Expanding Opportunities—Healthcare Consulting In an Era of Reform, Part I

Changes in the capital markets utilized in financing healthcare transactions have transformed the way that the healthcare providers and enterprises operate within the current transactional marketplace, explains Robert James Cimasi.  These changes, particularly in recent years following the “Great Recession,”  relate to both the availability of capital sources and the types of financial instruments used.  As the healthcare industry faces a changing paradigm, the increased need for healthcare consulting services has been met by professionals who have entered the consulting arena from a diverse array of professional backgrounds, e.g., accounting, finance and economics, insurance, etc.

Changes in the capital markets utilized in financing healthcare transactions have transformed the way that the healthcare providers and enterprises operate within the current transactional marketplace, explains Robert James Cimasi.  These changes, particularly in recent years following the “Great Recession,”  relate to both the availability of capital sources and the types of financial instruments used.  As the healthcare industry faces a changing paradigm, the increased need for healthcare consulting services has been met by professionals who have entered the consulting arena from a diverse array of professional backgrounds, e.g., accounting , finance and economics, insurance, etc.

While the Affordable Care Act of 2010 (ACA) is a significant milestone in healthcare reform, it is not the first, or only, U.S. healthcare reform initiative.  The last three decades have witnessed rapidly changing regulations, reimbursement issues, competitive forces, and technological advancements, each of which have created opportunities for those seeking to provide consulting services to healthcare clients.  Changes in the capital markets related to both the availability of capital sources and the types of financial instruments utilized in financing healthcare transactions, particularly in recent years following the “Great Recession,”[1] have transformed the way that the healthcare providers and enterprises operate within the current transactional marketplace. As the healthcare industry faces a changing paradigm, the increased need for healthcare consulting services has been met by professionals who have entered the consulting arena from a diverse array of professional backgrounds, including, e.g., accounting; finance and economics; insurance, law; health administration; medicine; nursing; academics; and, public health.  The in-depth, robust knowledge required of a healthcare consultant, often can begin with a background of healthcare industry expertise, e.g., hospital financial management.  However, credibility as a healthcare consultant requires a continuing commitment to keep abreast of the almost daily changes in: national and regional economic conditions impacting the healthcare industry; payment and reform initiatives; reimbursement trends; regulatory and enforcement trends; the payor/delivery system mix; healthcare delivery labor, supply, and capital costs; emerging and declining healthcare organizations; and, other issues related to the healthcare industry and transactional markets.

Consulting Activities

Consulting services may be offered through several different modalities, i.e., on a continuous basis, annually, or episodically on a case-by-case basis.  Typically, the nature and scope of the required service determines the modality of the consulting activity, e.g., management consultation often requires continuous monitoring while tax issue consultation typical requires attention only once a year.  Healthcare consultants will also find an array of discrete engagements based on one-time needs of clients, e.g., implementation of an electronic health record system or the valuation of a healthcare enterprise upon its dissolution. 

Consulting services that are typically provided on an ongoing basis are commonly referred to as continuity services.  This type of consulting generally provides a source of recurring work and a stable stream of income for the healthcare consultant.  In contrast to continuity services, healthcare consultants may also assist their healthcare clients on an annual basis by providing annuity services.  While annuity services may not provide the constant stream of work that continuity services do, annuity services still often represent a relatively regular income stream for a healthcare consulting practice, particularly when positive client rapport generates a long-term relationship between the healthcare consultant and the healthcare client.

In addition to services provided on a continuing or annual basis, healthcare consulting services may also be provided on an episodic, or discrete, engagement basis.  Each episodic project will have separate deliverables and timetables, and will often have a different engagement agreement detailing the terms of each.  While episodic engagements may not provide the regular revenue stream that continuity and annuity services do, these engagements are extremely important to the healthcare consultant as they are often the means by which the consultant may build rapport with a particular client, thereby providing a valuable source of both future work and referrals, for the purpose of expanding the consultant’s client base. 

