenues are dependent on
two things:
> The ACO’s ability to meet the MSR
> The ACO’s ability to successfully report and/or
achieve quality measures
SAVINGS GENERATED BY ACO
2012 2013 2014 2015 2012-2015
Reduction in inpatient admissionscompared to benchmark
5.0% 7.5% 10.0% 10.0%
Estimated savings generated by ACO (millions)*
$2.7 $8.2 $11.3 $11.6 $33.8
* The ACO starts in July 2012; 2012 therefore represents just six months of savings generated. The ACO’s results for 2012 will be summed with those of 2013, so that the first performance period represents the ACO’s first 18 months.
If an ACO does not meet the MSR and/or does not
achieve required levels for quality reporting and/or
performance, then CMS retains this additional share
of the savings.
Ability to meet the MSR. An ACO that does not meet
the MSR will not be eligible to sharing in savings in
that performance year. Therefore, to share in any
of the savings generated, the ACO must meet or
surpass its MSR. Depending on an organization’s size,
the MSR varies between 2.0 percent to 3.9 percent.
Larger ACOs have lower MSRs and, thus, can more
easily generate revenue.
With 30,000 members, the ACO for the baseline
model has an MSR of 2.4 percent. Based on our
assumptions regarding the ACO’s benchmark expen-
ditures, we can identify the actual savings dollars that
the ACO must generate to meet the MSR—i.e., about
$6 million annually (see exhibit at bottom of page).
CALCULATION OF MINIMUM SAVINGS REQUIRED FOR ACO TO SHARE IN SAVINGS
2012-2013* 2014 2015
Benchmark expenditures (millions) $385 $267 $275
Minimum savings rate 2.40% 2.40% 2.40%
Minimum savings required (millions) $9.2 $6.4 $6.6
* The first performance period is the ACO’s first 18 months (July 2012 to December 2013).
hfma.org JANUARY 2012 3
WEB EXTRA
CALCULATION OF SAVINGS: ESTIMATED CHANGE IN ACO EXPENDITURES, 2014
Benchmark Target Change
Admissions per 1,000 346 311 (35)
ACO members 30,000 30,000
Inpatient admissions for ACO members 10,380 9,342 (1,038)
Average Medicare payment per admission $10,879 $10,879
Payments for inpatient admissions (millions) $112.9 $101.6 $(11.3)
the first performance period represents the ACO’s
first 18 months. The total estimated savings for this
period, therefore, is $10.9 million ($2.7 million + $8.2
million).
Any year that an ACO is able to generate a surplus,
CMS will benefit by keeping at least 50 percent of the
savings. In this case, CMS keeps at least $17 million
over the contract period.
Step 2: Assess Factors Determining the ACO Revenue StatementThe shared savings the ACO receives from CMS are
its sole revenue source. In the case of our baseline
scenario, the ACO is eligible for up to $17 million in
revenues. However, the revenues are dependent on
two things:
> The ACO’s ability to meet the MSR
> The ACO’s ability to successfully report and/or
achieve quality measures
SAVINGS GENERATED BY ACO
2012 2013 2014 2015 2012-2015
Reduction in inpatient admissionscompared to benchmark
5.0% 7.5% 10.0% 10.0%
Estimated savings generated by ACO (millions)*
$2.7 $8.2 $11.3 $11.6 $33.8
* The ACO starts in July 2012; 2012 therefore represents just six months of savings generated. The ACO’s results for 2012 will be summed with those of 2013, so that the first performance period represents the ACO’s first 18 months.
If an ACO does not meet the MSR and/or does not
achieve required levels for quality reporting and/or
performance, then CMS retains this additional share
of the savings.
Ability to meet the MSR. An ACO that does not meet
the MSR will not be eligible to sharing in savings in
that performance year. Therefore, to share in any
of the savings generated, the ACO must meet or
surpass its MSR. Depending on an organization’s size,
the MSR varies between 2.0 percent to 3.9 percent.
Larger ACOs have lower MSRs and, thus, can more
easily generate revenue.
With 30,000 members, the ACO for the baseline
model has an MSR of 2.4 percent. Based on our
assumptions regarding the ACO’s benchmark expen-
ditures, we can identify the actual savings dollars that
the ACO must generate to meet the MSR—i.e., about
$6 million annually (see exhibit at bottom of page).
CALCULATION OF MINIMUM SAVINGS REQUIRED FOR ACO TO SHARE IN SAVINGS
2012-2013* 2014 2015
Benchmark expenditures (millions) $385 $267 $275
Minimum savings rate 2.40% 2.40% 2.40%
Minimum savings required (millions) $9.2 $6.4 $6.6
* The first performance period is the ACO’s first 18 months (July 2012 to December 2013).
MM ISSUE 5.cs5.5.indd 15 7/10/12 2:01 PM
16 Mass Media
ACOs have lower MSRs and, thus, can more easily generate revenue.
With 30,000 members, the ACO for the baseline model has an MSR of 2.4 percent. Based on our assumptions regarding the ACO’s benchmark expenditures, we can identify the actual savings dollars that the ACO must generate to meet the MSR—i.e., about $6 million annually (see exhibit above).
Ability to successfully report and/or achieve quality measures. After the ACO meets its MSR, it shares up to a maximum of 50 percent (Track 1) of all savings generated with CMS from the first dollar.The actual amount of shared savings can be lower than 50 percent, depending on quality reporting(2012-15) and performance (2014 and 2015).
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(continued from page 15)
ENTERPRISEPERFORMANCEMANAGEMENT
(continued on page 17)
hfma.org JANUARY 2012 3
WEB EXTRA
CALCULATION OF SAVINGS: ESTIMATED CHANGE IN ACO EXPENDITURES, 2014
Benchmark Target Change
Admissions per 1,000 346 311 (35)
ACO members 30,000 30,000
Inpatient admissions for ACO members 10,380 9,342 (1,038)
Average Medicare payment per admission $10,879 $10,879
Payments for inpatient admissions (millions) $112.9 $101.6 $(11.3)
the first performance period represents the ACO’s
first 18 months. The total estimated savings for this
period, therefore, is $10.9 million ($2.7 million + $8.2
million).
Any year that an ACO is able to generate a surplus,
CMS will benefit by keeping at least 50 percent of the
savings. In this case, CMS keeps at least $17 million
over the contract period.
Step 2: Assess Factors Determining the ACO Revenue StatementThe shared savings the ACO receives from CMS are
its sole revenue source. In the case of our baseline
scenario, the ACO is eligible for up to $17 million in
revenues. However, the revenues are dependent on
two things:
> The ACO’s ability to meet the MSR
> The ACO’s ability to successfully report and/or
achieve quality measures
SAVINGS GENERATED BY ACO
2012 2013 2014 2015 2012-2015
Reduction in inpatient admissionscompared to benchmark
5.0% 7.5% 10.0% 10.0%
Estimated savings generated by ACO (millions)*
$2.7 $8.2 $11.3 $11.6 $33.8
* The ACO starts in July 2012; 2012 therefore represents just six months of savings generated. The ACO’s results for 2012 will be summed with those of 2013, so that the first performance period represents the ACO’s first 18 months.
If an ACO does not meet the MSR and/or does not
achieve required levels for quality reporting and/or
performance, then CMS retains this additional share
of the savings.
Ability to meet the MSR. An ACO that does not meet
the MSR will not be eligible to sharing in savings in
that performance year. Therefore, to share in any
of the savings generated, the ACO must meet or
surpass its MSR. Depending on an organization’s size,
the MSR varies between 2.0 percent to 3.9 percent.
Larger ACOs have lower MSRs and, thus, can more
easily generate revenue.
With 30,000 members, the ACO for the baseline
model has an MSR of 2.4 percent. Based on our
assumptions regarding the ACO’s benchmark expen-
ditures, we can identify the actual savings dollars that
the ACO must generate to meet the MSR—i.e., about
$6 million annually (see exhibit at bottom of page).
CALCULATION OF MINIMUM SAVINGS REQUIRED FOR ACO TO SHARE IN SAVINGS
2012-2013* 2014 2015
Benchmark expenditures (millions) $385 $267 $275
Minimum savings rate 2.40% 2.40% 2.40%
Minimum savings required (millions) $9.2 $6.4 $6.6
* The first performance period is the ACO’s first 18 months (July 2012 to December 2013).
MM ISSUE 5.cs5.5.indd 16 7/10/12 2:01 PM
Issue 5
CMS will phase in the measures scored on reporting and quality over time (see exhibit at right).
