Hospital Finances Inpatient Practice

When It Comes To Length Of Stay, We Are Measuring The Wrong Thing

Hospital length of stay (LOS) is one of the most important metrics we use to judge hospital efficiency and to predict whether the hospital is making money or losing money on different diagnoses. LOS is measured in days with each day defined as whether a patient is considered admitted to the hospital at midnight. This is the so-called midnight census. I believe that the midnight census is no longer a valid measurement for the calculation of the duration of hospitalization.

Never admit a patient between 10 PM and midnight

If your hospital judges or bonuses hospitalists based on length of stay, then those hospitalists know to avoid writing admission orders in the two hours before midnight. The simple reason is that when the midnight hour strikes, that patient is already considered to have been in the hospital for one day when using the midnight census of admitted patients to measure length of stay.

Consider two patients, patient A and patient B who both arrive in the emergency department with pneumonia on a Tuesday evening. The ER physician determines that both patients need to be admitted to the hospital and the on-duty hospitalist is called to the ER to write admission orders. Patient A has an admission order placed at 11:59 PM and patient B has an admission order placed at 12:01 AM, two minutes later. Both patients improve with medical treatment and are ready to be discharged on Friday. Patient A is discharged at 8 AM Friday morning and patient B is discharged at 4 PM Friday afternoon. By using the midnight census to measure duration of hospitalization, patient A has a length of stay of 3 days and patient B has a length of stay of 2 days. However, patient A was actually hospitalized for 56 hours and patient B was actually hospitalized for 64 hours. Using the midnight census measurement, patient B’s hospitalization was  33% shorter than patient A’s but based on hours in the hospital, patient B’s hospital stay was 14% longer than patient A’s.

Hospitalists are aware of this and if they are judged by the number of midnights their patients are in the hospital, they will delay writing an admission order until after midnight whenever feasible in order to improve their LOS numbers.

“I’m getting my discharge orders written earlier in the day, so why isn’t my length of stay improving?”

Hospital administrators want to have patients discharged as early in the day as possible so that rooms can be cleaned and ready for the next bolus of hospital admissions. By using the midnight census, a patient’s length of stay will be the same whether that patient is discharged at 7:00 AM or 5:00 PM. Thus initiatives to get patients discharged earlier in the day will not affect the length of stay as measured by the midnight census.

In order to measure hospital efficiency, the hospital must measure both the length of stay and the time of day of discharge. However, the time of day of discharge is also fraught with flaws. For example, if a hospital bonuses its hospitalists on earlier discharge orders, the hospitalists may hold off on discharging a patient who is ready for discharge in the late afternoon and instead discharge them early the following morning so that their numbers look good. Additionally, depending on when a patient was admitted to the hospital, a patient discharged in the late afternoon may actually have a shorter duration of stay (in hours) than a patient discharged early in the morning. In that case, you don’t want to penalize the hospitalist for getting the patient out of the hospital faster, simply because that patient was discharged in the afternoon.

So, why use the midnight census to measure length of stay?

Hospitals have used the midnight census for decades. In the pre-computerization era, it was the most easy and reliable way to know how many patients were in the hospital – unit clerks or nursing supervisors would write down the number of admitted patients on each nursing unit at midnight and then report that to the hospital administration the following morning. That was also an era when hospitals typically ran at a lower capacity with the result that there were always empty beds to admit patients to and consequently, there was not pressure to get patients discharged as early in the day as possible.

In the pre-computerization era, it was difficult to track the time of day that a patient was discharged since it required someone to manually go through each patient’s paper chart to collect the time of day of that patient’s admission and discharge; many doctors did not enter the time of day that they hand wrote their orders and many nurses did not enter the time of day that they took those orders off of the patients’ charts. Electronic medical records have changed all of that and now the exact time an admission or discharge order is placed and acted on can be measured with a keystroke. Yet, the midnight census remains as a hold-over from the pre-computer era.

In addition, before the institution of diagnosis-related groups (DRGs) by Medicare in 1983, it really did not matter how long a patient was in the hospital since the hospital was usually paid by number of days that a patient was in the hospital. As a result, the longer the length of stay, the more the hospital got paid. With  DRGs, hospitals got paid based on a patient’s diagnosis and not based on the length of stay. Therefore, hospitals became motivated to shorten the length of stay in order to reduce their expenses for each patient. Once again, the midnight census remains a hold-over from the pre-DRG era.

The institution of DRGs was also a turning point for the time of day that patients were hospitalized. Prior to DRGs, most hospital admissions were elective admissions and those patients often had pre-planned testing and treatments and were usually admitted to the hospital in the late morning or early afternoon. Nighttime emergency admissions through the ER were less frequent. With daytime elective admissions predominating, the midnight census was a reasonably good measure of length of stay. DRGs brought an end to most elective medical admissions with a shift to the overwhelming majority now being admitted through the emergency department with the peak in ER admissions typically in the late afternoon or early evening. With that shift, the midnight census became a less accurate metric for measuring actual length of stay.

Length of stay should be measured in hours and not in days

The midnight census is a satisfactory measure in patients with a very long length of stay – if a patient is in the hospital for 50 days, then whether that is actually 49 days or 51 days has little impact on hospital efficiency. But as the hospital length of stay becomes shorter, the midnight census becomes a less accurate measurement. Given the flaws of using the midnight census to measure length of stay, I believe that we should move to measuring LOS by the hour. Our electronic medical records makes hourly measurement quite easy.

However, there are two types of hours in the hospital – daytime hours and nighttime hours. During the daytime, hospitalists do daily patient rounds, diagnostic tests are performed, surgeries occur, and consultants evaluate patients. During the nighttime, patients receive medications but the other daytime activities do not take place. In other words, more of the stuff that needs to happen in order to evaluate and treat the patient happens during the daytime hours. For this reason, a patient will spend fewer total hours in the hospital if admitted early in the daytime than if admitted early in the nighttime. Therefore, to accurately assess hospital efficiency, length of stay should be measured in both total hours of hospitalization and daytime hours of hospitalization.

The advantages of using total and daytime hours of hospitalization, rather than the midnight census, to measure length of stay include:

  • A more accurate measure of duration of patient hospitalization, especially for shorter duration hospital admissions
  • A more accurate measure of duration of observation stays which are inherently ultra short-duration stays
  • Elimination of the measurement bias that occurs with nighttime admissions as opposed to daytime admissions
  • Better representation of the effect of early-in-the-day discharge initiatives on length of stay
  • Better identification of individual hospitalists or hospitalist groups that could benefit by patient throughput efficiency training

The biggest barrier is the length of stay index

Hospitals benchmark their length of stay to other hospitals using the length of stay index. If a hospital’s length of stay for a given DRG diagnosis is 4 days and the average of hospitals across the country for that diagnosis is also 4 days, then that hospital’s length of stay index is 1.0 and the hospital has an average length of stay for that diagnosis. If the length of stay index is 1.2, then the hospital requires more inpatient days for that diagnosis and likely has greater expenses per admission. However, if the length of stay index is 0.9, then the hospital is able to treat that diagnosis with fewer inpatient days and likely has lower expenses per admission.

