Categories
Hospital Finances Inpatient Practice

Avoiding The “Observation Status” Trap For Surgical Admissions

Some surgical procedures require a patient to be in what is called “inpatient status” or else Medicare will not pay for the surgery. These are so-called Medicare inpatient only procedures. But Medicare specifies that many other surgeries can only be done as an outpatient, unless there are extenuating circumstances. In my last post, I discussed how surgeries done as an outpatient or “observation status” result in the cost of hospitalization being transferred to the patient rather than being paid for by Medicare or insurance companies. The differences are summarized in the table below:

From this table, you can see that Medicare (or the commercial insurance company) is highly motivated to have patients classified as being in outpatient or observation status since Medicare will not have to cover as much of the cost of hospitalization. Instead, either the patient has to cover the rest of the costs or the hospital just does not get paid for those costs. For surgical procedures such as a knee replacement, this has enormous implications for the patient: first, the patient is going to have a huge out of pocket cost and second, the patient is not able to go to a nursing facility for rehabilitation after the surgery. Knee replacement surgery was considered an inpatient surgical procedure in the past but now, it is considered an outpatient procedure unless there are other conditions that would require it to be done as an inpatient.

For patients who are otherwise healthy, it is very possible for the knee replacement to be done as an outpatient with perhaps a 1-night stay in the hospital for observation. These patients will have to pay more out of pocket but can still be cared for safely without being formally admitted to the hospital. But for other patients, particularly those with compounding medical conditions, it is unsafe to perform knee replacement as an outpatient and instead, these patients should be admitted to the hospital. The problem is that Medicare requires the decision about whether the surgery will be done as an outpatient or inpatient procedure to be made before the surgery, or at the latest, before the patient leaves the operating room. And if the surgeon decides that the surgery needs to be done as an inpatient and then Medicare audits the patient’s medical record after the fact and determines that the surgery could have been done as an outpatient, then Medicare can deny the charges and the hospital takes a huge financial loss on that surgery. In order to justify a surgery being done as an inpatient versus an outpatient, the surgeon and the hospital have two layers of defense: (1) the pre-admission testing evaluation and (2) the hospital’s “physician advisors”.

The pre-admission testing evaluation is typically done by an internist or anesthesiologist. Increasingly, nurse practitioners or physician assistants are employed in this setting, generally with back-up by a physician. Patients are sent to the pre-admission testing area after the decision to perform a surgery (such as a knee replacement) so that all of the patient’s medical conditions can be identified and post-operative complications can be anticipated. Some medical problems will be determined to be “optimized” and not pose a barrier to doing surgery, other medical problems will be determined to require subspecialty consultation for optimization before surgery, and other medical problems may be determined to be dangerous enough that surgery cannot be safely performed. This preoperative medical evaluation is beneficial to the surgeon who is often not trained or as experienced in the management of complex chronic medical conditions and is beneficial to the patient by making their care safer. During the pre-admission testing process, medical conditions may be identified that would make performing the surgery as an outpatient unsafe and documenting these co-morbid conditions can justify doing the surgery as an inpatient. Some of the more important to identify include:

  1. Known or suspected obstructive sleep apnea. These patients can develop worsened apnea after surgery due to the effects of opioid medications used to control post-operative pain. In some situations, this can be life-threatening. These patients often need to stay in the hospital for more than just one night for telemetry and/or oxygen saturation monitoring while sleeping. Often they may also require non-invasive ventilation (eg, BiPAP) in the post-operative period.
  2. Heart failure. These patients can worsen due to the effects of intravenous fluids used during surgery and anesthesia and often need titration of diuretics in the post-operative period requiring them to be in the hospital for more than 1 night.
  3. COPD. There are several reasons why patients with chronic obstructive pulmonary disease may need to spend more than 1 night in the hospital after surgery: they may require additional bronchodilators due to post-operative bronchospasm, they may require “pulmonary toilet” and incentive spirometry by a respiratory therapist, and they can develop potentially life-threatening carbon dioxide retention from opioid medications used to control post-operative pain.
  4. Diabetes. If a patient has difficult to control diabetes (for example, a pre-operative hemoglobin A1C of > 8.5) or requires insulin to control their diabetes, there can be wide swings in their blood sugar levels post-operatively due to going all day without eating on the day of surgery, having nausea/vomiting after surgery, or having their blood sugars fluctuate due to the physiologic stress of the surgery.
  5. Morbid obesity. These patients often have reduced mobility and may require additional physical therapy before they can be safely discharged home.
  6. Old age. Older patients are often more susceptible to medications and need lower doses and more careful dose titration after surgery. This can often require additional days in the hospital. There is not a fixed age before which the risk is low and above which the risk suddenly goes up but a 90-year old is at higher risk than an 80-year old who in turn is at higher risk than a 70-year old.
  7. Chronic kidney disease. These patients can require longer hospitalization because medication doses may need to be more carefully adjusted, they are more prone to fluid retention from the fluids given during surgery, and they are at higher risk of their kidney function worsening due to surgery or medications. This is especially true for patients on dialysis.
  8. Chronic liver disease. These patients are analogous to the patients with chronic kidney disease.
  9. Previous complications from anesthesia. If patients had post-operative complications from anesthesia in the past, they are at risk for having them in the future and this can result in longer hospital stays.
  10. Risks for excessive bleeding. This could be because of the requirement for long-term anticoagulation or because the patient has a disease that results in easy bleeding.
  11. Anemia. Even the best surgeon will have some blood loss during surgery and if a patient has baseline anemia, then they are at higher risk for requiring post-operative blood transfusion which can prolong the hospital stay. Anemia is an independent risk factor for re-admission to the hospital.
  12. Infection. If there is pre-existing infection (such as an infected joint), then the patient may require additional time in the hospital in order to receive antibiotics and to ensure that sepsis does not develop.
  13. Cognitive dysfunction. Patients with previous stroke, a history of “sundowning” when in the hospital, dementia, or other causes of impaired memory are more likely to have worsening of their memory problems after anesthesia and after medications used to control post-operative pain. Premature discharge to home can put the patient at risk of harm if their mental function is not given sufficient time to return to baseline.
  14. Fall risk. Patients with neuromuscular disease, vertigo, visual impairment, or significant arthritis in other joints often require additional physical therapy before they can be safely discharged home.
  15. Inadequate social support. Patients who live alone or in a residence where navigating stairs on a daily basis is necessary also often need additional physical therapy before they can be safely discharged home.

Before the hospital sends the final bill to Medicare for a surgery, such as a knee replacement, the hospital will want an additional level of assurance that the patient did, in fact, need to be an inpatient rather than an outpatient. This is especially true if the order for inpatient admission was made at the time of the surgery but the patient ended up only spending 1 night in the hospital post-operatively. These 1-night inpatient hospital stays are a red flag for Medicare auditors and they are at high risk of being subsequently denied by Medicare, resulting in a huge financial loss for the hospital. This is where the role of the “physician advisor” comes in. The physician advisor will typically review the chart either after the surgery but before the patient is discharged or (more commonly) after the patient is discharged. The physician advisor then becomes a (theoretically) impartial third party who can confirm that the patient did indeed need to be an inpatient. The physician advisor then reports back to the hospital billing department (and usually also to the surgeon) whether he/she agrees with the inpatient designation. In event of a Medicare audit, the documentation by the physician advisor can help the hospital defend the decision to make the patient an inpatient rather than being in outpatient or observation status. As a physician advisor myself, here are some of the things I look for:

  1. Were there pre-operative conditions that would require the surgeon to anticipate that the patient would likely need to be an inpatient? This equates to the anticipation that the patient would need to be in the hospital for at least 2 nights after surgery. The two places to most easily find this documentation is in the surgeon’s history and physical examination or in the pre-admission testing evaluation. Often the pre-admission testing evaluation will have additional details about the co-existent medical problems that can help to justify inpatient status for the surgical procedure.
  2. Were there complications at the time of surgery that would have required the patient to be an inpatient? This could take the form of intraoperative cardiac arrhythmia, witnessed sleep apnea that was previously not diagnosed, excessive bleeding, etc. The surgeon’s operative note and the anesthesiologist’s note often have this type of documentation.
  3. Did the patient recover more quickly than expected? In a presentation by our Medicare carrier’s Medical Director, the phrase that we, as physician advisors, were told to use in this situation is: “The patient had unexpectedly rapid recovery”. This is particularly relevant to those patients who had an inpatient order but only spent 1 night in the hospital after surgery. In the opinion documented by the physician advisor for the hospital’s billing office, this phrase is a key component.

