HCA 312: Health Care Finance- Certificate of Need

11 .AppleEyesStudio/iStock/Thinkstock Learning Outcomes By the end of this chapter, you will be able to:

• Discuss the importance of healthcare financial management • Describe future expectations of financial management Future Considerations for Healthcare Financial Management smi81240_11_c11_269-278.indd 269 3/10/14 2:29 PM 270 Section 11.1 The Importance of Healthcare Financial Management Introduction The board of directors and senior administrators at Hendrickson Memorial’s hospital, nurs - ing facilities, and health centers seem to be satisfied with the financial statements, budgets, and other reports provided by the finance department. However, the financial statements and other reports are independently produced for each type of facility. The hospital, nurs - ing home, and health centers are viewed as if they operate completely independently from one another, a view that is largely accurate. The healthcare marketplace may require that components of the system work together, and that may start with reporting and financial analysis. Consistent with similarly sized healthcare organizations, Hendrickson has a typical finance department structure. As they develop long-range plans for clinical operations, there is a question about whether financial management must change as well. Are they structured and working toward preparing and presenting the type of information that will be needed in the future?

Financial management concerns both current operations and planning for the future. Plan - ning for the future involves analyzing capital expenditures, as discussed in Chapter 10, as well as determining how patient volume, revenues, and expenses will change over time. Many of the changes that we read about happening in healthcare have potential financial impacts of providers of healthcare services. One of the roles of financial management is to anticipate changes in healthcare and how they will impact their own institution.

11.1 The Importance of Healthcare Financial Management At the end of 2013, national healthcare expenditures in the United States are forecasted to be close to $3 trillion and may be headed toward $4.6 trillion by the end of the decade, other things being equal (Keehan et al., 2011). Of course, other things are never equal. The addi - tional coverage available to persons associated with the Affordable Care Act will increase spending. Persons with health insurance spend more on covered services than those without health insurance, which is part of the motivation for having insurance coverage. To control total costs, the amounts that third-party payers, including the government, will spend per person will likely decrease. The net effect of covering more persons and spending less per person is somewhat difficult to project. Part of the unknown aspect of net spending changes is how people will select insurance policies and how providers will respond to incentives for structural change. If people select the less-comprehensive plans among their options, there may be less cost pressure than if people select more comprehensive plans.

Some experts in the field of healthcare finance forecast that incentives will steer more pro - viders toward high-value care (Kane, 2011). The trend toward per episode and per enrollee payment amounts will give healthcare organizations financial incentives to adopt patterns of treatment that will slow the increase in costs. Evidence that the environment is already changing, or at least is viewed as changing, may be reflected in the investments of health - care organizations. For one fifth of hospitals, total profit margins appear to be below levels that would permit them to maintain current physical plant and equipment and acquire new technology (Jennings, 2012). Planning for an environment with fewer resources is already taking place. smi81240_11_c11_269-278.indd 270 3/10/14 2:29 PM 271 Section 11.1 The Importance of Healthcare Financial Management Other observers note that many healthcare organizations have put large sums of money into physical and programmatic investments. Among the programmatic investments that have been made in recent years are the purchases of physician practices by health systems.

Large investments can commit an organization into a model of care that can be difficult to change (Flower, 2013). Should organizations be following existing incentives to invest in information technology or in facilities to provide more surgeries, tests, and procedures? Or do organizations need to change their expectations? Many healthcare organizations developed primary care networks and focused on developing relationships for effective capitation man - agement in the 1990s only to see a managed care backlash and the slowing of the growth of health maintenance organizations (Mechanic, 2001). Healthcare organizations that ignored the warnings of doom and gloom were rewarded with larger patient volumes and more prof - its. Investor-owned hospital systems expanded substantially and now represent one quarter of nongovernment hospitals (Dunn & Becker, 2013).

Common to most observers is the growing role for sound financial management and rigor - ous financial analysis for healthcare organizations. Change will not happen overnight, and financial managers must be looking for signs of change and preparing plans for a status quo environment as well as preparing plans for an environment that actually adopts healthcare reform, and not just health insurance reform. Financial managers will be expected to provide clear assessments of profit margins, returns on investments in capital projects, and alterna - tive long-run budgets, depending on the strategy for addressing the future that is adopted by their governing boards. Healthcare organizations do not generally have the funds to adopt an expansion agenda (a plan to build more clinical capacity) and a bundled payment agenda (a plan to reduce clinical capacity) at the same time. Once again, financial managers must provide information to permit decision makers to assess the trade-offs when addressing dif - fering views of the future.

