Hospitals can develop strategies to cope with HCFA's new outpatient payment scheme

Jul 31, 2000

By Robert Maier

Is radiology's role as a profit center for U.S. hospitals about to end? Many hospitals are about to find out, as today marks the implementation date for the Health Care Financing Administration's new hospital outpatient prospective payment system (HOPPS) for Medicare reimbursement.

Many industry observers believe the new system will have a significant impact on radiology’s contribution to hospital profit margins. Many hospitals seem unconcerned because of the hold-harmless and transition-corridor provisions associated with the new reimbursement program. But it’s only a question of when, not if, the impact will be felt.

Historically, radiology departments have contributed 40% to 60% profit margins to hospitals based on the net revenues generated by outpatient imaging services. In hospitals with more than 100 beds, radiology has been one of the most profitable hospital departments over the last decade. And yet, hospitals have little appreciation for the contribution radiology makes to their financial viability.

But that’s about to change. HCFA's new ambulatory payment classification (APC) rates for radiology will cause significant reductions in reimbursement. The level of reductions will depend on how deeply co-insurance will be discounted to patients.

In an illustrative analysis, a 120-bed hospital in the Midwest with a mix of 50% Medicare patients and performing approximately 19,000 outpatient Medicare exams in 1999 generated net revenues from Medicare services of $2.5 million. Outpatient modalities included diagnostic radiology, ultrasound, CT, MRI, and nuclear medicine.

Applying the new APC rates with maximum co-insurance, the hospital's revenues would fall to $1.8 million, a drop of $622,000. If the hospital is forced or chooses to discount the patient's share of payment to the minimum co-insurance, net revenue could decrease to as little as $1 million, or a reduction of $1.5 million in net revenues compared with pre-APC levels. At maximum co-insurance, the loss of Medicare revenue is 25%, while at minimum co-insurance the loss could be as much as 60%.

Is cost-cutting the answer?

Is the answer to this pending crisis to immediately cut costs? Not necessarily. Hospitals should first conduct a strategic analysis to understand which tactics make the most sense for their organizations. It's important to remember that hospitals have many payors and patients who value service and quality beyond Medicare rates.

Hospitals that apply knee-jerk reactions to decreased reimbursement will end up with diminished customer service, loss of outpatients, increased unit costs, and declining margins. Departments that plan their strategies based on solid analysis can experience continued growth and profitability.

What are the steps to developing an appropriate course of action?

Get a clear understanding of your radiology department’s current financial situation. Analyze your cost per modality, as well as the revenue and margins on both existing Medicare and non-Medicare patients. Even though other payors may follow Medicare’s lead in this matter, in the future, the opportunity for increased volume and margins may still be able to make up some of the expected loss.

Perform an APC impact analysis in order to know how your procedures and services will be affected. Every hospital will be different depending on its patient mix, procedural volumes, existing reimbursement, and the 1996 cost report and wage index. Evaluate current revenue and costs against expected Medicare and non-Medicare reimbursement.

Compare APC reimbursement to other payors and to the Medicare Physician Fee Schedule (MPFS) reimbursement for non-provider-based services. In the case of the previous illustration, the 1999 hospital reimbursement equaled $406 and APC reimbursement at maximum co-insurance dropped to $384. (MPFS technical reimbursement for MR was $486 on average.)

Develop appropriate strategies to minimize the impact of HOPPS. Depending on volume, a freestanding or joint-ventured MR scanner may make sense when reimbursement would be $100 more per procedure under MPFS than under APCs. (Joint-ventured services are not reimbursed under APCs.) Depending on cost structure, you may decide to discount co-insurance on selected APCs to market directly to patients, while maintaining other services at the higher rates. But be careful here, because how you apply discounts to co-insurance is subject to advance reporting requirements and specific rules, and may require discounting to other payors as well.

Be ready for APC implementation. This includes reviewing your chargemaster, analyzing the billing and coding process for compliance, and insuring that your coding is taking advantage of all possible APC codes and modifiers. An audit of the entire process for the hospital should be undertaken as soon as possible.

The moral of the story is that you should plan a tactical strategy for your radiology department, as you would for any business, based on hard data and an understanding of the potential ramifications of your decisions. Radiology in any venue is a business, and when planned properly will continue to reward your efforts through growth and profitability, however diminished by Medicare reimbursement.

A copy of the APC illustrative analysis is available at Regents Health's Web site.

Robert Maier is president & CEO of Regents Health Resources, a medical imaging consulting and development firm with offices in Brentwood, TN, and Oakdale, CA. He is a former CPA and hospital CEO and CFO. Regents specializes in helping hospitals and physicians analyze, develop, and manage their imaging services. For more information on Regents Health Resources, visit their Web site at www.RegentsHealth.com.

August 1, 2000

HCFA gives radiology 30-day reprieve from onset of new outpatient system, June 7, 2000

Radiology awaits arrival of HCFA's new APC payment system, June 5, 2000

Outpatient rad services could be hit hard by HCFA's new payment system, April 27, 2000

Let AuntMinnie.com know what you think about this story.