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.

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.

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.

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.

Independent hospitals have successfully faced difficult circumstances in the past, but new challenges are pushing the hospital industry onto more difficult footing. Fundamental, long-term industry challenges, including competitive disadvantages in size and scale, limited access to capital and competition for and with physicians, have increased the need for independent hospitals to re-examine their operational and financial strengths and weaknesses. In addition to these historic challenges, the industry also faces sweeping regulatory and third-party reimbursement changes as the focus increases on reducing cost, increasing quality and adjusting to outcomes-based payment structures. Combined, these challenges are contributing to wide-reaching changes in the American health care delivery model.

A Measured Approach

Independent hospitals should develop a proactive, strategic approach to address these challenges. As health care leaders know, an ounce of prevention is worth a pound of cure, but when related to strategic planning in the current environment, the phrase should be “an ounce of proactive planning is worth a pound of reactive effort.” An assessment of the hospital’s current position and strategic objectives is the foundation on which a comprehensive plan to provide health care in the community can be built.

After assessing its current operating and financial condition, the hospital should ask some fundamental questions. Can the hospital’s operations be sustained and enhanced under its current structure? If not, what options are available to the hospital? Some hospital leaders can answer in the affirmative and quickly move on to enhancing the hospital. However, leaders at some hospitals will answer in the negative or with significant question marks, and those leaders should be aware of the broad range of available options. Providing health care under America’s changing delivery model may look different depending on a community’s specific needs and characteristics and those of its hospital. National market and reimbursement forces are encouraging some independent hospitals to explore relationships with other hospitals and health systems.

Available Options

Strategic relationships in the hospital industry are taking a variety of forms, from loose affiliations to acquisitions. However, no relationship is one-size-fits-all. Every hospital has strengths, weaknesses, opportunities and threats. Through the wide range of collaborative relationships and transaction types and a managed negotiation process, many hospitals can reach an agreement addressing weaknesses and using strengths. The following diagram provides an overview of the most widely used organizational structures, along with the degree of control retained by the community and strategic benefit to the hospital.

Choosing to remain unaffiliated provides local control and community-based decision making. However, some unaffiliated hospitals may struggle to manage issues associated with lack of operational and financial scale and scope. Merging with or being acquired by another organization can provide significant operational and financial opportunities, but typically leads to significant loss of independent decision making for independent hospitals. Affiliations, joint operating agreements (JOA) and leases, found near the middle of the diagram, provide opportunity for hospitals to both maintain a measure of independence and gain operational and financial scale and scope.

Affiliations

Affiliations include a range of potential transaction structures, from loose cooperation agreements to virtual mergers. Most loose cooperation agreements are based around operations and patient care and can be unwound by either party at almost any time. Strong affiliation agreements, often cited as virtual mergers, typically build on a base of operations and patient care items to include financial and governance components. There are examples in the marketplace where strong affiliations contained significant financial components, including broader access to capital markets, funds for renovation or expansion, cost savings from shared back-office services and other financially beneficial arrangements. These virtual mergers can include a high degree of clinical integration, and strategic governance is typically collaborative while maintaining overall governing board independence. Financial, work force, material property acquisition and disposition and other broad strategic decisions are often shared by a joint board or by ex-officio board representation among the affiliates’ boards.

Joint Operating Agreements

A JOA typically provides a stronger financial footing for an undercapitalized hospital or a hospital seeking operational resources, while allowing the hospital to retain a separate board of directors and identity. The JOA allows hospitals to coordinate patient care services, financial decisions, construction and the purchase of strategic fixed assets, while allowing the hospitals to maintain some of their own policies. Under a JOA, religious hospitals can gain many of the benefits of a non-religious health care system and still retain their religious association. The converse applies to a community hospital executing a JOA with a religious system. Typically, the stronger of the hospitals or a new joint operating company is charged with operational responsibility, but assets and liabilities continue to be maintained separately, and the hospitals continue to be individually governed.

Leases

Fixed assets and related liabilities are maintained by the lessor under a lease agreement, but strategic governance and operation of the facility is vested in the lessee. Lease agreement negotiation is a critical factor in crafting a positive outcome for the community. Through the negotiation process, the hospital board could negotiate a broad range of items including continued or additional health care services for the community, contracts for key employees, initial staffing level commitments and the transaction price structure. The structure of the lease includes at least the term and lease rate, but might also include the purchase of furniture, fixtures and equipment and working capital, assumption of some assets, liabilities and contracts, a loss-share agreement, a no-shop clause, a right-of-first-refusal clause or a purchase option.

Risk Management & Planning to Succeed

Even as they are influenced by market forces, hospitals must be acutely aware of the risks associated with these strategic moves. Most leaders see the potential pitfalls in a tightly binding agreement, but even loose, informal relationships should be carefully considered because of their potential far-reaching effects. For example, moving to formalize an agreement with one organization could negatively impact a hospital’s relationship with other friendly competitors.

In addition to managing risks, hospitals must focus on planning for success. No strategic move should be taken without proper planning and guidance—this is a clear instance where failing to plan is planning to fail. Assuming the organization has objectively and proactively assessed the opportunities and threats to the hospital and health care in the community, there are three broad steps before moving toward a potential relationship:

1)  Establish goals for the relationship that are specifically identifiable with the hospital’s goals and community needs.

2)  Form a team of board members, executives and experienced outside advisors to guide the process.

3)  Create agreed-upon, phased decision points throughout the process.

Once these steps are complete, the organization can identify a list of potential candidates for a relationship and negotiate an agreement with the most appropriate relationship structure based on the goals of both parties.

While a specific outcome is never assured, a proactive, strategic discussion and approach by community health care leaders is the best option to ensure their community health care needs are met for years to come. For more information about strategic hospital relationships, contact your BKD advisor.

On October 5, 2011, the Department of Health and Human Services Office of Inspector General (OIG) issued its work plan for 2012, which outlines specific focus areas for the OIG next year.

Focus Areas

The 2012 OIG Work Plan includes increased focus on hospital quality measures, “present-on-admission” data, same-day readmissions, payment for outpatient services performed in the 72-hour window of an inpatient admission, hospice and home health care services, billing and payment for durable medical equipment (DME) and the professional component billing of evaluation and management (E/M) services. In addition, there will be renewed interest in whether services billed under the “incident-to” guidelines meet the Centers for Medicare & Medicaid Services (CMS) criteria.

The Medicaid program also will be elevating its audit activities to include focus on home health billed and paid services, hospice billed and paid services, DME, transportation services, i.e., ambulance, and family planning services.

A list of some focus areas by facility, provider and supplier type is provided below.

All Hospitals

• Reliability of hospital-reported quality measures data
• Hospital admissions with conditions coded as “present-on-admission” as well as accuracy of present-on-admission indicators submitted on Medicare claims; although critical access hospitals (CAHs) are not as affected because these facilities are not reimbursed through the DRG system, some state Medicaid programs as well as state Blue Cross Blue Shield insurers reimburse on a DRG system, so CAHs also are responsible for collecting this data
• Medicare inpatient and outpatient payments to acute care hospitals
• Hospital outlier payments and reconciliation of outlier payments
• Hospital claims with high or excessive payments
• Hospital same-day readmissions
• Acute-care inpatient transfers to inpatient hospice care
• Duplicate Graduate Medical Education (GME) payments
• Hospital occupational mix data used to calculate inpatient hospital wage indexes
• IPPS and non-IPPS payments for nonphysician outpatient services, i.e., 72-hour rule

Critical Access Hospitals

• Appropriateness of payments to CAH, i.e., meeting designation criteria and conditions of participation, as well as review of profile variations in size, services and distance from other hospitals

Nursing Facility

• Quality of care, safety of residents and quality of post-acute care
• Review of whether Medicare and/or Medicaid certified nursing homes have implemented compliance plans and whether those plans meet criteria set forth in the OIG compliance program guidelines
• Medicare Part A payments to skilled nursing facilities
• Trends of hospitalizations and repeat hospitalizations of residents
• Questionable billing patterns during non-Part A nursing home stays

Hospice

• Marketing practices and associated financial relationships with nursing facilities
• Inpatient hospice care claims from 2005–2010, specifically inpatient claims and drug claims billed under Part D

Durable Medical Equipment Suppliers

• Payment for replacement DME supplies, home blood glucose testing supplies and effectiveness of contractor edits to prevent payments to multiple suppliers of home glucose testing supplies as well as questionable testing supply billing
• Compliance with the competitive bidding process

Physicians/Medical Practice and Other Services

• Billing for ambulance services
• Compliance with Medicare assignment rules
• Trends of billing for high levels of service or high complexity services resulting in high Part B payments
• Place of service errors, i.e., reporting place of service office instead of hospital outpatient, resulting in inaccurate reimbursement
• Services billed under the incident-to criteria that have been performed by unqualified staff and/or resulted in incorrect billing
• Consistent billing of high E/M service levels without supporting documentation and billing in error for related E/M services within an operative global period
• Payment for Part B imaging services
• Services billed by independent physical therapy providers
• Payment for polysomnography, i.e., sleep studies
• Part B payments for Hemoglobin A1C testing and increased lab service utilization
• Physician-administered drugs and biologicals

Conclusion

The annual OIG Work Plan should be part of your compliance library and should serve as a vital reference for your compliance officer and committee. Compliance officers and committees should evaluate the OIG’s focus areas and consider them as part of an annual risk assessment and development of an annual compliance work plan. This offers the ability to develop internal or external compliance review processes around the focus areas, identify potential areas of risk and develop a course of action related to the evaluation. This can help improve charge capture and billing processes, facilitate staff education and improve the overall compliance program.

For more information on the 2012 Work Plan, contact your BKD advisor or email Joe Watt at jwatt@bkd.com.

The final rule for changes to the hospital inpatient acute care prospective payment system (PPS) for federal fiscal year 2012 was released by the Centers for Medicare & Medicaid Services (CMS) in early August. This release included two changes related to the amount of defined benefit pension costs a hospital is allowed to claim on its Medicare cost report. One of the changes relates to calculating allowable pension costs claimed on a PPS hospital’s wage index. BKD released an Insights article in September that examined this aspect in depth.

The second change relates to the calculation of allowable pension costs for cost-finding purposes. Two different methodologies are necessary to appropriately address the goal of each. The wage index is used to measure a hospital’s labor costs across areas, while cost-finding procedures determine the actual costs incurred at individual hospitals. The current maximum amount of defined benefit pension costs claimed for cost-finding purposes, as detailed in Section 2142.5 of the Provider Reimbursement Manual (PRM), is based on actuarial accrued liability, normal costs and unfunded actuarial liability. To be allowable, costs must be computed in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). The current period liability for pension cost also must be funded. Finally, funding in excess of a current period liability can be carried forward and recognized in a future period.

Under the Pension Protection Act of 2006 amendments made to ERISA, there is no longer a standard actuarial cost basis used by all types of plans. Therefore, changes have been made in calculating allowable defined benefit pension costs. These changes will be effective for cost-reporting periods beginning on and after
October 1, 2011.

The final rules state a provider’s pension cost for cost-finding purposes will be the sum of cash basis contribution deposits (which must be made within the current cost-reporting period and not reflected as a pension cost for a prior cost-reporting period) and any carryforward contributions. This total cost is subject to a limitation. To determine the limitation amount, providers need to calculate their average pension contributions for the three highest consecutive cost-reporting periods out of the five most recent cost-reporting periods. This average, multiplied by 150 percent, becomes a provider’s pension cost limitation for the current cost-reporting period.

If a provider has a newly adopted plan, the three-year and five-year periods described above will be limited to the number of cost-reporting periods the defined benefit pension plan has been in place. There is a provision within the final policy allowing providers exceeding the 150 percent limit to submit documentation showing that all or a portion of the excess amount is reasonable and necessary and should be reported in the current period as allowable pension costs.

Any pension contributions in excess of the amount reported in the current period can be carried forward to be reported in a subsequent cost-reporting period, again subject to the 150 percent limitation. CMS encourages providers to establish a carryforward balance to account for contributions (on a cash basis) made prior to the effective date of this change that were not reported as pension costs in a prior period. This balance should be updated annually to reflect changes and to lessen the chances for duplication of recognized contributions. Finally, CMS states it is the providers’ responsibility to document and maintain, for audit purposes, the data used to establish the carryforward balance and any changes to that balance.

As a result of this new policy, Section 2305 of the PRM-I, liquidation of liabilities provision, will be changed to exclude qualified defined benefit pension plan costs. This provision will continue to apply only to contributions made to liquidate pension costs for cost-reporting periods prior to the change in policy.

CMS has established a FY 2012 Final Rule Home Page where the final rule and related data files 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) has made some very restrictive interpretations of what costs are eligible for electronic health records (EHR) incentive payments for critical access hospitals (CAHs). These interpretations could seriously limit CAH options for obtaining, financing and paying for a viable EHR system and limit the incentive payments Medicare will pay.

The problems revolve around the language in Section 1814(l)(3)(C) of the Social Security Act. This section describes EHR costs as cost “for the purchase of certified EHR technology to which purchase depreciation (excluding interest) would apply” if payment was made under normal CAH payment rules. CMS is using a very literal definition of “purchase” and “EHR technology.”

To be allowed for the incentive payment, per CMS, a CAH must buy the asset. It cannot be leased, as noted in the FAQ on CMS’ EHR webpage. Even a capital lease will not make the asset eligible for the incentive payment. This severely limits a CAH’s options for financing the technology needed to implement an EHR system. Many CAHs will be forced to use less favorable financing options and incur additional interest expense—which would not be eligible for the incentive payment—to acquire the needed assets.

CMS also is limiting the cost of the EHR asset to the purchase price of the asset itself. Items such as installation, shipping, equipment testing, building modifications needed to accommodate the new equipment and any other cost normally capitalized under generally accepted accounting principles as part of the asset will not qualify as an EHR cost.

The CMS interpretation of what qualifies as cost for incentive payment is extremely restrictive. To become a meaningful user, a hospital must incur a large amount of cost to implement and maintain a certified EHR system. For a CAH, however, CMS will not pay an incentive on the cost the hospital must incur to make the system functional. All of these CMS interpretations mean it will be paying the incentive bonus on just a small fraction of the cost of implementing an EHR system in a CAH. This will leave many CAHs struggling to figure out how to pay for the system.

Discussions with CMS on its interpretation are ongoing with several organizations, although CMS has not changed its position.

Contact your BKD advisor for guidance on how your hospital might be affected by this CMS interpretation and to discuss possible options for limiting the impact. We also encourage you to contact your local hospital association and let that group know how this matter will affect your EHR allowable capital asset amounts.

The U.S. Department of Defense (DOD) is attempting to reduce active military and veteran health care costs by reducing reimbursement to sole community hospitals (SCHs) for inpatient services provided to TRICARE beneficiaries. The reduction comes by way of changes to the reimbursement methodology—which currently comprises a negotiated rate for network providers or billed charges for non-network providers—and is projected to save DOD more than $200 million annually once fully implemented.

Negotiated rates at network providers and billed charges for non-network providers are generally greater than the Medicare diagnosis-related group (DRG) rate, resulting in significantly higher payments to SCHs than what Medicare pays for equivalent care. The goal of the July 5 proposed rule is to transition TRICARE reimbursement to a methodology consistent with Medicare reimbursement to SCHs. These changes are applicable to all SCHs as defined by Medicare, except for Maryland hospitals paid by Medicare and TRICARE under a cost containment waiver.

Medicare reimburses SCHs for inpatient care at the greater of the Medicare DRG for all Medicare discharges, or the amount the SCH would have been paid if it were paid the average cost per discharge at that SCH in fiscal years 1982, 1987, 1992, 1996 or 2006, updated to the current year, for all Medicare discharges. DOD noted, however, that establishing a methodology exactly like Medicare is not practical. While the aggregate DRG reimbursement for all TRICARE discharges can be calculated, using the Medicare cost per discharge would not be appropriate for TRICARE because of differences in the TRICARE and Medicare beneficiary case mix. Also, applying an annual update to a TRICARE base-year average doesn’t make sense because of the relatively low number of TRICARE discharges in any given year—fewer than 20 at nearly half of SCHs. The average cost per discharge in any one year may not be a good measure of the average cost in future years.

As a result, DOD determined the most appropriate methodology will be to pay SCHs the greater of what the SCH would have been paid under the DRG method for all TRICARE discharges or an amount equal to the SCH’s specific cost-to-charge ratio (CCR), multiplied by the SCH’s billed charges for TRICARE services. To reduce the effect in any one year, the new methodology will be phased in, with a maximum 15 percent annual reduction allowed for non-network SCHs and 10 percent annual reduction allowed for network SCHs. For example, if a network SCH currently had a TRICARE allowed-to-billed ratio of 100 percent, that SCH would be paid 90 percent in Year One, 80 percent in Year Two, 70 percent in Year Three and so on, until it reaches the SCH’s CCR.

Final settlement of TRICARE claims will occur through submission of an annual cost report. New SCHs will be paid using the average CCR for all SCHs calculated in the most recent year until they file a Medicare cost report. SCHs with no previous inpatient TRICARE claims will be paid based on their Medicare CCR.

DOD anticipates the first-year impact of this change will result in a $31 million reduction of payments to SCHs. The change in reimbursement methodology is expected to take effect for discharges in federal fiscal year 2012, though the final rule has not been issued.

For assistance in measuring the impact of this change on your SCH, contact your BKD advisor.

On August 1, 2011, the Centers for Medicare & Medicaid Services (CMS) published the final rule for changes to the hospital acute care prospective payment system (PPS) for federal fiscal year (FY) 2012. As was discussed in a prior BKD article on this topic, CMS included several changes affecting the hospital wage index computation for FY 2013.

