What are you doing about those write-offs? Providers test solutions
Bad debt and contractual allowances follow growth of outpatient sector
It’s every chief financial officer’s bane: high uncompensated care. Add to it the effects of deep discounting stemming from negotiated contracting, and the results can lead to gaping holes in your outpatient facility’s financial statement.
Following years of relative immunity from large amounts of bad debt and contractual allowances, outpatient providers like their inpatient counterparts years earlier are seeing a worrisome rise in write-offs related to managed care and the uninsured.
What used to be primarily a hospital inpatient problem driven by high occupancy rates and low insurance coverage has spread to hospital outpatient departments and independent, freestanding outpatient providers.
It’s no longer just the hospital emergency department (ED) getting hit by write-offs from contractuals and non-pay patients. Ambulatory surgery centers (ASCs) and urgent care clinics are being affected too, according to industry watchers.
Fueling the new trend have been mergers between hospitals and independent ambulatory facilities and continuing integration of health care systems into ever larger entities.
These combinations have reduced competition and helped financially strapped facilities with cash reserves and management expertise. But they’ve also raised the risk-exposure of independent providers to large financial losses through their affiliations and negotiated contracts, say experts.
Now, some aggressive financial managers are taking back the streets by forging partnerships with deep-pocketed competitors and applying imaginative accounting techniques to the uncompensated care problem.
And they’re pursuing what for many represent new, potentially lucrative ventures such as workers’ compensation contracts and non-traditional services. Some of these non-clinical services include nutrition programs that can be launched at minimum cost.
"Keep your eye on your costs, but also look for new revenue-producing enterprises," advises Linda Gosslin, CPAM, director of patient financial services at University Medical Center-Mesabi in Hibbing, MN.
Earlier this year, University Medical pushed into a new outpatient respiratory service and began working with the hospital’s existing home care subsidiary to boost business. The rural hospital also opened a new $5 million radiation therapy center offsite and launched a nutrition business that delivers meals to local employers cut off from nearby food service providers.
And not long ago, the facility was acquired by the University of Minnesota Health System in Minneapolis, which later combined with Minneapolis-based Fairview Health System. Both combinations helped finance new business lines and reduced the hospital’s exposure to bad debt and contractuals.
Are these efforts working? "For us, it’s too soon to tell. But the effort has kept us viable so far under some tough circumstances," Gosslin says.
The hospital’s No. 1 challenge, Gosslin says, is serving a staggeringly high Medicaid population that has recently shifted to managed care. The facility’s busy outpatient surgery, emergency medicine, and physical rehab services draw thousands of patients from the poorest classes.
Yet, the provider is reimbursed at 50 cents for every dollar of usual charges by the four state-sponsored plans that serve the poor. Outpatient rehab and chemical dependency treatment services, in particular, have been bleeding large amounts of money, Gosslin complains.
But University Medical isn’t facing these problems alone. Providers nationwide are stuck with the same dilemma: Either incur huge amounts of bad debt from the uninsured or be forced to accept deep discounts from Medicare and Medicaid managed care.
In either case, the losses show up as unre-imbursed dollars, says Dan Rode, MBA, a tech-nical director with the Health Care Financial Management Association (HFMA), a Chicago-based trade group. And the following trend may not be in retreat:
• The number of dollars tied to direct patient services that ambulatory facilities failed to recover rose steadily between 1991 and 1996 and probably rose faster in the outpatient sector compared with inpatient departments, say some analysts.
• Despite some indicators that show profitability rising overall for hospitals and other providers in the past five years, write-offs from bad debt and charity care figured prominently in the day-to-day financial woes of many facilities.
According to the American Hospital Association in Chicago, uncompensated care costs more than doubled for community hospitals between 1985 and 1995, from $7.6 billion to $17.5 billion.1 The amount rose even as the number of hospitals shrank due to closures: from 5,729 to 5,166.
Comparable figures solely for outpatient facilities aren’t available. However, much of the growth in uncompensated care can be attributed to the steady growth in outpatient business, says Rode of HFMA. (For a chart tracking the growth of uncompensated care since 1980, see p. 82.)
• In markets with heavy managed care penetration such as Minneapolis and Southern California, contractual allowances are getting steeper and quite probably eroding bottom-line performance on the outpatient side, says William O. Cleverley, PhD, president of the Columbus, OH-based Center for Healthcare Industry Performance Studies, a private research firm.
In 1996, write-offs from Medicare, Medicaid, and commercial health plans amounted to 34.4% of charges, up from 29.8% in 1992. But in heavy managed care areas, the write-offs can go as high as 42%, Cleverley says.
• Worse yet, the ability of financial managers to shift the loss onto higher-paying self-pay or traditional indemnity payers, a tact that’s worked in the past, has all but disappeared, says Steven M. Markesich, CPAM, business office manager with Deaconess Hospital in Evansville, IN.
"Cost-shift? There’s virtually no one left to cost-shift to anymore," Markesich says. But managed care isn’t necessarily bad, observes Ray Grundman, general manager and chief operating officer of Surgicenter of Greater Milwaukee in Wisconsin. Contracting, even with Medicaid, can be a double-edged sword.
For one, the seriousness of your contractuals depends on how you calculate them. "Are they a certain percentage below cost or charges?" Grundman says. If you report them as below charges, they’re easier to live with than if they fall below costs.
Better rates with small HMOs
About 80% of Grundman’s patients come from managed care contracts, some of which pay decently, he says. Along with strong patient volume, Grundman has been able to negotiate better rates with traditional staff-model health maintenance organizations (HMOs) than with other larger health plans.
The reason: In Wisconsin, staff-model HMOs, which employ their own physicians and affiliate with outside providers when needed, tend to contract with small groups of outside providers and, therefore, can offer better rates and higher volume than large HMOs. But then, ASCs are generally in a better negotiating position than hospitals, Grundman says.
"Hospitals have to worry about their inpatient business. They tend to lose money in the first few days of each admission. ASCs make their money upfront. For us, there isn’t any second or third day," he says. (For additional suggestions on combatting bad debt and contractuals, see story, p. 83.)
Reference
1. American Hospital Association. Hospital Statistics, Emerging Trends in Hospitals, 1996-97 Edition. Chicago: American Hospital Association; 1996.
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