Hospitals need to evaluate break-even point for Medicare

May 11, 2010
iVantage Health

Medicare reimbursement levels force hospitals to improve

NEEDHAM, MASS. ” TM May 11, 2010 ” The Healthcare Management Council, Inc. (HMC) has found that current conditions demand hospitals consider the Medicare break-even point (BEP) as a key strategy for profitability.
Medicare is typically the single largest hospital payer by far, covering 45 percent to 65 percent of all inpatient costs. HMC research of 40 facilities revealed only 10 percent of them were profitable with Medicare, and 10 percent were on the cusp of Medicare profitability. The large majority of hospitals lost significant money on Medicare work. With the healthcare reform bill now law, hospitals face an even greater payment reduction risk. In light of this, HMC found its more successful clients proactively reevaluating their Medicare management and reimbursement strategies.

“Medicaid, the other major public funding mechanism for hospitals, in most states has negative margins, and that’s not likely to change in the foreseeable future,” says John Whittlesey, principal at HMC. “With that in mind, facilities must find a way to reach a financial BEP with their Medicare patients. Resetting your facility’s “water table’ by even just a few percentage points can mean the difference between thriving versus merely surviving. Achieving a Medicare BEP as an organizational strategy will shift the cost position for the rest of the payers, and make overall profitability more secure,” he says.

Currently, there are a growing number of Medicare cases risking denied reimbursement because of hospital acquired conditions (HACs), such as decubitis ulcers. Additionally, it’s likely the government will establish benchmarks for quality-based performance in healthcare, with the potential for additional financial incentives and punishments alike. Addressing the issues around cost, resource utilization, process flow, and quality for all patients will provide a strategic advantage.

“HMC has been highlighting this concept for the past couple of years,” says Whittlesey. “We see focusing on better management of physician utilization and the reduction of off-quality events as major opportunities for real cost savings in the future.”

Given these factors, three of HMC’s more cutting-edge clients are actively pursuing a Medicare BEP strategy as part of their overall financial plans, he says. Senior management in each facility sees it as a key component to long-term financial viability. Whittlesey notes how some clients are more focused on how muchTM their total cost structure has to change beyond just Medicare, as well.

“Breaking even on Medicare is just a pointer towards how toTM target their cost management efforts across the board,”TM says Whittlesey.

Managers: Think about nursing levels, margins, and supplies

In general, facilities that are profitable on Medicare have slightly more aggressive cost positions, particularly in supplies and ancillaries. Recently, HMC used its proprietary data to create a benchmark to see which hospitals were profitable on Medicare patients. One client used this data to see how it compared against its standard benchmark analysis for each of its five facilities. Overall, reaching the client’s Medicare break even required a 16 percent more aggressive improvement plan target, a significant ratchet up. Three of its facilities showed 15 percent, 28 percent, and 49 percent higher excess. Two of its facilities were 5 percent and 9 percent lower in cited savings.

HMC also made discoveries administrators can use to improve performance in the following areas:

  • Margin requirements.TM Many organizations would benefit significantly from achieving a 5 percent reduction in inpatient cost position. Hospitals typically view a 5 percent margin as healthy, making that a worthwhile goal to attain.
  • Nursing levels. HMC found that nursing levels didn’t vary much for Medicare BEP facilities versus others, while overhead and support functions were mixed.
  • Supplies and ancillary functions. In this category, HMC found much greater differences in BEP facilities when compared with other hospitals. This indicates that those hospitals with stronger Medicare cost positions also demonstrate leaner and more efficient clinical resource utilization.