One of the more significant wage index changes is the changing of methodology in computing allowable pension cost. Currently, the Provider Reimbursement Manual (PRM) defines maximum allowable pension costs as those requiring pension costs that must be funded to be allowable; that excess funding can be carried forward for recognition in a subsequent period. PRM currently requires allowable pension cost to be determined according to the Employee Retirement Income Security Act of 1974 (ERISA), even if the hospital is not subject to ERISA. However, recent regulatory changes to ERISA resulted in a lack of standard actuarial basis used by ERISA and non-ERISA plans.

Under the new methodology, allowable pension cost will not rely on the plan’s actuarial computation, but compute cost based on historical cash contributions. CMS decided not to follow general accepted accounting principles (GAAP) for determining allowable pension expense, citing different versions of GAAP as well as GAAP’s uncertain future.

With the new rules, allowable pension costs will equal the three-year average of contributions made to the pension plan. CMS believes this three-year average will add stability to allowable wage-related costs. For example, the FY 2013 wage index will be based on cost reporting periods that began in FY 2009. The new methodology requires not only pension plan contribution data for the existing base cost reporting year (FY 2009), but also contributions data for FY 2008 and FY 2010 cost reporting periods to determine the three-year average that will be used to determine allowable pension cost for the FY 2013 wage index. It is important to note this is only a change for wage index purposes; allowable costs for the annual Medicare cost report will be computed using separate rules. It is also important to note, although it is solely hospital data used to calculate this wage index, most other Medicare payment systems, including outpatient PPS, inpatient rehab and psychiatric, skilled nursing facilities and home health, use the same wage index.

As a result of the public comment period, CMS is developing a transition policy permitting a hospital to determine a “prefunding balance” based on pension contributions made but not reflected in the wage index. The transition policy will allow hospitals to establish a prefunding balance equal to (A) minus (B), where (A) equals the sum of cash contributions made during a period of consecutive cost reporting periods no earlier than October 1, 2002 (the cost reporting period applicable for the FY 2007 wage index), and ending with the cost reporting period applicable for the FY 2012 wage index, and (B) is the sum of pension costs actually reflected in the wage index for the same cost reporting periods. The transition policy will allow 10 percent of the prefunding balance to be included in allowable cost, starting with the FY 2013 wage index and ending with the FY 2022 wage index.

CMS has established a FY 2012 final rule home page, where the final rule and related data files are available for download.

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

Long-Term Care M&A Activity Accelerates

With consecutive increases in transaction volume each of the last six quarters, long-term care (LTC) mergers and acquisitions (M&A) volume has been on a torrid pace following the 40-transaction jolt in fourth quarter 2009. This accelerated deal volume can be traced to a number of factors affecting buyers and sellers.

What’s driving sellers:

• Increased regulation and reimbursement pressures
• Uncertainty about future reimbursement
• Aging facilities needing major renovations or replacement
• Improving valuations
• Beginning wave of baby boomer owners nearing retirement age

What’s driving buyers:

• The need to spread overhead costs due to regulatory and reimbursement changes
• Availability of cheap financing
• The impending wave of baby boomers needing future care

As the graphs below illustrate, after 110 transactions in 2010, there have already been 74 reported through the first half of 2011. Deal volume for this period topped deal volume for the same period in 2010 by an eye-popping 57 percent. Even with a relatively conservative second half of 2011, we could still see a greater number of transactions this year than during the last LTC M&A peak in 2007.

Source:  Irving Levin Associates, Inc.

With the Centers for Medicare & Medicaid Services (CMS) recently announcing plans to cut skilled nursing facility (SNF) Medicare payments by 11.1 percent and continued uncertainty with federal and state budgets, coupled with the Federal Reserve’s recent pledge to keep interest rates low at least into 2013 and the fact that people and facilities continue to age, the same factors driving today’s market should continue to drive LTC M&A activity for the foreseeable future.

Public Comparables

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

Historical Transaction Cap Rates

After average valuations for SNFs increased 30 basis points in the second quarter of 2010, they remained relatively flat through the rest of the year. Although the first quarter of 2011 saw a slight decrease in average valuations, with cap rates hitting 13.3 percent, data for the second quarter of 2011 is expected to show a slight correction to lower cap rates in the 13 percent range.

After the assisted living and independent living sectors gained 70 basis points and 100 basis points, respectively, from the second quarter of 2010 to the fourth quarter of 2010, they have leveled off a bit. These sectors should at least hold these gains over the next few quarters, with continued improvement more likely coming from the independent living sector.

Source: NIC – Seniors Housing & Care Industry

Recent Select Transactions

Skilled Nursing

• July 2011 – A private investor purchased a 107-bed SNF from a Catholic not-for-profit provider in Illinois for $6.1 million, or $57,000 per bed. Built in 1972, the facility had a 75 percent occupancy rate and annual revenues of $5.9 million.
• May 2011 – An undisclosed buyer purchased a 140-bed Illinois SNF for approximately $6.1 million. The facility was built in 1975 and had an 80 percent occupancy rate. The pro forma cap rate for the transaction was between 12 percent and 13 percent.
• May 2011 – A regional operator acquired a 74-bed Kansas nursing facility for approximately $1.3 million, or $17,500 per bed. The facility comprises 55 skilled beds and 19 residential care beds and was originally built in 1963, with a number of renovations and additions through the years. The facility had revenues and EBITDA of approximately $2.7 million and $180,000, respectively, representing a cap rate of 13.9 percent.
• April 2011 – A St. Louis, Missouri-based regional operator purchased a 96-bed Missouri SNF for approximately $5.5 million, or $57,000 per bed. The facility was nearly 25 years old and had a 90 percent occupancy rate. With $683,000 in EBITDA on $4.5 million in revenue, the cap rate was 12.5 percent.

Assisted/Independent Living

• July 2011 – Bickford Senior Living teamed up with Harrison Street Real Estate Capital to purchase a portfolio of six assisted living facilities in Illinois, Iowa, Nebraska and Missouri. The portfolio included 342 total units and was purchased for approximately $62.5 million, or $183,000 per unit.
• June 2011 – A local operator sold a 42-unit assisted living facility in Ohio to an undisclosed regional operator for approximately $4.4 million, or just more than $104,000 per unit. This facility was operating at 100 percent occupancy and, based on EBITDA of $377,000, yielded a cap rate of 8.6 percent.
• May 2011 – Four assisted/independent living facilities (419 total units) were purchased in Utah by MBK Senior Living for approximately $76.2 million, or approximately $182,000 per unit. Occupancy rates averaged 85 percent, and the cap rate was estimated at slightly less than 8 percent.
• May 2011 – Five Star Quality Care announced the acquisition of six senior living communities in Indiana. The facilities were approximately eight to 12 years old and included 525 assisted living units, 191 independent living units and 22 Alzheimer’s units. The private seller will receive approximately $123 million, or $166,667 per unit, with the cap rate believed to be around 8 percent.
• May 2011 – Senior Living Management sold an 89-unit assisted living facility in Georgia to Wakefield Capital and Bluerock Real Estate for $15.5 million. Based on estimated revenues and EBITDA of $3.73 million and $1.47 million, respectively, the cap rate for this transaction came in at 9.5 percent. The facility was built in 1997 and had a 94 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.

The Centers for Medicare & Medicaid Services (CMS) issued proposed rules to update the End-Stage Renal Disease (ESRD) prospective payment rates and quality incentive program (QIP) and ambulance fee schedules, as well as proposed changes to the definition of Durable Medical Equipment (DME).

CMS projects payment rates for dialysis treatments will increase by 1.8 percent, representing a projected inflation (or ESRD market basket) increase of 3 percent, less a projected productivity adjustment of 1.2 percent as required by statute, effective for dialysis treatments furnished for calendar year 2012.

The final rule on the ESRD QIP was published January 5, 2011. It outlines the initial quality measures and policies under which providers or facilities that did not meet or exceed a total performance score of 26 points would have payments reduced by 0.5 percent to 2 percent for payment year 2012.

The proposed new ESRD QIP requirements would affect the PY 2013 and PY 2014 program years. Along with proposing changes to the existing performance measures for PY 2013, CMS proposes eight measures for PY 2014, to continue its effort to determine whether patients with ESRD are receiving high-quality care:

1. Anemia Management Measure (Hemoglobin Greater Than 12 g/dL)
2. Kt/V Dialysis Adequacy Measure
3. Vascular Access Type Measure
4. Vascular Access Infections Measure
5. Standardized Hospitalization Ratio—Admissions Measure
6. National Healthcare Safety Network (NHSN) Dialysis Event Reporting Measure
7. Patient Experience of Care Survey Usage Measure
8. Mineral Metabolism Reporting Measure

The proposed rule also includes two proposals for scoring a facility’s performance under the ESRD QIP. One relates to the two-measure framework proposed for PY 2013, while the second outlines how CMS would score facilities under the eight-measure program proposed for PY 2014. The proposed PY 2013 scoring methodology would more closely align the ESRD QIP with the scoring methodology adopted for the Medicare Hospital Inpatient Value-Based Purchasing Program. This would make it easier to adopt new measures and reward facilities not only for delivering high-quality care, but also for improving the standard of care they deliver over time.

The proposed rule includes clarifications to the Low-Volume Adjustment Policy under ESRD PPS. To receive the low-volume adjustment, an ESRD facility would need to provide attestation to its fiscal intermediary or Medicare Administrative Contractor (FI/MAC) that it has met the criteria to qualify as a low-volume facility prior to November 1 of each year. The FI/MAC would verify the ESRD facility’s low-volume attestation for the three consecutive years preceding the payment year, using the ESRD facility’s most recent final-settled or as-filed 12-month cost reports. If the FI/MAC does not receive an ESRD facility’s attestation that the facility is eligible for the low-volume adjustment on or before November 1 prior to the payment year, the facility would not receive the adjustment for that payment year.

Lastly, the proposed rule included items not related to ESRD or QIP. These items include a proposal to conform the regulations to agree to the Medicare and Medicaid Extenders Act of 2010 on a one-year extension of certain payment rate increases for both ground and air ambulance services until January 1, 2012. There also is a proposed three-year minimum lifetime for equipment to be considered durable for purposes of payment under the durable medical equipment benefit category. CMS also continues to analyze recommendations on how to improve the Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) Competitive Bidding Program, since CMS did not include any changes in this proposed rule.

CMS will accept comments on the proposed rule until August 30, 2011, and respond to them in a final rule to be issued by November 1, 2011.

For more information on these proposed rules, contact your BKD advisor.

Have you received notification from your Medicare Administrative Contractor (MAC) to revalidate your Medicare enrollment information? If not, be prepared for it.

Section 6401(a) of the Patient Protection and Affordable Care Act requires all enrolled providers and suppliers to revalidate their enrollment information under new enrollment screening criteria. This revalidation effort applies to providers and suppliers enrolled prior to March 25, 2011. Newly enrolled providers and suppliers submitting enrollment applications to the Centers for Medicare & Medicaid Services (CMS) on or after March 25, 2011, are not affected. Between now and March 23, 2013, MACs will regularly send out notices to begin the revalidation process for each provider and supplier.

Providers and suppliers should submit revalidation only after receiving the request from their MAC to do so. Providers and suppliers will have 60 days from the date of the letter to submit the required completed enrollment forms. Failure to submit enrollment forms as requested may result in the deactivation of Medicare billing privileges. Revalidation can be completed through the Internet-based Provider Enrollment Chain and Ownership System (PECOS) or a paper application; currently, federally qualified health centers only may submit paper enrollment applications. Please note: CMS forms 855A, 855B, 855I, 855O, 855R and 855S all have been revised as of July 1, 2011, and should be used for the provider enrollment revalidation. The new forms can be found by searching “855” on the CMS website.

When you receive notification from your MAC to revalidate, you will need to complete the following steps:

• Update your enrollment through Internet-based PECOS or complete the appropriate CMS 855 paper application.
• Sign the certification statement on the application.
• Submit an enrollment fee ($505 for federal fiscal year 2011) via http://www.pay.gov.
  • On the pay.gov website, enter “CMS” into the field under “Search Public Forms.” Click “Go,” and then click the “CMS Medicare Application Fee” link.
  • The enrollment fee is imposed on institutional providers that are newly enrolling, re-enrolling/re-validating or adding a new practice location; the fee only applies to applications received on or after March 25, 2011.
  • Physicians, non-physician practitioners, physician group practices and non-physician group practices (unless enrolling as a DMEPOS supplier) are not subject to the enrollment fee.
  • Payments may be submitted by electronic check or debit/credit card.
  • Fees for future years will be adjusted by the percentage change in the consumer price index (for all urban consumers) for the 12-month period ending on June 30 of the prior year.
  • If necessary, a request for a hardship exception to the application fee can be made.
• Mail the form, supporting documents and certification statement to your MAC.
  • If using PECOS, enrollment forms are not required to be mailed to your MAC, but the certification statement and other supporting documents are required.
  • Providers and suppliers are strongly encouraged to submit a copy of their pay.gov receipt with their application. This enables the contractor to more quickly verify that payment has been made.

Additional details related to Medicare provider enrollment revalidation can be found in this CMS MLN Matters article and the Federal Register.

If you need further guidance or assistance, please contact your BKD advisor or Rebekah Wallace at rwallace@bkd.com.

On July 29, 2011, the Centers for Medicare & Medicaid Services (CMS) issued its final rule for federal fiscal year 2012 to update payment rates under the prospective payment system (PPS) for skilled nursing facilities (SNFs). The following are highlights of the final rule.

Payment Rate Updates

The most significant element of the final rule relates to cuts in payment rates for FY 2012, which CMS projects to be an overall net reduction of $3.87 billion, or approximately 11.1 percent. The cuts are only applicable to RUG rates paid for rehabilitation services, equating to a decrease of roughly $70 per patient day on average. Considerations in the net reduction in payment rates include the following:

• Effective October 1, 2011, all rate categories will be updated for the full market basket increase of 2.7 percent, less a 1 percent productivity adjustment required by Section 3401(b) of the Patient Protection and Affordable Care Act (ACA), for a net increase of 1.7 percent, or approximately $600 million. There was no “forecast error” correction for FY 2012 relating to the difference between forecasted and actual market basket increases.
• The biggest component of the rate adjustments pertains to the recalibration of nursing case-mix indexes in the therapy RUG categories so that they “more accurately reflect parity in expenditures between RUG-IV and the previous case-mix classification system” (RUG-III). The result of this recalibration is a projected reduction in Medicare Part A payments to SNFs of 12.6 percent, or approximately $4.47 billion, before offsetting the increase for market basket mentioned above.
• This is CMS’ attempt to adjust for unanticipated increases in payments to SNFs resulting from the transition from MDS 2.0 and RUG-III to MDS 3.0 and RUG-IV, which occurred October 1, 2010. The FY 2011 change in assessment and payment systems was intended to be budget-neutral. Unfortunately, CMS rejected suggestions by industry associations and others to phase in payment rate reductions in lieu of implementing such a significant hit in one year.
• The 128 percent per diem rate add-on for SNF AIDS patients remains in effect for FY2012.
• CMS will continue using the inpatient hospital wage index to adjust the labor-related portion of federal rates and continue to apply the alternative urban and rural methodologies for geographic areas with no hospitals.
• SNF PPS rates and wage indices contained in the final rule apply to free-standing SNFs, rural swing-bed hospitals and hospital-based skilled nursing units. However, critical access hospitals will continue to be paid on a reasonable cost basis for SNF services furnished under a swing-bed agreement.

Group Therapy

CMS feels the current method of reporting group therapy minutes creates an inappropriate payment incentive to perform group therapy instead of providing one-on-one individual therapy, because group therapy time is currently not required to be allocated among patients participating in a group session. To compensate for anticipated increases in group therapy utilization, CMS has modified its definition of group therapy, which is now defined as therapy provided simultaneously to four patients performing similar therapy activities. In addition, the final rule requires group therapy minutes to be allocated among four group therapy participants, regardless of the actual number of patients participating in group therapy.

SNFs will continue to report the total unallocated group therapy minutes on the MDS 3.0 for each patient; however, for RUG classification, the individual’s group therapy time will be divided by four and added together with individual therapy minutes along with any allocated concurrent therapy minutes to determine total reimbursable therapy time. Group therapy continues to be limited to 25 percent of total therapy provided.

MDS 3.0 Assessment & OMRA Changes

In the final rule, CMS made several changes to the assessment process, including changing the acceptable time frame for completing assessments as well as creating new Other Medicare Required Assessments (OMRAs). Details of these changes and clarifications effective October 1, 2011, include the following:

• CMS will shorten the assessment reference date (ARD) windows and reduce the number of available grace days for the 14-day through the 90-day MDS assessment types. The table below recaps the MDS 3.0 assessment schedules:

• CMS  reiterated in the final rule an End of Therapy (EOT) OMRA must be completed once therapy services cease or were missed for three consecutive days, regardless of the reason and regardless of whether therapy services are available and offered by the SNF five days per week or seven days per week.
• The final rule creates an End of Therapy Resumption (EOT-R) OMRA. This OMRA can be used in lieu of a Start of Therapy OMRA in cases where therapy ceases and an EOT OMRA was completed, but therapy subsequently resumes within five consecutive calendar days at the same RUG classification in effect prior to the EOT OMRA. Completing the optional EOT-R eliminates the requirement for the therapist to perform a new evaluation or establish a new plan of care if the resident resumes treatment at the previous level.
• CMS also has created a new Change of Therapy (COT) OMRA, required for patients in a therapy RUG classification where the intensity of therapy changes to the extent that the recent assessment’s RUG classification no longer accurately reflects the patient’s clinical condition and intensity of therapy services. The ARD of the COT OMRA would be set for Day Seven of a COT observation period, a successive seven-day window beginning on the day following the ARD set for the most recent scheduled or unscheduled PPS assessment (or beginning the day therapy resumes in cases where an EOT-R OMRA is completed), and ending every seven calendar days thereafter. This will require providers to monitor the amount of therapy delivered and the minutes allowed to be counted toward the thresholds that determine RUG categories on a rolling seven-day window beginning the day after the ARD of the most recent PPS assessment to look for changes. CMS says a COT OMRA also is required in cases where a therapy discipline is discontinued and results in a patient no longer meeting the required number of disciplines for the current RUG category, as well as in cases where the required number of therapy days for classification in a particular RUG category has changed. A COT OMRA also would be required where changes in therapy services would result in a change in rehab RUG category, even if the patient is classified into a non-rehab RUG category due to index maximization. Note that a COT OMRA is required not only when the amount of therapy decreases to a lower RUG level but also when therapy increases to a potentially higher RUG level.

