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December 2, 2015

Recent changes to Medicare reimbursement are expected to result in a reduction of payments to some long-term care hospitals (LTCHs) in favor of acute care hospitals (ACHs). LTCHs will need to take certain steps aimed at operational improvements, transforming strategic activities, increasing stakeholder interface, as well as business development and liquidity planning in order to prepare for the shift, according to Ronald (Ron) Winters, Cathleen (Cathy) Hernandez and Donald (Don) Casey, MD, Managing Directors in the Alvarez & Marsal Healthcare practice.

LTCHs should take a number of immediate steps to improve their sustainability. Specifically, LTCHs will need to make a concerted effort to secure high-acuity referrals from hospitals that meet eligibility requirements for LTCH reimbursement. In simplified terms, patients for which LTCH reimbursement applies will have had 72 hours ICU / CCU at a hospital and/or will or are expected to have 96 hours of mechanical ventilation. (Note: reimbursement for other patients is generally at no more than cost.)

Cathy notes LTCHs may increase their success in his area with these five strategies: 

  • A careful review of Medicare Provider Analysis and Review (Medpar) data to evaluate the potential supply of appropriate patients in the local marketplace as well as the LTCH competitive landscape; 
  • Designing a well-orchestrated outreach plan to referral sources that demonstrates ability to successfully treat high-acuity patients; 
  • Evaluating a re-design of staffing and physician support to enable treatment of a mix of patients that on balance will be more medically complex; 
  • Focusing on quality improvements to reduce complications and avoid rehospitalizations;
  • Consider other strategies to leverage the existing facility infrastructure while carefully navigating the Medicare reimbursement rule and other regulatory factors.

Don adds improving patient safety and quality will further enable an LTCH to compete for patients more favorably.

LTCH organizations may also need to look to other strategies such as bundling with providers or facilitating direct-admit arrangements with payers, as well as possibly departing from the traditional LTCH model, adds Cathy. Compliance and quality will also need to stay top of mind, as Medicare is requiring LTCHs to submit and report publicly on clinical outcomes, such as infections, complications and readmissions to acute care settings.

Can the industry predict who will falter and who will come out ahead?  The most vulnerable will likely be smaller operators with significant secured and/or real estate debt or leases, payor obligations (including Medicare) and extended trade creditor balances, as evolving value-based payment models will bring direct reductions in EBITDA and inferior quality that will therefore reduce debt capacity and enterprise value.  But, Ron adds, modeling out and implementing initiatives such as described above may create additional restructuring options.

Article Contributors

Ronald Winters is a Managing Director with the Alvarez & Marsal Healthcare Industry Group in New York. He specializes in advising companies and creditors in financial and operational turnarounds and restructurings. He has additionally had significant experience in labor relations.

Cathleen Hernandez, a Managing Director with Alvarez & Marsal in Dallas, brings a wide array of healthcare operational and acquisitonal experience to A&M clients. She focuses on driving strategic planning, operational and financial performance improvement.

Donald (Don) Casey, Jr., MD, a Managing Director with the Alvarez & Marsal Healthcare Industry Group in Chicago, consults with providers on cutting-edge solutions that improve the value of service, ensure proper cost-of-care investments, provide for value creation and facilitate accountability.

To learn more about the new Medicare reimbursement rules and their effect on LTCHs, read Ron's recent article published by the American Bankruptcy Institute (previously published in the American Bankruptcy Institute).