By Jeff Keeling
Judging from a wide-ranging interview on just his 86th day on the job, Alan Levine doesn’t appear to have wasted any time in his first 90 days as CEO of Mountain States Health Alliance (MSHA).
Then again, with hospital systems facing the twin challenges of declining admissions and reimbursement cuts as the full weight of healthcare reform bears down, Levine does not enjoy the luxury of a lengthy learning curve. In his first few weeks he oversaw a layoff announcement, and by month three Levine had redirected MSHA’s strategic planning approach – among other initiatives of what is shaping up to be an activist first year.
Levine and MSHA Chief Financial Officer Marvin Eichorn sat down with The Business Journal March 27 to discuss the beginning of his tenure and the state of the system.
Issues on the table included revenue challenges, spending cuts, and how healthcare reform colors the MSHA hospitals’ relationships with physicians, which Levine deemed highly important. Levine, though just in his mid-40s, has served two states in essentially cabinet-level healthcare positions, and came to MSHA from an upper management role at a large private hospital company,
Both men discussed some of MSHA’s initiatives to maintain positive earnings in a reform environment that saw system-wide net patient revenues decline by $20 million, or 2.1 percent, in the fiscal year that ended last June 30. They reported that short-term cost-cutting, most notably a net reduction of 116 jobs announced Jan. 15, two weeks after Levine came on board, appears to be achieving its objective. And Levine himself spoke of how he’s begun implementing his own management approach at an organization that had the same boss (Dennis Vonderfecht) from its inception. He also detailed his frustration with the federal government’s methods of reform, discussed ways MSHA can best operate within the constraints of the new normal, and opened up – slightly – about MSHA’s stance on potential partnerships or mergers.
Devolution: The Levine model taking hold
Dennis Vonderfecht’s strategic approach successfully guided MSHA through its birth in 1998 –when Johnson City Medical Center purchased five area for-profit hospitals from Columbia – and into years of steady growth to the $1 billion system it is today. It relied on a “hub and spoke” system with significant centralized power and decision-making at MSHA’s corporate headquarters in Johnson City. Without judging the effectiveness of that approach, Levine made it clear he was pursuing a different path. MSHA has already created two new positions at JCMC: chief operating officer and assistant administrator, and the system has hired a COO at Indian Path Hospital in Kingsport and will add one at Johnston Memorial in Abingdon, Va.
“We’re trying to push more of the structure into the hospitals, where our true business is,” Levine said. “Not one patient came into our system because of anything Marvin and I did. The true work in what we do every day happens in our hospitals and our doctor’s offices where people are taking care of patients.”
To that end, Levine said MSHA “scrubbed the process” with respect to strategic planning, which had been more of a top-down approach. “A lot of data and good work went into creating our long-term strategic plan, but there wasn’t as much interactivity with physicians,” Levine said. In early March, at Levine’s request, each hospital’s management team, local community board and medical leadership had a retreat.
“They’re developing a strategic plan for each of these markets based on the input of the physicians. Those plans are pushing their way up through our process here, so it’s more of a ground up approach as opposed to a top down approach,” Levine said.
“Structurally, I’m putting the pieces into those hospitals so that, again, there’s more ownership by local physicians and the local boards in what’s going on in their markets. The feedback that we’ve gotten from that process has been very positive. People feel empowered, they feel like they’re a part of the solution, and this is what I’m hearing from doctors. This is what I want, to the point of what I’m saying earlier – we’re not going to succeed because I have an idea and I push it down. That probably, in this environment, could be a disaster. What I want is for our physicians to help lead us through this.”
What the new boss walked into
Levine took the reins at a $1 billion system that has been coping with reimbursement cuts and flat to declining patient admission volumes for a couple of years now. Even before the January jobs announcement, MSHA had shed 700 jobs through attrition over two years – more than 7 percent of its workforce.
Healthcare reform had resulted in a double whammy of lower payment for services and lower admissions, particularly standard inpatient admissions. Meanwhile, the category of “observation visits,” which yields much lower reimbursements, was rising – largely thanks to what Levine considers government overreach into physicians’ decision-making.