In our baseline model, we assumed less than perfect reporting (90 percent) and performance (75 percent) scores. As a result, the ACO would receive $13.5 million of its $17 million, or about 80 percent of the savings it would have been eligible to receive (see exhibit on page 18).
The remaining $3.4 million of shared savings isretained by CMS. Adding this amount to the $17 million that CMS has already retained, CMS would benefit by saving about $20 million on this 30,000-member ACO, or about $680 per member over the contract period. In summary, in the baseline model, CMS retains approximately 60 percent of the savings generated and the ACO gets about 40 percent of the savings generated to use as its revenues (see exhibit at the top of the page).
Operating expense. Operating expenses required to ensure an ACO’s success can be significant. They include medical management and administrative staff, incentive payments for physicians, and IT investments for analytics and data sharing capabilities. These costs will vary depending on the hospital’s current popula-tion health capabilities and its level of IT sophistica-
(continued on page 18)
17
ENTERPRISEPERFORMANCEMANAGEMENT
(continued from page 16)
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4 JANUARY 2012 healthcare financial management
ACO QUALITY SCORING METHODOLOGY: PHASE-IN SUMMARY
Basis for shared savings:
2012-2013 2014 2015
Reporting 33 8 1
Performance 0 25 32
Total 33 33 33
Ability to successfully report and/or achieve quality
measures. After the ACO meets its MSR, it shares
up to a maximum of 50 percent (Track 1) of all
savings generated with CMS from the first dollar.
The actual amount of shared savings can be lower
than 50 percent, depending on quality reporting
(2012-15) and performance (2014 and 2015).
CMS will phase in the measures scored on reporting
and quality over time (see exhibit at right).
In our baseline model, we assumed less than per-
fect reporting (90 percent) and performance (75
percent) scores. As a result, the ACO would receive
$13.5 million of its $17 million, or about 80 percent of
the savings it would have been eligible to receive (see
upper exhibit below).
The remaining $3.4 million of shared savings is
retained by CMS. Adding this amount to the $17 million
that CMS has already retained, CMS would benefit by
saving about $20 million on this 30,000-member ACO,
or about $680 per member over the contract period. In
summary, in the baseline model, CMS retains approxi-
mately 60 percent of the savings generated and the
ACO gets about 40 percent of the savings generated to
use as its revenues (see exhibit at bottom of page).
Operating expense. Operating expenses required
to ensure an ACO’s success can be significant. They
include medical management and administrative staff,
incentive payments for physicians, and IT investments
for analytics and data sharing capabilities. These costs
will vary depending on the hospital’s current popula-
tion health capabilities and its level of IT sophistica-
tion. Estimates of the costs to set up and operate an
ACO vary considerably (see exhibit at top of page 5).
We have used a moderate estimate for the baseline
model (i.e., $1.1 million in start-up costs and $2.6
million in annual operating costs), assuming that the
hospital has some existing capabilities to leverage for
the ACO. Unlike the estimates by the American
Hospital Association, our estimates do not include
certain costs such as physician practice acquisition
and EHR implementation, as these activities may
CALCULATION OF SAVINGS RECEIVED BY THE ACO (MILLIONS)
2012 2013 2014 2015 2012-2015
Estimated savings generated by ACO $2.7 $8.2 $11.3 $11.6 $33.8
Sharing rate 50% 50% 50% 50%
Estimated shared savings to ACO — before quality
$1.3 $4.1 $5.6 $5.8 $16.9
Estimated quality score 90% 90% 75% 75%
Estimated shared savings to ACO — after quality adjustment
$1.2 $3.7 $4.2 $4.4 $13.5
CALCULATION OF GENERATED SAVINGS THAT ACCRUE TO CMS
2012 2013 2014 2015 2012-2015
Estimated savings generated by ACO $2.7 $8.2 $11.3 $11.6 $33.8
Dollars to CMS due to sharing rate $1.3 $4.1 $5.6 $5.8 $16.9
Dollars to CMS due to imperfect quality score
$0.1 $0.4 $1.4 $1.5 $3.4
Total dollars accruing to CMS $1.5 $4.5 $7.1 $7.3 $20.3
Percentage of savings that accrue to CMS
55% 55% 63% 63% 60%
WEB EXTRA
MM ISSUE 5.cs5.5.indd 17 7/10/12 2:01 PM
18 Mass Media
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ENTERPRISEPERFORMANCEMANAGEMENT(continued from page 17)
4 JANUARY 2012 healthcare financial management
ACO QUALITY SCORING METHODOLOGY: PHASE-IN SUMMARY
Basis for shared savings:
2012-2013 2014 2015
Reporting 33 8 1
Performance 0 25 32
Total 33 33 33
Ability to successfully report and/or achieve quality
measures. After the ACO meets its MSR, it shares
up to a maximum of 50 percent (Track 1) of all
savings generated with CMS from the first dollar.
The actual amount of shared savings can be lower
than 50 percent, depending on quality reporting
(2012-15) and performance (2014 and 2015).
CMS will phase in the measures scored on reporting
and quality over time (see exhibit at right).
In our baseline model, we assumed less than per-
fect reporting (90 percent) and performance (75
percent) scores. As a result, the ACO would receive
$13.5 million of its $17 million, or about 80 percent of
the savings it would have been eligible to receive (see
upper exhibit below).
The remaining $3.4 million of shared savings is
retained by CMS. Adding this amount to the $17 million
that CMS has already retained, CMS would benefit by
saving about $20 million on this 30,000-member ACO,
or about $680 per member over the contract period. In
summary, in the baseline model, CMS retains approxi-
mately 60 percent of the savings generated and the
ACO gets about 40 percent of the savings generated to
use as its revenues (see exhibit at bottom of page).
Operating expense. Operating expenses required
to ensure an ACO’s success can be significant. They
include medical management and administrative staff,
incentive payments for physicians, and IT investments
for analytics and data sharing capabilities. These costs
will vary depending on the hospital’s current popula-
tion health capabilities and its level of IT sophistica-
tion. Estimates of the costs to set up and operate an
ACO vary considerably (see exhibit at top of page 5).
We have used a moderate estimate for the baseline
model (i.e., $1.1 million in start-up costs and $2.6
million in annual operating costs), assuming that the
hospital has some existing capabilities to leverage for
the ACO. Unlike the estimates by the American
Hospital Association, our estimates do not include
certain costs such as physician practice acquisition
and EHR implementation, as these activities may
CALCULATION OF SAVINGS RECEIVED BY THE ACO (MILLIONS)
2012 2013 2014 2015 2012-2015
Estimated savings generated by ACO $2.7 $8.2 $11.3 $11.6 $33.8
Sharing rate 50% 50% 50% 50%
Estimated shared savings to ACO — before quality
$1.3 $4.1 $5.6 $5.8 $16.9
Estimated quality score 90% 90% 75% 75%
Estimated shared savings to ACO — after quality adjustment
$1.2 $3.7 $4.2 $4.4 $13.5
CALCULATION OF GENERATED SAVINGS THAT ACCRUE TO CMS
2012 2013 2014 2015 2012-2015
Estimated savings generated by ACO $2.7 $8.2 $11.3 $11.6 $33.8
Dollars to CMS due to sharing rate $1.3 $4.1 $5.6 $5.8 $16.9
Dollars to CMS due to imperfect quality score
$0.1 $0.4 $1.4 $1.5 $3.4
Total dollars accruing to CMS $1.5 $4.5 $7.1 $7.3 $20.3
Percentage of savings that accrue to CMS
55% 55% 63% 63% 60%
WEB EXTRA
(continued on page 19)
MM ISSUE 5.cs5.5.indd 18 7/10/12 2:01 PM
Issue 5
tion. Estimates of the costs to set up and operate an ACO vary considerably (see exhibit below).
We have used a moderate estimate for the baseline model (i.e., $1.1 million in start-up costs and $2.6 million in annual operating costs), assuming that the hospital has some existing capabilities to leverage for
the ACO. Unlike the estimates by the AmericanHospital Association, our estimates do not include certain costs such as physician practice acquisition and EHR implementation, as these activities may already be covered under other hospital/health system initia-tives. As a result, the baseline model includes approxi-
(continued from page 18)
(continued on page 20)
19
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ENTERPRISEPERFORMANCEMANAGEMENT
hfma.org JANUARY 2012 5
ACO COST ESTIMATES (MILLIONS)
CMS* AHA† DGA
Start-up costs $0.6 $5.3 $1.1
Annual operating costs $1.3 $6.3 $2.6
Total over the contract period $5.0 $27.4 $10.2
* Centers for Medicare & Medicaid Services, Medicare Shared Savings Program, Final Rule.† American Hospital Association and McManis Consulting, “The Work Ahead: Activities and Costs to Develop an Accountable Care Organization,” April 2011 (Prototype A).
