Effective May 19, 2013, skilled nursing facility (SNF) providers will have more leeway in the minimum data set (MDS) 3.0 assessment correction policy. The Centers for Medicare & Medicaid Services (CMS) announced the revision to Chapter 5 of the Resident Assessment Instrument (RAI) User’s Manual for the MDS 3.0 during the May 2, 2013, Open Door Forum.

The current correction policy in Chapter 5 of the RAI manual, “Submission and Correction of the MDS Assessments,” will only allow facilities to inactivate an assessment if an error is discovered in the following items:

• A0200 – Type of Provider
• A0310 – Type of Assessment
• A1600 – Entry Date (on an entry tracking record)
• A2000 – Discharge Date (on a discharge/death in facility record)
• A2300 – Assessment Reference Date (ARD)

For SNFs completing Medicare prospective payment system (PPS) assessments, the current policy results in default billing, as the ARD of the new assessment must be no earlier than the date the error was identified. Modifications only could be made to items in B0100 through V0200.

Effective May 19, providers will be able to complete a modification for typographical errors found in the Section A items—with the exception of A0200 – Type of Provider and A0310 – Type of Assessment—when the modification would change the Item Set Code (ISC) used for the assessment. In these two situations, an inactivation request still will be required.

Providers will need to determine if a modification is appropriate for item A0310 – Type of Assessment. As previously stated, if the ISC will change, a modification cannot be completed.

Example 1:  An MDS is coded as a combined 30-day and change-of-therapy (COT) Other Medicare Required Assessment (OMRA). The assessment should have been coded as a 30-day standalone assessment. In this situation, the modification is allowed.

Example 2:  An MDS is coded as a standalone COT OMRA. The assessment should have been coded as a combined 30-day assessment with the COT OMRA. The error cannot be corrected with a modification, as the ISC would be different. The facility would need to inactivate the assessment and complete a new assessment with a new ARD.

Chapter 2, Section 2-15 of the RAI manual includes a chart on page 2-77, “Nursing Home Item Set Code Reference Table,” to help determine if a modification will result in a changed ISC.

Typographical errors to the ARD in A2300 may be corrected through the new modification process, but only if the change in the ARD does not alter the look-back information coded in the assessment. CMS says if the change would result in a different look-back period than was used to code the previously accepted assessment, this is not a typographical error, e.g., if therapy totals the minutes for a patient as 640 during the look-back period, but when informed of the change to the ARD, the new minutes are 680. In this case, the assessment ARD cannot be modified and will need to be inactivated.

As a result of the changes in the correction policy, new error messages could appear on the validation reports:

• 1061 – A change in the target date or the reason for assessment (RFA), in combination with a change in the clinical item, may indicate improper coding.
• 1062 – A change in the target date or RFA, in combination with a change in the clinical item listed and Medicare Resource Utilization Group, may indicate improper coding.

These messages will help providers determine whether the modification was used appropriately.

Providers also could receive a fatal error in cases where the modified record contains a change in the ISC:

• 3939 – Nonmatching ISC:  The ISC of the modification record does not match the ISC of the record to be modified.

Providers already are asking questions about assessments completed prior to May 19. Providers can follow the new policy as long as the RAI guidelines are met. The crucial factor is the date the error is identified. The RAI manual states errors identified in assessments accepted into the QIES ASAP system must be corrected within 14 days. If an error in an assessment is noted on May 1, the assessment must be corrected within 14 days, which is before the May 19 effective date and, therefore, ineligible. If the same error is identified on May 24, the 14-day time frame is met and the assessment can be corrected using the new correction policy.

The changes to the Inactivation/Modification Policy in the MDS 3.0 RAI manual are a welcome relief to providers dealing with changes and clarifications that have created confusion and misunderstanding since implementation of MDS 3.0 in October 2010.

For more information, please contact your BKD advisor or Bob Lane.

The Centers for Medicare & Medicaid Services (CMS) released the 2014 IPPS Proposed Rule on April 26, 2013, proposing several payment revisions as a result of the Patient Protection and Affordable Care Act (PPACA). Perhaps the most highly anticipated issue within the proposed rule is the revision to the disproportionate share hospital (DSH) calculation. PPACA required an adjustment to DSH payments as a result of the anticipated reduction in uninsured as well as distribution of payments based on hospital comparison of uncompensated care costs. The proposed rule discusses these changes in detail—and provides a curve ball along the way.

As a result of the proposed new payment methodology, some hospitals will receive increased DSH payments while others will see their payments decrease. While reductions were expected, few believed hospitals might actually receive more DSH payments under the new calculation. However, given information released within the proposed rule, hospitals can reasonably estimate their federal fiscal year 2014 DSH payments, and several hospitals may actually receive more DSH payments under the new method than the historic method. This means less-fortunate hospitals could face drastic reductions.

Here is the proposed DSH payment formula for FFY 2014:

Determining Eligibility for Uncompensated Care Payment

This article focuses on the most common criteria to qualify for DSH payments, such as geographic designation, bed size and the hospital’s disproportionate patient percentage, which comprises Medicaid and Medicare SSI volumes. The historical DSH formula remains unchanged in FFY 2014 and beyond. However, reimbursement under the historical formula, referred to by CMS as the empirically justified Medicare DSH payment, is reduced to 25 percent of current payments. CMS will continue to pay this portion of the DSH payment as an add-on to the Medicare DRG payments.

The existing DSH formula also determines eligibility for the new payment methodology taking effect in FFY 2014. This portion of the formula is referred to as the uncompensated care payment. PPACA applies the new payment methodology to “subsection (d) hospitals” otherwise receiving a “disproportionate share payment … made under subsection (d)(5)(F).” Therefore, only hospitals receiving DSH using the empirical formula will receive the uncompensated care payment for the specific year as determined by the hospital’s cost report.

Reviewing the New Payment Methodology – “Uncompensated Care Payment”

In addition to receiving 25 percent of empirically justified Medicare DSH payments, PPACA requires payments be distributed based on uncompensated care costs incurred by hospitals. CMS will make interim payments for the uncompensated care portion on a periodic basis rather than as an add-on to the DRG payment. CMS revealed several key estimates in the proposed rule specific to this payment methodology, including the following:

• Factor 1:  75 percent of the estimated DSH payments otherwise made under the old DSH methodology (section (d)(5)(F) of the Social Security Act)

• Factor 2:  One minus the percent change in the percent of individuals under the age of 65 who are uninsured (minus 0.1 percentage points for FFY 2014, and minus 0.2 percentage points for FFY 2015 through FFY 2017)

• Factor 3:  A hospital’s amount of uncompensated care relative to the amount of uncompensated care for all DSH hospitals expressed as a percentage

Factor 1

PPACA grants CMS authority to make various estimates within the uncompensated portion of the formula. The first estimate CMS proposes relates to the 75 percent of DSH payments otherwise made in FFY 2014 using the old DSH methodology. The Office of the Actuary projects Medicare DSH payments twice per year based on the most recently filed Medicare cost reports. The office’s February 2013 estimate is the most recent FFY 2014 DSH estimate available. If the proposed rule for Factor 1 is finalized, CMS will use the July 2013 Medicare DSH estimate to determine Factor 1 in the FFY 2014 Final Rule.

The Office of the Actuary’s FFY 2014 DSH payment estimate is $12.338 billion. Therefore, Factor 1, representing 75 percent of DSH payments made under the historical formula, equates to $9.2535 billion. This estimate cannot be reviewed or appealed. In addition, this factor will be annually adjusted based upon the office’s estimates.

Factor 2

Based upon estimates from the Congressional Budget Office (CBO), the percentage of all nonelderly residents who are insured in FFY 2013 is 82 percent. Therefore, the uninsured population for FFY 2013 is 18 percent. According to the formula, the FFY 2013 uninsured percentage will be used as the baseline for FFY 2014 through FFY 2017. CMS proposes using the same source for FFY 2014, which estimates the uninsured population at 16 percent. As a result, Factor 2 is as follows:

Percent of individuals without insurance for 2013:  18 percent

Percent of individuals without insurance for 2014:  16 percent

1 – [(0.16 - 0.18)/0.18] = 1 – 0.111 = 0.889 (88.9 percent)

0.889 (88.9 percent) – 0.001 (0.1 percentage points) = 0.888 (88.8 percent)

Factor 2 = 0.888

This factor will be adjusted for FFY 2015 based upon CBO estimates of the uninsured population in 2015 and will be reduced by 0.2 percentage points rather than 0.1 percentage points.

By multiplying Factors 1 and 2, the uncompensated care portion of the DSH pool is $8.217 billion.

Factor 3

Finally, CMS must allocate payments based upon uncompensated care cost incurred by hospitals. Worksheet S-10 of the Medicare cost report might appear to be the logical choice to allocate payments. This worksheet includes hospital information for both charity and non-Medicare bad debts, which typically define “uncompensated care.” However, CMS stated its concern about the accuracy of the data reported on S-10. Furthermore, hospitals with high cost-to-charge ratios would reap benefits in uncompensated care DSH payments over more efficiently performing peer hospitals. CMS expressed concern about creating a policy using S-10 uncompensated care amounts that could create incentive for states to avoid Medicaid expansion. For these reasons and others, CMS proposed to not use Worksheet S-10 for FFY 2014 payments. However, CMS may adopt a revised methodology using Worksheet S-10 in future periods after it establishes the accuracy and reliability of the data.

As an alternative and surprising twist to using Worksheet S-10, CMS proposes using the “utilization of insured low-income patients” as a proxy for uncompensated care costs, with low-income patients defined as “inpatient Medicaid days plus days of Medicare SSI patients … ”—in other words, the same criteria in place for the current DSH payment methodology. As a result, Factor 3 is:

Individual Hospital Medicaid Days + Medicare SSI Days
All DSH Hospital Medicaid Days + Medicare SSI Days

CMS computed this ratio for expected DSH qualifying hospitals using Medicaid Days from the 2010/2011 Medicare Cost Reports and the FFY 2010 SSI database. The table including this ratio is available on the CMS website; the file is titled “Medicare DSH Supplemental Data File.” CMS has proposed using the 2010/2011 Medicare Cost Reports to allow time for audits to occur and has proposed using the 2011 SSI File if it becomes available by the final rule publication.

Implications

Factors 1 and 2 of the proposed methodology appear logical and consistent from year to year. Many feared the reduction estimate of the uninsured from FFY 2013 to FFY 2014 would be overstated and ultimately reduce the DSH pool. However, a reduction from 18 percent to 16 percent is modest; one could assume the inability to mandate Medicaid expansion is partially responsible.

Factor 3, on the other hand, will be cause for much discussion in the coming months. While there is no perfect data source for standardizing uncompensated care reporting, CMS’ chosen method doesn’t account for uncompensated care occurring on an outpatient basis. An alarming number of uninsured patients seek care in hospital emergency departments, which is not considered when using an inpatient proxy.

Secondly, the redistribution of funds creates winners and losers. Unfortunately, some of the hardest hit will be smaller hospitals that rely on the safety net of DSH payments. Hospitals with greater-than-average Medicare utilization are, in general, more negatively affected than those hospitals with below-average Medicare utilization.

How Should Hospitals Prepare?

1. It is critical to continue to perform Medicaid eligibility reviews and document-eligible days in accordance with Medicare cost report filing regulations. Medicaid volume will remain a factor for determining 25 percent of DSH payments and will affect the uncompensated care formula in FFY 2014 and potential future years.

2. Hospitals must proactively educate and enroll Medicare beneficiaries into SSI where eligible. Publicly available information suggests SSI enrollment is significantly lower than SSI-eligible persons. Education should occur within communities and health settings to assist the low-income, elderly population. The proposed rule also included a section dedicated to Medicare Advantage (MA) days and the Allina case. CMS reaffirms its position that MA days should be included in the SSI fraction and not the Medicaid fraction of the historical DSH formula.

3. Hospitals should review their charity policies and accurately report information on Worksheet S-10. CMS could adopt a new methodology to compute uncompensated care costs using Worksheet S-10. We recommend hospitals become more familiar with the instructions and develop reporting mechanisms to accordingly track and record charity and bad debt charges.

4. Given information in the IPPS proposed rule, hospitals can reasonably estimate their FFY 2014 DSH payments. We recommend using information within this article as well as the table for Factor 3 referenced above to determine future DSH payments. If a hospital is not included in CMS’ table and ultimately qualifies for DSH, CMS will make the payments at cost report settlement.

BKD has developed a tool to help estimate the DSH reimbursement impact to your hospital as a result of the newly proposed DSH payments.

For more information on how the disproportionate share instructions could affect your organization, contact your BKD advisor.

On April 5, 2013, the IRS issued proposed regulations for compliance with the community health needs assessment (CHNA) requirements under Internal Revenue Code Section 501(r)(3) for hospitals exempt from taxation under Section 501(c)(3).

The Patient Protection and Affordable Care Act, enacted March 23, 2010, established additional requirements for hospital organizations to obtain and maintain tax exemption. Effective for tax years beginning after March 23, 2012,  tax-exempt hospitals are required to conduct a CHNA every three years and adopt an implementation strategy to meet the identified community health needs.

The proposed regulations issued on April 5 provide additional guidance for complying with the CHNA requirements. The IRS previously provided guidance for compliance with the CHNA requirement in Notice 2011-52.

The proposed regulations generally are consistent with the guidance provided in Notice 2011-52, but they include several clarifications and new requirements.

Hospital Facilities & Organizations

A hospital organization is defined as an organization that operates a facility required by a state to be licensed, registered or similarly recognized as a hospital. A hospital organization that operates more than one hospital facility, i.e., a facility that is required by a state to be licensed, registered or similarly recognized as a hospital, must meet the requirements of Section 501(r) separately for each hospital facility.

Multiple Buildings Under a Single Hospital License

To increase certainty and consistency in the designation of hospital facilities, the proposed regulations change the definition of a hospital facility to provide that multiple buildings operated by a hospital organization under a single state license are considered a single hospital facility.

Operating a Hospital Facility Through a Partnership

Notice 2011-52 included within the definition of “hospital organization” any organization described in Section 501(c)(3) that operates a hospital facility through a joint venture, limited liability company or other entity treated as a partnership for federal tax purposes. The proposed regulations retained this definition as a “general rule.” However, the proposed regulations provide two exceptions to this general rule:

• First, if the organization does not have sufficient control over the hospital facility to ensure Section 501(r) compliance, and the organization treats the hospital facility as an unrelated trade or business, it will not be considered to operate the hospital facility for purposes of Section 501(r).

• Second, the organization will not be considered to operate the hospital facility for purposes of Section 501(r) if all of the following conditions are met at all times since March 23, 2010:

(i)     The 501(c)(3) organization must have been organized and operated primarily for educational or scientific purposes.

(ii)   The organization must not have engaged primarily in the operation of one or more hospital facilities.

(iii) The organization must have entered into the applicable partnership agreement prior to March 23, 2010.

(iv) The organization must meet certain criteria with respect to control and ownership.

Failure to Satisfy the Requirements of Section 501(r)

The proposed regulations provide much anticipated guidance for organizations that fail to meet the CHNA requirements.

Minor and inadvertent errors that are due to reasonable cause and are corrected promptly after discovery will not be considered a failure to satisfy Section 501(r).

Errors that are not minor or inadvertent will be excused if they are not “willful or egregious” and if they are properly corrected and appropriately disclosed, e.g., on Form 990.

The proposed regulations indicate the IRS will consider the relative size, scope, nature and significance of any failures to meet the Section 501(r) requirements, as well as the reasons for such failures and whether the same type of failures have previously occurred, when determining whether exempt status revocation is warranted for willful or egregious noncompliance cases.

If a hospital organization operating more than one hospital facility fails to meet one or more of the requirements of Section 501(r) separately with respect to a hospital facility during a taxable year but continues to be recognized as an exempt organization, the income derived from the noncompliant hospital facility during that taxable year will be taxed as if the facility were a taxable corporation.

The proposed regulations also prohibit hospital organizations from aggregating the income from a noncompliant hospital facility with the hospital organization’s other unrelated business activities.

The proposed regulations provide that a facility-level tax on a noncompliant hospital facility will not itself affect the status of the hospital organization’s tax-exempt bonds.

Community Health Needs Assessments

The proposed regulations provide several deviations from the guidance provided in Notice 2011-52 with respect to conducting a CHNA.

A CHNA only needs to identify and prioritize significant health needs. A hospital facility may determine whether a health need is significant based on all of the facts and circumstances present in the community it serves.

In assessing a community’s health needs, hospital facilities must take into account input from, at a minimum:

• At least one state, local, tribal or regional governmental public health department
• Members of medically underserved, low-income and minority populations in the community, or individuals representing their interests
• Written comments received on the hospital facility’s most recently conducted CHNA and implementation strategy

A hospital facility’s CHNA will be considered to describe how the hospital facility took into account input from the community if the report:

• Summarizes in general terms the input provided, including how and over what time period such input was provided
• Provides the names of organizations providing input and summarizes the nature and extent of those organizations’ input
• Describes the medically underserved, low-income or minority populations being represented by organizations or individuals providing input

If a hospital facility conducts a joint CHNA process with other hospital facilities, all of the collaborating hospital facilities may produce a joint CHNA report, as long as all of the facilities define their community to be the same. The joint CHNA report must clearly identify each hospital facility to which it applies, and each hospital facility must adopt the joint CHNA report.

The proposed regulations require the CHNA report to remain on the website of the hospital facility until two subsequent CHNA reports have been posted, so information on trends will be available to the public.

Implementation Strategies

In general, hospital facilities adopting a joint CHNA report also may adopt a joint implementation strategy, provided the joint implementation strategy clearly identifies each hospital facility, its particular role and responsibilities in taking the actions described in the implementation strategy and the programs and resources it plans to commit in taking those actions. The joint implementation strategy also must include a summary that helps the reader easily locate those portions of the joint implementation strategy that relate to the hospital facility.

Transition Rules

The proposed regulations provide transition relief for the adoption of a hospital facility’s implementation strategy for its first CHNA conducted after March 23, 2010.

In general, a hospital facility’s implementation strategy must be adopted in the same taxable year the CHNA is considered conducted. However, for the first CHNA conducted, the proposed regulations provide that a hospital facility must adopt a strategy on or before the 15th day of the fifth calendar month following the close of its first taxable year beginning after March 23, 2012. This relief is provided in recognition of the fact that certain hospital facilities may not have a full three years to conduct their first CHNA.

Effective Date

The effective dates of the proposed regulations were the dates they were published in the Federal Register. A hospital facility may rely on the regulations for any CHNA conducted or implementation strategy adopted on or before the date six months after the date the final regulations are published. Hospital organizations may continue to rely on the guidance provided in Notice 2011-52 for any CHNA conducted or implementation strategy adopted on or before October 5, 2013.

Hospital organizations should closely analyze the proposed regulations to determine the effect they may have on the organization. The deadline for compliance with the CHNA provisions of Section 501(r) is rapidly approaching for many organizations and may have already passed for other organizations. If your organization needs assistance with analyzing how your CHNA complies with the proposed regulations, please contact your BKD advisor.

As a result of the Budget Control Act of 2011, mandatory federal spending cuts, commonly known as “sequestration,” are required. This law is expected to generate spending cuts of $109 billion in the first year and $1.2 trillion through 2021. Sequestration was originally expected to begin January 2, 2013, but was postponed for two months through the American Taxpayer Relief Act of 2012, passed on December 31, 2012. Because Congress failed to reach a deficit reduction agreement before March, President Obama issued an order on March 1, 2013, marking the official start to the sequestration with spending cuts to be implemented the following month.

Medicaid is exempt from the sequestration, but mandatory payment reductions include a 2 percent cut in Medicare provider payments, which is projected to result in an $11 billion reduction in Medicare spending in 2013 and $123 billion through 2021. This Medicare spending reduction is in addition to the $716 billion in Medicare savings expected during the next 10 years through the Patient Protection and Affordable Care Act of 2010. Sequestration spending reductions are limited to 2 percent for Medicare and, therefore, no increases in the ongoing Medicare payment reduction percentage are expected through 2021 relative to the sequestration.

Fee schedules and payment rates remain unchanged by the sequestration, and the 2 percent reduction only applies to the final payment amount after determining deductibles, coinsurance and any applicable Medicare Secondary Payment adjustments. The reduction is identified on the remittance advice as a claim adjustment reason code (CARC) 223 and took effect April 1, 2013.

Medicare fee-for-services (FFS) claims with dates of service or dates of discharge on or after April 1, 2013, will be subject to this 2 percent reduction. Prosthetics, orthotics and supply claim payments will be reduced by 2 percent, based on the date of service; for durable medical equipment (DME), it is based on the start date for the equipment rental. For home health claims, the 2 percent payment reduction will be applied to claims with end of episode dates on or after April 1, 2013. This reduction only applies to the final claim and has no effect on the Request for Anticipated Payment (RAP). For hospice claims, the 2 percent reduction will be applied based on the claim “through” date, which generally is the calendar month billing for hospice services beginning April 1, 2013, and beyond.

Agencies should account for this expected payment reduction in a similar method to any other contractual adjustment. A separate reserve should be created on the balance sheet and credited for the expected sequestration payment reduction; a separate contractual adjustment or sequestration adjustment account on the operating statement should be debited. This accounting treatment is required to record patient accounts receivable and net patient service revenue at the expected net realizable value.