Hospital length of stay benchmarks use the midnight census for length of stay calculation and as long as benchmarks continue doing so, any given hospital will need to continue to measure and report midnight census-based length of stay measurements to determine how that hospital is performing compared to other hospitals.

Nationwide change to an hour-based length of stay measurement (and thus length of stay index measurement) will not happen quickly – the midnight census measurement is just too entrenched in administrative practice and data reporting. However, a hospital that internally uses an hourly measure of length of stay will have a more accurate measurement of its own efficiency and that data can be used gain a competitive advantage.

It is time to move past the midnight census.

August 20, 2021

Hospital Finances

How Should Hospitals Subsidize Physicians?

Hospitals and the physicians that practice in them have a conflicted relationship. They are mutually interdependent but often are often adversaries when it comes to finances. Across the country, this is the time of year that academic medical centers are preparing budgets for the next year. Most academic hospitals are on a July-June fiscal year to coincide with the June graduation of medical schools and the July start of new residents in the hospital. So, February and March is the prime season for physician practices to submit budget request for subsidies for the upcoming fiscal year. And every year, at every hospital in the country, more resources are requested than the hospitals have to give.

2019 was a turning point, when for the first time, more physicians were employed by hospitals than were self-employed. In academic medicine, the percentage of hospital-employed physicians is even higher. As with most things in life, the primary driver of this employment model is economics. By joining physicians and hospitals together, lower malpractice premiums can be negotiated and higher rates from commercial health insurance companies can be negotiated. The hospitals and doctors can better align their services and administrative efficiencies of larger size can often be realized. The hospital can be assured of referrals from hospital-employed physicians and the physicians can have a greater say in the services that the hospital provides.

But it is becoming increasingly difficult for physicians to earn enough to cover their entire salary + benefits. This is particularly true for specialties such as hospital medicine and palliative medicine where the time required to provide optimal care exceeds the professional fee reimbursement. But hospital-employed physicians generally do not use revenue from professional services as the medium of exchange; instead, it is the RVU that is used as the measure of physician productivity.  And when physicians do not meet RVU targets, they look for other ways to maintain their salaries. Here are some of the ways that hospital-employed physicians can be subsidized.

Everyone wants a nurse practitioner, physician assistant, or social worker

One of the easiest ways physicians can increase their RVU numbers is by having someone else generate them. A nurse practitioner or physician assistant is ideal because both NPs and PAs can write orders and can bill for services. If the hospital hires an NP or PA to assist a physician, that NP or PA can do all of the “scut” activities that would otherwise occupy the physician’s time without generating many RVUs. This could include doing phone calls, writing prescriptions, entering progress notes and orders into the electronic medical record, and filling out forms.

Surgeons can particularly benefit by this type of arrangement because the surgeon will be paid a set amount for doing a surgery and that amount is supposed to include post-operative follow up care. If the surgeon has a PA or NP doing the post-operative visits, either in the hospital or in the office, then that frees up the surgeon to be able to do more surgeries. Additionally, if that surgeon has an experienced PA assisting in the operating room, the surgeon will be more efficient and can do more surgeries per day. So, frequently, having the hospital pay for an NP or PA can be a win-win: the surgeon can do more surgeries leading to more RVUs for the surgeon and more procedural revenue for the hospital.

Because NPs and PAs cost considerably less than a physician, they can also be used to reduce costs in certain areas within the hospital. For example, if an emergency department is too busy for a single physician but not busy enough to justify 2 physicians, then a physician plus a nurse practitioner may make sense. Similarly, if an ICU is too busy for a single physician but not busy enough to justify 2 physicians, then a physician plus a physician assistant may be more cost-effective.

However, there are 2 situations when this type of subsidy can go wrong. First, if the NP or PA is used to subsidize an otherwise underperforming physician then the hospital is paying to support an inefficient physician (or one that just does not want to work very hard). Second, if the physician demands their own full-time PA or NP but the workload only justifies a partial FTE, then there is money wasted on the NP or PA who is not busy enough to justify their cost. The solution to the first situation is to be sure that the surgeon’s productivity is being benchmarked to others in that specialty. The solution to the second situation is to have an NP or PA who is shared by multiple surgeons.

Another common request by physicians is a social worker who works only for that physician to help with patient counseling and care coordination. Some physicians will ask for a scribe (particularly those who grew up before the era of the computer keyboard and can’t type). Other physicians will request a nurse to take care of phone calls and scheduling. In some situations, each of these requests may be valid and valuable. But each of these requests must have a careful cost:benefit analysis.

Call pay

You can’t cover the cost of a physician being on call with professional fee revenue. The hospitalist covering the inpatient service at night will generate a small number of RVUs from nighttime admissions but does not generate any RVUs from the calls from the floor nurses. The pediatrician taking home call at night can bill only a tiny number of RVUs for every phone call from an anxious parent of a child with a fever at 2 o’clock in the morning. The surgeon on trauma call who has to be within 20 minutes of the hospital at all times may not generate any RVUs if there are no motor vehicle accidents or gunshot victims that night.

In the past, for self-employed physicians, taking call was just part of the job. But increasingly, hospital-employed physicians are expecting addition pay to be on call. Similarly, physicians are often requiring a supplement for working on holidays.

Call pay is a necessity in many situations. Your hospital cannot manage myocardial infarctions, be a designated stroke center, or be a trauma center without an interventional cardiologist, stroke neurologist, or trauma surgeon available 24-hours a day. But what about specialists for less time-sensitive diseases or for conditions that less frequently result in calls to the hospital at night? Should the hospital provide call pay to the otolaryngologist, the endocrinologist, the psychiatrist? Which specialties warrant call pay will vary from hospital to hospital depending on the size of the hospital and the scope of emergency services provided.

Direct subsidies

These are often listed as “physician support” or “hospital investment” and are funds transferred from the hospital directly to the physicians to subsidize their income. Frequently, these are justifiable means to ensure availability of physician services. For example, hospitalists almost never bill enough to cover their salaries. Hospitals with a high percentage of uninsured patients or patients with Medicaid will have a difficult time attracting specialists who will be paid nothing or next to nothing in profession fees. In these situations, subsidies are necessary for the physicians to make a competitive take-home income.

But sometimes these direct subsidies are used as ransom by physicians when the hospital has no alternatives to provide that particular service or procedure. If all three of your hospital’s gastroenterologists demand an extra $50,000 per year or they are going to leave to go work at a hospital across town, you may have no option but to pay them. Ransom subsidies can be be as maliciously infectious as the plague… as soon as other physicians find out that the hospital is paying one group of physicians just to keep them, then every group of physicians will have their hand out.

