The Healthcare Landscape through a Financial Lens
Monday, April 10, 2017
Steven D. Weinman, Principal, FQHC Associates
Since the 2016 presidential election, the US healthcare industry has been bracing for some significant changes. The Affordable Care Act (ACA), while certainly not perfect, has helped move the US towards universal health coverage. As part of the Obama Administration's healthcare strategy, Community Health Center (CHC) funding was increased and moved under the ACA. This year’s initial ACA replacement proposal, the American Health Care Act (AHCA), was unable to gain traction in Congress and was withdrawn. While the ACA is still the law of the land, it clearly has a target painted on it. Amidst all of this uncertainty, how can health centers plan and prepare for continued financial stability?
Grant Funding Cuts: Beginning with the G.W. Bush administration and continuing through the Obama era, CHC funding has increased significantly. By 2015, CHCs were receiving about $3.7 Billion in grant funding from the Bureau of Primary Health Care (BPHC). Unfortunately, much of the additional funding came with an expiration date, October 1 2017, the so called "Funding Cliff". If Congress and the President do not take action, up to 70% of CHC funding will be lost. Much of the funding growth came in the form of grants to new organizations, which enabled them to become CHCs. The expectation is that any funding cuts will be borne by all grantees across the board.
Outlook: Optimistic. We believe that a massive CHC funding cut is unlikely. The CHC program has historicaly been extremely popular with both parties. The various state and regional Primary Care Associations (PCAs), as well as The National Association of Community Health Centers (NACHC) have been organizing a strong advocacy effort at the state and national levels. Approximately 1 in 13 people in the US receive care at a CHC. It's doubtful that the Congress or the administration will want to destroy that capacity. In fact, depending on what other sectors receive cuts, there is a strong liklihood that CHCs may receive additional funding.
Recommendations: While we are hoping that the program will continue to grow under the current administration, we are advising CHC clients to prepare for some level of funding cutbacks. PCAs and other organizations which do not provide direct patient care, are potentially at greater risk for funding loss. As we have for the past several years, we continue to advise all grantees to reduce their dependence on federal grants.
Medicaid Revenue: Beginning in 1989 with the creation of the FQHC designation, Medicaid has steadily grown in importance as a funding source for CHCs. In 2015, funded CHCs collected about $9.3 Billion from state Medicaid programs, nearly 3 times the amount of CHC grant funding that they received. This additional revenue has in large part been the fuel behind the growth of the CHC program.
Outlook: Worrisome. Not only is Medicaid the single largest revenue source for the FQHC program, but it is under assault on a number of fronts. By picking up the total cost in the initial years, the ACA encouraged states to expand Medicaid eligibility. The current administration and Congress are trying to move 180 degrees in the other direction by recycling an old idea: Block Grants. Under this scenario, Medicaid would shift from an entitlement with strictly defined minimum coverage requirements to a fixed level of federal funding to each state. States would be given significant leeway in implementing their Medicaid program. In theory this "flexibility" allows states to innovate. While this approach might work in some states, in many it would simply serve as an excuse to reduce benefits and the number of people covered. Potentially, the FQHCs lose their hard earned statutory protections and be left to fight for their share along with all of the other Medicaid providers.
Recommendations: This is primarily a political battle, largely fought at the Federal level. In addition to educating congressional representatives on the dangers of block grants, PCAs must continue to be heard in their state capitals. If block grants do happen, it is crucial to both fully understand and educate the states in the outcome based value that CHCs provide. We strongly recommend to our PCA and CHC clients that they invest in the infrastructure required to produce measurable cost and outcome data that demonstrates the value of their programs.
340B drug program. Since its inception in 1992, the 340B program has morphed from a method to purchase drugs at lower cost, thus saving scarce resources for other uses within the health centers, to a significantly larger program. Primarily due to the ACA, 340B eligibility was extended to several additional types of entities. Provisions were added that that allowed covered entities to add a virtually unlimited number of contract pharmacies. The combined result of these changes was to cause explosive growth in the program, to the point where 340B has become a major sticking point with the pharmaceutical industry. For many CHCs, 340B has gone from a cost saving opportunity to a profit center, often producing a significant portion of the organization’s revenue.
Outlook: Extremely Worrisome. While nearly everyone acknowledges that in general, the FQHCs have not been abusing 340B, some other types of entities don't come off looking nearly as well. Largely in response to pharmaceutical industry complaints, a collection of proposed new 340B rules , the "Mega-Guidance", was released in draft form in 2015. Along with many other proposed federal regulations, the draft was withdrawn in late January. In addition, HRSA audits of CHC 340B programs appear to be on the rise. There has rcently been some speculation that the program could be severely curtailed, or eliminated entirely. Even if there are no significant changes to the program, State Medicaid programs and Private Insurers are rapidly implementing extreme measures to manage drug costs by utilizing Pharmacy Benefit Management (PBM) companies, and "Narrow" Pharmacy networks.
Recommendations: Recognize and plan for the potential for 340B revenue decline. Assure that the CHC 340B "Covered Entity" is meeting all of the program compliance requirements by performing regular internal program audits. Engage a competent firm to provide regular independent audits of program compliance, as required by 340B regulations. Avoid capital investment in 340B facilities until the future of the program becomes clear. We are also recommending to our 340B covered entity clients that they begin to develop alternative sources to replace the expected reductions in 340B revenues.
Conclusion: While it is always important to pay attention to a business’s industry environment, it is crucial to do so in times of great uncertainy. The nation’s FQHCs are an extremely valuable and essential resource to the nation's health and well being. As such we believe that CHCs will survive and continue to grow as an industry. In order to do so in this increasingly competetive healthcare environment, it is crucial that CHCs and PCAs within a state operate in an manner that assures the following:
- While absolute cost of CHC services may be somewhat higher than other primary care providers, outcomes are better;
- CHCs are able to capture accurate data, which can be analyzed and reported in a meaningful manner;
- CHCs, through PCAs and networks are able to obtain and analyze outcome and cost data from outside their organizations, in order to measure, improve and report both their value add and cost savings for the patients they serve;
- CHCs that lag behind in key measures of quality and value receive the assistance needed in order to improve performance to an acceptable level;
- As a clinically integrated system of care, the CHCs through PCAs and networks are able to utilize this data to demonstrate and negotiate fair compensation for the value provided to both government and private funders of care, as well as to the health and well being of the patients .
For those states and CHCs that are able to master these paradigm shifts, the outlook for the forseeable future is extremely optimistic. Those unwilling or unable to adapt to the changing environment are likely to struggle, or perhaps even disappear.
NWRPCA welcomes and regularly publishes white papers and articles submitted by members, partners and associates with subject matter expertise. The appearance of any guest publication in our Health Center News database represents the views of the author and does not constitute endorsement by NWRPCA of the stated opinions or perspectives, nor does it suggest endorsement of the contributor's products or services.