Software issues are likely to turn up during the implementation of the 2 percent Medicare payment reduction, and agencies should monitor their payments to ensure reimbursement accuracy. Agencies should work with their software vendors to identify reporting options available to accurately track the sequestration adjustments for financial reporting.

If you have questions on how the sequestration adjustments will impact your Medicare payments or how to account for the adjustments, contact your BKD advisor or Mark Sharp.

It has been a year of change for health care providers eligible to participate in the 340B drug discount program. All hospital providers have completed a recertification process, and many have been selected for on-site program audits by the Health Resources and Services Administration (HRSA). Ongoing issues remain with this program; here are a few noteworthy items.

Group Purchasing Organizations

On February 7, 2013, HRSA issued a program notice regarding the prohibition of purchasing covered outpatient drugs through a group purchasing organization (GPO) for disproportionate share hospitals (DSHs), children’s hospitals and free-standing cancer hospitals participating in the 340B program. Facilities registering for 340B as critical access hospitals (CAHs), sole community hospitals (SCHs) and rural referral centers (RRCs) are not subject to this GPO exclusion. Under this prohibition, a covered entity is unable to purchase a covered drug using GPO pricing. Details of the recent program notice include:

• A hospital subject to the GPO prohibition may not purchase covered outpatient drugs through a GPO for any of its clinics/departments within the four walls of the hospital, i.e., same physical address, under any circumstance.
• Certain hospital off-site outpatient facilities may use a GPO for covered outpatient drugs if those off-site outpatient facilities meet the following criteria:

1. They’re located at a different physical address than the parent.
2. They’re not registered in the OPA 340B database as participating in the 340B program.
3. They purchase drugs through a separate pharmacy wholesaler account than the 340B participating parent.
4. The hospital maintains records demonstrating that any covered outpatient drugs purchased through the GPO at these sites are not used or transferred to the parent hospital or any outpatient facilities registered on the OPA 340B database.

This important notice allows areas within hospitals that are not eligible for the 340B discounted price to purchase those drugs using GPO pricing, rather than at wholesale acquisition cost (WAC), if the above criteria are met.

• Through its auditing process, HRSA has become aware that some hospitals have been purchasing drugs through a GPO and subsequently replenishing the drug with a 340B item or reclassifying the method of purchase after dispensing. This notice indicates HRSA has not authorized this GPO replenishment model and that the GPO prohibition is violated upon use of a GPO to obtain covered outpatient drugs and cannot be fixed by subsequently changing the characterization of the purchase. Hospitals using such models should immediately cease this practice. A 340B-covered entity subject to the GPO prohibition should purchase drugs using a non-GPO account and only replenish with 340B drugs once 340B patient eligibility is confirmed. Hospitals have been given until April 7, 2013, to comply with the new policy.

Medicaid Exclusion File

On February 7, 2013, HRSA issued a program notice regarding use of the HRSA Medicaid Exclusion File to avoid potential duplicate discounts when a drug is discounted under the 340B program and subject to a Medicaid pharmaceutical rebate to the state. Here are the details:

• If a covered entity houses many different clinics and only some are 340B-eligible, and it wants to receive the 340B price on drugs dispensed to Medicaid outpatients, it must obtain separate Medicaid provider numbers for the eligible clinics that use 340B drugs when billing Medicaid. If state Medicaid programs cannot generate additional Medicaid provider numbers for those entities, the covered entities must discuss alternative arrangements with the state.
• When registering a new covered entity, the registrant must include all Medicaid billing numbers the covered entity uses to bill Medicaid with 340B drugs. Changes to how a covered entity uses 340B drugs for its Medicaid patients will be effective quarterly only.
• Covered entities must attest to the accuracy of their information on the HRSA Medicaid Exclusion File during annual recertification. Covered entity billing information must be accurate at all times to ensure integrity of the file. If an audit reveals a covered entity’s information on the file does not reflect actual billing practices, the covered entity could be found in violation of the duplicate discount prohibition and be required to repay manufacturers.

Covered entities also should understand how state Medicaid agencies handle drug rebate calculations for drugs dispensed to patients of Medicaid Managed Care (MCO) plans. Some states could be including MCO drugs in the state pharmaceutical rebate. If a covered entity has elected to carve Medicaid patients out of the 340B program, the covered entity also should understand if this applies to Medicaid MCO patients as well. Inclusion of Medicaid MCO in the 340B program and failure of the state to remove those claims from its pharmaceutical rebate would result in an improper duplicate discount.

Orphan Drugs

Free-standing cancer hospitals, CAHs, SCHs and RRCs have been precluded from receiving the 340B price on orphan drugs since the inclusion of these types of covered entities into the 340B program. In May 2011, HRSA proposed regulations allowing these types of covered entities to purchase orphan drugs at 340B prices when the drugs were used to treat non-orphan diseases or conditions. This proposed regulation has not been finalized, but draft final regulations have been sent to the Office of Management and Budget (OMB). It is unclear what is included in these draft final regulations, but many covered entities are hopeful the content of the proposed regulations will be upheld in final regulations. We should know more on this later this spring.

For more information on the 340B program and its related compliance elements, please contact your BKD advisor.

In a ruling published March 13, 2013, the Centers for Medicare & Medicaid Services (CMS) officially revised the current policy on Part B billing, following the denial of a Part A inpatient hospital claim on the basis that inpatient admission wasn’t reasonable and necessary.

Since the National Recovery Audit Contractor (RAC) program started in 2010, CMS reports the total collection of overpayments went from approximately $75.4 million at the end of September 2010 to nearly $3.9 billion by the end of 2012. According to data voluntarily reported by hospitals to the American Hospital Association’s (AHA) RACTrac program and published in its fourth-quarter 2012 report, 96 percent of denied dollars were for complex denials, and the vast majority of those were for short-stay inpatient claims. The report also states nearly 70 percent of short stay medical necessity denial dollars were due to care provided in an incorrect setting, i.e., inpatient versus outpatient. The dollars associated with the issue are significant.

Until now, the opportunity to rebill services provided in the incorrect setting has been limited. Only a small number of diagnostic services could be billed on a “Part B Only” claim, leaving reimbursement for more costly services, including surgery, unreimbursed to providers. After a growing volume of provider appeals—with 72 percent of completed appeals overturned in favor of the provider, particularly at the Administrative Law Judge (ALJ) level—CMS started to feel pressure from the provider community. In addition, the AHA, together with several providers, filed suit against the U.S. Department of Health and Human Services (HHS) in late 2012 for refusing to reimburse hospitals for reasonable and necessary care that could have been provided in an outpatient setting.

The revised policy published on March 13 is intended to be an interim solution until a proposed rule, also published by CMS, is approved for application on a prospective basis.

Essentially, the ruling acquiesces to the approach taken in prior ALJ and Appeals Council decisions regarding rebilling Part B services that were clinically reasonable and necessary, after inpatient status was denied.

The ruling became effective on the date of issuance. It applies to Part A hospital inpatient claims denied by a Medicare review contractor because the inpatient admission was determined not reasonable and necessary, as long as the denial took place in one of the following circumstances:

• Denial was made while ruling is in effect
• Denial was made prior to the effective date of the ruling, but an appeal is pending
• Denial was made prior to the effective date of the ruling, but the time frame for appeal has not expired

The ruling states those services originally bundled into the inpatient claim in compliance with the three-day window should be billed on a Part B outpatient claim, which will not be subject to the usual timely filing restrictions. This includes observation time increments ordered and charged prior to the point of change to inpatient status. The other services that would be payable had the patient remained an outpatient should be billed on a Part B inpatient claim (bill type 12X).

The ruling gives providers the option to withdraw pending Part A appeals subject to this ruling and submit Part B claims for payment; otherwise, the provider will need to wait until the appeal is processed.

The ruling also states the Part A to Part B Rebilling Demonstration is being terminated; details will be communicated to participating hospitals and contractors.

Special rebilling time periods are established by the ruling. Until a final rule is approved and issued, CMS is adopting the position that subsequent Part B rebilling in situations covered by the ruling is supported by adjustment billing. Essentially, as long as the corresponding denied Part A inpatient claim was filed within the timely filing requirement, the one-year timely filing limitation will be held in abeyance; the Part B inpatient and Part B outpatient claims are not to be rejected by Medicare’s claims processing system. The ruling did not address any special billing code that will be necessary to permit the claim to bypass this edit in the Outpatient Claim Editor.

If a hospital with a pending Part A appeal decides to withdraw the appeal and rebill, it will have 180 days from the date of receipt of the dismissal notice to file its Part B claim(s). If the hospital decides to keep the appeal in process and the appeal is subsequently lost, the hospital will have 180 days from the date of the receipt of the appeal decision, determination or redetermination. The date of receipt is presumed to be five days after the date of the notice, unless there is evidence to the contrary.

Note:  The ruling specifically states the beneficiary’s patient status remains inpatient as of the time of inpatient admission and is not changed to outpatient. This implies the beneficiary’s co-insurance responsibility for the inpatient Part B claims will not change as a result of the change in reimbursement methodology to the provider.

CMS will issue operational and other applicable regulatory guidance necessary to implement the ruling, including the mechanics of how to bill Part B inpatient and Part B outpatient services.

Meanwhile, CMS is soliciting comments for a 60-day period about the proposed rule. The ruling and associated instructions to contractors only will be effective until such time a final rule is published. The relief offered by the ruling was driven by ALJ and Medicare Appeals Council decisions; CMS states it disagrees with these decisions and they may not be part of a final rule. Providers and interested parties have the opportunity to comment on the proposed rule and potentially influence the final decision. Both the proposed rule and the ruling can be found here.

For more information, contact your BKD advisor.

The long-term care (LTC) mergers and acquisitions (M&A) market had an outstanding year in 2012, generating 189 deals worth $9.2 billion. The high transaction volume for the year makes 2012 the most active year in LTC M&A since the late 1990s, with approximately 60 percent more transactions than the annual average over the previous four years. Factors contributing to the increase in activity include:

• Uncertainty in tax policy leading into 2013
• A growing senior population, with the number of people over age 65 expected to grow 33.3 percent to 54.8 million by 2020 from 41.1 million in 2011, according to the Administration on Aging
• National health expenditures in the LTC market are projected to grow 5.3 percent annually from 2010 to 2020, reaching $239.9 billion by 2020, propelled by rising payments from private insurers
• The Federal Reserve’s pledge to keep interest rates low for the next two to three years
• Regulatory and reimbursement changes enacted with the Patient Protection and Affordable Care Act
• The current inventory of distressed properties combined with low levels of new construction

As the following graphs illustrate, 2012 transactions grew 9.9 percent over the previous year, with Q4 2012 closing the year with 60 transactions, growing 33.3 percent over Q4 2011.

Public Comparables

Historical Transaction Cap Rates

During the third quarter of 2012, skilled nursing valuations decreased slightly from the second quarter, with cap rates increasing from 13 percent to 13.2 percent. The assisted living and independent living markets showed some valuation improvements, with each sector’s cap rates decreasing to 8.4 percent and 7.8 percent, respectively. Skilled nursing valuations for Q3 2012 decreased slightly from where they were two years prior, while assisted living and independent living improved over the two-year period by 140 and 80 basis points, respectively.

Recent Select Transactions

Skilled Nursing

• December 2012 – Vanguard Healthcare Services purchased a 172-bed facility in southeast Florida for $25 million, or $145,300 per bed. Overall occupancy for the facility was 93 percent. 
• November 2012 – A regional operator purchased an 87-bed nursing facility in Minnesota for $7.2 million, or $82,500 per bed. Revenue for the facility was $5.1 million, with a 20 percent EBITDA margin. The occupancy rate was 98 percent. 
• November 2012 – An investor purchased a 114-bed facility in Texas for $5.5 million, or $48,200 per bed. The facility had revenues of $5.8 million, with an occupancy rate of 80 percent. The facility was built in 1990.
• October 2012 – AdCare Health Systems purchased a 70-bed facility in Arkansas for $6.3 million, or $90,000 per bed. Revenues are projected to be $8.5 million.

Assisted/Independent Living

• December 2012 – National Health Investors purchased a 120-unit assisted living and memory care community in Wisconsin for $20.2 million, or $168,300 per unit. The community was built in 2003.
• December 2012 – A REIT purchased a portfolio of nine small assisted living and Alzheimer’s communities in Michigan, with a total of 322 units. The group paid $49 million, or $152,200 per unit. Revenues and EBITDA were approximately $13.4 million and $4.6 million, respectively.
• October 2012 – Two assisted living facilities were sold by a local owner/operator in Texas for $6.75 million. The facilities comprised 68 units and had an average occupancy rate of 77 percent. Revenues and EBITDA were $3.2 million and $695,000, respectively.
• October 2012 – MBK Senior Living purchased a 124-unit assisted living and memory care community in Colorado for $30.5 million, or $246,000 per unit. The community was built in 2008 and consists of five buildings. Revenues and EBITDA for 2012 were $5.2 million and $1.4 million, respectively.

Source:  Irving Levin Associates, Inc.

For more information on this market update or related matters, please consult your BKD advisor.

About BKD Corporate Finance, LLC

BKD Corporate Finance, LLC, a wholly owned subsidiary of BKD, LLP, provides merger and acquisition, sales, management buyout, ESOP, recapitalization and financing advisory services. Our experience covers a variety of industries, including health care, financial institutions, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.

On March 1, 2013, the Centers for Medicare & Medicaid Services (CMS) released Change Request 8214, which outlines rules related to the extension of the Low Volume Adjustment (LVA) and Medicare Dependent Hospital (MDH) regulations, as authorized by the American Taxpayer Relief Act of 2012.

The Federal Register notification related to these extensions, CMS 1588-N, was released on March 4, 2013, and officially published March 7, 2013. Hospitals will need to move quickly to take full advantage of the LVA extension, and they may be surprised by some of the requirements of the MDH extension.

Low Volume Adjustment

The new legislation extended for an additional year—from October 1, 2012, through September 30, 2013—the expansion of the LVA created by the Patient Protection & Affordable Care Act. To get the full 12 months of adjusted payments, hospitals must file the necessary documentation with the Medicare Administrative Contractor (MAC) by March 22, 2013. If a hospital files after March 22, the adjustment will be applied prospectively 30 days from the date of the MAC’s determination, which means hospitals filing late will lose more than half of the available LVA for this year. The rules in use for the federal fiscal 2012 LVA filings also are being used for the current year.

To qualify for the LVA, a hospital must have fewer than 1,600 discharges as documented on Table 14 of the CMS 1588-N and be more than 15 miles from any other subsection (d) (Inpatient Prospective Payment System, or IPPS) hospital. If a hospital has not received the LVA in the past, it must provide documentation, i.e., maps, that it meets the mileage requirement. If a hospital received the LVA in fiscal year 2012, it must verify, in writing, that it still meets the mileage requirement.

Note:  CMS and the MACs will only use Table 14 as the source data for meeting the 1,600 discharge criteria, so hospitals will need to check that table to verify they meet that standard of qualification.

It is imperative that hospitals qualifying for the LVA for this year file the appropriate documentation with their MAC by March 22, 2013. Many MACs will have specific personnel overseeing LVA applications and will have specific instructions on how to actually transmit the documentation. Applying hospitals should verify to whom at their MAC the LVA applications should be addressed and how they should be transmitted to avoid costly delays or problems.

Medicare Dependent Hospitals

All hospitals classified as MDHs when the program expired October 1, 2012, will be reinstated as MDHs effective October 1, 2012. There is no need to reapply for MDH classification. However, there are two exceptions to the automatic reinstatement—and these exceptions may come as a shock to a number of former MDHs.

If the MDH requested to be classified as a Sole Community Hospital (SCH) on or after October 1, 2012, the hospital must request reinstatement as an MDH. This applies whether the hospital applied for SCH status by August 31, 2012, using the special CMS provisions allowing seamless transition to SCH status as of October 1, 2012, or if the application was made later and SCH status was not granted until after October 1, 2012. The second exception was for hospitals that cancelled their rural classification under 412.103(b).

A number of MDHs that requested SCH status or dropped their rural classification did so with the proviso that if MDH status was reinstated, they wanted to remain MDHs. This question was raised in the FY 2013 final IPPS rules. A comment was made to CMS that hospitals should be allowed to retroactively rescind their request for SCH status and have MDH status seamlessly reinstated. CMS responded that if the MDH program was extended, it would “develop policy to implement the specific provisions of such legislation.” Many read that to mean CMS would allow MDHs to retroactively rescind SCH status. However, CMS does not state this in the final IPPS rules; it leaves the matter open to “the specific provisions” of the legislation that is passed. The taxpayer relief act simply changed dates, so in CMS’ interpretation there are no specific provisions in the law allowing hospitals now carrying the SCH or urban designations to be seamlessly returned to MDH status.

The wording of the Federal Register shows CMS closing the door on this possibly for SCH and urban hospitals. It states “in the following two situations, the effective date of the MDH status may not be retroactive to October 1, 2012” (emphasis added). It then cites the two exceptions:  hospitals that requested SCH status and hospitals that cancelled their rural classification under 412.103(b).

It’s important to remember how CMS generally uses the phrase “may not.” This does not mean “sometimes”; it means “will not.” The Federal Register notes hospitals in the two exception categories “will not” have MDH status retroactively reinstated to October 1, 2012. These hospitals will be granted MDH status “prospectively based on the date the hospital is notified that it again meets the requirements for MDH status under the regulations at 412.108(b).”

In this situation, these regulations severely limit the ability of  hospitals in the two exception classes to obtain MDH status much before the expiration of the MDH program on September 30, 2013. For those hospitals that gave up rural status, they will first have to apply for rural status and then apply for MDH status after they are approved for reclassification to rural status. For those hospitals that obtained SCH status, they must first give up their SCH status and then apply for MDH status. This will create a period of time where they are neither SCH nor MDH.

In addition, once the request for MDH status is received by the MAC, the MAC is required to make its determination and notify the hospital “within 90 days from the date it received the request and all required documentation.” If approved, the MDH status starts 30 days after the written notification from the MAC. Even if a hospital began now to apply for rural status or to cancel SCH status and then reapply for MDH, it could be easily within three months of the MDH program’s new sunset date before being approved as an MDH.

Hospitals in the exception classes likely will have little time to benefit from getting their MDH status back and will have no guarantee that CMS will allow a seamless conversion back to SCH status as of October 1, 2013. Throw in a period where the hospital will not have either SCH or MDH status during this year, and it makes the benefit of conversion back to MDH questionable.

While there is good news with the extension of the LVA, CMS has muted the positive impact of the extension of MDH by severely limiting those hospitals that can get their MDH status retroactively reinstated. Hospitals will want to move quickly if they desire to reinstate their MDH status, but caution must be used to ensure this decision is economically sound.

If you have questions or wish to discuss this further, please contact your BKD advisor.

Although the hospital industry has weathered difficult conditions in the past, widespread challenges continue to push change within the sector. Widely reported regulatory changes and the need to obtain operational and financial scale and scope in the health care industry have combined with other auxiliary issues to compound the need for further change within the sector.

Broad shifts by both government and private sector payors have had several effects:  cuts in long-standing subsidies, new fixed or global payment schemes, incentives and penalties for meeting or failing to meet quality, efficiency and patient satisfaction goals and rescinded payments for some readmissions. Although the environment is dynamic, the mandate to deliver lower costs while focusing on higher quality care in today’s environment is encouraging some hospitals and systems to explore strategic partnerships to deliver a continuum of cohesive care. This article focuses on many of the pending reimbursement changes and trends affecting the industry.

Disproportionate Share Hospital Payment Cuts

The Affordable Care Act (ACA) contains cuts to Medicare disproportionate share hospital (DSH) payments totaling more than $22 billion from fiscal year 2014 to 2019. The $11 billion DSH program has been used to support uncompensated care and ensure access to care for Medicare beneficiaries. The current DSH payment structure is calculated using a formula based on the percentage of Medicare beneficiaries on Supplemental Security Income and the percentage of Medicaid beneficiaries for each qualifying hospital.

Under the ACA, hospitals will receive a payment of 25 percent of the calculated amount under the current formula, with the remaining payment allocated from a shrinking pool based on each hospital’s share of national uncompensated care. Based on information from the Congressional Budget Office and Greater New York Hospital Association, DSH payments are projected to be cut by approximately 29 percent in 2014.

The ACA requires most Americans to obtain health insurance or pay a penalty. Hospitals are projected to require fewer DSH payments because uncompensated care will fall due to the lower number of uninsured patients. However, the uncertainty surrounding the transition has left many health care safety net hospitals wondering about their fiscal health after the changes take effect.

Global & Fixed Payment Schemes

In place of traditional fee-for-service systems, global or fixed payment systems continue to be discussed and, in some cases, implemented in limited settings. Overall, the concept appears to be gaining popularity with government and private payors as a cost-containment strategy. The Centers for Medicare & Medicaid Services (CMS) announced in September 2012 that it continues to move forward with the Bundled Payments for Care Improvement initiative under authority of the ACA. Under the Bundled Payments initiative, CMS is working to develop and test two payment types:  Retrospective Bundled Payments and Prospective Bundled Payments.

A number of states also are considering global or fixed payment systems, including Connecticut’s Person-Centered Medical Home initiative, Oregon’s coordinated care organizations and Washington’s accountable care organization and alternative quality contract models. Private insurance companies are testing fixed payment plans, with Blue Cross and Blue Shield of Massachusetts implementing one of the most prominent programs. Illustrative of the acceptance of global or fixed payment systems, The New York Times reported in September 2012, more than 225 health care provider organizations have entered into agreements with public or private insurers for some form of budget-based contracts.

