When Tammy Beers sends her nurses into the field, they will carry more than bags filled with stethoscopes, needles and bandages.
They also will be toting laptop computers.
Beers, administrator of Saint Agnes Home Health in Fresno, Calif., is betting that spending $500,000 to $600,000 to outfit her nursing staff with 50 laptops to collect patient-service information ultimately will pay off. By better analyzing service patterns and treatment outcomes, she hopes to achieve lower costs and increased efficiencies.
Like other post-acute providers highly dependent on Medicare revenues, Beers is making major investments and organizational changes to prepare for what hospitals have labored under for more than a decade: a prospective payment system.
Several proposals aimed at reducing the rate of growth in Medicare spending on home-care, skilled-nursing and rehabilitation services are moving to center stage in the congressional debate over how to reform Medicare and balance the budget.
As two of the fastest-growing areas of Medicare expenditures, home care and skilled nursing are favored savings targets. The average number of home-care visits has increased more than 40% between 1992 and 1997, rising to 74 visits per patient from 52, according to HCFA. The average payment per visit has risen to $68 from $57 during that time. While the average number of days a patient stays in a skilled-nursing facility has remained fairly constant, patients have been receiving more therapy services, more than doubling their average daily Medicare payments to $314 from $151 between 1992 and 1997.
HCFA predicts such increases in volume will lead to an annual growth rate of 10.6% for home-care Medicare expenditures from 1997 to 2002 and a 10.5% annual growth rate in payments to skilled-nursing facilities.
If home-care and skilled-nursing providers don't start reducing their expenses, the transition from cost-based reimbursement could cost them more than $21 billion in Medicare payments over the next five years.
The real world. "The industry has been spoiled," notes Patricia Sevast, director of clinical and administrative consulting for Lorenz & Associates in Baltimore. "The problem is that Medicare now pays an overwhelming share of costs. With a new reimbursement system, the industry will move into the real business world."
Post-acute providers are still operating under basically the same cost reimbursement models that acute-care hospitals used before their own dramatic shift to a PPS more than 13 years ago. Currently, a home-care agency, for example, makes money by billing Medicare for as many patient visits and services as possible. The agency is reimbursed for the total amount of its costs, within certain limits, with little regard for what condition the patient is being treated.
But under a PPS, reimbursement no longer would be so open-ended. HCFA essentially would set regional reimbursement rates based on the historical costs of providers in the same area. The rates would be classified according to the patients' medical condition and overall support needs and would be prospectively set on a per-day or per-episode-of-care basis. Pro-viders would receive payment following the course of care. If they kept their costs under the reimbursement rates, then they would make a profit. Otherwise, they would lose money.
HCFA already has initiated plans to test PPS models in the real world of post-acute providers. It has formed an internal work group to look at developing one unified PPS system for all post-acute providers. It also has contracted with various research groups to conduct several PPS demonstration projects.
Rand Corp., a Santa Monica, Calif.-based research firm, is expected to release in April its proposal for an inpatient rehabilitation PPS based on the results of a study of the costs and practices of more than 400 rehab hospitals. Mathematica Policy Research in Princeton, N.J., is evaluating cost and utilization data collected from 91 Medicare-certified home-care agencies in eight states. And Abt Associates, a Cambridge, Mass.-based research firm, is analyzing information gathered from more than 600 skilled-nursing facilities.
HCFA officials said their agency has made the most progress on a PPS model for skilled-nursing facilities. The agency said it could launch a nationwide PPS for these providers as early as 1998. By contrast, the agency is not expecting Abt to produce an applicable patient classification system for home care until January 1999.
Washington wants changes. But back on Capitol Hill, lawmakers and industry groups are pushing for faster changes. A PPS is popular with eager budget-cutters because it would give Medicare savings upfront and offer more incentives to control expenses. And providers prefer a PPS to other budget-cutting alternatives, such as copayments and price bundling, that would give them less control over their budgets.
President Clinton's latest budget proposal includes plans for separate prospective payment systems for home-care and skilled-nursing providers. Last year's budget act, which passed Congress and was vetoed by the president, included similar provisions.
In addition, Rep. Nancy Johnson (R-Conn.) is expected to introduce a modified industry-backed proposal for a home-care PPS. To take into account HCFA's need for more data collection time, the new proposal includes a phase-in period that could set providers on the road to a PPS as soon as the bill is enacted but would delay a complete shift for five years. The original proposal, introduced at the end of the last congressional session, took providers to a full PPS much sooner.
Earlier this month, Rep. Frank LoBiondo (R-N.J.) introduced a proposal directing HCFA to use a PPS for inpatient rehabilitation hospitals.
Although the full-blown effects of a PPS may be delayed for some providers or not even passed into law, the surge in recent activity has many providers on their toes, analyzing how the various congressional proposals will affect them and charting their courses accordingly.
