Healthcare in the Time of ACA Reform

Nonprofit Finance Fund works with community health organizations nationwide. Recently, NFF worked closely with a nonprofit health clinic, a Federally Qualified Health Center and other human service organizations as part of NFF's Community Resilience Fund initiative. This post, in concert with our blog series spotlighting Community Resilience Fund participants, aims to highlight the unique transition risks, concerns and capital structure needs facing healthcare providers as they continue to foster wellness in their communities.

Affordable Care Act (ACA) reform presents a complex set of challenges and opportunities for health centers, particularly those providing high-quality, low-cost care to the underserved. Clinics around the country are seeing increased demand for services due to greater inclusion of the uninsured, and a shortage of doctors as a result of the higher demand. State-specific and federal mandates have changed payment structures, and in many cases reimbursement rates are still unknown. While the Affordable Care Act is ultimately meant to improve the system of health delivery and reduce costs, those on the front lines providing the services are finding themselves in a riskier operating environment. Nonprofit health centers are facing challenges including:

• Managing uncertain and changing revenue dynamics
• Managing infrastructure and capacity needs to accommodate increased demand
• Determining capital investments for risk reserves, re-location and equipment additions

ACA reform is creating a shift from fee-for-service rate reimbursements to a spectrum of value-based payments with shared savings and risks. This will continue to evolve and affect how healthcare nonprofits make and spend money in service of their missions. Some of these models, such as pay-for-performance, bundled payments, capitation and hybrid payment models will usher in a new era of financial management and planning. Emphasizing outcomes over volume requires new planning tools and reporting metrics. Particularly for stand-alone healthcare providers, this means traditional financial management – monitoring patient volume or diversity of service – will not suffice. With payments dependent on positive outcomes, there will be moments when a clinic will spend more money on services rendered than will be reimbursed and will need to budget accordingly. And finally, coordinated care and the processes by which partnering providers will be paid is slowly working itself out. We have heard from a number of organizations about the difficulty of budgeting conservatively with little insight into how new payment structures will pay out.

Size, service profile and an understanding of full costs will likely have an effect on an organization's ability to negotiate appropriate rates with managed care companies. We heard from one CRF participant that small clinics not affiliated or partnered with a well-known hospital have a harder time advocating reimbursement rates that cover the full cost of service. Smaller clinics may not have the resources, capacity or time to determine favorable rates.

Given changing revenue models, health nonprofits are realizing that many will need philanthropic subsidy to continue to meet their missions in a new operating environment. As one CRF participant said, “It’s very new for most of us, but it’s something we’re all going to have to focus on more.” Historically, health nonprofits’ core funding has come from government grants and income from commercial insurance, Medicare and Medicaid. Given the uncertainty of payment rates and the likelihood that the rates will never cover the full cost of business, individual giving and philanthropy, considered subsidy funding, have become the next priority to help fill the gap. For nonprofits accustomed to working almost entirely with government dollars, implementing a fundraising or development strategy essentially means launching an entirely new line of business. Most organizations have very lean operations which prohibit them from spending energy on implementing a fundraising plan. Hiring staff with marketing and development skills takes planning and a reassessment of the financials to make it happen. This changing revenue model will require a new level of financial management and oversight by both board and leadership.

It comes as no surprise that healthcare organizations rely heavily on their people. Medical professionals, as well as administrative and billing support staff are all necessary to maintain the day-to-day functions of health service provision. With ACA reform increasing the number of patients seeking care, many clinics will require capital investments to accommodate greater service delivery and back-office infrastructure. These organizations will be looking to provide competitive salaries to keep the medical professionals they have and also attract additional talent.

Additionally, increased patient load and the ACA mandate to track outcomes and data necessitates a reconfiguring of billing and medical record systems. One of our CRF participants explained, "If you’re invested in the success of healthcare clinics, focus on compatibility of systems… investment in IT is very important.” Technology and systems changes that will require investments of time, money and people include:

• Transitioning to an Electronic Medical Record (EMR) system
• Supporting reporting and compliance mandates through a deep understanding of key metrics
• Establishing effective billing practices to ensure maximized reimbursement rate

These are just the high-level infrastructure needs. Nuances such as the compatibility of software to coordinate care, housing and managing healthcare data, and training on appropriate billing codes contribute to the depth of administrative expenses that many healthcare organizations will have a hard time funding. Ultimately, revenue generation will be more difficult to manage and control in the future, yet expenses continue to grow. Where will the money come from to cover these costs?

One of the most important ways health nonprofits can create more opportunity for themselves is by building savings to manage risk and make necessary investments in technology, people and systems. Addressing those components requires resources to invest in change and pursue opportunities. In the nonprofit sector, it’s often hard to cover everyday expenses (both programmatic and administrative), let alone build savings into our budgets, but prioritizing reserves allows an organization to do just that. Whether they are used for new medical equipment, managing receivables and/ or maintaining a healthy cash flow, savings can make the difference between feeling like the sky is falling and being poised to absorb change in a responsible manner.

Beyond an organization's savings there may be a need for outside investment or financing from private philanthropy, government or CDFIs. For example, in New York City there is a big push toward FQHC expansion, encouraging healthcare providers to expand and scale operations in underserved communities. To achieve a goal of this size requires sizeable investments in physical expansion – investments likely out of reach for many organizations without external financing.

“To be a leader of a health nonprofit you need to be comfortable making decisions with little to no information and then adjust accordingly.”

This sentiment is shared by a number of our nonprofit leaders in the health sector. To effectively deal with risk and change, leadership needs to focus on long-term strategy all while understanding that you’ll never have the right or enough information to make the perfect decision. Based on what we do know – that demands for change are high and available resources for nonprofit health centers are falling short – clinics on the front lines will need to build staff, skills, infrastructure and reserves in order to deliver on the ACA's promise of improved care.