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DRG strategies from the Big 8.

The furor aroused by introduction of prospective payment for Medicare patients is finally beginning to abate. Hospitals and their laboratories are settling down to the business of refitting their operations to DRG economics.

And business is quite literally what it is. More detailed profit and loss statements, data management systems that reveal pertinent new trends, productivity studies, aggressive marketing efforts, joint ventures--in short, the standard management tools of corporate America--are the order of the day at many medical institutions.

Nowhere are such developments more evident than in the stepped-up health care planning activities of the nation's Big 8 accounting firms. Hospitals are turning to these experts and others like them for help in coping with prospective payment. Consultations range from assessments of current practices to recommendations for complete reorganization.

To find out what efforts are under way, which techniques have proved the most successful, MLO interviewed key executives in the health care planning divisions of the Big 8. Here's the lineup: Cletus J. Moll, a partner in the health care division of Arthur Andersen & Co.; Neal F. Bermas, national director of health care planning and productivity services for Arthur Young & Co.; Julie A. Micheletti, manager of national health care practice for Coopers & Lybrand; Albert A. Cardone, national director for health care services at Deloitte Haskins & Sells; John Nackel, a partner in the national health care practice division of Ernst & Whinney; John Mertens, the partner responsible for reimbursement in the health care group of Peat Marwick Mitchell; Jack Buelt, a partner at Price Waterhouse and chairman of the firm's hospital and medical services group; and Doug Newton, a partner and director of the health care consulting services of the New Jersey office of Touche Ross.

According to these experts, after the initial shock of going on an inflexible budget, the majority of hospitals discovered that prospective payment wasn't quite as painful as they had feared. That's not to say it was easy--in fact, it required a complete rethinking of the way almost every department was run.

"After all," Jack Buelt (Price Waterhouse) explains, "DRGs are the biggest revolution in health care since the original Medicare regulations. Under the old system, you didn't want to let patients go too quickly; now that philosophy has undergone a complete turnaround.

"We've seen a big increase in our hospital business since prospective payment. All of a sudden, they're interested in our business services: cost accounting, productivity studies, staffing assessments, and information systems. There's also overall higher interest in how to make better use of discharge planning and home health care."

These observations are echoed by all the other consultants we spoke with. John Nackel (Ernst & Whinney) says his firm is being asked for much more operations management advice than in the past. The four areas included in the firm's operations appraisal are staffing, scheduling, organization, and policies and procedures.

Doug Newton (Touche Ross) reports his hospital clients look for services that are oriented toward increasing productivity and supporting economic decisions. "Hospitals are bringing us in when they have questions about how a proposal will affect them economically. In data processing, for example, they're focusing more on the cost/benefit relationship instead of just throwing money at the problem."

Julie Micheletti (Coopers & Lybrand) identifies three major areas of study as operational and system management review, productivity studies, and cost containment.

One thing these studies show hostapils: Application of good business techniques can result in economies that don't appreciably diminish the quality of patient care. "All you have to do to know how inefficient a hospital might be is to be a patient there," Buelt says. "Inefficiency used to be the burden of the patient and the payer alone. Now, if a hospital can speed up diagnosis, reporting, and treatment, it can cut length of stay and improve its financial picture."

The clinical laboratory can contribute directly to shorter stays through preadmission testing and what Micheletti characterizes as reflexive testing--an automatic follow-up procedure after an abnormal result. For example, the laboratory may set a policy that a BUN significantly outside normal limits be automatically followed by a creatinine level. "If the attending physician were notified of the result, he or she would likely order the second test anyway, so why not do it immediately instead of letting all that extra time elapse?"' Micheletti observes.

"If there's any one area where cost can be most controlled," Nackel says in a similar vein, "it's in getting the patient out of the hospital as soon as possible." So important is the laboratory's contribution to this effort that Cletus Moll (Arthur Andersen & Co.) calls increased preadmission testing "our primary recommendation" to clients.

Beyond savings per DRG, a less obvious advantage of shorter stays is pointed out by Newton: "In an institution that's very heavily utilized (high occupancy rate), you can increase your admission capacity if you reduce your length of stay through preadmission testing."

He adds that the same does not hold true for a hospital with a low occupancy rate. "In a hospital with low utilization, you have to assume that they won't be able to make use of that extra patient day. In that case, what they have to do is manage costs."

Micheletti suggests other moves the laboratory might make to cut costs. "Review all standing orders. For example, some labs cancel standing orders after three days, subject to the physician reordering the test." She also recommends flagging standing orders that yield normal values for, say, two days in a row and bringing them to the attention of the attending physician.