Other

Beginning in FY 2012, CMS removes the requirement that a therapy student in an SNF setting must be under the “line-of-sight” supervision of the professional therapist. Instead, CMS indicated “each SNF would determine for itself the appropriate manner of supervision of therapy students consistent with applicable state and local laws and practice standards.” However, CMS says such students must be qualified based on specific guidelines, adding the supervising therapist should have ultimate authority to determine whether the student can adequately treat patients without line-of-sight supervision. CMS also clarified, for the purpose of billing, the therapy student is treated as simply an extension of the supervising therapist rather than being counted as an additional practitioner—adding this policy change would not change the manner in which therapy minutes currently are recorded on the MDS or cause the student’s time to become separately billable.

CMS indicated a separate final rule—addressing revisions to reporting requirements SNFs must disclose at time of enrollment or when any change in ownership occurs, in accordance with ACA Section 6101—will be published in early 2012.

Effective October 1, 2011, the drug Treanda will be excluded from consolidated billing requirements.

While many aspects of the final rule, including the significant payment reduction, do not come as welcome news to skilled nursing providers, facility staff must be well-trained on the rule’s components, including changes to the assessment completion window, the additional required and optional assessments and changes in group therapy minutes, to minimize further payment reductions.

For more information on how these rules might affect your organization, contact your BKD advisor.

BKD will be hosting a webinar, “Potential Effects of the SNF PPS Final Rule,” on August 24. Click here for more information or to register.

On July 19, 2011, the Centers for Medicare & Medicaid Services (CMS) published the Calendar Year 2012 Physician Fee Schedule (PFS) proposed rule.

While the proposed rule includes significant changes, it does not address changing the methodology in place for updating the PFS conversion factor. Earlier this year, CMS estimated the CY2012 conversion factor (and thus Medicare-allowable reimbursement under the PFS) will be reduced by 29.5 percent effective January 1, 2012, under existing regulations, due in large part to existing Sustainable Growth Rate provisions. While some lawmakers have indicated a desire to change this methodology—and historically have temporarily limited its effects—this remains a fluid situation not clarified by the proposed rule.

Highlights of the proposed rule include updates to Relative Value Units, Geographic Practice Cost Indices, the Physician Quality Reporting System and the Electronic Prescribing Incentive Program. Many of the updates are budget neutral to the Medicare program by mandate, meaning their financial effect will likely be a change in reimbursement levels between provider specialties.

Relative Value Unit (RVU) Updates

• Updates various RVU weights, including:
  • Increases for procedures typically involving moderate sedation performed in a non-facility setting
  • Reductions for certain group education and therapy codes
  • Increases for malpractice RVU weights of certain cardiothoracic procedures
• Further clarifies incorrectly valued code initiatives endorsed by the Patient Protection and Affordable Care Act, including elimination of the formal five-year reviews of work and practice expense RVUs, which are now included in the annual update process
• Clarifies process for code review requests submission and identification of codes being reviewed in CY2012
• Updates handling of multiple procedure payment reductions, including expansion of reductions into the professional component of advanced imaging services, and proposals to expand reductions into other imaging and diagnostic modalities in the future

Geographic Practice Cost Indices (GPCI) Updates

• Allows floor for Physician Work GPCI of 1.0 to expire January 1, 2012 (except for Alaska, Hawaii and “frontier” states)
• Expands geographic adjustment effect on Practice Expense GPCI
• Implements the second transition year for the sixth GPCI update changes
• Continues study but does not change GPCI localities
• Reweights from Physician Work component to Practice Expense component

Physician Quality Reporting System (PQRS) & Electronic Prescribing Incentive (eRx) Program Updates

• Changes definition of group practice allowed to report using the Group Practice Reporting Option (GPRO) to groups with at least 25 providers billing under one taxpayer identification number (from two-provider minimum in CY2011)
• Clarifies process to become qualified to use GPRO
• Expands reporting options required to report over a 12-month period as opposed to the current six-month period
• Reaffirms CMS plans allowing option to report through current three methodologies (claims-based, registry-based and EHR-based) in future
• Clarifies requirements to become qualified registry
• Defines core and individual quality measures along with various quality measures included in measures groups to be reported under the PQRS program in CY2012
• Defines PQRS quality measures required to be reported under GPRO for CY2012
• Clarifies requirements for earning 0.5 percent PQRS incentive payment for reporting in relation to maintenance of certification requirements, in addition to meeting PQRS reporting requirements
• Clarifies requirements associated with eRx Program and implements payment incentive levels for successful participation, as well as payment penalties (for first time) for non-participation as defined in earlier rulemaking
• Expands hardship criteria and defines process to submit hardship requests to CMS to avoid payment penalties under the eRx Program

Other Medicare Part B/PFS Updates

• Updates and clarifies Telehealth billing and payment policies, including inclusion of smoking cessation and emergency room consultation codes, and clarification of documentation submitted to request CMS review of other related changes
• Updates and clarifies drug payments under Medicare Part B involving effect of relationships between average sales price, widely available market price and average manufacturer price
• Continues budget neutrality reductions for certain chiropractic procedures
• Eliminates technical component billing from independent laboratories for pathology services furnished to a hospital inpatient or outpatient, effective January 1, 2012
• Updates Annual Wellness Visit rules to require inclusion of a Health Risk Assessment (HRA) and defines HRA requirements
• Establishes a PQRS-Medicare EHR Incentive Pilot program to integrate PQRS reporting with required quality measures to achieve EHR incentive payments
• Discusses future plans for physician feedback reporting and associated value-based payment initiative, similar to the PPS Hospital Value-Based program; baseline periods for such a system will likely commence in CY2013
• Clarifies certain aspects of the Three-Day Payment Window policy including handling of services performed by wholly owned or wholly operated physician practices of a hospital provider

The comment period for the proposed rule closes on August 30, 2011.

The estimated effect of the proposed changes (excluding the potential 29.5 percent conversion factor reduction) varies widely by specialty, with maximum estimated effect ranging from -9 percent for radiation therapy centers to 5 percent for nurse anesthetists and physical/occupational therapy. In addition, GPCI methodology changes could have significant effects on reimbursement levels between geographic areas. Providers should analyze the effects of these changes on their historical activity to better understand potential reimbursement effects for CY2012.

If you have questions about this or other PFS issues, contact your BKD advisor.

The debt limit crisis was resolved with the enactment of the Budget Control Act of 2011.  The good news for Medicare providers is there are no immediate cuts to provider payment.  In a best-case scenario, there may not be any in the longer term, either, but the bad news is such cuts are more likely than not to occur.

The new law mandates more than $900 billion in reductions over 10 years to discretionary spending. While these reductions do not affect either Medicare or Medicaid, which are entitlement—i.e., non-discretionary—outlays, health care providers may be indirectly affected. For example, the Medicare contractor budget is subject to the annual discretionary appropriations process, as are grants for the National Institutes of Health and the research budget for Centers for Medicare & Medicaid Services.

Most importantly, unless certain events occur between now and year-end, Medicare (but not Medicaid) providers may be subject to across-the-board payment reductions of up to 2 percent, starting in 2013. These reductions, called “sequesters,” would work very similarly to those in effect in the 1980s, pursuant to the Gramm-Rudman-Hollings Act.

A sequester can be avoided three ways, two of which are created by this new law.[i] The first, passage by Congress of a balanced budget amendment to the U.S. Constitution, is considered highly unlikely to occur. (The new law requires a vote in both houses of Congress by year-end.)

The second way sequesters can be avoided is pursuant to a special legislative process to take place between Thanksgiving and Christmas this year. The new law creates a special congressional joint committee. If the joint committee’s report passes both houses of Congress through expedited consideration and is signed by the president, sequester will be avoided.

The joint committee legislation must reduce the deficit by $1.5 trillion through some combination of budget cuts and revenue enhancements; nothing is off the table. On the other hand, no particular category of government spending must be included. In other words, a legislative free-for-all is on the horizon.

Joint committees are not unusual; for example, there has been a Joint Committee on Taxation for many years. What is unique about this joint committee is its real legislative power; it can vote out a massive piece of legislation, rather than merely holding hearings or issuing reports.

A joint committee, by definition, is bicameral, so identical bill language will go to the floors of both houses.[ii] As noted above, a “fast-track” process is mandated for consideration in both houses. Importantly, this bill cannot be filibustered in the Senate.

The committee members will be appointed by the majority and minority leadership in both houses. Each of the four party leaders will pick three from his or her caucus, meaning 12 members are to be named.[iii] Since seven votes are required to vote out a bill, at least one committee member will have to agree to cross party lines. Whether that will occur is the great unknown.

Sequesters could happen at many points. If the committee fails to report out a bill, sequesters are mandated. If a bill makes it out of this committee but is defeated on a floor vote, sequesters are triggered. If the bill passes Congress but is vetoed by the president, sequesters are in order.[iv]

Providers should know the current expectation is that Medicare will bear the brunt of some of the cuts, as will Medicaid. Indirect medical education and graduate medical education programs will certainly be scrutinized, as will bad debts. The special treatment of critical access hospitals, Medicare dependent hospitals and sole community hospitals likewise is in the crosshairs. Medicaid provider tax schemes have long been a target and will be again.

By the way, Congress also must deal with the so-called “doc fix” by year-end. It is not clear whether this will happen in separate legislation or as part of this special process.

In short, it is going to be a very busy and interesting autumn in the nation’s capital.

[i] The third way is for the Congress, pursuant to regular order, to pass legislation saving $1.5 trillion before the sequestration takes place on 1/2/13.

[ii] A specific timetable has been established by the new law.

[iii] Committee members must be named by August 16.

[iv] Of course, Congress retains its constitutional prerogative to override a veto. Also, as noted in footnote No. 1, Congress could pass separate legislation that achieves the savings.

Recently issued IRS Notice 2011-52 addresses community health needs assessment (CHNA) requirements added to the Internal Revenue Code by the Patient Protection and Affordable Care Act (ACA). While CHNA requirements are not effective until tax years beginning after March 23, 2012, the IRS is issuing guidance for hospital organizations wishing to start the process now.  Guidelines in the notice refer to any CHNA made widely available to the public and any implementation strategy adopted on or before a date six months after the IRS issues further guidance. The IRS also is requesting comments regarding its intent in applying the CHNA rules.

Notice 2011-52 addresses CHNA requirements under IRC Section 501(r)(3). These requirements apply to hospital organizations operating a state-licensed hospital facility and any other organizations the Secretary determines have the provision of hospital care as their principal function or purpose giving the basis for their exemption under IRC Section 501(c)(3). Until future guidance is issued, the notice says only organizations operating state-licensed hospital facilities will be considered “hospital organizations” and need to meet the CHNA requirements. In addition, the IRS intends to apply the requirements under IRC 501(r)(3) to any 501(c)(3) organization that operates a state-licensed hospital through a disregarded entity, joint venture, limited liability company or other entity treated as a partnership for federal income tax purposes. Based on this expanded applicability, the IRS is requesting comments regarding the CHNA requirements for an organization with a small ownership interest (other than a general partnership interest) in an entity treated as a partnership for federal tax purposes operating a hospital facility.

The IRS intends to apply the 501(r) requirements to all hospital organizations described under 501(c)(3), including government hospitals with dual-exempt status under Section 115. The IRS is requesting comments on alternative methods for government hospitals to satisfy the 501(r)(3) requirements.

Hospital organizations with multiple hospital facilities should conduct a CHNA and develop implementation strategies for each facility. Under section 501(r)(2)(B), if any hospital facility fails to meet the CHNA requirements, the organization as a whole fails to meet the requirements. In future guidance, the IRS intends to address potential consequences of failure to satisfy these and other requirements under section 501(r) with respect to one or more hospital facilities.

A CHNA must be conducted at least every three years. The IRS will require hospital organizations to document compliance with CHNA requirements for each of their facilities in a written report that includes:

• A description of the community served
• A description of the process and methods used to conduct the assessment
• A description of methods used to include input from people representing the broad interests of the community served
• A prioritized description of all community health needs identified in the CHNA, as well as a description of the process and criteria used in prioritizing such needs
• A description of existing health care facilities and other resources in the community available to meet the needs identified in the CHNA

A CHNA is considered conducted in the taxable year the written report is made widely available to the public. A CHNA satisfies the requirements if a hospital facility identifies and assesses the health needs of, and includes input from people who represent the broad interest of, the community served by that specific facility. A hospital organization may base its CHNA on information collected by other organizations, including public health agencies or not-for-profit organizations. A CHNA may be conducted in conjunction with other organizations, including related organizations, other hospital organizations, for-profit and government hospitals or state and local agencies such as public health departments.

A hospital organization may take into account all relevant facts and circumstances to determine the community the hospital facility serves. The IRS is requesting specific comments on whether future regulations should define the geographic community of a hospital facility as the Metropolitan Statistical Area or Micropolitan Statistical Area in which the facility is located. For rural facilities, the county in which the facility is located would be the geographic community for CHNA purposes.

The CHNA must take into account input from:

• Persons with special knowledge of or expertise in public health
• Federal, tribal, regional, state or local health or other departments or agencies with current data or other information relevant to the health needs of the community served by the hospital facility
• Leaders, representatives or members of medically underserved, low-income and minority populations and populations with chronic disease needs in the community served by the hospital facility

Others may provide input for the CHNA, including health care consumer advocates, not-for-profit organizations, academic experts, local government officials and other health care providers.

The CHNA must be made widely available to the public, which the IRS says is accomplished by posting the written report of the CHNA findings on the hospital facility’s website. If the hospital facility does not maintain a website separate from the hospital organization that operates it, the CHNA written report may be posted on the hospital organization’s website. A written report may be posted on a website established and maintained by another entity if the hospital organization’s website provides a link to the website where the CHNA resides or by providing the direct website address to any individual requesting a copy of the written report. The website on which the CHNA is posted must provide instructions for downloading the written report. The downloaded report must be an exact image of the original report, and special computer hardware or software may not be required for the format of the report other than free software available to the general public. The report must be provided free of charge to the person downloading the report, and it must be available until the subsequent CHNA for that hospital facility is widely available to the public.

Each hospital facility must adopt a separate implementation strategy—a written plan addressing each of the needs identified in the CHNA for that particular facility. The plan should describe how the facility plans to meet the identified health need or explain why the hospital does not intend to meet a particular need. The organization must attach the implementation strategy to its annual Form 990 for each hospital facility. The implementation strategies may be developed in collaboration with other organizations, other hospital organizations, for-profit and government hospitals or state and local agencies as long as the implementation strategy identifies all participating organizations.

The implementation strategy is considered adopted on the date it is approved by an authorized governing body of the hospital organization. The strategy must be adopted by the end of the same taxable year in which the CHNA was conducted. An excise tax of $50,000 will be assessed for each hospital facility failing to meet the CHNA requirements.

To comply with CHNA reporting requirements, the IRS has added new questions to Schedule H of Form 990. These additional questions are optional for tax years beginning on or before March 23, 2012.

Comments on the new CHNA requirements should be submitted to the following address no later than September 23, 2011:

Internal Revenue Service, CC:PA:LPD:PR (Notice 2011-52), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

For additional information on how these requirements could affect your organization, contact your BKD advisor.

Two significant updates to Medicare Part A claims for skilled nursing facilities (SNFs) and hospital swing-bed providers will occur with dates of service beginning August 1, 2011. The Centers for Medicare & Medicaid Services (CMS) is making the following changes through Change Request 7339:

• Any Part A claim reporting an End of Therapy Other Medicare Required Assessment (OMRA) must include Occurrence Code 16 and the date of the last therapy service.
• Therapy units reported with revenue codes 0420, 0430 or 0440 on Part A claims are changed to represent the number of calendar days of therapy provided by discipline, regardless of the number of minutes or types of therapy services provided. According to the CMS Division of Institutional Claims Processing, therapy evaluations will continue to be reported separately under revenue codes 0424, 0434 and 0444.
  For example, if a resident was covered by Medicare Part A from August 1 to August 4, 2011, and received physical therapy and occupational therapy services each day during that period, the August claim would include four units of physical therapy and four units of occupational therapy. The number of minutes and types of therapy services for Part A-covered residents is irrelevant for determining the number of units on the claim.

To prepare for these changes, providers should discuss these issues with their software vendor and therapy services provider to determine how information will flow into billing software programs and to Medicare Part A claims.

If you have any questions about this or other SNF Medicare billing issues, contact your BKD advisor.

The Centers for Medicare & Medicaid Services (CMS) has proposed a rule to establish, for the first time, conditions of participation (CoPs) required for community mental health centers (CMHCs) in the Medicare program. The proposed CoPs are part of an effort to improve the safety and quality of all care provided to Medicare beneficiaries, regardless of the setting. CMS, which has revised regulations for hospitals, nursing homes and other providers, believes the proposed CMHC CoPs would help ensure consistent protections for clients as they move from one type of care to another. The new CoPs also would enable CMS to survey CMHCs for compliance with health and safety requirements.