Direct subsidies are particularly common in academic medical centers. These medical centers must produce research and education but the amount of money that physicians get paid directly from research grants or teaching appointments is so much less than they get paid for clinical activities, that in order to keep those physician researchers and educators, the hospital has to support their salaries. Furthermore, the success of a department chair or division director is measured by that department’s or division’s research and educational output and so that chair or director is incentivized to bring on as many researchers and educators as possible, requiring the additional costs of those researchers and educators to be passed on to the hospital. Although some subsidy is necessary, there is a limit to the number of researchers that the hospital can support, particularly if those researchers do not have grant funding. The hospital must have a regular accounting of the value that every subsidized researcher and educator brings.

It can be challenging when the clinical volume of the hospital is insufficient to justify a 100% FTE physician. For example, if the inpatient cardiology consult census only averages 5 patients per day, then that only equates to 2-3 hours of inpatient work per day. If the cardiology group wants to put one physician in the hospital all day for consult coverage, then they are going to require an enormous subsidy. It may require some negotiation with the cardiology group in that situation to have that consult cardiologist also assigned to interpret EKGs, read outpatient cardiac echos, or do outpatient telemedicine visits when the consult service is slow. Usually creative thinking and flexibility can solve the dilemma.

Medical directorships

In the past, this was a common way of disguising subsidies to physicians, with medical directorships paying a lot more than the actual physician time required to perform a given administrative role. However, more recently, CMS is requiring that fair market value be paid for medical directorships and this generally means ensuring that medical directors keep time logs and ensuring that medical director compensation be in line with national averages.

However, this is an important way for the hospital to get the administrative and quality oversight that it needs so that the operating room runs efficiently, the emergency department is meeting regulatory standards, and the intensive care unit has protocols in place. If the uncompensated administrative time required for a service provided in the hospital is 2-3 hours per week, then a 5% FTE directorship is appropriate. For administrative jobs that require only a few hours per year, sometimes an unpaid medical directorship that comes with a title (but no money) is sufficient for many physicians.

Think beyond this month’s financial statement

Every year, I get requests for more nurse practitioners & physician assistants than the hospital can afford and each year, I get a requests for enough direct subsidies to put the hospital in deficit. Deciding who and how to subsidize requires careful analysis of upfront costs and benefits as well as downstream costs and benefits. Sometimes the requests that seem most outlandishly over-expensive on the surface can either dramatically increase revenue or decrease expenses in the long-term. But sometimes, the requests that are most outlandishly over-expensive on the surface are really just outlandishly over-expensive.

March 14, 2021

Hospital Finances

The 2020 Medicare Readmission Penalty Program

Each year, Medicare analyzes the readmission rate for every hospital in the United States and then imposes financial penalties on those hospitals determined to have excessively high readmission rates. And every year, most U.S. hospitals get penalized. This year is no exception – 83% of all hospitals face penalties.

The Medicare Hospital Readmission Reduction Program

The hospital readmission reduction program was created as a part of the Affordable Care Act as a way to improve quality of care and reduce overall Medicare costs. Readmissions are defined as a patient being readmitted to any hospital and for any reason within 30 days of discharge from the hospital being analyzed. The program began in 2013 by looking at readmissions for just 3 conditions: myocardial infarction, heart failure, and pneumonia. In 2015, the program expanded to 5 conditions by adding readmissions for chronic obstructive pulmonary disease and knee & hip replacement surgery. In 2017, the program further expanded to 6 conditions by adding coronary artery bypass graft surgery. Each year, Medicare calculates the penalties based on the previous 3 years’ readmission data and then hospitals are penalized up to 3% of their total Medicare payments the following year.

The program has been controversial since inception with concerns that it preferentially penalized hospitals that care for sicker patients as well as for lower-income patients and underinsured patients who often lack the resources to get outpatient medical care that can keep them out of the hospital. Medicare responded by making 2 adjustments to the penalty based on a given hospital’s patient demographics:

  1. The severity of illness of the hospital’s patients (often called the case mix index) with the premise that the sicker a patient is, the more likely that patient is to be readmitted to the hospital.
  2. The rate of “dual eligible” patients, that is , patients who are eligible to receive both Medicare and Medicaid with the premise that lower income (i.e., Medicaid) patients are more likely to be socioeconomically disadvantaged and therefore more likely to be readmitted because of lack of outpatient resources beyond a hospital’s control that can affect readmission.

Adjusting the penalties for socioeconomically disadvantaged patients

Medicare divided all U.S. hospitals into quintiles based on the percentage of dual eligible patients.  Hospitals were only compared to other hospitals within the same quintile for the purposes of penalty calculation; therefore, a hospital with a high percentage of dual eligible patients was held to a different readmission rate expectation than a hospital with a low percentage of dual eligible patients. In fiscal year 2019, the dual eligible adjustment went into effect and the effect of this on the Medicare readmission penalties has now been analyzed in an article in the June 2019 issue of JAMA Internal Medicine. Hospitals that were more likely to be classified in quintile 5 (high percentage of socio-economically disadvantaged patients) were more likely to be:

  1. Teaching hospitals
  2. Larger hospitals
  3. Public hospitals
  4. Rural hospitals
  5. Medicaid expansion state hospitals
  6. Northeastern and Western U.S. hospitals
  7. Hospitals in neighborhoods with high prevalence of disabled persons

As one would expect, on average, hospitals in quintiles 1, 2, and 3 saw an increase in their readmission penalties whereas hospitals in quintiles 4 and 5 saw a decrease in their readmission penalties.

Characteristics of the 2020 readmission penalties

Last month, Medicare released the penalties for next year. These are based on 2015 – 2018 readmission data. 2,142 hospitals were exempt (childrens hospitals, veterans hospitals, Maryland hospitals, critical access hospitals, psychiatric hospitals, and hospitals with too few admissions for statistical significance). Overall, out of 3,129 U.S. hospitals included in the penalty program, 2,583 hospitals (83%)  received penalties totaling $563 million. The average penalty was 0.71% of total Medicare payments. 56 hospitals received the maximum (3%) penalty.

In Ohio, 90% of hospitals were penalized. Our medical center, the OSU Wexner Medical Center, received the lowest possible penalty, 0.01% which amounts to $14,000 for next year (last year, our penalty was 0.06%). In fact, all seven of the hospitals in Central Ohio fared very well for next year’s penalties with all of them coming in at less than half of the average U.S. hospital penalty.

In a previous post, I commented on the unintended consequence of the Medicare hospital readmissions reduction program, specifically that the program is associated with an increase in outpatient mortality. Since hospitals are paid by the DRG (in other words, by the diagnosis), hospitals are financially incentivized to discharge patients as quickly as possible in order to reduce their expenses. The Medicare hospital readmission reduction program was designed to offset that financial incentive by penalizing hospitals that discharge patients prematurely. Overall, the current readmission penalty program appears to be more fair to hospitals that care for socioeconomically disadvantaged patients. However, the danger remains that by creating a barrier for hospitals to readmit patients who truly need to be readmitted, outpatient mortality can increase.

