Implications for a CFO-led strategic response to a Medicare-based payment system

Hospital and health system CFOs will need to play a leading role in preparing their organizations for any payment system that looks solely to Medicare for setting payment rates.

CFOs should be fully prepared for the financial implications of such a system, including the need to implement a modified benchmarking system that accounts for outliers. CFOs also should be able to guide their organizations efforts to analyze the financial, operational, clinical and strategic risks and opportunities presented by such a payment system.

Financial implications

As hospitals respond to the need to adopt the new modified Medicare benchmarking system (MMBS) to allow for valid benchmark comparisons with peers that account for outliers, finance must assume the huge responsibility of implementing the MMBS. Finance also will be charged with using the system to create meaningful executive reports that drill down into various dimensions of performance, including by individual payers, by major diagnostic categories (MDCs) or service lines and by physician and/or physician group. New case management tools will need to be developed or redesigned to facilitate side-by-side assessment of financial performance by DRG for each payer, side by side, which will be imperative for identifying the organization’s strengths and/or potential improvement opportunities for its management teams, physicians and staff charged with contract negotiations with commercial health plans.

The CFO should collaborate closely with hospital and physician leaders to ensure everyone understands the financial implications and changes required to sustain future success in a Medicare-based payment environment. 

Operational opportunities

Finance can support operational efforts to ensure all patients receive timely, efficient and high-quality services regardless of payer, by providing financial and key indicators and benchmarks —such as average length of stay (ALOS) versus geometric mean LOS, case mix index and costs — that help in assessing impacts on profits and losses by physician and health plan. Finance can take the lead in initiating such efforts but eventually should perform a supporting role in helping the operations team and physician leaders identify and implement performance enhancement opportunities.

Clinical opportunities

Assessing DRG performance utilization indicators by physician can help identify physicians who might require some intervention to assist them in operating more efficiently in a managed care environment, notwithstanding their commitment to provide the highest-quality care for each patient. The MMBS can help generate new reports, comparing physicians of like specialties, side by side, to identify key resource utilization indicators along a range of metrics, including by DRG, by ALOS, by ICU day utilization, by operating room cost and by pharmacy utilization cost, for example. Such reports have been proven to build awareness among physicians about where potential opportunities may exist, prompting behavioral changes and realizing major savings.  Many case management systems may already have such analytical capabilities, but finance should be intimately involved to ensure that the cost, payment, utilization and other data for all health plans are accurately reflected to all end users.

Strategic opportunities

Based upon the new DRG benchmarks, hospitals will need to reanalyze their strategies and possibly develop new market-driven strategies based on a new assessment aimed at determining which services they can provide at a reasonable cost. The CFO should work closely with the administrative team, the chief medical officer and other physician leaders to raise awareness of how care delivery is changing and evolving to a more population health management approach. As payment methodologies change and evolve, the CFO will need to constantly analyze these changes to determine the impact on the P&L for the organizations’ major service lines. Senior leaders will need to make hard decisions to evaluate whether they need to provide all their existing services in the face of competitor hospitals that may have higher volumes and greater cost efficiencies. Each hospital will need to assess the service needs of its community and determine which DRGs, including costly outliers, can generate a profit to sustain the organization’s future financial viability.