Outpatient knee replacement surgery can create a lot of unhappiness. The patient is unhappy because he/she has to pay a lot more out of pocket. The hospital is unhappy because they won’t get paid as much. The patient may be unhappy because he/she is not able to go to a SNF for additional rehabilitation after hospitalization. And the surgeon is unhappy because his/her patient is unhappy.

The strategy to avoid all of this unhappiness is to appropriately designate those patients as being inpatient who justifiably should have their surgery performed as an inpatient. Although this adds additional layers of administrative cost and additional pre-operative consultation visits, it can be worth it to the patient, the surgeon, and the hospital.

June 8, 2018

Categories
Hospital Finances Medical Economics

How Many Days Cash On Hand Should A Hospital Have?

When a hospital runs a positive margin and makes money at the end of the year, everyone wants some of it – hire more doctors, hire more nurses, buy a new MRI machine, build a new hospital wing. It can be tempting to spend it all but should you? Liquidity is survival insurance for a hospital and it is essential to hold some money back. Every individual person should have an “emergency fund” with 2-6 months of expenses held in a checking/savings/money market account, and so should hospitals. These cash reserves are called “days cash on hand” and represent the amount of money it takes to pay all of the hospital’s expenses for that number of days.

A few year ago, Dr. Charles V. (Bo) Sanders gave a presentation at the annual Association of Professors of Medicine meeting that I was attending. He is the Chairman of the Department of Medicine at LSU School of Medicine in New Orleans and was describing the effect of Hurricane Katrina on the hospital and his department. Katrina flooded Charity Hospital which then closed, displacing most of the doctors in his department. With limited cash reserves, the hospital could not pay physician salaries and many of the doctors and nurses moved on. The hospital essentially died and was never able to reopen.

Charity Hospital is just one example of why a hospital needs to have sufficient days cash on hand but there are many things other than hurricanes that can temporarily close a hospital and require it to draw from cash reserves to cover payroll so that all of the employees don’t leave. Fire, flood, lapse of malpractice insurance coverage, prolonged power outage, unpredictable admission rates, you can think of a dozen other reasons that a hospital might have to reduce or close operations for a day, a week, a month, or longer.

In 2011, Moody’s Investors Service reported on the financial statements of 400 hospitals in their database. The overall median number of days cash on hand was 165 with a mean of 183. The range was from 11 days to 521 days. A 2013 analysis of critical access hospitals reported a median of 68 days. More recently, in 2015, Moody’s reported that the average for 350 hospitals and health systems had increased to 212 days. A 2014  Fitch Ratings report of nonprofit hospital and healthcare systems found that the credit rating of the hospital correlated with the number of days cash on hand with the “AA” hospitals having 289 days cash on hand and hospitals having a “BBB” rating only having 161 days cash on hand. A 2016 report by S&P Global Ratings indicated that “AA+” hospitals had 420 days cash on hand whereas “BBB+” hospitals had 149 days cash on hand; speculative grade hospitals (those that finance with “junk bonds”) had only 74 days cash on hand. The implication is that if your days cash on hand is high, the hospital’s credit rating is high and consequently, the hospital can get a better interest rate on bonds to do expansion, etc. In other words, more cash on hand equates to lower interest rates for loans.

From this analysis, it appears that the number of days cash on hand that is held by hospitals appears to be increasing over the past decade. I believe that there are at least three reasons. (1) The economic recovery since the great recession has led to overall better financial positions of U.S. hospitals. (2) Medicaid expansion (by those states that elected to participate) has led to a reduction in uninsured patients and this translates to improved margins. (3) Better analytics that are attendant to electronic medical records, better inventory management programs, and improved staffing programs has resulted in better hospital operational efficiency as well as better hospital billing efficiency.

There are a number of factors that can influence the ideal number of days cash on hand for any given hospital:

  1. Geographic location. Hospitals in areas vulnerable to natural disasters are themselves vulnerable to unexpected closings. For example, hospitals in low-lying coastal cities are vulnerable to flooding – Charity Hospital is an example of this. Other geographic vulnerabilities include susceptibility to regional wildfires, tornados, and earth quakes.
  2. Centralized versus decentralized. A hospital system built around a single large hospital (standalone hospital) is more vulnerable to closing operations than a hospital system with multiple buildings in different locations in the region. For example, if a water line breaks and floods the operating rooms taking them out of commission for 3 months to renovate, the centralized hospital will have no place to perform surgeries whereas the decentralized hospital system can redirect surgeries to alternative locations. The S&P bond rating analysis confirms this and indicates that standalone hospitals that had a “AA” bond rating had 100 more days cash on hand than decentralized health systems.
  3. Need for borrowed money. A hospital that is planning a $750 million expansion is going to need to borrow money by selling bonds. The current interest rate on a 20-year AAA rated municipal bond is 3.00% whereas an A rated bond is 3.50%. That is a $3.75 million dollar per year difference and over the course of the bond, a total of $75 million dollars additional cost for just that slight increase in the interest rate on the bond. For a “B” rated hospital, the difference in the interest rate that they can get on a bond can be even more, up to a full 1% higher. A hospital with a higher number of days cash on hand will be able to get a better bond rating.
  4. Need to pay off borrowed money. Most hospitals will have both cash and loans. If those loans were taken out at relatively high interest rates, then it may be more desirable to pay them off using the hospital’s cash. This can reduce the number of days cash on hand but can strengthen the hospital’s long-term financial position.
  5. Competitiveness of the regional health insurance market. When hospitals negotiate rates with commercial health insurance companies, one of their greatest leverage points is the ability to walk away from the table. By that I mean, the ability to tell the insurance company that if they won’t give the hospital the reimbursement rates that the hospital wants, the hospital will stop taking patients covered by that insurance company. If that hospital is the only hospital in a 50-mile radius, then they have a  pretty good bargaining position because the insurance company can’t easily send their patients to another hospital. On the other hand, if there are a number of other hospitals in the community, then the hospital has less leverage because the insurance company can simply redirect its insured patients to another hospital in town. If such a hospital has relatively few days cash on hand, then the commercial insurance company will know that the hospital really has no bargaining position since they don’t have the resources to survive a sudden drop in admissions if the insurance company sends them all to a competitor hospital. On the other hand, if such a hospital has a lot of days cash on hand, the threat of walking away from the table is much more real and that stronger negotiating position is more likely to translate into higher reimbursement rates from the insurance company. Thus, a hospital in a region with other competing hospitals needs to have more days cash on hand in order to effectively compete for the best insurance reimbursement rates.
  6. Anticipated large capital purchases. Hospitals will not generally sell bonds for purchases such as a new electronic medical record but these can be quite costly and are better paid for out cash. If the hospital plans on buying a new EMR or some other large-priced purchase in the next few years, then it it best to increase the days cash on hand in anticipation of that purchase.
  7. Admission fluctuation. Our hospital in Central Ohio has a fairly consistent number of admissions per month; it tends to go up during the influenza season but otherwise is fairly constant. On the other hand, a hospital in a ski resort community in Colorado may see a significant rise in admissions in the winter whereas a hospital in the Outer Banks of North Carolina may see a significant rise in admissions in the summer. Hospitals with greater fluctuation in admissions and ambulatory visits will need to have more days cash on hand than those with very predictable admissions and visits.
  8. Medicaid expansion. Between 2010 and 2018, 83 U.S. hospitals went out of business. The overwhelming majority of these were in states that did not expand Medicaid under the Affordable Care Act. In all, 19 states did not expand Medicaid and 63 of the hospitals that closed were in these states. That means that 76% of all hospitals that closed were in these states. Six of these states had more than 5 hospitals close: Alabama (5), Mississippi (5), North Carolina (5), Georgia (6), Tennessee (8), and Texas (14). Hospitals in states that did not participate in medicaid expansion have been faced with higher numbers of uninsured patients and are at a competitive disadvantage to hospitals that did expand Medicaid. Having a larger number of days cash on hand is desirable for hospitals in states that did not expand Medicaid.
  9. Donor attractiveness. Wealthy donors are wealthy because they have a lot of financial sophistication. Donors will often examine the financial viability of a hospital before committing large endowments: why donate to a hospital that is on the verge of going out of business? More days cash on hand is one way of demonstrating the hospital’s financial solvency and stewardship. More days cash on hand can translate to larger endowments from wealthy donors.

