Editor: Please tell us about your practice areas.
Bavolack: I function as Marcum’s National Healthcare Practice leader, and my background includes over 20 years of experience in healthcare finance, operations and reimbursement. Marcum’s clients represent a cross-section of the healthcare industry and include long-term care providers, home healthcare agencies, residential care homes, physician practices and hospitals.
Miller: I’ve been practicing in the healthcare sector for over 20 years and am now Marcum’s West Coast Healthcare Practice leader. Primarily an audit partner, I am involved in auditing and financial consulting for hospitals and clinics. In general, I work with acute-care hospitals (both standalone and those within systems), mobile surgical centers and various healthcare clinics, both not-for-profits and for-profits.
Editor: Matt, as the American population ages, elder care is becoming a major growth industry. During your years advising clients in this sector, what overall trends have you witnessed, and what trends are emerging in the long-term care and home healthcare arena?
Bavolack: As the population continues to age, and federal and state reimbursement continues to shrink, providers are faced with reinventing themselves to meet the ever-growing demands imposed by increasing costs and outside regulatory influences. Successful providers are continually looking to maintain quality care while also keeping a competitive edge by diversifying themselves, with an eye toward expanding and/or developing new services.
Editor: The rising cost of healthcare for this aging population has become the biggest driver of our long-term debt. One agenda item is changing the way the government pays for Medicare, specifically, linking quality of care to cost. How will this affect nursing home and home-care providers?
Bavolack: Prior to the early ’90s, many providers were paid through a cost-based reimbursement model. With the federal government’s goal of controlling costs, some form of Prospective Payment System (PPS) was implemented. This system reimburses providers on an episodic basis. Trending forward, the federal government continues to evolve payment mechanisms to include a case mix indexing (CMI), ACO and ASO models designed to reduce reimbursement and enhance community-based programs. This is evidenced by the recent 11.5 percent rate reduction to nursing home PPS rates.
At the same time, the federal government continues to impose new audit initiatives to recoup fraudulent claims and payments to nursing home and home-care providers.
Miller: It’s easy to say that linking quality of care to cost is a good thing; everyone can get on that bandwagon. The question becomes, how do you develop the metrics for that? I’ve served on the Dignity Healthcare Audit Committee for five years, and they believe that if you have good quality of care, obviously costs are going to go down – but how can you measure this, let alone administer such a program? Many large healthcare systems grapple with this, because they do want to provide good care, but it’s hard to do when you know that if you spend an extra day with a patient then you’ll be arguing about it for years with Medicare. The RACs (recovery audit contractors) who come into hospitals today are not there on a daily basis and are ill-equipped to assess quality of care.
Editor: Another potential reform is the acceleration of already planned cuts to Medicare Advantage and home healthcare programs. How greatly will this challenge the sustainability of your clients in the home healthcare industry?
Bavolack: The Medicare Advantage plan is a managed Medicare plan in which an intermediary group controls payments received by the provider community. Reductions in payments and the shift of increased copays to the patient do not necessarily drive a reduction in spending. In fact, a shift of the burden to the patient causes a patient to spend down their assets quicker and in turn shifts the future burden from the federal government to the state Medicaid programs, which creates an issue for state governments.
In terms of sustainability, we see the home-care provider community beginning to constrict. If copays continue to be implemented, smaller agencies will find it more difficult to compete and manage cash flow, which will most likely cause providers to seek other opportunities for growth in less regulated environments and/or merge to obtain further economies of scale. We do believe that home care is an important component in the continuum of care and, like the nursing home industry, will continue to be an instrumental service for our aging population.
Editor: The Affordable Care Act contains fraud and abuse provisions that impact nearly every aspect of providing healthcare. Will internal audits play a greater role in a rapidly changing compliance environment?
Miller: All the large healthcare providers do substantive internal audits and many outsource these audits, and I see them playing a greater role. The proliferation of electronic data has made patients’ records extremely difficult to manage: you might lose a file of patient numbers and incur a penalty of $1,000 per number. The potential claims are very severe financially, so healthcare providers have become increasingly proactive, with zero tolerance internally. Self-reporting can reduce some penalties, so, yes, we will see more internal audits.