Accounting and Tax-Related Services

There are three types of financial statement preparation applicable to healthcare enterprise clients:  

1. financial statement compilation, used to present information that is the representation of management (owners) without undertaking to express any assurance on the financial statements; [2]
2. financial statement review, used to express limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with generally accepted accounting principles (GAAP);[3] and,
3. (3)  financial statement audit, an expression of an opinion on the fairness with which the enterprise presents, in all material respects, financial position, results of operations, and its cash flows in conformity with GAAP.[4]

Consulting opportunities also exist for providing tax-related services for healthcare related enterprises, e.g., the preparation of state and federal tax forms and filings, year-end tax projections, and audit support.  Additionally, non-profit healthcare enterprises may seek consulting services to assist them fulfilling additional government fiscal requirements and reporting standards.  Further opportunities for tax consulting services exist when different healthcare legal organizations merge, set up joint ventures or other operating arrangements.[5]

In an industry where cost is increasingly becoming a necessary consideration in many decisions affecting a healthcare enterprise, implementation of a cost accounting system, which enables management to properly understand the costs associated with the enterprise through a breakdown at the level of the diagnostic or treatment procedure performed, can often assist administrators with such tasks as: negotiating with payors who reimburse on a case basis; planning service expansions more strategically; and, improved monitoring of provider efficiency, by providing data on individual treatment protocols.[6]  There are various ways of conceptualizing cost (e.g., direct variable costs, direct fixed costs, indirect overhead costs, etc.), and healthcare consultants, particularly those with accounting experience, may offer their expertise in implementing appropriate cost accounting systems, and utilizing those systems to identify cost-saving opportunities.[7] 

Revenue Cycle Services

Optimization of the revenue cycle is important to the success of any healthcare enterprise.  Consultants may provide assistance to healthcare professionals who may be too focused on a single part of the revenue cycle to effectively address other aspects with a comprehensive understanding of the entire revenue cycle.  Healthcare is reimbursed through a system that begins with charting the diagnostic and treatment services provided to each patient.  This information is then converted to a system of codes that are billed to payors and patients at a predetermined rate.  Significant unrecognized revenue can exist when patient services are being charted or coded improperly.  Accordingly, consulting opportunities related to reviewing coding policies and charting guidelines ensure that practitioners are being reimbursed the full and correct payment amount for the services they provide.  Additionally, healthcare consultants may conduct audits of past medical records to ensure that there is sufficient documentation supporting the coded amounts (e.g., ensuring that “bundled” procedure codes are not reported individually) and that no over- or under-payments are being made to the enterprise.[8]

Additionally, by analyzing the charge description master (CDM), healthcare consultants can assist healthcare clients in identifying services for which the enterprise receives less reimbursement than the procedures cost to deliver, as well as to assist the enterprise in revising the CDM to appropriately recover all costs associated with each service, thereby maximizing cash flow to the enterprise.[9]   Further, consultants may assist healthcare clients regarding matters related to their billing and claims resolution process by being well-versed in the claims appeal process, as well as effective strategies for streamlining the billing process.[10]  Additionally, an independent analysis of the reasons given for payor denial of a claim may be a useful tool for re-engineering the enterprise’s revenue cycle to avoid future denials.[11]

Regulatory Relates Services

Healthcare providers are under constant scrutiny from regulatory agencies at the local, state, and federal level, as well as private organizations such as insurers/payors and investment groups.  Improperly maintained and managed policies and procedures can lead to heavy fines; revocation or suspension of licenses or certifications; mandatory reporting; exclusion from state and federal reimbursement programs; and, potential criminal penalties.  Accordingly, a healthcare provider’s corporate compliance program requires continuous monitoring and updating.  Healthcare consultants may assist healthcare clients with this task by providing risk assessments and, in turn, development and implementation of a compliance program, which may include such items as training programs, policy and procedure manuals, and auditing support.[12] 

The healthcare industry is also laden with complicated accreditation, certification, and licensing requirements.  A provider or enterprise’s failure to meet certain aspects of these requirements may result in the enterprise facing certain restrictions regarding the provision of patient services.  Additionally, certain payors may refuse to reimburse providers who are not certified or accredited.  Healthcare consultants can assist in this arena by understanding how state certification and licensing requirements, as well as other accreditation requirements, may impact their healthcare clients and assist them in appropriately meeting these requirements.

Organizational Structure and Governance-Related Services

Healthcare providers are not required to have any business or management training, thereby providing numerous opportunities for consulting professionals to assist healthcare providers with start-up services related to: obtaining insurance; selecting, setting up, staffing and maintaining an office; marketing the enterprise to the public and other professionals; complying with local, state, and federal regulations; and, developing procedures for day-to-day operational management and accounting practices, among many other issues.  Further, should two or more providers seek to integrate their enterprise into an independent practice association (IPA) or other integrated provider entity, healthcare consultants may provide market research and analysis to determine if the integration would disparately impact competition in a particular service area (i.e., raise antitrust concerns), and may work with each enterprise’s legal counsel to structure the integration in a legally permissible manner.

