PPS: The Survivor Team.

"Moneymen" and caregiving professionals must work together. Witness the sad tale of Tommy Tu

With the constant barrage of new regulations and financial risks that have enveloped the long-term care field, it is paramount that the businessperson and the caregiver share a similar vision. The facility accountant, who once sat comfortably in a sequestered office crunching numbers, must now reach out and communicate with other essential staff. The controller must sit with the rehab director to determine hours worked in relation to treatments provided, and speak with the medical director to better comprehend drug costs. The controller needs to talk with nursing to understand the need for certain staffing patterns. Most importantly, there needs to be ongoing dialogue and a pervasive trust among all key personnel, so that important decisions are made with accurate and complete information.

There was a time, not too many years ago, when one could use comparisons, year to year and month to month, to drive facility healthcare decisions. Because of the consistency in spending patterns from one year to the next, the accountant had minimal need to discuss and communicate issues with the rehab, nursing and admissions departments. There were few "short-term rehab" residents in nursing home settings and new rehab admissions were significantly fewer.

This is no longer true. Things have changed and will continue to change. The average length of stay has declined substantially for many nursing care providers. This has resulted in more discharges and, consequently, more patient receivable accounts.

Vacancy levels have changed significantly; there appear to be more beds than there are patients to fill them. The days of waiting lists for admissions are over and have been replaced with a fiercely competitive market. Some facilities are struggling just to maintain bedhold status (i.e., 95% occupancy). Patient acuity has increased significantly. Discharges from hospital to nursing home for patients who are less than one week post-op is now the norm. Nursing homes perform complex wound care and extensive IV therapy, along with a myriad of other technologically advanced services, once provided only in acute care settings. Certainly it is difficult for nursing homes to attain 98 to 99% levels of occupancy today because of the decrease in length of stay and the increase in alternatives to institutional long-term care programs.

The situation started to change, in New York, in 1986. The State of New York (Medicaid) developed a new approach to reimbursement based on a "modified pricing system." This system allowed facilities, for the first time, to earn a marginal surplus by spending less than abase (minimum) price. Thus, the astute accountant eliminated the "spend it and get it" policy and replaced it with a philosophy of "reduced spending and increased surplus." Now there was a need for financial personnel to communicate with and understand key staff.

This trend actually had its inception in the late 1970s, when the New York Department of Health prohibited nursing homes from segregating Medicare Part A patients to a distinct-part (i.e., certifying a specific portion of its beds as a distinct-part Medicare Part A unit). Therefore, the New York Medicare Part A (high-acuity) reimbursed rate was compatible (excepting the allowable ancillary costs) with the lower-acuity New York Medicaid rate, because both rate methodologies used comparable formulas that divided "total" costs by the "total" days, in the development of rates based on a weighted average "cost" per day.

The formulation of third-party reimbursement rates based on weighted average costs resulted in diluted reimbursement (compared to the actual Medicare Part A costs) for the higher-acuity Medicare Part A patients and conversely generated greater reimbursement(than cost) to the lower-acuity Medicaid patient. The Medicare Part A (diluted) reimbursement rate was limited further by a restrictive routine cost limit (RCL).

Commencing in 1995, nursing facilities (in New York) that participated in the Medicare Part A Demonstration Project (demo project) received substantially higher reimbursement rates of pay (without a reduction in their Medicaid rate). This was a result of a payment system that was based on a "pricing system" driven by a predetermined charge for a resource utilization group (RUG), rather than by a "retrospective cost reimbursement." Medicare Part A patients were no longer held to a diluted "cost" reimbursement and rates for these types of services substantially increased revenues from previous years.

In exchange for higher rates of reimbursement, New York nursing homes (participating in the Medicare Part A demo project, along with four other states) shared their clinical data (MDS+) with the federal government. This information was used in the development of the PPS rates instituted nationally in 1999. The "prices" developed by the federal government were substantially greater than the "cost-based rates" used in New York.

These same prices, however, became financially devastating for many nursing homes, which had previously been paid using a reimbursement method based on segregating, identifying and concentrating costs attributable to a distinct-part nursing unit or cluster of rooms. Table 1 shows the relative impact of PPS in nursing facilities with and without distinct-part, cost-based reimbursement.