Although having a large number of days cash on hand sounds good, too high of a number can be bad. For example, it may be better to invest that money in a better-paying investment, for example expanding the hospital’s primary care base by hiring additional primary care physicians. Or, if the hospital’s quality metrics are below average, it is better to spend additional money to improve patient satisfaction, decrease hospital readmissions, or improve the infection control efforts. For public hospitals that are owned by the city, county, or state, having too high a number of days cash on hand can create a perception to lawmakers and the public that the hospital is hoarding the public’s money.

So, what is the best number of days cash on hand? From this post, it should be clear that there is not a single best number for all hospitals. I’d start with a number of about 300 for standalone hospitals and about 250 for hospital systems. Then move that number up or down depending on all of the variables mentioned above. For a decentralized health system in a Medicaid expansion state that does not have excessive natural disaster risk and does not anticipate purchasing large amounts of bonds, 130 days may be plenty. On the other hand, a centralized standalone hospital in a competitive market in a state that did not participate in Medicaid expansion and is at risk of natural disasters and also plans on a major building expansion requiring bond sales, 400 days may be more desirable.

The number of days cash on hand is something that physicians rarely think about and almost never incorporate in their decision-making about whether to take a job at a hospital. But I think that physicians should take notice of this number and if it is too low, ask the hospital administrators why it is low. If you can’t get a good answer, think long and hard about whether that hospital represents a risky career choice.

May 5, 2018

Categories
Hospital Finances Physician Finances

How To Write A Pro Forma For A Doctor

When a medical practice wants to hire a new physician, they will often turn to the hospital to ask for financial support. The hospital gets lots of these kind of requests – more than they can afford to pay for. For the medical practice to get what it wants, you have to know what the hospital wants and how to write a compelling pro forma. You want to show that the hospital’s investment will bear fruit over the next several years.

The pro forma is a statement of projected income and expense for a new physician, service line, or piece of equipment. What the hospital is going to want to see is:

  1. Will the new physician bring new business to the hospital?
  2. Is the new physician needed to provide necessary services that would falter without the new physician?
  3. What type of ramp-up period will the physician require in order to be maximally productive?

To create the compelling pro forma, there are a couple of caveats. First, be concise. If the pro forma is longer than 1 or 2 pages, it is not going to be read in detail. Second, don’t make it excessively technical. The hospital chief financial officer and executive director are usually not physicians and even though they will be knowledgable about medical issues, you need to be sure that you are writing the pro forma using words that they will understand. Third, be realistic in your projections. The people who run the business of a hospital are used to over-exaggerated claims of future programs and if they find you are overestimating income in one section, they won’t believe anything in the entire proposal. Fourth, don’t make your reader have to work to figure out what you are trying to say. Be sure that your sections and tables are clearly labeled so that even with just a brief glance, someone can find the information that they want and understand exactly what you are saying.

To create the compelling pro forma, break it into 5 sections (in order): introduction, revenue, costs, hospital support needed and summary. Your goal is to “Tell them what you are going to tell them, tell it to them, then tell them what you just told them”. The introduction is telling them what you are going to tell them; the revenue, cost, and hospital support needed is what you are telling them; and the summary is telling them what you just told them.

Introduction. Concisely say why this physician or position is needed in your hospital and what the net value will be of the physician/position. Notice that I used value and not profit. Although the hospital is going to be interested in increasing income, sometimes the value is in other measures, such as length of stay, patient satisfaction, mortality, or public relations. The value will depend on the particular specialty and circumstance. For example, the value of a joint replacement surgeon will be in improving lucrative elective inpatient surgical admissions but the value of a palliative care physician will be in improving patient satisfaction and length of stay. The introduction should be short – no more than 2-3 sentences – just enough to remind the reader why this particular physician/position is important.

Revenue. As a person who reads a lot of pro formas, I like to have revenue up front before expense in most situations. This allows me to see financial value to set the stage before I hear about how much it will cost me. Most revenue projections should extend for 3-5 years, depending on the specialty. Physicians who require a longer ramp-up time to get fully busy need a 5-year projection (for example, a urologist straight out of residency who will need to build a referral base and start of with longer OR times per surgical case). On the other hand, a physician who will be busy from the first day of work may only need a 3-year projection (for example, an experienced radiologist who will only need a year or two to hit peak operational efficiency after he/she gets used to the workflow in your hospital). If you can base projected revenue off that of an existing physician, this will improve the perception of validity of the compelling pro forma because you have an internal precedent.

The best medium of exchange to use in revenue projections is the RVU. For some specialties, it may be the work RUV and in others, it may be the total RVU. For example, if the physician will be hiring his/her own office staff, paying for a billing company, and renting office space, then the total RVU is probably better. On the other hand, if the physician will be using hospital staff for scheduling, having the hospital do the billing, and using office space provided by the hospital, then the work RVU is probably better.

Next, you’ll need to project how much, on average, the doctor will get paid per RVU. If there is a physician in a similar practice in the hospital, then you can use his/her payer mix to come up with an average number of dollars per RVU to expect. Start with Medicare reimbursement per RVU – currently about $38/RVU. Adjust that number up if the doctor will be seeing patients who have higher paying private insurance and adjust that number down if the doctor will be seeing Medicaid or uninsured patients.

Lastly, project the number of patients the doctor will be seeing on a typical workday and then determine how many workdays that doctor will be working per year. Don’t forget to factor in vacations (usually 2-4 weeks per year, depending on the practice), CME time (up to 1 week per year), and holidays (there are typically 10 holidays per year but most years, at least 2 of those days fall on a weekend so 8 days is a good number to use). Also, don’t forget to factor in weekends which will vary from specialty to specialty. A general surgeon who working a weekend will usually have relatively little new income generated on that weekend since he/she will only be doing emergency add-on surgeries and their inpatient rounding will be on patients who they are already billing a global surgical fee for the entire hospital stay. On the other hand, a critical care physician will be generating just as much new revenue on a Sunday as he/she will on a Monday. In an academic medical center, not accurately accounting for weekends is one of the most important reasons why a physician’s actual financial performance ends up looking a lot different than was projected in the original pro forma. As an example, take 2 physicians in the same specialty, one has 33% clinical time (15 weeks of inpatient care) and one has 100% clinical time (45 weeks of inpatient care [after accounting for 7 weeks of vacation, CME, & holidays]). If weekend call is split equally among all physicians resulting in both physicians taking one weekend per month rounding on the inpatient service, then the physician with 33% clinical time will have a lot more than 30% of the number of RVUs as the 100% clinical time physician at the end of the year – in fact, it will be 40%, making it look like the 33% clinical FTE physician is knocking it out of the proverbial RVU park. If we assume that a physician generates 36 RVUs per day then:

Expense. Only include those expenses that are reasonable but make sure that you list all of the reasonable expenses. It is important to be consistent. If you are asking the hospital to subsidize a physician’s salary, then don’t include expenses for cell phones, journal subscriptions, and gas mileage for driving from the office to the hospital – unless the hospital covers those expenses for all physicians. Here are the expenses that I believe are reasonable:

  1. Salary
  2. Benefits
  3. Shift differential (eg, additional pay for doing night shifts)
  4. Malpractice premiums
  5. Cost of trainees (in many institutions, attending physicians have to pay for a portion of fellow salaries)
  6. “Taxes”, including Dean’s taxes and departmental taxes
  7. Business expenses including billing, compliance, legal, etc.
  8. Rent
  9. Office expenses (staff, equipment, supplies, answering service, electronic medical record, etc.)

This is where using the total RVU versus the work RVU as a basis for the income analysis becomes important – if the physician will personally be incurring all 9 of these expenses, then use the total RVU. On the other hand, if the physician only needs to cover his/her salary and benefits (and the hospital pays for everything else), then use the work RVU. If the physician will be covering salary, benefits, and malpractice, then use the work RVU + malpractice RVU. If you use the wrong number (eg, use the total RVU when you should be using the work RVU), then the hospital leadership will think that you are either dumb or devious – either way, they are not going to believe anything you tell them in the future.

Hospital support needed. This is the bottom line of what you are asking the hospital to pay to subsidize this particular physician. In its simplest form, this is the anticipated expense minus the anticipated revenue for each year. This will typically be highest in the first year out and then drop each subsequent year. For some specialties, it will eventually reach zero, if it is anticipated that the physician will eventually be self-sustaining once his/her practice matures. For some specialties (such as palliative medicine and hospitalists), hospital support will always be necessary, albeit at a lower amount than the first year of practice.

