Could ICD-10 have as big a financial impact as the mortgage crisis? Yes. Here's why.

By Michael F. Arrigo
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U.S. National Healthcare Expenditures (NHE) are $2.7 trillion in 20111 and are forecasted to grow 34% in five years. This multi-trillion dollar economy will shift its reimbursement paradigm to ICD-102 in under 24 months. ICD-10 will introduce opportunities and risks to hospitals and health plans that may be equivalent to the $148.2 billion to $500 billion in losses3 to the U.S. economy in the mortgage crisis. This is because ICD-10 introduces favorable and unfavorable reimbursement results.

Yet, ICD-10 was obscure outside the health care industry until just months ago. Only recently did mainstream business media start covering ICD-104, described by The Wall Street Journal as health care’s ‘Y2K5 problem’. It is ironic that Y2K, the mortgage crisis, and ICD-10 have similarities. Cynics criticized Y2K as an expensive non-event. As I’ll point out later, even if this were true, Y2K produced other important benefits. The mortgage crisis was about ethical failures in leadership, transparency, and poorly documented quality that led to higher than expected risk.

[Cover story: ICD-10's ten-year reign of fear.]

One of the most important risk mitigation strategies for ICD-10 will be choosing and empowering leaders. We need to help leaders make the business case for dealing with ICD-10 as an innovation and quality improvement program as well as a regulatory compliance effort. Compliance will enable one to complete a checklist by a deadline to avoid penalties. Quality and innovation will mitigate reimbursement variation and provide health care organizations with strategic advantage. ICD-10 and HIPAA 5010 are just the beginning of a five-year perfect storm of mandates. Start now to build a foundation that will enable agility to respond to these and future changes. Make a decision now about leadership.

Here is one business case for ICD-10. First, reimbursement risk affects all parties in the healthcare service supply chain. For example, an 82-year old female patient with a cardiovascular condition could have a procedure under ICD-9 CM with a correlating Diagnosis Related Grouping (DRG) of 251 equaling a reimbursement to the provider of $9,622.80. Under ICD-10 this same procedure might be documented and coded similarly and correlate to the same DRG of 2516. In this case the reimbursement would be “neutral” under ICD-10. If the same procedure is documented and coded differently, this procedure could result in a DRG 2307 . The reimbursement might shift to $24,343. This reimbursement risk is $14,721 or 153% of the original reimbursement. However, CMS suggests cross-walking this procedure to another DRG 2548, which could result in a third reimbursement outcome. A macroeconomic view in this spreadsheet shows the impacts, using CMS projections.

Illuminating CMS projections for 2014 with our estimated ICD-10 reimbursement risk rate of 4.6%, it appears negative financial impacts of ICD-10 could indeed equal Federal losses in the mortgage crisis. To get a sum equal to the loan portfolio write-down by the Freddie Mac and Fannie Mae, multiply the ICD-10 reimbursement risk factor 0.046 x $3.2 trillion = $148.2 billion. Across NHE categories the risk factor has specific meaning to different constituencies. Employer sponsored expenditures might shift by $44 billion, Medicare and Medicaid by $29 billion, and Out of Pocket Payments by $15 billion. Many hospitals are lucky to operate on a 2% net margin, so this top line reimbursement risk could make the difference between profit and loss.

A second business case should be about compliance. Many health care executives are hoping for a delay. While CMS insists there won’t be any delay, one of the first cracks in the dike of industry compliance just appeared regarding HIPAA 5010, a precursor to ICD-10. California Medicaid is asking healthcare providers to send ‘old’ HIPAA 4010 transactions for up to a year9 stating, “Medi-Cal is unlikely to meet the scheduled deadline of January 1, 2012 to accept the latest version of standard electronic healthcare transactions.” Since HIPAA 5010 provides the foundation for enrollment, eligibility, claims, remittance and other transactions that will use ICD-10, it will be interesting to see how CMS responds to this new development.

[Q&A: How meaningful use is clashing with ICD-10.]

California Medicaid doesn’t get to make the final decision, but what can CMS do to a state that is already running a deficit budget? A second crack in the dike appeared Friday October 14th when HHS Secretary Kathleen Sebelius wrote a letter to Congress asking to rescind part of healthcare reform known as "Community Living Assistance Services and Supports” (CLASS) program10 stating that it was actuarially unsound.

Don’t be fooled by California’s fiscal failures or rescinded healthcare reform initiatives. ICD-10 is not part of health care reform (also known as HR 3590, or the Patient Protection and Affordable Care Act). ICD-10 is a separate mandate by the Centers for Medicare and Medicaid (CMS) in August 2008 prior to the election of President Obama. Therefore, if ‘Obama care’ reform were repealed, ICD-10 is still forecasted to go into effect on time October 1, 2013. With all of the data available on the Internet about ICD-10 risk, the questions we should be asking are not whether you will have risk or whether you need to comply. Decide whom to involve within your organization, and who will lead the effort. Will you delegate to IT? If so, ensure IT facilitates business involvement. If the CFO leads, ensure that IT, clinical, and other stakeholders have a seat at the table. Second, decide whether you will address it as an innovation and quality improvement program or as regulatory compliance only. We call this ‘survive vs. thrive’ approach to ICD-10.