The federal government is the largest U.S. health care services payor; in 2007, 224 certified CMHCs billed Medicare for partial hospitalization services for 25,087 Medicare beneficiaries. CMHCs are Medicare-certified and Medicare-enrolled based on CMS Regional Office determination that they meet the definition of a CMHC. CMS claims many participating CMHCs never had an on-site CMS visit after their initial certification, and that most states either have no certification or licensure program or have regulatory regimens applying only to CMHCs receiving state funding. CMS believes basic CMHC health and safety standards should be established to protect patients and their families, and these proposed CoPs would allow CMS to establish a survey process promoting safe and quality client care from Medicare-certified CMHCs.

The six proposed CMHC CoPs are personnel qualifications; client rights; admission, initial evaluation, comprehensive assessment and discharge or transfer of the client; treatment team, active treatment plan and coordination of services; quality assessment and performance improvement; and organization, governance, administration of services and partial hospitalization services. The proposed rule offers definitions and descriptions of each CoP.

Many CMHCs already may have implemented these requirements in their current practice, so adoption of the CoPs will not have a significant impact. However, CMS estimates the proposed changes will cost CMHCs approximately $4.1 million, or $18,475 per CMHC, in the first year of implementation and approximately $2.6 million, or $11,566 per CMHC, annually. Careful review of the proposed requirements is necessary to ensure compliance.

CMS is taking comments on the proposed CoPs through August 16, 2011, with the proposed effective date coming 12 months after publication of the final rule.

The Centers for Medicare & Medicaid Services (CMS) recently released the final regulations of the value-based purchasing (VBP) program, affirming much of what was proposed in January. Specifically, CMS confirmed the following key provisions of the proposed rule, which were discussed in detail in our February article:

• The value-based purchasing program will impact all short-term acute care hospitals and exclude critical access hospitals, psychiatric, rehabilitation, long-term care, children’s and cancer hospitals. Although the current rule doesn’t specifically address how this will impact hospitals paid on their hospital-specific rate, such as sole community hospitals, CMS intends to implement special rules for these hospitals in future rules.
• Beginning October 1, 2012, discharge payments will be reduced by 1 percent to create the VBP pool. Reductions will increase by 0.25 percent annually until reaching 2 percent in federal fiscal year 2017. The reduction will be based on operating diagnosis-related groups (DRG) and excludes add-on payments such as indirect medical education, disproportionate share, outlier and low-volume payments.
• The overall Three Domain of Care approach methodology, including the Clinical Process of Care & Outcome Measures and Patient Experience of Care Survey, will be used to determine a hospital’s total performance score.
  • CMS affirmed the initial weights for FFY2013:  70 percent for clinical process of care measures and 30 percent for the patient experience of care survey. Weights may be adjusted in future years, given additional measures or domains such as outcome measures and efficiency domain.
  • CMS affirmed the definitions and calculations of achievement and improvement standards, as well as achievement thresholds and benchmarks, which were published in the final rule for the baseline period. A review of the thresholds and benchmarks is available here.
  • The baseline period was confirmed as the period from July 1, 2009, through March 31, 2010, and the performance period was confirmed as the period from July 1, 2011, through March 31, 2012.
  • CMS affirmed the use of the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey and its eight dimensions:  nurse communication, doctor communication, cleanliness and quietness, responsiveness of hospital staff, pain management, communications about medications, discharge information and overall hospital rating.
  • Hospitals having a minimum of 10 cases per measure, a minimum of four measures and 100 patient experience of care surveys during the performance period are considered eligible for the value-based purchasing program.
  • VBP incentive payments will be reallocated to hospitals based on the total performance scores ranked in a linear scale, so that hospitals with higher total performance scores will receive larger incentive payments.
• CMS intends to validate quality data submitted through selection of random hospitals. There must be a 75 percent correlation for a hospital’s data to be deemed reliable. CMS will treat hospitals that fail the 75 percent test as if they did not report quality data and reduce payment by 2 percent.
• CMS affirmed its timeline for implementation of the program:
  • Hospitals will receive their preliminary VBP score no later than August 1, 2012, via CMS QualityNet accounts.
  • Base-operating DRG will be reduced by 1 percent beginning October 1, 2012.
  • Hospitals will learn their final VBP score on November 1, 2012, and have 30 days to review and submit corrected information.
  • VBP incentive payments will begin January 1, 2013, with retroactive adjustments for any FFY2013 discharges paid prior to that date.

Based on comments to CMS regarding the proposed rule, CMS revisited certain provisions and made the following changes:

• CMS originally proposed to include 17 clinical process of care measures in the initial VBP scores and excluded seven, as they were considered “topped out.” (Topped out measures are those on which CMS feels all but a few hospitals have achieved a similarly high level of performance; their inclusion in the VBP program would have no meaningful effect on total performance scores.) CMS received several comments requesting it to rerun its analysis of topped out measures with more recent data to determine if any other measures also met the definition. Based on analysis of data from July 1, 2009, through March 31, 2010, three additional measures were deemed topped out:  AMI-2, Aspirin Prescribed at Discharge; HF-2, Evaluation of LVS Function; and HF-3, ACEI or ARB for LVSD. In addition, CMS is retiring PN-2,  Pneumococcal Vaccination, and PN-7,  Influenza Vaccination, from the Hospital Inpatient Quality Reporting Program. Therefore, after removal of these measures, 12 of the 17 measures proposed will be implemented as a part of the VBP program. A list of the program’s final measures is available here.
• Beginning in FFY2014, CMS proposed to include multiple outcome measures in the VBP score, including three 30-day mortality measures, nine AHRQ Patient Safety Indicators, Inpatient Quality Indicators, various composite measures and eight hospital-acquired conditions. After reviewing comments, CMS concluded certain measures captured duplicate information. Therefore, the final rule outcome measures to be implemented in FFY2014 will include three 30-day mortality measures, two AHRQ composite measures and eight hospital-acquired conditions. A list of the final outcome measures for the program is available here.
• The 30-day mortality rate outcome measure’s performance period was originally July 1, 2011, through December 31, 2012. CMS changed this measurement period to 12 months:  July 1, 2011, through June 30, 2012, with a baseline period of July 1, 2009, through June 30, 2010.
• The hospital-acquired conditions and AHRQ composite measure were included on the Hospital Compare website on March 3, 2011. CMS finalized the beginning of a performance period for these measures as March 3, 2012, one year after they were posted to the website. CMS plans to propose the end of the performance period in the 2012 Outpatient Prospective Payment System (OPPS) proposed rule.
• Many comments provided to CMS opposed the use of a “subregulatory process” to add or retire measures, calling on the agency to instead use full notice and comment rulemaking. CMS noted it understands the importance of stakeholder input to ensure the VBP program and its measures improve the quality of care and patient safety. However, CMS believes it must act quickly and deliberately to expand the pool of measures used in the program. For this reason, CMS believes it should adopt measures for the VBP program relevant to improving care, particularly measures directed toward improving patient safety, as quickly as possible. In addition, retirement of measures from the VBP program should be just as fast to ensure it does not detract from more significant measures improving patient health. Therefore, in response to comments, CMS has not finalized the subregulatory process for adding and retiring measures. Instead, it has proposed in the FFY2012 Inpatient Prospective Payment System (IPPS) proposed rule to simultaneously adopt one or more measures for both the Hospital IQR and Hospital VBP programs.

IPPS 2012 – Efficiency Domain

CMS included a new Efficiency Domain in the 2012 IPPS proposed rule, effective for FFY2014, to measure Medicare spending per beneficiary. Scoring this measure would be similar to the clinical process of care and outcome measures through achievement and improvement standards and baseline and performance scores. In determining Medicare spending per beneficiary, CMS proposes the following:

• Episodes are proposed to run from three days prior to an inpatient PPS hospital admission through 90 days after hospital discharge.
• Three types of payment are included in an episode of care:
  • Medicare Part A and Part B payments for services during the episode period, including Medicare Advantage plans
  • Payments made by beneficiaries for deductibles and coinsurance
  • Transfers, readmissions and additional admissions during the 90-day, post-discharge window
• Type of payments excluded from an episode of care include:
  • Episodes during which the individual was not enrolled in both Medicare Part A and Part B
  • Individuals covered by Railroad Retirement Board
  • Medicare secondary payer claims
• CMS’ proposed adjustments to standardize payments include age, severity of illness and geographic payment rate differences, i.e., wage index neutral, and exclude payment differentials such as hospital-specific rates, indirect medical education and disproportionate share payments.

Future Regulation

It will be increasingly important to monitor new regulations, as numerous references to future rulemaking were included in the final rule:

• Additional clinical measures and the end of the performance period for the hospital acquired conditions and AHRQ measures are planned for the 2012 OPPS proposed rule.
• Additional operational and payment information should be included in the 2013 IPPS proposed rule.
• Future rules also will describe how VBP will affect hospitals paid on their hospital-specific rate, though timing of these decisions has not been defined.

To learn more about how the final VBP rule will affect your hospital, contact your BKD advisor.

As part of the Patient Protection and Affordable Care Act (PPACA), tax-exempt hospitals must meet new requirements to maintain exempt status. To document compliance with these new requirements, the IRS added Section B under the facility information reporting section of Schedule H. A recently released announcement notifies hospitals that the newly created Schedule H, Part V, Section B will be optional for the 2010 Form 990. All other sections of the Schedule H must be completed for the 2010 tax year. Attaching audited financial statements will remain a requirement for a complete and accurate filing; only Section B reporting is optional.

According to the IRS, the entire Part V, Section B will be optional “to give the hospital community more time to familiarize itself with the types of information the IRS will be collecting.” The IRS will continue accepting comments regarding Schedule H “to improve the clarity and reduce the burden of reporting.” Various organizations have urged the IRS to withdraw and reissue the form after a proper comment period with improved instructions.

Hospitals were notified earlier this year to not file 2010 Form 990 before July 1 as the IRS worked to finalize Schedule H and instructions to include the new tax-exemption reporting requirements arising from PPACA.  This automatic three-month extension is not affected by the notice.

The effective dates of Internal Revenue Code provisions added by Section 9007 of PPACA remain in effect. This includes 501(r) requirements that detail new requirements for conducting and reporting community health care needs assessments. The section also addresses what must be included in financial assistance policies and emergency medical care policies, imposes rules and limitations on charges for medical care and enacts billing and collection rules hospitals must follow. Schedule H, Part V, Section B includes questions on all of these areas for each of the organization’s facilities.

For more information on how these requirements could affect your business, contact your BKD advisor.

The Centers for Medicare & Medicaid Services (CMS) recently released proposed rules for the skilled nursing facility prospective payment system (SNF PPS) for fiscal year 2012. This proposal outlines two options for payment rates under SNF PPS for FY2012.  Option 1 would create an 11.3 percent, or $3.94 billion, net reduction in payments to nursing home providers. Option 2 would result in a 1.5 percent, or $530 million, net increase in provider payments based on a projected market basket increase.

First-quarter claim data for FY2011 shows parity adjustments made with implementation of Minimum Data Set (MDS) 3.0 and RUGS IV created higher-than-expected payments to providers and did not achieve the projected budget neutrality. Claim data also show a significant decrease in concurrent therapy and a significant increase in individual and group therapy use as compared to historical data. If this trend continues, CMS claims it will need to apply a 19.81 percent reduction to the nursing components of all therapy RUG classifications. This adjustment would result in the aforementioned $3.94 billion net reduction in payments for Option 1.

In addition, CMS also is proposing assessment changes that, if approved, would take effect October 1, 2011. According to the proposed rule, the current PPS assessment would be modified to reflect new assessment windows and grace days. This proposal would shorten the assessment reference date (ARD) window and grace day periods. CMS claims this would eliminate duplicated information on assessments with overlap of days and allow more time between resident interviews.

Completion of Other Medicare Required Assessments (OMRAs) are clarified in these proposed rules. An End of Therapy (EOT) OMRA still will be required for residents in therapy RUG classifications when therapy ends and skilled nursing care continues. This assessment will continue to calculate a non-therapy RUG score for use in billing services on the first non-therapy day. The proposed rule clarifies the need for completion of an EOT OMRA when a resident in a therapy RUG classification receives no therapy services for three consecutive days, regardless of the reason. Every facility would be treated as a seven-day-a-week therapy provider to calculate the need for this assessment.

The rule proposed creation of an End of Therapy Resumption (EOT-R) OMRA. This assessment would be optional and could be used for residents who had an EOT OMRA completed but had therapy resume within five consecutive calendar days at the same RUG classification level in place prior to the EOT OMRA. If therapy resumes more than five days after therapy cessation, or within five calendar days at a changed RUG level, the EOT-R OMRA would not be applicable. In these situations, the facility would need to perform a new therapy evaluation and complete a Start of Therapy (SOT) OMRA or wait until the next scheduled PPS assessment to reclaim a therapy RUG classification. To accommodate the EOT-R OMRA, items O0450A and O0450B would be added to the OMRA item set.

CMS also has proposed the use of a Change of Therapy (COT) OMRA, required for residents in a therapy RUG classification when the intensity of therapy changes to the extent that the RUG classification from the most recent PPS assessment no longer accurately reflects the intensity of therapy services being provided. This would require facilities to evaluate total Reimbursement Therapy Minutes (RTM), or the actual number of therapy minutes used by the software to determine RUG categories, on a rolling seven-day window beginning the day after the ARD of the most recent PPS assessment to look for a change. The ARD of the COT OMRA would then be set for Day 7 of the COT observation period.

To calculate RTMs, CMS also has proposed a new definition of group therapy for Medicare payments:  four participants who are performing similar therapy activities. This would be consistent with the proposed rule allocating group therapy minutes across the four group participants when RUG classifications are calculated.

These proposed rules were posted in the May 6, 2011, Federal Register. Public comments on the proposal will be accepted through June 27, 2011.

For more information on how these rules might affect your organization, contact your BKD advisor or Bob Lane at rlane@bkd.com.

The Centers for Medicare & Medicaid Services (CMS) issued a final rule on May 5, 2011, offering hospitals and critical access hospitals (CAHs) the option to streamline the credentialing and privileging process for physicians and nonphysician practitioners providing telemedicine services. The revised guideline will allow small hospitals and CAHs to expand access to specialty patient care services provided by remote practitioners and receive those services from another Medicare-participating hospital or other distant-site telemedicine entity in a timely manner.

Telemedicine Defined

Telemedicine is defined in the final rule as “provision of clinical services to patients by practitioners from a distance via electronic communications. The distant-site telemedicine physician or practitioner provides clinical services to the hospital or CAH patient either simultaneously, as is often the case with teleICU services, or nonsimultaneously, as may be the case with many teleradiology services.”

“Simultaneous” telemedicine services are performed in real time, similar to medical services provided during a face-to-face encounter.

“Nonsimultaneous” telemedicine services are requested by the patient’s attending physician or practitioner and may involve interpretation of diagnostic testing. The interpreting telemedicine practitioner does not assess the patient in real time, but transmits the interpretation results to the attending physician or practitioner for patient diagnosis or management.

A “distant-site telemedicine entity” is defined in the final rule as “one that (1) provides telemedicine services; (2) is not a Medicare-participating hospital (therefore, a non-Medicare-participating hospital that provides telemedicine services would be considered a distant-site telemedicine entity also); and (3) provides contracted services in a manner than enables a hospital or CAH using its services to meet all applicable CoPs, particularly those requirements related to the credentialing and privileging of practitioners providing telemedicine services to the patients of a hospital or CAH.”

Current Guidelines

Under the current condition of participation (CoP), all hospitals must credential and assess privilege for all physicians or nonphysician practitioners who provide services to their patients, including telemedicine practitioners. The hospital’s governing body is responsible for accepting practitioners to its medical staff and granting privileges after thorough examination, verification of credentials and evaluation of specific criteria. CAHs that are members of a rural health network must follow a similar process, but also must maintain an agreement with another hospital that is a member of the same health network, a Medicare Quality Improvement Organization (QIO) or another qualified entity. The CAH credentialing and privileging process also requires assessment and approval of its medical staff by this outside entity. CMS recognized the process was burdensome and that small hospitals and CAHs might not have the resources or clinical expertise within their medical staff to evaluate and assign privileges to specialists providing telemedicine services.

Revised Guidelines

Effective July 2, 2011, the final rule revised sections of the CoP for hospitals and CAHs to allow the governing body (or responsible individual for CAHs) to accept the “credentialing and privileging decisions made by the distant-site telemedicine entity” for individual physicians or nonphysician practitioners asked to provide telemedicine services. In addition, the governing body must obtain a written agreement specifying the distant-site entity as a “contractor of services” and stating the distant-site entity ensures all furnished services will comply with applicable CoP criteria for hospitals or CAHs.

There is an exception to the requirement for a CAH to have an agreement with one or more Medicare-participating providers or suppliers. The CoP now allows for an agreement with a distant-site, non-Medicare-participating entity providing telemedicine services. Specifically, the final rule says an agreement can exist “between a CAH and a distant-site telemedicine entity for the entity’s distant-site physicians and practitioners to provide telemedicine services to the CAH’s patients.”

Conclusion

The final rule for credentialing and privileging of telemedicine services is a significant advancement for specialty medical care providers, particularly rural hospitals and CAHs. Facilities considering implementing this streamlined process may experience initial cost in developing agreements with the distant-site telemedicine entity. Essentially, the benefits of expanding access to specialty services should outweigh any administrative cost.

A copy of the final rule is available online. For more information, please contact your BKD advisor or Sherry Witzman at switzman@bkd.com.

The Centers for Medicare & Medicaid Services (CMS) issued the final rule related to payment updates for inpatient psychiatric facilities (IPF) for Rate Year (RY) 2012 on May 5, 2011. The final rule includes a 15-month update period beginning July 1, 2011, to transition the RYs to coincide with the federal fiscal year, similar to inpatient acute and rehabilitation hospital updates. The change in RYs allows CMS to consolidate Medicare update publications and align with ICD-9-CM updates effective October 1 of each year.