Summary. The hospital business leader has just spent 5 or 10 minutes scrutinizing your numbers to be sure that they are accurate and that you are not trying to take advantage of the hospital and then checking your work to be sure that the amount of dollars that the hospital is being asked to come up with is correct. In the summary section, you need to bring them back from their left-brain accounting mindset to their right-brain strategy mindset by reminding them why this particular physician brings net value to the organization. It will be similar to the introduction section but try to make it short: 1 or 2 sentences.

Your first pro forma will not be your last pro forma so it is important that you get it right the first time. If you do, then you will get the reputation as a fair and realistic planner so that when you submit your next pro forma, they will see you as a trustful partner rather than a deceitful adversary.

July 22, 2017

Categories
Hospital Finances Medical Education Physician Finances

The Conundrum Of Academic Release Time

It is that time of the year when department chairs and division directors come to the hospital administration asking for financial support for the upcoming year. Few specialties can be self-sufficient in an academic medical center so the hospital has to provide some amount of money to ensure that there is adequate physician staffing. Inherent in being an academic physician is the premise that you are not going to be seeing as many patients or doing as many surgeries as your colleagues in private practice because you are going to be spending part of your time doing academic activities: teaching, writing papers, developing a focused area of clinical expertise, and doing research. You also commit to directing part of your income to the college of medicine (“dean’s tax”) and the department/division (“academic expense”). For this, you are willing to make a little less than your private practice counterpart, but not too much less. Thus, the need for the subsidies from the hospital.

But the hospital wants to know that there is some value in the these subsidies. By and large, the funds are ultimately used for “academic release time”, that is the time that the physician spends doing those activities that are important to the academic mission of the medical center but are otherwise unfunded. Back in the 1980’s, unfunded academic release time was typically about 40% for a newly hired physician: the physician would do 6 months of inpatient service and see patients for a half-day in the clinic. By the 2000’s, that had dropped to about 20% and now 10-15% is more common for new physicians.

The problem with academic release time, is that if everyone gets it, it can become an entitlement and then it becomes next to impossible to take away without organizational disruption. So, our challenge is to find a way to ensure that physicians are accountable for that otherwise unfunded academic time that they have. In order to figure out how we can do that, lets start with a look at how several specialties in our medical center deal with unfunded academic time. For the purposes of simplicity, I am going to use “department” to mean either department or division.

Department #1. All physicians start at 100% clinical full time and then after they are practicing for months or years, they come up with specific proposals to acquire academic release time. These could include doing a hospital quality project, chairing a hospital/college committee, doing a clinical research study, taking on an administrative position, etc. The physician continues to get that academic release time as long as he/she continues to perform that particular non-clinical activity.

  • The problem: many of these physicians never have the initial time investment to get any kind of academic activities off the ground and so after several years, they often move to private practice jobs since there is nothing tethering them to the university.

Department #2. All physicians get some percentage of academic release time that is negotiated individually at the time of their initial appointment. The percentage varies from 10% to 20%. The purpose is to teach and obtain research funding. At this time, however, none of the physicians except the chair have research grants.

  • The problem: there is a lot of “release time envy” by those physicians who only negotiated 10% release time versus those with 15% or 20% release time since those with more release time are seen as having to work less but getting paid the same as those who have less release time.

Department #3. All physicians get 20% academic release time and that is maintained in perpetuity, regardless of what they do during that time. There is an annual review process with the chair and those physicians who lack any academic productivity are directed by the chair to do more.

  • The problem: in theory, this academic productivity would be tied to physician bonuses but the department has not had any money to give bonuses for 15 years. Therefore, there is little incentive for the physicians to do anything productive for 20% of their time.

Department #4. All physicians get 10% academic release time at the time of their initial appointment. If they don’t have any academic output to show for after 3-4 years, then their release time is eliminated and they become 100% clinical.

  • The problem: once you go 100% clinical, you can never go back. Eventually, a private practice job across town that will pay you more for the same amount of work looks pretty inviting.

Department #5. All physicians get 20% academic release time but they are expected to produce work RVUs at the 75th percentile of national benchmark during the 80% of their time that they are doing clinical activities. In this way, the physicians self-fund their own 20% academic release time.

  • The problem: you are really deceiving yourself by making yourself be way more productive than the average physician 4 days of the week so that you can have the 5th day to do academic stuff. The reality is that most physicians work at a pace of average productivity so inevitably, they end up doing clinical work on that 5th day to catch up. In other words, the physicians coast for 1 day to make up for sprinting the other 4 days. What you are in reality doing is asking the physicians to have average productivity 100% of the time; you are just wrapping it up differently.

Department #6. All physicians get 20% academic time. If a physician gets a paid administrative or teaching position, that 20% of time is eliminated.

  • The problem: you reward those physicians who do not take on administrative or teaching roles. Those physicians who do take on a paid administrative role have to do more work than everyone else and get paid the same. You discourage anyone from volunteering to take on paid teaching and administrative roles and you encourage your doctors to not do anything that might ultimately improve care within the hospital or bring academic notoriety to the college of medicine.

So what is the answer? Ultimately, what the academic medical center wants are those activities that bring research grant dollars, result in journal articles with the institution’s name on them, create teachers who attract the best medical students & residents, generate clinical expertise that attracts patient referrals, create an environment of high-quality clinical care, and result in efficient clinical care with a positive financial margin. What the doctors want is enough time to do academically creative things that will help them achieve whatever they define as an academically success for themselves. Here are two proposals:

Model #1:

This is essentially what department #1 does above. Namely, all new physicians start out at 100% clinical and then submit specific proposals to “buy down” academic release time. The goal would be for most physicians to buy down 15% academic release time by their 4th year of practice. Because there is not enough money in the system to pay for every single physician to have 15% non-clinical time, there would have to be some way of adjudicating the proposals to cull out those that do not provide institutional value or that have a low chance of success. This model works best for physicians who do shift work where it is relatively easy for them to flex up or down in the number of shifts that they do since they are relatively interchangeable with one another. Examples include hospitalists, anesthesiologists, and emergency medicine physicians.

Model #2:

This is a variation on the “ramp up” period that many surgeons have in their initial contract with the assumption that as they build experience and a build a referral base in their first 5 years of practice, they are more able to support their own salary so that they need a lot of hospital support their first year in practice but need progressively less each subsequent year. So, in model #2, a typical clinical-track physician faculty member would get 20% unfunded academic time in their first 2 years, 15% unfunded academic time in their third and fourth years, and then 10% unfunded academic time in their fifth and sixth year. The physician could maintain their 20% unfunded academic time after their second year by demonstrating that they have been good steward of that time by producing publications, obtaining grants, doing a lot of unpaid teaching activities, etc. After year six, a physician who has no academic output would be moved to a 100% clinical role. This model works best for physicians who are office-based or who rely on an individual referral base since increasing non-clinical release time after they have become established can be disruptive to patients by transferring his/her patients to other physicians in order to reduce the physician’s outpatient patient panel or by refusing some patients referred specifically to that physician. Examples include primary care physicians, surgical sub-specialists, and outpatient consultative specialists.

Ultimately, unfunded academic time should be used as an investment in junior physicians with the potential to become academically productive and to support those physicians who are doing academic or clinically unique activities that are vital to the success of the institution but that are otherwise unfunded. It is up to us to ensure that this unfunded time does not simply become an entitlement that allows the physicians to leave work at 2:00 on Friday afternoons or do fewer surgeries per week, just because they have an academic title in front of their name.

April 9, 2017

Categories
Hospital Finances Inpatient Practice

So, How Should You Pay Hospitalists?

Hospital’s priorities are usually not aligned with how we pay hospitalists. In fact, the two are often in direct conflict with each other. In my last post, I argued that the RVU is not the best measure of productivity for a hospitalist. In this post, I have some ideas of how hospitals can align hospital priorities with the hospitalist’s income.

CMI-Adjusted Census

The first thing we need to do is to get away from the model of a rigid census cap/expectation per hospitalist. In a previous post, I discussed why the work required to take care of 15 patients at one hospital does not equal the amount of work required to take care of 15 patients at another hospital. In fact, a census of 15 patients on one floor of any given hospital is not the same as 15 patients on another floor. Quite simply, this is because the amount of physician work necessary to take care of one patient is not the same as the amount of work necessary to take care of another patient. One way of determining the proper census per hospitalist is to do a CMI-adjusted census (CMI = case mix index). The idea is that the higher the CMI, the sicker the patient and presumably, the more time required by the hospitalist to care for that patient. Let’s look at the CMI of 3 hypothetical hospital services:

Service 1: CMI = 1.30. This service admits general medicine patients but also admits to the ICU.