Like Y2K remediation in the 1990s, ICD-10 remediation will force an ancillary benefit. There are many aging and brittle transaction systems in health care that companies have postponed upgrading. It has been suggested that on September 11, 2001, the New York infrastructure (including subways, phone service, and financial transactions) were able to continue operation because of the redundant networks established in the event of Y2K bug impact and the contingency plans devised by companies.

Your IT department probably knows about these problems, but feels helpless to secure the business support and budget to improve systems because it is often seen as cost centers instead of valued partners and enablers of strategic advantage. If you make a business case to remediate and upgrade systems for regulatory compliance alone, that could be a partial win.

 

ICD-10 may create a massive redistribution of healthcare wealth; cause hospital and health plan bankruptcies, mergers, consolidation, and precipitate radical shifts in healthcare IT software and solutions companies. Most investors, health care IT firms, hospitals, and insurance companies are unprepared for this new paradigm. Investors are just awakening to the business opportunities for IT, consulting, software, analytic, and other companies who are positioning themselves for strategic advantage around this shift. Like a good business plan, investors make their decision based on leadership and solid management teams. Investing in leadership and best practices should be a component of the ROI for your ICD-10 business case. Proper ICD-10 impact assessment and implementation planning can help health care make the best transition possible.

Education can help socialize the right values and ethics so that organizations do the right thing. Some executives assume that ICD-10 is an IT only problem instead of a clinical and business problem as well. Understanding how ICD-10 changes medical concepts can help hospitals and other health care providers plan for shifts in reimbursement. For hospitals, ICD-10 clinical documentation improvement, coder quality, and other aspects can be addressed via a methodology and reference implementation model. For health plans and large self-insured employers, planning will be critical in redesigning medical policy, benefit plans and remediating systems in time. Vendor assessments for enrollment portals, electronic medical record (EMR) systems, revenue cycle, analytics, actuary, claims, case management and utilization management systems will be important. Awareness training for management and coder re-training will also be key. Following the assessment, establish a clear business road map for ICD-10. This must include an "as-is" and "to-be" process evaluation and redesign, application remediation, possibly even modification of enterprise architecture. Greater cooperation among hospital staff as well as between providers, health plans, and large self-insured employers can also help.

Real world examples bring ICD-10 business cases into focus. Large companies have bigger reimbursement risks, are subject to headline risk in the press, and are seen as ‘deep pocket’ litigation targets. Recently, a large employer was reviewing HIPAA compliance. The company is self-insured and manages a health plan that pays $ billions in benefits each year. At first, the company took comfort knowing that its outsourced claims partner was primarily responsible for ICD-10 compliance. When presented with the reimbursement risk ICD-10 may introduce, senior management pointed at the presentation and said, “Now that worries me.” The employer realizes that it can use ICD-10 to its strategic advantage by planning now for reimbursement shifts, and potentially avoid headline risk, labor relations problems, and hits to its stock price.

Those companies that don’t make these important leadership decisions might experience financial impact that carries a wallop like the mortgage crisis.

 

1. Source: “National Health Expenditures…,” CMS https://www.cms.gov/NationalHealthExpendData/downloads/proj2010.pdf

2. ICD-10 (World Health Organization International Classification of Diseases; US Version ICD-10 CM for diagnosis and ICD-10 PCS for procedure codes). The compliance date for ICD-10 is October 1, 2013.

3. Source for amount of mortgage losses by Freddie Mac and Fannie Mae: Los Angeles Times http://articles.latimes.com/2010/sep/16/business/la-fi-fannie-freddie-20100916 Total mortgage losses are estimated to be over $500 billion.  ICD-10 loss estimate based on a hypothetical 4.6 % shift in reimbursements during 2014, the first full calendar year of ICD-10. Risk factor decreases from 4.6% to 4.4% via coding accuracy and clinical documentation improvements between 2014 and 2016.

4.IT Companies Stand To Gain From Health Care’s ‘Y2K’ Problem: The Wall Street Journal http://on.wsj.com/fJOnqG

5. Y2K planning and remediation estimates exceed $300 billion. http://en.wikipedia.org/wiki/Y2K 

6. Percutaneous Transluminal Coronary Angioplasty - MS-DRG 251 “Percutaneous cardiovascular procedure without coronary artery stent without MCC”

7. Coronary bypass -- MS-DRG 230 "Other cardiothoracic procedures without CC/MCC"

8. Source: CMS https://www.cms.gov/acuteinpatientpps/downloads/CMS-1533-FC.pdf - Vascular Repair - MS-LTC-DR 254 “Other vascular procedures without CC/MCC”

9. Source: California Medical http://files.medi-cal.ca.gov/pubsdoco/newsroom/newsroom_20048.asp

10. Administration Pulls Plug on Health Reform Measure http://www.foxbusiness.com/markets/2011/10/14/told-government-pulls-plug-on-health-reform-measure/

 

 

Michael F Arrigo is Managing Partner of the Healthcare Practice at No World Borders a HIPAA and Health Care Reform Management and IT consulting firm that helps hospitals, health plans, and self-insured employers improve their planning and outcomes for ICD-10 and other initiatives.