"We've been saying for years that we'll have a PPS, but now we're in a different environment of Medicare cuts," says Karen Pace, vice president for research and regulatory affairs for the National Association for Home Care. "We can't say what the reform will look like, but we're fairly confident that something will happen this year. It's not too early for agencies to start preparing."
Getting prepared. Given their high reliance on Medicare dollars, most post-acute providers can't afford not to prepare.
Home-care providers are among the most motivated. In 1995, 60% of home-care patients reported Medicare as their primary payment source. From 1990 to 1995, Medicare home-care expenditures increased to $16 billion from $3.9 billion. A switch to a PPS could eliminate some $14 billion in Medicare expenditures for home care over five years.
Likewise, skilled-nursing facilities could lose $7 billion in Medicare payments over the next five years. They received $9.1 billion from Medicare in 1995. Rehabilitation providers are less of a savings target. They received about $4 billion from Medicare in 1995. Currently, the PPS proposal introduced by LoBiondo is budget-neutral, meaning it will neither raise nor lower total spending.
To avoid heavy losses, many pro-viders are busy upgrading their infor-mation systems, establishing case management and clinical pathways systems, refining their accounting practices to match clinical and financial data, and determining what patients they want to include in their mix.
Barbara Phillips, who is leading Mathematica's evaluation of the home-care agencies participating in the HCFA demonstration project, says providers have made a number of changes as a result of their experimental shift to a PPS based on a per-episode-of-care model.
Phillips says research teams have visited 67 of the 91 participating agencies and found that more than half have reduced their administrative costs through such efforts as consolidating locations, increasing the productivity of visiting staff, automation and centralizing purchasing.
More than half also are developing new referral sources, such as managed-care organizations, hospitals and physician groups. In addition, she said, more than 80% are trying to expand their markets to increase volume while keeping administrative costs down.
Another key part of their strategy is to reduce the number of patient visits. Phillips says many are achieving this by increasing the supervision of the visiting staff, developing care maps to help guide the staff on which visits to cut, and using more telephone contact with patients.
Rick Matros, chief executive officer and president of Tustin, Calif.-based Regency Health Services, says his long-term-care company has reduced its home-care visits by half since signing up two of its California agencies with the HCFA demonstration project. "We're looking at how we can effectively reduce costs and still produce good outcomes," he says.
Other post-acute providers are bracing for an industrywide change to a PPS. For Beers-whose Saint Agnes Home Health receives 95% of its revenues from Medicare-the key to a successful transition will be the ability to easily track and document the needs of patients, the number and kind of services they are using, and treatment outcomes. She thinks laptops are one way to do that.
Before, her nurses filled out a patient's medical chart by hand and later compared findings with other therapists using a master chart at agency headquarters or by holding a conference. Now, a nurse enters the patients' information into the computer at the patient's home and immediately compares her findings with those of the referring physician and other caregivers. She then takes the laptop home and plugs it into her phone line. Overnight, the information is relayed to the agency's mainframe computer and is ready for other caregivers and administrators to access the next morning.
"In order to make appropriate dollar allocations under PPS, I will need to understand the typical needs of the patients," Beers says. "We will need good communication between nurses and other therapists and documentation to measure outcomes. The manual system could lead us to that but not fast enough to make operational decisions. The laptops should allow us to achieve that level of analysis in a more timely fashion."
Silver lining. Some home-care providers actually are looking forward to a PPS because it will more closely align the government's expectations with those of managed-care organizations, which already are demanding that providers control costs.
Adrienne Casanova, president of Northwestern Memorial Home Health Care/Services in Chicago, says the current divergence in the goals of managed care and Medicare has created a "schizophrenic" payment system.
To cope, she and other home-care administrators have begun managing the use of their services according to the same standards, regardless of payer source. Although this may mean providers are no longer taking in as much in revenues from Medicare, they view it as a necessary sacrifice.
Robert Fusco, president of Olsten Health Services, the nation's leading home-care provider, says three years ago Olsten was getting half its revenues from Medicare. The Melville, N.Y.-based company recently changed its name from Olsten Kimberly QualityCare.
Today, Fusco says, that percentage has dropped to 25% as a result of the company's efforts to introduce utilization controls across the board. "We couldn't ask people to operate differently," he says.
Neal Baum, CEO and president of the not-for-profit Visiting Nurse Services of the Northwest in Seattle, also welcomes a PPS.
He thinks his agency's net income could increase by as much as 25% to 35% under the new system. His cost savings, he explains, are coming from efforts to pin down and reduce all costs, from those for field travel to administrative paperwork. "There's an overall awareness among the staff that PPS is on the way, and we have to know what our costs are and where costs can be reduced," he says.
Similarly, CEO Denise Keefe has been preparing Advocate Home Health Services in Oak Brook, Ill., to take advantage of a PPS for the past two years. An internal task force has been monitoring the proposals coming out of Washington, and Advocate, a freestanding agency that receives 80% of its revenues from Medicare, has been testing different approaches.
