November 10, 2014

Value-Based Payments and the Transition to ICD-10

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Those of you who are listeners of our weekly Talk-Ten-Tuesday Internet broadcasts may have heard my “Follow the Money” segment and my comments on the financial implications regarding the implementation of ICD-10.

Recently I gave some general statistics on the growth in value-based payments (VBP) and how both the federal government and commercial payers are quickly moving larger and larger portions of provider payments onto some type of VBP. Well, here are some more points to consider.

According to the group Catalyst for Payment Reform, of the value-based payment models in action, 53 percent of commercial payer VBPs put providers at some financial riskif they fail to contain costs or improve care.

However, on the flip side, many value-based payments still fall into the category of pay-for-performance, which offers providers only potential financial rewards and no risk. I believe that the progression of VBPs will move quickly away from this model into models that will penalize providers for poor quality.

This is already being done by the Medicare program, which is seeing to it that hospitals are slapped with big penalties that experts say are only increasing. A recent study from CipherHealth shows a mounting $1.6 billion in Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) and readmission penalties facing hospitals today. That’s $1.6 billion! The survey calculated that at more than 500 hospitals nationwide, the three-year at-risk amounts were $3,500 per inpatient bed.

Based on a study by the PWC Health Research Institute, the financial impact of these value-based reforms is expected to have a significant impact on low-performing hospitals. For example, a 300-bed hospital with poor quality metrics would be penalized approximately $1.3 million a year, beginning in 2015, under Centers for Medicare & Medicaid Services (CMS) value-based reforms. And this doesn’t consider the impact of reduced payments from commercial payers. In this example, if we assume that another 30 percent of the hospital’s revenue is commercial, using the same penalty relationship, the hospital would lose over $2 million a year.

Now, let’s put that number into perspective – while profitability for hospitals increased overall in 2012, there was a wide disparity in hospital performance, with over 30 percent of hospitals running at a loss. For those hospitals, even a small decrease in payments will strain resources. So, how does a hospital fix any quality issues through changes in operational practices, which will cost money, while receiving less in payments? It will not be easy, and keep in mind that any quality comparisons, at least at the federal level, are a moving target. Under the current CMS formula, not only do providers need to improve their scores, they need to improve at a faster rate than other hospitals nationally to benefit.      

Now how does VBP relate to ICD-10? Well, the accuracy and completeness of coding drives many of the quality and severity-of-illness indicators that in turn determine value-based payments or penalties. And with the increased complexity of coding under ICD-10, the potential for inaccurate coding increases exponentially. On top of that is the uncertainty of how both CMS and commercial payers will change their measurement criteria for quality and value with the increased specificity of the ICD-10 codes. With all of these unknowns, one thing is clear – clinical documentation is, or should be, a top priority for every provider. The accuracy and preciseness of the coding of a patient's record ultimately will affect VBP payments and whether reimbursement decreases, increases, or stays the same during the ICD-10 transition. Millions of dollars are hinging on your clinicians and coders, so here are two tactics to help you tackle these transitions.

First, ease into ICD-10 codes now. Whether you have the ability and money to dual code or whether you can only afford to do this on a sample basis, start to code in ICD-10 now. You will gain a wealth of information on your coders’ strengths and weaknesses, and where your physicians need documentation education. There is no better educational environment than working with live data and actual patient records. We have all heard the mantra that practice makes perfect, so practice your ICD-10 coding now so that by October 2015, you may not be perfect, but you will be a heck of a lot better in coding overall.

Second, beef up your clinical documentation integrity program and integrate it with your coding and billing processes. I know I am preaching to the choir; however, you need to make the convincing argument to your hospital’s finance team if it is not already on board. It is more important than ever for the HIM, PFS, and clinical documentation teams to work together.

While this may be viewed as a cost in the short run, the investment will be well worth it in the long run. I’d bet on it.

About the Author

Greg Adams more than 35 years of experience in the field of healthcare including 20 years experience as a hospital CFO and 10 years as the partner in a healthcare consulting company. His experience includes financial operations, managed care contracting, physician practice management, patient accounting, patient access, medical records, materials management and real estate development.

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Gregory M. Adams, FHFMA

Greg Adams more than 35 years of experience in the field of healthcare including 20 years experience as a hospital CFO and 10 years as the partner in a healthcare consulting company. His experience includes financial operations, managed care contracting, physician practice management, patient accounting, patient access, medical records, materials management and real estate development.

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