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Healthcare providers face $42 billion in cuts in 2018 under Medicare’s traditional fee-for-service program. Those payment rate reductions, which were put in place by the Affordable Care Act, are scheduled to cut deeper with each year—from $53 billion in 2019 to $86 billion in 2022.

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No matter what happens with “repeal and replace” or who controls Congress and the White House, the efforts to reign in federal healthcare spending will continue. We simply have no other option, when you consider that Medicare and Medicaid program costs are on track to exceed 8% of our national GDP by 2020.

That means CMS will continue to pursue its goal to shift more payments to risk-based models. By 2018 (just over six months away), at least 50% of Medicare payments will be tied to risk-based models. Perhaps even more significant, 90% of FFS payments will be tied to quality through programs such as the Hospital-Acquired Condition Reduction Program, the Hospital Readmissions Reduction Program and the Merit-Based Incentive Payment System.

A Sustainable Medicare Risk Strategy

The number of Medicare patients is on the rise and will comprise more than half of the average inpatient case mix by 2022. These demographic and economic trends make it imperative for nearly every U.S. healthcare provider to participate in Medicare risk-based payment models, which hold the provider accountable for achieving financial and clinical goals. Practices that choose to ignore this imperative will start seeing deep hits to their revenue within the next few years, if they haven’t already.

A sustainable Medicare risk strategy begins with the following key steps:

  1. Adopt activity-based cost accounting. Most healthcare practices have an inaccurate view of costs at the patient level. High-level cost-to-charge ratios illuminate costs per payer, but they are not a true representation of costs for individual patients or even categories of patients. This lack of understanding of the true costs of treating patients puts your organization at a disadvantage when negotiating contracts—whether they are fee-for-service or value-based. Healthcare organizations that implement activity-based costing software quickly see significant return on that investment by enabling them to price more competitively and protect their market share.
  2. Radically reduce your cost structure. In addition to pricing flexibility, reducing the cost structure better positions your organization for participation in models that entail downside risk, otherwise known as two-sided risk models. In one-sided risk models, participants are largely made whole for any payments that CMS withholds. But in Next Gen ACOs and other two-sided risk models, participants absorb any costs above certain thresholds. This is a sea change for healthcare providers, who for the most part have been insulated from market forces of supply and demand.
  3. Pace your transition to Medicare risk. Don’t jump in to any risk-based model without understanding the financial and operational implications on the rest of your practice. Quantify your practice’s Medicare revenue streams—both traditional and Medicare Advantage or managed care —and understand how much of a hit you can afford to take on those sources of income. Then begin assessing the ROI of participating in programs such as Medicare Shared Savings Programs, the Bundled Payments for Care Improvement Initiative (BPCI), and Patient-Centered Medical Homes. Remember to integrate your fee-for-service and value-based revenue streams. For example, one way to defray some of the infrastructure costs is to take advantage of ongoing payments from CMS care management codes.

As you form your Medicare risk strategy, remember to keep your eyes on the long-term horizon. While the infrastructure investment that will be required to succeed in risk-based models can be significant, look at it as a necessary cost that will ultimately shield you from the very real risk of declining Medicare payments as CMS increasingly ties payments to value rather than volume.

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THIS POST WAS WRITTEN BY David Williams

David is a partner and serves as the leader of healthcare reimbursement and advisory services. With more than 25 years of experience, David's practice is concentrated in the healthcare industry providing assurance, reimbursement and advisory services for a wide range of organizations including hospitals, outpatient centers, home healthcare agencies, skilled nursing facilities, assisted living centers, rural health clinics and mental rehabilitation centers.

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