By Jeff Keeling
Medicare drives the train of hospital system finance, but Mountain States Health Alliance continues looking for innovative ways to control cost and create revenue streams outside the Medicare piece, CEO Alan Levine said. In last month’s issue, we relayed part of a conversation with Levine and Chief Financial Officer Marvin Eichorn about issues facing the hospital system. Discussion points included how managerial philosophy, adjustments to Medicare “observation patient” rules, supply chain improvements and staff reductions are helping MSHA cope with declining revenues and reimbursements.
This month, we pick up on that March 27 interview with more on revenue and cost strategies, finances, government policy and MSHA’s position on partnerships, up to and including merger with another system.
Driving back the debt dragon
MSHA has maintained an adequate BBB plus bond rating for years, but the rating agencies have continually nicked the system for its debt ratios. As of June 30, 2013, MSHA had $1.09 billion in long-term debt, up slightly from a year earlier. The system had $1.06 billion in total revenues for fiscal 2013.
MSHA has seen its revenues climb as a percentage of debt since 2008, when revenues were $743 million and debt $920 million. Still, the system’s most recent rating (Jan. 22), when Standard & Poors reaffirmed BBB plus and a stable outlook, noted MSHA’s “system leverage is elevated” and concluded “MSHA’s sizable debt and accompanying high leverage remain the system’s most significant credit risks.”
That factor is changing, Eichorn said. He said a “bolus” of capital spending that began with the 2007 construction of Niswonger Children’s Hospital and continued through the recently completed surgery tower at Johnson City Medical Center has passed (S & P did cite its belief that “the spending put the system in a better competitive position.”).
“Even though we’re still spending significantly on capital ($90 million this fiscal year), what’s going on now is…a lot more focused around certain strategic initiatives we’re trying to do in various hospitals around the system (chiefly information systems), but not major bricks and mortar type projects,” Eichorn said. “That’s helped us get our days cash on hand back up again.”
The system was at 245 days cash on hand at the end of calendar 2013. MSHA policy requires the system to begin paying extra on debt when cash on hand exceeds 250 days. With just $50 million in capital spending projected for the fiscal year that begins July 1, should operating margins cooperate, MSHA could drive down some of the debt that vexes the ratings agencies. S & P’s review noted “natural improvement in debt ratios that is occurring, and … we expect that to continue over time.”
Revenues and margins key
Levine outlined several strategies related to care models and physician relationships MSHA will pursue to keep its operating numbers as strong as possible. S & P’s calculations showed MSHA finished the first quarter of FY 2014 (to Sept. 30) with $4.2 million in “excess income,” but an operating loss of $3.6 million. The agency noted MSHA’s leadership focus on “quality, ongoing physician integration, smart growth through service line and revenue cycle opportunities, cost reduction initiatives, and the development and implementation of new accountable care models…”
On the physician integration front, Levine said MSHA has two distinct business pieces with respect to doctors – employed physicians and physician practices, whether owned by or simply in relationship with MSHA. For some of the employed doctors (hospitalists, emergency room physicians chief among them) “as the business pressure goes south, in order to keep and sustain these physicians we also have to continue to sustain their income. There has been pressure on that. If they can leave and make the same or more income, you’re at risk of losing them.”
With respect to physician practices, Levine suggested MSHA is at an important point in a cyclical pattern. The system has purchased a number of practices in recent years.
“Every 10 years we run out and employ doctors, and whoops, none of us knows how to run doctor practices, so you have to start pruning and correcting course,” Levine said. “We’re challenging ourselves on every single physician practice – are we productive, are we seeing the right number of patients, what’s our expense structure. I think it’s important that we do that. And the doctors want to be productive, they want to contribute.”
Building and maintaining good relationships with doctors is crucial, Levine said. “Without them, our hospitals are big empty buildings.” The need for collaboration increases, he said, in an era when everyone in health care is working harder for the same or less money.
“There are economic interests that physicians have, and they’re real. Physicians are having to work a lot harder today than they used to have to work, and for the same or less money. We understand those pressures. As we’re thinking of our strategies, it’s not a bad thing for us to have a position that we want our physicians to do well economically.
“We want them to trust that we do understand that. The better quality we deliver, the more financial stability we have in our hospitals the better it is for the doctors. When they need that piece of equipment we can buy it.”
As for implementation of new accountable care models, Levine offered up his prediction that the early version accountable care organization (ACO) models won’t survive.
“They’re still tied to the old fee-for-service system. You still get paid Medicare fee-for-service rates, you come up with a shared savings based on utilization, but you haven’t really changed the payment model.”
MSHA’s Crestpoint product, on the other hand, works with physicians to “create payment models that are rational for the services we’re buying.”
Crestpoint, he said, “gives us an amount of flexibility that actually achieves the real objectives of reform. That is, shift the payment models away from pay for volume to paying for value.”