One of the impressions that may be left upon the reader over the past 10 chapters is that healthcare financial management is involved in almost every aspect of managing and plan - ning a healthcare organization. Financial managers do not always make decisions. However, they must provide decision makers with information on the financial implications of alterna - tive decisions. As the decisions on strategy and implementation of strategy become more complex, the tools of financial management may need to become more complex as well. In this concluding chapter, views of emerging and required financial management skills are highlighted.

Applications of Financial Management to Different Healthcare Settings Whatever the future holds for total healthcare spending and the financial management of healthcare organizations, the impact will vary among organizations by market and by type of organization. For healthcare organizations that are well positioned in their communities and face little competition from other providers, the near-term future may not look much dif - ferent from the recent past. For healthcare organizations in competitive markets, the pace of change may be faster. Hospitals, ambulatory care centers, skilled nursing facilities, physician’s offices, and managed care organizations face very different payment systems, cost structures, and incentives, each of which is changing at varying rates. smi81240_11_c11_269-278.indd 271 3/10/14 2:29 PM 272 Section 11.1 The Importance of Healthcare Financial Management Some elements of financial management are common to all organizations. The complexity and specific rules governing financial accounting and auditing vary by organization, though underlying principles remain the same. Since financial accounting aims to prepare financial statements that are accessible to all persons, some degree of uniformity is expected. Gener - ally accepted accounting principles always apply.

Managerial accounting and corporate finance, which aim to provide managers inside an orga - nization with financial information for decision making, exhibit more variation in practice among organizations and among industries. For skilled nursing facilities (SNF), cost account - ing is simple, as represented by a Medicare Cost Report that may have eight cost centers.

In contrast, for hospitals, cost accounting is challenging, as represented by a Medicare Cost Report that may have more than 30 cost centers. As displayed in Exhibit 11.1, SNF services are included as one of the cost centers when operating within a hospital.

Exhibit 11.1 Hospital and skilled nursing facility cost centers Hospital Cost Centers Skilled Nursing Facility Cost Centers Hospital adults & pediatrics Anesthesiology Medical Director Intensive care unit Operating room Nursing Coronary care unit Pharmacy Therapy Burn intensive care unit Laboratory Activities Surgical intensive care unit Respiratory therapy Social services Trauma intensive care unit Physical therapy CNA training Neurology intensive care unit Skilled nursing facility Program transportation Neonatal intensive care unit Swing bed SNF Other Delivery room & labor room Nursing facility Cardiac rehabilitation Other long-term care Radiology—diagnostic Home health agency Radiology—therapeutic Rural health clinic Magnetic resonance imaging CT scan Ambulatory surgical center Hospice Community mental health center Ambulance services Migrant health center Other Federally qualified health center Source: http://www2.illinois.gov/hfs/MedicalProvider/CostReports/Pages/default.aspx . For healthcare organizations that envision combining with other types of organizations, there may be a need to cross-train finance personnel in different systems. Accountable care organizations (ACOs) are being developed in many communities, some with demonstration funds from the Center for Medicare and Medicaid Services. There are currently more than 400 ACOs, with more being developed (Dunn & Becker, 2013). ACOs combine the funding of several types of healthcare organizations, both providers (hospital, physician’s office) and payers (managed care). Developing a shared understanding of costs among participants in an ACO can require substantial time and effort on the part of finance managers. smi81240_11_c11_269-278.indd 272 3/10/14 2:29 PM 273 Section 11.2 Future Expectations of Financial Management For Review: 1. One facet of the healthcare system that may change is the appropriateness of diag - nostic services, especially computed tomography (CT) scans. What role should finance play in an organization that currently earns substantial profits by providing CT scans?

Finance should attempt to forecast the volumes, revenues, and costs associated with services provided by the organization. If there are concerns that there may be fewer CT scans performed, finance should prepare analyses of the impact on the organiza - tion’s overall profitability and assess what changes in budgets may be required. 11.2 Future Expectations of Financial Management The future for healthcare financial management depends on the future of the healthcare system within which practice occurs. Two different futures, with many commonalities, are offered as models for consideration.

Two Possible Futures Tony Colarossi forecasts a healthcare system with four key components: 1. Quality indicators and cost reduction are two of the most important items. 2. Commercial payers lead change in cost reduction. 3. Accountable care organizations will dictate financial success. 4. Long-term care needs to be built into a hospital’s fiscal strategy (Herman, 2013). The future envisioned by Colarossi requires financial managers to work alongside other personnel with data on quality to provide comprehensive outcomes reporting. The future requires attention to changing payment systems in different ways than in the past. For the past several decades Medicare payment policies have led change in the market. If commercial payers take the lead, there may be many actors to watch, instead of just one. Accountable care organizations (or health maintenance organizations) may change payment from a per service basis (fee for service) to bundled payments or capitation payments. Bundles and capitations require cost accounting that matches services for individuals, placing information system burdens on healthcare organizations. Finally, with bundled payments or capitation payments that cover the continuum of care, either ownership or partnership models will be enhanced, creating more analysis from corporate finance on these projects and more complex reporting.

