American Accounting Association2011 Government and Nonprofit Section

Health Care Reform: Implications forOne Academic Medical Center

John Faulstich

CFO UAB Health System

March 18, 2011

Page 2

Agenda

I. Background on UA System and UAB

II. Reform Drivers

III. Health Care Reform – key issues

IV. Most likely changes to bills

V. Rating agency predictions for industry

VI. Implications for industry

a. IT

b. Opportunity

c. Becoming the Preferred AMC of the 21st Century

VII. Accounting issues and challenges

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University of Alabama Fact Sheet

University of Alabama System Fact Sheet

Enrollment - Fall 2010 School Undergraduate Graduate First Professional TotalUA (Tuscaloosa) 24,884 4,726 622 30,232UAB (Birmingham) 11,028 4,086 2,429 17,543UAH (Huntsville) 6,005 1,609 n/a 7,614

41,917 10,421 3,051 55,389

Research (Government Contracts/Grants FY2010)

UA (Tuscaloosa) $68,583,560UAB (Birmingham) $487,674,404UAH (Huntsville) $80,584,998

$636,842,962

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UAB Academic Medical Center Facts

I. School of Medicine:

a. Entering class in 2010 = 176 medical students; total enrollment = 749

b. Full time faculty – approximately 1200

c. Resident(s) = 814

d. Graduate trainees = 350

e. Postdoctorial scholars and fellows = 380

II. Research:

a. Total research $ = more than $400M annually

b. Ranks in the top 25 nationally in National Institutes for Health funding

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UAB Academic Medical Center Facts

III. Facilities:

a. 1128 Bed University Hospital

b. Callahan Eye Foundation Hospital, 106 licensed bed specialty eye hospital

c. The Kirklin Clinic, 430,000 square feet; I.M. Pei designed building housing 700 physicians in 35 specialties

d. Affiliated Health Care Authorities:

i. Baptist Health, 3 hospitals in Montgomery/Prattville totaling 689 beds

ii. Medical West, 300 bed hospital in Bessemer

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North Pavilion

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Women and Infant’s Center

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Reform Drivers

Exponential growth in healthcare expenditures

Substantial opportunities to improve quality of care and patient outcomes

No correlation between spending and quality

Economic downturn

Page 9

National Health Expenditures

National Health Expenditures Projected 2011 ($ in millions)September 2010 Projections

Employer Sponsored PrivateHealth Insurance $822.2 30.3%Other Private Insurance 41.8 1.6%Other Private Funds 190.6 7.0% Subtotal $1,054.6 38.9%

Medicare 548.9 20.2%Medicaid/CHIP 466.0 17.2%Other Public 342.8 12.7%

Subtotal $1,357.7 50.1%

Out of Pocket Payments 297.5 11.0%

Total $2,709.8 100%

Projected to be 17.4% of GDPSource: Centers for Medicare and Medicaid Services, Office of the Actuary

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Challenges:Healthcare Reform – What We Know

GOAL• Insurance coverage for 50 million

Americans currently without insurance

SOLUTION• Health Care Exchange

• Mandate individual coverage• Employer coverage mandate

HOW TO FUND• Medicare payment adjustments – market basket reductions, readmission and bundling payments, pay for performance• Assessments on pharmaceuticals, medical device manufactures and health insurers• Reduction in Disproportionate Share Payments• Tax employer benefits

What is not addressed:• Physician shortage• Cost-containment & Utilization

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Key Reforms and Implementation Dates

FFY: 2010 2011 2012 2013 2014 & After

High Risk Pools

Dependents Covered to 26 yrs

Small Business Tax Credits

Ends Rescissions & Coverage Limits

MBU Productivity Reductions Begin

NFP Requirements Begin

Community Health Center Funding

Report HC Benefit Value on W-2

No Fed Matching for Caid HACs

Penalties for High Readmission Rates

ACO Pilot

Co-Ops Established

Administrative Simplification

Bundled Payment Pilot

Increased Caid Pmt for PCP

Medicaid Expansion

Exchanges and Affordability Credits

Guaranteed Issue

Individual and Business Mandates

Medicare & Medicaid DSH Cuts

Independent Pmt Advisory Board

Reduced Pmt for High Levels of HAC

Boxes with diagonal bars indicate reforms that will impact hospitals as insurance providers.