Strategic and Organizational Development Services

Strategic and organizational development in the healthcare setting often involves assisting clients in development of a mission and vision; ensuring staff acceptance of these principles; and, structuring each segment of the healthcare enterprise to fit within the principles upheld by the enterprise’s mission and vision.[13] This type of consulting typically requires identification of core competencies of the organization and alignment of the enterprise’s business strategy to complement them.[14] 

One of those factors that must be considered within the enterprise’s overall business strategy is the evaluation of physician compensation and income distribution.  The development of physician compensation and income distribution plans involves identification of the appropriate methods by which to compensate the enterprise’s physicians for their professional services based on the enterprise’s revenues and expenses.  While the mechanical details of the compensation development process may vary due to the diverse array of enterprise types and provider arrangements, the healthcare consultant may assist the enterprise with an evaluation of the existing compensation system, financial modeling of alternative plans, and contribute to the proposal of alternative plans to the enterprise’s physicians. 

Information System/Information Technology Services

Information Technology (IT) consulting and integration engagements currently represent half of the healthcare consulting marketplace.[15] In today’s world, business, innovation, and improvement are largely driven by data.  The abstract idea of “big data” was first encountered over 70 years ago, but not until recent decades have industries begun to actively take advantage of what has been termed the “information explosion.” Big data has been described as having “…the potential to utterly transform the relationship that…patients [have] with the healthcare system…” and further, has been likened to historical events “…as great as the electronics revolution…perhaps even as great as the first and second Industrial Revolutions.”[16]  One estimate predicts a reduction of $300 to $450 billion in healthcare spending with a system-wide adoption of big data innovation in healthcare.[17]

Numerous advances in healthcare information technology have been made in recent years, and legislation is incentivizing practitioners to move towards advanced technology such as electronic health records (EHR) in order to reduce errors, streamline the healthcare delivery process, and reduce associated costs.  Privacy regulations such as HIPAA, HITECH, and the Red Flag Rules also regulate the secure storage and transmission of private health or other identifying data, requiring some special equipment and programming or re-programming of old equipment.

Consultants can provide an array of services in this arena, including the implementation of information security systems; installation and configuration of medical enterprise resource planning systems; assistance in the transition to EHR, telemedicine and e-prescribing; assisting with maintenance of the organization’s data network; and, development of a website or other advanced marketing tools.[18]

Turnaround/Management Restructuring Services

In the current and ever-changing regulatory, reimbursement, competitive, and technology environments, as well as the economic environment, many healthcare enterprises may find it difficult to maintain profit levels due to excessive debt, both personally (e.g., education) and professionally (e.g., due to decreased reimbursement, the increasing complexity of the regulatory environment, and changes to the enterprise’s patient base).  Healthcare consultants may assist their clients by providing services such as a billing process assessment; collections evaluation; fee schedule review; benchmarking for office efficiency; and, suggestions for office expense reductions and employee outsourcing, among many others. 

Transition Planning Services

Healthcare clients deal with many of the same financial planning and retirement planning issues as other businesses.  Additionally, care must be taken to ensure retirement planning complies with the provisions of the Employee Retirement and Income Security Act (ERISA). Consulting opportunities exist for healthcare consultants to:

1. Review or design plans;
2. Work with the healthcare enterprise concerning plan adoption or alteration;
3. Prepare tax filings in relation to these plans;
4. Project contributions mid-year;
5. Conduct allocations or accountings for plans;
6. Coordinate Qualified Domestic Relations Orders (QDRO);
7. Maintain disbursements or loans from the retirement plan; and,
8. enerate 401(k) safe harbor notices and IRS/NCDR letters; and, generate summary annual reports.[19]

The number of practicing physicians in the U.S. is predicted to remain fairly stagnant over the next decade, due in part to physician lifestyle changes, which have resulted in a reduction of the total number of work hours, and the retirement of the current physician workforce, approximately 26.3 percent of which were 60 years of age or older in 2010.[20]  This data emphasizes the importance of good succession plans so that an enterprise can go on after the departure of one of its physicians.[21] Healthcare consultants may advise the practice on issues related to physician retirement and the resulting impact on the operating expenses and revenue of the enterprise, as well as how the shareholder/partnership or employment agreement should be restructured to accommodate a physician who is contemplating only partial retirement.[22]  