Medicare’s reform approach is “the worst of all worlds,” with continued payment on a fee for service basis, combined with cuts to payments.
“We’ve invested in an ACO designed for the purpose of reducing utilization. For every dollar we reduce of hospital utilization cost, we get back 25 cents of that later, or 50 cents we share with the doctors later. It’s not a great business model when you think about it, but it’s socially responsible, and that’s why we did it.
“It’s given us some practice, and once we evolve to the full-risk model, we understand a little better what works and what doesn’t work.”
I’m from the government, and I’m here to help
All hospital systems are coping with federal cuts to Medicare, but in some states they are experiencing a double whammy due to state governments’ refusal – including in Tennessee and Virginia – to accept Medicaid expansion. Eichorn said that difficulty compounds $30 million of previous cuts to the system from Medicare changes and other factors.
“The Medicaid expansion and this effort that’s under way through the exchanges, if both states were doing it, and if the exchange population was at least for the state of Tennessee sort of comparable to the rest of the country, it would go a good ways – not all the way, but a good way to offset all those cuts,” Eichorn said.
Levine has just a bit of experience dealing with the federal government. Before his last gig with a private hospital chain, he worked in state government in both Louisiana and Florida, and helped steer a Medicaid waiver for Florida through the Centers for Medicare and Medicaid Services nearly 10 years ago.
“The University of Florida evaluated the reforms and just put out a final report that said in fact that reform dramatically saved money and improved outcomes,” Levine said. “So I think there are models of transforming Medicaid programs.”
He has discussed accepting the expansion with state legislators, and also discussed Tennessee Gov. Bill Haslam’s currently stalled effort at securing a waiver for Tennessee to do an expansion its way. Levine said legislators – and he doesn’t blame them – don’t realize most of the explosive growth in Medicaid has come from “dual eligible” elderly and disabled citizens who need long term care, not from the poor and young who would benefit (along with hospital systems) from Medicaid expansion. Even when he explains the difference, Levine said, he recognizes the pressure legislators may feel to resist expansion because “Obamacare is toxic right now.
“There’s a powerful move on the far right against, if you even come within 100 miles of Obamacare you’re going to be in danger of having a primary challenge. That’s democracy in action, and that’s what we’re in the middle of. I don’t think anybody intends to hurt the hospitals, that’s just sort of the unintended consequence of all of it.”
Nevertheless, Levine sounded eager to help with reforms to Medicaid, especially if they could be accompanied by an expansion. In Florida, he said, the waiver provided rewards and incentives for certain positive health behaviors. It allowed opt-out provisions for recipients to buy private coverage if employers provided it. It gave insurance companies leeway to reestablish benefit structures to reduce overall cost and improve outcomes. Haslam’s “Tennessee plan” has some similar initiatives.
“That type of innovation has been permitted by the federal government, so I think the governor’s onto something,” Levine said. “The problem is, here’s the way it works: CMS doesn’t respond to things verbally. You have to give them a waiver. We literally drafted section by section of the waiver. We’d go up and meet with them and walk through it, and we worked – I personally had leaders from the hospital industry, the physician leadership in the state, every step of the way they were involved … We want to help the governor do that.”
Partnership search on the horizon?
While respectful of Wellmont Health System’s well-publicized search for a strategic partner, Levine said MSHA is not likely to follow suit in the near term.
“Our board is constantly looking at all of its options. For us to say we’re doing it would sound like it was something new. We’ve got a really good board. I think right now our strategy is, we’re a local system, we want to be a local system, financially we’re strong. We believe that we can be very successful as a local system.
“And I think Wellmont’s a great system. The hospitals over there are great hospitals, good people. I think we just need to let their process play out and see where it goes. I really want to be respectful of their process.”
Volumes and margins will tell the tale
According to S&P, MSHA assumes no Medicaid expansion in its five-year forecast, which predicts continued volume and reimbursement declines. Successful innovation and cost-containment both will be important, therefore, in MSHA successfully producing annual EBIDA in the $150 to $160 million range, which S&P deems “adequate to comfortably support debt service and further reduce debt, once cash exceeds 250 days.” Best case scenarios from S&P suggest a possible rating improvement, should maximum annual debt service coverage exceed 3.0 (it was 2.3 last year), cash to long-term debt reach 70 to 75 percent and debt to capitalization (61 percent last year) decline to 55 percent.
On the flip side, S&P said, a negative rating action could ensue if MADS fell below 1.7, or operating margins (1.13 percent last year) declined and stayed below 1 percent.
In late March, Levine leaned toward the positive side.
“The budget this year was budgeted down from prior year. But we’re exceeding what was budgeted. Marvin took a realistic approach to the budget process and what we were going to be able to do, and so far so good.”