Patient Satisfaction Scores Impact Payments

On October 1, 2012, new Medicare payment rates took effect that combine procedural metrics with patient satisfaction scores to allocate nearly $1 billion in payments through the Hospital Value-Based Purchasing (Hospital VBP) program under the ACA. The Hospital VBP will reduce payments for low-performing hospitals by 1 percent while increasing payments to high-performing hospitals. Although the federal government has surveyed hospital patients since 2006, this is the first time the scores have been used to help determine Medicare payments. With many hospitals operating on narrow margins, the rate cuts—which could total hundreds of thousands of dollars—may have a significant impact on hospitals’ financial results.

Readmissions Trigger Payment Reductions

CMS recently finalized its list of hospitals subject to the Hospital Readmissions Reduction Program (HRRP), which penalizes hospitals by up to 1 percent of their diagnosis-related group reimbursement if too many of the hospitals’ patients were readmitted soon after discharge. Hospitals could lose more than $280 million in Medicare funds over the next year.

The cost of readmissions is a significant issue for Medicare, as approximately one in five Medicare patients return to the hospital within a month of discharge, at a cost to Medicare of more than $17 billion per year. Even some top-tier hospitals have been hit with the full 1 percent payment reduction for failing to cut high readmission rates. Hospitals across the country are assessing the effect HRRP will have on their finances and looking for opportunities to reduce their readmission rates.

Mergers & Affiliations Continue

Across the country, hospitals and health systems of all sizes continue to join forces through mergers, acquisitions or affiliations. Through September 30, 2012, Irving Levin & Associates reports there have been 59 reported mergers and acquisitions in the hospital industry, slightly behind the 69 transactions that took place through September 30, 2011. Large health systems continue to expand, as illustrated by the October 2012 announcement of the Trinity Health and Catholic Health East merger. The combined Catholic health system encompasses operations in 21 states and includes 82 hospitals, 89 continuing care facilities and more than 87,000 employees.

The pressure to pursue transactions has even driven one Catholic hospital to reconsider its religious affiliation. Catholic Healthcare West, which operates 40 hospitals, announced in January 2012 that it was ending its governing board’s affiliation with the Catholic Church and changing its name to Dignity Health. Leaders at the hospital said concerns about the system’s Catholic affiliation have hampered some prospective transactions.

Outside of traditional mergers and acquisitions, hospitals and health care systems continue to pursue affiliations that support higher-quality health care while reducing costs. The BJC Collaborative exemplifies this trend. In October 2012, BJC Healthcare of St. Louis, Missouri, CoxHealth of Springfield, Missouri, Memorial Health System of Springfield, Illinois, and Saint Luke’s Health System of Kansas City, Missouri, announced an affiliation that will allow the four not-for-profit health systems to reduce costs and share information regarding best medical practices.

Proactive Planning

Any of the challenges noted above can present a significant, complex hurdle for a hospital or health care system to overcome. Hospitals and health care systems of all sizes should develop a proactive approach to the broad challenges facing the industry. Some health care providers may determine that providing health care under America’s changing delivery model requires them to explore strategic relationships with other hospitals or health systems.

If you have questions related to health care industry trends, or for more information on strategic hospital relationships, contact your BKD advisor.

The results of recent recovery audit contractor (RAC) automated reviews of hospital services were outlined in the January 2013 Medicare Quarterly Provider Compliance Newsletter, Volume 3, Issue 2. Among the hot topics discussed was a significant issue for physician providers:  the RACs identified that inappropriate current procedural terminology (CPT) codes were being assigned for related professional evaluation and management (E/M) services “rendered in swing bed facilities (with nursing facility levels of care)” in the same episode of care as an acute inpatient stay, when the patient was not “on a leave of absence from the hospital.”

Specifically, inpatient hospital CPT codes, i.e., hospital admission 99221-99223, hospital subsequent days 99231-99233 or hospital discharge 99238-99239, were assigned instead of the following nursing facility CPT codes:

• Admission (99304-99306)
• Subsequent Nursing Facility Care (99307-99310)
• Nursing Facility Discharge Services (99315-99316)
• Annual Nursing Facility Reassessment (99318)

Professional service codes are dictated by the status and location of the patient when he/she is seen face-to-face by the physician or non-physician practitioner. It has long been a source of confusion that Medicare requires the physician to write an order to “discharge” the patient, then write an order to “admit” or “transfer” the patient to “skilled nursing,” when the physician sees the patient in the same bed. If the patient is physically moved to a separate skilled nursing or swing bed unit within the four walls of the hospital, it is easier to identify a change in status or location, but often the provider will select an inpatient hospital CPT code to report a swing bed visit, because the patient is in the same building.

Patient status is continually updated in the hospital registration system during an episode of care and mirrors the facility acuity of care as the patient moves from outpatient to inpatient acute care and potentially to post-acute skilled nursing facility or swing bed skilled nursing care. Medicare Claims Processing Manual, Chapter 12, instructs “if the inpatient care is being billed by the hospital as inpatient hospital care, the hospital care codes apply. If the inpatient care is being billed by the hospital as nursing facility care, then the nursing facility codes apply.”

Therefore, when a patient status changes to “skilled nursing” or “swing bed,” the American Medical Association (AMA) Current Procedural Terminology code section for “nursing facility services,” i.e., 99304-99318, should be referred to for professional service code assignment.

In addition, the Medicare Claims Processing Manual states, “Contractors pay the hospital discharge code (codes 99238 or 99239) in addition to a nursing facility admission code when they are billed by the same physician with the same date of service” with the exception of a surgeon who is under a surgical global period.

In addition to accurate code assignment, the following also are required:

• Professional billing should reflect the date of service when the provider saw the patient face-to-face and performed the discharge and/or admission work.
• All required medical record documentation for the hospital discharge and the separate nursing facility or swing bed admission, i.e., care plan, must be completed by the performing provider.
• The CMS-1500 claim form must reflect the appropriate place of service based in part on insurance coverage:
  • POS 31 – SNF/swing bed for Part A resident
  • POS 32 – SNF/swing bed to Part B residents or non-Medicare covered stays
• For rural health clinic (RHC), federally qualified health center (FQHC) or community health center (CHC) providers, the UB-04 must reflect the appropriate revenue code:
  • 524 – Visit to a member in a covered Part A stay at a SNF/swing bed
  • 525 – Visit to a member in a SNF/swing bed (not in a covered Part A stay, NF or ICF MR) or other residential facility

What can you do to avoid potential errors and subsequent inaccurate reimbursement for these professional services? We recommend that providers do all of the following:

• Review and update communication tools/charge tickets.
• Query professional staff and/or verify patient status with the hospital registration department prior to charge entry.
• Perform concurrent or retrospective audits on a sample of skilled nursing facility or swing bed claims to identify errors.
• Educate professional, coding and billing staff on appropriate documentation and coding criteria for nursing facility services.

Promoting correct code assignment within your medical practice, RHC, FQHC or CHC will result in increased compliance, decreased areas of risk and potentially more accurate reimbursement.

For more information on professional code assignment for nursing facility site of service and claim form completion, contact your BKD advisor.

The last day of the 90-day reporting period for the 2012 program year for an Eligible Professional (EP) was December 31, 2012. The EP’s payment year runs on a calendar year instead of the federal fiscal year like the Eligible Hospital’s (EH) payment year. The last day of the EH’s 90-day reporting period for the 2013 program year will be September 30, 2013. EHs must complete the attestation process no later than November 30, 2013, to receive their incentive payment from 2013 budgeted dollars.

If the EP has met the 90-day reporting period before January 1, 2013, it will have until February 28, 2013, to complete the attestation process for the 2012 program payment year. This means the federal incentive money being paid to the EP would come from 2012 budgeted dollars and not money budgeted for 2013. The Centers for Medicare & Medicaid Services encourages Medicare EPs to register and attest as soon as possible to resolve any potential issues that may delay their payment. By successfully completing the attestation process before the February deadline to be paid out of 2012 budgeted dollars, this will allow the EP to attest to and receive its next year’s incentive payment from 2013 budgeted dollars. If the EP does not meet the February deadline, it would be paid for the attestation in the 2012 program year out of the 2013 budgeted dollars and will have to wait until January 1, 2014, to attest for their next year’s incentive payment.

January 1, 2014, also begins the last program year for EPs to begin their incentive payment program.

If you have additional questions, contact your BKD advisor.

On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012, which the president has signed. The act delays sequestration for two months, but assumes the remaining sequestration will resume on March 1, 2013.

This means that, for two months, health care providers have avoided the 2 percent cuts in Medicare payments scheduled to take place January 1. However, the act contains significant provider cuts to pay for spending increases and delay sequestration.

If a budget is completed that permanently eliminates sequestration by March 1, 2013, many predict provider payment cuts could exceed the 2 percent contained in sequestration, and this act supports that concern.

The physician sustainable growth rate (SGR) or “doc fix” was extended for one year and once again avoids steep cuts in Medicare physician payments. The bad news:  It’s paid for by reducing Medicare spending in other areas.

The act contains a wide array of provisions, but below is a recap of the most notable Medicare provisions listed by additional spending versus cuts.

Additional Spending Provisions

• The act retroactively extends the Medicare Dependent Hospital (MDH) status to October 1, 2012. Previously existing MDH hospitals may have elected to change their Medicare status in anticipation of losing MDH status on October 1, 2012, and CMS has indicated it will allow hospitals to rescind those changes in these situations. These hospitals should work closely with their reimbursement advisors and intermediaries to make the necessary elections.
• The act also retroactively extends the Medicare low-volume add-on payments to September 30, 2013. This is available for hospitals with fewer than 1,600 Medicare discharges that are at least 15 miles from the nearest like hospital. Hospitals that qualify have had to request this add-on and attest that they qualify. Hospitals that believe they qualify should be on the lookout for instructions from CMS on how and when to apply.
• The 1.0 work geographic adjustment floor, used to compute physician payment rates, is extended through December 31, 2013.
• The act extends the exception process for outpatient therapy services for medically necessary therapy services exceeding the beneficiary payment limit to December 31, 2013.
• Ambulance add-on payments for rural, urban, super-rural and rural air-ambulance have been extended. These have been extended for ground runs through December 31, 2013, and for air ambulance through June 30, 2013.

Medicare Spending Reductions

For providers who benefit from the above provisions, celebration may not be in order; the amounts provided above may, in many circumstances, be exceeded by the cuts outlined below:

• Phase-in for recoupment of past overpayments to hospitals for MS-DRG case mix creep, referred to as the documentation and coding adjustment
• Hold-harmless or “TOPS” payments were not extended for sole community and small rural hospitals
• Reductions in end stage renal disease (ESRD) payments by rebasing rates for current behavior and drug usage, as well as reductions in transport payments for ESRD patients by 10 percent
• Increase to the statute of limitations for recovering overpayments from three to five years
• Rebase of the Medicaid disproportionate share payments, extending changes made by the Affordable Care Act
• Two percent increase to the coding intensity adjustment for Medicare Advantage plans, reducing payments to these plans for the differences in coding practices between Advantage plans and traditional fee-for-service plans
• Increase in Multiple Procedure Payment Reduction for Therapy Services from 25 percent to 50 percent

The act also addresses the applicability of the therapy cap to outpatient services provided by critical access hospitals (CAHs). It states that “the Secretary shall count toward the uniform dollar limitations … and threshold … the amount that would be payable under this part if such services were paid under section 1834(k)(1)(B) instead of being paid under section 1834(g).” In other words, the therapy cap also applies to services provided in an outpatient CAH and paid under cost, and the limit is to be calculated as though paid under the fee schedule. This section also says this should not be construed as a change in payment mechanism for therapy provided in a CAH.

While the act includes additional Medicare spending provisions—most notably the one-year deferral of the SGR—once again health care providers pay for the lion’s share with cuts to traditional fee-for-service payments. The documentation and coding adjustment alone is estimated to cut hospital payments by more than $10 billion, and ESRD payments will be cut by more than $5 billion. Health care providers will need to work to estimate the effect of these provisions on their organizations while educating legislators on the impact of further cuts to provider payments as a primary vehicle for spending reductions.

Outlook

In some ways, this bill was the easy part. The hard work is still to come, and it won’t be long from now. There are three events in the first quarter of 2013 alone requiring further legislative action. First is the need to raise the debt ceiling. Treasury Secretary Tim Geithner issued the warning on December 31, saying he can move some money around to avoid the problem but just for a few weeks; then it’s default time. This bill is where the Republicans, in particular, will make their stand. Providers and other stakeholders in the Medicare/Medicaid/CHIP programs should gird for new battles. There is no question publicly financed health programs will be a major target. Providers can look to what MEDPAC, OIG and CBO have suggested for cuts as a starting point.

The second event is the implementation of the sequester, now scheduled for March 1. Providers are still on the hook for a 2 percent across-the-board cut in payments. To avoid the sequester, providers may wind up with something worse, so the stakes for providers are incredibly high.

Finally, don’t forget government operations are funded only through March 27. In other words, the new Congress must either pass appropriation bills for the remainder of fiscal year 2013 or have the federal government close up shop. The threat to providers in this context is that contractor budgets are at risk. It’s hard to get a claim paid when there is no one at the other end to pay it. In short, this may be the most active first quarter we have ever experienced. Fasten your seat belts.

On November 1, 2012, the Centers for Medicare & Medicaid Services (CMS) released the final 2013 Medicare Physician Fee Schedule (MPFS) and its updated conversion factor. Under current law, providers paid under the MPFS will face significant cuts to reimbursement rates. Within the law governing reimbursement rates, a mechanism known as the Sustainable Growth Rate (SGR) automatically would have resulted in a significant decrease in Medicare reimbursement rates over the past several years. However, Congress has intervened each year to override the SGR, meaning rates have been generally flat each subsequent year. For 2013, if Congress does not intervene, the SGR will result in a 26.5 percent cut to the Medicare Part B conversion factor from $34.0376 to $25.0008.

As has been the case in past years, Congress appears committed to “pay-fix” measures that will avert this cut, as neither side of the political aisle seems interested in seeing rates drop in a manner that could cause a subset of physicians to cease taking Medicare patients. A fact sheet published by CMS on November 1, 2012, stated, “Congress has overridden the required reduction every year since 2003. The Administration is committed to fixing the SGR update methodology and ensuring these payment cuts do not take effect. Predictable, fiscally-responsible physician payments are essential for Medicare to sustain quality and lower health care costs over the long-term.”

Fee schedule revisions involve more than an annual change to the conversion factor; they also involve changes in the three categories that make up total Relative Value Unit (RVU) for each CPT code:  physician work, practice expense and malpractice risk. If the conversion factor is allowed to drop to $25.0008, virtually all physician fees will decrease. But whether there is a pay fix or not, you might be wondering what changes you’ll see in your “bread-and-butter” services as a result of RVU changes. The changes to your practice’s revenue will depend on which Current Procedural Terminology (CPT) codes you use the most—which is probably a function of your specialty and the locality in which you practice.

We don’t have room in this article to list the estimated effect on every CPT code, but we’ve shown in the tables below how some of the most commonly used codes will change from 2012 to 2013, using the scheduled conversion factor of $25.0008 and assuming there will be a pay fix resulting in a conversion factor equal to 2012 at $34.0376.

Winners & Losers

Assuming the conversion factor is maintained at a similar level to 2012, most of the listed codes actually receive a boost when calculated using national values—that is, without regard to Geographic Practice Cost Indices (GPCI). From a dollar standpoint, the biggest winner on this list is 58558 – Hysteroscopy Biopsy, which national value would be raised from $383.60 to $406.07. Other examples of procedures receiving boosts are 27236 – Treat Thigh Fracture ($10.21 increase), 52332 – Cystoscopy and Treatment ($9.87 increase) and 45378 – Diagnostic Colonoscopy ($8.17 increase).

Examples of procedures taking significant dollar amount reductions include 50590 – Fragmenting of Kidney Stone ($102.12 decrease), 47562 – Laparoscopic Cholecystectomy ($80.67 decrease) and 76830 – Transvaginal Us Non-Ob ($51.73 decrease).

Strictly from an RVU point of view, the Evaluation and Management services getting boosted could provide incentive to reduce admissions (Initial Observation Care, for example). Also receiving an RVU increase are certain endoscopic procedures that could help detect and treat cancer and other diseases in early stages. Perhaps this is designed to reduce the cost of care that occurs when disease has run its course undetected. Selected services on our list receiving the greatest RVU decrease are the Dopplers, Prostatectomy and Lithotripsy procedures.

In summary, what does this mean to your practice? As mentioned earlier, this depends very much on your specialty, your service mix and to some degree your payor mix. If your practice demographics don’t include many Medicare patients, there could be less impact. However, it is common practice for commercial and managed care plans to key their reimbursement rates off of Medicare’s RVU system, so the effects on your practice could be more significant than you might think at first blush. The only way to know for sure is to run the numbers. If you need assistance projecting the impact of the 2013 Medicare Fee Schedule on your practice, contact your BKD advisor.

Although compliance programs for skilled nursing facilities (SNFs) are not a new concept, the Patient Protection and Affordable Care Act, enacted March 23, 2010, requires nursing facilities to have a compliance and ethics program in operation by March 23, 2013, that effectively prevents and detects criminal, civil and administrative violations under the Social Security Act of 1935 and promotes quality of health care.

The act requires the following program components:

• Compliance standards and procedures must be adopted and followed by employees and other agents who are reasonably capable of reducing the prospect of criminal, civil and administrative violations under the act.
• Specific individuals with authority in the organization must be assigned overall responsibility to oversee compliance with the standards and procedures and have sufficient resources to assure compliance.
• The organization must exercise due care to ensure the above authority is not delegated to an individual with a propensity to engage in criminal, civil and administrative violations under the act.
• The organization must take steps to communicate and educate its employees and agents about the compliance program.
• The organization must take reasonable steps to achieve compliance with its standards by using effective monitoring and auditing systems and must have in place and publicize a reporting system for employees and agents to report violations without fear of retribution.
• The standards and procedures must be consistently enforced.
• In the event an offense is detected, the organization must take all reasonable steps to respond appropriately and  prevent further similar offenses.
• The organization must periodically reassess the compliance program and make changes necessary to reflect changes within the organization.

Is Your Program Effective?

Organizations that have implemented a compliance program will need to take a hard look at their program to determine if it is effective. In other words, does it include the required elements as outlined above? Organizations will need to change the mindset of having a compliance plan, which may include good written policies and procedures, and expand it to having an ongoing system and culture of compliance, ethical business practices and corporate conduct. When you “kick the tires” of your compliance program, are you identifying areas of vulnerability, finding problems and responding appropriately?

What Is the Silver Lining?

Organizations with an effective compliance program could realize the following benefits:

• Ability to demonstrate to employees and the community the organization’s commitment to ethical business practices and corporate conduct
• Ability to accurately assess employee behavior and identify and prevent unlawful or unethical behavior
• Improve quality of care and efficiency of operation
• Avoid overpayment or “upcoding” of claims
• Potentially enhanced revenues by identifying underpayment situations
• Improve internal communications and encourage reporting of potential compliance problems or fraudulent behavior
• Reduce exposure to civil damages, penalties, criminal sanctions and administrative remedies
• Demonstrate to other referral partners, i.e., hospitals, the organization’s commitment to compliance and quality of care, including reduction of hospital readmissions (This can increase referrals and position the organization to be a quality partner in an Accountable Care Organization.)

Is There Additional Guidance?

Over the years, the Office of Inspector General (OIG) has provided guidance for compliance programs for nursing facilities, including the following:

2000 Compliance Program Guidance for Nursing Facilities

2008 Supplemental Compliance Program Guidance for Nursing Facilities

In addition, the Secretary of Health and Human Services, working jointly with the OIG, was directed to promulgate regulations for effective compliance and ethics programs by March 23, 2012, and that such regulations may contain a model compliance program. To date, these regulations and guidance have not been published.

How Can BKD Help?

BKD consultants can assist you in developing and implementing an effective compliance program, including:

• Program review and design
• Risk assessments
• Training and education
• Compliance assessments—clinical documentation
• Compliance assessments—billing

For more information and assistance with compliance and ethics programs for SNFs, contact your BKD advisor.

Date:  Tuesday, November 6, 2012
Presenters:  Lori Brunholtz  & William Clark

Several changes have been made to the Medicare inpatient prospective payment system (IPPS) final rule for fiscal year 2013, including finalizing which hospitals are subject to the Hospital Readmissions Reduction Program (HRRP). Join BKD as we help you understand the ins and outs of HRRP and identify opportunities to reduce penalties.

Learning Objectives

Upon completion of this webinar, participants will be able to:

• Discuss what conditions are measured now and in the future
• Examine which hospitals are subject to the program and how penalties are calculated
• Explain how to monitor and evaluate readmissions
• Identify opportunities to reduce readmissions and avoid payment penalties

Presentation

Webinar

Date:  Tuesday, October 30, 2012
Presenter:  Brian Todd

This webinar will focus on the latest developments with respect to proposed regulations issued to provide clarification on the requirements under IRC Sections 501(r)(4), (r)(5) and (r)(6). These requirements relate to a hospital’s financial assistance policy, limitation on charges to individuals eligible for financial assistance and billing and collections practices.