November 17, 2019

Hospital Finances Inpatient Practice

Every Hospital With More Than 150 Beds Should Be A Trauma Center

A small article about trauma in the journal JAMA last week has big implications about the business of hospital finances. In short, it shows that the U.S. spends more on trauma than any other group of diseases… and the implication is that in the future, financially healthy hospitals will need to be trauma centers.

The study looked at a random sample of 20% of all Medicare claims between 2008 – 2014 for patients over age 65 years. During this time, there were 11.8 million hospital admissions. The authors then looked at the ICD-9 diagnostic codes submitted to Medicare for these hospitalizations. Not surprisingly, heart failure accounted for the most hospitalizations at 692,031 (5.9% of total admissions) but trauma ICD-9 diagnoses were the second most common reason for hospitalization at 653,413 (5.6% of total admissions). Extrapolating this to the full 100% of Medicare admissions during that time, it works out to 3.46 million admissions for heart failure and 3.27 million admissions for trauma during the 7-year period.

Next, the study examined the total amount of Medicare payments for each of these conditions for the 90 days after the initial date of admission. Looking at the total cost of care for those 90 days, trauma was overwhelmingly the most expensive condition, costing $2.76 billion. Of that amount, the index hospitalization for trauma cost $1.11 billion, or 40% of the total cost.

This analysis was done using ICD-9 CPT codes. In 2015, the United States changed to ICD-10 codes but that is unlikely to have any impact on the implications of the study. The ICD-9 trauma codes are 800 – 959.9 and includes various fractures. Although the study’s authors did not break down the cost by specific CPT code, it is likely that geriatric fractures accounted for the largest portion of the trauma costs.

Patients with traumatic injuries are preferentially directed to hospitals that are designated trauma centers. Many hospitals undergo verification (accreditation) by the American College of Surgeons  as level 1 (highest level of trauma care capability) to a level 3 center (lowest level of trauma care capability). Currently, there are 517 hospitals that are verified as level 1, 2, or 3 trauma hospitals by the American College of Surgeons. However, the requirements for designation of hospitals as being trauma centers is state-specific and not all states require American College of Surgeons verification. A study in 2003 reported that there were 1,154 trauma centers nationwide when including hospitals that were designated by their state as being a trauma hospital but did not undergo American College of Surgeons verification. In that study, 16.5% were level 1 hospitals, 22.8% level 2 hospitals, 21.7% level 3 hospitals, and 39.0% level 4/5 hospitals.

Trauma in Medicare patients is expensive because it involves older patients who frequently have medical co-morbidities and because a geriatric fracture is extremely expensive. For example, in the United States, there are more than 300,000 hip fracture hospitalizations each year with each fracture resulting in average direct medical costs of $51,000 per fracture. DRG 430 (fracture of hip and pelvis with major complications or comorbidity) results in hospital payments of $9,192 where as DRG 390 (hip and femur procedures with major complications or comorbidity) is $20,928, and DRG 379 (hip replacement with major complication or comorbidity) is $21,987. Following a hip fracture, there are the additional costs of rehabilitation, nursing homes, and medications.

As the U.S. population continues to age, the Medicare population will also age. The U.S. Census Bureau projects that the percentage of Americans over age 65 years old will increase from 15.2% of the total population currently to 23.5% of the current population in 2060. In 2035, for the first time in our country’s history, the percentage of the population over age 65 will exceed the population under age 18. It is projected that those over age 65 will increase from 49 million in 2016 to 78 million in 2035. This population growth has enormous implications for trauma care. By 2035, we will need more hospitals that are capable of managing trauma in the Medicare population. Since most of these trauma patients will likely be geriatric falls and fractures, hospitals will need a robust orthopedic surgery program, a strong physical therapy department, and close ties to post-hospital rehabilitation care. Under current U.S. healthcare financing, inpatient surgery admissions for hip and leg fractures are some of the most lucrative admissions for U.S. hospitals and are a major contribution to maintaining a positive financial margin at the end of the year. Based on the projected increase in the U.S. population over age 65, the total amount of Medicare payments to hospitals for trauma care, particularly geriatric falls and fractures, is going to increase significantly.

The bottom line is that in order to remain financially viable in the future, hospitals with more than 150 beds should be starting plans to become at least a level 3 trauma center today – that is where the money is going to be flowing in the future.

June 16, 2019


Hospital Finances

DRGs That Pay The Most To Hospitals

The CMS websites have a wealth of information about our nation’s health and about medical economics. One of the more insightful is the Inpatient Charge Dataset that lists the average charges and average payments to hospitals for different diagnoses. You can also search the dataset to find out how much any given hospital in the United States gets paid on average for each diagnosis (for Medicare patients). The diagnoses are listed as DRGs, or “diagnostic-related groups”. These are essentially the reason why the patient was in the hospital: a disease, a condition, or a surgical procedure. Medicare will pay set amount of money to hospitals for each DRG. The Medicare payment per DRG is also affected by the amount of money a given hospital gets for being classified as a teaching hospital, by disproportionate share funds, by capital funds, and by outlier funds. Thus an academic medical center that cares for a disproportionate number of Medicaid or uninsured patients will be paid much more for any given DRG than a private hospital with relatively few Medicaid or uninsured patients a few blocks away. For example, in Chicago in 2016, the John H. Stroger Hospital (also known as Cook County Hospital) received an average Medicare payment of $10,858 for DRG 638 (diabetes with complication or comorbidity) whereas Louis A. Weiss Hospital received an average Medicare payment of $6,291 for the same DRG.

The Medicare payment amount can increase if a patient has certain other complications or comorbid conditions. For example, a hospital admission for a patient with “septicemia or severe sepsis with mechanical ventilation > 96 hours” (DRG 870) will result in higher Medicare payments to the hospital if that patient also had disseminated intravascular coagulation or if that patient also has acute kidney failure. Therefore, hospitals hire coders who spend a lot of effort tracking down and documenting all of those various co-morbidities in order to enhance revenue. So, for example, in 2016, DRG 281 (acute myocardial infarction, discharged alive with complication or comorbidity) resulted in an average Medicare hospital payment of $6,213 to the Carolina East Medical Center in New Bern, North Carolina but the same DRG resulted in an average payment of $4,741 to Lenoir Memorial Hospital in Kinston, North Carolina, 35 miles away (I picked these two hospitals semi-randomly because we vacation regularly in the area and they presumably have a very similar patient demographic in rural Eastern North Carolina).

