Module 4: Introduction to the Capital Analysis Tool powered by Kaufman Hall
Definition, Clarification and Assumptions for Key Input Parameters in the Model
Many of the data entry points that you will be asked for while completing the Capital Analysis Tool powered by Kaufman Hall will be simple and easy for you to obtain. This section will focus on the required data entries that may not be familiar to you, or data entry points that may need clarification, or where data must be acquired from sources outside your department.
Before we jump into the model you must understand how external factors could impact your capital project. Following is a list of external factors that play a key role in how your institution projects patient mix, reimbursement rates, and growth. Before completing the model, it may be advantageous to have a discussion with your Planning, Marketing, or Finance department to help determine how your institution is, or might be impacted by these external forces.
BBRA (Balanced Budget Refinement Act)
In 1997 the Federal government signed into law the Balanced Budget Act. This was the most significant change to Medicare and Medicaid programs in 30 years. The purpose of the act was to extend the life of the Medicare trust fund, reduce Medicare spending, increase options to seniors, fight fraud and abuse, and improve preventative benefits. The result of this legislation was major reimbursement reductions for Medicare providers, reducing net revenues, and negatively impacting operating margins and profits. Especially hard hit was the home healthcare industry. Part of this act was to mandate an outpatient prospective payment system for Medicare, now called ambulatory patient classifications (APCs), a fixed price payment system. To help stem the tide of the Balanced Budget Act provider reductions, Congress passed the BBRA in 1999. This act created certain monetary safety nets for hospitals as the APC program is phased in, and may help in the short term to improve revenues.
Knowing what your Medicare/Medicaid payer mix is will be important in projecting what short-term benefits the BBRA will provide for your institution in terms of reimbursement charges. You will be asked to provide standard reimbursement charges for all payers for any new procedures your capital project may bring in. Your Finance department can give you typical Medicare reimbursement rates based on the BBRA and also help you project the impact of APCs on your outpatient population in the future (more on APCs below).
HIPAA (Health Insurance Portability and Accountability Act)
In 1996 the Federal government passed this Act which has two components; protecting health insurance coverage for workers and their families when they change or lose their jobs, and prevention of fraud and abuse through administrative simplification (electronic data standards). HIPAA will mandate the electronic filing of patient bills, thereby requiring all healthcare providers, payers, and employers to upgrade their information technology (both hardware and software).
The implication is that if your capital project is an IT project you may have an easier time justifying the purchase. Consequently, if it is not, you will be competing for dollars against a mandated program, even though the return on investment for the IT project may be lower than your capital project. Talk with your CIO or Capital Expenditure committee to understand the capital investments your institution may be planning.
Medicare APCs (Ambulatory Payment Classifications)
As was discussed earlier, the Balanced Budget Act of 1997 mandated the Medicare APC system. Prior to the APC system, Medicare’s payment to a hospital for outpatient services was based on that hospital’s cost and charges for a procedure. Under the APC system, which is similar to the inpatient DRG system, hospitals will receive a fixed payment based on various mandated groupings. As of August 1, 2000, the Medicare APC program has taken effect. Hospitals that receive a greater portion of their revenue from Medicare outpatient services will be more at risk under the APC system than those with smaller portions.
There are two immediate impacts that you and your institution should consider when projecting outpatient volumes and revenues. They are; 1) what is the impact on reimbursement rates, and 2) from an institution perspective, will there be any adverse affects (decrease in revenues, days in accounts receivable) because of inaccurate claim submissions due to coding complexities. As you and your institution project out into the future, you must also consider the impact of other payers (i.e.: PPO’s, HMO’s) adapting this system for outpatient accounts.
For services such as Laboratory the impact is minimized because these services are still paid on a fee schedule that will not be affected by current APC regulations. In addition, rural hospitals with less than 100 beds will be exempt from APCs until 2004. Cancer hospitals are permanently exempt from APC regulations. Keeping abreast of APC impacts and regulation changes will again add validity to your outpatient volume and charge projections in the Capital Analysis Tool powered by Kaufman Hall.
Demographics
The most important projection that you will make when using the Capital Analysis Tool powered by Kaufman Hall will be volume, which will directly affect your institution’s revenue stream and variable expenses. Patient or procedural volume projections are certainly impacted by the external forces discussed above. These are fixed impacts and are not very controllable by your organization. Your institution however, can analyze population demographics in your service region and determine what type of services and disease categories they would like to target. This will most certainly impact projected volumes.
Again, discussions with your Planning and/or Marketing departments will aide you in determining what demographic trends (population growth, patient age, ethnic mix, etc) are, or may impact your institution. This will help you to make more educated assumptions when making volume projections in the Capital Analysis Tool powered by Kaufman Hall.
Competition
Local competition is also a factor that can impact volume projections. Being savvy about what services are being provided by local healthcare providers, and most importantly what future directions other providers are taking, is key. Some questions you should be asking are:
Will my project compete with a local provider who offers the same, or similar service (e.g.: a new PET scanner in the local area)?
Who is my referral base and how will I differentiate my services from my competition?
Are local providers expanding facilities, investing in technology, or specializing in services such as a Women’s Healthcare Clinic or an outpatient Cardiology service?
Where can you obtain this information? Your Planning and Marketing departments should be able to help you with this information. In addition, check local newspaper clippings and your competition’s web sites to look for investment and expansion announcements. Factoring this data into your volume projections in the Capital Analysis Tool powered by Kaufman Hall is vital to the validity of your results.
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