“The only person in this entire system that actually sees, touches and talks to a patient and is authorized to make the decisions for the patient is the doctor,” Levine said. “Yet you have all of these people in Washington, and these for-profit RAC (Recovery Audit Contractor) audits and everything else that come after the fact and put themselves between the doctor and the patient. I find that appalling, personally. I think it’s bad policy. It’s not the right kind of way to practice medicine.”
Yet it has made a difference. Between fiscal 2010 and fiscal 2012, acute admissions were basically flat, and then took a sharp drop of 5 percent in FY 2013. Observation visits, meanwhile, while still accounting for less than a quarter of total hospital stays, climbed steadily each year during that period: 13.8 percent in 2011 from 2010, another 8.4 percent for 2012, and 14.7 percent for 2013. Altogether, observation visits rose more than 41 percent over those three years, while admissions were 3.3 percent lower in 2013 than in 2010.
Not only have fewer patients been admitted, but MSHA is being reimbursed less to care for them in hospital. Private insurors are following the lead of Medicare and paying less for services. The federal sequester has hit healthcare payments. Medicare cuts and other reductions are linked to the ACA. And adding insult to injury, neither of the two states MSHA operates in (Tennessee and Virginia) has elected as yet to participate in the Medicaid expansion linked to the ACA.
In fiscal 2010, MSHA reported net patient revenues of $928.3 million, and expenses of $930.2 million. The official numbers for 2013 show net patient revenues of $932.7 million and expenses of $999.7 million. While other operating revenues have made up much of the difference and allowed MSHA to retain a positive operating margin, this trend – a three-year increase of just 0.4 percent in patient revenues versus an increase of 7.5 percent in expenses – suggests a profound shift.
“All those things combined, just from a rate standpoint, we have to deal with that operationally,” Levine said.
Eichorn prepared a conservative FY 2014 budget with respect to revenues, particularly operationally. But with the cost-cutting measures deployed so far, he said that despite a continued drop in volumes through calendar 2013 (it has improved since), MSHA’s books look good at this point – as evidenced by very recent reaffirmations of MSHA’s BBB-plus bond rating by both Fitch and Standard & Poors.
“We certainly look at operations,” Eichorn said. “But we look at all those things that come into play as well (investments, other income) and essentially budget a total cash flow number, total EBITDA number. Through the end of February we were about $9 million ahead of our budget, all in, looking at total cash flow of the system.”
Shaving the top line without drawing blood
In a national scene full of pain it may have been just another hospital system layoff announcement, but that didn’t make it any easier for the new guy to come in and tell the community MSHA was eliminating 161 jobs, and that 116 of them were currently filled. Yet Levine said the painful decision announced Jan. 15 – one very visible part of cost-cutting efforts – is yielding dividends already.
“In the near term, our focus has been to just continue to keep our cost structure appropriate to the revenues that we’re receiving, and so far so good,” Levine said. “Our labor cost management in the last two months has been very effective.”
He said MSHA looked at corporate, non-clinical jobs “to try to keep the people at the bedside but to try to push out some of the administrative cost.”
Levine said long-falling patient volumes appear to finally have turned a corner (more on that later). If that trend continues, he said, there may not be another round of personnel cuts in the foreseeable future.
Labor costs total about half of MSHA’s overall expenses, with supplies running second at about 20 or 21 percent. That budget area, too, has seen serious cost-containment efforts that Levine said are bearing fruit. For instance, Levine said, MSHA is using computer analytics to spot when its vendors may be shifting codes to essentially upcharge the system.
“We’ve got some real initiatives going on right now with our supply chain, to try to continue to keep the pressure on our vendors and ourselves to make sure we’re utilizing the right supplies for the right cost.
“We think there’s opportunity there to improve our supply cost without affecting physician choice.”
RACked with pain: CMS program a poster child for unintended consequences
Speaking of physicians, Levine hopes MSHA’s relationships with them can yield dividends in areas where reform has squeezed doctors and hospitals alike. With the emphasis on cost-containment, physicians’ decisions about patient care – what treatments to order, whether to admit a patient to the hospital, and so on – have a major impact on revenues. Medicare sets the tone for the payor industry, and though for now it’s continuing to use the fee-for-service model, doctors’ decisions about what services to order are being closely watched.