Service 2: CMI = 1.10. This is service admits non-ICU general medicine patients.

Service 3: CMI = 1.00. This service mainly covers lower acuity medicine patients, generally with single-issue medical problems and about half of patients being observation status patients. They have a short length of stay.

Let’s start with an assumption of 20 patient encounters per hospitalist and then divide the census by the CMI. So, for service #3, we would have 20 ÷ 1.00, which would be 20 patient encounters per hospitalist per day. On the other hand, for service #2, we would have 20 ÷ 1.10 = 18 patient encounters. Service #1 would be 20 ÷ 1.30 = 15 patient encounters. Notice that I used hospital encounters in this analysis and not daily census. Because of the differences in length of stay (and therefore differences in patient turnover) for each of the 3 services, the daily census could be the same for each of the services (eg, 13). Moreover, if you have night coverage hospitalists who are doing admissions to these services at night, the service census at the midnight census tally might be 15 for each of the services. Surgical patients inherently have a higher case mix index because of the surgical procedure so you cannot apply the same analysis for staffing surgical patients as you would with medical patients.

CMI-adjustment does several things to align the hospital and the hospitalists:

  1. It rewards the hospitalist to compulsively document in the chart all of the mundane co-morbidities that affect the CMI score but really don’t affect how the patient gets managed. So, for example, if a patient has a sodium level of 144 (normal 133-143) on admission, the hospitalist is going to ignore it since it is not clinically significant – adding “hypernatremia” to their admission note is extra work and why bother typing in the extra line of text if it is clinically irrelevant? However, since by adding the word “hypernatremia” to their note, the CMI goes up slightly and so the hospitalist is granted a slightly lower census target.
  2. The hospital’s financial margin improves because the higher the CMI, the more the hospital gets paid for that patient admission.
  3. The hospital’s length of stay index improves because the index is determined by the actual length of stay adjusted for the CMI.
  4. The hospital’s mortality index improves because the actual mortality rate is adjusted for the CMI to give the publicly reported mortality index.

Outcomes-Based Bonus Plan

Historically, bonus plans were based on productivity. At the end of the day, the productivity that really matters is total cash collections. However, we all know that when performing the same service, you get paid more for a commercially-insured patient than you do for a Medicare patient. You get paid even less for a Medicaid patient and you get paid practically nothing for most uninsured patients. So, the RVU has evolved to be a better measure of physician work effort than cash collections in order to remove the disincentive of taking care of the uninsured and Medicaid patients in the hospital since the hospital has to have someone take care of these patients.

In medicine, we often define true value in the service that we provide by the equation: value = quality ÷ cost. In other words, you can increase your value by increasing your quality or by decreasing your cost. So, what the hospital really wants is for the hospitalist to improve value of healthcare, by either improving quality (particularly in those publicly-reported quality measures on the Medicare Hospital Compare Website) or by improving the hospital’s financial margin. The financial margin in turn, can be improved by either increasing the revenue per patient-day in the hospital or by decreasing the cost per DRG. Therefore, bonuses should be based on some combination of:

  1. Query responsiveness. Hospitals have coding staff that comb inpatient charts looking for those co-morbidities that add up to a higher case-mix index for any given patient. The problem is that even if those co-morbidities appear in the lab results (for example, hypernatremia in the previous discussion) or appear in a non-physician’s note (for example, the dietician who mentions “protein calorie malnutrition” in his/her note), it only counts toward the CMI if a physician (or nurse practitioner or physician assistant) puts it in their note. So, hospitals have evolved a query system where co-morbidites identified by coders are reported to the hospitalist as a query and then the hospitalist decides whether or not it is valid and then addends their note accordingly. This is extra work for the hospitalist and so if they are not incentivized to answer the queries, they are going to ignore the coders and then the CMI ends up being lower.
  2. Patient discharge time. The earlier you get patients out of the hospital, the earlier in the day that bed can be filled by the next patient. However, you don’t need to get all of the patients discharged early in the day – your housekeeping staff can’t clean all of those rooms at the same time. The strategy is to get some of the patients out by 11:00 AM, some more out by 1:00 PM, etc. so that you have a steady flow of discharges throughout the day in order to accommodate the steady stream of patients waiting to be admitted into those beds. So, pick some numbers that work best for your hospital, for example, 20% of discharges by 11:00 AM and 40% of discharges by 1:00 PM.
  3. Mortality index. Because the mortality rates are one of the publicly reported items by Medicare, the hospital wants patients to die anywhere but in the hospital. For those patients who are anticipated to die, transferring a patient to a hospice facility to die is ideal. The danger of using mortality index for hospitalist bonuses is that sometimes, it can work against you from a hospital expense standpoint. For those patients who are clearly going to die in the ICU, the hospitalist could be incentivized to try to keep that patient alive a little longer in order to buff them up just enough to survive the transport to inpatient hospice or to have them die on another hospitalist’s shift so that the death doesn’t count against them. In this situation, earlier withdrawal of life support would have resulted in the hospital not having the expense of those extra days treating the patient in the ICU and the patient (and family) would have been spared making an inevitable unpleasant and uncomfortable death last longer.
  4. 30-day readmission rate. Hospitals get penalized by Medicare if this is too high. The hospital wants all of its rooms to be full, but to be full of patients who were not there in the past month. Hospitalists can often reduce the readmission rate by putting more time and effort into the discharge process (see post on The Most Dangerous Procedure In Medicine).
  5. Lower length of stay. This is a tricky one. If you discharge a patient prematurely, that patient is more likely to be readmitted within 30 days and is more likely to be dissatisfied if they perceive that they were thrown out of the hospital too early. So, length of stay should never be the sole metric for a bonus plan and should only be used when coupled with hospital readmission rates and with patient satisfaction. Also, length of stay lends itself to gaming the system since it is based on the midnight census. So, a patient admitted to the hospital at 11:30 PM already has a 1-day length of stay a half hour later at midnight. In order to improve his length of stay, the hospitalist will procrastinate putting the admission orders in for anyone showing up in the ER in the evening. If that order is placed at 12:01 AM, you just knocked a day off of that patient’s length of stay.
  6. Patient satisfaction. For inpatients, this is measured by the “HCAHPS” survey questions that are reported on the Medicare Hospital Compare Website. Some of these questions are specific to physician practice and can be used in a hospitalist bonus plan; other questions pertain to the patient’s overall perception of the hospital which measures the physician’s performance as a member of a larger team of providers in the hospital.

Billing Benchmarks

You can’t do away with RVUs completely, otherwise, the hospitalist would either not bother to submit their charges for patient encounters or they would bill everyone as a level 1 visit, thus reducing the necessity of all of the painful documentation required to bill higher levels of service. So, there has to be some why to hold the hospitalist accountable for turning in their bills and to insure that they are actually billing for the level of service that they are providing. Most electronic billing programs will allow you to see what the distribution of level 1, 2, and 3 CPT codes for any given physician. This distribution can be compared to internal benchmarks of all of the other hospitalist or to external benchmarks, such as the Vizient benchmark data for academic medical centers.

The Bottom Line

Ultimately, the strategy is to align the hospitalist’s reward system with the financial margin of the hospital. To do this, you need to think beyond hospitalist census caps and RVUs.

March 7, 2017

Categories
Hospital Finances Inpatient Practice

You Can’t Pay Hospitalists By The RVU

Every year about this time, hospitalists begin their contract negotiation with hospitals for the upcoming fiscal year. I’ve been on both sides of the negotiation table over the past 20 years. As with any negotiation, to be really successful, one party needs to not only know what the other party really wants but they need to know what it is they, themselves, really want. All too often, because we know neither what the other side wants nor what it is that we really want, we fall back on negotiating about money. The problem is that money is often not the most important thing that either side values.