The forecast provided by Colarossi is consistent with that of many other observers. There are varying views on the speed of change and the degree of health system integration. There is some degree of consensus on the overall theme of greater attention to quality, more private sector involvement, and payments that go beyond fee for service. Analyze This If commercial insurance companies want to reduce the cost of hospital services, what might they do in the short run? smi81240_11_c11_269-278.indd 273 3/10/14 2:29 PM 274 Section 11.2 Future Expectations of Financial Management A more dramatic and detailed vision for the future is provided by Michael Porter and Thomas Lee (2013). Their future of healthcare includes adoption of a strategy for “value transforma - tion,” where value is defined by the combination of outcomes (not just quality of care) and costs. They forecast a healthcare system with six key components: 1. Integrated practice units (a dedicated team of providers in one organization) 2. Outcomes and costs for every patient 3. Bundled payments for care cycles 4. Integrated care delivery systems 5. Expanded geographic reach 6. Information technology This future requires financial managers to work alongside other personnel with data, as does the future envisioned by Colarossi. Two key elements of the Porter and Lee future have unique and specific implications for financial management. First, as Kaplan and Porter (2011) have previously prescribed, extensive work is needed in the area of managerial accounting to dem - onstrate costs, and to relate costs to outcomes. They suggest activity-based costing (ABC) as the means toward this end. Despite the observation that few healthcare organizations cur - rently employ ABC, it may become critical for future decision making. Along these lines, with - out mention of ABC, others envision a much more efficient delivery system where waste is minimized (Berwick & Hackbarth, 2012). Even though waste associated with administrative complexity may not go away with a more integrated delivery system, pricing failures, fraud, and abuse may be reduced by more detailed financial management.

Second, consistent with Colarossi’s inclusion of long-term care services, Porter and Lee include the entire integrated care delivery system. The addition is the vision of expanded geographic reach for providers. On the one hand, expanded geographic reach may permit tak - ing advantage of greater economies of scale in health services delivery. Spreading the fixed costs of facilities and management across larger areas is one way to lower average costs. On the other hand, expanded geographic reach may result in more opportunities for the cre - ation of monopolies that may not work toward competitive market solutions. On either hand, analyses of integrating and expanding organizations will keep corporate finance offices and consultants very busy.

Implications for Financial Management Competing views of the future for healthcare organizations have some commonalities in the implications for financial management. The first implication is that there will be greater demands for financial accounting reporting on subunits within healthcare organizations. As organizations form partnerships or new ownership models, financial analysis will require information on lines of business. A decision on buying or building a skilled nursing facility to handle the care needs of patients after hospitalizations requires detailed information on the financial status of organizations that do or do not integrate for monitoring and evalua - tion purposes.

A second implication is that healthcare financial managers may need to expand their exper - tise across service types. Hospitals, physician offices, skilled nursing facilities, and managed care organizations have specialized processes and practices. To manage an integrated or aligned system, managers need information that can combine results. Combined results can smi81240_11_c11_269-278.indd 274 3/10/14 2:29 PM 275 Section 11.2 Future Expectations of Financial Management be derived from systems that add results together, a top-down approach, or develop data from a common platform, a bottom-up approach. Demonstrations of both approaches are ongoing, with no clear indication of the preferred or superior approach.

A third implication is that cost accounting must improve. It is insufficient to only know the cost per day of care, with an adjustment for the diagnosis of the patient. The healthcare indus - try is a long way away from having any standards for activity-based costing. The essence of activity-based costing is that it matches the costs with the processes in care delivery. Porter and Lee (2013) envision new groups of actors called integrated practice units (IPUs) that may differ substantially from organizations’ current departments. An IPU is a dedicated team of providers in one organization that use a single management structure with a physician leader and care manager to oversee each patient’s care (Porter & Lee, 2013). If IPUs develop, and if there is agreement upon clinical guidelines to optimize practice patterns, placing costs on these patterns may make activity-based costing at the patient level feasible. Two “if ’s” in a sentence indicate that widespread development of activity-based costing systems will not occur soon for healthcare organizations. Analyze This Why isn’t cost accounting more sophisticated in healthcare organizations? From the Front Lines Our current balanced scorecard is well suited for our needs today, but we will likely need to completely revise it within three years. Because of this, we are explor- ing what the “right” measures are to guide our new scorecard and will need to col - laborate with the Department of Public Health and other organizations in order to head down the right path. We are currently exploring measurements of average life- span, prevalence of preventable diseases, and other population-based measures.

