Planning Services and Payer Contracting

Experience

Assessing a Major Initiative for an Academic Medical Center

Client Profile: A nationally-known academic medical center Project Type: Strategic and Business Planning; Financial Planning Challenge: To help the client make a decision about the purchase and operation of a proton beam accelerator for tens of millions of dollars. The high investment requirements had to be evaluated in the context of the organization’s commitment to clinical and research leadership. DGA Solution and Results: Getting the latest technology is often presented as an imperative for a leading institution. Our analysis was designed to bring the uncertainty surrounding the decision to an acceptable level through a thoughtful and structured process. This allowed the institution to evaluate the likely financial realities in the context of its need to maintain its clinical and research leadership position. Because the initiative would have a long lead time, we assessed the direction and pace of technological development to assure that it would still be state-of-the-art when completed. We assessed the financial implications of several different equipment vendors and financing mechanisms. We modeled the implications of specific hospital partners in the initiative. This allowed the hospital to compare its options objectively. DGA engaged a range of internal constituencies, including clinical and research leaders, administration and the Board. Given this client’s situation, we concluded that they should not purchase the equipment at this time, but should treat patients at another facility through an affiliation. When technology and reimbursement questions settle, the client will reconsider acquisition.

Planning to Increase Market Share without Capital Investment

Client Profile: A full service community teaching hospital serving a major city on the eastern seaboard Project Type: Healthcare strategic planning Challenge:To identify strategies for the hospital to increase market share with no additional capital investment. The client had fulfilled the key objectives of its prior strategic plan with the initiation of a major construction project. DGA Solution and Results: DGA analyzed market, operational, financial, and physician data, and interviewed key stakeholders in order to assess the strategic position of the hospital. DGA facilitated a planning retreat with Board, senior management, and physician leaders to gain consensus on the hospital’s strategic position and to identify strategic goals. DGA then worked with senior management to refine the goals and to plan strategies that would achieve the goals. DGA was able to identify strategies with low capital requirements and high yield in market share, by engaging physicians positively in the planning process. The result is a three-year plan outlining nine strategic priorities for the hospital, as well as the tactics to implement them, resource requirements, financial impact and timing for implementation. The hospital now has a clear plan that achieves its performance targets with minimal capital investment required.

Merging Two Community Hospitals

Client Profile: A 200 bed community hospital and a 25 bed critical care access hospital serving a common service area Project Type: Mergers and acquisitions Challenge: To analyze and validate a contemplated merger between two hospitals serving the same community and similar service areas. After several years of discussion, the hospitals had developed a preliminary memorandum of understanding outlining the organizational framework of a potential affiliation. The larger hospital offers a full range of primary and general tertiary healthcare services and maintains a large, diverse medical staff. The smaller hospital provides basic critical access services and maintains a small osteopathic medical staff of mostly primary care physicians. The hospitals sought identification of revenue enhancement and cost saving opportunities, as well as advice and recommendations pertaining to the organization, management and medical staff structures, and other aspects of the definitive agreement. DGA Solution and Results: DGA worked with the client to define the areas to be evaluated in relation to the merger. These included governance and management structure, medical staff integration, clinical programs, operations and use of capital resources and financial/economic outcomes. DGA then developed a detailed understanding of the two organizations and the proposed affiliation structure through a review of documents and data and by conducting in-depth interviews with key board, management and medical staff stakeholders. Each of the core areas were then evaluated within the context of the potential affiliation structure. More detailed analysis was devoted to unique challenges of the affiliation, including:

medical staff credentialing and integration
department-specific operational efficiencies and cost savings
the development of financial estimates for annual capital investment for facilities and infrastructure
potential incremental operating expenses
potential incremental savings

Under attorney-client privilege, DGA also prepared a separate confidential analysis of third-party contracting and reimbursement considerations potentially resulting from the affiliation structure. DGA’s validation process resulted in specific recommendations and supporting analyses for each of the core affiliation areas. The affiliation was successfully implemented and the projected benefits realized.

Revenue Enhancement for a Health System-Owned Physician Enterprise

Client Profile: Health care system Project Type: Financial planning and modeling Challenge: To assist this complex health system in quantifying the opportunity for improving reimbursement fee schedules with payers and negotiating with the payers to realize this opportunity. The health system negotiates payment rates with payers on behalf of its owned hospitals and physician enterprise and had anecdotal information that some fee schedules were significantly low. They sought DGA’s assistance in determining the size of the opportunity and developing a strategy for negotiating with payers to obtain better fee schedules. DGA Solution and Results: DGA worked with the billing and other departments within the health care system to assemble historical volume, revenue and payer fee schedules for all of the employed physicians across multiple billing systems. We developed a complex data model comparing payers’ fees with regional and national benchmarks. We modeled multiple scenarios to demonstrate the potential impact of changes in fees. DGA prepared the health system to initiate negotiations. We presented the size of the opportunities, by payer, to health system senior management, along with a detailed spreadsheet model. We drafted letters to each of the payers outlining the health system’s position regarding the need to renegotiate the fee schedules, and provided supporting documents. We assisted the health care system in developing negotiating strategies for discussions with each payer. We also provided on-going support as discussions progressed by calculating the potential impact of the payers' offers. This detailed benchmarking and analysis put the health system in a strong negotiating position, and all payers were willing to enter into discussions. To date, fee schedule increases are anticipated to result in a revenue increase range of about 5 to 30 percent per payer in the upcoming year.

