The Georgia Scroll
April 1998

Are You Ready?

The Balanced Budget Act of 1997 Presents New Challenges and Opportunities for Post-Acute Care Providers

By: Francine Machisko
Manager, Post-Acute Consulting Services
Coopers & Lybrand, L.L.P.

By now, most of you are aware of the many provisions of the Balanced Budget Act of 1997 (BBA), including those which affect hospital-based and freestanding post-acute care providers. However, awareness is only the first step in effectively meeting the challenges presented by the Balanced Budget Act. The most critical step lies in designing and implementing operational and strategic responses that transform these challenges into opportunities that effectively position providers for the future. The question to all providers is "Are you ready for the post-BBA era of post-acute care provision?"

The Pre-Balanced Budget Act of 1997 Era

Facing increased pressure to reduce inpatient stays and costs, post-acute venues have experienced dramatic growth in importance and utilization. In Fiscal Year (FY) 1995, Medicare spent approximately $29 billion on post-acute services provided by skilled nursing facilities (SNFs, which include subacute providers), home health agencies, and specialty hospitals such as rehabilitation and long-term care facilities. Between 1990 and 1995, spending for post-acute services increased an average of 29 percent annually, compared to 11 percent for all Medicare benefits and 6 percent for acute, inpatient services. Post-acute spending comprised approximately 14 percent of total Medicare outlays, with more than 80 percent was attributable to SNF and home health services.

The Balanced Budget Act of 1997

Recognizing growth in total Medicare and post-acute spending could not continue unabated, the Balanced Budget Act of 1997 initiated the most comprehensive changes to reimbursement since 1965. Over the next five years, provisions of the Act are projected to trim Medicare expenditures by $115 billion. More than 21% of the savings will come from home health (13.4%) and skilled nursing (8.0%) services alone.

The changes in post-acute reimbursement and regulation are sweeping, with the most significant being that all post-acute venues will convert from cost-based reimbursement to a prospective pay methodology. Consequently, many of the financial incentives that post-acute venues provided to acute care hospitals, such as the downloading of overhead costs, will cease to exist. Coupled with this, payments to acute care providers who "transfer" patients will be reduced. While these changes do not mean that post-acute venues will cease to offer hospitals and health systems value, the rules of the game have changed and providers must respond accordingly or risk potentially huge financial losses.

The Post-Balanced Budget Act of 1997 Era — Are You Ready?

As a result of the BBA, there are likely to be significant changes in how and who delivers post-acute care. Among the significant changes that one could expect are increased:

• Consolidations as providers (particularly hospital-based) seek to divest post-acute venues that no longer offer the financial opportunities of the pre-BBA era.
• Specialization among post-acute venues, with providers focusing on those patients offering the most favorable reimbursement opportunities.
• Capitation as providers reduce costs, improve case management and enhance infrastructure.

Given the implications of the BBA providers must be prepared to respond quickly and decisively. Unfortunately, there are no stock answers for determining what the appropriate response is. Every provider and market possesses its own nuances, which suggests that each should adopt an individualized course of action. Nonetheless, some basic short- and long-term PPS readiness initiatives exist.

The short-term processes focus on those actions necessary to understand the BBA’s implications for your facility and ensure immediate compliance with the Act’s provisions. The longer-term processes are more strategic in nature and focus on two critical questions:

• What is the strategic value of continuing to own and operate each of my post-acute venues?
• What operational, clinical, financial and strategic options are available to maximize the value of each of the post-acute venues to the hospital/healthcare system, its physicians and patients?
• Figure 1 provides some of the critical steps that providers must follow to ensure that providers are "PPS Ready" – both from a short-term and long-term perspective.

PPS Readiness Initiatives

Short-Term PPS Readiness Initiatives

• Re-examine prior year cost reports to ensure total accuracy for use as basis during transition from cost-based to PPS reimbursement for home health and skilled nursing.
• Evaluate Minimum Data Set (MDS) data for skilled nursing facilities to estimate case mix to be used for PPS reimbursement.
• Quantify the impact of the BBA on each of your post-acute venues (home health, skilled nursing/subacute, acute rehabilitation and long-term acute).
• Quantify the impact of the "transfer rule" on your facility.
• Evaluate and redesign, as necessary, core processes to ensure compliance with billing and other operational changes imposed by the BBA (e.g., consolidated billing requirements in skilled nursing).
• Educate caregivers and other key staff on the changes imposed by the BBA and the implications on their day-to-day responsibilities.
• Conduct top-level operational benchmarking to identify areas that warrant immediate attention in light of declining reimbursement.

Longer-Term PPS Readiness Initiatives

• Assess the quantitative and qualitative contribution of each post-acute venue to your hospital/health system. Consider: mission, managed care strategy, continuum of care issues, competitive factors, quality of care issues, and direct (venue’s profitability) and indirect (impact on acute care) financial implications.
• Determine whether owning and operating each post-acute venue is the appropriate strategy for your hospital/health system.
• If no, consider options for: (1) discontinuing ownership of post-acute venues including closing, leasing, and divesting of venues and the financial, marketing, operational and clinical implications of each option; and (2) affiliation and joint venture opportunities, particularly with other community providers.
• If yes, re-orient your post-acute venues as appropriate. Strategies include re-engineering operations and/or re-orienting clinical focuses.
• Implement case management systems that span across both acute and post-acute venues.
• Identify and implement appropriate cost reporting and other information systems.
• Re-educate staff and physicians regarding changes in clinical focus, operational and compliance issues, and reimbursement.
• Continuously monitor direct and indirect financial performance. Adjust clinical and operational processes, as appropriate.

Given the BBA and its likely impact, the question remains:

"Are You Ready?"

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Last modified: June 22, 2001