The Stonewall Memorial Hospital Board of Directors heard from Kyle Lee late last month, presenting a broad-stroke overview of the complexities of hospital financing and how it relates to SMH’s critical access status. These funds are tracked and monitored with the district’s cost report.
Stonewall Memorial CEO Billie Carter explained that the cost report works in hospital financing similar to the way income tax works for individuals. She said anything the district would do in the way of expanding services is reviewed to see how those services might affect the cost report.
With two brand new board members, she felt it was a good idea to have Lee present some information as to how the district operates financially and the rules critical access has on the overall funding mechanisms. “Critical access rules are very different from any other healthcare or any other business in the world,” said Carter.
Working in the healthcare industry for over 20 years, Lee began his career auditing hospitals for the government before switching over to the private sector. He has been working as a consultant for hospitals, especially rural, critical access hospitals (CAHs) ever since.
CAH designation was created through the passing of the Balanced Budget Act in 1997. The Medicare Rule Hospital Flexibility Program was formed to address the unique challenges rural hospitals were facing. Lee has been working with SMH for the better part of a decade, explaining the valuable opportunities for smaller operations that are made possible through the critical access designation.
Located in medically underserved areas or health professional shortage areas, critical access hospitals must be located more than 35 miles from another acute care hospital, provide 24-hour emergency care, and have no more than 25 acute care beds.
The average length of stay for acute care patients is 96 hours, not including observation and swing beds. CAHs are meant to treat patients, stabilize them, and get them well enough to return home or transfer them to a hospital that is better equipped to provide long-term care.
The American Hospital Association said 5,198 general hospitals are licensed by Centers for Medicare and Medicaid Services (CMS), 26% — a total of 1,351 — of which are designated CAHs as of 2018 “It’s a significant number of hospitals that are in rural areas,” said Lee
Texas has the largest number of community hospitals with 523 and the most CAHs with 87 across the state. Lee also said there should be t-shirts made that read: Critical Access Hospital status is a safety net but does not guarantee financial viability. “It’s a tenuous exercise to stay in business in rural health,” he said.
Forbs reported 120 rural hospitals have closed since 2010, and roughly 450 rural hospitals are in jeopardy of closing. Lee said the biggest indicator for hospital closures are those states where Medicaid has not been expanded, adding how important it is to talk about Medicaid expansion with state legislators.
With 20 closed facilities, Texas also leads all other states in hospital closures over the past decade. This is eight more than Tennessee, and 14 more than those at the bottom like Missouri. Missouri is the only one on the list that only recently approved Medicaid expansion.
Although CMS oversees both Medicare and Medicaid programs, each state primarily funds the Medicaid program, which is why the program functions differently from one state to another. Medicare is a primarily federally funded program and is typically more universal.
Medicare is a cost-based system that pays CAHs line Stonewall Memorial based on its cost report. The program reimburses the district on its fixed costs — such as infrastructural costs for the buildings themselves or the utilities needed to operate them—and variable costs — such as for supplies. The more patients the hospital has, the more supplies are required.
“If you have more cows to feed, you need more hay,” said Lee. “This fluctuates with your volume.” He explained how Medicare reimburses CAHs for these costs using a simple analogy of manufacturing shovels as a stand-in for treating patients.
From turning on the lights to the lease on the building, if the fixed cost is $8.00 per day to manufacture a shovel and the handles, screws, and paint totals a variable cost of $2.00 per day, then the total cost to manufacture one shovel is $10.00 per day to produce one unit.
To produce another shovel — or treat a second patient — the variable cost at $2.00, but the fixed cost is now divided in half, now only $4.00. At four units, the fixed cost would only be $2.00 with variable cost remaining the same at $2.00.
“This means we made four shovels and it only cost $4.00, so the more volume we do, the cheaper it is to produce each shovel,” said Lee. “This would be great if all patients were Medicare.”
Commercial payers, such as patients with Blue Cross Blue Shield or Humana, etc. pay at a higher rate than the 101% of the cost Medicare pays. Therefore, commercial payers are sought after for increasing profits, as it would be difficult to reinvest in the hospital with such a small profit marine that Medicare provides.
Based on the example, the hospital would get paid the cost for two patients at $8.00 apiece, additionally; a commercial payer would pay $10. Unfortunately, if one patient were self-pay then the hospital would probably get only a small payment, or, more likely, no payment at all.
This is before Medicare Advantage patients are factored into the equation. Lee said Medicare Advantage looks like Medicare but it is not, it’s actually a commercial payer that doesn’t pay as much as a typical commercial payer.
The way it works is similar to a cost-sharing program, as the federal government provides a pool of funds to a commercial payer like Humana or Blue Cross Blue Shield. The companies pay for patient services out of this pool. Whatever money they don’t pay out, the company gets to keep.
Therefore it is better for the company’s bottom line to deny care, claim services weren’t justified, or say hospital records were not sufficient in some way in order to refuse payments to hospitals.
“They are very clever at not paying,” said Carter. “We have a growing number of [Medicare Advantage] patients, and the greatest snake-oil salesmen in the world are selling those plans.”
Therefore it is important hospitals do everything possible to bill Medicare for every possible service because Medicare’s portion of charges is going to help establish some financial security.
For instance, every dollar SMH spends on its administration — such as the CEO’s salary — 59 cents is cost reimbursable. Services for adults and pediatrics are reimbursed at $1.05 for every dollar spent, pharmaceuticals are reimbursed at 83 cents on the dollar, and on the low end, EKG service is reimbursed at 50 cents on the dollar.
Based on its recent cost report SMH provided roughly $8 million in services, of which, Medicare reimbursed about 52%. Reflecting on this data, Lee said, “Therefore the rest of the shovels have to make up the rest of that four million dollars, plus some if we are going to make a profit.”