Transactional Services

Transactional events, such as purchases, sales, liquidations, and dissolutions, are governed by regulations requiring them to be valued at the thresholds of fair market value and commercial reasonableness during the transaction process.  The requirement of an appropriate valuation in these situations provides opportunities for healthcare consultants with backgrounds in finance, accounting, appraisal, or even general business.  These opportunities include assignments for enterprise valuation; identification of potential buyers based on market research; negotiation of transaction terms; collaboration with legal counsel to prepare documents related to the transaction; completion of a due diligence overview; and, assisting with financing arrangements, among other things. 

Due to the rampant and consistent change in the environment in which healthcare professional enterprises operate, many healthcare providers are forced to examine the manner in which they deliver their services and search for more efficient ways to treat patients. For many healthcare enterprises, consolidation, merger, strategic alliance, and, in some cases, timely divestiture can be the keys to survival.  In such cases, the healthcare consultant can provide valuable services serving as an intermediary between the client and their legal and financial advisors by conducting market research and feasibility analyses; developing potential strategies for the future of the client enterprise; structuring governance and operation of newly created enterprises; and, presenting new potential ownership strategies.

In addition to valuation services, a feasibility analysis is useful when determining whether to open an enterprise, develop a new service line, or expand a current, service line or facility.  For example, a feasibility analysis related to the development of an accountable care organization (ACO), including forecasting the predicted return on investment and the likelihood that the probable margins of the operation of the ACO will offset initial capital requirements for its development, may be useful, or even essential, to an ACO and its stakeholders, in order to avoid the conundrum of “getting all dressed up with nowhere to go.”  As the healthcare industry transitions from a volume-driven payment system toward an outcome-centered, value-based reimbursement system, the development of a sustainable financial model that will provide adequate funding for the initial capital investment related to the ACO, as well as the ongoing working capital and operational costs required of the ACO going forward, will be essential.  Healthcare consultants can provide invaluable market research required for an accurate and comprehensive feasibility analysis by studying the (proposed) enterprise or service line, assessing the competitive marketplace for the enterprise, analyzing the data, and developing a report for the client’s consideration.  These trends allow the consultant and client to analyze the scope; supply and demand; provider demographics; reimbursement and regulatory environments; and, market competition relevant to each service line, in order determine the resulting impact of these forces on the relevant enterprise (e.g., ACO) or service line.

Litigation Support Services

Many of the consulting services described above can be also be utilized by the healthcare consultant when providing litigation support services.  In this role, the healthcare consultant may solely provide consulting services to assist legal counsel throughout the litigation engagement with preparation of opposing expert deposition and trial questions.  Additionally, the healthcare consultant may be engaged to provide expert witness testimony services during the deposition and trial.  The expertise of the consultant will typically determine the scope of his or her expert opinion and may include such topics as the fair market value of an enterprise, asset, or service; industry standards of care and corporate compliance; and, typical revenue cycle procedures and billing practices, etc. 

There are various qualifications that a consultant must meet to qualify as an expert witness in a court of law based both on Federal Rule of Evidence 702 and the opinions rendered in the cases of Daubert and Kumho Tire. [23]  To determine whether expert testimony is the “product of reliable principles and methods,” and therefore, admissible, the Daubert court determined that courts must verify whether the theory or technique:

1. Can be and has been tested;
2. Has been subjected to peer review or publication;
3. Has: (a) a high known or potential rate of error, and, (b) standards controlling the technique’s operation; and,
4. Enjoys general acceptance within a relevant scientific community.[24]

Six years later, the Supreme Court handed down Kumho Tire, clearly stating that Daubert was to be applied to non-scientific testimony as well.  However, given that Daubert’s gatekeeping obligation in non-scientific testimony situations may never “fit” the enumerated factors, Kumho Tire encouraged judges to be “flexible” in determining admissibility.[25]

Part I of this article discussed the expanding opportunites for healthcare consultants following the passage of the ACA, including the increased diversity in the range, and more robust scope of services that consultants may provide to their healthcare clients. Part II of “Expanding Opportunites—Healthcare Consulting in an Era of Reform” will discuss the  methods utilized by healthcare consultants, as well as the phases of a typical healthcare consulting engagement.