Learning Objectives

Upon completion of this webinar, participants will be able to:

• Identify what elements must be present in the hospital’s financial assistance policy under current law and additional items the proposed regulations would require
• Explain the requirements for limiting charges to individuals eligible for financial assistance and evaluate methods for calculating amounts generally billed under the proposed regulations
• Describe what constitutes a reasonable effort that must be conducted under the proposed regulations before engaging in extraordinary collections actions

Presentation

Webinar

Date:  Tuesday, September 18, 2012 (originally broadcast September 6, 2012)
Presenters:  Patrick Malayter , Rick Klahsen , Jim Still  & Jesse Palmer

The new regulations regarding capitalization of tangible property costs will have a significant effect on all businesses with fixed asset investments. Complying with these new rules will likely require changes to your tax accounting methods. Is your organization prepared for the changes? Join BKD tax leaders as we discuss the wide impact of these new regulations and steps your company should take to comply with these rules.

Learning Objectives

Upon completion of this webinar, participants will be able to:

• Discuss the basics of the tangible property regulations
• Explain new definitions of materials and supplies, unit of property, improvements and other important terms
• Identify changes their organization will need to make to comply with the tangible property regulations

Presentation

Webinar

Regulated transactions with physicians are now common for hospitals. With the significant number of physician practice acquisitions and other affiliations, the number of regulated transactions with physicians has gone up exponentially. In this current era of regulatory enforcement, hospitals and health systems have an increased, potentially crippling risk in terms of the financial damages.

Financial relationships with physicians exist throughout the hospital, and nearly all can be classified as a regulated transaction that, if not properly managed, could result in violations of Stark and anti-kickback statutes that may result in treble damages and $11,000 per claim in penalties. The Office of Inspector General has noted this area in its FY 2012 workprogram.

Elements of a Regulated Transaction

Hospitals and health systems generally understand that the acquisition of a practice, subsequent employment and other financial relationships are regulated transactions. Therefore, most do a good job with fair market value (FMV) compliance with these contracts on the front end of these new physician relationships.

However, in a recent, nonscientific series of interviews with hospital executives, seven in 10 hospitals indicated there likely were inadequate safeguards to monitor compliance after the relationship began. This is where most compliance risk is present—after the initial transaction closes. To be in compliance with applicable regulations, all financial relationships with physicians should be closely monitored and periodically reviewed.

Three Common Internal Control Problems

As part of a robust, enterprise-wide physician risk management system, here are the top three internal control problems BKD has seen in the last 12 months regarding regulated transactions.

1. Contract Renewals

This is an opportunity to review both the substance of an arrangement and the financial terms. Fees paid under any physician contract must be at FMV in light of existing facts and circumstances. An FMV evaluation of contracts should include a review of the actual services or goods rendered as part of the arrangement to make sure what is actually transpiring is reflected in the contract terms.

Common Problems

A.  FMV Review Timing – Often, an FMV analysis is not performed or performed after the fact. Whether prepared internally or externally, FMV analyses performed after the fact create a tremendous amount of pressure for the analyst to arrive at the “right” answer.

B.  Change in Facts and Circumstances – Contract time is when you can reflect on what happened under the prior contract and what will be the agreement going forward. Did physicians add extenders or staffing? Did they meet production goals? The key is identifying where things stand today relative to when the deal was entered into work relative value unit (wRVU); consider those answers in light of proposed compensation.

2. Departure from Contract Terms

While unregulated businesses have dynamic employment and other contractual relationships in which the services and expectations can change over time naturally, some changes in the health care industry can actually create compliance risk. These changes can lead to improper compensation calculations according to the original contract terms.

Common Problem – Change in Physician Extender Utilization

It is common for a busy physician to add a nurse practitioner to increase a clinic location’s capacity. This is not a problem in and of itself, but problems can emerge several steps down the road.

We know there are payors that will not recognize an extender as a unique provider, so the patients he or she sees are billed under the supervising physician. For a physician paid under a wRVU model where he or she receives a dollar per wRVU, the physician could unintentionally be receiving compensation for both their own wRVUs and the extender’s. There is an internal control failure here that can and should be reviewed.

This scenario could be construed as overpayment to the physician. Overpayments to physicians call into question any protected referrals to the hospital (such as imaging and labs) and potentially create significant exposure for a hospital under the False Claims Act.

3. Stacked Contracts

Hospitals often engage physicians for a multitude of services these days as health systems strive for clinical integration. These contractual relationships include employment, medical directorship, on-call arrangements, joint ventures, building and equipment rentals, co-management arrangements, professional services arrangements and others.

When these other arrangements are related to an employed physician, the regulated transaction becomes more complex. Contracts should be reviewed in conjunction to confirm that the total package is at FMV and clearly document there is no coordinated effort to reward physician referrals through a series of aggressive contractual arrangements.

Common Problems – If employed physicians participate in a separate contractual call arrangement with separate payments for call services rendered, there are two key areas of concern:

A.  Stacked Payment – If a physician is paid for being on call during normal business hours and the physician is actively seeing patients, there’s potential the physician is being paid twice for the same time period.

B.  Overpayment – The architecture of on-call payments compensates providers for two fundamental components, the inconvenience of being on call and the uncompensated and undercompensated care rendered to unassigned patients. To the extent an employed physician is being paid on a per wRVU basis, they already are being protected against uncompensated and undercompensated care. That is, to the extent that a universal call coverage rate is paid to an employed physician, there may be a per se overpayment based on the overall call rate (the higher the on-call rate, the greater the risk of overpayment).

Internal Control Action Steps

Many hospital providers believe they have inadequate safeguards to monitor physician relationship compliance. However, providers often are in denial and indicate everything is perfectly fine. The cost of noncompliance around physician relationships is high. The cost-benefit analysis to committing resources in the area of enterprise-wide physician risk management tilts strongly towards making an investment in an experienced advisor.

Health systems should actively manage risk related to physician arrangements. Take the time to review contracts, keep them organized, pay attention to stacked arrangements and understand how wRVUs are calculated. Contact your BKD advisor for help with FMV analysis, contract reviews, physician compensation plan implementation and other regulation compliance issues.

In the fiscal year 2013 Medicare inpatient prospective payment system (IPPS) final rule, the Centers for Medicare & Medicaid Services finalized which hospitals are subject to the Hospital Readmissions Reduction Program (HRRP), as well as what portion of the IPPS payment will be affected by the readmission adjustment factor. The impact on the diagnosis-related group (DRG) reimbursement will begin October 1, 2012, with the beginning of the federal fiscal year (FY).

Studies show nearly one in five patients discharged are readmitted within 30 days, at a cost to the Medicare program of $15 billion per year. Beginning in October, hospitals with readmission rates higher than a certain threshold for the three conditions below will be penalized up to 1 percent of their aggregate base DRG rate. The penalty increases to a maximum of 2 percent in FY 2014 and 3 percent in FY 2015. In addition, the list of conditions measured increases in FY 2015.

Conditions Measured in FY 2013

• Acute Myocardial Infarction
• Heart Failure
• Pneumonia

Additional Conditions Measured Beginning in FY 2015

• Chronic Obstructive Pulmonary Disease
• Coronary Artery Bypass Graft
• Percutaneous Transluminal Coronary Angioplasty
• Other Vascular Conditions

The FY 2013 payment adjustments are based on readmission rates from July 1, 2008, through June 30, 2011; FY 2014 payment adjustments will be based on readmission rates from July 1, 2009, through June 30, 2012; and FY 2015 payment adjustments will be based on readmission rates from July 1, 2010, through June 30, 2013.

Nearly 2,000 hospitals will be penalized by the HRRP in FY 2013. These hospitals’ combined Medicare payments will be reduced by about $260 million; 252 hospitals will receive the full 1 percent payment reduction.

The HRRP applies only to PPS hospitals.  Sole community hospitals, even those paid based on a hospital specific rate, will be affected by the payment adjustments.  Critical Access Hospitals, Long Term Acute Care Hospitals, Inpatient Rehabilitation Facilities, and Psychiatric Hospitals are exempt.

Hospitals should assess the impact the HRRP will have on their facility, implement procedures to measure and evaluate readmissions and identify opportunities to improve readmission rates, including working with post-acute care providers in their service area.

For more information on how the HRRP may affect your organization, contact your BKD advisor.

Date:  Wednesday, August 29, 2012
Presenters:  Paige Gerich  & Anne Adams

Organizations that receive contributions from donors have certain reporting obligations to the IRS. Is your organization prepared for the requirements that come with these gifts? Join BKD for this informational webinar, which will address an organization’s responsibility when it accepts donor contributions.

Learning Objectives

Upon completion of this webinar, participants will be able to:

• Decide when an organization is responsible for sending donor acknowledgement
• Explain the different reporting requirements to donors for charitable contributions
• Decide what information needs to be included in a donor acknowledgement

Presentation

Webinar

The Office of Pharmacy Affairs (OPA) and Health Resources and Services Administration (HRSA) have issued a number of communications and provided several webcasts emphasizing that 340b program operations compliance is a priority. Federally Qualified Health Centers (FQHCs) should not interpret the lack of historical oversight or testing as a sign of leniency going forward.

Compliance with 340B program rules always has been the responsibility of participating organizations. OPA has been clear:  FQHCs may not assign their responsibility to someone else through a contract pharmacy relationship. Remember that 340B-priced drugs purchased are paid for and remain the property of the 340B-covered entity. FQHCs pay for 340B-priced drugs, which remain the responsibility of the covered entity. A contract pharmacy relationship simply offers more access to patients through a sort of consignment sales agreement.

Effective with fiscal years ending June 30, 2012, the Consolidated Health Centers, HIV Care Formula and HIV Outpatient Early Intervention grants (CFDA #’s 93.224, 93.527, 93.917 and 93.918) have a new special test and provision requirement under the Office of Management and Budget Section A-133, which describes the procedures to be performed on the 340B program. Information is available on the White House website (See Part 4 – Department of Health and Human Services). If any of these programs are audited as major federal programs, your auditor is required to perform compliance procedures. You also could be selected for an OPA audit or a manufacturer-conducted audit and, beginning with grantee site visits for fiscal year 2013, 340B program compliance questions will be included.

The two primary areas for concern for the 340B program are diversion and duplicate discounts. Diversion is when 340B-priced pharmaceuticals you purchase are distributed to individuals who are not your qualifying patient; the definition of a patient can be found in the Federal Register. The duplicate discount is when the manufacturer provides a 340B discount on a drug and pays a Medicaid rebate to the state on the same drug.

In this new heightened compliance environment, here are some steps you should be taking:

• Review or develop relevant policies and procedures, including internal controls, for administering a compliant 340B program. This online resource offers a self-assessment resource and example policy and procedure manual resource.
• Verify all of your 340B-eligible health care sites are listed accurately on your scope of project as documented in the Electronic Handbook (EHB).
• Compare the sites listed on your scope of project on the EHB with the OPA website and make sure they match exactly.
• Verify all contract pharmacy relationships are properly reported in the OPA database.
• Review the additional information in the OPA database for accuracy and update and correct the information as necessary; the covered entity is responsible for the accuracy of all information in the OPA database.
• Each state has its own expectations for how 340B-covered entities should treat Medicaid and Medicaid Managed Care claims. To stay compliant, ensure you have a clear understanding of your state’s expectations and processes for billing prescription drugs purchased at 340B prices for these programs; contact your state’s key pharmacy representative for more information.
• Determine if you are using 340B-priced drugs for Medicaid or Medicaid Managed Care covered claims in your in-house or contract pharmacy.
• If you are billing Medicaid or Medicaid Managed Care claims, ensure your organization has made the proper elections on the OPA database and is properly included on the Medicaid Exclusion File.

These are just some of the steps you should begin taking to verify or become compliant. The OPA does not view these as new requirements; in its view, the only change is the addition of program integrity measures to provide oversight. If you are participating in the 340B program, your compliance will be evaluated in the near future.

For more information on the compliance requirements surrounding the 340B program, contact your BKD advisor.

As last reported, the long-term care (LTC) merger & acquisition (M&A) market had a record year in 2011 in terms of transaction volume, reporting approximately 74 percent more transactions than the annual average for the previous three years.

Although 2011 was a tough year to follow for LTC M&A, the first quarter of 2012 started strong, matching the same period in 2011 with 39 reported transactions. Even though Q2 2012 slowed in terms of year-over-year transactions, there were 16 deals reported in the last month of Q2 alone. In addition, there are sure to have been additional transactions in the first half of 2012 that have yet to be announced. Based on the 68 transactions reported thus far through Q2 2012, and the likelihood of additional transactions for that time period to be announced later in the year, we could be looking at a first half volume of closer to 75 or 80, keeping things on pace for another robust 150-plus transaction year.

Total transaction value for the transaction volume through the first half of 2012 was approximately $3.5 billion.

The primary factors continuing to drive LTC M&A market activity include regulatory changes and continued reimbursement pressures due to strained federal and state budgets, low capital costs and the growing wave of baby boomers. With the Federal Reserve’s pledge to keep interest rates low into 2014, combined with the regulatory and reimbursement changes the industry is facing, we should continue to see favorable M&A volume over the next couple of years, both in LTC and across the broader health care services landscape.

Public Comparables

Skilled Nursing

Assisted/Independent Living

Historical Transaction Cap Rates

During Q4 2011, skilled nursing valuations decreased slightly from Q3 2011, with cap rates increasing from 13.2 percent to 13.3 percent. The assisted living and independent living markets showed some valuation improvements, with each sector’s cap rates decreasing by 20 basis points, bringing them to 9.3 percent and 8.2 percent, respectively. Skilled nursing valuations for Q4 2011 are exactly where they were two years prior, whereas assisted living and independent living have each improved by 60 basis points from Q4 2009.

Recent Select Transactions

Skilled Nursing

• May 2012 – A not-for-profit group sold a skilled nursing facility in Texas with 122 beds for $7 million, or $57,400 per bed. The facility was built in 1988 and was operating at an 88 percent occupancy rate with revenues and EBITDA of $6.4 million and $1.15 million, respectively.
• May 2012 – A local operator purchased a 252-bed nursing facility in West St. Louis, Missouri, for $21.95 million, or $87,100 per bed.
• May 2012 – AdCare Health Systems purchased a 160-bed skilled nursing facility from a local hospital in Georgia for $8.24 million, or $51,500 per bed.  
• April 2012 – AdCare Health Systems closed on the purchase of three skilled nursing facilities in Arkansas for $27.2 million with a total of 437 beds, or $62,500 per bed. Two of the facilities’ revenues were approximately $15.9 million annually, and the third facility, located next to a major hospital, was recently renovated and is expected to generate $20 million in annual revenues.
• April 2012 – A regional provider purchased a 196-bed skilled nursing facility in New Jersey for $14 million, or $71,400 per bed. The facility had an occupancy rate of 93 percent and revenues were more than $16 million.

Assisted/Independent Living

• June 2012 – Assisted Living Concepts has purchased 12 assisted living communities from Ventas for $97 million, or about $139,000 per unit. The 12 properties have a total of 696 units and combined revenues of $18.3 million. 
• June 2012 – An investment group sold a 74-unit assisted living community in Maryland to an affiliate of Capital Health Group for $12.7 million, or $171,600 per unit. The community was built in 2000 and maintains a 95 percent occupancy rate.
• June 2012 – Chartwell Senior Housing sold six independent living communities with a total of 1,221 units to Harvest Facility Holdings for $165.5 million, or $135,500 per unit.
• April 2012 – A regional operator purchased a 46-bed assisted living community in Missouri for $2.3 million, or $50,000 per bed. The community was built in 1990 and renovated in 2002. The occupancy rate was strong at 98 percent, and revenues were $2.6 million.

Source:  Irving Levin Associates, Inc.

For more information on this market update or related matters, consult your BKD advisor.

About BKD Corporate Finance, LLC

BKD Corporate Finance, LLC, a wholly owned subsidiary of BKD, LLP, provides merger and acquisition, sales, management buyout, ESOP, recapitalization, financing and IPO advisory services. Our experience covers a variety of industries, including health care, financial institutions, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.

U.S. health care organizations have recently—or are currently—assessing their information technology operations and software systems for the effects of compliance with electronic health record (EHR) requirements and the pending implementation of ICD-10. The implementation of ICD-10 is a conversion of the approximately 13,500 current coding data sets into 70,000 coding data sets used to report a patient’s medical condition, hospital inpatient procedures and updated medical terms. This conversion will make the coding system more complex, but also will improve information reported in patient medical records.

A proposed rule issued in April would delay the original compliance date for ICD-10 from October 1, 2013, to October 31, 2014, and a final rule is expected to be released in the near future. Accounting for the purchase or development of software for organizations to use internally is specifically addressed within generally accepted accounting principles (GAAP). The American Institute of Certified Public Accountants released a Technical Practice Aid (TPA) in July that addresses accounting for costs incurred during implementation of ICD-10. This TPA guidance also applies to accounting for purchases or development of internal-use software, such as the purchase of or upgrades to an accounting or patient management system.

The costs incurred during the process of evaluating and implementing upgrades and changes to an existing software system or the overall purchase of a new software system generally fall into one of the following categories:

• Business process re-engineering
• Software purchase, development or modification
• Acquisition of fixed assets

The cost of business process re-engineering should be expensed when incurred and includes costs related to the evaluation of current business processes, review/analysis of process re-engineering solutions, work force restructuring and the implementation of process re-engineering. Some of the costs incurred to become EHR or ICD-10 compliant may be considered process re-engineering, but other costs may be capitalized if they result in modifications to an organization’s internal-use software, which is discussed below. When evaluating the costs incurred, business process re-engineering expenses center on processes and not software systems. Accounting for business and technology re-engineering is addressed in FASB ASC Topic 720-45; these costs can be incurred internally or from a third-party vendor, such as a consultant.

Purchases of equipment and other assets associated with EHR and ICD-10 implementation should be accounted for in accordance with the organization’s existing fixed-asset capitalization policies. When purchasing and replacing assets, organizations should review fixed-asset records for other software or asset costs that might be impaired by implementation.

Accounting for costs incurred for software purchases, development or modification requires the costs to be broken down into the different stages of the project for consideration of capitalization. The guidance for determining the proper accounting of internal-use software is addressed in FASB ASC Topic 350-40.

During a software project, there are three stages in which activities take place:

For most organizations, the preliminary project stage consists of the planning, evaluation and decision making regarding the options for software purchases and development. Costs in this stage are to be expensed when incurred. The hiring of a consultant to assist with evaluating and acquiring software projects is typically expensed, as it falls within the scope of the preliminary stage.

External and internal costs within the application development stage are capitalized. External costs include materials used and services provided during development or in purchasing software from vendors. Organizations also can capitalize travel expenses directly associated with developing software. Internal costs that can be capitalized are limited to payroll and payroll-related costs, i.e., employee benefits, for employees who work directly on the internal-use software project. Typically, these employee activities are for configuration of information flow, designing interfaces to conform to business needs and testing system outputs. The organization should maintain detailed individual time reports as documentation to support the internally capitalized costs. As a general rule when determining if employee time should be capitalized, inquire if that time added value to the software program. Any general and administrative or overhead costs are not eligible to be capitalized internal costs.

Post-implementation and operation stage costs are to be expensed as incurred. These costs include any monthly or annual support and maintenance agreements and training costs. All training costs are expensed regardless of the stage in which they occur. The purchase of training courses from a software vendor or consultant is expensed at the time the service is received and not included in the cost of software.

Any time spent converting, cleaning or reconciling data from the old system to the new system should be expensed as incurred. Only the costs to develop or obtain software to convert data from an old system into a new system should be capitalized. If an organization hires a consultant to scan and create or convert medical records to a new system, that cost should be expensed.

Software Enhancements or Modifications

Aside from purchasing a new software system or module, many organizations will modify or add enhancements to their existing software. These costs would follow the same development stages as described above and must result in additional software functionality and capability. Additional functionality allows the software to execute processes it could not perform prior to the updates and enhancements of value to the organization. Health care organization software systems may require modifications to become ICD-10 compliant, which may result in additional software functionality. Each organization must look at its specific facts and circumstances to evaluate whether this additional functionality was achieved. Factors to consider include the history of coding system maintenance or changes in maintenance fees charged by vendors. If free upgrades were provided to the coding system or the coding system is updated quarterly, it would be less likely additional functionality was achieved. If the organization has been delaying an update to its coding system and the changes resulted in additional maintenance fees or hardware, additional functionality likely has been achieved. Other items to consider are the quantity of additional coding changes and changes in system complexity. Organizations with more current software systems may need fewer changes to become ICD-10 compliant; thus, any costs incurred may not result in additional software functionality. Significant changes in software design, processes and ability will indicate additional functionality.

Valuation of Software Contracts

Software contracts often contain several services or elements, such as implementation services, software licenses, maintenance fees and training costs. Often, these services are not separately valued within the contract; if they are, this value may be determined differently for accounting purposes under GAAP. The contract should be valued based on the actual fair value of the elements in the contract. For example, a software contract states that training costs are free; however, the organization is receiving this service and should assign a fair value to the training. Another common item to value within a software contract is free or reduced maintenance fees for the first year of a contract. An organization should review the reasonableness of values in their contract and can compare those values to prices charged by other vendors to determine a fair value.

As an organization evaluates and implements changes to become compliant with EHR and ICD-10, it needs to evaluate where it is now and the effect of the changes needed. The organization should document its consideration of additional functionality and discuss all the facts and circumstances contemplated in determining the proper treatment of the cost incurred.

For more information on how this may affect your organization, contact your BKD advisor.