"We will be able to refer to our tested models and implement them in a fairly quick time frame," Keefe says. The new processes, she notes, include case management and new technology, such as optical scanning to reduce paperwork.
Housecall Medical Resources, an Atlanta-based home-care provider, has embraced the philosophy that it can be more cost-effective if it covers more ground. Formed in 1994, Housecall now has more than 150 branch offices across 15 Southeastern states. "We thought for some time that PPS was a problem and decided to be proactive about reducing expenses," says President George Shaunnessy. "We want to be a broad geographic provider. With more volume, we can become more cost-effective with more buying power."
Big guns. Among long-term-care providers, industry leader Beverly Enterprises has invested tens of millions of dollars over the past three years to position the company for a change to a PPS. CEO David Banks says the Fort Smith, Ark.-based company, with $3 billion in annual revenues, is ready. "We felt like it would be here before now," he says.
In preparation, Beverly has taken almost 80% of its therapists in-house, reducing costs by 30%. It also is integrating its financial and clinical information systems to more efficiently track patient outcomes and the amount spent on each patient in relation to the prospective rates.
"We're going to be at an advantage because we've already paid the fiddler to get the company prepared for PPS," says Chief Operating Officer Boyd Hendrickson. "You can't create a cost structure overnight."
Bill Mathies, executive vice president for Beverly's skilled-nursing and rehabilitation division, says the company will benefit from a PPS because it will provide more equal payments to hospital-based and freestanding nursing homes. Beverly operates more than 700 freestanding skilled-nursing facilities in 33 states and receives nearly $750 million, or 29%, of its revenues from Medicare annually. "PPS will pay based on what care is provided, not where care is provided," he says.
Meanwhile, Richard J. Clark, senior vice president and COO of Arbor Health Care Co., said his New Orleans-based long-term-care company initiated in mid-1996 a multiyear re-engineering plan designed to tighten its efficiencies in anticipation of changes in Medicare reimbursement.
The company is changing its staff mix, including using more certified nurse aides instead of registered nurses, and bringing more ancillary services in-house. Arbor operates 30 skilled-nursing centers that each have subacute and long-term acute-care units and receives a third of its revenues from Medicare.
"We're assuming that PPS or any transitional payment system will reduce the rates generally across the board," Clark says. "A lot of providers are taking a wait-and-see attitude, assuming they can turn the Queen Mary around overnight. We think we need to go through a process for a reasonable length of time rather than cutting costs in a radical way in mid-'98 or the turn-of-the-century, whenever the change comes."
At Bacharach Rehabilitation Hospital in Pomona, N.J., Administrator Richard Kathrins has implemented a new cost-accounting system that tracks costs per patient and per diagnosis.
The hospital also has started using a critical pathways process to move patients through the system more efficiently. The hospital has designed, for example, a 28-day program to help stroke patients recover. During that period, the clinical staff notes at exactly what point certain services need to be performed and when the family needs to be trained for the patient's return home. "By the end of that time, all the elements should have come together," he says.
Hospital experience. Although the cuts appear threatening, post-acute providers can take advantage of the early warning signs and take heart from the less-than-revolutionary effects a PPS had on the bottom line of acute-care hospitals when they made the switch in 1983 (See chart, this page).
The Prospective Payment Assessment Commission, which advises Congress on Medicare issues, concluded on the 10-year anniversary of a hospital PPS that the system had succeeded in controlling Medicare spending for inpatient care but had dropped the ball when it came to the growth in per-patient hospital costs.
ProPAC reported that hospitals simply replaced their lost Medicare dollars with higher payments from private payers and with new business ventures, such as home care and outpatient care.
As a result, hospitals saw an 8.7% profit margin on Medicare patients covered under PPS in fiscal 1986 following a 13% PPS profit margin in fiscal 1985. In fiscal 1991 hospitals posted a -2.4% PPS profit margin but enjoyed a 2.48% operating margin and a 4.05% total profit margin. Then in 1993, PPS margins began climbing again. In 1995, they hit 7.9%.
And as Jeffrey C. Villwock, an analyst with Johnson Rice & Co. in New Orleans, points out, the entire healthcare environment is different today than it was when hospitals made the leap.
Unlike yesterday's hospitals, many of today's post-acute providers have had experience working under capitated systems.
Skilled-nursing facilities, for example, typically receive a third to two-thirds of their revenues from Medi-caid, which already doles out capitated payments. "The change for them is going to depend on the level of the rate," Villwock predicts.
In addition, he says, larger players and those in major metropolitan areas have been forced by managed care to face the issues of cost control and case management. The need for smaller players to tap into this experience will likely accelerate the consolidation already taking place in the industry, he predicts.
"Assuming the reimbursement rate is reasonable, then the larger companies will still be profitable and may be more profitable because their cost structures and their relationships with hospitals and HMOs are in place," Villwock says. "They know what their outcomes need to be and how to be efficient. The person who gets hurt is the one with one facility who doesn't already have these systems in place."