Source: Health system chief operating officer. A fourth implication is that health outcomes of various types will need to be combined for comparison with costs. Health outcomes include clinical quality, functional outcomes, and indicators of the health status of the population as a whole. Many healthcare organizations have aligned management and strategy around balanced scorecards that consider more than just financial results (Grigoroudis, Orfanoudaki, & Zopounidis, 2012). Scorecards in practice frequently include quality of care, patient satisfaction, provider satisfaction, inno - vation in the organization, sustainability, and other factors. Scorecards do not often include measures of functional outcomes and the health status of a community, as these are not well measured and have not traditionally been viewed as the responsibil - ity of healthcare organizations. As expectations and the score of responsibility changes, balanced score - cards may become more complex.

One final implication of the changes occurring in the healthcare marketplace is that there will be no short - age of demand for capable finance personnel. Financial accountants, managerial accountants, financial ana - lysts, and financial managers are expected to have an increasing and increasingly important role in the man - agement of healthcare organizations. To be sure, the future is also bright for information systems personnel and persons with quality measurement and assurance expertise. Financial information and data are increas - ingly important inputs into decision making for health - care organizations. smi81240_11_c11_269-278.indd 275 3/10/14 2:29 PM 276 Summary & Resources For Review: 1. Colarossi forecasts a healthcare system where commercial payers (insurance compa - nies) lead change in cost reduction (Herman, 2013). What would healthcare finan - cial managers do in response to this change?

Finance should attempt to forecast the volumes, revenues, and costs associated with services provided by the organization. If insurers are providing lower payments, financial managers should forecast the impact on the organization and work with operations personnel to determine whether there are fixed or variable cost changes that might be possible to maintain profitability. Summary & Resources Chapter Summary This chapter has reiterated the theme of the importance of healthcare financial management.

Understanding the financial status of an organization and its component parts is essential during times of change. It is difficult to forecast the future healthcare delivery system in which organizations will exist. For whatever system evolves, it is highly likely that it will impose greater demands upon financial reporting and financial information for decision making.

For financial managers, an environment with more demands may require continued learning about best practices within similar types of organizations and potentially partnering orga - nizations. Specialization in the financial management of one type of healthcare organization will always have value. Expertise in working across organizations will also be valued.

Financial managers will also be called upon for more intensive seeking of evidence-based financial management practices. Just as there are calls for more widespread use of clinical practice guidelines and other forms of evidence-based medicine, there are calls for evidence- based financial management (Finker, Henley & Ward, 2003). Various chapters have high - lighted trade-offs in financial management. There are trade-offs between the cost of collecting information and the cost of not having the best available information for decision making.

There are trade-offs between risk and return. In many places, it was noted that organizations discuss and struggle over these trade-offs before making decisions. Financial managers will be expected to learn from the experiences of others and the results of decisions based on alternative positions on trade-offs.

Learning about healthcare financial management does not end with a course, with a position in an organization, or even with leading the financial management of a healthcare organiza - tion. Learning is a lifelong process toward improvement, for personal rewards, and for the improvement of the healthcare system.

Discussion Questions 1. Should healthcare provider organizations be following existing incentives to invest in information technology or in facilities to provide more surgeries, tests, and procedures? 2. What can healthcare financial managers do to expand their expertise across ser - vice types: hospitals, physician offices, skilled nursing facilities, and managed care organizations? smi81240_11_c11_269-278.indd 276 3/10/14 2:29 PM 277 Summary & Resources Key Term integrated practice unit (IPU) A dedicated team of providers in one organization that uses a single management structure with a physician leader and care manager to over - see each patient’s care.

Suggested Websites • For news and trends in health finance, see Fierce Health Finance: http://www .fiercehealthfinance.com/ • For news and methods on healthcare financial management, see Healthcare Financial Management Association: ht tp://w w w.hfma.org/ • For Medicare and Medicaid cost reports by provider in the State of Illinois, see ht tp://w w w2.illinois.gov/hfs/MedicalProvider/CostReports/Pages/default.aspx smi81240_11_c11_269-278.indd 277 3/10/14 2:29 PM smi81240_11_c11_269-278.indd 278 3/10/14 2:29 PM