ACO PROFIT & LOSS STATEMENT (MILLIONS)
2012 2013 2014 2015 2012-2015
Revenue (shared savings) $1.2 $3.7 $4.2 $4.4 $13.5
Operating expenses 2.3 2.6 2.6 2.7 10.2
ACO net income ($1.1) $1.1 $1.6 $1.7 $3.3
ESTIMATED ACO CASH REQUIREMENTS (MILLIONS)
2012 2013 2014 2015 Close-Out
Receipt of prior-year ACO share of savings*
$0.0 $3.0 $1.9 $4.2 $4.4
ACO operating expenses ($2.3) ($2.6) ($2.6) ($2.7) $0.0
Cash surplus (deficit) ($2.3) $0.5 ($0.8) $1.6 $4.4
Cumulative cash surplus (deficit) ($2.3) ($1.8) ($2.6) ($1.1) $3.3
* The baseline ACO opts for the interim payment. It therefore receives a payment in 2013 that represents its share of savings for the first 12 months of performance.
already be covered under other hospital/health
system initiatives. As a result, the baseline model
includes approximately 18 additional FTEs, most of
whom are medical management staff, along with
several administrative staff and a medical director,
as well as some costs for IT and other expenses.
ACO surplus/deficit. Under our scenario, a look at
the baseline ACO’s operating statement by year
discloses that the ACO generates a surplus in most
years (see upper exhibit below).
At times, however, the ACO will be face cash flow
challenges. Shared savings will be paid out the year
following each performance period. CMS has indicat-
ed that it will offer ACOs an interim payment to allevi-
ate significant cash flow issues that they would face for
the first 18 months of operations. Our baseline ACO
opts for this interim payment, with the assumption that
the ACO would receive the first 12 months of shared
savings (July 2012 to June 2013) at the end of 2013.
The payment received in 2014, therefore, represents
the latter six months of performance in 2013.
The delay in the receipt of shared savings can
cause the ACO to experience cash deficits across
the contract period—a situation that can be challeng-
ing for many organizations (see exhibit at bottom
of page).
The ACO’s net income is shared equally between
the hospital and physician participants in the baseline
ACO. Although physicians would receive some
incentive payments along the way for meeting certain
performance targets, we assumed that neither party
would receive its shared savings payout until the ACO
has achieved a positive cumulative cash surplus, which
does not occur until 2016.
Step 3: Assess the Net Impact on the Hospital Revenue Statement An ACO generates savings primarily by reducing
inpatient admissions of ACO members. Ultimately,
however, achieving this result adversely affects the
hospital. The portion of ACO shared savings accruing
to the hospital is not enough to make up for the lost
revenue due to this decrease in utilization. Before
identifying ways to offset this effect on the hospital,
it is necessary to quantify it.
WEB EXTRA
MM ISSUE 5.cs5.5.indd 19 7/10/12 2:01 PM
20 Mass Media
mately 18 additional FTEs, most of whom are medical management staff, along with several administrative staff and a medical director, as well as some costs for IT and other expenses.
ACO surplus/deficit. Under our scenario, a look at the baseline ACO’s operating statement by year discloses that the ACO generates a surplus in most
years (see exhibit at the top of the page).
At times, however, the ACO will be face cash flow challenges. Shared savings will be paid out the year following each performance period. CMS has indi-cated that it will offer ACOs an interim payment to alleviate significant cash flow issues that they would
(continued on page 21)
(continued from page 19)
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hfma.org JANUARY 2012 5
ACO COST ESTIMATES (MILLIONS)
CMS* AHA† DGA
Start-up costs $0.6 $5.3 $1.1
Annual operating costs $1.3 $6.3 $2.6
Total over the contract period $5.0 $27.4 $10.2
* Centers for Medicare & Medicaid Services, Medicare Shared Savings Program, Final Rule.† American Hospital Association and McManis Consulting, “The Work Ahead: Activities and Costs to Develop an Accountable Care Organization,” April 2011 (Prototype A).
ACO PROFIT & LOSS STATEMENT (MILLIONS)
2012 2013 2014 2015 2012-2015
Revenue (shared savings) $1.2 $3.7 $4.2 $4.4 $13.5
Operating expenses 2.3 2.6 2.6 2.7 10.2
ACO net income ($1.1) $1.1 $1.6 $1.7 $3.3
ESTIMATED ACO CASH REQUIREMENTS (MILLIONS)
2012 2013 2014 2015 Close-Out
Receipt of prior-year ACO share of savings*
$0.0 $3.0 $1.9 $4.2 $4.4
ACO operating expenses ($2.3) ($2.6) ($2.6) ($2.7) $0.0
Cash surplus (deficit) ($2.3) $0.5 ($0.8) $1.6 $4.4
Cumulative cash surplus (deficit) ($2.3) ($1.8) ($2.6) ($1.1) $3.3
* The baseline ACO opts for the interim payment. It therefore receives a payment in 2013 that represents its share of savings for the first 12 months of performance.
already be covered under other hospital/health
system initiatives. As a result, the baseline model
includes approximately 18 additional FTEs, most of
whom are medical management staff, along with
several administrative staff and a medical director,
as well as some costs for IT and other expenses.
ACO surplus/deficit. Under our scenario, a look at
the baseline ACO’s operating statement by year
discloses that the ACO generates a surplus in most
years (see upper exhibit below).
At times, however, the ACO will be face cash flow
challenges. Shared savings will be paid out the year
following each performance period. CMS has indicat-
ed that it will offer ACOs an interim payment to allevi-
ate significant cash flow issues that they would face for
the first 18 months of operations. Our baseline ACO
opts for this interim payment, with the assumption that
the ACO would receive the first 12 months of shared
savings (July 2012 to June 2013) at the end of 2013.
The payment received in 2014, therefore, represents
the latter six months of performance in 2013.
The delay in the receipt of shared savings can
cause the ACO to experience cash deficits across
the contract period—a situation that can be challeng-
ing for many organizations (see exhibit at bottom
of page).
The ACO’s net income is shared equally between
the hospital and physician participants in the baseline
ACO. Although physicians would receive some
incentive payments along the way for meeting certain
performance targets, we assumed that neither party
would receive its shared savings payout until the ACO
has achieved a positive cumulative cash surplus, which
does not occur until 2016.
Step 3: Assess the Net Impact on the Hospital Revenue Statement An ACO generates savings primarily by reducing
inpatient admissions of ACO members. Ultimately,
however, achieving this result adversely affects the
hospital. The portion of ACO shared savings accruing
to the hospital is not enough to make up for the lost
revenue due to this decrease in utilization. Before
identifying ways to offset this effect on the hospital,
it is necessary to quantify it.
WEB EXTRA
MM ISSUE 5.cs5.5.indd 20 7/10/12 2:01 PM
Issue 5
face for the first 18 months of operations. Our baseline ACO opts for this interim payment, with the assump-tion that the ACO would receive the first 12 months of shared savings (July 2012 to June 2013) at the end of 2013. The payment received in 2014, therefore, repre-sents the latter six months of performance in 2013.
The delay in the receipt of shared savings cancause the ACO to experience cash deficits acrossthe contract period—a situation that can be challeng-ing for many organizations (see exhibit below).
(continued on page 22)
21
(continued from page 20)
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hfma.org JANUARY 2012 5
ACO COST ESTIMATES (MILLIONS)
CMS* AHA† DGA
Start-up costs $0.6 $5.3 $1.1
Annual operating costs $1.3 $6.3 $2.6
Total over the contract period $5.0 $27.4 $10.2
* Centers for Medicare & Medicaid Services, Medicare Shared Savings Program, Final Rule.† American Hospital Association and McManis Consulting, “The Work Ahead: Activities and Costs to Develop an Accountable Care Organization,” April 2011 (Prototype A).
ACO PROFIT & LOSS STATEMENT (MILLIONS)
2012 2013 2014 2015 2012-2015
Revenue (shared savings) $1.2 $3.7 $4.2 $4.4 $13.5
Operating expenses 2.3 2.6 2.6 2.7 10.2
ACO net income ($1.1) $1.1 $1.6 $1.7 $3.3
ESTIMATED ACO CASH REQUIREMENTS (MILLIONS)
2012 2013 2014 2015 Close-Out
Receipt of prior-year ACO share of savings*
$0.0 $3.0 $1.9 $4.2 $4.4
ACO operating expenses ($2.3) ($2.6) ($2.6) ($2.7) $0.0
Cash surplus (deficit) ($2.3) $0.5 ($0.8) $1.6 $4.4
Cumulative cash surplus (deficit) ($2.3) ($1.8) ($2.6) ($1.1) $3.3
* The baseline ACO opts for the interim payment. It therefore receives a payment in 2013 that represents its share of savings for the first 12 months of performance.
already be covered under other hospital/health
system initiatives. As a result, the baseline model
includes approximately 18 additional FTEs, most of
whom are medical management staff, along with
several administrative staff and a medical director,
as well as some costs for IT and other expenses.