In July, the Centers for Medicare & Medicaid Services (CMS) changed its position on the inclusion of assets acquired through capital leases in the assets eligible for the Medicare EHR Incentive Payment. In a revision to a previous series of frequently asked questions, CMS states it will allow assets acquired through a capital lease to be included in the cost of eligible electronic health record (EHR) assets. However, this revision does not apply to operating leases, which are still excluded from assets eligible for the EHR incentive payment. The cost of an operating lease may continue to be included on the cost report as reimbursable cost.

A capital lease, or virtual purchase, as defined in the Medicare Provider Reimbursement Manual, will be considered an operating lease if it doesn’t meet one of the following four conditions:

• The lease transfers title of the facilities or equipment to the lessee during the lease term.
• The lease contains a bargain purchase option.
• The lease term is 75 percent or more of the useful life of the facilities or equipment; this provision is not applicable if the lease begins in the last 25 percent of the useful life of the facilities or equipment.
• The present value of the minimum lease payments—payments to be made during the lease term, including bargain purchase option, guaranteed residual value or penalties for failure to renew—equal 90 percent or more of the fair market value of the leased property. (This provision is not applicable if the lease begins in the last 25 percent of the useful life of the facilities or equipment. The present value is computed using the lessee’s incremental borrowing rate, unless the interest rate implicit in the lease is known and is less than the lessee’s incremental borrowing rate; in this case, the interest rate implicit in the lease is used.)

If any one of the above conditions is met, a critical access hospital (CAH) may include the cost of the leased asset, which must be based on the asset’s fair market value when the lease is initiated. The interest and insurance portions of the leased asset are not included in the asset’s cost for purposes of calculating the EHR incentive payment. However, these costs may be included on the cost report as reasonable reimbursable costs, subject to the limitation on rental charges allowed under a virtual purchase.

If these costs are included in the EHR incentive payment, the CAH will be required to provide the Medicare Administrative Contractor (MAC) with sufficient documentation to prove that the lease meets the criteria of the capital lease as described above. The CAH also will have to document that the cost of the asset was determined using the fair market value at the date the lease was initiated.

For more information on how these proposed changes could affect your organization, contact your BKD advisor or Craig Steen.

The ICD-10 implementation date is looming—are you ready? A successful, planned implementation strategy will help your organization mitigate decreased productivity and delayed reimbursement.

BKD is sponsoring training sessions in September that will provide health care providers with organizational awareness and implementation strategies for the ICD-10 transition. The sessions—held in Kansas City, Missouri, Dallas, Texas, and Louisville, Kentucky—will be led by G2N Consultant Ann Zeisset, RHIT, CCS, CCS-P. Ann is a noted national authority on ICD-10-CM/PCS who will provide you with valuable insight on preparing for these changes. Topics covered during this training include:

• Implementation Strategies for ICD-10-CM/PCS (2 hours)
• Organizational Awareness Training on ICD-10-CM/PCS (1 hour)
• Converting & Comparing Data & Clinical Documentation Strategies Related to ICD-10-CM/PCS (1 hour)

For more information and to register, click here.

On June 22, 2012, the IRS issued proposed regulations regarding several additional requirements enacted by the Patient Protection & Affordable Care Act applicable to tax-exempt hospitals. The IRS has provided a comment period that ends September 24, 2012.

The proposed regulations address new Internal Revenue Code (IRC) Section 501(r)(4),(5) and (6) requiring hospitals exempt from tax under IRC Section 501(c)(3) to do all of the following:

• Establish written financial assistance and emergency medical care policies
• Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy
• Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s financial assistance policy before engaging in extraordinary collection actions (ECAs) against the individual

The proposed regulations provide detailed guidance regarding content now required in an exempt hospital’s written financial assistance policy. While some of the required content already may be included in the hospital’s currently executed financial assistance policy—content such as eligibility criteria, basis for calculating charges or the method for applying for assistance—other items also should be considered for inclusion in a hospital’s financial assistance policy. Specifically, an exempt hospital’s financial policy should do the following:

• Outline the actions the hospital may take in the event of nonpayment if the hospital has no separate billing and collection policy
• Discuss measures to widely publicize the financial assistance policy within the community served by the hospital
• Include specific language outlining the amounts, such as gross charges, to which discounts are applied
• Include a statement indicating that an individual eligible for financial assistance will not be charged more than the amounts generally billed (AGB) for emergency services or other medically necessary care
• Detail the method used to compute AGB

In addition, the proposed regulations state that the financial assistance policy must be approved by the governing body or committee or other party permitted under state law to act on behalf of the governing body.

The proposed regulations also provide two options for computing AGB. Exempt hospitals may use a look-back method or a prospective method to compute AGB. Determining appropriate AGB is critical, as a tax-exempt hospital may not charge a financial assistance-eligible patient more than AGB under the new rules. While use of gross charges for billing is prohibited, invoices may include gross charges as the starting point to which discounts are applied, as long as the actual amount the patient is expected to pay meets the criteria. Safe harbors are provided for hospitals with respect to individuals who would qualify for assistance but refuse to complete an application for financial assistance.

In addition to the guidance provided for financial assistance purposes, the regulations also provide insight as it relates to the billing and collections procedures outlined in IRC Section 501(r). The proposed regulations require exempt hospitals to make reasonable efforts to qualify a patient under the hospital’s financial assistance policy before ECAs are initiated by the hospital. These efforts include a 120-day notification period, in which the hospital is prohibited from initiating an ECA, and a 240-day application period, in which the hospital must accept and process financial assistance applications. The proposed regulations clarify that extraordinary collection actions include reporting to credit agencies, sale of an individual’s debt to another party and any action that requires a legal or judicial process. In addition, IRS guidance includes information the exempt hospital must provide to the patient during the notification period and procedures for handling both incomplete and complete financial assistance applications.

The above information summarizes only a small portion of the explanation and proposed regulations as published by the IRS, which are 94 pages in length. While the proposed regulations may be relied upon, they are not required. However, the guidance does provide exempt hospitals with the position the IRS may take in applying the rules under IRC Section 501(r).

Exempt hospitals will be required to complete questions regarding compliance with these rules on their Form 990 reporting for years beginning in 2011. In preparation for Form 990 reporting and compliance with the new rules, exempt hospitals should consider conducting a thorough review of the proposed regulations and evaluate its current compliance policies and procedures.

For more information on how these proposed changes could affect your organization, contact your BKD advisor.

The U.S. Supreme Court recently decided to uphold virtually all of the Affordable Care Act (ACA) as it was enacted.

First and foremost, all Medicare-related provisions are left intact, so all payment cuts to providers that have already been implemented will remain. There will be no refunds of the monies lost to those cuts from the Centers for Medicare & Medicaid Services (CMS). Similarly, cuts that have not yet occurred, e.g., the readmission adjustment, will take place as scheduled. The good news is that all of the special adjustments, e.g., the wage index floor in the so-called frontier states, that were part of the ACA also survive. In short, it is business as usual with respect to the Medicare program.

The court did strike down a Medicaid provision. While it upheld the law’s eligibility expansion (to include, among others, poor childless adults), it also held that any given state does not have to go along with that expansion as a condition to receiving federal matching money to help pay for its existing Medicaid plan. In other words, only if the state accepts the new funds must it then agree to follow the new rules for expanded eligibility. In essence, the new category of eligible recipients is voluntary, not mandatory.

There is considerable speculation as to what the states’ response might be to this new option. Some believe the states will not turn down the chance to cover these newly eligible people and have the federal government pay 100 percent of the cost for three years (FY 14, FY 15 and FY 16). But others believe the states will look at their obligation to pay 10 percent of the cost starting in FY 17 and decide not to go forward. Many states likely will be in the first group, but there will undoubtedly be at least a few in the second.

It’s clear providers must now pay close attention to what occurs in their state. All 50 state legislatures now have a choice to make.

There is considerable uncertainty at the moment as to the budgetary effect of this decision. Shortly after the decision was handed down, the Congressional Budget Office announced it would be some time before it could make an estimate of the cost of the ACA as it is now constituted. The uncertainty comes primarily from the fact that no one is quite sure what happens to poor childless adults in a state that decides not to cover them. It is possible they may still be eligible to go into the private insurance exchange and purchase a subsidized policy, which could lead to exchange subsidies greater than what the federal government would have paid out under the Medicaid matching funds.

A potential implication for the provider community is that there will likely be at least some people who will remain uninsured, being covered by neither Medicaid nor a subsidized private plan. The likelihood of such a scenario in any given state will remain unknown for at least another year.

On the private insurance side, the news is that there is no news. Since the individual mandate was upheld, there was no need to try to strike other provisions in this comprehensive regulatory reform of private plan behavior. Thus, the requirement to cover pre-existing conditions stands; the same holds true for the community rating. The assumption has been that these reforms will mean more people will have robust private health insurance when they present themselves at the door of a health care provider. Only time will tell if that proves to be true.

For more information on how this decision affects your organization, contact your BKD advisor.

On Monday, May 21, 2012, the Centers for Medicare & Medicaid (CMS) published a reminder that, effective for services provided on or after July 1, 2012, the statutory moratorium allowing certain pathologists and independent laboratories to bill for the technical component (TC) of pathology services expires. This means the TC for those surgical pathology services provided under arrangement to Medicare hospital patients only will be considered covered and payable by Medicare if billed by the hospital. The hospital will receive additional payment under the Outpatient Prospective Payment System (OPPS) for services provided to outpatients, but such services are considered included in the diagnosis-related group reimbursement for inpatients.

The TC of surgical pathology services involves preparing tissue removed during surgery for examination by a pathologist. These services are usually performed by a specialized technician and include preparing microscope slides by cutting, mounting and staining the specimen. The pathologist would then examine the specimen and prepare a report. This policy change does not affect the billing of the pathologist’s professional component. In addition, the employment status of the pathologist is not relevant to this policy change.

It appears the independent laboratories that currently bill the TC of surgical pathology services for hospital beneficiaries will lose a significant percentage of their total payment from Medicare per service, while the hospital will either not gain revenue or will pick up significantly less than what was previously paid to the laboratory. For example, the independent laboratory will lose approximately $50 in payment for Surgical Pathology Level III, e.g., appendectomy and gallbladder, while the hospital will gain only $37 in OPPS Medicare reimbursement when performed as an outpatient. The reimbursement difference for the surgical pathology codes based on billing entity is shown in the table below:

During the development of the Inpatient Prospective Payment System (IPPS), it was decided the volume and reimbursement of outsourced surgical pathology preparation was not sufficient to require hospitals to assume the billing.

In the final physician fee schedule regulation for 2000, the Health Care Financing Administration (now CMS) stated it would implement a policy to pay only the hospital for the TC of physician pathology services provided to hospital patients. However, the Benefits Improvement and Protection Act of 2000 (BIPA) extended the moratorium for two more years, at which time CMS decided to continue directly paying laboratories for these services. BIPA also required the U.S. General Accounting Office (GAO) to quantify the magnitude of the savings that would be realized by requiring hospitals instead of providing laboratories bill for the TC.

In September 2003, the GAO published its report recommending the CMS terminate the policy of permitting laboratories to receive payment from the program for technical pathology services provided to hospital patients. The report stated the program would have saved $42 million in expenditures in 2001 and overall beneficiary cost sharing would have been reduced by $2 million had independent laboratories not been permitted to bill the program directly. CMS responded that, due to the low volume of TC surgical pathology services outsourced by rural hospitals, requiring those hospitals to bill the program directly and pay rendering laboratories or pathology groups a contracted amount would not place a significant financial burden on the hospitals. The GAO also did not believe the policy change would negatively affect beneficiaries’ access to care.

The Tax Relief and Health Care Act of 2006 further delayed implementation of the proposed policy change. An additional extension of six months was created in the Medicare, Medicaid, and SCHIP Extension Act of 2007, with annual extensions thereafter. Most recently, the Middle Class Tax Relief and Job Creation Act of 2012 extended the moratorium until July 1, 2012, and there seems to be little chance of another extension. This policy change likely removes the final exception to the bundling requirement, which requires all hospitals to bill TC services provided either directly or under arrangement to hospital patients, regardless of admission status.

After July 1, 2012, CMS likely will install system edits to prevent improper payments for the TC of pathology laboratory services provided during a covered inpatient hospital stay or provided on the same date of services as an outpatient service when billed to Part B.

Hospitals should have discussions with their contracted pathology group if they currently outsource the billing of the TC of surgical pathology services. Independent laboratories and pathology groups providing services for Medicare patients under arrangement with a hospital will need to begin billing their hospital client instead of the program. While the financial effect on hospitals may be minimal, operational barriers will need to be effectively managed. The financial effect for hospitals will be driven by their contractual rate as well as any additional costs related to charge capture and data collection. Charge Description Masters will need to be expanded, and timely reporting of Current Procedural Terminology/Healthcare Common Procedure Coding System codes and description of services from the contracting pathology group to the hospital will be key to reducing lost revenue.

For more information, contact your BKD advisor.

CMS has proposed a 2.1 percent update to the federal operating standardized amount. This is based on a 3 percent market basket update, reduced by two factors mandated by the Patient Protection and Affordable Care Act (PPACA):  a 0.8 percent economy wide productivity adjustment and an additional 0.1 percent reduction. CMS proposes additional adjustments for budget neutrality and documentation and coding. While there are no more mandated documentation and coding adjustments, CMS will continue to monitor this area. After all items are considered, the proposed FY 2013 operating standardized amount is $5,325.62, an increase of 2.1 percent from prior year.

Hospitals not reporting quality data will have a 2 percent reduction applied to their standardized amount update factor. The difference in the standardized amount for hospitals reporting and not reporting quality data is $104.32.

CMS proposes applying all of the same adjustments to the hospital-specific rates of sole community and Medicare-dependent hospitals. Due to the effect of prior update factors and budget neutrality adjustments, hospitals paid using their hospital-specific rate will see a reduction in payments of 1.3 percent in 2013.

Among the other payment factors addressed in the proposed rule:

• CMS proposes setting the 2013 outlier threshold at $27,425, an increase of $5,040 from 2012.
• The proposed national capital standard federal payment rate of $424.42 is up $3 from 2012.

Proposed Changes to MS-DRG Classification & Relative Weights

Once again, CMS spends a lot of verbiage discussing its justification for and authority to make adjustments for “changes in documentation and coding that did not reflect real changes in case-mix.” These documentation and coding adjustments are based on claims data from FY 2008, 2009 and 2010.

Following is a summary of the various documentation and coding adjustments to the standardized amounts:

• Remaining Prospective Adjustment for FY 2008-2009, –1.9%
• Prospective Adjustment for FY 2010, –0.8%
• Removal of Onetime Recoupment Adjustment made in FY 2012, +2.9%
• Combined Documentation and Coding Adjustment for FY 2013, +0.2%

The standardized amount for Puerto Rico has separate documentation and coding adjustments:

• Remaining Prospective Adjustment for FY 2008-2009, –1.5%
• CMS Proposes No Prospective Adjustment for FY 2010

CMS continues to argue under its special exceptions and adjustment authority it has the right to apply documentation and coding adjustments to the hospital-specific rates (HSR) of sole community and Medicare-dependent hospitals.  CMS proposes to adjust the HSR as follows:

• Remaining Prospective Adjustment for FY 2008-2009, –0.5%
• Prospective Adjustment for FY 2010, –0.8%
• Combined Documentation and Coding Adjustment for FY 2013, –1.3%

While CMS says it currently has no statutory mandate to create further documentation and coding adjustments, it will continue to monitor data to determine if one is needed in the future.

CMS created a separate Implantable Device cost center in hopes of refining the MS-DRG weight calculation. At this time, it does not feel it has enough reliable data to use the Medical Supplies Charged to Patients and Implantable Device cost to charge ratios separately in the weight calculation. So for FY 2013, the data from these two cost centers will be combined, as they have been in the past, in calculating the new MS-DRG weights.

CMS hopes to use these two cost centers separately in the future and also hopes to use the CT, MRI and Cardiac Catheter cost centers separately for the MS-DRG weight refinement in the future.

Changes have been made to the Hospital-Acquired Condition (HAC) policy for FY 2013:

• Diagnosis code 999.32 and 999.33 has been added to the Vascular Catheter-Associated Infection category beginning October 1, 2012, based on prior comments.
• The rule proposes to add Surgical Site Infection Following Cardiac Implantable Electronic Devices as a new HAC beginning October 1, 2012.
• The rule proposes again to add Iatrogenic Pneumothorax with Venous Catheterization as a new HAC beginning October 1, 2012. This was proposed but not finalized in 2009.

Detailed discussions, along with the diagnosis and procedures codes involved, can be found in the Federal Register.

There were few changes in the specific MS-DRG classifications:

• The rule proposes to reassign principal diagnosis code 487.0 with certain secondary diagnosis codes from MS-DRG 193, 194 and 195 to MS-DRG 177, 178 and 179, effective for FY 2013.
• The rule proposes a change to the Medicare Code Editor to create a new length of stay edit for continuous invasive mechanical ventilation for 96 continuous hours or more.
• Because of lack of changes, Tables 6A, 6B, 6C, 6D, 6E and 6F will not be published this year.

There were four applications for new technology add-on payments. CMS is seeking comments on whether these meet the criteria for the add-on:

• Glucarpidase (Trade Brand Voraxaze)

• DIFICID (Fidazomicin) Tablets

• Zilver PTX Drug Eluting Stent

• Zenith Fenestrated Abdominal Aortic Aneurysm (AAA) Endovascular Graft

Changes to the Hospital Wage Index for Acute Care Hospitals

As part of the proposed rules for the hospital acute care prospective payment system for FY 2013, CMS included the following as it relates to the Wage Index:

• Core-Based Statistical Areas –  Acute care hospitals have their wage index calculated and assigned based on the labor market area in which the hospital is located. These areas are defined based on the Core-Based Statistical Areas (CBSAs). The proposed rules for FY 2013 plan to use the same CBSAs used for FY 2012.

• Occupational Mix Survey –  Every three years, all short-term, acute care hospitals that participate in the Medicare program must submit data on the occupational mix of employees that will create the occupational mix adjustment to the wage index. The FY 2013 proposed rules for the wage index were calculated using the new 2010 Medicare Wage Index Occupational Mix Survey. This survey was required to be submitted by July 1, 2011, for inclusion in these proposed rules. No changes were proposed from the FY 2012 methodology used to calculate the occupational mix adjustment factor.

• “Imputed Floor” Policy –  Since FY 2005, there has been a temporary measure in place to address the concern from two hospitals that are considered all-urban states and feel they are at a disadvantage by having no rural hospitals to calculate a “Rural Floor” wage index. Under the current methodology, only one of the two states, New Jersey, benefits from this policy; Rhode Island does not. While the FY 2013 wage index is the final year of the extension of the imputed floor policy, the proposed rule does include an alternative, temporary methodology for computing the imputed floor wage index which could thereby benefit both all-urban states.

• Frontier Floor –  Consistent with the prior year, hospitals located in designated frontier states cannot receive a wage index of less than 1. For the FY 2013 wage index, Montana, North Dakota, South Dakota and Wyoming are being treated as frontier states. In these states, there are 51 providers that will receive the frontier floor value. In addition, while Nevada is considered a frontier state for FY 2013, the proposed rural floor is 1.0293, which will be the state’s proposed minimum wage index.

• MGCRB Reclassifications –  There are no proposed changes to the general policies for reclassification and redesignation in FY 2013.  Hospitals that received reclassification under the Medicare Geographic Classification Review Board (MGCRB) have the opportunity to withdraw their application if done within 45 days of the proposed rules publication date. Reclassified hospitals should review the proposed wage index rules to ensure they want to keep their reclassification. Applications for FY 2014 reclassifications will be due by September 4, 2012, and will be available in mid-July 2012 at the CMS website.

• Section 508 Reclassifications –  Section 508 allows certain qualifying hospitals to receive a wage index reclassification that they otherwise would not have been eligible to receive under the law. Originally set to expire after a three-year period, additional provisions have extended the period through March 31, 2012. The proposed rules do not include any further extension at this point. Hospitals that have reclassified under this rule will need to find an alternative provision for reclassification if no changes are made in the final rule. Please also see the April 20, 2012, Federal Register for more information on Section 508.

Hospital Readmissions Reduction Program

The Hospital Readmissions Reduction Program was established under health care reform to provide hospitals with an incentive to reduce hospital readmissions and improve care coordination. The pending Supreme Court ruling on health care reform may affect these proposed rules.

The readmission and reduction program will be implemented for three applicable conditions in FY 2013:  heart failure, acute myocardial infarction and pneumonia. Hospitals must have 25 discharges per each condition to be included in the program, which will be determined by using three years of claim data from July 1, 2008, to June 30, 2011, to calculate excess readmissions ratios and calculate the FY 2013 program payment reduction.

The payment reduction will be applied to the wage-adjusted DRG operating payment plus any applicable new technology add-on and excluding Indirect Medical Education (IME), Disproportionate Share (DSH), Outlier, low-volume payments and Sole Community Hospital’s (SCH) hospital-specific rate. Hospital payment will be the greater of their actual payment adjustment factor or the payment adjustment floor, set at 0.99 for FY 2013.

SCH Status

CMS is clarifying that if a hospital was incorrectly granted SCH status but didn’t qualify for that status, CMS would withdraw SCH status retroactively and recoup SCH payments consistent with the reopening rules.