The Medicare Inpatient Charge Dataset lists three prices:

  1. Average Covered Charges. This is what the hospital charges on the final hospital bill and is equivalent to the sticker price. This is largely an irrelevant number since no matter what different hospitals charge, they are all going to get paid the same amount from Medicare for any given DRG and the co-morbid conditions associated with that DRG. Virtually no one pays the sticker price at a hospital.
  2. Average Total Payments. This is what the hospital actually gets paid and includes whatever Medicare pays plus any co-pays that the patient pays plus anything that secondary insurance pays.
  3. Average Medicare Payments. This is what Medicare alone pays to the hospital for that DRG (adjusted for whatever co-morbid conditions that the hospital documented for each patient).

Therefore, to extend the example using Carolina East Medical Center in New Bern, North Carolina, the hospital’s average covered charge (sticker price) for DRG 281 was $20,828. The average total payments for this DRG (what they actually got paid in total) was $7,409. The average Medicare payment for this DRG was $6,213.

Here are the top 20 highest paying DRGs to hospitals (listed by the Average Medicare Payments):

  1. $223,532 – Heart transplant or implant of heart assist system with major complication or comorbidity.
  2. $140,536 – Extensive burns or full thickness burns with mechanical ventilation > 96 hours with skin graft.
  3. $129,842 – Heart transplant or implant of heart assist system without major complication or comorbidity
  4. $125,777 – ECMO or tracheostomy with mechanical ventilation > 96 hours with major O.R.
  5. $113,055 – Other heart assistant system implant
  6.  $105,901 – Allogenic bone marrow transplant
  7. $100,462 – Liver transplant with major complication or comorbidity or intestinal transplant
  8. $86,809 – Lung transplant
  9. $81,707 – Combined anterior/posterior spinal fusion with major complication or comorbidity
  10. $76,561 – Intracranial vascular procedures with principal diagnosis hemorrhage with major complication or comorbidity
  11. $71,098 – Tracheostomy with mechanical ventilation > 96 hours without major O.R.
  12. $70,008 – Spinal fusion excluding cervical with spinal curvature/malignant/ infectious or extensive fusion with major complication or comorbidity
  13. $67,613 – Cardiac valve and other major cardio thoracic procedure with cardiac catheterization with major complication or comorbidity
  14. $59,975 – Cardiac defibrillator implant with cardiac catheterization with acute myocardial infarction/heart failure/shock with major complication or comorbidity
  15. $59,738 – Endovascular cardiac valve replacement with major complication or comorbidity
  16. $55,191 – Cardiac valve and other major cardio thoracic procedures without cardiac catheterization with major complication or comorbidity
  17. $54,852 – Combined anterior/posterior spinal fusion with complication or comorbidity
  18. $53,418 – Intracranial vascular procedures with principal diagnosis hemorrhage with complication or comorbidity
  19. $52,838 – Coronary bypass with PTCA with major complication or comorbidity
  20. $52,020 – Other O.R. procedures for multiple significant trauma with major complication or comorbidity

Not surprisingly, the highest paying diagnoses are for various transplants, major heart surgery, and major neurosurgery. However, these are generally procedures done in specialized and tertiary care hospitals and are relatively few in total numbers compared to other DRGs. Here are the top 10 most common diagnoses in the United States and their average Medicare payments in 2016:

  1. $11,632 – Septicemia or severe sepsis without mechanical ventilation > 96 hours with major complication or comorbidity
  2. $11,837 – Major joint replacement or reattachment of lower extremity without major complication or comorbidity
  3. $9,404 – Heart failure and shock with major complication or comorbidity
  4. $6,026 – Heart failure and shock with complication or comorbidity
  5. $4,359 – Esophagitis, gastrointestinal and miscellaneous digestive disorders with out major complication or comorbidity
  6. $6,392 – Septicemia or severe sepsis without mechanical ventilation > 96 hours without major complication or comorbidity
  7. $4,667 – Kidney and urinary tract infections without major complication or comorbidity
  8. $7,799 – Pulmonary edema and respiratory failure
  9. $5,692 – Renal failure with complication or comorbidity
  10. $8,600 – Simple pneumonia and pleurisy with major complication or comorbidity

There are many ways that hospitals can use the information from the Medicare Inpatient Charge Dataset. For example, let’s say that Lenoir Memorial Hospital in Kinston, North Carolina decides to target one DRG to improve throughput efficiency in order to improve its hospital margin. So, they put resources into case management, pharmacy, rehabilitation services, and post-discharge care with a goal of reducing expenses by 10% below the average payments that the hospital receives for that DRG. Should they choose knee & hip replacement (DRG 470) or exacerbation of chronic obstructive pulmonary disease with major complications or comorbidity (DRG 190)?

On the surface, one might think that since knee & hip replacement is a very expensive DRG, that by targeting it for expense reduction, the hospital stands to gain the most at the end of the year. However, even though admissions for COPD exacerbation pay far less on a per-admission basis ($7,532 versus $10,039), because there are so many more patients admitted with COPD exacerbation, the hospital will have a $40,000 greater end-of-the-year total positive margin if it puts the resources into reducing COPD exacerbation costs as opposed to reducing knee & hip replacement costs.

All of this underscores the critical importance of hospital coders in hospital finances. At the end of the day, choosing the correct DRG and capturing all of the various complications and comorbidities for each patient is more financially valuable than doing a few more inpatient surgeries each year.

June 2, 2019

Hospital Finances

Reducing The Hospital Length Of Stay

One of the best ways to improve a hospital’s financial margin is to reduce the average patient length of stay. Since hospitals are paid by the “DRG” (diagnosis related group), the hospital is going to get paid the same amount for a patient with say, pneumonia, if that patient spends 4 days in the hospital or spends 8 days in the hospital. Therefore, the quicker the hospital can get a patient discharged from a hospital bed, the sooner the hospital can put a new patient in that bed. If the hospital can get all of their pneumonia patients discharged in 4 days, as opposed to 8 days, then the hospital can admit twice as many patients into that bed over the course of a year and consequently can make almost twice as much money.

Hospitals report their length of stay (in days) as a standard administrative metric. But I would argue that the length of stay in days is a meaningless number. The more important number is the length of stay index.

The case mix index is a way of adjusting for how sick a patient is, as defined by co-morbid medical conditions. For example, an otherwise healthy patient with pneumonia will have a lower case mix index than a patient with pneumonia who also has diabetes, COPD, heart failure, and cancer. Medicare and insurance companies pay hospitals more if a patient with a given diagnosis has a lot of these co-morbidities. Thus, hospitals are actually paid by the Medicare Severity-Diagnosis Related Groups (MS-DRGs) rather than by the plain DRG.

