Do You Have a Flight Plan? Budgeting Strategies to Navigate PDPM

Thoughtware Alert Published: Aug 14, 2019
PDGM Healthcare Professional Taking Care of Patient

CMS is preparing to launch the new Patient-Driven Payment Model (PDPM). Effective October 1, PDPM is transforming the landscape and will be the most significant change to the Medicare skilled nursing facility (SNF) payment system in more than 20 years. CMS has built the model on a “budget-neutral” basis; that said, industry leaders, including BKD, are predicting facility-to-facility volatility under the new system. The CMS budget was built based on its assumptions—not the least of which was budget neutrality. However, actual results may vary significantly based on hospital referrals and the changes in recent years from serving patients with elective procedures—which was a large portion of the patient population at the time the PDPM reimbursement model was constructed—to the more clinically complex patient type being served today. We could analogize navigating the new PDPM to flying a small, single-engine airplane across country—both involve certain risks and rewards. To arrive safely at the destination, one needs a flight plan, and for PDPM that flight plan is your budget. To succeed under PDPM, SNFs must carefully consider their budgets and the potential changes that could occur under PDPM. 

Naturally, there now are growing levels of curiosity, confusion and concern on this new journey for how a SNF should budget for PDPM. The financial statement areas affected most will be cash, accounts receivable, accounts payable, net assets for nonprofits (NP) or retained earnings with for-profits (FP), net patient service revenue, ancillary expenses (particularly contract therapy expenses) and operating income. 

But before going any further, a word of caution should be offered: Regardless of the effect CMS projects for the organization—based on comparing the 2017 five-day Minimum Data Set (MDS) under the Resource Utilization Group (RUG) methodology and the new PDPM reimbursement methodology—your organizational results indicated by CMS should be taken with a huge grain of salt. This is like taking off on a sunny afternoon without checking the weather along the flight path, where thunderstorms could be looming en route, even though they’re not currently visible. How patients receive health care has changed in the last few years, and success going forward is based more on the patient’s characteristics and needs and less on the ability to capture ancillary services provided. Consequently, organizations with a good strategic plan in place could actually realize greater reimbursement than the CMS analysis indicates. On the other hand, organizations failing to prepare may have a difficult time making a margin and will be diverted from their original destination, failing to land safely at the end of the year under PDPM despite a promising early analysis.

When preparing to fly, one needs to assess all the conditions before ever firing up the engine: weather, weights, balance, fuel and more. When it comes to PDPM, first determine any major changes in the patients the SNF anticipates serving under PDPM. If there is an expected change in providing, in a concerted way, respiratory therapy services, for example, these additional costs need to be added to the budget. Based on the number of passengers and luggage, there may not be enough fuel to reach the final destination without stopping. So, another critical area to address in planning the budget is recent trends in census and length of stay. A quick comparison of these two stats in the first quarter of the organization’s fiscal year, versus the most recent quarter, might reveal changes that should be considered in the next year’s budget. If, however, the organization plans to treat a similar patient population with a census comparable to last year, it may be appropriate to present the budgeted revenue without change from last year. If one has prepared an analysis of recent MDS data run through a grouper to estimate PDPM reimbursement—assuming those MDS data have been prepared based on PDPM best practices and not soon-to-be outdated RUG practices—and it appears there is greater reimbursement based on the documentation, coding and patients, the SNF can make a case for increasing budgeted revenue. You could liken these additional services and level of advanced preparedness to flying a plane with a supercharged engine, as it creates more margin and would make PDPM implementation quicker and more efficient.

One thing crucial for a safe flight is radio communication with air traffic control, the tower and other pilots. One of the most significant ancillary expenses that may fluctuate in transition is rehab. Under PDPM, facility leadership and nursing personnel must communicate with the providers of rehab services—whether they’re delivered under contract or in house. There is a lot of interference being picked up around contract therapy services under PDPM. With minutes no longer driving reimbursement, it is possible the total therapy services rendered may begin to fall—or “lose altitude.” In projecting therapy costs into the future, beware: The way the organization contracts for therapy could affect volume of therapy (read more about this issue in "Crossing the Line: Navigating PDPM Therapy Rate Contracting"). As an example, if one uses a flat daily rate, depending on the rate, that approach could lead to underutilization and a decrease in cost. Similarly, if one employs a per-minute rate or time-in-facility, this could lead to overutilization and an increase in cost. A percent of the therapy component or total PDPM rate may lead to a more balanced exchange between the therapy company and the SNF, as well as more level margin by patient. The use of group and concurrent therapy may also lead to a decline in total therapy dollars in the financial statements.

One must evaluate the headwinds they will face so as to not run out of fuel; that would be like either the organization or the therapy company not having sufficient margin to survive. This leaves a couple of choices for budgeting therapy services. First, one could budget the same level of therapy services they currently are providing, if there is not a decline in census. Second, one could decrease therapy service costs in the budget, indicating a potential decrease in minutes and increase in group and concurrent therapy. If one chooses to reduce their budget in this first year it may be worth considering not overutilizing group and concurrent therapy. It is better to not decrease expenses too much, which is similar to not calculating fuel correctly; both, at a minimum, require a lot of explaining and at a maximum could lead to disaster. CMS has been very clear they will be monitoring for a reduction in therapy services for similar patient diagnoses pre- and post-PDPM implementation, so the focus of the plan should be providing the appropriate amount of service for each patient with appropriate documentation of those services. In any case, the SNF should consider contract terms (for contracted rehab), expected intensity and delivery method to realistically budget for this expense.

The mechanics of making a successful transition from the current RUG system to the PDPM system October 1 may have an effect on accounts receivable and cash, which ultimately plays into accounts payable. One needs to prepare a flight plan to bill for all patients in the SNF on September 30 and remaining on October 1 to segregate billing under each system appropriately. Being prepared will allow the organization to continue cash flow and liquidity uninterrupted. Without a plan, these balance sheet areas could be greatly affected and one could begin to lose altitude quickly, which will trickle down into additional lines of the financial statements.

Like true north, everything ultimately points to stakeholder education. So begin instructing owners (FP) and the board of directors (NP) now on the significant changes PDPM will cause to the industry and the potential for change to the financial statements. It is then imperative to include related disclosures in the budget—and ultimately the interim financial statements—about the potential effect PDPM could have on the organization’s finances. Those preparing the budget are like the pilot—the budget format and interim financial statement presentation all are within control, so consider footnoting cash, accounts receivable, accounts payable, net assets (NP) or retained earnings (FP), net revenue, Medicare ancillary expenses (particularly therapy expenses) and net operating income. Maybe even consider a single-line disclosure at the bottom of the budget and/or in the balance sheet and income statement (FP) or statement of changes in net assets (NP) within the interim financials, which mentions PDPM as a significant variable to actual financial results that are yet to be determined.

By now it’s obvious the effect of PDPM could be as revolutionary for health care as the Wright Brothers’ Wright Flyer at Kitty Hawk was for human flight. The reform will have a real and immediate impact on specific areas of financial plans as outlined above, and the time is now to plan and project for those to help mitigate potential negative effects when implementation takes off. 

There may be other areas unique to your organization, so please reach out to your BKD trusted advisor or submit the Contact Us form below to discuss.

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