The market basket update of 3.2 percent is reduced by a 0.25 percentage decrease mandated by provision of the Patient Protection and Affordable Care Act (PPACA) and a 0.9995 budget neutrality to establish a federal per diem base rate of $685.01 and electroconvulsive therapy (ECT) per treatment rate of $294.91. This equates to a 2.9 percent increase from the 2011 federal base rate of $665.71 and ECT rate of $286.60. The outlier threshold amount is updated to $7,340 to ensure the estimated outlier payments are approximately 2 percent of total estimated IPF payments. The labor portion of the base rate decreased from 75.4 percent in 2011 to 70.137 percent in 2012, which benefits IPFs in areas with a wage index of less than 1.

Changes were not made to the facility, variable per diem, age, MS-DRG and comorbidity adjustment factors for 2012. As CMS noted throughout the rule, it has delayed making refinements to the IPF prospective payment system (PPS) until it has adequate data. CMS now believes it has adequate data—approximately five years into IPF PPS—to begin an analysis to better understand the IPF industry. The agency will be able to present their analysis in the 2013 rulemaking to determine whether IPF PPS refinements are appropriate, allowing the possibility of major changes in the FY2013 rules.

In addition, quality measures are being developed for reporting by IPFs for each RY beginning in 2014, in accordance with PPACA. For those IPFs not reporting quality data, the annual update to the base rate will be reduced by 2 percent. The Medicare Payment Advisory Commission (MEDPAC) also will evaluate facility margins and likely make recommendations regarding appropriate IPF updates for the first time, and CMS is interested in obtaining feedback on these future refinements.

Lastly, CMS incorporated a regulation allowing a temporary update to an IPF’s full-time equivalent cap for displaced medical residents for cost reporting periods beginning on or after July 1, 2011. A copy of the final rule is available for download on the CMS website.

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

On April 25, 2011, the Centers for Medicare & Medicaid Services (CMS) issued its proposed rule for inpatient rehabilitation facility (IRF) prospective payments. Not only did the proposed rule identify proposed annual payment updates, it identified the proposed implementation of the IRF Quality Reporting Program and the elimination of repetitive and obsolete rules IRFs and IPFs created by changes in reimbursement methodology to a PPS.  The elimination of the repetitive and obsolete rules also will apply to inpatient psychiatric facilities (IPF).

Proposed IRF Payment Updates

The long-term care hospital PPS market base update is 1.5 percent, comprising 2.8 percent minus a proposed Money Follows the Person (MPF) program adjustment of 1.2 percent minus a 0.1 percent required reduction. The proposed IRF Standard Payment Conversion factor increased 4.82 percent to $14,528, and the outlier threshold amount increased to $11,822. The proposed rule also reduces the low-income payment (LIP) adjustment factor from 0.4613 to 0.1897.

The changes result from a change in CMS methodology, which has switched from a weighted to unweighted regression analysis for the calculation of both the standard payment conversion factor and the LIP factor. From a practical standpoint, this shifts reimbursement out of the LIP adjustments and puts it into the base CMG payments. CMS believes this will help stabilize payments to IRFs.

Proposed IRF Quality Reporting

For FY2014 payment determinations, the rule proposes IRFs submit data on two quality measures:  Catheter-Associated Urinary Tract Infections (CAUTIs) and pressure ulcers that are new or have worsened, beginning October 1, 2012. CMS also is developing a 30-Day Comprehensive All-Cause Risk Standardized Readmission Measure it intends to include in future rulemaking for FY2014 payment determinations. Annual updates to the standard federal rate for discharges in FY2014 will be reduced by 2 percent for any IRF not complying with quality data submission.

Other Proposed Rule Changes in Size & Square Footage of IRF & IPF

Under current rules, any expansion must be made at the beginning of a cost reporting period and is subject to other restrictions on the number of beds that could be added. CMS proposes to allow IRFs and IPFs to increase or decrease the number of beds or square footage at any time in the cost reporting period, but only one time per period.

In addition, if an IRF or IPF has delicensed or decertified beds, it must wait a full 12-month cost reporting period before it can add new beds. The IRF or IPF must notify the Medicare Appeals Council and CMS Regional Office 30 days before the proposed date of change.

An IRF or IPF can be considered new if it has not been paid under the PPS for at least five calendar years. This makes it easier for a facility that closed its unit in the past to reopen a new unit. Beds added to an IRF or IPF are now considered new if they meet the applicable State Certificate of Need and State Licensure laws and if they get written approval from CMS. The notification to CMS is so the agency can verify they meet the full 12-month cost report requirement noted above.

A change in ownership, where the new owner accepts the exiting provider agreement, would allow the IRF to retain its excluded status. If the new owner does not accept the provider agreement, the excluded status is terminated, and the new owner must reapply. In this case, the IRF does not have to wait five years to reapply for excluded status.

For more information, contact your BKD advisor.

On April 19, 2011, the Centers for Medicare & Medicaid Services (CMS) posted proposed rule changes to the hospital acute care prospective payment system for federal fiscal year 2012. In addition to proposed payment rate changes, the rule discusses CMS’ commitment to quality initiatives by proposing changes to existing quality measures and coordinating quality reporting mechanisms. CMS is accepting comments on the proposed rule through June 20, 2011.

Payment Rate Updates

CMS has proposed a 1.5 percent update to the federal operating standardized amount. This is based on a 2.8 percent market basket update, reduced by two factors mandated by the Patient Protection and Affordable Care Act (PPACA):  a 1.2 percent economy-wide productivity adjustment and an additional 0.1 percent reduction. CMS proposes additional adjustments for budget neutrality and documentation and coding. After all items are considered, the proposed operating standardized amount is $31.75 less than the 2011 rate, a decline of 0.61 percent.

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 $101.13.

CMS proposes applying all of the same adjustments to the hospital-specific rates of sole community and Medicare-dependent hospitals. Due to the impact of prior update factors and budget neutrality adjustments, hospitals paid using their hospital-specific rate will see a reduction in payments of 1 percent in 2012.

Among the other payment factors addressed in the proposed rule:

• CMS proposes setting the 2012 outlier threshold at $23,375, a change from $23,135 in 2011.

• The proposed national capital standard federal payment rate of $422.54 is up 0.60 percent from 2011.

CMS has used several estimates when computing the proposed payment rates. For example, the 2.8 percent market basket update is referred to as an estimate by CMS. In addition, in recognition of the expected settlement of a recent court case, CMS proposes a 1.1 percent adjustment to the standardized amount related to budget-neutrality calculations, in recognition of a recent court case. Hospital-specific rates will increase by 0.9 percent for this matter. CMS notes the case driving this change is not yet finalized, so this adjustment may change.

Changes to the Hospital Wage Index for Acute Care Hospitals

CMS included several changes that will affect the hospital wage index computation for federal FY2013. Some of the more significant changes include:

• Defined Benefit Pension Costs: CMS is proposing to change the methodology to compute the allowable pension costs for wage index purposes starting with 2013. Currently, the Provider Reimbursement Manual defines maximum allowable pension costs, including requirements that pension costs must be funded to be allowable and that excess funding can be carried forward for recognition in a subsequent period.

In the proposed 2012 rules, CMS recommends a new methodology for wage index purposes that would not rely on a plan’s actuarial computation, but would compute costs based on historical cash contributions. CMS believes using a three-year average will add stability to allowable wage-related costs.

Under CMS’ proposed rule, allowable pension costs will be equal to the three-year average of contributions made to the pension plan. For example, the FY2013 wage index would be based on cost reporting periods that began during FY2009. The proposal would not only require pension plan contribution data for the existing base cost reporting year (FY2009), it would require pension plan contributions data for the cost reporting periods immediately preceding (FY2008) and following (FY2010) the base cost reporting period to determine the three-year average annual contributions. This three-year average of contributions is what will be used in determining the allowable pension costs for the FY2013 wage index. It is important to note this is only a wage index change; allowable costs for the annual cost report will be computed using separate rules.

• Occupational Mix Survey: The 2012 rule continues to use the Occupational Mix Survey (OMS) from the 2007–2008 data submission. A new OMS using 2010 data is due from providers by July 1, 2011.

• MGCRB Reclassifications: Consistent with prior years, hospitals reclassified by the Medicare Geographic Classification Review Board (MGCRB) may withdraw the election, but this must be done within 45 days of the issuance of the proposed rule. It is important for reclassified hospitals to review the proposed wage index data to ensure they want to keep their reclassification. For hospitals filing a reclassification request for FY2013, applications are due September 1, 2011. CMS anticipates forms will be available on the CMS website in mid-July 2011.

• Section 508 Reclassifications: Hospitals reclassified under Section 508 receive reclassifications for wage index purposes they may not otherwise qualify for. Originally scheduled to sunset after three years, Section 508 had been extended by Congress through September 30, 2011. No further extensions have been passed by Congress, and Section 508 hospitals will revert to the rural wage index in 2012 unless they qualify for reclassification under other provisions.

• Out-Migration Adjustment for Lugar Hospitals: The proposed rule clarifies Lugar hospitals must waive their Lugar urban status to receive the out-migration adjustment. If Lugar hospitals waive their status, they do so for all payment items, including disproportionate share hospital (DSH) payments. Depending on a hospital’s DSH percentage, the benefit of the out-migration adjustment could be offset by the DSH cap placed on rural hospitals.

• PPACA Report: Under PPACA, CMS is required to report to Congress by December 31, 2011, on potential changes to the wage index. In the proposed rule, CMS states it is seeking comments regarding the definition of labor markets. These comments will not be in the final 2012 Federal Register, but will be considered for the report due to Congress.

Hospital Inpatient Quality Reporting (IQR) Program

CMS proposes retiring eight measures and adding four new measures for the 2014 payment determination period. Two of these relate to healthcare-associated infection (HAI) measures, one is based on Medicare spending per beneficiary, and the last is based on a new structural measure requiring hospitals to report participation in a cardiac surgery registry. The HAI measures will be collected through the National Healthcare Safety Network. Medicare spending per beneficiary will be calculated by CMS and standardized to remove payment variance such as wage index, DSH, indirect medical education (IME) and case mix.

CMS proposes reducing the quarterly submission deadline for chart-abstracted quality measures from 135 days to 104 days. CMS also proposes moving patient satisfaction survey (HCAHPS) submissions up one week for quarterly submissions to 13 weeks after the close of a quarter.

Changes to Value-Based Purchasing (VBP)

Under the proposal, the new Medicare spending per beneficiary measure would be added to value-based purchasing scoring. After standardizing Medicare spending per beneficiary, CMS will calculate the VBP score similar to proposed scoring for its clinical processes-of-care measures. There will be an attainment score, assuming an achievement threshold is met, and/or an improvement score, assuming a benchmark is met.

As currently structured, the VBP program calculates a hospital’s score using 70 percent of the clinical process-of-care domain score and 30 percent of the patient experience of care domain score. As proposed, Medicare spending per beneficiary will be added to a third “efficiency domain.” CMS would include the new domain weighting in the 2012 Hospital Outpatient Prospective Payment System proposed rule.

Proposed Hospital Readmissions Reduction Program

PPACA established the “Readmissions Reduction Program,” effective for discharges from an “applicable hospital” on or after October 1, 2012. Hospitals with excess readmissions will be subject to payment reductions, which CMS plans to outline in detail in the 2013 proposed rule.

In this year’s proposed rule, CMS goes into great detail about how it will measure readmission rates and how it will determine if a hospital’s readmissions warrant a payment reduction.

Payment Adjustment for Low-Volume Hospitals

Under temporary changes included in PPACA, during FY2011 and FY2012, hospitals with fewer than 1,600 admissions could qualify for a low-volume adjustment. The proposed rule includes an updated list of hospitals with fewer than 1,600 Medicare discharges that could qualify for this payment in FY2012. Newly qualifying hospitals must submit a request by September 1, 2011, to qualify for the payment adjustment beginning October 1, 2011.

Hospitals that previously qualified for the low-volume adjustment in 2011 must verify in writing to their Medicare Administrative Contractor by September 30, 2011, that they still meet the mileage criteria to continue receiving the payment adjustment during 2012.

Medicare DSH & IME

CMS proposes to exclude patient days associated with hospice patients receiving hospice services in an inpatient hospital setting from the Medicare and Medicaid fractions of the Disproportionate Share Payment Percentage (DPP) and from the counts of available beds for purposes of the DSH and IME adjustments. For urban hospitals with just more than 100 beds, this change could subject DSH payments to the 12 percent cap applicable to smaller hospitals.

High Percentage of End-Stage Renal Disease (ESRD) Payments

The proposed rule amends the definition of the denominator used in the high percentage ESRD payment. As proposed, the denominator will include all patients entitled to Medicare Part A by including discharges for beneficiaries whose benefits were exhausted, discharges for beneficiaries whose stay was not covered by Medicare and discharges for beneficiaries under Medicare Advantage.

Changed Pension Cost Reporting Requirements for Medicare Cost-Finding Purposes

In addition to the aforementioned wage index changes related to pension costs, CMS addresses allowable pension costs for cost-finding purposes. Due to changes required by the Pension Protection Act of 2006, CMS does not believe plans are using common methods to report pension costs. CMS proposes revising its policies to allow for a standardized approach for cost reporting periods beginning on or after October 1, 2011.

Under CMS’ proposed policy, defined benefit costs must be funded to be allowable and will be subject to a cap based on 150 percent of the average of the highest three of the prior five years’ costs. If a hospital’s costs exceed the cap, they will be allowed to carry these costs forward or submit information explaining why the “excess” costs are necessary.

Bundling Payments for Services Provided to Outpatients Later Admitted as Inpatients

CMS also proposes changing the application of certain “three-day window” payment limits for physician services in clinics wholly owned or operated by a hospital (regardless of whether or not the clinic is provider-based). Current regulations require certain diagnostic and nondiagnostic services provided to patients within three days of admission to be bundled into the inpatient bill and related payment. This bundling does not include physician services.

In the proposed rule, CMS asserts because the overhead, staff and equipment of hospitals are paid for in the inpatient rate, physicians in wholly owned or operated clinics should bill at the reduced facility rate for services to patients that fall under the three-day window. By using the lower fee schedule rate, CMS believes hospitals will not be paid twice for these overhead costs.

Also, if a hospital believes nondiagnostic services provided within the three-day window are unrelated to the admission, they may bill separately for these services using condition code 51, though the hospital must maintain documentation to support why these services are not related.

Critical Access Hospital (CAH) Ambulance Services

The proposed rule changes the application of the 35-mile rule used for a CAH to qualify for cost-based ambulance reimbursement. CMS currently measures the distance to the nearest ambulance service from either the hospital building or anywhere the CAH ambulance service has a station. Under proposed interpretation, the 35-mile criterion will be measured from the CAH building.

If the only ambulance service within a 35-mile drive of a CAH is the ambulance service the CAH owns, it will qualify for cost-based reimbursement. If the CAH’s ambulance service is stationed more than 35 miles from the CAH, it must be the closest service to the CAH to qualify for the cost-based reimbursement. The new interpretation is effective for cost report periods beginning on or after October 1, 2011, and should result in additional CAHs qualifying for cost-based ambulance payments.

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.

BKD advisors Craig Steen, Kevin Wellen, Mick Welscher, Sally Hardgrove, Sue Brammer and Sherry Witzman contributed to this article.

The May 5, 2011, Federal Register includes the Centers for Medicare & Medicaid Services’ (CMS) proposed rule changes to the Long-Term Care Hospital Prospective Payment System (LTCH PPS) for federal fiscal year 2012. In addition to proposed payment rate changes, the rule expands quality reporting to long-term care hospitals (LTCHs) and provides clarification of two existing policies.

Among the changes in the proposed rule:

• LTCH Rate Updates: Similar to the inpatient PPS market basket update, the LTCH PPS market base update is 1.5 percent. The proposed LTCH PPS standard rate increased 1.22 percent from the prior year to $40,082.61, and the fixed-loss threshold amount increased slightly over the prior year to $19,270.
• LTCH Quality Reporting Program: For 2014 payment determination, the rule proposes LTCHs submit data on three quality measures:  Catheter-Associated Urinary Tract Infections (CAUTIs), Central Line Catheter-Associated Bloodstream Infection (CLABSI) and pressure ulcers that are new or have worsened for services provided in FY2012. CMS is requesting public comment on the proposed reporting cycles for LTCHs. Annual updates to the standard federal rate for discharges in 2014 shall be reduced by 2 percent for any LTCH not in compliance with quality data submission.
• Clarifying Average Length of Stay: CMS proposed clarifying two existing policies related to the greater than 25 days average-length-of-stay requirement:
  1. Where an existing LTCH has changed ownership, the hospital will continue to be paid LTCH PPS for the cost report period beginning with the change of ownership only if, for at least five of six months immediately preceding the change of ownership, the hospital meets the required average length of stay. If the hospital fails to meet the required average length of stay criterion, after its evaluation, and if it is an acute-care hospital, it will be paid under IPPS effective on the day of the change of ownership—the start of the new owner’s cost report period.
  2. The rule clarifies the calculation of the average length of stay to specify all data on all Medicare inpatient days, including Medicare Advantage (MA) days, should be included in the average length-of-stay calculation.
• Proposed LTCH Moratorium on Increase in Beds to LTHCs and Satellite Facilities: The rule proposes, effective October 1, 2011, moratoriums on the establishment or classification of new LTCHs and LTCH satellite facilities and on the increase in the number of LTCH beds in existing hospitals and satellite facilities be applied to the subset of LTCHs and LTCH satellite facilities established via the exception process subsequent to December 29, 2007. Essentially, CMS proposes to limit the number of beds in these facilities to the number of beds certified by Medicare at the LTCH or satellite facility when it was first paid under the LTCH PPS.