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Deep DSH Cuts

Medicare and Medicaid DSH Reimbursement Will Be Reduced By $36.1B Over the Next 10 Years

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Billions of dollars in cuts

Note: For 2012 and 2013, changes in DSH payments are projected at 0.5 billion to - 0.5 billion.

Source: Congressional Budget Office and the staff of the Joint Committee on Taxation. Table 2. Estimate of changes in direct spending and revenue effects of the reconciliation proposal combined with H.R. 3590 (as enacted).

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Key State Implementation Responsibilities

Setting up insurance exchanges

Enforcing insurance reforms

Overseeing Medicaid expansion

Outreach and enrollment of new populations

Integration of Medicaid with exchanges

Application of new income eligibility standards

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New Requirements for Tax-Exempt Hospitals

Conduct a community health needs survey and develop a plan to address needs

Adopt, implement, and widely publicize a financial assistance policy

Bill patients who qualify for assistance no more than the amount billed to insured patients

Use extraordinary collection methods only after reasonable attempts to determine eligibility for financial assistance and collect

Penalty for noncompliance: $50,000 per year

Deadline: Community needs assessment must be completed in the provider’s tax year that starts after 3/23/12; other provisions take effect in the provider’s first tax year that starts after 3/23/10

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Value-Based Purchasing

A Value-Based Purchasing Program Reduces MS-DRG Payments Overall, But Provides “Bonuses” for High-Quality Providers

MS-DRG Payment Reduction UnderValue-Based Purchasing Plan

1.75%-2.00%-

-1.50%

1.00%--1.25%

-3%

-1%

1%

3%

2013 2014 2015 2016 2017

Withholds would continue at 2% of all MS-DRG payments after 2017

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Reducing ReadmissionsAlmost twenty percent of Medicare patients

are readmitted within 30 days…

Average Medicare 30-Day Readmission Rate

…resulting in $15B in cost to the program…

2005 Medicare Payments Related to Readmits

Potentially Avoidable Readmits:

$12B

Unavoidable Readmits:

$3B

…leading Congress to reduce payments for preventable readmissions beginning in FY 2013.

Key Attributes of Readmit Policy

•Will begin with three conditions and be expanded in 2015 at the discretion of the HHS secretary

•Payments reduced on all MS-DRG payments for facilities with higher-than-average readmissions

•Targeted hospitals will receive bonus payments to improve transitional care services

Minimum Payment Withhold For All MS-DRGs Over the Threshold

-1%

-2%

-3%

-7%

-5%

-3%

-1%

2013 2014 2015 and After

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Implementation Issues

Bill references that the “Secretary shall…” more than 1,000 times

CMS reportedly asked for about $1.8 billion for implementation, received $1.0 billion

Many key positions not filled – new ones being established

Timetable is very aggressive

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Most Likely Pruning

Reporting Business Payment on 1099 Form

Individual Mandate

Limited Enrollment

Public Option

Stiffer Employer Mandate

Independent Payment Advisory Board

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Health Care Flexible Spending Accounts

Repeal Over The Counter restriction

If can’t raise $2500 limit then let $ roll over CLASS Act (for care at home)

Worry is it will become entitlement Reduce Taxes on Insurers

Restructure formula so that insurers with lower premiums would not be penalized as much as others.

