Star ratings: Buy low, sell high

This article was originally published in Crain’s Health Pulse

Health care providers are no fans of CMS' star ratings, but those stars are guiding private equity investors. They are using the federal agency's nursing home quality ratings to decide where they should place their money, according to a new analysis from BDO Center for Healthcare Excellence & Innovation.

CMS is aiming to move 90% of traditional Medicare payments to quality by 2018. If nursing homes reimbursement is so closely linked to quality, those facilities that can't keep up will soon find themselves in financial peril. That concept will be reinforced by hospitals that begin to reshape their referral networks based on nursing-home quality ratings. There are 233 one- and two-star facilities statewide, according to CMS data.

A catalyst for that process is the Comprehensive Care for Joint Replacement Model, which was rolled out April 1 in 67 regions, including the New York City area.

"Relationships will start changing around who is providing the best care at lowest cost," said Patrick Pilch, BDO's managing director and Healthcare Advisory practice leader.

By 2019, 90% of Medicaid payments in New York will be at risk, he added. When evaluating facilities, BDO looks at outcomes using data from CMS and commercial payers on such trends as readmissions rates, said Pilch. He recommends looking at measures for specific service lines using public and private data.

There appears to be an opportunity for investors who are willing to mine through such data, BDO explained in the report. Some facilities have a poor overall star rating, which Pilch called "the veneer," but show much better performance in one area, such as joint-replacement rehab.

"It's not just about [investors] flipping an entire organization from a one-star performer to an all-around, five-star, great-at-everything performer," Pilch said in the report. "Instead, they may buy a two-star facility that's good at one thing and focus on that, putting only the dead-weight service offerings on the chopping block."

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