Determining Feasibility of a Surgical Specialty Hospital Joint Venture

Client profile: Middle Atlantic multi-hospital system with major hospital facility in no-growth downtown location and significant competition in the growing suburbs. Project type: Facility planning; financial planning and modeling Challenge: Determine the feasibility of joint development of a surgical specialty hospital with local physicians. This bold strategic move would, if feasible, allow the health system to create additional capacity and strengthen its market position in a growing suburb by building on an extremely successful ambulatory care presence. DGA Solution and Results: DGA supported the facility planning, deal structuring, and financial analysis for development of a 44 bed surgical specialty hospital. DGA coordinated input from architects and managed the planning process to determine project cost and integration of the existing ambulatory care facility. We estimated market demand based on detailed discussions with physicians, and determined facility size based on these estimates. DGA performed several financial analyses, working closely with the system's finance staff, to estimate revenues based on the mix of actual cases treated by the likely physician participants. We built detailed budgets for the operation to determine expenses. Our financial analysis gained credibility with the system board by considering both the income from the new facility and the negative impact of shifting cases out of the old facility. DGA lead the joint venture effort to bring the physicians and the system into a balanced and equitable partnership for the ownership and operation of the new hospital. We proposed the initial deal terms and worked with outside counsel to translate these terms into the final documentation needed to close the transaction. The board approved the project, and DGA has assisted by developing the financial estimates for the offering memorandum.

Feasibility and Structuring of an Orthopedics Joint Venture

Client Profile: A 250-bed independent community hospital in Pennsylvania Project Type: Strategic and business planning, joint venture development Challenge: To respond to market challenges caused by a competitor's new ambulatory care facility, the loss of the hospital's primary orthopedics group, and other competitive threats to the hospital's market position. DGA Solutions and Results: DGA recommended several ambulatory/physician office strategies. We identified a premier orthopedics group and negotiated an arrangement for a satellite of the group to locate at the hospital. To ensure the arrangement's financial success, DGA completed a detailed financial analysis, including assessing the market opportunity and analyzing the financial benefits for multiple scenarios. We helped define the structure of the deal, ensuring that the different components of the affiliation met the required fair market value standards. The hospital has now transformed devastating losses in its orthopedics service line into a significant improvement in the hospital's quality, patient volume, finances and an improved image for the hospital in its community.

Review of Proposed Payer Contracts for Major Health System

Client Profile: Major metropolitan health system with three hospitals Project Type: Payer contracting Challenge: To evaluate the neutrality of a proposed sweeping change to the current outpatient payment methodology by a major local third-party payer. Instead of being paid on a percentage of charges, the health system was to be paid on the basis of a fixed-fee schedule. The proposed fee schedule was intended to be "neutral" with respect to the previous charge-based payment, and DGA was engaged to test that neutrality. The proposed payment methodology for Emergency Department (ED) and Ambulatory Surgery Center (ASC) services provided a single "episode of care" payment for all services to the patient. For these services, the system would be paid the lower of the fee schedule amount or the actual charges for the service. DGA Solution and Results: DGA obtained payer worksheets provided showing the data and the neutrality calculations, and hospital data showing charges and volume by service code. For ASC and ED, we obtained clinical data that allowed us to determine the "severity" of the case (which established the proper payment) and to group together all related services into each "episode". For each system hospital and department, we computed payment under the current and proposed systems. We discovered that the payer had not properly implemented the "lower of charges or fee amount" rule for the ED. Some low-severity cases would actually be paid at a lower amount than computed by the payer, so that the resulted fee multiplier was below "neutral". When the health system informed the payer of the problems, the payer dropped the rule. The work protected the system from incurring a significant loss of revenue loss in its Emergency Department and Ambulatory Surgery Center.

Evaluating a Pay-for-Performance Option for a Health System

Client profile: A five-hospital health system, struggling with the financial burden of a large base of Medicaid and indigent care patients Project type: Payer contract modeling and support Challenge: Create the tools and methodology to allow the client to choose whether to participate in a quality-based pay-for-performance program, and to provide the data to support them in participating if they chose to do so. DGA Solution and Results: We created a detailed simulation model that let the health system assess the potential impact of the proposed agreement. Based on this assessment, the client decided to move ahead with pay-for-performance, and was able to negotiate for performance metrics and goals that worked to their benefit in determining whether they had achieved quality goals. This client now has the tools and skills to manage the on-going modeling and performance analysis it needs to manage this essential payer contract. The health system has reported highly successful financial and operational performance with this payer agreement. The pay-for-performance program has also boosted morale and public image for some of the hospitals by creating a healthy competition to achieve quality goals.