Expiration of the Medicare Dependent, Small Rural Hospital (MDH) Program

The MDH program is set to sunset at the end of FY 2012 by statute. CMS is proposing a new provision that any MDH must apply for SCH classification status at least 30 days prior to the expiration of the MDH program provision and requests that SCH classification status be effective with the expiration of the MDH program provision. If approved, the effective date would be the day following expiration of the MDH program.

Rural Referral Centers (RRC) Prerequisites

The proposed rule updated the two mandatory prerequisites for hospitals with less than 275 beds to be classified as a RRC. The hospital’s case mix index (CMI) must be 1.5378 or the median CMI value for their census region. The hospital’s number of discharges is at least 5,000 per year or 3,000 for osteopathic hospitals.

Payment Adjustment for Low-Volume Hospitals

Effective for FY 2013, the low-volume hospital qualifying criteria and payment adjustment will revert back to the policy in effect during FY 2005-2010. This means that for FY 2013, a subsection (D) hospital must have fewer than 200 total discharges based on the hospital’s most recently submitted cost report and be located more than 25 road miles from the nearest subsection (D) hospital to request in writing to its MAC for the 25 percent low-volume add-on September 1, 2012.

Payment Adjustment for Medicare DSH and IME

CMS is proposing labor and delivery beds be removed from the current list of excluded beds and be incorporated into the available bed counts for DSH and IME purposes.

Payment for GME & IME Costs

CMS proposes, for new teaching hospitals that begin teaching residents in new programs for the first time on or after October 1, 2012, the program now will have five years to establish or grow the new programs. At the end of the fifth program year (of the first program), the new teaching hospital’s IME and GME FTE cap would be determined and permanently set and effective with the beginning of the sixth program year.

CMS clarified it is not proposing any changes to regulations governing treatment of the rolling average and the intern and resident bed ratio for new programs. New program FTE residents will be exempt from the rolling average and the cap on the IRB ratio for the minimum accredited length for the specific type of residency training program.

In the proposed rule, CMS proposes revisions to its methodology for determining the FTE cap if residents are rotating to more than one hospital during the five-year period.

Clarifying its policy regarding the redistribution of IME and GME resident slots under Section 5503 of PPACA, CMS proposes that a hospital awarded slots under Section 5503 must fill at least half of its awarded slots in one of the first three 12-month cost reporting periods. Failure to do so will result in the hospital losing its awarded slots.

CMS also discusses at length its process and policy preserving intern and resident FTE cap slots from closed hospitals under Section 5506 of PPACA.

CMS is clarifying once again that when hospitals submit claims for services provided to Medicare Advantage enrollees, for additional IME and GME payments, the hospitals must comply with the regulations governing time limits for filing claims at §424.44. In addition, CMS is clarifying that the regulations governing the time limits for filing claims at §424.44 also apply to claims submitted for nursing or allied health education program payments for services provided to Medicare Advantage enrollees, as well as for hospitals required to submit “no-pay” or shadow bills for Medicare Advantage patients for the purpose of the Disproportionate Share Payment Percentage.

Proposed Changes to Pension Cost Reporting Requirements for Cost-Finding Purposes

CMS is proposing to amend the general cost reporting rules under §413.24 and §413.100 to note the exception for recognizing actual pension contributions funded during the cost reporting period on a cash basis for defined benefit pension plans to comply with the policy changes in the FFY2012 final rule. (See our previous Insights article for more information.) In addition, CMS plans to update the Provider Reimbursement Manual to reflect this policy change.

Rural Community Hospital Demonstration Program

CMS is proposing an adjustment to the national IPPS rates for payments to be made under the rural community hospital demonstration program. In addition, CMS has computed the proposed budget neutrality factor under the program.

Proposed Changes for Hospitals Excluded from the IPPS

CMS proposes the FY 2013 rate-of-increase percentage of 3 percent be applied to the target amount for cancer and children’s hospitals and religious nonmedical health care institutions (RNHCIs).

Quality Data Reporting Requirements for Specific Providers & Suppliers

Following are some of the highlighted changes proposed to the quality data reporting requirements:

• CMS is proposing to remove 17 measures from the Hospital IQR Program for 2015; one is chart-abstracted, and the other 16 are claims-based.
• CMS is proposing a new surgery-based measure for inclusion in the HCAHPS survey for 2015. Specifically, it proposes to add the NQF-endorsed Three-Item Care Transition Measure.
• CMS is proposing a new claims-based measure for the 2015 payment year. Specifically, it proposes to adopt the hip/knee readmission:  Hospital 30-Day All-Cause Readmission Following Elective Total Hip Arthroplasty and Total Knee Arthroplasty.
• CMS is proposing a new chart-abstracted measure:  Elective Delivery Before 39 Completed Weeks Gestation.
• CMS is proposing to adopt a Safe Surgery Checklist structural measure; this is not NQF-endorsed for 2016.
• CMS proposes that hospitals wanting to participate in the Hospital IQR program for the first time, or that previously withdrew but would like to participate again, must submit a completed Notice of Participation to CMS by December 31 of the calendar year preceding the first quarter of the calendar year in which the chart-abstracted IQR data submission is required for any given fiscal year. For example, if a hospital chooses to participate in FY 2015, it must submit a Notice of Participation by December 31, 2012, and submit data with discharges beginning on or after January 1, 2013.
• CMS is proposing to adopt five quality measures for the FY 2014 program for PPS-exempt cancer hospitals.

Value-Based Purchasing (VBP) Program

• CMS is proposing to include new technology add-on payment amounts in the definition of base operating DRG payment amount for the hospital VBP program. The rationale is that the new technology add-on payment is a treatment decision, unlike the other add-on payments, which are excluded by statute.
• CMS is proposing, beginning with FY 2013 discharges, every eligible hospital would receive a reduction to its base operating DRG payment amount for each discharge in a fiscal year, regardless of whether CMS has determined that the hospital earned a VBP incentive payment for that fiscal year.
• CMS proposes to estimate the total amount of the reductions across all eligible hospitals and the size of the funding pool before the start of each fiscal year. This is necessary so CMS operationally can calculate each hospital’s VBP incentive payment percentage, so that the amount paid out equals the amount retained.
• CMS is proposing to define the term value-based incentive payment percentage as the percentage of the total base operating DRG payment amount that a hospital has earned back, based on its Total Performance Score (TPS) to that fiscal year.
• The applicable percent CMS will use to reduce the base operating DRG payment for each FY2013 discharge is 1 percent.
• Beginning in January 2013, a hospital would receive a base operating DRG payment amount for each discharge occurring in FY 2013 that is the net result of the application of the 1 percent reduction and the application of the hospital’s individual value-based incentive payment amount adjustment.
• CMS is proposing to adopt a review and corrections process that will allow hospitals to submit corrections in regard to their performance on each condition, their performance on each domain and their TPS. Under the proposed process, CMS will provide each hospital with a TPS report. It is proposed that a hospital would have 30 days from the date CMS posts the report on its QualityNet account to review the TPS report and submit any corrections to the agency via QualityNet.
• CMS is proposing to adopt one new measure, the Medicare Spending per Beneficiary Measure, for the efficiency domain. The proposed measure includes all Part A and B payments from three days prior to a subsection (D) hospital admission through 30 days after discharge, with certain exclusions. The measure will be risk-adjusted for age and severity of illness, and the payments are standardized to remove differences attributable to geographic payment adjustments.

CMS has established a 2012 IPPS Proposed Rule home page, where the proposed rule and related data files and tables are available for download.

If you have additional questions or would like more information on these matters, please contact your BKD advisor.

The Centers for Medicare & Medicaid Services (CMS) is accepting comments through June 25, 2012, on the proposed rule changes to the hospital inpatient prospective payment system (IPPS) for federal fiscal year (FY) 2013.

The proposed rule identifies CMS’ changes to the annual payment policy updates for hospitals as well as revisions to the wage index, quality reporting requirements and value-based purchasing.

The proposed Payment Rate Updates establish the FY 2013 operating standardized amount at $5,325.62, a 2.1 percent increase from prior year for those reporting quality data. A 2 percent reduction will be applied to hospitals not reporting quality data to their standardized amount update factor.

It was a relatively quiet year in terms of changes to calculations of the Medicare Severity Diagnosis-Related Group (MS-DRG) weights, groupings and codes, although there were some changes.

On the wage index front, CMS proposes to use the same CBSAs and same methodology used to calculate the occupational mix adjustment factor used for FY 2012. But the occupational mix adjustment factor will use the data from the 2010 Medicare Wage Index Occupational Mix Survey. In addition, CMS proposed no changes to the general policies for MGCRB Reclassifications in FY 2013. While Section 508 reclassifications are set to expire March 31, 2012, the proposed rules do not include any further extension at this point.

CMS is proposing to clarify that if a hospital was incorrectly granted Sole Community Hospital (SCH) status but didn’t qualify for that status, CMS would withdraw SCH status retroactively and recoup SCH payments consistent with the reopening rules.

The Medicare Dependent, Small Rural Hospital (MDH) Program is set to sunset at the end of FY 2012 by statute, but CMS is proposing a new provision applicable to MDHs now seeking SCH classification.

Effective for FY 2013, the Low-Volume Hospital qualifying criteria and payment adjustment is proposed to revert back to the policy in effect during FY 2005-2010.

In terms of Payment Adjustment for Medicare Disproportionate Share Hospitals and Indirect Medical Education (IME), labor and delivery beds should be removed from the current list of excluded beds and incorporated into the available bed counts for DSH and IME purposes. Other changes to the Payment for Graduate Medical Education (GME) affect new teaching hospitals that begin teaching residents in new programs for the first time on or after October 1, 2012. In addition, CMS is clarifying that hospitals must comply with the regulations governing time limits for filing Medicare Advantage claims affecting the payment calculations for IME and GME payments and nursing or allied health education programs.

Changes are proposed to the number and types of quality measures impacting Quality Data Reporting Requirements for Specific Providers and Suppliers. CMS proposed revisions to the payment calculations and criteria implementing value-based purchasing payments.

CMS is proposing to postpone the effective date of its policy position that therapeutic and diagnostic services are the only services that may be furnished outside of the hospital to Medicare beneficiaries “under arrangement,” and that “routine services” must be furnished by the hospital to be effective for cost-reporting periods beginning on or after October 1, 2013.

Lastly, proposed changes for Long-Term Care Hospitals (LTCHs) include a change in the standardized amount on both October 1, 2012, and December 29, 2012, a reduction in the fixed loss thresholds and extensions of some of the moratoria imposed on LTCHs.

If you have additional questions or would like more information on these matters, please contact your BKD advisor.

For an in-depth look at the proposed changes, read our full article.

The Patient Protection and Affordable Care Act (PPACA) introduced various ways to strengthen primary care by improving care coordination, making it easier for clinicians to work together and helping clinicians spend more time with their patients. One such program is the Comprehensive Primary Care (CPC) initiative.

In April 2012, the Centers for Medicare & Medicaid Services (CMS) Innovation Center (the Center) announced the following seven markets participating in this initiative:

• Arkansas:  statewide
• Colorado:  statewide
• New Jersey:  statewide
• New York:  Capital district – Hudson Valley region
• Ohio:  Cincinnati – Dayton region
• Oklahoma:  Greater Tulsa region
• Oregon:  Statewide

The CPC is a multipayer initiative. Medicare will work with commercial and state health insurance plans and offer bonus payments to primary care practices that better coordinate patient care.

On June 1, 2012, the Center released the application for primary care physician practices in the above markets to participate in the CPC. CPC providers may not participate in other CMS initiatives, demonstrations or programs that involve shared savings such as accountable care organizations. The goal is to enroll approximately 75 practices per market and serve approximately 330,750 Medicare and Medicaid beneficiaries, with preference given to practices that have achieved Stage 1 meaningful use in the Electronic Health Record Incentive Program. Applications will be accepted until July 20.

The Center has identified an evidenced-based set of five core functions essential to comprehensive primary care:

• Risk-Stratified Care Management
• Access & Continuity
• Planned Care for Chronic Conditions & Preventive Care
• Patient & Caregiver Engagement
• Coordination of Care Across the Medical Neighborhood

The Center will develop a common market-level approach to implementation milestones and quality improvement strategies for the purpose of monitoring and evaluating achievement of the comprehensive primary care functions. Medicare will pay selected practices traditional fee-for-service payments, along with a new risk-adjusted, monthly care management fee ranging from $8 to $40. Medicare also will distribute payments to practices if shared savings occur in the market after Year Two. Finally, practices will receive compensation from other payors participating in the initiative, including private insurance companies and other health plans.

The management fee payment will average approximately $20 per beneficiary per month in the first two years and approximately $15 per beneficiary per month in the third and fourth years. The average is reduced in later years to reflect efficiencies and shift reliance to the shared savings model.

The shared savings model will be calculated at the market level, not the individual practice level, and based on Medicare Part A and B expenditures. After the initiative’s second year, the amount of shared savings will be allocated based on quality measures reported by the practice.

The Center has invited state Medicaid programs to participate in the initiative as well. However, the shared savings model will not be part of the payment methodology for Medicaid fee-for-service. In addition, CMS will look to collaborate with other payors in the markets who will commit to similar changes to how they engage primary care practices.

The Center will monitor the program on a continuous basis at six-month intervals. After two years, it may discontinue its participation agreement with any practice failing to meet the requirements or with markets in which the majority of the practices fail to meet the requirements

In June, CMS will publish a list of payors participating in the CPC on its website.

For more information about the program and how it could affect your organization, contact your BKD advisor.

Federal health care reform continues to spur consolidation and integration among hospitals in the U.S. One example is the acquisition of 36-bed Cumberland River Hospital in Celina, Tennessee, by 247-bed Cookeville Regional Medical Center in Cookeville, Tennessee. “Because of uncertainties in today’s health care environment, more and more independent hospitals are beginning to explore the possibility of joining with others,” said Cookeville CEO Dr. Menachem Langer after the acquisition. “With health care reform looming in our future, it makes sense to explore options so that we are better able to secure our mission to provide high-quality health care into the future.”

Larger hospital systems can better compete in a more heavily regulated environment by spreading fixed costs over a larger patient base. In addition, these organizations can invest in systems that measure and aid the pursuit of quality outcomes while managing decreasing reimbursement rates. These regulatory consequences have led many hospital boards and administrators to consider mergers, acquisitions and affiliations.

Private Equity Groups See Opportunities in Health Care

Private equity groups (PEGs) will continue to drive more health care merger and acquisition (M&A) activity in 2012. According to private equity information provider Pitchbook, PEGs have been active in the health care sector, with more than 500 groups investing in the health care industry since 2007. In 2011 alone, PEGs completed 459 health care deals worth more than $79 billion.

Despite the challenges of decreasing revenue and increasing costs, PEGs have a positive, long-term view of the health care industry. Demographic trends point to continued high demand for health care services. For example, seniors represent only 13 percent of the U.S. population, but account for 36 percent of total health care costs—approximately $1.01 trillion in 2010. With a projected 41.6 percent increase in population over the age of 60 in the next 40 years, U.S. health care spending will continue to rise. Overall, PEGs expect the government will continue to support the health care system, and continued demand will drive industry profits higher.

As of March 31, 2012, PEGs held $425 billion in funds to be invested. Much of that capital is starting to age, and PEGs are looking to constructively deploy it to provide returns to investors. Health care investments provide an opportunity for PEGs to deploy significant capital in a relatively stable, highly fragmented industry sector, with the top 10 health care companies in the U.S. representing only 10 percent of the total market. The following chart illustrates the number of PEG-invested health care deals and the total deal value of those transactions since 2008.

Source:  Pitchbook

Historical Transaction Activity & Recent Transactions

Within the health care services industry, hospitals accounted for 14.7 percent of overall transaction activity in the first quarter of 2012 and accounted for $128.5 million in transaction value. Recent trends in health care consolidation and reform will drive an increase in deals through the rest of the year.

The following is a summary of transaction activity within the health care services industry during the past five years, including results through March 31, 2012.

Source:  Irving Levin Associates

Source:  Irving Levin Associates

Recent Select Hospital Transactions

Below is a summary of select hospital transactions occurring in fourth-quarter 2011 and first-quarter 2012.

Source:  Irving Levin Associates

For more information on the M&A market, contact Steve Blumreich or your BKD Corporate Finance advisor.

The 2012 Mississippi legislative session was closely watched as Gov. Phil Bryant and Lt. Gov. Tate Reeves, among other new names, took their new positions. On the Medicaid front, Mississippi House Bill 421 will change inpatient and outpatient Medicaid reimbursements.

The current inpatient reimbursement methodology, a cost-based per diem payment methodology, will change to an All Patient Refined – Diagnosis Related Group (APR-DRG) methodology. The current hospital outpatient reimbursement methodology of applying the Medicare cost-to-charge ratio (CCR) to billed charges will change to an Ambulatory Payment Classification (APC) Outpatient Prospective Payment System (OPPS) payment methodology. The new law brings Medicaid reimbursement methodologies for inpatient and outpatient hospital services more in line with current reimbursement methodologies used by Medicare for inpatient and outpatient hospital services.

For inpatient hospitals, the new APR-DRG methodology will be similar to DRG-based payment methods currently used by Medicare. All inpatient stays will be classified in one of 1,256 APR-DRGs based on the difficulty of the case. The payment amount for each stay will be derived by multiplying the APR-DRG relative weight by a budget-neutral base rate established by the Mississippi Division of Medicaid (DOM). Hospitals will be paid more for complex cases and less for more routine procedures. Policy adjustments will be made for pediatric mental health, adult mental health and obstetrics and newborns, to enhance payments made for the most at-risk Medicaid beneficiaries. Expected benefits of the change are as follows:

• Access to care will improve, as hospitals reimbursed at a higher rate will be more willing to treat sicker patients.
• All hospitals will be paid similarly for similar patients. Currently, individual hospitals often are paid very different amounts for similar care.
• Hospitals will benefit from being more efficient, since hospitals will receive a flat rate for stays of a given case-mix level. Under the current methodology, hospitals that increase efficiency and decrease costs receive less.
• Payment clarity will improve as each patient stay is assigned a single APR-DRG with a single payment based on acuity.
• Hospitals will face reduced administrative burden. Under the new methodology, hospitals will receive final payment for a patient stay shortly after a claim is submitted. Under current methodology, hospitals sometimes wait years before payments are finalized.

For outpatient hospitals, the APC OPPS methodology also will be very similar to Medicare OPPS. This will implement a set of fee schedules that will attempt to establish consistency between Medicare and Medicaid policies and improve simplicity of reimbursement methodologies. Also, expected benefits of the outpatient methodology change are expected to be the same as inpatient hospital benefits noted above.

The impact of these methodology changes on the disproportionate share/upper payment limit distribution to providers is projected to be minimal, with a projected increase of approximately $4.3 million, or 0.43 percent, in additional distributions statewide compared to the current per diem model. Although a few hospitals will be significantly affected positively or negatively, the net effect for most hospitals under the program is expected to be marginal.

The implementation of these methodologies has been pushed by DOM since 2007. Its belief is that the new methodologies foster efficiency and distribute payments in an equitable manner based on the actual complexity of the procedures performed. DOM also believes this methodology will decrease administrative burden for providers, as well as DOM, while improving access to care across the state.

For more information on these changes and how they could affect your organization, contact Linda Trifone in BKD’s Jackson, Mississippi, office or your BKD advisor.

The May 11, 2012, Federal Register includes the Centers for Medicare & Medicaid Services’ (CMS) proposed rule changes to the Long-Term Care Hospitals Prospective Payment System (LTCH PPS) for federal fiscal year 2013.

Among the changes in the proposed rule:

• LTCH Rate Updates:  The proposed LTCH-specific market is based solely on Medicare cost report data of LTCHs and excludes Inpatient Rehabilitation Facilities (IRFs) and Inpatient Psychiatric Facilities (IPFs) for the first time. The full market basket is proposed to be 3 percent and is adjusted downward for a 0.8 percent productivity adjustment and a 0.1 percent predetermined adjustment, bringing the proposed net market basket adjustment to 2.1 percent. The standard federal rate as determined in the proposed rule identified a 3.75 percent reduction, accounting for budget neutrality issues to be implemented over three years for discharges on or after December 29, 2012. Therefore, the proposed LTCH PPS standard rate is $41,026.88 for discharges occurring on or after October 1, 2012, and before December 29, 2012. A 0.9875 (3.75 percent/three years) reduction is applied to reduce the standard rate to $40,507.48 for discharges on or after December 29, 2012, for the remainder of FY 2013. The proposed fixed-loss threshold amount decreases from $17,931 in the prior year to $15,728 for FY 2013.
• LTCH Quality Reporting Program:  Beginning in 2014, LTCH standard payment rates will be adjusted for compliance with quality measure reporting based on services provided during 2012 as initiated in prior year’s final rule. The proposed rule identifies five new quality measures proposed for payment year 2016. The following table summarizes the proposed quality reporting measures for payment years 2014–2016.