In the Medicare sector particularly, the oversight of physicians and hospitals come from the Recovery Audit Contractor (RAC) program. RAC was created through the 2003 Medicare Modernization Act with the goal of identifying and recovering improper Medicare payments to providers. The government didn’t implement the RAC program nationwide until 2010, but its debut paralleled, not coincidentally, the quick increase in observation days and the decline in acute-care admissions (see chart, Page 15). Hospitals are reimbursed at a significantly lower rate for observation patients.
“Going back two years, throughout the industry we’ve seen this shift,” Levine said.
He believes some of the decisions have been driven by hospitals’ and doctors’ fears of being audited through the RAC program. Losing those audits results in fines.
“You look at these observation patients, a lot of them were appropriate to be admitted, but we’re so worried about the RAC audits and all the other stuff that comes later that these doctors are afraid to admit the patients.”
“The only difference today between whether they should be admitted or not, is whether certain things were documented the right way for a for-profit company to sit after the fact looking at a cold chart, never having evaluated the patient. These decisions are being made by people who have never seen this patient … I think this is terrible policy.”
While some self-interest is clearly involved, Levine said the shift also has created problems for patients – if not clinically, at least financially.
“When somebody is in observation status it’s covered under Medicare Part B, not Part A, and Part B has a much larger out of pocket for the patient,” Levine said. “So they think they’ve been admitted to the hospital. They weren’t admitted, they get a big bill, and they’re mad at us because they think they were admitted.”
On top of that, Medicare only covers post-acute care if a patient is admitted for at least three days, so observation patients who end up needing nursing home care afterward can get stuck with a $10,000 out of pocket bill.
“It’s actually in my view a very cynical way for there to be savings in the system,” Levine said. “It’s one thing if you say you want to cut payments to hospitals. Beyond that, it’s a massive shift in cost to the Medicare beneficiary.”
Whether it’s nursing homes or hospitals, those co-pays or out of pockets often are unaffordable for Medicare patients, “so it’s going to bad debt,” Levine said. “That’s why you see our numbers with the pressure on bad debt.”
Levine said he believes hospital systems and physicians could more effectively create solutions for a lower-cost, preventive-driven American healthcare approach with less micromanagement from the biggest payor of all – the U.S. government.
“I would far rather the government get rid of all of this and just say, ‘we’re going to cut you x amount.’ At least we’d know what we’re dealing with.”
Pushing against the RAC pendulum
So what’s a hospital system to do, beyond hoping for a change in policy that gives hospitals more flexibility? In MSHA’s case, the answer is to work closely with physicians on legitimate ways to redirect admissions, when appropriate, to acute care. MSHA recently started an initiative to educate physicians on the need for appropriate documentation to support acute admission.
“We actually had a group of physicians come together and they have led this effort,” Levine said. “In February, in the first month in over a year, we had year-over-year growth in admissions.”
That’s one example of an approach in physician-hospital system relations Levine intends to see spread across the system, whether it involves the admission/observation dilemma or any of the myriad other points where physicians and MSHA interact with money on the line.
“Our philosophy here at least from the time I’ve gotten here is, the decision about how to treat a patient is a doctor’s decision to make. Our job as a system is to support the doctor in their decision. We’ve really been tooling ourselves to do that, and we’ve seen a reversal of that trend.”
February’s 3.5 percent admissions increase was accompanied by a 3 percent decline in observation patients compared to the same month a year earlier. Levine said March acute admissions were tracking toward 5 percent growth.
“So much happened in the health system back in 2010, the system’s just been unsteady. All we’re trying to do right now is just create some consistency and steadiness operationally and get back on a platform where we have some stability. And so far, so good. Two months doesn’t necessarily make a trend, hopefully 3 or 4 months we’ll start to see some positive results from that.”
Next month: The observation/acute admission is a major factor in MSHA’s finances – and in its relationships with physicians and other players in healthcare – but numerous other initiatives will impact MSHA’s future and ripple through the healthcare and patient communities. Levine and Eichorn discuss more of those in May’s article. Drawing on experiences in Florida and Louisiana, Levine also offers his thoughts on healthcare policy at the state and federal level. He believes some flexibility could help lead to positive changes for patients and providers. Plus, more on MSHA’s financial numbers and debt situation, and Levine’s thoughts on the potential benefits of a partnership or merger with another system.