ACO surplus/deficit. Under our scenario, a look at
the baseline ACO’s operating statement by year
discloses that the ACO generates a surplus in most
years (see upper exhibit below).
At times, however, the ACO will be face cash flow
challenges. Shared savings will be paid out the year
following each performance period. CMS has indicat-
ed that it will offer ACOs an interim payment to allevi-
ate significant cash flow issues that they would face for
the first 18 months of operations. Our baseline ACO
opts for this interim payment, with the assumption that
the ACO would receive the first 12 months of shared
savings (July 2012 to June 2013) at the end of 2013.
The payment received in 2014, therefore, represents
the latter six months of performance in 2013.
The delay in the receipt of shared savings can
cause the ACO to experience cash deficits across
the contract period—a situation that can be challeng-
ing for many organizations (see exhibit at bottom
of page).
The ACO’s net income is shared equally between
the hospital and physician participants in the baseline
ACO. Although physicians would receive some
incentive payments along the way for meeting certain
performance targets, we assumed that neither party
would receive its shared savings payout until the ACO
has achieved a positive cumulative cash surplus, which
does not occur until 2016.
Step 3: Assess the Net Impact on the Hospital Revenue Statement An ACO generates savings primarily by reducing
inpatient admissions of ACO members. Ultimately,
however, achieving this result adversely affects the
hospital. The portion of ACO shared savings accruing
to the hospital is not enough to make up for the lost
revenue due to this decrease in utilization. Before
identifying ways to offset this effect on the hospital,
it is necessary to quantify it.
WEB EXTRA
MM ISSUE 5.cs5.5.indd 21 7/10/12 2:01 PM
22 Mass Media
The ACO’s net income is shared equally between the hospital and physician participants in the base-line ACO. Although physicians would receive some incentive payments along the way for meeting certain performance targets, we assumed that neither party would receive its shared savings payout until the ACO has achieved a positive cumulative cash surplus, which does not occur until 2016.
Step 3: Assess the Net Impact on the Hospital Revenue StatementAn ACO generates savings primarily by reducing inpatient admissions of ACO members. Ultimately, however, achieving this result adversely affects the hospital. The portion of ACO shared savings accru-ing to the hospital is not enough to make up for the lost revenue due to this decrease in utilization. Before identifying ways to offset this effect on the hospital,it is necessary to quantify it.
Revenue. To estimate the ACO’s impact on hospitalrevenue (patient services plus shared savings fromACO), we analyzed the expected change in hospitaladmissions. Although the ACO will likely reduce theoverall number of admissions among ACO members,it may also increase the share of member admissionsgoing to the sponsor hospital through improved carecoordination and enhanced integration of providers.For our scenario, we assumed the hospital would seean increase in its market share from ACO memberadmissions from 72 percent in 2012 to 77 percent in2014 and 2015 (see upper exhibit on page 23).
The net result of decreases in inpatient admissionsamong ACO members with increases in the hospital’sshare of ACO member admissions is more moderaterevenue losses for the hospital (see bottom exhibit on page 23).
(continued on page 23)
(continued from page 21)
ENTERPRISEPERFORMANCEMANAGEMENT
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MM ISSUE 5.cs5.5.indd 22 7/10/12 2:01 PM
Issue 5
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23
(continued from page 22)
ENTERPRISEPERFORMANCEMANAGEMENT
6 JANUARY 2012 healthcare financial management
Revenue. To estimate the ACO’s impact on hospital
revenue (patient services plus shared savings from
ACO), we analyzed the expected change in hospital
admissions. Although the ACO will likely reduce the
overall number of admissions among ACO members,
it may also increase the share of member admissions
going to the sponsor hospital through improved care
coordination and enhanced integration of providers.
For our scenario, we assumed the hospital would see
an increase in its market share from ACO member
admissions from 72 percent in 2012 to 77 percent in
2014 and 2015 (see upper exhibit below).
The net result of decreases in inpatient admissions
among ACO members with increases in the hospital’s
share of ACO member admissions is more moderate
revenue losses for the hospital (see exhibit at bottom
of page).
Under our scenario, the hospital’s share of the shared
savings generated by the ACO is about $1.7 million
(see top exhibit, page 7).
Hospital operations. Due to the high fixed costs of hos-
pitals, we assumed that inpatient revenue decreases
due to ACO operations would not be offset by variable
cost reductions, resulting in a decline in hospital
operating income of roughly $1.6 million before shared
savings (see middle exhibit, page 7).
Hospital surplus/deficit. Despite the hospital’s experi-
ence the aforementioned decline in its operating
income resulting from the ACO, we also determined
under our scenario that the hospital would receive
$1.7 million as its portion of shared savings from
the ACO (see bottom exhibit, page 7).
In short, under our assumptions, an increase in the
share of ACO member admissions paired with the
shared savings received by the hospital would pro-
duce a neutral impact on the hospital. To achieve this
result, it is necessary to increase the share of ACO
member admissions occurring at the sponsoring hos-
pital from 70 percent to 77 percent over the contract
period. The hospital’s ability to achieve this increase in
market share will depend on several factors, including
the current level of leakage and the degree of splitting
among participating physicians. The willingness of
ACO IMPACT OF REDUCED UTILIZATION AND INCREASED SHARE OF ADMISSIONS ON HOSPITAL, 2014
Current Under ACO Change
Inpatient admissions for ACO members 10,380 9,342 (1,038)
Sponsor hospital market share of ACO member admissions
70% 77%
ACO member admissions at sponsor hospital 7,266 7,193 (73)
Average Medicare payment per admission $10,879 $10,879
Hospital revenue for ACO member admissions (millions)
$79.0 $78.3 ($0.8)
WEB EXTRA
According to our baseline scenario, an ACO that generates $34 million in savings leaves $20 million in CMS’s hands and receives $14 million from CMS, operating at a profit of $3 million.
IMPACT ON HOSPITAL INPATIENT REVENUE FROM ACO MEMBERS (MILLIONS)
2012 2013 2014 2015 2012-2015*
Sponsor hospital market share of ACO member admissions 72% 75% 77% 77%
Change in hospital admissions due to ACO (83) (65) (73) (35) (256)
Change in hospital revenue for ACO member admissions ($0.9) ($0.7) ($0.8) ($0.4) ($2.7)
* Numbers do not precisely add up to the total for 2012-15 due to rounding.(continued on page 24)
MM ISSUE 5.cs5.5.indd 23 7/10/12 2:01 PM
24 Mass Media
ENTERPRISEPERFORMANCEMANAGEMENT
Under our scenario, the hospital’s share of the sharedsavings generated by the ACO is about $1.7 million(see top exhibit above).
Hospital operations. Due to the high fixed costs of hospitals,we assumed that inpatient revenue decreasesdue to ACO operations would not be offset by variablecost reductions, resulting in a decline in hospital oper-ating income of roughly $1.6 million before shared
savings (see bottom exhibit above).
Hospital surplus/deficit. Despite the hospital’s expe-rience the aforementioned decline in its operating income resulting from the ACO, we also determined under our scenario that the hospital would receive $1.7 million as its portion of shared savings from the ACO (see exhibit below).
hfma.org JANUARY 2012 7
ACO beneficiaries to seek care within the ACO will
also have to be considered.
However, if the ACO fails to increase market share
incrementally, the hospital will experience significant
losses—up to $15 million in our sensitivity analysis. For
this reason, as a critical strategic consideration, the
hospital will require the ACO’s assistance in backfill-
ing for decreased utilization.
In sum, according to our baseline scenario, an
ACO that generates $34 million in savings leaves
$20 million in CMS’s hands and receives $14 million
from CMS, operating at a profit of $3 million. The
affiliated hospital can break even only if its share of
ACO admissions is increased significantly.
It should be noted, however, that a deeper analysis
of this financial model might well yield more positive
results for the hospital. In particular, the types of
admissions that the ACO initiative would likely
help to avoid would most likely be medical
admissions associated with better management
of chronic conditions. Such admissions tend to
have significantly lower profitability for hospitals,
so losing them would not as harmful as losing the
average admission, as we assumed in our baseline
scenario.
