What’s the net effect of the IMPACT Act?

by Jeff Shaw

New reimbursement model is changing the post-acute landscape

By Rob McAdams 

The latest initiative from the Centers for Medicare & Medicaid Services (CMS) in its move toward a patient-centric care model is the Improving Medicare Post-Acute Care Transformation (IMPACT) Act. This bipartisan bill is designed to enhance collaboration among care providers and physicians. 

The act mandates an electronic patient-data trail, which moves with the patient across the full spectrum of post-acute care (PAC) providers, allowing care to be coordinated in real time. The overarching goal is to create a holistic healthcare environment that pays based upon the quality, rather than the quantity, of care provided to patients.


Improving and coordinating care

The IMPACT Act includes implementation of standardized assessments for critical care issues, giving both consumers and the government access to important data regarding outcomes and cost among PAC providers. 

All PAC providers are required to use the tool to collect patient data at admission and discharge beginning in October of 2018. In addition, PAC provider data will be reported publicly on several key quality measures, such as hospitalizations, re-hospitalizations, pressure ulcers, major falls, and average total Medicare cost per beneficiary.

CMS is giving hospitals the responsibility for the patient’s care, both inside and outside the hospital. Patient outcomes, which are essentially an indication of a hospital’s performance and oversight, will be linked directly to reimbursement. 

In 2015, Medicare payment penalties jumped to 3 percent for excess readmissions. The financial incentive is high for hospitals, and as a result, hospitals are under extreme financial pressure to seek partnerships with PAC providers who can help them reduce costs and keep penalties at a minimum.

The act will shape the way PAC providers coordinate care for patients. Satisfying the hospital, a major source of patient referrals, will become increasingly important as hospitals narrow their network of PAC providers. 

The providers that demonstrate the strongest proficiency in helping hospitals lower costs and improve patient outcomes will reap the benefits of steady referral networks.

The IMPACT Act is only one of the tools CMS is using to transition from a fee-for-service model to a patient-centric model focused on quality care. The CMS Five-Star Rating System underwent a major transformation. Long criticized because the data was self-reported and unverified, the new rating system will now closely link standardized quality measures, such as re-hospitalization rates, along with data gathered directly from CMS on staffing numbers and turnover rates. 

Under the new guidelines, the five-star system will become a forced ranking system that is continuously monitored and updated. Not all skilled nursing facilities can rank as a five. When one facility moves up, another one must move down. In addition, this data will be reported publicly, giving consumers competitive insight into nursing home performance.

Both private-pay and Medicare facilities are under the same pressure to ensure efficiency of care to eliminate wasteful, unnecessary procedures, and failure to do so may result in financial repercussions. Hospitals will send referrals to only those providers earning the quality metrics of care mandated by CMS.


Referrals create access to capital

Lenders look for continuity in facility performance when assessing a property’s value and debt capacity, especially if the loan being considered is nonrecourse. This continuity comes in the form of steady occupancy, revenues and operating margins. 

A strong referral network will lead to consistent occupancy rates and a strong, consistent bottom-line performance. That consistent performance gives lenders confidence in the facility’s ability to generate the cash flow necessary to meet its debt-service obligations.

The owners and operators that can maintain consistent referrals, demonstrate strong hospital relationships and achieve consistent operating margins will be coveted by lenders looking to place capital, and will benefit by way of favorable financing terms. In comparison to their competition, they will pose less credit and default risk and will be appropriately compensated with greater access to attractive capital.

Conversely, a decline in occupancy resulting from a loss of a hospital referral stream will raise red flags with any lender. 

Lenders will look at the property’s historical performance. These lenders will assume occupancy statistics and operating margins are consistent with the weakest metrics achieved for the period being analyzed, if not lower, when determining the amount of cash flow that will likely be available for debt service. A conservatively underwritten net operating income will in turn lead to a conservative valuation from the lender’s perspective, which will reduce the amount of loan proceeds available to the borrower due to loan-to-value constraints.

These are dire consequences for borrowers that previously financed these types of properties at higher valuations, when the risk/reward for providing quality care was not as significant. Depressed facility values and looming balloon payments could spell trouble for owners looking to refinance or sell.


Bracing for IMPACT

Preparing for the IMPACT Act will be expensive. 

CMS estimates the total projected cost of the rule will be over $729 million in the first year, or $46,491 per facility. Subsequent annual costs are estimated at $40,685 per facility.

Yet the incentive is high for facilities to adopt new solutions that enhance collaboration among hospitals and physicians, and to create a team with the shared goal of reducing readmissions. Operators must eliminate unnecessary care while creating an environment that encourages collaboration between hospitals, physicians and supporting facilities.

Despite the costs, the required technology initiatives outlined in the IMPACT Act are essential to generating quality care, minimizing CMS penalties and minimizing lost revenues from empty beds.

Operators must comply with an aggressive schedule of IMPACT deadlines. By Oct. 1, 2018, failure by skilled nursing facilities to report the standardized patient assessment data or quality measures will result in a 2 percent reduction in payment rates.

The most important step is to become involved in a network or partnership and begin coordinating care. These include accountable care organizations (ACOs) and other more formalized networks. Despite the competitive advantages, 78 percent of senior living providers are not participating in an ACO, according to a recent Lancaster Pollard survey of nearly 250 providers. 

Those facilities that embrace the technology initiative to capture and share data will be in a more competitive, strategic position to improve patient outcomes. Star rankings will improve alongside profitability. 

Now is the time to emerge as drivers of patient success by consistently monitoring performance to improve patient outcomes, and to become value-oriented, patient-centric care providers.


Rob McAdams is a vice president with Lancaster Pollard. He was hired in October of 2015 to open the financial services firm’s new Denver office.

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