• 25 Percent Rule:  CMS proposed delaying the implementation of the 25 percent payment threshold for one more year for cost reporting periods beginning on or after October 1, 2012, and before October 1, 2013. Certain LTCHs with cost reporting periods beginning on or after July 1, 2012, and before October 1, 2012, would be subject to the 25 percent rule and relief would apply to discharges that occur between July 1, 2013, and July 1, 2014. All LTCHs should review this section of the proposed rules in detail to see if they fall in this category.
• Short-Stay Outliers:  A five-year moratorium on incorporating the IPPS comparable threshold per diem for short-stay outlier determinations is scheduled to expire for discharges beginning on or after December 29, 2012. This adds an additional payment option for short-stay outlier cases. The case will be paid the lowest of the following four payment options:
  • 100 percent of the estimated cost of the case
  • 120 percent of the Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-DRG) specific per diem amount multiplied by the covered length of that particular case
  • The full MS-LTC-DRG per diem amount
  • Comparing the covered length of stay for a short-stay outlier case and the “IPPS comparable threshold”

New LTCHs and New LTCH Bed Moratorium:  The moratoria on the development of new LTCHs or LTCH satellite facilities and on increases in the number of beds in existing LTCHs or LTCH satellite facilities mandated by Section 114(d) of the Medicare, Medicaid, and SCHIP Extension Act of 2007, as amended by Section 4302(b) of the American Recovery & Reinvestment Act of 2009 and further amended by Sections 3106 and 10312 of the Patient Protection & Affordable Care Act, are set to expire on December 29, 2012. Although CMS has stated its support for a statutory extension of the moratoria, CMS does not propose to extend the moratoria administratively.

The May 11, 2012, Federal Register containing the proposed rule is available for download. CMS is accepting comments on the proposed rule through June 25, 2012.

If you have additional questions or would like more information on these matters, please contact your BKD advisor.

Since the inception of the 340B drug purchasing program in the early 1990s, program compliance has been the responsibility of participating organizations with relatively little oversight. It appears those days are quickly coming to an end. The program’s exponential expansion in recent months has caused many stakeholders and legislators to look more closely at compliance with the program. Much of the recent expansion is a result of the health care reform law passed in March 2010, including:

• Allowing all critical access hospitals (CAHs) to participate in the program
• Reducing the Medicare Disproportionate Share (DSH) criteria for sole community hospitals and rural referral centers to 8 percent from 11.75 percent
• Allowing covered entities to contract with multiple retail pharmacies to provide prescription drugs for covered outpatients

Recent communications from the Health Resources and Services Administration (HRSA) and its Office of Pharmacy Affairs (OPA) discuss the plans in place to oversee compliance with certain areas fundamental to the program. These plans include:

• Requiring compliance testing of the 340B drug purchasing program in A-133 federal grant audits
• Increasing the number of targeted and random audits of covered entities
• Requiring covered entities to annually recertify enrollment forms for participation in the program
• An expectation that all covered entities with contract pharmacy arrangements perform some form of annual compliance audit of the program

Participation in this program can yield significant financial benefits for providers. With so much at risk, providers must review their compliance with key elements of the 340B program, including verification of the following:

• All patients provided drugs purchased through the 340B program comply with HRSA’s definition of a “covered patient”
• Covered patients are receiving services included as reimbursable on the hospital’s Medicare cost report
• A double discount has not been paid by the drug manufacturers through reduced prices on purchased drugs for the covered entity and inclusion of those drugs in the state’s Medicaid drug rebate calculations
• Contracted pharmacies are following appropriate procedures as instructed by the covered entities, and the DSH percentage continues to exceed the required thresholds after the recent release of the updated Supplemental Security Income percentages

For more information on complying with the federal regulations surrounding the 340B program, contact your BKD advisor.

In accordance with the Patient Protection and Affordable Care Act (PPACA), the Secretary of Health and Human Services issued a report to Congress on April 11, 2012, addressing a plan to reform the Medicare wage index methodology. The report calls for a change to a Commuting Based Wage Index (CBWI), which would use commuting data to define hospital labor markets instead of the current Core Based Statistical Areas (CBSAs). The stated intent is to eliminate significant differences in neighboring hospitals that are actually pooling from the same labor market and to generate a more accurate wage index than the current methodology.

The proposal calls for a CBWI that uses smaller areas, such as ZIP codes or census tracts. The CBWI would be unique to each hospital in that it would consider each hospital’s proportion of workers for each area. The proposal states the base wage index data from the cost report could still be used to compute average hourly wage, but it would use the smaller benchmark areas to arrive at each hospital’s CBWI. Based on the April 2012 Acumen, LLC report included in the appendix of the report, the computation would include the following steps:

• Step 1:  Construct benchmarks for area wages – The example involves forming a commuting matrix using hospital data. The proportion of workers living in an area and the proportion of residents in an area working in a hospital are needed to form the rows and columns, respectively, of the matrix.

• Step 2:  Calculate the hospital’s benchmark wage data – Using the data from Step 1, each hospital’s weighted average of the various areas becomes the hospital’s wage data. The examples from the Acumen report still used the hospital’s wage index data, including the occupational mix adjustment. While the Acumen report notes Bureau of Labor Statistics (BLS) data could be used, the focus of the report is on the labor market—not changing the source data.

• Step 3:  Compute the CBWI – This step is similar to current wage index methodology. It would be:

• Hospital benchmark wage data (from Step 2)
• National average benchmark hospital wage

The CBWI would remain a budget-neutral computation, so some providers will benefit from the CBWI, and others will experience decreases. The report notes the CBWI “tends to be higher than the Medicare post-reclassification index for hospitals that currently do not benefit from reclassification and those that employ more workers from relatively high-cost areas” and “tends to be lower than the Medicare post-reclassification index for hospitals where reclassification and other wage index adjustments have resulted in a hospital’s inclusion in a higher cost MSA …”

The secretary acknowledges in the report to Congress that obtaining current commuting data would be important. The report suggests this could be achieved “with a modest addition to the current wage index reporting requirements,” suggesting three options for the commuting data:  census bureau data, BLS data and hospital-reported data. Because the census data does not include the ZIP code or census tract-specific data, this option was dismissed, and the use of BLS data was not supported by hospitals when this option was originally presented. Therefore, it appears the hospital-reported data is the favored option. It is possible this will be gathered periodically, similar to the current occupational mix survey.

One significant concern with the CBWI methodology for many providers is the reimbursement effect of potentially not being able to reclassify to another labor market to get higher reimbursement. The report states the “existing statutory exceptions to the wage index may likely no longer be applicable and should therefore be reviewed for their continued relevance.” It specifically addresses the need to review geographic reclassifications, Section 508 reclassification and rural and frontier state floor provisions for applicability.

Another concern is hospitals’ ability to alter hiring practices to manipulate the CBWI. In the report to Congress, the secretary said “minimal policies” could be implemented to prevent such manipulations from occurring; the details of such policies are not outlined in the report.

Both statutory and regulatory changes are required to implement the plan. In addition, the plan would require additional data collection to support the commuting patterns. The use of the CBWI for other provider types also would need to be evaluated, and changes to the current methodology would need to include a transition period. It’s unknown how likely Congress would be to implement the proposed wage index reform.

Even with all the uncertainty, there are steps hospitals can take to prepare for potential changes to wage index methodology. First, we recommend evaluating your current average hourly wage compared to the CBSA average or the likely peer group for a commuting based average to estimate if your hospital would likely benefit or lose from a CBWI system. Second, continue to carefully evaluate your base wage index data to identify areas for improvement. With the focus on a more specific labor market, reporting correct individual hospital data is even more relevant. Finally, discuss the specifics of your situation on this key reimbursement issue with your advisor. As you know, the wage index currently affects more than 60 percent of your Medicare reimbursement, so it’s an important component to evaluate.

For more information on the proposed changes, contact your BKD advisor.

Date:   Thursday, May 24, 2012
Presenter: Ann Zeisset, RHIT, CCS, CCS-P, G2N

This complimentary one-hour webinar will provide up-to-date information regarding ICD-10-CM/PCS implementation. Staying focused on preparation is important, despite the fact that the compliance date will be postponed. The impending implementation does not just affect coding processes; it permeates all processes in an organization dealing with coded data.

Learning Objectives
Upon completion of this webinar, participants will be able to:

• Discuss the value and benefits of moving to ICD-10
• Define key first steps in implementation planning
• Identify departments affected by change
• Describe consequences of being inadequately prepared
• Discuss future ICD-10 Awareness and Implementation Preparation Training

Presenter
Ann Zeisset, RHIT, CCS, CCS-P, is an independent consultant on ICD-10-CM/PCS who develops, supports and delivers training on ICD-10. Ann serves as author and faculty for the American Health Information Management Association (AHIMA) ICD-10-CM/PCS Academies and is an AHIMA-Approved ICD-10-CM/PCS Trainer. She has testified before the National Committee on Vital and Health Statistics on industry readiness for compliance with Version 5010 and ICD-10-CM/PCS.

Presentation

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Hospitals and health systems are well served by proactive strategic planning and processes with respect to physician alignment, both for employed and independent physicians.  This article points out some common problems and solutions to becoming a more purposeful organization with respect to physician alignment.

Problem
Many hospitals are reactive in determining where resources are best spent around physician alignment.  Often, a physician group will approach a hospital looking to be acquired or to enter into a contractual arrangement, such as an on-call deal, and the hospital will immediately begin working with the group to reach an understanding or accommodation.  This reactive approach can waste time and resources on low-impact results or low-priority relationships.

Solution
Hospitals need to develop a clear strategy around physician alignment and implement a unified process around affiliation activity. Hospitals should rethink their approach to physician alignment around these two key principles:

• Systematic Approach – Naturally, as we repeat processes, we become more consistent and efficient. An ad hoc approach to physician alignment leads to hurried due diligence and hasty decisions and is frequently undercoordinated internally. The clear benefit to a consistent, predictable and repeatable approach to physician alignment is internal efficiency and synergy, as well as presenting well to the external physician community.

• Physician Leadership – The presence and active participation of physician leaders generates buy-in among the broader physician community and results in more thoughtful planning and governance.

There is always resistance to these principles, so let’s address three common concerns:

1. “We don’t have the time to form another committee.”  Without physicians, there is very little revenue cycle to worry about. The same is true for information technology, facilities management, legal, etc. Simply put, physicians admit patients, order tests and have a direct impact on supply cost, length of stay and numerous other factors. The idea that a hospital does not have time for physician alignment is absurd. The bottom line is that physicians are critical to operations, and hospitals need to make systematic alignment a priority.Hospital administrators of all stripes spend a good part of their time on physician matters, so unifying and standardizing the internal and external physician interface may not be difficult to fit into the schedule. In fact, because so many functional areas spend time dealing with physician issues, a unified approach may save time in the long run.
2. “There are no suitable physician candidates.”  If this is your facility’s situation, you need to take action right away.  While leadership cannot be cultivated overnight, moving away from a low-trust or low-respect culture with physicians should be an immediate priority.  Leadership also may need to come from outside of the community, especially in rural areas.  There have been a few recent success stories in recruiting specifically for leadership positions at rural facilities, which may offer some hope to communities that have historically had difficulty recruiting.
3. “We can’t play favorites between competing physician groups.” This is another area where hospitals can take the high road by inviting both parties to the table.  Unlike Issue 2, at least there are candidates. However, sitting on the sidelines with respect to alignment issues is a poor decision in the long run. As community organizations, the purpose of bringing physicians to the table is positive, e.g., care coordination, community health, patient safety, etc.  In general, if the situation is politically charged, the relationship-building process should be more formally structured.

Physician alignment is of great importance to hospitals, and there are tremendous benefits to being organized and deliberate on this issue. The alternative is eventual market weakness in the face of rapid industry change.

Specifics on Employed Physicians
Do not assume that just because you have employed physicians they are necessarily “aligned.” While alignment may bloom spontaneously, hospitals are largely at a loss on how to effectively manage and motivate employed physicians.

Strategic Planning & Corporate Governance – In some cases, the rate of physician practice acquisition by hospitals is so fast that there is an immature culture of leadership and governance of a hospital-owned physician entity. On the other hand, installing a traditional hospital bureaucratic structure on top of a mishmash of acquired physicians is not the answer to meaningful alignment. Hospitals must invest for success and provide resources for employed physician groups to cultivate a strategic plan and unite around common principles for performance and accountability.

Compensation Plan Design – While an effective compensation program is difficult in the absence of strategic planning and good corporate governance, compensation can be a huge motivator for driving behavior. Payment for volume alone can encourage the wrong behaviors—overutilization—and discourage the right ones—preventative screening, disease management, etc. Pay for performance is the future of health care reimbursement and already is beginning to impact hospital reimbursement. Ultimately, similar pay-for-performance principles will apply to physician compensation.

The compensation plan of the future will reduce the incentive for volume with a corresponding increase in earnings paid for success in quality, patient experience and corporate citizenship. A compensation plan change will need physician input and creative thinking to meet a variety of challenges, including cultural norms and available information infrastructure.

The bottom line is that physician employment by itself is not a strategic partnering strategy. Organizations should seriously consider whether or not the significant losses many facilities are incurring on employed physicians are truly necessary to achieve meaningful alignment and integration.

Specifics on Independent Physicians
Hospitals are well served by understanding the various types of contractual relationships to find the best fit for working with different groups of independent physicians. The toolbox for relationships with independent physicians is enormous. From medical directorships and on-call relationships to co-management arrangements and joint ventures, the scope and depth of physician alignment opportunities can be overwhelming. The wealth of options can lead to indecision about the best vehicles for nonemployed formal physician relationships.

A description of all the different types of financial relationships with physicians with a summary of pros and cons is beyond the scope of this article. However, here is a brief summary of some of the more common arrangements:

In general, you should tap into the entrepreneurial spirit of physician practice leaders. Physicians tend to be data-driven and respond well to systematic approaches.  But wherever possible, allow physician entrepreneurs to think big. Both parties can capitalize on the ambition and zest of hard-driving physicians and well-organized hospitals. Of course, the noted assignments regarding alignment value, financial cost and complexity are subjective and can vary from arrangement to arrangement.

Legal & Fair Market Value Compliance
When a hospital is entering into a contractual relationship, the importance of compliance cannot be overstated. Because so many services are “designated health services,” the Stark regulations will likely be in play, as well as the federal anti-kickback statute and not-for-profit rules, if applicable. Getting early advice on structural and compensation issues will help all parties comply with Stark regulations and avoid the dreaded false claims zone. Early advice also will keep the parties from wasting time on exploring impermissible deal elements.

This subset of due diligence is important as a part of a hospital’s overall compliance plan and ties into existing financial relationships with independent and employed physicians.

If your organization hasn’t gotten serious about physician alignment strategy and process, now’s the time to get started. With the onset of payment reform and a variety of other economic pressures, developing a formal physician alignment program will enable your organization to be more effective and efficient in meeting its mission-driven goals.  For more information, contact your BKD advisor.

Date: March 13, 2012
Presenter:  Scott Bezjak

Internal Revenue Code (IRC) Section 501(r) requires a Community Health Needs Assessment (CHNA) for hospitals to attain and maintain IRC Section 501(c)(3) tax-exempt status. This program offers attendees a better understanding of CHNA requirements, including the key components and strategies for planning and conducting a CHNA. This program also will provide an overview of common CHNA concepts and terminology.

Learning Objectives

Upon completion of this webinar, participants will be able to:

• Explain how IRC Section 501(r) is driving the need for CHNAs
• Define key CHNA elements
• Describe key CHNA concepts and terminology
• Identify available options for obtaining community input and how to incorporate that input into a CHNA
• Recognize whether a CHNA meets Section 501(r) requirements

Presentation

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Date: Wednesday, February 22, 2012
Presenter:  Kim Scifres

New Internal Revenue Code (IRC) Section 501(r) imposes additional requirements for hospitals to attain and maintain tax-exempt status under IRC Section 501(c)(3). This program will provide an overview of specific 501(r) requirements related to the Community Health Needs Assessment (CHNA) and provide hospital management and board members with a better understanding of key CHNA components necessary to achieve and maintain compliance. In addition, this program will assist organizations in planning for and understanding the initial CHNA process.

Learning Objectives

Upon completion of this webinar, participants will be able to:

• Define the requirements of IRC Section 501(r)
• Identify specific 501(r) CHNA requirements
• Describe CHNA requirements as outlined in IRS Notice 2011-52
• Review 2011 Revised Schedule H, Part V
• Discuss key CHNA elements
• Recognize whether a CHNA meets the requirements of Section 501(r)

Presentation

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Date: December 14, 2011
Presenter:  Mark Sharp

Health care regulations continue to change, and your home health agency (HHA) faces additional cuts to Medicare payment rates in 2012. There also are changes in the prospective payment system (PPS) case mix model. This complimentary webinar defines the changes for 2012 and identifies strategies to help HHAs prepare for these rate reductions and other PPS changes.

Learning Objectives

Upon completion of this webinar, participants will be able to:

• Understand changes in Medicare home health PPS rates and the home health PPS case mix model
• Discuss potential impacts of Medicare PPS changes on home health agencies
• Recognize other HHA changes unrelated to payment
• Identify strategies to help prepare for the 2012 changes
• Indicate potential changes beyond 2012 and strategies for long-term success

Presentation

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On February 16, 2012, the Centers for Medicare & Medicaid Services (CMS) published proposed rules for reporting and returning overpayments. While providers and suppliers have been reporting and returning overpayments from the Medicare program for years, section 6402(a) of the Patient Protection & Affordable Care Act established a new section of the Social Security Act that essentially requires a provider or supplier receiving an overpayment from the Medicare program to report it in writing and return it to the appropriate entity, at the correct address.

The act states, “An overpayment must be reported and returned … by the later of (A) the date which is 60 days after the date on which the overpayment was identified; or (B) the date any corresponding cost report is due, if applicable.” The rule proposes using the existing voluntary refund process for reporting, which will be renamed the “self-reported overpayment refund process.”

In basic terms, if the overpayment was caused by a claim issue that will not be corrected with the filing of your next cost report, you have 60 days from the time you identify the overpayment to report it and return the excess funds. If the issue will be settled (or to use the term from the proposed rule, “reconciled”) by the filing of the cost report, the 60-day requirement does not apply and the payment is returned with the filing of the cost report.

The proposed rule notes that Medicare makes estimated payments, and those estimates will be adjusted to actual on the cost report. Providers are not obligated to compare their interim payments to what actual cost report reimbursement will be throughout the year. They assume when the cost report is filed a proper reconciliation has taken place.

If a provider discovers after filing the cost report that there was an error that caused the cost report reimbursement to be too high, there is an obligation to file an amended report to fix the error. There are two exceptions to this rule:

• If CMS releases the Supplemental Security Income percent after the filing of the cost report, the provider is not obligated to amend the cost report to correct the settlement.
• If the provider knows it has exceeded the thresholds triggering an outlier reconciliation, the provider is not obligated to try to estimate the overpayment and return it; it may wait until CMS provides the actual calculations from the reconciliation process.

Cost report issues aside, the rule requires overpayments to be reported and returned within 60 days of when they are identified. The proposed regulation states, “… a person has identified an overpayment if the person has actual knowledge of the existence of the overpayment or acts in reckless disregard or deliberate ignorance of the overpayment.” The proposed rule also states if you receive information of a potential overpayment, you are required to make a “reasonable inquiry” into the issue. It is further stated that “failure to conduct such inquiry with all deliberate speed” could be construed as reckless disregard or deliberate ignorance.

Interpretation of some of these terms can get a little murky. For example, if a billing clerk tells you he or she thinks there is a problem in the coding of a claim and you do not get a chance to look at it for a week, did you act with “deliberate speed” or “reckless disregard”? If you looked at the claim brought to you and found nothing wrong, is that a “reasonable inquiry” or “deliberate ignorance”? Because these terms are vague, they likely will create problems for providers going forward.

The rules do not require CMS to prove “a specific intent to defraud,” but neither does it support prosecution for an honest mistake that a provider had no reason to know was there. CMS clearly believes all providers should be doing some review of the payments received at the individual claim level.

By using the term “identified,” CMS states it is giving “providers and suppliers an incentive to exercise reasonable diligence to determine whether an overpayment exists.” CMS goes on to state that without this incentive, providers “might avoid performing activities to determine whether an overpayment exists, such as self-audits, compliance checks or additional research.”

The rules also have implemented a 10-year look-back period. If the overpayment occurred more than 10 years ago, you have no obligation to pay it back. CMS believes the 10-year period will allow providers to “have certainty after a reasonable period that they can close their books and not have an ongoing liability associated with an overpayment.”

To allow the 10-year look-back to mesh with the cost report reopening rules, CMS proposes to amend 42 CFR 405.980(b) to allow that cost reports affected by overpayments reported in accordance with this rule may be reopened for a period of 10 years. This means that effectively any cost report fewer than 10 years old can be reopened where the provider owes Medicare money. However, if the error is in the provider’s favor, the rule remains three years from the Notice of Program Reimbursement. In the proposed rules, CMS specifically asks for comments on the 10-year look-back rule. As currently written, the 10-year look-back gives CMS a large advantage over providers in terms of collecting overpayments and underpayments.

What are the penalties if an overpayment is not paid back in the proposed time frame? The proposed new law says that any overpayment not reported or returned is an obligation for the purposes of the False Claims Act. You also can be found liable under the Civil Monetary Penalties Law and could be excluded from the Medicare program. Penalties imposed under these laws can be significant.

The proposed rule includes other sections related to special situations. Extended Repayment Schedules will be allowed to accommodate the potential hardship of a large overpayment for a provider. Overpayments due to improper physician self-referral and the potential violation are reported through the Medicare Self-Referral Disclosure Protocol (SRDP). These overpayments also must be reported under the new proposed rule, but the overpayment will not have to be repaid in accordance with the new rules. The payback will be handled by the SRDP. Lastly, CMS noted that providers may not be aware of a kickback arrangement to which they are not a party. This means a provider would be unlikely to have “identified” it and has no duty to report or repay it. However, if you do become aware of a kickback situation, you have an obligation to report it. Any related payback would be suspended until the kickback matter is resolved.

