“Beware of little expenses; a small leak can sink a great ship.” — Benjamin Franklin
The “Big Squeeze” continues in New York state, affecting each and every health and human-services provider. The NYS Department of Health’s focus for the past year has been the implementation of the Delivery System Reform Incentive Program (DSRIP). DSRIP is a five-year demonstration project to transition and transform the Medicaid delivery system for 6 million New Yorkers from a system that rewards and reimburses volume to one that rewards and reimburses valued-service outcomes. New York state community-based providers, and the 25 Performing Provider Systems (PPS) established throughout the Empire State, have just completed year one of the five-year project timeline. We are the fifth state in the country to have entered into a federal-state partnership under the DSRIP initiative.
My previous columns have described the DSRIP PPS initiative in more specific detail. The focus of this column is the financial impact on and threats to all health and human-service providers resulting from the Big Squeeze. That is, implementation of extensive federal and state reform initiatives affecting Medicaid, Medicare, and Obamacare health and human service providers. Whether politicians or the public like it or not, we already have a fragmented government health-care system that covers close to 70 percent of Americans. So, the country is already more than halfway towards socialized medicine, just like every other industrialized nation in the G-7.
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There is an excellent, must-read report prepared and issued by the New York City Human Services Council entitled, “New York Nonprofits in the Aftermath of FEGS: A Call to Action.” I strongly recommend that every board and management team member of a health and human services nonprofit read the report.
The report was prompted by the bankruptcy filing of “a $250 million behemoth nonprofit human service provider” known as the Federation Employment and Guidance Service (FEGS), originally formed in the 1930s. With 1,900 employees, unpaid creditors holding more than $47 million in debt, and 350 program sites, the closing / bankruptcy of FEGS sent shockwaves throughout New York City and the rest of New York state. The transition of FEGS’ programs and services to other not-for-profit service providers, which was accomplished quickly and efficiently, proved that there are no not-for-profit organizations that are “too big to fail.”
The report is extensive, detailed, and well done. Reading it completely is your best course of action. However, knowing that we exist in an information-overload society, I have summarized below the key recommendations produced by the report.
The commission participants consisted of a “blue ribbon panel” of individuals across the spectrum of those involved in the health and human-services sector. The report identified a number of “major findings” that it summarized, with accompanying recommendations, into the following three problem areas:
1) New or redesigned human-services programs intended to build human potential and social welfare are too often developed without consulting the human-services providers that will be responsible for implementing them.
- Programs that work well require effective partnerships among the public sector, private funders, and human-services providers. Human-services providers with decades of experience would be instrumental in designing and implementing programs that more effectively serve New Yorkers and should be involved at the outset of transitioning program services and payment methodologies.
- New York’s transition to Medicaid Managed Care is a win for beneficiaries, taxpayers, and human-services providers only if it includes adequate funding. Adequate reimbursement must be made available to nonprofits for investments in information technology, capacity building and training, metrics tracking, and providing a financial safety net against the resulting transformation risks.
- Extensive oversight regulations and regulatory audit procedures that fail to catch bad actors are a waste of everyone’s time and money, and should be replaced with meaningful governance, monitoring, and oversight, which ensures that providers are financially viable and programmatically responsible.
2) Government contracts and philanthropic grants rarely fully cover operating and administrative costs, and payments are often late and unpredictable, resulting in cash-flow constraints and chronic under-funding.
- Contracts and grants must fully cover indirect costs and overhead. Expenses such as information technology, facility maintenance, program evaluation, accounting, human resources, regulatory compliance, and employee training are vitally important to successful service delivery.
- Payments to providers on either a fee-for-service or value-based methodology must be timely and reliable so that providers are not left “holding the bag.” Contracts with government funders, managed care organizations, and / or PPSs must allow for sufficient reimbursement increases to cover inflation and unanticipated expenses. A perfect example of this issue was adopted in the New York State budget on April 1. That is, Gov. Cuomo’s objective of increasing the minimum wage to $15 Downstate and $12.50 Upstate results in hundreds of thousands, and many times millions, of incremental salary costs for individual providers. These incremental salary costs and the associated impact of salary compression have not yet been correlated to increased government funding to effectively accomplish the minimum-wage increase without creating fiscal distress for providers.
3) There is a lack of adequate risk assessment in the nonprofit service sector. Providers must accept responsibility for aggressively identifying, assessing, and addressing risks to their fiscal health, viability, and sustainability. Ongoing monitoring of current and projected fiscal viability is an absolute requirement, particularly given the FEGS bankruptcy example.
- Providers must implement financial and programmatic reporting systems that enable them to identify and quantify the financial impact of changes in the operating environment. For the past 20 years, the Bonadio “A-Score methodology” has been used effectively, along with other performance monitoring systems to identify challenges to fiscal sustainability on a timely basis. Timely recognition of these challenges and appropriate corrective action are critical components of longer term financial sustainability.
- Provider board and management team members must be actively engaged in risk assessment that includes implementing financial and programmatic reporting systems that enable them to better predict, quantify, understand, and respond to financial, operational, and administrative risks. This can only be accomplished by every organization identifying and implementing the necessary procedures and capacity for business competence through leadership development, technical assistance, and coaching/mentoring.
- The health and human-services sector must establish an RFP rating system and government-agency performance survey to eliminate the risks associated with problematic government agency policies and practices.
All of the foregoing should lead to a candid assessment of strategic positioning in evaluating and assessing one specific question. That is, what is the best course of action for your organization to position itself for future success in a transformational health-care delivery and payment structure?
The options to consider are as follows:
- Maintaining autonomy — need to be big and good at what you do
- If autonomy is not considered an appropriate strategy, the remaining options to consider are varied and include the following:
- Performing provider systems under DSRIP
- Membership in an IPA (independent physician association)
- Membership in an ACO (accountable care organization)
- If autonomy is not considered an appropriate strategy, the remaining options to consider are varied and include the following:
- Evaluate the most appropriate organizational strategy in the 10-point continuum from autonomy to acquisition, as follows:
- Autonomy
- Co-option
- Collaboration
- Shared-service agreement
- Contractual affiliation
- Network formation
- Joint venture
- Partnership/corporation, on a brother-sister basis
- Merger, two become one
- Acquisition, to acquire or be acquired
The first five steps above most frequently include contractual relationships. The final five involve some form of shared governance structure.
Gerald J. Archibald, CPA, is a partner in charge of the management advisory services at The Bonadio Group. He can be reached at (585) 381-1000, or via email at garchibald@bonadio.com