The May 5, 2011, Federal Register containing the proposed rule is available for download. CMS is accepting comments on the proposed rule through June 20, 2011.

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

]]> http://www.healthcarereforminsights.com/2011/04/21/jon-unroe/feed/ 0 http://www.healthcarereforminsights.com/2011/04/12/proposed-rule-for-accountable-care-organizations/ http://www.healthcarereforminsights.com/2011/04/12/proposed-rule-for-accountable-care-organizations/#comments Tue, 12 Apr 2011 16:43:00 +0000 Brad Brotherton http://www.healthcarereforminsights.com/?p=1273

On March 31, 2011, Centers for Medicare & Medicaid Services (CMS) released its proposed rule for implementing the provisions of the Patient Protection and Affordable Care Act relating to the Medicare Shared Savings Program (MSSP) and associated accountable care organizations (ACO). Under these provisions, service providers and suppliers to Medicare beneficiaries can continue to receive their traditional Medicare reimbursement while also being eligible for additional payments for shared savings to an ACO. These regulations are currently being proposed, and final rules for implementation are expected this summer after CMS evaluates the comments received on these proposed regulations.

The MSSP is an attempt to redesign the delivery of health care intended to provide better care for individuals, better health for populations and lower growth in Medicare expenditures.

Eligibility & Governance

ACOs are legal entities comprising an eligible group of Medicare-enrolled ACO participants that work together to manage and coordinate care for Medicare beneficiaries. ACO professionals are physicians or mid-level practitioners, i.e., physician’s assistants, nurse practitioners or clinical nurse specialists. ACO participants can be ACO professionals in a group practice, networks of individual ACO professionals, partnerships or joint ventures between hospitals and ACO professionals or hospitals employing ACO professionals. All hospitals that employ ACO professionals and are paid under the prospective payment system (PPS), as well as critical access hospitals (CAHs) billing Method II for physician services, would be eligible to form an ACO. Rural health clinics (RHCs) and federally qualified health centers (FQHCs) are not eligible to form an ACO, but they are allowed to be part of an ACO formed by eligible participants; in fact, ACOs, including RHC/FQHC members, can receive an enhanced percentage of shared savings.

ACOs must file an application with CMS to participate in the MSSP and agree to participate in the program under a three-year agreement. Due to the beneficiary assignment process, all agreement periods will start on January 1 of a given year. The ACO must have shared governance giving all ACO participants proportionate control over their decision-making process, including at least 75 percent control of the governing body, which also must include Medicare beneficiary representation. Additional structural and operational criteria must be met, such as requiring at least 50 percent of an ACO’s primary care physicians to be meaningful users of electronic health records.

Assignment of Medicare Beneficiaries

Approved ACOs must have at least 5,000 Medicare fee-for-service beneficiaries (not Medicare Advantage) receiving the plurality of their primary care services (defined as allowable charges for billed evaluation and management Healthcare Common Procedure Coding System codes) from ACO professionals who are primary care physicians (defined as physicians with the specialty of internal medicine, general practice, family practice or geriatric medicine only). Plurality of primary care services will be based on which primary care physician provided services with the highest amount of allowed charges to a specific beneficiary regardless of whether it is a majority of such services or not. CMS will determine the Medicare beneficiaries assigned to an ACO in each year of participation on a retrospective basis based on National Provider Identifier (NPI) information for ACO professionals meeting the definition of primary care physicians and billing under a Tax Identification Number (TIN) of an ACO participant. While all physician specialties and mid-level practitioners are ACO professionals, the assignment of beneficiaries will be based only on primary care physician data. Also note primary care services performed in an RHC/FQHC setting will not be used for the assignment of beneficiaries due to limited coding information available on RHC/FQHC claims. When a Medicare beneficiary is assigned to an ACO for a given year, the ACO will be held accountable for the quality, cost and overall care of that beneficiary.

ACO participants other than primary care physicians can be in multiple ACOs, but to avoid assigning beneficiaries to multiple ACOs, primary care physicians can only be in one ACO. It is important to note the assignment of a beneficiary to an ACO can have no effect on the benficiary’s ability to seek services from any Medicare-enrolled provider whether in the ACO or not; improper restriction of this right can lead to termination of the ACO from the MSSP.

Quality & Reporting Requirements

For ACOs to participate in shared savings distributions, they must meet minimum quality and reporting requirements. Sixty-five data elements must be submitted, and beginning in Year 2 of the agreement, ACOs with higher quality scores will be eligible for higher shared savings distributions. Year 1 payment distributions will be based on meeting reporting requirements rather than quality thresholds.

CMS intends to monitor the quality of ACOs closely and has the ability to remove ACOs from the program (future participation also may be prohibited at CMS’ discretion) if quality measures are not at an expected level and are not improving.

Shared Savings Distributions/Loss Repayments

ACOs can choose between two tracks during their first three-year agreement period. Track 1 will allow the ACO to participate in a maximum of 52.5 percent potential shared savings distributions during the three-year period and participate in a maximum of 47.5 percent potential shared loss repayments in the third year only. Track 2 will allow the ACO to participate in a maximum of 65 percent potential shared savings distributions while participating in a maximum of 35 percent potential shared loss repayments for all three years. Agreements beyond the initial three-year period will all be under Track 2. Track 1 ACOs that meet all quality and reporting standards can receive a 50 percent share of the savings achieved, and if the ACO has a RHC/FQHC in its organization, the distributions will increase by a maximum of 2.5 percent, depending on the percentage of beneficiaries with visits to the RHC/FQHC. Track 2 ACOs that meet all quality and reporting standards can receive a 60 percent share of the savings achieved, and if the ACO has a RHC/FQHC in its organization, the distributions will increase by 5 percent, depending on the percentage of beneficiaries with visits to the RHC/FQHC.

At the start of each three-year agreement period, a cost-per-beneficiary benchmark will be established for all beneficiaries that would have been assigned to the ACO (a second option provided for comment would change this to those beneficiaries actually assigned) for the prior three years using the actual expenditures from the prior three-year period weighted toward the most recent year. This benchmark will then be adjusted each year by an expense trend factor and a factor for variations in the complexity and severity of the beneficiaries, as well as to effect for changes in the assigned beneficiaries. In years where the ACO manages the CMS cost per beneficiary below the benchmark, the ACO will receive a share of these savings. For Track 2 ACOs, the ACO will pay a share of the losses in years where the CMS cost per beneficiary exceeds the established benchmark.

In establishing the benchmark, CMS has proposed to include all relevant Medicare costs, including enhanced payments for disproportionate share hospitals, indirect medical education payments, hospital specific rate payments and incentive payments for hospitals that achieve “meaningful use” of an electronic health record (physician bonus payments for electronic health record and other quality initiatives are excluded from the benchmark). Therefore, evaluating the Medicare reimbursement landscape for current and anticipated payments is an important factor to consider when deciding whether to enter into the MSSP.

To receive a shared savings distribution, the ACO must reduce cost by a “minimum savings rate.” CMS is concerned normal fluctuations in annual costs could result in a shared savings distribution when real change in efficiency of care did not occur. To adjust for this, they have established minimum savings thresholds, ranging from 3.9 percent for the smallest ACOs to 2 percent for the largest organizations and all Track 2 ACOs, which must be exceeded before distributions can be calculated. All ACOs exceeding their minimum savings rate threshold will receive sharing distributions on savings exceeding a 2 percent threshold. There are exceptions for ACOs with fewer than 10,000 assigned beneficiaries, which are entitled to sharing distributions on all savings if any of the following conditions apply:

• The ACO is comprised only of medical practitioners in group practice or networks of individual practices
• 75 percent of the assigned beneficiaries are in rural counties outside of Metropolitan Statistical Areas
• 50 percent of the assigned beneficiaries are related to primary care services from a Method II CAH
• 50 percent of the assigned beneficiaries had at least one encounter with an RHC/FQHC

The maximum amount of shared savings each year will be limited to 7.5 percent of an ACO’s benchmark for Track 1 ACOs. Track 2 ACOs, along with Track 1 ACOs that have transitioned to Track 2 in Year 3 of their agreement period, will have a maximum shared savings amount of 10 percent each year.

Each year, 25 percent of the shared savings distribution will be withheld by CMS to protect against their ability to be repaid in years where shared losses occur. At the end of the three-year agreement, the withheld amounts will be distributed to the ACOs as long as they do not have shared loss amounts that need repaid. If an ACO does not complete its three-year agreement, the ACO would forfeit any of the withheld amounts.

CMS strongly believes that, to get real and meaningful change in efficiency and care for patients, ACOs need to be exposed to some risk of shared losses. Therefore, it is requiring all ACOs to become exposed to some risk by at least the third year of their initial agreement period. In addition, while this proposed rule does not address any partial capitation models, it is clear the CMS Innovation Center will continue to design and test partial capitation models and may introduce those concepts in future rulemaking.

Shared losses will be computed similarly to the above shared savings description, with the following exceptions:

• Minimum loss thresholds will be 2 percent for all ACOs.
• Maximum loss rates will be phased in starting at 5 percent in Year 1, 7.5 percent in Year 2 and 10 percent in Year 3; Track 1 ACOs will have a maximum loss rate of 5 percent in Year 3 of their agreement period.
• Shared loss percentage is equal to 1 minus the shared savings percentage.

After the first three-year agreement is completed, a new benchmark will be set for the next agreement period. It is important to realize that cost reductions in the initial agreement period will result in a lower benchmark for the next agreement period. Therefore, ongoing savings may be difficult to obtain while the ACO absorbs increased risk for shared losses. In addition, the proposed regulations preclude future participation in the MSSP for any ACO that generates a shared savings loss for the initial three-year term, so potential ACOs must be ready to effectively manage care when joining the program.

Anticipated Impact

CMS is predicting this proposed rule will result in 75–150 ACOs joining the MSSP, generating an overall savings to the Medicare program of $510 million over the 2012–14 period, covering up to 4 million Medicare beneficiaries. The first-year additional operating expense of an ACO is estimated at $1.7 million. The estimated shared savings distributions, net of shared loss repayments, are $760 million over three years.

Coordination of Proposed Regulations with Other Agencies

Concurrent with the issuance of the MSSP proposed regulations, several other federal agencies issued proposed regulations regarding potential waivers and interpretations of portions of various statutes primarily related to the shared savings payments and coordination of services associated with participation in an ACO in the MSSP. These proposed regulations included a joint CMS/Office of Inspector General waiver design of the civil monetary penalties law, federal anti-kickback statute and the physician self-referral law; a proposed Antitrust Policy Statement issued by the Federal Trade Commission and Department of Justice; and an IRS notice soliciting comments regarding the need for additional guidance for tax-exempt organizations participating in ACOs. Organizations considering the formation of an ACO are encouraged to further investigate these proposals and consider potential risks associated with these statutes in consultation with their legal representatives.

Conclusion

This proposed rule for ACOs to participate in the MSSP may be the first step in significant change throughout the health care industry. Organizations contemplating participation in the program have many factors to consider, but some of the most critical include:

• How strong is the primary care physician complement of our proposed ACO? Primary care is the driver of the beneficiary assignment to an ACO. It will be difficult for an ACO to be successful without a strong primary care physician base.
• What does Medicare reimbursement for our potentially assigned beneficiaries look like over the next few years? Receipt of meaningful use incentive payments, wage index trends and other factors need to be considered when evaluating if future cost savings to the Medicare program can be achieved.
• How effective can your potential ACO be at controlling costs for organizations that are not components of your ACO but provide services to your potentially assigned beneficiaries?
• Is the benefit of shared savings distributions greater than the potential increased cost and oversight of an ACO and assumption of risk on shared losses? Each organization needs to evaluate this early in the process, as formations of ACOs are anticipated to require large time investments by individuals throughout an organization.
• Can my organization have at least 5,000 Medicare beneficiaries assigned based on the plurality of primary care without the ability to include RHC/FQHC services in the calculation?
• For hospitals that employ primary care physicians outside of an RHC, will we be allowed to participate in multiple ACOs under the proposed rules?

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

As the impact of the Affordable Care Act (ACA) on providers continues to unfold, the tools the legislation provides to reduce fraud, waste and abuse are being implemented. The Centers for Medicare & Medicaid Services (CMS) has issued a final rule, effective March 25, 2011, that increases the scrutiny placed on medical service and medical supply providers applying for enrollment or revalidation as a Medicare provider.

Based on CMS experience with various types of providers and its assessment of risk of fraud, waste and abuse, providers and suppliers will be classified into limited-, moderate- and high-risk categories. Each category has corresponding screening levels. Click here to see where you fall in the risk matrix, along with related screening requirements.

Screening levels for providers and suppliers in the limited-risk category are largely unchanged from existing screening measures. These procedures include verification of provider-specific requirements as established by Medicare, license verifications and various database checks. Moderate-risk providers and suppliers will be subject to additional screening procedures, including unannounced site visits. Finally, the screening procedures for providers and suppliers in the high-risk category will be extended to include fingerprint-based criminal history checks of key individuals, including owners and managing employees.

To cover the costs of additional screening procedures, CMS will begin charging institutional providers a $505 application fee in 2011; this fee will be adjusted annually for inflation. If the fee is not submitted, the application will be rejected or billing privileges revoked, as applicable. “Institutional provider” includes any provider or supplier submitting a paper Medicare enrollment application using the CMS-855A form, CMS-855B form, not including physician and nonphysician practitioner organizations, CMS-855S form or the associated Internet-based Provider Enrollment, Chain, and Ownership System (PECOS) enrollment applications.

The final rule also enables CMS to impose incremental six-month moratoria on the enrollment of new Medicare providers and suppliers in certain situations, including:

• Instances where CMS has identified trends that could be indicative of fraud, waste and abuse, including a disproportionate number of providers relative to the number of beneficiaries and rapid increase in enrollment applications within a particular provider category
• A state-imposed moratorium on enrollment in a particular geographic area or a particular provider type
• CMS, in conjunction with the Office of Inspector General (OIG), identifying a significant risk of fraud, waste and abuse in a particular provider type or geographic area

The ACA also gives CMS greater authority in the suspension of payments to providers during an investigation of credible fraud allegations. Existing rules allowing CMS to suspend payments for 180 days with a one-time 180-day extension will be relaxed and will no longer apply if the case is being considered by the OIG for administrative action. Extensions beyond 180 days also can be granted if requested by the U.S. Department of Justice due to an ongoing investigation.

CMS efforts to reduce fraud, waste and abuse continue to evolve, and health care providers should consider the implications of this final rule. For more information, please contact your BKD advisor.

Although federally qualified health centers (FQHCs) and rural health clinics (RHCs) are not eligible at the organizational level for the Medicare and Medicaid Electronic Health Record (EHR) Meaningful Use (MU) incentives, certain providers within those facilities may qualify. Providers practicing at FQHCs or RHCs are eligible for the Medicaid program if they meet the case-mix requirements. Some providers may qualify for Medicare incentives for services billed under the Medicare Physician Fee Schedule (PFS).

Medicare eligible professionals (EPs) who demonstrate meaningful use of certified EHR technology for calendar years 2011 through 2016 can receive up to $44,000 over five years under the Medicare EHR Incentive Program. To receive the maximum EHR incentive payment, Medicare EPs must begin participation in the EHR MU incentive program by 2012. For 2015 and later, Medicare EPs not successfully demonstrating meaningful use will have a payment adjustment to their Medicare reimbursement. The payment reduction starts at 1 percent and increases each year a Medicare EP does not demonstrate meaningful use, to a maximum of 5 percent.

Since FQHCs and RHCs are not eligible to receive the incentives, these organizations will not be subject to a Medicare fee reduction or penalty at the institutional level for nonadoption of an EHR.

The Medicaid EHR Incentive Program is administered voluntarily by states and offered to EPs as early as 2011 and continuing through 2021. EPs can participate for six years throughout the duration of the program. The last year to begin participation in the Medicaid EHR Incentive Program is 2016. EPs must meet the Medicaid patient volume requirements—at least 20 percent for pediatricians and at least 30 percent for all other health professionals—for a 90-day period. Medicaid EPs can receive up to $63,750 over six years under the Medicaid EHR incentive program for calendar years 2011 through 2021. Medicaid EPs practicing at FQHCs/RHCs must show more than 50 percent of their clinical encounters occurred at an FQHC/RHC over a six-month period and that a minimum of 30 percent of their patient volume came from needy individuals.

The criteria for MU will be staged in three steps over the next five years. Stage 1 (2011–12) sets the baseline for electronic data capture and information sharing. Stage 2 (expected to be implemented in 2013) and Stage 3 (expected to be implemented in 2015) will expand on this baseline and be developed through future rulemaking. MU requirements include a core and menu objectives specific to EPs or eligible hospitals and critical access hospitals. There are a total of 25 MU objectives for EPs. To qualify for an incentive payment, 20 of these 25 objectives must be met. Of the 25 objectives, 15 are required core objectives; the remaining five objectives can be selected from a list of 10 menu objectives.

There are many questions you should consider if your EPs plan to take part in the EHR MU incentive programs. Are your EPs:

• Using certified EHR technology?
• Enrolled in the Physician Enrollment Chain and Ownership System?
• Registered online to participate in the Medicare EHR Incentive Program?
• Successfully demonstrating MU for each required reporting period (90 days in the first year, full calendar year for subsequent years) of participation?
• Medicare EPs who predominantly furnish services in a designated Health Professional Shortage Area?
• Planning to switch back and forth between the Medicare and Medicaid EHR incentive programs?
• Planning to assign their payments to another entity, e.g., a group practice, if they so choose?