There are more statistics available for length of stay than for length of stay index. For example, there are geographic differences in length of stay: hospitals in the Northeastern U.S. have an average length of stay fo 4.9 days, the South 4.5 days, the Midwest 4.3 days, and the West 4.2 days (2012 AHRQ data). There are also state-specific differences in length of stay with South Dakota having the longest length of stay (9.2 days) and Utah having the lowest length of stay (4.3 days) in 2014. There are economic differences with hospitals in low income areas having an average length of stay of 4.6 days and hospitals in high income areas the average is 4.4 days. There are also differences by payers: Medicare = 5.2 days, Medicaid = 4.3 days, commercial insurance = 3.8 days, and uninsured = 4.0 days (although this may be a reflection of different ages of patients served by different payers since older [Medicare] patients have a longer length of stay than younger patients).

Here are some practical steps that the hospital can take to reduce the length of stay index:

  1. Increase the case mix index. This does not mean that the hospital has to seek out sicker patients to admit. It does mean that the hospital has to have a robust process for ensuring that all of the various co-morbidities that each patient has are captured at the time of admission to the hospital. This generally requires a physician document that these various conditions were present on admission in their H&Ps and consults. There are two steps in doing this. First, educate all of the physicians (and especially the hospitalists) in the various co-morbid conditions that they need to be on the lookout for when admitting a patient. Some of these conditions may seem minor to the physicians (for example, hyponatremia and hypernatremia) but can significantly increase the case mix index. Second, documentation specialists should do real-time audits of the patients’ charts in the first days of their hospital stay to identify any co-morbidities that the physicians may have missed and request that the physicians addend their notes accordingly.
  2. Adequately staff the hospital’s case management department. If a case manager or social worker is so overworked that he/she cannot get to a patient on a given day, then you have likely added an extra day to the length of stay for that patient. Those “opportunity days” add up and their cost can quickly exceed the expense of hiring an additional case manager or social worker.
  3. Develop arrangements with high-performing skilled nursing facilities. Patients being discharged to SNFs often have the highest length of stays, not because they take longer to get well in the hospital but because there is a delay in getting a bed in the SNF. The best SNFs are those that can promptly obtain prior authorization from the insurance company and accommodate the patient as soon as the patient is medically stable for transfer. Ultimately, the hospital may need to even lease beds from SNFs.
  4. Schedule the operating room strategically. Ideally, patients who will require an inpatient stay post-operatively should be scheduled as early in the morning as possible. This allows them to get a head start on their recuperation. For example, the patient with a hip replacement surgery in the morning can get their first physical therapy session the same day as their surgery and potentially be ready for discharge a day earlier than if they have surgery in the afternoon.
  5. Whenever possible, be a 7-day a week hospital. For procedures and tests that can delay discharge, try to offer these tests every day of the week. Common examples include cardiac stress tests, echocardiograms, endoscopy, bronchoscopy, and venous duplex ultrasounds. It may be impractical to run a full-day schedule for these tests on Saturdays and Sundays but at least be able to do half-day schedules on either a Saturday or Sunday shorten hospital stays.
  6. Consultants should be co-managers. In academic medical centers, consultation services typically consist of a resident or fellow who will initially see a patient in the morning and then round with the attending consultant physician later in the afternoon with the consult getting finalized at the end of the day. Furthermore, in order to preserve the residents’ autonomy and ownership of patients on the admitting teaching services, the consulting physicians generally leave recommendations in the chart but do not order tests or medication changes. Frequently, this can result in delays in care when, for example, the consulting attending leaves recommendations for blood tests or x-rays in the chart at the end of the day and then the resident on the admitting service does not see that recommendation until the following day with the result that the test gets delayed. Ideally, inpatient medicine should be a team effort and the consulting physicians should be empowered to order the tests that they want and medications that they recommend. Furthermore, consulting physicians should continue to follow patients after the initial consultation to assess the patients’ response to treatment and to help interpret the tests that they have recommended/ordered. Although this culture change can result in the admitting physicians feeling like they have lost control over their patients, the benefit to the patients’ care and to the patients’ length of stay is worth it. I believe that this strategy is one of the most over-looked strategies in length of stay reduction programs.
  7. Consult liberally. Many hospitalists are loath to consult specialists, a mindset borne out of the tenet that “a consult is a sign of weakness”. Although it is true that consultation will add to overall healthcare costs because of the additional professional service that will be billed to the patients’ insurance company, consultation may also reduce overall healthcare costs by expediting inpatient throughput, reducing unnecessary medication use, and facilitating outpatient follow-up arrangements.  Many experts feel that United States healthcare should reduce the use of subspecialists; I take a contrarian view that when it comes to inpatients, more liberal consultation has a net effect of reducing costs while improving quality of care.
  8. Discharge planning starts on the day of admission. If the case management staff do not do an initial evaluation of the patient until the patient is close to discharge, discharge delays ensue. Sometimes, you just know that a patient is going to need to go to a SNF or an LTACH or inpatient rehab from the minute they arrive on the hospital floor. By initiating discussions with the patient and their families early, discharge choices can be made early in the hospital stay and the staff can initiate prior-authorization process with insurance companies as soon as possible, thus avoiding delays in discharge.
  9. Institute multidisciplinary rounds. These are typically done mid to late morning, after the hospitalist has made “work rounds”. The hospitalist, nurse, case manager, and often pharmacist then round on each patient together so that all parties are on the same page regarding tests that need to be done, discharge planning barriers, etc. Multidisciplinary rounds are the most effect way to reliably communicate patient care among all of the care providers and optimize patient throughput in the hospital.
  10. Ensure that guardians are appointed in a timely fashion. Many states have long waits for guardianship determination. For patients who are incompetent, the wait for guardianship can have a huge effect on the length of stay. Hospitals can work with state authorities to develop processes to expedite guardianship in order to move patients through the system in a more timely fashion.
  11. Eliminate emergency department boarding. Patients who wait for hours in the emergency department for a bed to become available in a hospital that is at full capacity do not get the same care in the ER as they do on a nursing unit. Tests do not get done, medications often are not started, and consultants often do not see the patient. The faster the hospital can get a patient out of the ED and into a nursing unit, the sooner definitive evaluation and treatment of the patient’s medical problems can occur.
  12. Right-size your hospitalist staffing ratios. A hospitalist who is managing 25 inpatients is not going to be as efficient as one who is managing 15 inpatients and consequently, the overburdened hospitalist is going to have a longer length of stay. When your hospitalists are spending most of their work days getting admission H&Ps done and attending to unstable patients, the lowest priority will be expediting discharges. That hospitalist needs to have sufficient extra time in the day to meet with family members, help the case managers with discharge plans, and critically evaluate new test results. When the hospitalist has sufficient time to round on their patients twice a day, as opposed to once a day, care is expedited.
  13. Right-size your nurse staffing ratios. Similar to hospitalists, if a nurse is caring for too many patients, he/she will not have the time to help expedite the patients’ throughput and length of stay can suffer.
  14. Measure it. In order to know where the length of stay problems are, the hospital has to be able to identify which services and nursing units are strong performers and which have excessive length of stays. Also, there needs to be a mechanism for real-time assessment of the effect of any interventions you make on the length of stay. Ideally, the length of stay index should be measured and reported monthly by service and by nursing unit.
  15. Know which tests and procedures can be done as an outpatient. Not everything needs to be done when a patient is in the hospital. For example, a patient who has a lung mass incidentally identified on an abdominal CT done to evaluate their cholecystitis can just as easily have their PET scan and lung biopsy done as an outpatient. In order to do this, there must be reliable outpatient follow-up available. Transition clinics are a great way of ensuring that these tests get done timely after discharge.
  16. Use palliative medicine strategically. Palliative medicine can reduce the ICU length of stay but has considerably less effect on non-ICU length of stay. However, palliative medicine is costly, requiring heavy subsidy by the hospital since palliative medicine rarely, if ever, pays for itself by regular billing for physician services. By prioritizing palliative resources on the ICU, the most cost-efficient use of palliative medicine can be achieved.
  17. Draw morning labs early. Patients do not like to be woken up at 2:00 AM to get their morning labs drawn. However, by getting those blood samples sent to the lab early, results can be available at the time of the physicians’ morning rounds. This permits clinical decision making early in the day.
  18. Save some time slots for inpatients on the procedure schedules. Most hospital procedure areas do testing for both inpatients and outpatients. There is a tendency to schedule on a first-come, first-served basis and as a consequence, the earliest time slots get assigned to outpatients who schedule their procedures days or weeks in advance. This often leaves the only times available for inpatients at the end of the day as “add-on” cases. This can add an extra day to the patient’s hospital stay if procedure results are not available to the hospitalist or consultants when they are doing their regular daytime rounds. By reserving some time slots for inpatients (particularly on Mondays and days after holidays), throughput can be expedited for tests such as venous duplex ultrasounds, cardiac stress tests, echocardiograms, cardiac catheterizations, and endoscopies.
  19. Never admit a patient at 11:59 PM. Most hospitals calculate the length of stay by patients in an inpatient bed at midnight (the so-called “midnight census”). A patient admitted 10 minutes before midnight will have a length of stay that is 1-day longer than a patient who is admitted at 10 minutes after midnight, even if they are discharged at exactly the same time and day. The reality is that the true cost of caring for that patient will be the same, but your LOS index numbers will look worse.
  20. Be aware of unintended consequences of admission practices. Patients tend to come to the ER in the late afternoon and evening and consequently, these times are when most patients get admitted to the hospital. If there is a service that only admits during the morning and early afternoon (for example, a resident teaching service), then those services can get a jump on patient testing that can be done on the same day of admission. On the other hand, if there is a service that admits disproportionately more patients in the evening when routine testing is not available, that service will have a 1-day delay in getting initial testing done and as a consequence will have a longer length of stay than the service that admits earlier in the day. Knowing the typical time of day of admissions can help you avoid penalizing services that primarily admit in the evenings when their length of stay looks higher than other services.
  21. Do not put over-utilize observation status. Many times, it is not entirely clear if a patient will be in the hospital for less than 2 midnights (the CMS definition of observation status). By placing a patient who could legitimately be an inpatient into observation status, the length of stay index will increase for the inpatients since these patients generally have a lower length of stay.