What the hospital really wants:

  1. A positive financial margin at the end of the year. This is what the Board of Trustees really cares about and you can improve the margin in two ways: increase your revenue or decrease your expenses. But sometimes spending a little more on one expense item/department can greatly reduce the expense of another item/department. This becomes very difficult because large hospitals are often administratively compartmentalized and each compartment is held individually accountable for its financial bottom line and often for the hospital to make money overall, one compartment has to lose money. If the hospitalist is trying to see as many patients as possible and pump out as much in billings, then this may or may not be in alignment with the hospital margin. By paying a little more for the hospitalist, the hospital can often save more money if the extra amount of time that the hospitalist can now spend on the patient translates into a shorter stay and less expensive testing.
  2. Higher patient satisfaction. This is one of the publicly reported measures that hospitals are judged and compared to each other on the Medicare Hospital Compare website. If the hospitalist is primarily motivated by patient volume, what the patient thinks about the hospitalist (or the hospital) becomes relatively unimportant. RVUs are a quantity contest, not a popularity contest.
  3. Shorter length of stay. A shorter length of stay results in a more positive financial margin. If you can get a patient out of the hospital one day earlier, then that patient doesn’t consume expensive hospital resources (medications, lab tests, nursing time, meals, etc.) and, more importantly, you can get another paying patient in that room quicker. If the hospitalist’s goal is to maximize RVUs, then it can be paradoxically better for that hospitalist to keep the patient in the hospital one more day because that extra day in the hospital will involve relatively little time on the hospitalist’s part thus resulting in earning low-effort RVUs.
  4. Lower readmission rates. The hospital is penalized if 30-day readmission rates are excessively high. The hospitalist is rewarded if the 30-day readmission rate is high: it not only means more RVUs, but you can copy most of your previous history and physical exam making the admission quick with more low-effort RVUs. One of the key drivers in whether a patient gets readmitted shortly after discharge is the amount of time and effort spent in the discharge process. If the hospitalist has the time it takes to personally speak with the patient’s primary care physician, do a careful medication reconciliation, and ensure that all post-hospital tests and appointments are scheduled, that patient is less likely to be readmitted. The problem is that the hospitalist is going to get paid the same amount in RVUs whether or not they go to all of that extra effort to ensure a good discharge.
  5. Patients being discharged from the hospital earlier in the day. From the hospital’s perspective, an earlier discharge hour means that another patient can fill that bed earlier from either the ER or the OR and so patients don’t have to wait as long in the post-op recovery room or in the ER to get a bed. From the hospitalist’s standpoint, getting those patients out earlier in the day means that he/she will have to work a lot more intensely early in the morning and if paid by the RVU, you end up with the same amount of money in your pocket whether you discharge that patient at 10:00 AM or 4:00 PM and it is a lot easier to take your time and get the patient out at 4:00.
  6. Higher case mix index. The higher the case mix index (a measure of the severity of disease of the patient), the more the hospital gets paid. The case mix index also affects the publicly reported mortality index  (mortality rate adjusted for case mix index). So, the hospital wants a higher case mix index and the only way to do this for non-surgical admissions is for the physician to document all of the little co-mobidities that the patient had on admission (such as hypomagnesemia, malnutrition, etc.). When paid by the RVU, the hospitalist is not motivated to go to the extra effort to document all of these co-morbidities because he/she is going to be paid the same and ferreting out all of these (often obscure and unimportant) findings takes extra time and effort.
  7. Patients moved out the ER to the floor rapidly. The hospital has to report the amount of time the patient spends in the ER waiting for a bed and needs to keep that number as low as possible to avoid public embarrassment. Furthermore, the quicker the hospital can get that patient out of the ER, the sooner another patient can be placed into that ER room. To do this, the hospitalist needs to see the patient and write orders on the patient so that the patient can move from the ER to the nursing unit. The hospitalist who is paid by the RVU could not care less how quickly the patient gets out of the ED since they get paid the same, regardless.
  8. Avoidance of unnecessary expensive tests and treatments. For the hospital, fewer tests on inpatients equates to a higher financial margin. The hospitalist paid by the RVU could not care less.
  9. Lower mortality index. Neither the hospital nor the hospitalist wants to have one of their patients die. But patients are going to die, regardless. Most of the patients who die in our hospital are “DNR-CC” or “DNR-CCA”, meaning that they are anticipated to die and have elected to not be resuscitated when their heart and lungs stop working. There are two ways to lower your mortality index: (1) increase your case mix index by documenting all of the obscure co-morbidities or (2) get the patient to die somewhere other than in your hospital, most commonly at an inpatient hospice facility. For most of these patients, dying at home is neither practical nor desired by the family. If a DNR patient dies in your hospital, it is included in the hospital’s mortality rate but if that same patient dies at a separate inpatient hospice, the death doesn’t count against the hospital’s mortality rate. Once again, the mortality index is publicly reported on the Medicare Hospital Compare website. For the hospitalist paid by the RVU, arranging the transfer of a dying patient to a hospice facility takes a lot of work and it is easier to just care for that patient in the hospital until they die; plus, the hospitalist can bill for a few more days of inpatient care.
  10. Avoidance of complications. Healthcare associated infections and surgical complications are publicly reported on the Medicare Hospital Compare website so the hospital wants to keep the numbers down. Even more importantly, hospital complications are costly and can lower the hospital’s financial margin. For the hospitalist, the RVU pays the same, with or without complications. In fact, if a patient has a complication, the hospitalist can bill a higher level of service thus generating more RVUs.
  11. A sufficient number of doctors to provide care to the patients at any given time. The hospital wants to optimize patient throughput whereas the hospitalist paid by the RVU wants to optimize patient volume. There comes a point, however, where too high of patient volume results in reduced patient throughput. For more explanation, see the post on The Starling Curve of Physician Productivity.

What the hospitalist really wants:

  1. To feel that they are valued as professionals. The hospitalist invested 11 years of post-high school education to become a hospitalist and they want to be recognized for that effort. What the hospital often thinks it needs is a warm body with the initials M.D. or D.O. One advantage that our hospital has in the local market is that all of our hospitalists get an OSU faculty appointment, even if it is an unpaid appointment. Being able to say that you are an Assistant Professor at the Ohio State University is enormously valued.
  2. Adequate work-life balance. Physicians of the baby boomer generation went into medicine with the expectation that they were going to work very long hours and have very few days off. Most hospitalists are in the millennial generation and trained in an era of ACGME-legislated duty hour limits and emphasis on life outside of work. Baby boomer doctors have no problem carrying their pagers 24-hours a day and being called on their days off work. Millennial doctors want to turn their pagers off when they leave the hospital and not turn them on again until their next shift.
  3. To have sufficient time during the day to do their job well. Physicians are professionals and they want to take pride in a job done thorough and a job done well. To do that, they have to have enough time that they don’t have to cut corners in patient care. Insufficient time to do one’s job leads to burn-out.
  4. A reasonable salary. Notice that I didn’t say the highest salary. Most hospitalists are not choosing a job because it pays the best but because it is the best place for them to work. In fact, if a hospitalist is choosing a job purely based on salary, you probably don’t want that hospitalist in your hospital. A hospital with a terrible “churn and burn” environment with excessive hospitalist work loads and high turnover will have to pay more to attract a hospitalist than a hospital where the hospitalists feel valued and treated as professionals.
  5. To heal patients’ disease and suffering. Lets face it, college students who decide to go to medical school are intelligent… really intelligent. And to get into medical school, they’ve got to be hard working… really hard working. They are going to spend 4 years racking up $180,000 in medical school debt then get paid a little more than minimum wage as a resident for 3 years. With their intelligence and work ethic, they could have gone into engineering or IT and made more money over the course of a lifetime than a doctor. The reason that they went into medicine in the first place was a desire to heal and help.
  6. A collegial work environment. Most hospitalists want to work in a team of like-minded physicians and they want to work with people who they know will back them up if they have a family emergency or they get sick. They want to know that when they have 3 patients crashing at the same time, that one of their partners is going to come over to help out without being asked. They also want to work with consultants who are going to partner with them in the care of their patients.

There isn’t a lot of overlap between these two lists. So, what we usually do is fall back on things that we can understand and easily quantitate, like the number of patients a hospitalists sees per day, the number of shifts per year, salary, and RVUs (Relative Value Units) billed. But by doing this, neither side really gets what they want and both sides end up being less satisfied than they could be. What is the solution? I have some ideas and I’ll outline them in the next post.

March 4, 2017

 

Categories
Hospital Finances

Take The Money Or Take The Quality Metric?

Yesterday, I was faced with a philosophical dilemma: is it better for the hospital to get paid more for a hospital admission or to have a better score on publicly reported quality outcomes?

Heroin overdose is an epidemic in Ohio (see the post: Found Down With A Needle In The Arm). At issue was a patient transferred to our hospital two days ago from a smaller hospital in Southern Ohio after an out-of-hospital cardiopulmonary arrest following a heroin overdose. He was found apneic and pulseless. The EMS personnel did CPR and managed to get his heart started but by then, he had sustained severe anoxic brain injury. He was intubated and on a mechanical ventilator. He had shock liver and acute kidney failure. On admission to our hospital, he was suspected of being brain dead but the hospitalist needed to wait until the following day for a physician credentialed in brain death determination to assess the patient.

