projecting the financial impact of healthcare reform
Hospitals and health systems should forecast the effects of the Affordable Care Act on various payment sources to prepare for substantial changes in net income.
The long-term financial effects of the Affordable Care Act (ACA) are expected to be profound and far-reaching. To adequately plan for the impact, healthcare finance leaders should understand the specific changes that will affect their organizations.
Provisions of the ACA are likely to influence many areas of hospital finances, including:
> Self-pay revenues
> Payer mix
> Revenue redistribution
> Bad debt and charity care
>
To examine the potential impact of relevant AGA provisions, this article considers the likely circumstances of a hypothetical 115-bed hospital in a
In this article, we assume that overall use rates-and therefore gross revenue-will not change as a result of the ACA. This analysis describes just one possible scenario, however. Many believe use rates (and gross revenues) will increase because more people will have insurance, while others think usage will decline because of mechanisms such as accountable care organizations, new payment methodologies, and other aspects of reform that are intended to make healthcare delivery more efficient. As finance leaders forecast the effect of the ACA on operations, they should consider the potential impact of increasing or declining use rates.
Quantifying the Newly Insured
To evaluate the likely financial impact that millions of newly insured Americans will have on providers over the next several years, it is necessary to have a reliable estimate of the percentage of uninsured who will obtain insurance.
In
In states that choose not to expand
Changes to Gross Revenue Sources
The next step is to forecast AGA-related changes to inpatient and outpatient gross revenue by payer. Using the calculations of the numbers of newly insured, we can calculate the change in self-pay gross revenue and redistribute it to the appropriate payer categories. To evaluate the impact on our hypothetical hospital in a
Based on the
With these percentages, we can calculate the expected reductions to self-pay and commercial gross revenue and redistribute those to the newly created exchange-payer category. This redistribution provides us with forecasted inpatient and outpatient gross revenue in various payer categories for our sample hospital under the ACA, as shown in the exhibit above. (Although the AGA includes
Changes to Bad Debt and Charity Care
After estimating the reduction in self-pay gross revenue as a result of the ACA, we can gauge the impact on a hospital's bad debt and charity care levels.
For purposes of this forecast, the assumptions are that those in the self-pay category are uninsured and that payment cannot be expected from these patients (i.e., they also can be classified as no-pay). It should be noted, however, that in reality, self-pay rarely, if ever, equates completely to no-pay. Actual analysis should reflect a hospital's experience in terms of the percentage of self-pay revenue that is typically classified as bad debt.
Based on the assumption that uninsured equals self-pay and self-pay equals no-pay, one would expect bad debt and charity levels to be reduced in 2018 by just over $i3 million, which equals the reduction of
Two components of the ACA were designed to reduce
Second, the ACA requires certain payment adjustments meant to recognize improvements in hospital productivity that were expected to result from the implementation of healthcare reform. For these productivity adjustments, the ACA refers to the multifactor productivity measure (MFP) published by the
With forecasted volumes, an assumed case mix index, and current base DRG rates, we can estimate the effect of the ACA on
We can use a similar methodology to estimate
Along with regular
Total
17.14 percent in FY17, and 46.73 percent in FY18; these figures are based on information from the CB0.b (As stipulated by the legislation that established the delay in DSH cuts, the FY16 adjustment in the exhibit is double that which was originally estimated.)
Exchange Payments
In addition to
Commercial Payments
The ACA also is likely to have an impact on commercial payments. The need for hospitals to "cost shift" for bad debt and charity care losses likely will be lessened as uninsured people obtain insurance, leading commercial carriers to seek reductions in the amount of hospital cost shifting in their contracts. We account for this decrease by reducing the expected payment increase for commercial contracts by one percentage point each year, beginning in 2015.
The exhibit at the bottom of page 106 summarizes the estimated impact of the ACA on payments by commercial plans (i.e., employer-based plans and nongroup plans outside the exchanges), including the reduction in revenue as a result of employers pushing employees to the exchanges and the aforementioned payment-rate reduction of one percentage point.
Other Adjustments
Effective for discharges after
The ACA also established the value - based purchasing (VBP) program, a quality-incentive program that is funded by a reduction in hospitals' base operating Medicare DRG payments equal to 1 percent in FYi3,1.25 percent in FY14, 1.5 percent in FY15,1.75 percent in FY16, and 2 percent in FY17 and FY18. Hospitals that perform well in designated quality measures can earn back a percentage of this payment. Using a list of VBP adjustment factors from the CMS website, we calculated the impact for 2014 and 2015, assumed the same relationship of the adjustment factor to the funding reduction in 2015, and applied this adjustment to 2016-18.
There will be other adjustments as a result of the ACA, including an adjustment for hospitalacquired conditions (HACs) that took effect Oct. i. Such adjustments will need to be evaluated as they become effective. For the purposes of this article, we are assuming no HAC adjustment for our sample hospital.
Assessing the Overall Impact
Using the assumptions set forth in this discussion, it is possible to forecast the total impact-i.e., the impact on net income-of the ACA on the sample hospital, as shown in the exhibit on page 107.
For this summary exhibit, bad debt and charity levels in 2018 are projected to be reduced by almost
This positive impact of the ACA is offset by the decrease in self-pay net revenue of $i3.3 million, which occurs as the uninsured become insured.
Additional payments for individuals buying insurance through the exchanges are projected at more than
As the numbers indicate, the financial ramifications of the ACA could be substantial. To mitigate the impact, hospitals will need to change the way they do business. Having estimated the effects of the ACA, our sample hospital's next steps should be to plan strategies and operational changes to finance the negative impact. Your hospital should do the same. *
AT A GLANCE
> The Affordable Care Act is expected to have a sweeping impact on revenue intake at healthcare organizations over the next several years.
> Self-pay cases will dwindle as more uninsured people purchase coverage through the exchanges, and
> Anticipating the long-term payment trends is vital to hospitals' efforts to mitigate the likely changes.
a. Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act,
b.
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