Analysis of ScenariosIn addition, the scenario described previously, it is
useful to consider a variety of other scenarios using
this baseline ACO to assess the impact of various
factors on the hospital, such as the size of the ACO,
amount of savings generated, ACO operating costs,
quality scores, hospital share of ACO admissions, and
selection of Track 2 instead of Track 1.
If, for example, the ACO has 40,000 members
(one-third more than our baseline), ACO net income
and, therefore, the savings to distribute nearly double.
However, under such a scenario, hospital operations
would be more severely affected, as managing the
care of a larger population would further reduce
hospital utilization.
The size of the ACO also determines the MSR; more
members mean a lower MSR, down to a minimum of
2 percent for ACOs of 60,000 members or more.
For ACOs that generate savings that just meet or fail
HOSPITAL DISTRIBUTION OF ACO SHARED SAVINGS (MILLIONS)
2012 2013 2014 2015 Close-Out
Cumulative cash surplus (deficit) of ACO ($2.3) ($1.8) ($2.6) ($1.1) $3.3
ACO savings available for distribution $0.0 $0.0 $0.0 $0.0 $3.3
ACO savings distribution — hospital $0.0 $0.0 $0.0 $0.0 $1.7
OVERALL NET IMPACT OF THE ACO ON THE HOSPITAL (MILLIONS)
2012 2013 2014 2015 Close-Out 2012-Close-Out
Impact on hospital operating income ($0.5) ($0.4) ($0.5) ($0.2) N/A ($1.6)
Hospital share of savings $0.0 $0.0 $0.0 $0.0 $1.7 $1.7
Net impact on hospital ($0.5) ($0.4) ($0.5) ($0.2) $1.7 $0.0
WEB EXTRA
IMPACT OF ADMISSION CHANGES ON HOSPITAL SURPLUS/DEFICIT (MILLIONS)
2012 2013 2014 2015 2012-2015*
Reduction in hospital revenue for ACO member admissions ($0.9) ($0.7) ($0.8) ($0.4) ($2.7)
Variable costs for ACO member admissions (40% of revenues)
$0.3 $0.3 $0.3 $0.2 $1.1
Impact on hospital operating income before shared savings ($0.5) ($0.4) ($0.5) ($0.2) ($1.6)
* Numbers do not precisely add up to the total for 2012-15 due to rounding.
hfma.org JANUARY 2012 7
ACO beneficiaries to seek care within the ACO will
also have to be considered.
However, if the ACO fails to increase market share
incrementally, the hospital will experience significant
losses—up to $15 million in our sensitivity analysis. For
this reason, as a critical strategic consideration, the
hospital will require the ACO’s assistance in backfill-
ing for decreased utilization.
In sum, according to our baseline scenario, an
ACO that generates $34 million in savings leaves
$20 million in CMS’s hands and receives $14 million
from CMS, operating at a profit of $3 million. The
affiliated hospital can break even only if its share of
ACO admissions is increased significantly.
It should be noted, however, that a deeper analysis
of this financial model might well yield more positive
results for the hospital. In particular, the types of
admissions that the ACO initiative would likely
help to avoid would most likely be medical
admissions associated with better management
of chronic conditions. Such admissions tend to
have significantly lower profitability for hospitals,
so losing them would not as harmful as losing the
average admission, as we assumed in our baseline
scenario.
Analysis of ScenariosIn addition, the scenario described previously, it is
useful to consider a variety of other scenarios using
this baseline ACO to assess the impact of various
factors on the hospital, such as the size of the ACO,
amount of savings generated, ACO operating costs,
quality scores, hospital share of ACO admissions, and
selection of Track 2 instead of Track 1.
If, for example, the ACO has 40,000 members
(one-third more than our baseline), ACO net income
and, therefore, the savings to distribute nearly double.
However, under such a scenario, hospital operations
would be more severely affected, as managing the
care of a larger population would further reduce
hospital utilization.
The size of the ACO also determines the MSR; more
members mean a lower MSR, down to a minimum of
2 percent for ACOs of 60,000 members or more.
For ACOs that generate savings that just meet or fail
HOSPITAL DISTRIBUTION OF ACO SHARED SAVINGS (MILLIONS)
2012 2013 2014 2015 Close-Out
Cumulative cash surplus (deficit) of ACO ($2.3) ($1.8) ($2.6) ($1.1) $3.3
ACO savings available for distribution $0.0 $0.0 $0.0 $0.0 $3.3
ACO savings distribution — hospital $0.0 $0.0 $0.0 $0.0 $1.7
OVERALL NET IMPACT OF THE ACO ON THE HOSPITAL (MILLIONS)
2012 2013 2014 2015 Close-Out 2012-Close-Out
Impact on hospital operating income ($0.5) ($0.4) ($0.5) ($0.2) N/A ($1.6)
Hospital share of savings $0.0 $0.0 $0.0 $0.0 $1.7 $1.7
Net impact on hospital ($0.5) ($0.4) ($0.5) ($0.2) $1.7 $0.0
WEB EXTRA
IMPACT OF ADMISSION CHANGES ON HOSPITAL SURPLUS/DEFICIT (MILLIONS)
2012 2013 2014 2015 2012-2015*
Reduction in hospital revenue for ACO member admissions ($0.9) ($0.7) ($0.8) ($0.4) ($2.7)
Variable costs for ACO member admissions (40% of revenues)
$0.3 $0.3 $0.3 $0.2 $1.1
Impact on hospital operating income before shared savings ($0.5) ($0.4) ($0.5) ($0.2) ($1.6)
* Numbers do not precisely add up to the total for 2012-15 due to rounding.
(continued from page 23)
(continued on page 25)
hfma.org JANUARY 2012 7
ACO beneficiaries to seek care within the ACO will
also have to be considered.
However, if the ACO fails to increase market share
incrementally, the hospital will experience significant
losses—up to $15 million in our sensitivity analysis. For
this reason, as a critical strategic consideration, the
hospital will require the ACO’s assistance in backfill-
ing for decreased utilization.
In sum, according to our baseline scenario, an
ACO that generates $34 million in savings leaves
$20 million in CMS’s hands and receives $14 million
from CMS, operating at a profit of $3 million. The
affiliated hospital can break even only if its share of
ACO admissions is increased significantly.
It should be noted, however, that a deeper analysis
of this financial model might well yield more positive
results for the hospital. In particular, the types of
admissions that the ACO initiative would likely
help to avoid would most likely be medical
admissions associated with better management
of chronic conditions. Such admissions tend to
have significantly lower profitability for hospitals,
so losing them would not as harmful as losing the
average admission, as we assumed in our baseline
scenario.
Analysis of ScenariosIn addition, the scenario described previously, it is
useful to consider a variety of other scenarios using
this baseline ACO to assess the impact of various
factors on the hospital, such as the size of the ACO,
amount of savings generated, ACO operating costs,
quality scores, hospital share of ACO admissions, and
selection of Track 2 instead of Track 1.
If, for example, the ACO has 40,000 members
(one-third more than our baseline), ACO net income
and, therefore, the savings to distribute nearly double.
However, under such a scenario, hospital operations
would be more severely affected, as managing the
care of a larger population would further reduce
hospital utilization.
The size of the ACO also determines the MSR; more
members mean a lower MSR, down to a minimum of
2 percent for ACOs of 60,000 members or more.
For ACOs that generate savings that just meet or fail
HOSPITAL DISTRIBUTION OF ACO SHARED SAVINGS (MILLIONS)
2012 2013 2014 2015 Close-Out
Cumulative cash surplus (deficit) of ACO ($2.3) ($1.8) ($2.6) ($1.1) $3.3
ACO savings available for distribution $0.0 $0.0 $0.0 $0.0 $3.3
ACO savings distribution — hospital $0.0 $0.0 $0.0 $0.0 $1.7
OVERALL NET IMPACT OF THE ACO ON THE HOSPITAL (MILLIONS)
2012 2013 2014 2015 Close-Out 2012-Close-Out
Impact on hospital operating income ($0.5) ($0.4) ($0.5) ($0.2) N/A ($1.6)
Hospital share of savings $0.0 $0.0 $0.0 $0.0 $1.7 $1.7
Net impact on hospital ($0.5) ($0.4) ($0.5) ($0.2) $1.7 $0.0
WEB EXTRA
IMPACT OF ADMISSION CHANGES ON HOSPITAL SURPLUS/DEFICIT (MILLIONS)
2012 2013 2014 2015 2012-2015*
Reduction in hospital revenue for ACO member admissions ($0.9) ($0.7) ($0.8) ($0.4) ($2.7)
Variable costs for ACO member admissions (40% of revenues)
$0.3 $0.3 $0.3 $0.2 $1.1
Impact on hospital operating income before shared savings ($0.5) ($0.4) ($0.5) ($0.2) ($1.6)
* Numbers do not precisely add up to the total for 2012-15 due to rounding.