So, the issue was, do we admit him to the ICU as a regular hospital admission or do we put him in observation status? In a previous post, Moon Over Medicare Or Mooned By Medicare?, I laid out the differences in regular admission status versus observation status. The bottom line is that the hospital gets paid a lot more if a patient is in regular admission status than if they are in observation status; a patient in observation status is considered to be an outpatient rather than an inpatient and is anticipated to be in the hospital for < 2 midnights. For a patient being admitted to the ICU after a cardiac arrest who is in acute respiratory failure, acute liver failure, and acute renal failure, normally, this would be a slam-dunk regular hospital admission. The DRG associated with this admission would pay the hospital pretty well. But, you can also make the argument that since the patient was suspected of being brain dead, he could also be in observation status since life support would be discontinued the following day if he is truly determined to be brain dead.

On the other hand, if he is in regular admission status, he counts against our hospital’s publicly reported inpatient mortality rate but if he is an outpatient in observation status, his death would not count against our inpatient mortality rate.

Last year, our hospital finished with an inpatient mortality index of 0.54. This was the second to the lowest mortality rate of all academic hospitals in the United States and we are incredibly proud of it. This year, however, we have seen our mortality index creep up and for the month of December, it was greater than 1.0. In drilling down into our hospital deaths this year, the only thing different is that we have been taking more hospital transfers this year, that is, patients admitted to another hospital and then transferred to our hospital for a higher level of care. In fact, hospital transfers account for 3% of all of our hospital admissions but account for 24% of all of our hospital deaths.

We like hospital transfers because these patients have diagnoses that put them into higher-paying DRG classifications and they tend to have a lot of co-morbidities that amplify the DRG and get the hospital paid even more. But these transfers come with a cost of a higher likelihood of dying in the hospital.

Yesterday, I had to make the decision: should we put the patient in regular admission status and get paid more but take a hit on our mortality rate? Or should we put him in observation status and get paid considerably less but not have his death count against our inpatient mortality rate? I spoke with a number of people in our hospital. Some recommended taking the money and the mortality hit. Others recommended avoiding the mortality and take the financial hit.

So last night I made my decision before we pronounced him brain dead.

What would you have done?

February 16, 2017

Categories
Hospital Finances Operating Room

Thou Shalt Not Covet Thy Neighbor’s Surgeon

penguin-rockIf you are addicted to the National Geographic Channel, like I am, then you’ve probably seen videos of Adelie penguins. The males build nests out of stones in frozen Antartica in order to attract female penguins. Instead of going out and collecting their own stones, some criminal male penguins will steal stones from one his neighbor’s nests when his neighbor is out stone-hunting. Hospitals do the same thing – except instead of stones, they steal surgeons.

Surgical admissions to the hospitals are more lucrative than medical admissions. Surgical admissions account for 29% of all hospital admissions but account for 48% of hospital costs. If you are paying out of pocket, the hospital expense of a heart valve surgery is about $117,000 and a hip replacement is $39,000. For most hospitals, surgeries are their lifeblood. And inpatient surgeries are far more valuable than outpatient surgeries. Consequently, hospitals are constantly on the prowl for surgeons, especially those surgeons who do big-ticket surgeries that bring patients into the hospital and who can do a large volume of surgeries with low complication rates.

There are two ways that you can get acquire a high-volume, low-complication surgeon. You can hire him or her straight out of residency and then develop him/her by careful mentoring. Or, you can recruit them from another hospital. Recruiting from an out-of-state hospital is usually seen as fair game. A hospital in Columbus, Ohio doesn’t really compete with a hospital in Tampa, Florida when it comes to doing hip replacement surgeries so leaving a hospital in Columbus for a hospital in Tampa is not seen as taking surgical market share to Tampa.

moses-10-commandmentsBut recruiting a surgeon from one hospital to a different hospital in the same city is typically seen as playing dirty. First, that surgeon likely has a large referral base of primary care physicians and those physicians will continue to refer their patients to the surgeon regardless of which hospital he/she is operating at. Second, the first hospital has invested several years developing that surgeon to get him or her to a point of efficiency and notoriety.

A great surgeon wasn’t a great surgeon the day he/she finished residency. It takes time after training to become really great. In his book Outliers: The Story of Success, Malcolm Gladwell proposed that to be really great at something, you need to spend 10,000 hours in meaningful practice of it. For example, Bill Gates spent about 10,000 hours programming before he came up with the foundations of Microsoft’s operating system. The Beatles practiced and played concerts together in Germany for 10,000 hours between 1960-1964 before they made music history. A surgeon can’t get 10,000 hours of operating room time during a 5-7 year residency. Most of their operating time during training is spent as an assistant rather than being the primary surgeon and even so, they’d have to spend 40 hours a week operating for 5 years to get to 10,000 operating hours. So it takes some time after residency to make a good surgeon a great surgeon – I think it is typically about 7 years. Those 7 years are kind of like the time the Beatles spent in Germany before they became famous.

Not only does it take time for a surgeon to hit peak surgical skill, but it also takes time for that surgeon to cultivate a referral base and to become efficient. That part typically takes about 5 years. Therefore, the hospital has to subsidize the surgeon for about 5 years during the surgeon’s start-up period. So, a typical start up funding package from the hospital for a newly trained surgeon might be $250,000 for year 1, $150,000 for year 2, $125,000 for year 3, $100,000 for year 4, and $50,000 for year 5. That’s a total of $675,000 that the hospital invested in that surgeon to get them to a level of self-sustaining practice.

Now, if you are a competing hospital in the same city, you can either spend $675,000 cultivating your own surgeon right out of residency or you can spend $675,000 recruiting another hospital’s surgeon who is at the end of their 5-year start up. And if you really want to come out ahead financially, you can give that surgeon an extra $150,000 per year for 4 years (total $600,000) and save yourself $75,000 that you would have spent cultivating a newly trained surgeon.

pattonWhen leaving Africa in 1943, General George S. Patton famously said “No dumb bastard ever won a war by going out and dying for his country. He won it by making some other dumb bastard die for his country.” Similarly, a hospital wins the surgery volume war not by paying to develop its own surgeons but by making some other hospital pay to develop the surgeon… and then stealing them.

Not all types of surgeons are equal in this regard. For example, a surgeon who is really good at something unique and cutting edge that brings in lots of new lucrative elective surgeries to the hospital, like robotic prostatectomy, makes for great stealing. On the other hand, a general surgeon in a city with 50 general surgeons may not be worth spending as much to steal.

Additionally, optimal efficiency is not just a function of the surgeon but it is the entire operating room team, including the physician assistant, nurses, and operating room technician. It is much harder to steal an entire team from a hospital so there is inevitably some lost efficiency from a newly stolen surgeon.

Hospitals create barriers to other hospitals absconding with their surgeons by implementing “non-compete” clauses in the surgeon’s contract. A typical non-compete clause will say that the surgeon cannot work at a hospital within 10 miles for a year after resigning. There are ways around the non-compete clauses, however. They can be contested in court and the surgeon may or may not win. Or the hospital stealing the surgeon can locate the surgeon in a branch hospital or surgical center just outside of the non-compete radius. This happened to us a couple of years ago when 2 plastic surgeons a few years out of residency were recruited by a competing hospital system in Columbus that then located them at one of their branch hospitals that is 10.5 miles away from the OSU Medical Center, a half mile beyond the non-compete radius.

So in deciding whether to grow your own surgeon or steal someone else’s, it all comes down to financial strategy. Either approach can be cost effective and it is ultimately finances and not morality that guides behavior.

December 6, 2016

Categories
Hospital Finances Medical Economics

How Many Researchers Can You Really Afford?

Academic medical centers’ reputations are rarely built on the quality of clinical care or the quality of education. Reputations are built on the volume of research grants and publications. The academic medical center becomes famous by doing research about clinical care and publishing about education. Similarly, to be promoted as a faculty member at most colleges of medicine in the U.S., it is not enough to be a great clinician or great teacher, you have to do research and publish about medicine and teaching. In theory, devoting a lot of time to research and publication about clinical care and education will also make the institution a better place to provide clinical care and medical education. But in reality, the best researchers and journal article writers are not necessarily the best clinicians or teachers.