The challenge of reducing length of stay is to do it without reducing quality. In this regard, there is a limit to how low the hospital length of stay index can safely go. In my opinion, for most hospitals, a length of stay index of 0.80 – 0.95 is optimal. Below that, quality of care can suffer and above that, costs are excessive.

February 11, 2019

Hospital Finances

How Much Should A Hospital Subsidize A Hospitalist?

The most rapidly growing specialty in medicine is hospitalist medicine. The demand exceeds the supply and as a consequence, salaries are increasing annually at a remarkable rate. Most hospitals cannot function without hospitalists and most hospitalists cannot earn their entire salary from clinical billings alone. Thus, hospitals and hospitalists have formed a symbiotic relationship over the years with hospitals subsidizing hospitalist salaries and hospitalists directing efforts toward quality and financial metrics that benefit the hospital.

So, from the hospital’s perspective, how do you know how much you should be paying to subsidize your hospitalists? Pay too little and you will be unable to compete with other hospitals for the limited number of hospitalists in your community. Pay too much and you risk losing money on inefficiency and not getting good value for the dollar.

Over the past 10 years, the measure of productivity for hospitalists was primarily the RVU. The advantage of the RVU is that it is a readily available and easily quantifiable measure of productivity and physician work, Many hospitals will subsidize a hospitalist group based on the RVUs that they generate or based on a target of a certain number of RVUs per FTE.  I argued in a previous post that you shouldn’t pay the hospitalist by the RVU and that the hospital should instead incentivize the hospitalist based on other measures, such as readmission rates, mortality rates, query responsiveness, etc. I propose that the hospital should subsidize hospitalist groups based on the number of complexity-adjusted admissions. In this post, I will outline the model to calculate this and then lay out the arguments for why it works.

The Complexity-Adjusted Admission Model

This model incorporates several values including the annual number of hospital admissions for the hospitalist group, the case mix index of those patients, the current typical hospital subsidy per hospitalist in the U.S. and the average hospitalist salary. The model can be summarized by:

Calculating the “Subsidy per Adjusted Admission” allows the hospital to compare the cost of hospitalist care from one year to another and between different hospitalist groups that may care for different populations of patients. Lets look at each component:

  1. Annual Admissions. In this model, the number of admissions that the hospitalist group has per year becomes the foundation of measured volume. In other models, the number of encounters is used as an estimate of volume but there are problems with encounters. If encounters are used, then there is no allowance for the difference in the amount of effort that it takes to do an admission versus a discharge versus a daily inpatient visit. It is much easier for the hospitalist to do 15 return visit encounters than to do 15 admissions or discharges.When encounters are used as the measure of productivity, the incentive to discharge patients promptly is lost and there is actually an incentive to keep patients in the hospital longer so that the hospitalist an get more encounters with relatively less effort. By using annual admissions, the hospitalist would be motivated to discharge patients faster (thus reducing length of stay) in order to make room on his/her census to be able to admit more patients. One question that comes up is should the number of annual admissions include both inpatient admissions and observation admissions? Although arguments can be made to manage inpatient and observation patients separately, the easiest answer is to include both types of admission in the analysis. Another challenge is what to do with consults and co-management encounters, which are commonly done by hospitalists. On the one hand, co-management of the medical conditions of surgical patient provides value to the hospital by reducing the chance of complications that can otherwise increase the length of stay. On the other hand, co-management encounters typically take less time and effort than daily patient management as the primary attending physician of record.
  2. Case Mix Index (CMI). In this model, the CMI is used as an indicator of complexity in order to adjust the amount of effort that it takes for a hospitalist to care for any given inpatient on any given day. The higher the CMI, the more highly weighted an admission becomes. As an example, this overcomes the difference between a regular medical admission versus an ICU admission. In other models, the number of wRVUs are used as a measure of effort but the problem with wRVUs is that most inpatient medical visits will be coded as either a level II or level III visit and this does not leave much room for the subtleties of patient complexity; for example, most ER admissions will be coded as a level III new patient visit regardless of whether the patient has a medium or high number of co-morbidities. Furthermore, from the hospital’s standpoint, the CMI is very important – documenting all of those co-morbid conditions on admission pushes the CMI up and thus pushes up the amount of money that the insurance company pays the hospital for any given DRG. By using CMI in the model, the hospitalist’s subsidy is aligned with what the hospital values. One pitfall to be aware of is that surgical admissions (especially orthopedic admissions) have a very high CMI that does not really reflect the work for the medical management of that patient and if the hospitalist is co-managing those surgical admissions, then their CMI-adjusted admissions could be inflated – it is therefore better to use the CMI for the patients admitted to the hospitalist’s service rather than the CMI of consult/co-management surgical patients.
  3. Number of FTEs. It is better to simply use the total FTEs in the hospitalist group rather than admissions/encounters/wRVUs per individual physician because some shifts have inherently fewer admissions/encounters/wRVUs (for example, night and ICU shifts). The ratio of hospitalists providing day coverage to hospitalists providing night coverage can vary considerably depending on the population of patients being cared for and the frequency of admissions during the night. It could be rather low at 2:1 for an ICU-dominated hospitalist practice or as many as 4:1 for a low-acuity hospital practice with few nighttime admissions. Similarly, in a tertiary care hospital, a night shift hospitalist may only be able to care for 50-60 patients but in a smaller community hospital, a night shift hospitalist may be able to care for 90-100 patients. Many hospitalist groups will incorporate advance practice providers (nurse practitioners or physician assistants) but these “APPs” are generally not equal to a physician in the annual amount of work that they can do – one option is to count each APP as a 0.5 FTE.
  4. Hospital Subsidy. The hospital subsidy per hospitalist can vary considerably depending on the payer mix of the hospital (a higher percentage of uninsured or Medicaid patients will require a higher subsidy), whether the hospitalist is in private practice versus academic practice, the regional average hospitalist salary, etc. An article in the journal The Hospitalist reported that the average hospital subsidy per hospitalist was $157,500 in 2016. This may seem high on first look, however, data from the 2017 MGMA Physician Compensation and Productivity Report (using 2016 salary data) indicated that the median compensation:collection ratio for private hospitalists is 1.402 and for academic hospitalists is 1.386; in other words, a hospitalist’s salary is more than he/she can bring in by professional billing alone.

Why This Model Works

The complexity-adjusted admission model has a number of advantages over other hospitalist productivity models that allow for better alignment of the priorities of the hospitalist group with the priorities of the hospital.

  1. It encourages co-morbid condition documentation by the hospitalist, thus enhancing hospital reimbursement per DRG.
  2. It encourages lower length of stay by rewarding the number of admissions to the hospital rather than by the number of encounters or RVUs.
  3. It facilitates right-sizing hospitalist nighttime coverage. By measuring the total admissions that the entire hospitalist group does per year, rather than the number of encounters/RVUs that each individual hospitalist does, it makes it easier to account for night shifts that have inherently fewer total encounter or RVUs than day shifts.
  4. It reduces the culture of hospitalists “dodging admissions”. I’ve known residents and hospitalists who will put in more time to get out of an admission than it would actually take to do the admission. The model makes incentivizes the hospitalist to do more admissions.
  5. It allows equal comparison of hospitalist groups that work longer shifts but fewer shifts per year to hospitalist groups that work shorter shifts but more shifts per year. For example, a hospitalist group where the doctors work 183 12-hour shift per year versus a hospitalist group where the doctors work 210 shifts per year that are a mix of 10 and 12-hour shifts.

Putting It All Together

Next, lets see how the model works given two hypothetical situations.

Hospitalist Group #1. Assume this hospitalist group has 3 daytime physicians and 1 nighttime physician (total of 4 per day). Each shift is 12-hours. Each physician works 182 shifts per year. For full staffing, the hospitalist group needs 8 FTEs. This group only cares for medical floor admissions (not ICU admissions) and has a CMI = 1.1. They have 4,839 admissions per year. The hospital subsidizes the group by $157,500 per hospitalist FTE.  Therefore, using our model, the subsidy required is $237 per CMI-adjusted admission:

Hospitalist Group #2. Assume this hospitalist group has 6 daytime physicians and 2 nighttime physicians (total of 8 per day). Each physician works 182 shifts per year and each shift is 12-hours. For full staffing, the hospitalist group needs 16 FTEs. This group cares for ICU patients as well as medical floor patients and has a CMI = 1.3. They have 8,312 admissions per year. The hospital subsidizes the group by $157,500 per hospitalist FTE. Therefore, using our model, the subsidy required is also $237 per CMI-adjusted admission:

Given these two hypothetical hospitalist groups with different CMIs, both come out to a subsidy of $237 per CMI-adjusted admission. These are hypothetical cases; no one knows the average across the country. But from the 2017 MGMA Physician Compensation and Productivity Report (which reports on 2016 data), the average number of encounters per hospitalist in non-academic practice was 2,114 per year. If one assumes a 3.5 day average length of stay, then that comes to right around 600 admissions per hospitalist per year; if the length of stay is 4.5 days, then it works out to 470 admissions per hospitalist per year. Assuming a range of annual admissions of 470 (2.5 per shift) to 670 (3.5 per shift) per hospitalist per year, the range of subsidy per adjusted admission should be between $235 and $335. Making allowances for the variation in payer mix, patient volumes, etc. and extending this range, then a reasonable value is probably between $200-$400 per CMI-adjusted admission. The table contains data from the most recent MGMA report (2016 data reported in the 2017 publication). There is a wide-range for each of these values and there is considerable variation from one region of the United States to another.

Structuring The Bonus Incentive

The above model allows the hospital to determine the amount that the hospital will subsidize a hospitalist group, in this case, $237 per CMI-adjusted admission. This should form the base salary but there also needs to be an bonus incentive component to reward the hospitalist for other things that the hospital values such as:

  1. Readmission rate
  2. Mortality rate
  3. Patient satisfaction scores
  4. Emergency department throughput times
  5. Discharge time of day
  6. Pharmacy cost per admission
  7. Hospital-acquired infection rates


The hospital will almost always have to subsidize the hospitalist. The challenge is to structure the subsidy in a way that aligns the desires of the hospital with the desires of the hospitalist. Subsidies are like compensation plans, whatever the subsidy rewards is what you get and sometimes there can be unintended consequences if what the subsidy actually rewards is not anticipated. The hospital should start with a target of subsidizing between $200 – $400 per CMI-adjusted admission; if the actual subsidy is either more or less than this range, then further analysis of the reasons why are necessary.

June 13, 2018

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

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

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