On the surface, the rules seem fairly innocuous. However, some of the terminology leaves much of the enforcement open to interpretation. Coupled with expanding CMS’ ability to reopen a cost report or reevaluate payment of a claim for 10 years if money is due to the program, these rules could have a significant effect on providers and suppliers.

If you have questions regarding these rules or other Medicare reimbursement issues, contact your BKD advisor.

The National Health Service Corps (NHSC) supports communities, known as Health Professional Shortage Areas (HPSAs), with limited access to primary, dental or mental health care by providing financial support for loan repayment and scholarships for professionals working at NHSC-approved sites. Through its Loan Repayment Program (LRP),  NHSC is offering to repay qualifying educational loans in exchange for service to underserved areas.

Initial Award Amounts

LRP offers two levels of funding, based on the need of the community a provider serves, as defined by the HPSA score. HPSA scores range from 1 to 26, based on factors such as population-to-provider ratio, percent below poverty, travel time or distance to closest source of care and other factors. Sites with an HPSA score of 14 or above can receive up to $60,000 depending on the clinician’s service commitment. Sites with HPSA scores below 14 can receive up to $40,000, again dependent on the clinician’s service commitment.

Service Commitment

Applicants can elect a full-time or half-time clinical practice. A full-time commitment is defined as a minimum of 40 hours per week for at least 45 weeks per year. The 40-hour week may be done over four days, but no more than 12 hours of work may occur in a 24-hour period. Applicants do not get credit for more than 40 hours in a week or for on-call hours with no direct patient service.

The half-time clinical practice requires a minimum of 20 hours per week (not to exceed 39 hours per week) for at least 45 weeks per year. Similar to the full-time criteria, work can be done in two days with no more than 12 hours in a 24-hour period. Also, as with full-time practice, there is no credit for more than 20 hours or on-call time with no direct patient service.

Both the full-time and half-time clinical practices have other service commitment criteria depending on the type of clinician.

Eligible Disciplines

NHSC LRP applicants must have the appropriate professional license or certification for the state in which their NHSC-approved site is located. Primary care specialties for physicians include family medicine, obstetrics/gynecology, general internal medicine, geriatrics, general pediatrics and psychiatry. For physician assistants, eligible practice areas include adult, family, pediatric, psychiatry, mental health, geriatrics and women’s health. Primary care certified nurse practitioners’ NHSC-approved primary care specialties are adult, family, pediatric, psychiatric and mental health, gerontological and women’s health. Other eligible disciplines include certified nurse-midwives, psychiatric nurse specialists, dentistry, dental hygienists, psychologists, licensed clinical social workers, licensed professional counselors and marriage and family therapists.

NHSC-Approved Sites

NHSC clinicians must work at an NHSC-approved site in an HPSA. NHSC-approved sites are outpatient facilities providing primary medical, dental and/or mental and behavioral health services. Until recently, critical access hospitals (CAHs) could not be NHSC-approved sites. Under the previous NHSC site policy, CAHs had limited eligibility. During that time, only the outpatient clinic was eligible to be an approved site and, in general, clinicians did not receive credit towards fulfilling their service obligations for time spent in the inpatient hospital. Beginning in fiscal year 2012, NHSC will approve an entire CAH—including the emergency room, wing bed unit and skilled nursing facility—as a service site under a three-year pilot program in an effort to meet the needs of these underserved communities. In addition, the clinicians’ time in the inpatient hospital now counts towards their service obligations. The award amount, service commitment and eligible disciplines at approved CAHs may vary from other NHSC-approved sites.

Additional Information

The 2012 application cycle is now open, and those interested in participating in the loan repayment program need to apply by May 15, 2012, to be eligible for funding. Awards will be made to applicants on or before September 30, 2012. Applicants that will be working at a site with an HPSA score of less than 14 only will get funds after funds are given to those working at sites with an HPSA score of 14 or more.

Facilities interested in becoming NHSC-approved sites should contact their State Primary Care Office, prior to submitting an application, to get an HPSA designation. There is no deadline for CAHs applying to become an NHSC-approved service site; however, the approval process takes six to eight weeks. For more information, visit the NHSC website or call 877.313.1823 to speak to a state representative.

If you need further guidance or assistance, please contact your BKD advisor or Craig Steen.

Washington engaged in an annual ritual on February 13. The president sent his proposed budget for fiscal year 2013 to Capitol Hill, where it promptly was declared dead on arrival. While this declaration is true, it also is entirely beside the point.

The president’s budget document starts the process of creating a menu of options[1] for budget savers; Congress can pick and choose “pay fors” for other spending from this list. For example, as this is being written, Congress apparently has picked several of these proposals to pay for the latest “doc fix.”

If the specific cuts in this document sound familiar, it is because they were first unveiled last autumn by the White House during the deliberations of the so-called “super committee.” That effort was a total failure, but one should not assume they will just go away. They will be back—again and again.

The following is not an exhaustive list of the proposals; rather, it is a short description of the items most likely to be of interest.

Critical access hospitals (CAHs) are the target of two different proposals. The first would reduce reimbursement from 101 percent of reasonable costs to 100 percent. As best I can tell, this would be effective for cost reporting periods on or after October 1, 2012. The other—and potentially far more serious—provision would prohibit CAH designation for facilities less than 10 miles from the nearest hospital, starting in 2014. This is not just for new designations; it would mean loss of the designation for many existing CAHs.

Several groups would be subject to a 1.1 percent reduction in the otherwise applicable update to their standardized amounts for an eight-year period beginning in 2014, i.e., through the end of 2021. Affected groups include long-term acute care hospitals, inpatient rehabilitation facilities (IRFs), skilled nursing facilities (SNFs) and home health agencies.

All provider types currently eligible for bad debt reimbursement, e.g., hospitals and SNFs, would have such reimbursement cut to 25 percent from the current 70 percent over a three-year period, starting in 2013. This has reportedly already been picked by Congress as one of the “pay fors” for the latest sustainable growth rate fix, albeit with some modification.

Teaching hospitals would not be spared. The White House suggests cutting indirect medical education by 10 percent starting in 2014.

Rehab hospitals come in for special—and unwanted—treatment in addition to the cut in basic payment described above. The budget would reinstate the 75 percent rule beginning in 2013. Thus, the current 60 percent rule, which only has been around since 2007, would be scrapped, and the previous higher threshold would be reinstated. IRFs also are looking at further reduction in payment for certain patients. The budget document indicates that for “hip and knee replacements, hip fractures and certain pulmonary diseases,” IRF payment would be reduced to an amount more closely resembling what a SNF would get for treating a patient with one of those conditions.

SNFs also are a special target. Starting in 2016, payment may be reduced by up to 3 percent for those SNFs “with high rates of care-sensitive, preventable hospital readmissions.”

Finally, the administration would take an axe to graduate medical education funding for children’s hospitals. This funding is subject to an annual appropriation to the Health Resources and Services Administration, the arm of the U.S. Department of Health and Human Services that administers the fund. The current appropriation is $265 million, but the request for 2013 is only for $88 million. The good news, relatively, is that last year the request was for zero.

What Congress chooses to do with any of the foregoing is entirely speculative. Some of these proposals soon will be the law of the land. Providers need to pay attention in coming months as the annual process plays out.

For more information, contact your BKD advisor or Eddie Marmouget.

2011 Long-Term Care M&A Activity Finishes Strong

The long-term care (LTC) merger & acquisition (M&A) market saw its best year in 2011 since peaking in 2006 and 2007 in terms of publicly announced transactions and dollar volume. Results are still filtering in, but with a final year-end projection of 150 transactions, 2011 is slated to be the most active year in LTC M&A since the late 1990s. The first three quarters of the year alone exceeded transaction counts for full years 2008 through 2010 with 118 deals. LTC transactions in 2011 led to more than $16 billion in total transaction value.

As the following graphs illustrate, there have been a near-record 139 transactions reported so far for 2011, topping 2010 by 26.4 percent.

*Preliminary results

Source:  Irving Levin Associates, Inc.

Several factors continue to drive LTC M&A market activity, including regulatory changes and continued reimbursement pressures due to strained federal and state budgets, low capital costs and the “aging of America” as the wave of baby boomers continues to grow. With the Federal Reserve’s pledge to keep interest rates low into 2014, combined with the regulatory and reimbursement changes facing the industry, we should continue to see favorable M&A volume over the next couple of years in LTC as well as the broader health care services landscape.

Public Comparables

Skilled Nursing

 
Assisted/Independent Living

Note:  LTM=Last Twelve Months; EV=Enterprise Value; EBITDAR=Earnings Before Interest, Taxes, Depreciation, Amortization and Rent

Historical Transaction Cap Rates

In the third quarter of 2011, skilled nursing cap rates reversed direction slightly from the previous quarter, increasing 20 basis points to 13.2 percent. The assisted living sector cap rates increased in the third quarter by 20 basis points, while the independent living sector increased by 30 basis points, bringing them to 9.5 percent and 8.4 percent, respectively. As the high level of M&A activity continues, these figures are projected to remain stable in 2012.

Average Historical Transaction Capitalization Rates

Source:  National Investment Center for the Seniors Housing & Care Industry

Recent Select Transactions 

Skilled Nursing

• December 2011 – A large health system purchased a 149-bed skilled nursing facility from an Arizona provider for $7.8 million, or $52,300 per bed. Built in 1969, the facility had an occupancy rate of 86 percent and annual revenues of $16.5 million.
• December 2011 – A private investor purchased a 29-bed Oklahoma skilled nursing facility for approximately $561,000. The facility had a 93 percent occupancy rate.
• November 2011 – A local not-for-profit sold a 142-bed facility in Alabama to a private investor for $10.6 million, or $74,600 per bed. The facility was built in the late 1960s, and the occupancy rate was only about 65 percent. Revenues were about $11.5 million. 
• November 2011 – Adcare Health Systems purchased a portfolio of five skilled nursing facilities in Oklahoma for approximately $16 million, or $44,800 per bed. Each facility has an average of 71 beds, and they generate about $15 million in revenues. 

 Assisted/Independent Living

• December 2011 – Wilkinson Corporation purchased three assisted living communities in Illinois from a national senior housing operator for $30.8 million, or $168,000 per unit. Each property has about 50,000 square feet with 96 percent occupancy. Revenue and EBITDA were approximately $6.3 million and $2.5 million, respectively, yielding a cap rate of about 8.1 percent.
• December 2011 – A local operator sold a 57-unit assisted living facility in California to a private investor for approximately $11.3 million, or just more than $198,200 per unit. This facility was operating at 95 percent occupancy and yielded a cap rate of 8.2 percent, based on revenue and EBITDA of $2.9 million and $925,000, respectively.
• December 2011 – A large assisted living center consisting of 142 units and 225 licensed beds sold in Virginia to a private investor for $3.5 million, or approximately $24,650 per unit. The price was discounted because of 80 percent state-assisted revenues. The facility operated at a 26 percent margin, yielding a 20 percent cap rate.
• November 2011 – The Autumn Group purchased a 30-unit assisted living facility in Maryland. The facility was built in 1999 and maintained an 85 percent occupancy rate. The private seller will receive approximately $3.8 million, or $126,700 per unit, and based on revenue of $1.5 million, the cap rate was 11.9 percent.
• November 2011 – Meridian Senior Living purchased a 90-unit assisted living facility in California from Western America Properties for $5.5 million, or $61,600 per unit. The facility was built in 1970 and had a 50 percent occupancy rate.

Source:  Irving Levin Associates, Inc.

For more information on this market update or related matters, please consult your BKD advisor.

About BKD Corporate Finance, LLC

BKD Corporate Finance, LLC, a wholly owned subsidiary of BKD, LLP, provides merger and acquisition, sales, management buyout, ESOP, recapitalization, financing and IPO advisory services. Our experience covers a variety of industries, including health care, financial institutions, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.

This article is property of BKD, LLP and is copyright protected.  It may not be republished or reproduced without permission.  To view BKD’s Terms of Use, click here.  To inquire further about reusing this article, contact Matt Wagner at 417.831.7283 or mpwagner@bkd.com.

Under the Social Security Act, Medicaid Disproportionate Share Hospital (DSH) payments to hospitals cannot exceed the uncompensated cost of providing inpatient and outpatient hospital services to Medicaid-eligible and uninsured individuals.

The 2008 DSH final rule required state reports and audits to ensure the appropriate use of DSH payments and compliance with the DSH limit imposed at Section 1923(g) of the Social Security Act. This rule also defined uninsured individuals as those who have no health insurance or other third-party coverage for the services provided. Individuals with insurance coverage, even if they don’t have coverage for the services provided, cannot be counted in the calculation of uncompensated cost for the Medicaid DSH payments. This is applied on an individual basis.

Proposed Rule Broadens the Definition of ‘Uninsured’

The proposed rule, released in the January 18, 2012, Federal Register, broadens the definition of “uninsured” to include the following:

1. Services furnished to individuals covered under the Indian Health Service (IHS) are considered covered only to the extent that the services are directly from IHS or when IHS has authorized coverage. Otherwise, these individuals are considered uninsured.
2. Services provided to individuals who have reached their lifetime insurance limits or who have exhausted their benefits are considered uninsured.
3. Services provided to individuals with health insurance that does not cover a medically necessary service also are considered uninsured.

Bad Debts & Unpaid Coinsurance/Deductibles & Inmates

The Centers for Medicare & Medicaid Services (CMS) clarified that cost associated with bad debts, unpaid coinsurance/deductibles and payor discounts cannot be included in the calculation of the uncompensated care for Medicaid DSH. This is due to the fact that these individuals had a source of third-party coverage for the service—the unpaid amount actually represents uncollected revenues.

In addition, the proposed rule supports previous definitions that inmates are not considered uninsured. Inmates are those in secured custody, and the appropriate federal, state or local law enforcement agency is legally liable for their care.

Effect on Hospitals

CMS did not prepare an analysis as prescribed by various regulations because it does not anticipate the rule change will have a significant financial effect on state Medicaid programs. They indicated the proposed change does not modify the DSH allotment amounts. Finally, CMS indicated the proposed rule may affect the calculation of the hospital-specific DSH limit by increasing the cost provided to uninsured individuals. This may affect the hospital’s DSH Medicaid payment if the hospital has its DSH Medicaid payment limited to the uncompensated care cost.

Please note:  CMS is accepting comments on the proposed rule until February 17, 2012. For more on this proposed rule, contact your BKD advisor or Kevin Wellen at kwellen@bkd.com.

According to the Centers for Medicare & Medicaid Services (CMS), version 5010 transaction standards will create improved standardization for administrative and clinical data. Unlike the current version, 5010 accommodates ICD-10 codes and must be in place before the change to ICD-10, which will occur October 1, 2013.

As the January 1, 2012, deadline approaches, your transition should be well under way. One key to preparing for this upgrade is testing transactions in the new 5010 format, which will increase your ability to effectively send and receive compliant transactions.

What providers need to know about HIPAA 5010:

• Compliance is mandatory by January 1, 2012.
• After January 1, 2012, CMS will no longer accept transactions in the version 4010 format.
• Mandatory transaction testing must be completed no later than December 31, 2011.
• If testing has not been approved by January 1, 2012, your claims may not be processed.
• You will need to contact your software provider to determine specific changes needed.
• The Medicare free software is already HIPAA 5010 compliant, but you will need to contact your Medicare

Administrative Contractor’s (MAC) Electronic Data Interchange (EDI) department for setting changes. Testing requirements vary by MAC; contact your MAC’s EDI department to determine their specifications.

On November 18, 2011, CMS issued guidance indicating 5010 implementation will still be mandatory effective January 1, 2012, but enforcement will be delayed until April 1, 2012. Providers should continue their testing processes to be compliant by the January 1 deadline.

Additional details related to HIPAA 5010 compliance can be found on the CMS website or your MAC website.

If you need further guidance or assistance, please contact your BKD advisor or Julie Bilyeu at jbilyeu@bkd.com.

On October 20, 2011, the Centers for Medicare and Medicaid Services (CMS) issued its final rule for Accountable Care Organizations (ACO) under the Medicare Shared Savings Program enacted in 2010 as part of the Patient Protection and Affordable Care Act. The proposed rule for this program, published April 7, 2011, created a large number of comments that have led to several significant changes to the final regulations. Many of these changes are intended to encourage the provider community to participate in ACOs.

Significant changes in the final rule include the following:

• A significant area of concern for the provider community in the proposed rule was the retrospective assignment process of beneficiaries to ACOs—an ACO could not identify its assigned beneficiaries until after the end of any agreement period. In the final rule, the beneficiary assignment process has been modified to provide ACOs with information regarding assigned beneficiaries on a quarterly, rolling-year basis, with final determination of assigned beneficiaries at the end of a given agreement year. This change offers ACOs more timely information regarding potential assigned beneficiaries, although final determination remains on a retrospective basis.
• In the proposed rule, CMS required all ACOs—even those electing a one-sided risk arrangement known as Track 1—be subject to sharing both savings and losses in the third year of their initial program participation term. Under the final rule, ACOs electing a Track 1 arrangement participate in shared savings for the initial three-year term without participating in shared losses.
• In the proposed rule, primary care services for Medicare beneficiaries in a rural health clinic (RHC) or federally qualified health center (FQHC) participating in an ACO were not considered in the process of assigning beneficiaries to that ACO. The final rule considers such services within the assignment process, creating an opportunity for RHCs and FQHCs to play a greater role in an ACO and even to independently form an ACO in some circumstances. As a result, the final rule also eliminates the separate incentives within the shared savings calculation associated with including an RHC or FQHC in an ACO.
• The number of quality measures required to be reported by an ACO were reduced from 65 to 33 in the final rule. Additionally, the phase-in for adjusting shared savings and losses by performance on certain quality measures was delayed from Year Two of the initial agreement term to Year Three for seven measures and after Year Three for one measure.
• In order to prevent ACOs from being paid for shared savings for normal variances in the cost of beneficiary care from year to year, the proposed rule set a minimum savings threshold of two percent that must be achieved before savings were shared on amounts greater than that threshold. The final rule changes this methodology to allow for all savings to be shared if the two percent threshold is met.
• The proposed rule included a required 25 percent withhold of shared savings paid to an ACO in any given agreement year, to be held by CMS until the end of any three-year agreement period. The final rule eliminates this withhold provision.
• Medicare direct medical education (DME) and disproportionate share (DSH) reimbursements were included in program costs for benchmark and actual expenditure purposes in the proposed rule, but are not included in the final rule.
• In the final rule, CMS has allowed two alternative dates to begin participating in the shared savings program—April 1, 2012, and July 1, 2012. ACOs beginning on April 1 will have their first performance period be 21 months, and ACOs beginning on July 1 will have their first performance period be 18 months. ACOs wishing to begin participation after July 1, 2012, will have an opportunity to begin on January 1 of each successive year.
• The proposed requirement that 50 percent of an ACO’s primary care physicians achieve “meaningful use” of certified electronic health record (EHR) technology has been eliminated in the final rule. The EHR criteria remain a heavily weighted quality measure in the final rule to encourage adoption.

Several other regulations recently have been released from the Federal Trade Commission, U.S. Department of Justice and IRS to address issues related to ACO formation. In addition, CMS and the Office of Inspector General have issued an interim final rule for establishing waivers under the federal Stark, anti-kickback and civil monetary penalty laws for ACOs.

Health care organizations should remain aware of the development of ACOs and the Medicare shared savings program, which may result in significant changes to the provider landscape. Health care organizations should continue to ask questions such as the following:

• Is becoming an ACO in our organization’s future? If not, where should we focus to make ourselves desirable to a forming ACO when the appropriate time comes?
• How strong is the primary care physician component of our proposed ACO? (Primary care is the driver of the beneficiary assignment to an ACO, and ACOs will have difficulty succeeding without a strong primary care physician base.)
• How effective can our potential ACO be at controlling costs for organizations not in our ACO but providing services to potentially assigned beneficiaries?
• Is the benefit of shared savings distributions greater than the potential increased cost and oversight of an ACO? Each organization needs to evaluate this early in the process, as ACO formations are anticipated to require significant time and resources.

For more information on the final ACO rules, please contact your BKD advisor.

Recent changes to Medicare Part A mean skilled nursing facilities (SNFs) and their therapists must remain vigilant to make sure therapy services are provided consistently. The Centers for Medicare & Medicaid Services clarified an End of Therapy Other Medicaid Required Assessment (OMRA) must be completed for Medicare Part A patients who miss three consecutive days of therapy services, using an assessment reference date (ARD) of the first, second or third day after the last therapy treatment. The approaching holidays may create difficulties delivering therapy services on a regular schedule as therapy staff take time off or skilled residents spend extra time with family.

SNFs also are now required to perform an “informal assessment” every seven days to determine if the amount of therapy being delivered is consistent with the Resource Utilization Group (RUG) minutes on the last prospective payment system scheduled or unscheduled assessment. If the RUG group has changed, the facility must complete a Change of Therapy (COT) OMRA to adjust the reimbursement rate. Again, the upcoming holidays could impact levels of therapy delivered.

Providers should discuss staffing with their therapy provider prior to the holiday season to ensure staff will be available to accommodate resident needs. This may prevent headaches in the days and weeks to come. For more information, contact your BKD advisor or email Lori Brunholtz at lbrunholtz@bkd.com.