Without exploring cost accounting alternatives, many administrators and owners scrambled to admit residents with higher acuities to produce higher gross revenues. Although it has been historically true that the higher-acuity patients have generated increases in gross revenues in excess of the incremental costs of serving them, it is potentially dangerous to conclude that this will always be the case. One must take into account, for example, the "absorption principle," which assumes the possibility that staff utilization did not approach capacity levels in prior years. As admission policies target heavier care patients, many New York nursing homes were able to absorb the underutilized staff, and the resulting increased revenues fell directly to the profit and loss bottom line. This has led some nursing home managers to believe that higher-acuity patients will always produce increased net surplus. Internal studies at one author's firm (Horan, Martello, Morrone) concluded early in the process that many RUG pric es were insufficient to cover costs. We found that, as utilization increases in these RUG categories, staff eventually reaches its optimal production level. Once this optimal level is surpassed, the crossover will lead to a decline in net revenues.

This decline in net revenues has accelerated with the increase in high-acuity admissions in many facilities throughout the nation. Unfortunately, many of these decisions were made hastily and without consideration of each facility's unique workings, as illustrated in table 2.

For a simple case study of this, let's look at what happened recently to Tommy Tu's (imaginary) Chinese restaurant. After graduating from high school, Tommy built and operated the eatery for 40 years. He was a wonderful entrepreneur and, in 1990, empowered his son, a college graduate, to oversee the operation of the restaurant. The restaurant had always had a consistent mix of customers: 65% were families with children, 10% were teenagers and 25% were seniors there for discount lunches or early-bird dinners. The average profit was approximately $50,000 per year.

The situation was stable until 1995, when the son decided to change the restaurant, to an "all you can eat and drink" establishment. He made his decision after having difficulty finding waiter/waitress help. The "serve your-self" approach resulted in a tremendous increase in profits from 1996 to 1998, averaging approximately $75,000 per year.

But, in 1999, the clientele began to change. The restaurant became a hangout for high school football teams. These patrons had enormous appetites and their presence intimidated both families with children and seniors, who stopped coming to the restaurant. The son had not anticipated this result. Profits fell, and he had to rethink his decision to change.

As this unhappy story indicates, the two fundamental cornerstones in any business decision are:

a. a clear understanding of the mission or goal

b. adjusting to variable costs in direct relationship to changing revenue streams (in this case, population mix and charges per unit) in a timely fashion, while taking into account competition for market share.

"A" is accomplished only when all key personnel are included in the fact-finding journey. Remember, each bit of information might serve as a useful piece in solving the difficult puzzle of decision making.

As for "b," good business decisions cannot solely be the result of an accountant's synopsis of numbers and projections. Operators and administrators must understand the long-lasting impact of the choices they make within a business context. Using a hasty, poorly thought out Band-Aid solution to facility vacancies might generate some temporary relief (just as Tommy Tu experienced), but might create difficult and unwanted situations in the future.

So how, exactly, are decisions made in your nursing facility? How are patients admitted? Is there a strategy governing this, and what is it? Does the strategy have any substantial facts to support it? How does your nursing facility change its strategy when there is a change in occupancy (say, from 98% to 94%)? Is the admissions coordinator aware of the strategy, and is it formalized as written policy? What happens if the acuity levels drop--is the direct, hands-on nursing and rehab staff reduced accordingly? When should your nursing facility change its standard criteria for admissions?

All of these questions affect day-to-day operations. Yet many facilities today do not have a clear understanding of how to address these questions as they attempt to make needed adjustments.

Cost accounting provides nursing facilities the necessary understanding of unit margins and will serve as the basis for the development of an admission plan strategy. Today's mercurial environment requires, however, that the successful facility view healthcare decision making as an art as well as a science. The essential personnel in a facility must understand the financial formulas and use them to create results rather than simply to verify them. Both the financial advisor and the healthcare provider of a skilled nursing facility must realize that financial reimbursement has changed, and will continue to change. Indeed, change is the only thing that is certain.

This understanding will allow the unlikely team of caregiver and controller the ability to make medical decisions based on facility-specific abilities and limitations. It is this ongoing communication, trust and uninhibited sharing of ideas that generates the development and implementation of strategies that work. The vital bond between nursing and finance is one that will encourage and promote a powerful and positive momentum for the facility.

As an example, take this article--the joint creation of an accountant and a nurse.

Anthony Morrone has been a partner in the accounting firm of Horan, Martello, Morrone, PC, since 1980. Jill Smoller is assistant administrator and director of nursing at Carillon Nursing and Rehabilitation Center, Huntington, N.Y.