She cites another area ripe for improvement: "Particularly in larger facilities, it's not uncommon to have a physician, a consultant, and a resident all working on the same patient. Sometimes this leads to duplicate ordering of tests. You can catch this in the laboratory after requisitions are batched by having someone audit the serial orders."

This may imply that physicians are insensitive to cost considerations. Not so, the consultants state. "Germany to what a lot of people thought, physicians want to know what services cost," Nackel says. "That information wasn't available to them before. We're finding that physicians are concerned about the cost of care. Seeing this kind of information allows them to make better decisions."

"Physicians are definitely interested," John Mertens (Peat Marwick Mitchell), confirms, but he cautions that the way information is presented may be the key to acceptance. "If you just talk to them about coding, they're not that interested. But if you explain that steps they take to correct their coding will mean another $1,000 in the hospital's coffers, you make it very relevant. They're willing to listen, at least on the first go-round, if you explain that the money lifeline of the institution is directly affected when they don't complete a chart properly or on time."

According to Neal bermas (Arthur Young & Co.), physician understanding and cooperation in efforts to cut costs and increase volume are central to hospital success under prospective payment. "In order to survive, that's going to be the name of the game. Hospitals and doctors have to work together rather than compete or have an adversarial relationship."

One approach all the Big 8 firms advocate in the physician education process is generation of computerized reports. Most of the companies license or sell software for this purpose. At Ernst & Whinney, for example, Nackel recommends a system that merges medical records, billing, and cost information to produce profit and loss statements by DRG classification, physician, or payer type. "We look at volume of service and delivery patterns by individual DRGs. Then we walk through those reports with physicians and work with them on managing costs."

Case-mix management systems are described in all kinds of literature put out by the Big 8. Albert Cardone summarizes part of the case-mix discussion in a 62-page Deloitte Haskins & Sells booklet for hospital clients: "The cost of the specific service must be computed before a hospital can determine teh relative profit or loss contributions of various diagnoses or services."

Fortunately, hospitals don't have to determine the cost for each of the 468 DRGs. Most hospitals treat no more than 50 different diagnoses, with 25 of those representing the majority of cases, Deloitte Haskins & Sells notes.

Commenting on the computer's expanding role, Newton says: "There's a tremendous amount of data needed just to respond to the Federal system from a statutory standpoint. In addition, there's a big increase in the amount of information necessary to manage under the system. For example, we need detailed information on unit costs and what it costs to treat a particular DRG. Those needs create accelerating demands on data processing. Hospitals are realizing that the only way to manage aggressively in the future is to enhance their data processing capabilities."

Once computerized systems are in place, they can be used on a day-to-day basis to cut costs. "Suppose that the lab and pharmacy are computerized and coordinated with one another," Micheletti says. "In that case, if there are three alterantive drugs of choice for a particular infection, the lab report that is printed out for the physician will include not only the MIC, but the cost of each of those drugs. The physician can then make a decision based not only on the drug, but on the cost as well."

Cost-cutting measures in the laboratory can range from the simple expedient of group purchasing to analysis of individual tests. "We encourage labs to look very closely at low-volume, high-cost tests and determine if there's a more economical way to do them," Newton says. "We explore instrument changes, as well as the classic business evaluation of make-or-buy. Should you really be doing a test internally?"

Micheletti likewise sees hospital laboratories evaluating greater use of reference labs. "There may be a trade-off in terms of longer turnaround time. On the other hand, sending out the work may be les costly--you have to balance your choices." She also urges labs to evaluate interchangeable illness-specific lab tests to discover which are the most cost-effective.

Cost control is the tightening side of hospital operations. Marketing is the expanding side. "Hospitals are really getting into marketing their businesses now," Bermas says. "Even traditional strategic planning is taking on a much more market-driven dimension."

"Marketing is one of the areas where we have seen the most activity," Nackel affirms. "You pick up a newspaper or listen to the radio, and there are ads for hospitals--preferred provider organizations in particular. There's one here in Cleveland that advertises in the Sunday paper every week and runs ads constantly. They're pretty aggressive in terms of promoting their product. Their pitch is to employers who want to reduce their medical costs and still get quality care on a local level."

By the same token, hospital laboratories are beginning to pursue outside business aggressively. Many are exploring the possibility of competing locally with reference laboratories for physicians' office testing. Micheletti also reports that hospital labs are trying to attract corporate business for employee and executive testing.

"Larger hospitals compete effectively with independent labs," Moll says. "They're only looking at incremental costs since they already have the equipment and staff."

In New Jersey, Newton has seen a substantial increase in the number of labs seeking outside revenue. "Some of the edge is taken off by the reimbursement rules for outpatient labs. However, if your marginal revenues are greater than your marginal costs, it's a good thing to do because it gives you some additional coverage of overhead."