Bavolack: In the hospital, nursing home and home-care sectors, we are seeing increased outsourcing of the internal audit process. For a significant number of our clients, we’ve conducted mock audit representations to identify what potential exposure would exist if a provider were to be audited by federal and state payors. As I mentioned earlier, new CMS initiatives to recapture substantial dollars through numerous audit processes - including RAC audit, whistleblower incentive and contingency-based audits - present further challengers for the provider community. Hence, there’s growing concern in the healthcare industry to identify and address areas of concern or possible exposure.
Miller: The same is true in my practice. Some of my small community hospitals are engaging us to conduct their internal audit because they’re just too small to do it themselves. RAC audits have been conducted in my area for three or four years, and at first the RAC audits found incorrect coding, billing problems and issues of that nature, so everybody rushed to fix those, and few problems are found today.
These days, statistics show that RAC audits are overwhelmingly focused on quality of care issues – challenging procedures, diagnoses and the like. Because they are incentivized to do so, the auditors are quick to recommend denial of payments in this complicated professional judgment area, and it’s costing the hospital compliance departments millions – as well as over a year – to fight them.
Editor: With Medicare reforms and value-based purchasing, are many of the small community hospitals you work with looking to be acquired by larger hospital systems?
Miller: Many mergers and acquisitions are occurring among larger hospital chains, with large hospitals actively acquiring smaller ones, allowing them to enjoy economies of scale. Sometimes bigger is better.
Interestingly, I’ve also seen cases in which a smaller district hospital – in Palm Springs and other rural areas, for example – that became unsustainable was bought by a group of doctors as a collaborative because the doctors wanted to continue local care as well as ownership. I believe we’ll see a lot of mergers and acquisitions not just among the larger systems but among local doctors as well.
Bavolack: I would echo Nanette's commentary. On the East Coast, we’ve seen a flurry of transactional work not only in the hospital sector but also in the long-term care, home-care and physician practice sectors.
Editor: How would you counsel those considering whether to stay independent or to join a larger entity?
Miller: You have to look at facts and circumstances. Certainly there is a benefit to being independent – you understand your community and can be responsive to it. On the other hand, as part of a larger chain, you have more places to share costs and drive them down. I will say I feel that because of the destabilizing forces of today’s economic environment, we see a continued trend in smaller hospitals joining larger chains.
Bavolack: I would agree. From the long-term and the home-care provider’s perspective, it is becoming increasingly difficult to remain independent when the ever-growing cost-cutting demands imposed on providers require the creation of economies of scale. Over the last few years, we’ve seen a large exodus of single-entity organizations because they find it difficult to compete in this environment. That’s not to say that we counsel them to merge, but we identify for them areas of potential exposure and/or savings that may help them navigate through the changing healthcare arena.
Editor: When looking to purchase a smaller entity, what should a potential acquirer look for?
Miller: As with any merger, it’s essential to conduct a thorough due diligence into the entity’s records, but you also want to make sure that the target uses one of three or four major financial systems considered reputable within the healthcare sector. You’ll also closely examine their malpractice history with an eye to the kinds of cases they have had, and whether they are above or below the standard curve. And, you’ll also look into challenges they may have had with cost reimbursement. On a different note, if you’re a faith-based not-for-profit, you’ll consider carefully the culture of the entity – whether the target’s value systems are similar to your entity’s and whether those same values are upheld by the care providers and the employees.
Bavolack: The buyer is also looking from the standpoint of compliance risk. Might there be an issue with old receivables – have days, procedures and visits been billed appropriately? In my practice, we frequently get involved with exposure issues associated with potential Medicare and Medicaid liabilities.
Editor: What are some key considerations for buyers and sellers in this growing marketplace?
Miller: One of the benefits for physicians who join a hospital group is having an infrastructure and back office services in place to handle overhead and administration so they can focus their efforts on superior patient care.
Editor: Is there anything else you would like to add?
Bavolack/Miller: As you surmised from speaking with us, healthcare really is regional. One of the advantages to having offices throughout the country is that we have people on the ground who understand the mix of federal, state and local issues that are part of consulting in this area.