MM ISSUE 5.cs5.5.indd 24 7/10/12 2:01 PM
ENTERPRISEPERFORMANCEMANAGEMENT
Issue 5 25
In short, under our assumptions, an increase in theshare of ACO member admissions paired with theshared savings received by the hospital would producea neutral impact on the hospital. To achieve thisresult, it is necessary to increase the share of ACOmember admissions occurring at the sponsoring hospi-tal from 70 percent to 77 percent over the contractperiod. The hospital’s ability to achieve this increase in market share will depend on several factors, includ-ing the current level of leakage and the degree of split-ting among participating physicians. The willingness of ACO beneficiaries to seek care within the ACO will also have to be considered.
However, if the ACO fails to increase market share incrementally, the hospital will experience significant losses—up to $15 million in our sensitivity analysis. For this reason, as a critical strategic consideration, the hospital will require the ACO’s assistance in backfill-ing for decreased utilization.
In sum, according to our baseline scenario, anACO that generates $34 million in savings leaves$20 million in CMS’s hands and receives $14 million from CMS, operating at a profit of $3 million. The affiliated hospital can break even only if its share of ACO admissions is increased significantly.
It should be noted, however, that a deeper analysisof this financial model might well yield more positiveresults for the hospital. In particular, the types of admissions that the ACO initiative would likely help to avoid would most likely be medical admissions associated with better management of chronic condi-tions. Such admissions tend to have significantly lower profitability for hospitals, so losing them would not as harmful as losing the average admission, as we assumed in our baseline scenario.
Analysis of ScenariosIn addition, the scenario described previously, it isuseful to consider a variety of other scenarios using this baseline ACO to assess the impact of various factors on the hospital, such as the size of the ACO, amount of savings generated, ACO operating costs, quality scores, hospital share of ACO admissions, and selec-tion of Track 2 instead of Track 1.
If, for example, the ACO has 40,000 members (one-third more than our baseline), ACO net income and,
therefore, the savings to distribute nearly double. However, under such a scenario, hospital operations would be more severely affected, as managing the care of a larger population would further reduce hospital utilization.
The size of the ACO also determines the MSR; more members mean a lower MSR, down to a minimum of2 percent for ACOs of 60,000 members or more. For ACOs that generate savings that just meet or fail to
meet the MSR, having a slightly larger membership can mean the difference between sharing in savings with CMS or have no revenue.
ACOs that do not generate meaningful levels of savings will have negative net incomes, because their operating costs will not be balanced by any substantial revenue in the form of shared savings. An ACO that does not meet the MSR will need to bear the full load of its operating costs. The impact on the hospital of an underperforming ACO may be positive though, asutilization may remain relatively constant and the share of ACO member admissions could increase.
ACOs started by hospitals with limited care manage-ment experience and minimal accountable care infra-structure will have higher start-up costs. These ACOs will, therefore, take longer to generate positive ACO operating results. In the first contract period, there may be no shared savings to distribute to the hospi-tal or physicians. Start-up costs are one-time expenses though and should not be given to much weight in the strategic decision on whether to become an ACO.
A hospital that cannot increase its share of ACO member admissions faces serious losses.
(continued from page 24)
(continued on page 26)
MM ISSUE 5.cs5.5.indd 25 7/10/12 2:01 PM
ENTERPRISEPERFORMANCEMANAGEMENT
26 Mass Media
An ACO that scores lower on quality measures will receive less back from CMS in shared savings. The erosion of shared savings due to the ACO can be signif-icant. This diminished revenue may result in operating an ACO at a loss. The ACO, therefore, may not have shared savings to distribute to the hospital or physi-cians, and the hospital will not be able to mitigate the losses it faces due to decreased utilization.
The overall impact of an ACO on the sponsor hospi-tal is most sensitive to the share of ACO admissions that the hospital captures. If a hospital cannot increase its share of ACO member admissions (e.g., admissions remain constant at about 70 percent), it faces a serious losses; holding all other factors in the baseline model constant, losses would be over $12 million. On the
other hand, a hospital that can boost its share of admis-sions by an additional 3 percent (up to 80 percent
share) would generate $3.5 million in additional reve-nue. These large swings in hospital impact for relatively small variations in share of ACO member admissions underscore the importance of capturing a greater share of ACO member admissions.
The Track 2 opportunity may be attractive to ACOs that are confident they can generate savings. The more generous sharing and MSR set at 2 percent, regardless of ACO size, may outweigh the risk of sharing in losses in any years where expenditures exceed benchmarks. These ACOs would, nonetheless, be wise to reinsure against this risk.
8 JANUARY 2012 healthcare financial management
SUMMARY OF FINANCIAL RESULTS (3.5-YEAR CONTRACT PERIOD)
CMS Calculation of ACO Shared Savings
ACO Revenue Statement
Net Impact on Hospital Revenue Statement
Revenue “Revenue” = Medicare benchmark spending for
ACO population$927 million
Shared savings$13.5 million
Patient services-$2.7 million
plusShare of ACO surplus/deficit$1.7 million
Expense “Expense” = total spending for ACO
population (hospital/physician/other)$893.2 million
ACO operations$10.2 million
Hospital operations$1.1 million
Surplus/Deficit Shared Savings$33.8 million
ACO surplus/deficit$3.3 million
Hospital surplus/deficit
$0
Physicians$1.7 million
CMS$20.3 million
to meet the MSR, having a slightly larger membership
can mean the difference between sharing in savings
with CMS or have no revenue.
ACOs that do not generate meaningful levels of
savings will have negative net incomes, because their
operating costs will not be balanced by any substantial
revenue in the form of shared savings. An ACO that
does not meet the MSR will need to bear the full load
of its operating costs. The impact on the hospital of an
underperforming ACO may be positive though, as
utilization may remain relatively constant and the
share of ACO member admissions could increase.
ACOs started by hospitals with limited care manage-
ment experience and minimal accountable care infra-
structure will have higher start-up costs. These ACOs
will, therefore, take longer to generate positive ACO
operating results. In the first contract period, there
may be no shared savings to distribute to the hospital
or physicians. Start-up costs are one-time expenses
though and should not be given to much weight in the
strategic decision on whether to become an ACO.
An ACO that scores lower on quality measures will
receive less back from CMS in shared savings. The
erosion of shared savings due to the ACO can be
significant. This diminished revenue may result in
operating an ACO at a loss. The ACO, therefore, may
not have shared savings to distribute to the hospital or
physicians, and the hospital will not be able to mitigate
the losses it faces due to decreased utilization.
The overall impact of an ACO on the sponsor hospital
is most sensitive to the share of ACO admissions that
the hospital captures. If a hospital cannot increase its
share of ACO member admissions (e.g., admissions
remain constant at about 70 percent), it faces a serious
losses; holding all other factors in the baseline model
constant, losses would be over $12 million. On the
other hand, a hospital that can boost its share of admis-
sions by an additional 3 percent (up to 80 percent
WEB EXTRA
A hospital that cannot increase its share of ACO member admissions faces serious losses.
(continued from page 25)
(continued on page 27)
MM ISSUE 5.cs5.5.indd 26 7/10/12 2:01 PM
Idette Elizondois a manager, DGA Partners, BalaCynwyd, Pa. ([email protected]).
hfma.org JANUARY 2012 9
share) would generate $3.5 million in additional
revenue. These large swings in hospital impact for
relatively small variations in share of ACO member
admissions underscore the importance of capturing
a greater share of ACO member admissions.
The Track 2 opportunity may be attractive to ACOs
that are confident they can generate savings. The
more generous sharing and MSR set at 2 percent,
regardless of ACO size, may outweigh the risk of
sharing in losses in any years where expenditures
exceed benchmarks. These ACOs would,
nonetheless, be wise to reinsure against this risk.
Final ThoughtsGiven the financial picture, the question about
whether to establish an ACO is essentially a strategic
decision. Hospitals that succeed as ACO participants
will reduce inpatient utilization. Shared savings will
not be sufficient to make up for the losses, so it is
essential to build market share. However, if a hospital
does not create an ACO and its competitors do, the
hospital may lose share to those competitors anyway.