All of the consultants stress that careful study should precede a marketing decision. Newton warns of the pitfalls. "Where most hospitals run into trouble is a failure to understand what it takes to compete in a commercial environment. There are a lot of logistical requirements, such as computerization of results and pickup of specimens, that you need to look after if you are going to compete. Labs that are doing well are taking a very aggressive and thorough business approach."

What it takes to compete--at least in southern California--may be deluxe treatment, according to an example offered by Bermas. "There's a hospital here that's trying to make its outpatient services, including the laboratory, more palatable by offering patients valet parking and a separate, easily accessible entrance to the outpatient department!

"Although that sounds comical, it's the right thing to do. People never went to hospitals for outpatient lab work if they could avoid it because it was such a pain in the neck. It was easy to get lost in the institution, and they usually had to wait a long time to get anything done. Now, they can drive right up, walk in, and get handled quickly, efficiently, and pleasantly. All the incentives are there."

This high-powered marketing approach to health care often demands a new kind of executive to run the hospital itself and oversee major departments. According to the experts we talked with, though, this is just part of a natural progression. "It might temporarily speed things up," explains Mertens, "but requirements for chief executive officers and chief financial officers have been steadily changing ever since Medicare was introduced. What's happening is that the hospital administration is becoming a true management team rather than just a caretaker."

The result is a hospital administration comfortable with exploring new business options. Moll reports that a number of his firm's clients are exploring joint venture arrangements with pathologists, either on or off site.

For the most part, however, such set-ups are more talk today than action. Bermas was highly enthusiastic about the idea. He feels that creative joint ventures are of the utmost importance and that laboratories are perfectly suited for such an arrangement.

The kind of joint venture he envisions would exclude investment by pathologists. "You need incentives to induce doctors to use your laboratory rather than someone else for their outpatient work," he says. "That's why the joint venture should include a number of your key physicians as investors. Then all concerned have an interest in seeing the venture succeed. Pathologists' revenues increase as use of their services grows, while the hospital and other physicians as investors maximixe their position. In this arrangement, everyone benefits."

Of course, some hospitals will be better able than others to adjust to prospective payment. As Buelt sees it: "Those with low cost and high volume are doing very well because the DRGs are based on averages. We just did a study for a hospital in Oklahoma. It's a good area because the volume is going up and they have low regional costs. They're going to do very well under prospective payment. Low occupancy, on the other hand, realy hurts a hospital, even fi they keep their costs down."

"Small community hospitals that are not part of a health care system may have more problems than large institutions that are," Moll says. He also predicts difficulties for northern institutions (because of higher regional costs) and for teaching programs. So does Newton:

"Teaching programs will not go unaffected by the pressures on health care costs. Although they're relatively stable so far, I don't see that continuing. The Feds are scrutinizing teaching programs to determine whether it's appropriate for Medicare to continue funding them. As they pursue that line of questioning, they'll find ways to reduce the premium that hospitals now get to continue teaching programs."

Other predictions for the future of prospective payment vary, but all the consultants we interviewed agreed on one thing: Prospective payment in here to stay, although some fine-tuning will take place over the next few years. Mertens and Micheletti, for example, think the system will have to change to take into account the acuity level within a particular DRG.

Mertens also reports a great deal of interest in prospective payment on the part of other third-party payers. "We have performed studies for Blue Cross plans across the country. As the Federal Government stabilizes its prices, they will be even more interested. Economically, they won't be able to ignore it."

Bermas goes even further: "My own view is that prospective payment under the Feds is kid stuff compared to what private payers are going to begin to come up with. We're already seeing fairly aggressive attempts from the business community in certain parts of the country to demand cost containment--either directly from providers or through intermediate payers."

Cardone's firm, too, is cautioning clients not to limit their planning to a Medicare-only system: "Some states and Blue Cross plans are already planning to implement prospective payment systems based on DRGs. It is rapidly becoming clear that hospitals must plan ahead, identify their management needs, and make every effort to insure that they can adapt quickly to the changing environment."

The question is, will hospitals and laboratories have the time they need to make the necessary changes? As Bermas points out, "It took the auto industry 10 to 11 years to get their cost accounting systems into shape; hospitals are trying to do it in three years (the Medicare prospective payment phase-in period). The hospital adjustments we're talking about are just the beginning stages here. I think quite a few institutions aren't even doing this much.

"Predictions are that 2,000 hospitals will close because they won't be able to function under prospective payment. You can already start to get an idea of which hospitals are endangered, based on a lack of activity. On the other hand, we are helping many of our clients to become more aggressive and creative in operating in this new environment."
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Title Annotation:largest accounting firms
Author:Brennan, Leslie
Publication:Medical Laboratory Observer
Date:Jan 1, 1985
Words:2917
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