Additional details and key dates related to EHR MU incentives can be found at the CMS website and with your respective state Regional Extension Center (REC).  RECs provide education, outreach and technical assistance to help providers in their geographic service area select, successfully implement and meaningfully use certified EHR technology to improve the quality and value of health care.

If you need further guidance or assistance, please contact your BKD advisor, Mike Schnake at mschnake@bkd.com or Jeff Allen at jeallen@bkd.com.

As the IRS works to implement changes under the Patient Protection and Affordable Care Act of 2010, the agency issued Announcement 2011-20 directing tax-exempt hospital organizations required to file Form 990, Schedule H – Hospitals, to delay filing their 2010 Form 990 until July 1, 2011, or later. The delay applies to hospital organizations filing electronic or paper returns. The IRS requested the delay to allow more time to complete changes to required forms and systems needed for additional reporting requirements for charitable hospitals under the new law.

Charitable hospitals are granted an automatic three-month extension to file Form 990. The automatic extension applies only to hospital organizations required to file Schedule H with the 2010 Form 990 due before August 15, 2011.

Hospital organizations affected by Announcement 2011-20 are not required to file Form 8868, Application for Extension of Time to File an Exempt Organization Return. No late-filing penalties will apply to tax year 2010 Forms 990 (with Schedule H attached) filed by hospital organizations on or before their extended due dates. Recently formed hospital organizations that did not complete Form 990, Schedule H, in 2009 are encouraged to file an extension to reduce the risk of incorrectly receiving a penalty notice. If a hospital organization determines additional time beyond the automatic three-month extension is needed to file its Form 990, the hospital may request an additional (not automatic) three-month extension by properly completing, signing and filing Form 8868.

The delay does not apply to any other tax-exempt organization required to file Form 990. It is important to note that the delay does not apply to Form 990-T filings. If a hospital organization required to file Form 990, Schedule H, also files Form 990-T and needs additional time to complete Form 990-T beyond the original due date, a Form 8868 should be filed for the 990-T.

Please contact your BKD advisor if you have any questions.

With the passage of the Affordable Care Act (ACA) in 2010, Congress directed the Centers for Medicare & Medicaid Services (CMS) to implement a Value-Based Purchasing (VBP) program. The goal of VBP is to revamp how Medicare services are paid to better reward value, outcomes and innovations instead of basing payment merely on volume. Proposed regulations released by CMS in the January 13, 2011, Federal Register give providers a first look at how CMS plans to implement VBP and provide quality incentives.

As proposed, the VBP program generally applies to all short-term acute care hospitals other than critical access hospitals. Other hospital types excluded from VBP include psychiatric, rehabilitation, long-term care, children’s and cancer hospitals. The VBP program also does not apply to hospitals that have not reported quality data under current regulations and, therefore, already have received a 2 percent Medicare payment reduction.

CMS proposes that, beginning with federal fiscal year (FFY) 2013, i.e., payments for discharges on or after October 1, 2012, hospital operating diagnosis-related group (DRG) payments will be reduced by 1 percent to create a VBP payment pool. The reduction will increase 0.25 percent per year to a full reduction of 2 percent in FFY 2017. This reduction will be reallocated to hospitals in a budget-neutral manner based on each hospital’s total performance score under the proposed VBP measurement criteria. The VBP payment will be made by increasing each hospital’s base DRG payment amount by its VBP incentive payment add-on.

CMS proposed using the “Three Domains of Care” approach to assess quality, which includes clinical process of care measures, outcome measures and patient experience survey results. For FFY 2013, the program will only include the clinical process of care and the patient experience survey domains, with the outcome measures domain starting in FFY 2014. CMS will determine a hospital’s “total performance score” based on its results in each of the three domains.

Clinical Process of Care & Outcome Measures

Under the clinic process of care and outcome measure domains, hospitals will earn two scores for each performance measure—an achievement score and an improvement score. The achievement score will be based on a hospital’s performance on each measure compared to other hospitals during that reporting period, while the improvement score will compare the hospital’s current measures to those achieved in the baseline period.

The clinical process of care and outcome measures will focus on four topics:  Acute Myocardial Infarction (AMI), Heart Failure (HF), Pneumonia (PN) and Surgical Care Improvement (SCIP). For a complete listing of clinical processes included, click here.

Seventy percent of a hospital’s total performance score will be based on the 17 clinical processes of care and outcomes measures (once implemented). In instances where the hospital has fewer than 10 cases in any measurement category, that category is excluded from the total possible points.

Because CMS must determine each hospital’s VBP incentive add-on before the start of an FFY, it has proposed to use measurement and baseline periods for the nine months ending March 31 of each year. The initial baseline period is July 1, 2009, to March 1, 2010, and the initial performance period is July 1, 2011, to March 31, 2012.

For each measure, CMS will set an achievement threshold and benchmark threshold. The achievement threshold represents the median score of all hospitals on a particular measure during the performance period. The benchmark threshold represents the performance mark equal to the mean of the top decile of hospitals for that measure during the performance period.

For the achievement score, CMS will use a 10-point scoring method for each measure. Hospitals exceeding the benchmark would receive 10 points for the measure. Hospitals scoring above the achievement threshold but below the benchmark would receive between one and nine points, depending on its location within that range. Hospitals failing to reach the achievement threshold would receive no points for the achievement score.

For the improvement score, CMS will also use a 10-point scoring method. Hospitals exceeding the benchmark will receive a 10-point score. In addition, CMS will establish a hospital-specific improvement range using a hospital’s baseline performance. A hospital improving its score on a measure will receive one to nine points, based on a sliding scale between the performance in the baseline period and current period benchmark.

Hospitals will receive the higher of the achievement or improvement score for each measure. The sum of these scores is aggregated and divided by the possible total points—10 points for each category that applies to the hospital.

CMS intends to expand the clinical process of care measurements in future years. Beginning in FFY 2014, it will include three mortality outcome measures currently reported on the Hospital Compare website:  MORT-30-AMI, MORT-30-HF and MORT-30-PN. Additional current and long-term priority topics include prevention and population health, safety, chronic conditions, high-cost and high-volume conditions, elimination of health disparities, healthcare-associated infections and other adverse healthcare outcomes, improved care coordination, improved efficiency, improved patient and family experience of care, effective management of acute and chronic episodes of care, reduced unwarranted geographic variation in quality and efficiency and adoption and use of interoperable health information technology.

Before additional topics can be added to the specific clinical process of care and outcomes, each must be published on the Hospital Compare website (www.hospitalcompare.hhs.gov) for one year. CMS has suggested new measures will be implemented to have their respective performance period begin immediately after the display period on the website is complete.

Patient Experience Score

The remaining 30 percent of the VBP payment will be based on a patient experience score as determined through a survey. CMS will use the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) survey (www.hcahpsonline.org), which contains 18 core questions about critical aspects of patients’ hospital experiences. These items include communication with nurses and doctors, responsiveness of hospital staff, cleanliness and quietness of the hospital environment, pain management, communication about medicines, discharge information and overall rating of the hospital.

The random survey is administered to a sample of adult patients across medical conditions between 48 hours and six weeks after discharge and is not restricted to Medicare beneficiaries. Each of the questions is grouped into eight dimensions and compared to the related achievement performance standards of the 50th and 95th percentile. Hospitals with ratings above the 95th percentile will receive 10 points. Ratings between the 50th and 95th percentile will receive one to nine points, and those below the 50th percentile will receive no points. Hospitals also will be scored based on improvement; hospitals will be awarded between one and nine points if their scores improve over their baseline period. The higher of a hospital’s achievement or improvement score will be awarded, with a maximum of 80 points.

The scoring process also includes a consistency variable, where hospitals earn consistency points ranging from zero to 20 points based on how many of their dimension scores meet or exceed achievement thresholds. If all dimensions are above the 50th percentile, the hospital will receive 20 points. The total patient experience score is equal to the sum of dimension points and consistency points, for a total of 100 possible points.

Total Performance Score

The total performance score is determined by combining the clinical process of care and outcomes score (weighted at 70 percent) and the HCAHPS survey results (weighted at 30 percent). The total performance score is then ranked in linear scale with other hospitals to determine incentive payments. Hospitals with a higher total performance score will receive higher incentive payments than those with lower scores. Currently, all hospitals will be ranked together. There is no differentiation between hospitals for size or Medicare designations such as urban, rural, sole community or Medicare dependent hospitals.

Other Matters

Hospitals will be notified of their preliminary VBP score no later than August 1, 2012, via CMS QualityNet accounts. CMS will notify hospitals of their final VBP score by November 1, 2012, and hospitals will have 30 days to review and submit correct information. CMS will adjust payment rates for the VBP incentive amount starting January 1, 2013, with retroactive adjustments for any FFY 2013 discharges paid prior to January 1, 2013.

CMS proposes to validate the accuracy of quality data submissions through random selection of hospitals and will select approximately 20 percent of hospitals and request 12 cases per quarter. CMS will re-abstract the quality measure data elements and compare the results to information submitted by the hospital. The hospital must achieve a correlation of at least 75 percent for its data to be considered reliable. If the hospital fails to meet this 75 percent mark, CMS will treat the hospital as if it did not report quality data and reduce payments by 2 percent.

Hospitals should take the following steps now to prepare for VBP:

• Review current hospital clinical care and outcome measures and survey of patients’ hospital experiences as submitted and reported on the Hospital Compare website to national averages.
• Identify those clinical care and outcome measures below national averages and focus on how to increase these measures for the upcoming performance period beginning in July 2011. Remember hospitals are not only awarded for absolute outcomes, but also improvement compared to the baseline period.
• Review quality data submitted for accuracy and completeness as presented on the Hospital Compare website. Hospitals may want to engage outside assistance to validate their information.

For more assistance reviewing the impact of Value-Based Purchasing on your hospital, contact your BKD advisor.

The Patient Protection and Affordable Care Act (PPACA) clearly states the current Medicare payment system for Federally Qualified Health Centers (FQHCs) will change to a new Prospective Payment System (PPS) in 2014. Beginning January 1, 2011, claim submission requirements for FQHC services changed based on PPACA mandates.

When billing Medicare services dated on or after January 1, 2011, FQHCs must report all pertinent services provided and list the appropriate Healthcare Common Procedure Coding System (HCPCS) code for each line item, along with revenue codes for each FQHC visit. If service lines do not contain valid HCPCS codes, the claim will be returned to the provider, except for those revenue codes that do not permit HCPCS code reporting. When claims service lines contain a valid HCPCS code but not a revenue code, the claim will be returned to the provider. Until the FQHC PPS is implemented in 2014, the Medicare claims processing system will continue to make payments under the current FQHC interim per-visit payment rate system.

Please note that the updates provided in Change Request 7038 (CR7038) and detailed in Medicare Learning Network’s MLN Matters article MM7038 do not affect claims for supplemental payments to FQHCs under contract with Medicare Advantage Plans. In addition, preventive services covered by Medicare for beneficiaries were expanded effective January 1, 2011.

For FQHCs to respond to these changes, extra effort may be required for organizations to update or modify practice management systems or claims submission processes. In addition, expanded billing and coding training for clinicians and billing staff may be necessary to address changes that could affect your organization’s ability to receive appropriate reimbursement.

Additional details of CR7038 can be found in the attached MLN Matters article and with information provided by your respective fiscal intermediary or Medicare Administrative Contractor.

If you need additional assistance, please contact your BKD advisor or click on one of the photos below to email one of our community health center professionals.

On November 2, 2010, the Centers for Medicare and Medicaid Services (CMS) issued the final rule on the 2011 update for the Medicare Home Health Prospective Payment System (PPS) rates—yet another document issued in 2010 to send ripples through the home health provider community. This rule, combined with the Patient Protection and Affordable Care Act of 2010 (PPACA), has created the furthest-reaching changes facing home health agencies since the implementation of the original home health PPS in 2000.

The home health industry has been thrust into the government spotlight with repeated reports from the Medicare Payment Advisory Commission (MedPAC) about excessive profit margins and accusations of questionable business practices. With this negative attention, home health took its fair share of the hit as our government looked to reform health care with the passing of PPACA in March. CMS also has taken matters into its own hands with payment reductions and implementation of additional compliance requirements for home health.

The 2011 home health payment rule was used as a vehicle to implement some of the home health provisions within PPACA. Therefore, a refresher on those provisions will help provide the groundwork to better understand the rule’s changes.

Home Health Provisions in PPACA

PPACA included specific rules for updating home health payment rates, new Medicare coverage requirements for home health services and directives for the Department of Health and Human Services (HHS) and MedPAC to perform studies on home health payment methodologies. Items affecting home health payment rates include:

• A 3 percent rural add-on effective for Medicare episodes ending on or after April 1, 2010, and before January 1, 2016
• Indefinite continuance of the agency-specific 10 percent outlier payment cap
• A 2.5 percent 2011 reduction to the Medicare home health PPS base rates due to realigning outlier budget of 5 percent versus outlier spending target of 2.5 percent
• A 1 percent reduction in the annual Medicare home health market basket update for the years 2011 through 2013
• Rebasing of payment rates to better approximate costs over a four-year phase-in beginning with 2014, with a maximum reduction of 3.5 percent per year
• Reduction of the annual Medicare home health market basket update by a productivity adjustment, beginning in 2015

New coverage requirements for Medicare home health services include:

• For certifications for Medicare home health services made by a physician, the certifying physician must have documentation supporting that the physician has had a face-to-face encounter with the individual prior to such certification and within a reasonable time frame
• For home health certifications made on or after July 1, 2010, the physician ordering home health services must be enrolled in Medicare
• Beginning with services on or after January 1, 2010, timely filing requirements are one year from date of service (by December 31, 2010, for all services provided prior to January 1, 2010)

HHS and MedPAC are required to report on or perform studies on various home health payment methodologies, including:

• The Secretary of HHS must report to Congress by October 1, 2011, the plan for implementing value-based purchasing for Medicare home health
• The Secretary of HHS must report to Congress by March 1, 2014, the results of a study on the development of Medicare home health payment revisions to ensure access to care and payment for severity of illness. If the study (and demonstration project) deems that revisions to the Medicare home health payment methodology are appropriate, the revisions are required to begin no later than January 1, 2015, and be carried out over a four-year period
• MedPAC must report to Congress by January 1, 2015, on its study of the effects of the rebasing effort

Home Health Payment Rule – Payment Updates

The base home health 60-day episode payment rate, prior to case-mix and wage-index adjustment, is decreased by 5.2 percent. The decrease consists of the following three components:

• 1.1 percent market basket increase (2.1 percent market basket index minus one percentage point as required by PPACA)
• 2.5 percent decrease for the outlier cap as required by PPACA
• 3.79 percent decrease for case mix creep as determined by CMS

Wage index changes can vastly change the ultimate effect on a specific geographic area’s payment rates. Some areas are receiving wage index decreases that double the decrease in their payment rates, while other areas are receiving wage index increases that virtually wipe out the base rate decrease.

The non-routine supply (NRS) payment and low utilization payment adjustment (LUPA) payment rates were both decreased by 1.5 percent, as they are not impacted by the case mix creep adjustment. The outlier payment provisions are unchanged, and the agency-specific 10 percent outlier payment cap is retained as required by PPACA.

Rural payment rates receive a 3 percent rural add-on as specified in PPACA. This add-on is included in the rural base rates as well as the NRS and LUPA rural payment rates.

As mentioned above, the 2011 payment rule not only provided the update for the Medicare home health PPS payment rates, it also addressed several non-rate issues. These non-rate issues address compliance concerns and implement PPACA requirements.

Physician Face-to-Face Encounters

For Medicare home health admissions on or after January 1, 2011, the certifying physician must have a face-to-face encounter with the patient either within 90 days prior to or 30 days after admission. The encounter must be performed by a qualified certifying physician or other qualified nonphysician practitioner and must be related to the primary reason the patient is being admitted to home health. Appropriate documentation must be in place as a condition of payment.

Therapy Standards

The payment rule addressed therapy standards in home health, as therapy utilization continues to be a focus of concern of CMS and others. According to clarification within the requirements, therapy documentation should focus on functional, measurable and objective goals and progress being made towards these goals. New standards require qualified therapists, excluding assistants, to assess, measure and document progress toward goals at least every 30 days, or prior to the 13th and 19th total therapy visits. Additional guidance also is provided on the coverage of maintenance therapy. These heightened therapy standards are not effective until April 1, 2011.

Additional HCPCS Codes

Effective January 1, 2011, new Healthcare Common Procedure Coding System (HCPCS) codes are to be used on Medicare claims. These new HCPCS codes include new “G” codes to be used for maintenance therapy visits as well as for visits performed by therapy assistants. New “G” codes also will be required for nursing visits for management and evaluation, observation and assessment and training and education. The intent of these new codes is to help provide CMS with a better understanding of the home health services being provided.

Capitalization

To protect patient care of new-start agencies, additional capitalization requirements were set forth in the payment rule. New-start agencies now must prove that three months’ operating capital is in place at three points: upon application, at the time of survey and when enrolling in Medicare. CMS will require cost report data of comparable agencies as a basis to determine the necessary capitalization.

36-Month Rule

The 36-month rule was actually put in place under the 2010 payment rule, but the 2011 payment rule provides further guidance on the application of the rule after a year of confusion. The 36-month rule prohibits the conveyance of the home health provider agreement to a buyer if the selling agency started within 36 months or a prior change of ownership took place in the last 36 months. Under these circumstances, the buyer must enroll in Medicare as a new, or initial, agency. The 2011 payment rule confirms it does apply to both asset and stock transactions. However, it will only be applied to changes in “majority” ownership, and several exceptions to the rule are provided, including death of an owner, indirect ownership changes and changes in entity structure.

Take Action Now

Agencies must move quickly to prepare for these far-reaching changes. Preparation should include education, assessment of opportunities to improve operational efficiencies and implementation of policies and procedures to ensure compliance. Contact your BKD advisor for further information.