To be successful obtaining and implementing research grants, physicians have to have “protected time”. This is time that they are not assigned clinical duties and can devote to scientific investigation and writing in order to be competitive for research grants. The most prestigious grants for physicians are those from the National Institutes of Health and these grants provide money to conduct research projects and also provide money to pay for the physician’s “protected time”.

But we have a problem in American research. Grants from the National Institutes of Health don’t really cover the physician’s protected time. It all comes down to something called the NIH salary cap. This is the maximum salary that can be paid from an NIH grant. Currently, the salary cap is $185,100. To any normal human being, this seems like a lot of money, a whole lot of money. The problem is, that physicians doing clinical practice usually make more than this. In fact, according to the MGMA salary survey, the average salary for most specialties is higher than $185,100. This means that to be a researcher, you either have to accept a lower salary than a clinician in the same specialty or someone else needs to subsidize your salary.

Lets take an example of a group of physicians who have 50% protected time, meaning that they see patients half of the work week and do research funded by the NIH for the other half of the work week. In the table below, the salary is taken from the MGMA survey. The the cost of 50% protected time is listed as 50% salary. The NIH salary cap is for a 100% full-time researcher is $185,100, so half of that (to cover the 50% protected time) is listed as 50% NIH cap. For most specialties, the NIH salary cap will not fully cover the salary that the physician would receive if her or she was a full-time clinician; this difference is listed in the last column.

nih-salary-analysis

From this analysis, you can see that a hospital can afford to have 4 specialties do research without having to subsidize them: infectious disease, general internal medicine, nephrology, and general pediatrics. For any other specialty, the hospital has to come up with additional funds to make up the difference between the NIH salary cap and what that physician could make doing pure clinical practice. Neurosurgeons are the most financially challenging since they have the highest salaries: you can fund 19 endocrinologists to do research for the price of funding one neurosurgeon.

In reality, most researchers accept a lower income than full-time clinicians. Researchers don’t have to round on weekends, don’t get called in at night for emergencies, and don’t have malpractice suits filed against them. But there are limits and even the most scientifically curious physicians will find the allure of an extra $50,000 or $100,000 too much to keep them in research.

As a consequence of this, an academic medical center that wants to get the greatest return on research investment will seek a lot of researchers from endocrinology, physical medicine, infectious disease, and nephrology. Researchers who are neurosurgeons, orthopedic surgeons, and cardiologists are too expensive to have more than a small number of researchers.

One of my colleagues who is a cardiologist on his division’s finance committee once told me that that the worst news he can get is a mass congratulatory email from the division director telling all of the cardiologists that one of their peers just got an NIH grant. The unwritten implication of that grant was that the rest of the cardiologists were going to have to pony up to help subsidize the portion of the grant awardee’s salary not covered by the NIH salary cap. Now days, the clinical physicians usually can’t afford to pay this difference because it means that they have to take a pay cut in order to support their research colleagues. Therefore it comes down to the hospital to provide the salary difference subsidy.

So as a hospital medical director, how should we view this? We only have a limited amount of money to invest in researchers so we have to be prudent in how we spend it and who we spend it on. It is like investing. For high salary specialties, the hospital can only afford a small number of researchers and they have to have a high probability of research success – think of this as buying 1 expensive stock share in Apple. For lower salary specialities, the hospital can afford a larger number of researchers and can afford to take a chance on researchers with a less certain probability of research success – think of this as buying 1 inexpensive stock share in each of 10 start-up companies.

The holy grail of research funding is the endowed chair where the academic medical center can use money from donors to off-set the NIH salary cap difference. This is pretty easy at a well-endowed college of medicine like, for example, Harvard. But it is not so practical at a state-supported college of medicine (like Ohio State) with relatively meager endowment funds. For institutions with less endowments, you have to decide what the right ratio of clinicians:researchers is. That ratio will vary depending on the specialty and the percent protected (research) time that the researchers have. The goal is to have the right balance so that you have enough research to make the institution famous but not so much research that institution goes into debt.

December 3, 2016

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Hospital Finances

A Cheap Tool Is An Expensive Tool

toolIt is one of those sayings that everyone’s father or grandfather told them at some time and it basically means that you get what you pay for. An inexpensive tool that has to be replaced because it wasn’t well made costs you more in the long run than the well-made expensive tool. Same goes with hospital purchases.

In hospitals, we buy expensive stuff. An MRI machine is going to run you $1 million. If you want to buy a da Vinci surgical robot, you’re going to need $2 million. A pair of endoscopes to do ERCP is about $50,000. When you are buying equipment that is this expensive, there is a good chance that your hospital is going to put out an RFP (“request for proposals”) and then use those proposals to work the price down as low as possible by creating a bidding war between different manufacturers.

Before I go on with this post, I have to make a confession. I used to hate to buy cars. No matter how much I paid for one, I was always sure that at some level, I was getting ripped off. Now, however, it’s not so bad. You can check on Edmunds or Consumer Reports and get a good idea of what a fair price is. And you can get an on-line price so you don’t have to spend horribly unpleasant time in a dealer showroom while the salesman “…checks with the manager about your counter offer price”. But buying equipment for the hospital still has that car dealer feel to it. You can’t go to consumer reports to get ratings and average prices on ultrasound equipment.

So, it takes a little bit of work to decide if the equipment that you are buying is really a good deal or not. First, talk to the physicians who will be using the equipment. Second, meet with the manufacturer representatives (but only after you have done enough homework and reading to know what questions to ask them). Third, check on-line and with other hospitals that have recently made similar purchases. Fourth, work with your purchasing department in case the purchase can be bundled as a part of a larger equipment purchase or an exclusivity contract. Fifth, don’t be in a hurry – if you are buying a car, it is best to wait until the end of the month or during the winter to get your best price, similarly, waiting will get you a better price if the sales rep or the company needs to move medial equipment inventory before the end of their fiscal reporting period. You are usually not going to just pay the sticker price for medical equipment.

Once you have a price, you’ll need to determine if there is an adequate return on investment or whether you’re going to lose money on it. To do this, you’ll need to draft a “pro forma” which is a document that projects the future net revenue that a new capital purchase will bring. Here is where you have to be particularly careful because a pro forma can be manipulated to show almost anything you want. Here are some of the steps you’ll need to take:

  1. Accurately project how often you’re going to use it. Your physicians are going to over-estimate how much they’ll use a piece of equipment – it’s just human nature. If you have children, when they reach age 11, they’re going to come home and tell you that “…every single one of their classmates is allowed to see PG-13 movies”. It may seem like it to them but the reality was that 2 of their classmates snuck into a PG-13 movie when they told their parents that they were going to see the Finding Dory at the multiplex cinema. If you aren’t sure how often equipment will really get used, call some of your counterparts at other hospitals to get an idea of actual equipment use frequency.
  2. Determine depreciation. If you depreciate a piece of equipment too quickly, then the cost of that piece of equipment will appear to be too high. For example, let’s say you need a new bronchoscope that costs $18,000 and you expect to use it 100 times a year. If you depreciate it over 3 years, that will be an equipment cost of $60/bronchoscopy. If you depreciate it over 6 years, then the equipment cost drops to$30/bronchoscopy. Accurately projecting the life expectancy and frequency of use of a piece of equipment is critical to calculating your return on investment.
  3. Project revenue. To do this, you’ll need to know how much the hospital is going to get paid for using the equipment. This is pretty easy to do for outpatient procedures since you can determine how much Medicare, Medicaid, and commercial insurance companies are going to reimburse for a particular CPT code. Just be sure you are not mixing “charges” with “receipts” since your charges are always going to be a lot higher and do not reflect what you will actually get paid for the procedure. For inpatients, this can be difficult because the hospital is going to be paid by the DRG and not by the individual procedures done during the hospitalization.
  4. Make sure you account for all of your expenses. We are starting an endoscopic ultrasound program at our hospital. In this case, it wasn’t just the expense of the equipment but also the disposable needles, the depreciation on the machine that cleans the equipment, the time for a cytopathology technician to do real-time microscope slide preparation, and the depreciation cost of a tele-pathology microscope so that a cytopathologist at a remote location can do real-time preliminary interpretation of those slides. The best way to be sure that you captured all of the expenses is to map out the procedure and include the time cost of every person involved in the procedure, preparation, disposables, cleaning, etc.

Buying a piece of medical equipment is a lot more complicated than buying a car. Getting your hospital purchasing department involved early can help keep you from buying a cheap tool that ends up becoming an expensive tool.

September 13, 2016