If one believes that Medicare will continue to squeeze
fee-for-service payments and reward providers that
manage population health, then forming an ACO may
be a helpful developmental step. A lot will depend on
a hospital’s competitive market, physician relations,
and related strategies with commercial payers and
insurance exchanges.
A hospital that succeeds with an ACO will not make
a lot of money from the ACO directly, but it may
succeed in transforming its organization into a clini-
cally integrated provider of high-quality care with a
strongly aligned medical staff who can provide high-
value, low-cost care not only to governmental but also
to commercial payers.
Remember, however, that the first contract period is
just the beginning. After the initial three- to three-
and-a-half-year contract period, it will be time to
consider renewal. The ACO will need to achieve a
new level of savings to succeed against tighter bench-
marks, and there will be both upside and downside
risk in the renewal period. It is therefore appropriate
to consider related alternative strategies, such as
Medicare Advantage and Medicare Select.
John M. Harris
is a principal, DGA Partners, Bala
Cynwyd, Pa., and a member of HFMA’s
Metropolitan Philadelphia Chapter
Idette Elizondo
is a manager, DGA Partners, Bala
Cynwyd, Pa. (ielizondo@
dgapartners.com).
Molly Johnson
is a senior associate, DGA Partners, Bala
Cynwyd, Pa., and a member of HFMA’s
Metropolitan New York Chapter
WEB EXTRA
About the authors
If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step.
hfma.org JANUARY 2012 9
share) would generate $3.5 million in additional
revenue. These large swings in hospital impact for
relatively small variations in share of ACO member
admissions underscore the importance of capturing
a greater share of ACO member admissions.
The Track 2 opportunity may be attractive to ACOs
that are confident they can generate savings. The
more generous sharing and MSR set at 2 percent,
regardless of ACO size, may outweigh the risk of
sharing in losses in any years where expenditures
exceed benchmarks. These ACOs would,
nonetheless, be wise to reinsure against this risk.
Final ThoughtsGiven the financial picture, the question about
whether to establish an ACO is essentially a strategic
decision. Hospitals that succeed as ACO participants
will reduce inpatient utilization. Shared savings will
not be sufficient to make up for the losses, so it is
essential to build market share. However, if a hospital
does not create an ACO and its competitors do, the
hospital may lose share to those competitors anyway.
If one believes that Medicare will continue to squeeze
fee-for-service payments and reward providers that
manage population health, then forming an ACO may
be a helpful developmental step. A lot will depend on
a hospital’s competitive market, physician relations,
and related strategies with commercial payers and
insurance exchanges.
A hospital that succeeds with an ACO will not make
a lot of money from the ACO directly, but it may
succeed in transforming its organization into a clini-
cally integrated provider of high-quality care with a
strongly aligned medical staff who can provide high-
value, low-cost care not only to governmental but also
to commercial payers.
Remember, however, that the first contract period is
just the beginning. After the initial three- to three-
and-a-half-year contract period, it will be time to
consider renewal. The ACO will need to achieve a
new level of savings to succeed against tighter bench-
marks, and there will be both upside and downside
risk in the renewal period. It is therefore appropriate
to consider related alternative strategies, such as
Medicare Advantage and Medicare Select.
John M. Harris
is a principal, DGA Partners, Bala
Cynwyd, Pa., and a member of HFMA’s
Metropolitan Philadelphia Chapter
Idette Elizondo
is a manager, DGA Partners, Bala
Cynwyd, Pa. (ielizondo@
dgapartners.com).
Molly Johnson
is a senior associate, DGA Partners, Bala
Cynwyd, Pa., and a member of HFMA’s
Metropolitan New York Chapter
WEB EXTRA
About the authors
If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step.
Molly Johnsonis a senior associate, DGA Partners, Bala Cynwyd, Pa., and amember of HFMA’s Metropolitan New York Chapter ([email protected]).
John M. Harrisis a principal, DGA Partners, Bala Cynwyd, Pa., and a member of HFMA’s Metropolitan Philadelphia Chapter ([email protected]).
hfma.org JANUARY 2012 9
share) would generate $3.5 million in additional
revenue. These large swings in hospital impact for
relatively small variations in share of ACO member
admissions underscore the importance of capturing
a greater share of ACO member admissions.
The Track 2 opportunity may be attractive to ACOs
that are confident they can generate savings. The
more generous sharing and MSR set at 2 percent,
regardless of ACO size, may outweigh the risk of
sharing in losses in any years where expenditures
exceed benchmarks. These ACOs would,
nonetheless, be wise to reinsure against this risk.
Final ThoughtsGiven the financial picture, the question about
whether to establish an ACO is essentially a strategic
decision. Hospitals that succeed as ACO participants
will reduce inpatient utilization. Shared savings will
not be sufficient to make up for the losses, so it is
essential to build market share. However, if a hospital
does not create an ACO and its competitors do, the
hospital may lose share to those competitors anyway.
If one believes that Medicare will continue to squeeze
fee-for-service payments and reward providers that
manage population health, then forming an ACO may
be a helpful developmental step. A lot will depend on
a hospital’s competitive market, physician relations,
and related strategies with commercial payers and
insurance exchanges.
A hospital that succeeds with an ACO will not make
a lot of money from the ACO directly, but it may
succeed in transforming its organization into a clini-
cally integrated provider of high-quality care with a
strongly aligned medical staff who can provide high-
value, low-cost care not only to governmental but also
to commercial payers.
Remember, however, that the first contract period is
just the beginning. After the initial three- to three-
and-a-half-year contract period, it will be time to
consider renewal. The ACO will need to achieve a
new level of savings to succeed against tighter bench-
marks, and there will be both upside and downside
risk in the renewal period. It is therefore appropriate
to consider related alternative strategies, such as
Medicare Advantage and Medicare Select.
John M. Harris
is a principal, DGA Partners, Bala
Cynwyd, Pa., and a member of HFMA’s
Metropolitan Philadelphia Chapter
Idette Elizondo
is a manager, DGA Partners, Bala
Cynwyd, Pa. (ielizondo@
dgapartners.com).
Molly Johnson
is a senior associate, DGA Partners, Bala
Cynwyd, Pa., and a member of HFMA’s
Metropolitan New York Chapter
WEB EXTRA
About the authors
If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step.
ENTERPRISEPERFORMANCEMANAGEMENT
Issue 5 27
Final ThoughtsGiven the financial picture, the question about whether to establish an ACO is essentially a strategic decision. Hospitals that succeed as ACO participants will reduce inpatient utilization. Shared savings will not be suffi-cient to make up for the losses, so it is essential to build market share. However, if a hospital does not create an ACO and its competitors do, the hospital may lose share to those competitors anyway.
If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step. A lot will depend on a hospital’s competitive market, physician relations, and related strategies with commercial payers and insur-ance exchanges.
A hospital that succeeds with an ACO will not make a lot of money from the ACO directly, but it may succeed in transforming its organization into a clini-cally integrated provider of high-quality care with a strongly aligned medical staff who can provide high-value, low-cost care not only to governmental but also to commercial payers.
Remember, however, that the first contract period is just the beginning. After the initial three- to three-and-a-half-year contract period, it will be time to consider renewal. The ACO will need to achieve a new
level of savings to succeed against tighter benchmarks, and there will be both upside and downside risk in the renewal period. It is therefore appropriate to consider related alternative strategies, such as Medicare Advan-tage and Medicare Select. ❑
If one believes that Medicare will continue to squeeze fee-for-service payments and reward providers that manage population health, then forming an ACO may be a helpful developmental step.
About the authors
(continued from page 26)
MM ISSUE 5.cs5.5.indd 27 7/10/12 2:01 PM
presentation focused on managing and monitoring progress with risk based contracts and how to translate this into finance statements and budgeting. A presentation on orthopedic procedures and bundled payments was led by David C. Ayers, MD, Chair of Orthopedics and Physical Rehabilitation at UMass Memorial Medical Center. Joining Dr. Ayers was Paul Lofrumento, Sr. Director of MSK, Jeanne Shirshac, Director of Government Payers and Phil Moriarty, Sr. Director of Decision Support -all from UMass Memorial Medical Center.
Following a luncheon, Karen Wartenberg,
Panelists Phil Moriarty, Paul Lofrumento, David C. Ayers, MD, and Jeanne Shirshac discuss the work the MSK (Musculoskeletal) Center of Excellence has done regarding bundled payments along with the assistance of Navigant.
