Healthcare reform has had a dramatic impact on hospital reimbursement. While millions of Americans are now insured under the Affordable Care Act, high-deductible health plans can leave patients cash-strapped after expensive episodes of care. Sometimes, patients can't pay for the services they receive, pushing up bad debt at hospitals. At the same time, hospitals are dealing with lower reimbursements and a shift from inpatient to outpatient care, leaving some with property and beds that are no longer financially productive.
Take Community Health Systems for example. Burdened with $15 billion in debt , the Franklin, TN-based hospital chain sold a four-hospital joint venture and spun off 38 hospitals into a separate entity, Quorum Health Corp., earlier this year. Recently, the system inked deals to sell an additional 17 hospitals.
According to Patrick Pilch, head of BDO Consulting’s healthcare advisory practice, many hospitals and health systems don’t have a complete handle on what their costs of care are and they’re losing money as a result. “Understanding your costs of care as well as your cost of capital is imperative,” he tells Healthcare Dive. “Then align that to a future strategy. That’s where you’re going to pull your way out of debt.”
Hospitals should look at their assets, business plan, market and supply chain and then see how those align with their capital strategy, Pilch says. With interest rates expected to rise, non-investment grade hospitals will have a harder time getting capital. “If you have a lot of capital that’s not performing well, you’re in a bit of a state right now,” he adds.
Here are nine ways hospitals can work on debt:
1. Understand your costs of care. Hospitals make money taking care of patients, so their debt needs to be clinically proportionate to the types of services they provide, Pilch says. If a hospital has large surgery needs, it will require lots of operating rooms, which are expensive to implement and maintain. If revenues aren’t hit, the hospital can’t make payments and is likely to default on its bonds. Make sure the capital structure is appropriate to the model of care needed or the risk profile of the patients the hospital treats.
2. Improve ICD-10 coding on claims forms. Not coding appropriately and not coding for the proper amount of time the doctor sees the patient or for interactive effects can cause reimbursement rates to plummet, says Bill Bithoney, a managing director of BDO and chief physician executive of its healthcare advisory practice. For example, coding for malnutrition in a patient with HIV suggests the patient needs intense intervention and not standard care.
Training physicians to properly code for concomitant conditions and effects is critical to improving a hospital’s bottom line, he says.
3. Renegotiate rates with insurers. Larger, more prestigious hospitals and health systems are able to extract much higher reimbursement from private payers than less prestigious ones, even in the same geographic area. Hospitals can increase volume and revenues by convincing health plans to increase rates and then direct patients toward the less-expensive hospital.
4. Increase efficiencies and productivity. Another thing hospitals can do is make sure nurse practitioners, nurse, LPNs, and other clinicians are operating at the top of their license. For instance, nurse practitioners can perform many of the tasks a physician does, but at a lower cost of care.
Hospitals can also increase efficiencies by embedding EHR systems with pharmacy protocols and clinical guidelines that drive best practice, Bithoney says.
“The cuts that we’ve seen in reimbursement lately make it incumbent on health systems in general to improve their efficiencies,” he says, adding “0.8% per year over the next five years would be a minimum of what people are going to have to do just to stay level.”
5. Manage risk. This is something that all hospitals are having to do under the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), but it is also a good way to reduce costs and knock out debt. Focusing on high-risk patients to reduce costly inpatient stays can have a rapid return on the bottom line. Coupling that with narrow networks of high-quality, low-cost physicians may increase referrals from health plans and enhance reimbursement rates.
6. Refinance or restructure to cut debt. Hospitals can also work with capital market organizations to see if there are ways to refinance or restructure to reduce the debt burden, says Rick Gundling, SVP for healthcare financial practices at the Healthcare Financial Management Association.
When deciding to finance a capital project, hospitals need to determine if they have enough internal reserves to fund it or if they need to borrow and pay that back. If interest rates are low, it may be advantageous to take on debt, Gundling says.
7. Divest property. “Many hospitals are stuck with tons of inpatient real estate that is becoming less and less utilized and less profitable,” says Bithoney. “Converting some of that into cash, monetizing that, and then buying or building places where patients are going to start to grow like ambulatory surgery centers and skilled nursing facilities is going to be quite salutary.”
That’s what Kindred Healthcare did when it exited the skilled nursing business to expand into home health. The health services firm, which also operates hospitals, reported a third quarter loss of $685.6 million. Divesting its skilled nursing business is expected to lower its yearly rent obligations by $90 million and annual capital expenditures by $30 million, not to mention millions of dollars in corporate and divisional overhead savings.
8. Reduce ‘bad’ debt. To increase the odds of getting paid, some hospitals are training patient access staff to identify patients who may default on payment and putting in point-of-service payment plans. Some hospitals have also set up space to enroll uninsured patients in Medicaid, Bithoney says.
9. Join a health system. “There’s a huge amount of efficiencies that comes from having health systems, as opposed to being a single hospital,” Bithoney says. “You have the finances of the whole system, you have the credit worthiness of the whole system behind you and lower interest rates are available.”