Section 1833(t)(17)(A) of the Social Security Act requires hospitals failing to submit outpatient quality indicators incur a 2 percent reduction to their outpatient prospective payment system (OPPS) market basket update for the year at issue. The act requires the Centers for Medicare & Medicaid Services (CMS) to conduct validation audits of the submitted data to ensure participating hospitals are submitting accurate data, and 800 hospitals will be randomly chosen to help with the validation process.

Although participation in the Hospital Outpatient Quality Data Reporting Program (HOP QDRP) is voluntary for Critical Access Hospitals (CAHs), those that choose to participate are not subject to the validation audit requirement.

In the fiscal year 2011 OPPS Final Rule, published in the November 24, 2010, Federal Register, CMS outlined the new validation audit procedures applicable to the update for federal FY2012. The audit methodology is similar to that in place for the FY2011 update, with some modifications intended to ease administrative burden. For example, hospitals with fewer than five cases in a quarter for a particular quality indicator are not required to report patient level data for that indicator. Hospitals with volumes exceeding a certain threshold for an indicator are permitted to sample cases and submit data for the sample rather than all applicable cases. The hospital is required to follow the sampling methodology and submission requirements as published in the Hospital Out Patient Department Specifications Manual at least three months in advance of the quarterly deadline.

In FY2011, the HOP QDRP permits CMS to randomly select 800 hospitals (approximately 20 percent of all participating PPS hospitals) for validation audits to confirm the data reported to OPPS Clinical Warehouse is accurate and reliable. (Click here to download the list.)

All hospitals that have elected to participate in the 2012 payment update are eligible for review. Per the rule, 800 hospitals will be randomly selected for the validation audit. In the past, the audit consisted of five cases per hospital in the OPPS Clinical Warehouse. CMS believes that a larger sample from only a percentage of hospitals would provide a representative sample of every type of hospital and increase the reliability of data, while reducing the burden of compliance for hospitals overall. This would improve CMS’ ability to project the finding across the entire provider base.

For each randomly selected hospital, CMS will randomly select 12 cases per quarter. CMS chose 48 cases as it is close to 50, the sample size considered adequate for a probe sample used to identify trending relationships. CMS believes this specified number of cases will provide increased reliability in estimating the validity of data submitted by the hospital. With each of these 48 cases, CMS will re-abstract the quality measure data elements and compare the results to information submitted by the hospital. The hospital must achieve a correlation of at least 75 percent for its data to be considered reliable and to receive the full 2012 OPPS payment update. If the hospital fails to meet the 75 percent threshold, it will be as though the hospital failed to report. Dates of service under review to validate the 2012 update are April 1, 2010, to March 31, 2011.

CMS’ interest is whether the information submitted by the hospitals is accurate and reliable in reflecting patient care given and documented in medical records. The agency is not interested in accuracy by measure or topic area, so the sample will not be stratified by indicator.

Once the data is requested by CMS, the hospital has 45 calendar days to submit the requested information. If the hospital fails to do so within the allotted time, it will receive a 2 percent reduction in its 2012 payment update factor. Note that this reduction will only affect the payment year audited.

There is a reconsideration process available to hospitals where audit results indicate failure to provide accurate and reliable data. Under this process, the hospital must submit a Reconsideration Request form (available here) to CMS by February 3, 2012. If the hospital is not satisfied with the result of the reconsideration decision, there also is an appeal process available.

If you are one of the 800 hospitals randomly selected and CMS requests data for a validation audit, it is in your best interest to comply. The extra effort required for the audit is well worth the opportunity to receive the full 2012 payment update.

If you have questions about this new reporting requirement, please contact your BKD advisor, or Sally Hardgrove at shardgrove@bkd.com.

M&A Activity Continuing to Gain Traction

From the start of the economic downturn in late 2008 through the majority of 2009, merger and acquisition (M&A) activity in the long-term care (LTC) market was hard to come by, and many of the sales that did take place were of the distressed variety. Similar to other industries, contributing factors to the LTC M&A slowdown included:

• Poor operating performance
• Reimbursement uncertainty
• Tight credit markets
• Sellers holding out for a better market

As the economy begins to piece itself back together and lenders carefully evaluate new loan opportunities, the LTC market is regaining its luster as an attractive investment in the competitive M&A market.

As illustrated in the graph below, 3Q 2010 represented the fifth consecutive quarter with a quarterly year-over-year increase in LTC deal volume. Although the market made significant gains in the second half of 2009, the continued gains seen throughout 2010 have been impressive. There were 68 LTC transactions reported during the first three quarters of 2010, compared to only 49 for the same period in 2009, representing a 39 percent increase. Furthermore, the dollar volume nearly tripled during the same time period to more than $2.1 billion. As we continue through the fourth quarter, it appears likely this growth will continue, as both buyers and sellers appear ready to take advantage of improving debt markets and low interest rates.

Source:  Irving Levin Associates, Inc.

In addition to the improving debt markets that have helped ease the bottleneck of deals, a number of other contributing factors should help spur continued M&A activity in the LTC sector, the largest of which may be the increasing cost of compliance. With the new requirements enacted through the Patient Protection and Affordable Care Act, skilled nursing facilities (and possibly assisted living facilities in the future) will see compliance costs rise. This in itself will be difficult for smaller independent facilities to absorb. As a result, to achieve economies of scale in increasing compliance costs, independent facilities will likely consider merging with larger regional or national chains at some point in the near future. Other factors contributing to increased activity include aging facilities, low interest rates, aging baby boomers and increasing valuations.

With the increased deal activity, there is a good chance cap rates will continue to decline and valuations will become stronger. As the “risk-free” rate remains relatively low with the sputtering economy, higher valuations and lower expected returns on investment may become more appropriate for an industry that’s performed relatively well throughout the recession.

In summary, with more regional and national LTC chains actively seeking acquisition targets, valuations continuing to improve, the cost of compliance rising and the number of baby boomers getting closer to retirement age, the LTC M&A market should continue to become increasingly active.

Public Comparables

Skilled Nursing

Assisted/Independent Living

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

• Although the skilled nursing and assisted/independent living public comparables indices saw capitalization rates rise 30 basis points and 40 basis points, respectively, from 2Q 2010 to 3Q 2010, the capitalization rates already have improved by 20 basis points for skilled nursing and 30 basis points for assisted/independent living during the first month of 4Q 2010.

• Publicly traded cap rates are still off their recent lows from 1Q 2010; however, the market’s improvement over the last few months is expected to continue through the remainder of 2010.

Recent Transaction Cap Rates (06/30/10)

Source:  NIC-Seniors Housing & Care Industry

Recent Select Transactions

Skilled Nursing

• October 2010 – Radius Management Services purchased six Massachusetts skilled nursing facilities (SNFs) from Health Care REIT. The properties total 837 skilled nursing beds and 27 assisted-living (AL) units that averaged an occupancy rate of 92 percent and sold for $88.5 million, or $102,500 per bed.
• September 2010 – Kindred Healthcare announced the acquisition of three nursing and rehabilitation centers with a total of 405 beds in the Dallas-Fort Worth market for $38 million, or approximately $93,800 per bed. Annualized revenues and EBITDA were $24 million and $3 million, respectively.
• September 2010 – Covenant Care purchased a 102-bed SNF in Iowa for $2.5 million, or $24,500 per bed. Revenues for the facility were approximately $3.4 million, and the facility operated just above break-even. The new ownership should be able to leverage its expertise to improve efficiency and return on this facility.

Assisted/Independent Living

• October 2010 – Wilkinson Group sold a Tennessee facility consisting of 59 assisted-living (AL) units, 42 independent living (IL) units and 15 memory care units to a Florida-based real estate investment company for $8.5 million, or $72,300 per unit. Revenue and EBITDA were approximately $3.5 million and $800,000, respectively, based on a 97 percent occupancy rate.
• September 2010 – Five Star Quality Care purchased a campus of three buildings (AL with 48 units, memory care with 27 units and IL with 35 units) in Wisconsin for $14.7 million, or approximately $133,600 per unit. Revenues and EBITDA for the facilities were approximately $4 million and $1.3 million, respectively. Overall occupancy on the campus was around 98 percent.
• September 2010 – MBK Senior Living acquired a 135-unit IL facility in Olympia, Washington. The purchase price of $16 million equates to a per-unit price of $118,500. Occupancy was approximately 85 percent at the time of the sale. MBK plans to convert up to 40 of the units to assisted living to improve occupancy statistics.

Health Care Reform Spurs Increase in M&A Activity

Since the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010 passed in mid-March, there have been 28 deals involving 57 hospitals for a combined total of $3.3 billion. Prior to this, only five deals had been announced in 2010, totaling $94.2 million, according to data from Irving Levin Associates, Inc. The suppressed level of activity in 2009 and beginning of 2010 clearly was a result of hospitals and investors waiting to gauge the new reform’s effect on operations. This legislation, and its impact on hospitals, will most likely cause a dramatic increase in the level of M&A activity for the remainder of 2010 and beyond.

Recommendations for Hospitals Considering a Sale, Merger or Acquisition

Most analysts expect a continued increase in the number of hospitals looking to sell, merge or reposition their facilities. Here are some key factors hospitals should consider when assessing their future:

Sale

• Be proactive – The sooner you can identify issues that need to be addressed, the better chance you have to receive full value for the facility.
• Accentuate your strengths – When the decision is made to sell, it is important to aggressively promote the positive attributes of the business.
• Keep an open mind – We are in unprecedented economic times, and the deal community recognizes this. What may have been “standard” deal terms in the past, may not be standard today.

Merger

• Verify common objectives – Make sure all parties agree on expectations, services, strategies and the future of the business.
• Consider all options – A merger is an important and difficult decision. Make sure all prospective partners have been considered.
• Determine new roles – It is vitally important to determine which entity will have a predominant role early in the negotiation process.

Acquisition

• Understand the big picture – Aside from the financial aspect of the transaction, make sure the nonfinancial areas have been addressed and the deal has been deemed an appropriate merger or acquisition.
• Thoroughly research the investment – Evaluate the short- and long-term possibilities of the acquisition to determine if the return on invested capital is adequate.
• Assess every detail – Deals are difficult, but bad deals can be fatal to an organization. Don’t be afraid to walk away.

National Health Expenditures

In 2009, despite difficult economic conditions in nearly all industries, national health expenditures (NHE) in the United States increased by 5.8 percent to $2.5 trillion. At this level, NHE totaled 17.3 percent of total gross domestic product (GDP), up from 16.2 percent in 2008. It also represents the largest single-year increase in several years. Looking forward, and as a result of the implementation of recent legislative and regulatory changes, the Centers for Medicare & Medicaid Services is projecting NHE to have an annual average growth rate of 6.3 percent for 2009–19. These increases will result in NHE totaling $4.5 trillion in 2019, representing 19.6 percent of GDP. The following chart summarizes NHE 2004–09, as well as the corresponding percentage of GDP.

Source:  Centers for Medicare & Medicaid Services, Office of the Actuary; 2009 represents estimated results

Public Hospital Systems – Historical Stock Performance

Below is a summary of stock performance for five of the largest hospital systems over the past four years. The first graph illustrates the percentage change compared to their stock price as of December 31, 2006. The second graph aggregates these public companies into an index based on market capitalizations and compares them to the S&P 500. As shown, the S&P has outperformed the index fairly consistently over this period, but as of September 30, 2010, the gap has closed.

Historical M&A Activity and Recent Transactions

Within the health care services industry in 2009, hospitals accounted for 14 percent of the overall M&A activity, with a total transaction volume of $1.6 billion. While this activity level has continued in 2010, the recent health care reform legislation has most experts believing that consolidation activity will increase dramatically within the hospital sector. It is believed the large 501(c)(3) hospitals and for-profit hospitals, including those backed by private equity, will lead this consolidation.

Below is a summary of M&A activity within the health care services industry over the past four years and preliminary results through June 2010. Also included is a summary of some of the larger hospital M&A deals that occurred in the second quarter of 2010, according to information from Irving Levin Associates.

Source:  Irving Levin Associates, Inc.

For more information on the health care market update, 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 financial institutions, health care, communications, defense, food processing, manufacturing, retail, software, technology, transportation and distribution. Member FINRA and SIPC.

As part of the health care reforms passed earlier this year, Congress created a new tax credit available to eligible small employers (ESEs) for nonelective contributions to purchase health insurance for their employees. The credit is available for taxable years beginning after 2009. For-profit companies as well as tax-exempt employers may be able to benefit from the credit starting with their 2010 tax returns.

Who Is an Eligible Small Employer?

To qualify for the credit, a taxpayer must meet the following criteria:

• Total number of full-time equivalent (FTE) employees is 25 or fewer. The number of FTE employees is calculated by dividing the total number of hours worked by both full-time and part-time employees by 2,080. The result is rounded down to the next whole number. If an employee works more than 2,080 hours, excess hours are excluded. Hours worked by seasonal workers are not included in the calculation unless the seasonal worker worked for the employer more than 120 days during the year. Hours worked by certain owner-employees, i.e., self-employed individuals, greater than 2 percent shareholders of an S corporation, 5 percent owners and employees related to owner-employees, also are excluded from the calculation. Based on how total FTEs are calculated, employers with more than 25 employees may still qualify as an ESE if a portion of the employees work part time or are excluded from the “employee” definition.
• Average annual wages of employees are $50,000 or less. Average annual wages are determined by dividing total wages paid to employees (not including wages paid to employees excluded from FTE calculation) by the number of FTEs. The result is rounded to the next lowest multiple of $1,000. For purposes of this credit, wages are defined the same way as for purposes of the Federal Insurance Contributions Act.
• The employer has a qualified health care arrangement in effect. For tax years 2010 through 2013, a qualified health care arrangement requires an employer to make nonelective contributions of at least 50 percent of the premium cost on behalf of each employee who enrolls in a qualified health plan offered by the employer. For tax years beginning after 2013, the arrangement must be through a state exchange. Under the health care reforms, each state is required to establish an exchange by January 1, 2014, to facilitate the purchase of qualified health plans. The IRS has provided transitional relief for tax years beginning in 2010 to make it easier for a health care arrangement to qualify. First, an employer that pays at least 50 percent of the premium for each employee enrolled in coverage is deemed to satisfy the qualifying arrangement requirement even if it pays a higher percentage of premiums for certain employees.  Second, the 50 percent premium requirement applies to the premium for single (employee-only) coverage. Therefore, if an employee is enrolled in more expensive family or self-plus-one coverage, the employer satisfies the 50 percent requirement if the amount it pays for the more expensive coverage is at least 50 percent of the single coverage premium.

For purposes of the above criteria, certain related taxpayers must be treated as a single employer. In other words, a taxpayer cannot circumvent the FTE and wage limitations through the use of multiple entities.

Calculation of Credit

For tax years 2010 through 2013, the maximum credit is equal to the lesser of 35 percent of contributions the ESE made on behalf of its employees during the year for qualifying health coverage or 35 percent of contributions the employer would have made during the year if each employee had enrolled in coverage with a small business benchmark premium. The benchmark premium is the average premium for the small group market on a state-by-state basis as determined by the Department of Health and Human Services. (Click here for the 2010 benchmark premiums.) For taxable years beginning after 2013, the maximum credit percentage increases to 50 percent but will be available only for two years and only for ESEs that purchase coverage through an insurance exchange.

The credit is reduced for ESEs with more than 10 employees or if average employee wages are more than $25,000. If total FTEs are more than 10, the credit is reduced by approximately 6.67 percent for each employee in excess of 10 and is fully phased out at 25 or more FTEs. If total average wages are more than $25,000, the credit is reduced by 4 percent for each $1,000 of average annual wage in excess of $25,000 and is fully phased out once average wages equal or exceed $50,000. For employers with both more than 10 FTEs and average wages greater than $25,000, the credit must be reduced by the sum of both phase-out amounts.

The amount of credit is calculated on Form 8941, Credit for Small Employer Health Insurance Premiums. The IRS has released a draft of the 2010 form.

The small employer health insurance credit is treated as a general business credit and can be used to offset income tax liability. Any unused credit can be carried back one year and forward 20 years. In addition, the health insurance credit can be used to offset alternative minimum tax liability.

Special Rules for Tax-Exempt Entities

While most tax-exempt entities do not pay any income tax, they may still benefit from the small employer health insurance credit by treating it as a refundable credit. To qualify, the exempt entity must meet the same criteria to be treated as an ESE and must be an organization described in Internal Revenue Code Section 501(c). Similar credit phase-out rules apply to exempt organizations. However, the credit is limited to 25 percent of contributions the ESE made on behalf of its employees for taxable years 2010 through 2013 and 35 percent for tax years after 2013. Further, the credit is limited to the total income and Medicare tax the employer is required to withhold from employee’s wages for the year and the employer share of Medicare tax on employees’ wages for the year.

Exempt organizations that qualify for the small employer health insurance credit will compute the credit on Form 8941 but will claim the credit by filing Form 990-T, Exempt Organization Business Income Tax Return. Form 990-T is used by exempt organizations to report and pay tax on unrelated business income. The IRS will revise Form 990-T for the 2011 filing season to enable exempt organizations to claim the small employer health insurance credit.

Conclusion

Determining whether your business qualifies as an ESE and calculating the allowable credit can be complex. In addition, accurate calculations will likely require the assistance of your payroll department. Businesses expecting to meet the ESE criteria should start making initial calculations to determine potential benefit. While the actual credit is not claimed until the income tax return is filed, businesses can recognize an immediate cash flow benefit by reducing quarterly estimated tax payments for the anticipated credit.

Additional information on the small employer health insurance credit, including examples and answers to frequently asked questions, can be found on the IRS website.

For more information on the small employer health insurance credit and assistance in calculating the credit, please contact your BKD advisor.