(continued on page 29)
Panelists Phil Moriarty, Phil Moriarty, Phil Paul Lofrumento, Paul Lofrumento, Paul David C. David C. David Ayers, MD, and Jeanne and Jeanne and Shirshac Jeanne Shirshac Jeanne discuss Shirshac discuss Shirshac the work the work the the MSK the MSK the
Pho
tos c
ourt
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of T
ony
Slab
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ealth
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eet
(continued from page 5)
Director of Financial Analysis and Budget from H. Lee Moffitt Cancer Center in Tampa Florida and Debra Miller, Vice President at Kaufman Hall presented rolling forecasts and making the transition away from a traditional budget process and some of the pros and cons of this change.
The end of the day was rounded out by a panel discussion on the changes health reform is having on the industry. This panel was comprised of James L. Heffernan, Chief Financial Officer and Treasurer at Massachusetts General
MM ISSUE 5.cs5.5.indd 28 7/10/12 2:01 PM
Over 160 attendees gathered for the day’s presentations.
(continued from page 28)
Over 160Over 160Over attendees 160 attendees 160 gathered for gathered for gathered the for the for day’s the day’s the presentations.
Physicians Organization, Charlene Underwood, Senior Director of Government and Industry Affairs with Siemens Healthcare and Todd Whitecross, Director of Commerical Contracting, Tufts Health Plan.
A special thanks to the EPM program coordinators, Roger Price and Steve Saudek, Board Liaison, Rose Rotty, and all of the dedicated EPM members that worked so diligently in putting together this annual meeting.
Speakers Todd Whitecross, Tufts Health Plan, and Phil Moriarty, Umass Memorial Medical Center (UMMMC). Speakers Todd Whitecross, Todd Whitecross, Todd Tufts Health Plan, and Phil and Phil and Moriarty, Phil Moriarty, Phil Umass
MM ISSUE 5.cs5.5.indd 29 7/10/12 2:01 PM
The following members recently joined the Massachusetts-Rhode Island Chapter of HFMA. We welcome you to the Chapter and encourage you to take advantage of the many professional development, networking and information resources available to you at HFMA. Other HFMA members are a terrific resource for your everyday professional challenges – we encourage all members, current and new, to get involved with HFMA committees and social activities. And… use the Membership Directory – it’s a great resource! We value your membership, so please send us feedback or questions on your HFMA experiences to [email protected].
New Massachusetts-Rhode Island Chapter Members April 1, 2012 – May 31, 2012
Lisa AdamczykMiriam Hospital
Brian W. AndersonSouth County Hospital
Michael A. BeaulieuSouth County Hospital
Diane Carroll Partners HealthCare System Inc.
Paula CommendatoreCare New England
Carlos W. CubiaCovidien
Elisabeth L. Daley
Clifford T. DesmondShriners Hospital for Children
Neeta DhawanPricewaterhouseCoopers
Michael Feinberg
Brenda M. FoleyCape Cod Healthcare
Michael GelbwachsExperian Healthcare
Timothy HallCBCS – Credit Bureau Collection Services
Erin HerbstObjective Health, A McKinsey Solution
Ellen JanosMintz Levin
John P. KirkLease Portfolio Recover Services, LLC
Richard LangeBeth Israel Deaconess Physician Org., LLC
Elizabeth LymanOptumInsight
Marcia J. MoranReliant Medical Group
30 Mass Media
(continued on page 31)
Welcome New Members!
MM ISSUE 5.cs5.5.indd 30 7/11/12 1:26 PM
(continued from page 30)
Issue 5 31
Robert MuszynskiCDMI, LLC
Mark NovotnyCooley Dickinson Hospital
Mark L. PattiPartners Healthcare
Steve PicaSurgi-Care
Eileen Reid-MccuskerDana-Farber Cancer Institute
Frederick RomanoHealth Management Associates, Inc.
Mark A. RukavinaCommunity Health Advisors, LLC
Mark SiegelThe Outsource Group
Pam TaylorFTI Consulting
Susan ThibeaultPartners Healthcare System, Inc.
Peter UnderhillPartners Healthcare System, Inc.
Jenny YanPartners Healthcare System, Inc.
Welcome New Members! (continued from page 30)
Better fi nancial performance. Better patient care. Better results.
� Online budget information � Revenue cycle management � Payer mix analysis � Clinical and financial dashboards � Planning and forecasting
informationbuilders.com
We help healthcare organizations make evidence-based decisions about fi nancial performance so they can focus on improving care and the bottom line.
We’re here to help you get better.
Better fi nancial performance.
MM ISSUE 5.cs5.5.indd 31 7/10/12 2:01 PM
Date Event Location Coordinator(s)
08-09-2012 Annual Golf Tournament Juniper Hills Tony Slabacheski Golf Coursel 09-14-2012 New to Health Simmons College Judy Johnson & Care Seminar Boston, MA Karen Hart
10-19-2012 Accounting & Regulatory Sheraton Ferncroft Update Framingham, MA Sheila Harrington
12-07-2012 Compliance Update Doubletree Hotel Christophe Gingras, CHFP Westborough, MA and Matthew Putvinski
01-18-2013 Revenue Cycle Meeting Gillette Stadium Angela Confoey, Amy Ryba, & Foxboro, MA William Wyman, FHFMA
02-15-2013 Enterprise Performance Doubletree Hote Roger Price & Westborough, MA Stephen Saudek
03-15-2013 Physician Practice Management/ Doubletree Hote Nan Jones & Ambulatory Care Meeting Westborough, MAs Deb Schoenthaler
05-15-2013 – Region 1 Conference Mohegan Sun Region 105-17-2013 Uncasville, CT
06-07-2013 Managed Care Programt Doubletree Hotel James Donohue, MBA, Westborough, MA Karen Rosania, CHFP & Dan Willi
HFMA Massachusetts- Rhode Island Chapter 411 Waverley Oaks Road, Suite 331B Waltham, MA 02452
MASS COMMUNICATIONS, INC. VARIOUS INDICIA’S / PERMIT IMPRINTS
USE THIS INDICIA FOR INTERNATIONAL MAIL
USE THIS INDICIA FOR STRAIGHT FIRST CLASS MAIL – FULL RATE
USE THIS INDICIA FOR PRESORT FIRST CLASS MAIL
USE THIS INDICIA FOR PRESORT STANDARD BULK
USE THIS INDICIA FOR NON-PROFIT
USE THIS INDICIA FOR PRESORT BOUND PRINTED MATTER
OR THIS INDICIA CAN BE USED FOR PRESORT BOUND PRINTED MATTER INSTEAD…EITHER ONE IS ACCEPTABLE BY THE USPS.
FIRST-CLASS MAIL INTERNATIONAL U.S. POSTAGE
PAIDLEOMINSTER, MA
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PAIDLEOMINSTER, MA
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PRESORTEDFIRST-CLASS MAIL
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Date Event Location Coordinator(s)Coordinator(s)
08-09-2012 Annual Golf Tournament Juniper Hills Tony SlabacheskiGolf Coursel
09-14-2012 New to Health Simmons College Judy Johnson &Care Seminar Boston, MA Karen Hart
10-19-2012 Accounting & Regulatory Sheraton FerncroftUpdate Framingham, MA Sheila Harrington
12-07-2012 Compliance Update Doubletree Hotel Christophe Gingras, CHFPWestborough, MA and Matthew Putvinski
01-18-2013 Revenue Cycle Meeting Gillette Stadium Angela Confoey, Amy Ryba, &Foxboro, MA William Wyman, FHFMA
02-15-2013 Enterprise Performance Doubletree Hote Roger Price &Westborough, MA Stephen Saudek
03-15-2013 Physician Practice Management/ Doubletree Hote Nan Jones &Ambulatory Care Meeting Westborough, MAs Deb Schoenthaler
05-15-2013 – Region 1 Conference Mohegan Sun Region 105-17-2013 Uncasville, CT
06-07-2013 Managed Care Programt Doubletree Hotel James Donohue, MBA,Westborough, MA Karen Rosania, CHFP
& Dan Willi
E d u c a t i o n / P r og r a m A d m i n i s t r a t i o n C o m m i t t e e , C o - C h a i rs : C a t h e r i n e Ro b i n s o n - S k e e n , c a t hy. s k e e n @ ki n d r e d h e a l t h c a r e. c o m & Roge r B o u ch e r, r oge r. c. b o u ch e r @ b a m l . c o m
NOTE: Please keep in mind that the themes listed for the programs are general. The programs themselves address current issues pertaining to these themes.
P r o g r a m & S p e c i a l E v e n t S c h e d u l e
2011
-201
2
MM ISSUE 5.cs5.5.indd 32 7/11/12 1:26 PM