Most Likely Pruning

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Moody’s Assessment: Challenges Outweigh Benefits

Market basket payment reductions

Disproportionate-share hospital payment cuts (partly offset by decline in charity care and bad debts)

Higher internal auditing costs related to increased federal oversight and reporting requirements

More difficult negotiations with payers

Increase costs for medical devices and pharmaceuticals

. . . and many other provisions expected to have “mixed effects”

Source: Moody’s Investors Service, Long-Term Credit Challenges of Healthcare Reform Outweigh Benefits for Not-for-Profit Hospitals, April 2010.

“The ultimate credit effect of the recently passed federal healthcare reform for the not-for-profit hospital sector will be negative …”

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Healthcare ReformImplications for Planning

Community and Patient Engagement

Outreach and education

Health status and improvement initiatives

Patient Access

Coverage vs. Access - capacity strain

Alternative outlets of care / Alternative care models

PCP supply and demand

Care Delivery Innovations

Coordination of care

Patient Centered Medical Home

Accountable Care Organizations

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Healthcare ReformImplications for Planning

New Payment Models

Readmission penalty / Bundled payments

Value Based Purchasing

Acquired conditions

Reduction to DSH

Reduction to market basket updates ~ 3.0%

Compression of commercial rates

Quality Reporting

Public disclosure of quality performance– Hospital Compare

VBP and PQRI reporting

Enhanced Information Technology

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UAB Response:IT Preparations for Health Care Reform

Electronic Health Records – Cerner for Hospital and Clinics

Meaningful Use

Health Information Exchange – active in support state effort

Data Support for Quality, Research and Finance

Cerner – Power Insight

Informatics Division

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From Chaos and Change Comes Opportunity

Increased Demand &

Patient Volume

• 135,000 newly insured in MSA• Geographically dispersed, aging, with complex disease

New Clinical Care

Paradigms

• ACO’s• Medical Homes• Populations not episodes• Virtual networks and telemedicine

New Reimbursement

Models

• Readmissions• Bundled Payments• VBP• Integration of physicians and hospitals

• Alignment & Integration

• Coordinated Patient Care

• Target Markets & Access

• Effectiveness and Efficiency

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Developing the UAB Health System as the Preferred AMC of the 21st Century

4 Sustaining Innovation Teams represent key strategic themes Develop strategic recommendations around Healthcare Reform and market analysis Build on core service line strategy

Month 1 Month 3 Month 5 Month Month

Disruptive Innovation Develop structure for Disruptive Innovation Center and processes needed Recommend disruptive innovations in identified strategic areas of focus

Month

Service line updates Market assessment and setting strategic directions

Health care Reform panel discussion Setting the framework for AMC of 21st century Disruptive Innovation Next Steps

Task Force For Preferred AMC

Vision and Focus Areas of

Innovation

Healthcare Planning Oversight Group : Oversees, coordinates and provides feedback to teams and task force

Idea Generation

2

3

7

1

Organizational Readiness – Design Teams

Finance & Capital Plan

Approval and Implementation

6

Team 1

Team 2

Team 3

Team 1

Team 2

• Clinical Chairs

• Key Stakeholder Group

• Advisory Group

• Patient Stakeholders

Organizational Readiness - Diagnose

UABHS Board

5

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Future

What Can We Do?

1. Reduce overhead

2. Increase efficiency and effectiveness

3. Better economic alignment of hospital and physician practices

4. Increase innovation: Scope and speed

5. Questions and Discussion

Page 27

Accounting Issues and Challenges under Health Care Reform and Increased Regulatory Oversight

I. Accounting for Electronic Health Record Incentive Payments under the American Recovery and Reimbursement Act (ARRA) of 2009 to eligible hospitals and eligible providers.

II. Increase number and type of regulatory audits:

a. Medicare: Recovery Audit Contractors (RACs)

b. Medicaid: Medicaid Integrity Contractor (MIC) reviews

c. Medicare Advantage: Medicare Part (?) C Risk Adjustment Validation Audit (RADV)

d. Ongoing Other Medicare, Medicaid, and other governmental audits

e. Blue Cross and other insurers audit

f. Establishing appropriate reserves for audits