Presented by Scott Houk, CPA 438 e wilson bridge road, suite 200 worthington, oh 43085-2382...

presented by

Scott Houk, CPA

438 e wilson bridge road, suite 200worthington, oh 43085-2382

888-779-5663www.cleverleyassociates.com

Ten Critical Questions forHealthcare Financial Management

West Virginia HFMA – October 10, 2013

| 2 |bottom line: absolute value

Background

Issue 2010 2011 2012

Financial challenges 77% 2.5 2.5

Patient safety and quality 31% 4.6 4.4

Healthcare reform implementation 53% 4.5 4.7

Governmental mandates 32% 4.6 5.0

Care for the uninsured 28% 5.2 5.6

Patient satisfaction 16% 5.6 5.6

Physician-hospital relations 30% 5.3 5.8

Technology 10% 7.2 7.6

Population health management - - 7.9

Personnel shortages 11% 7.4 8.0

Creating an ACO - 8.4 8.6

Top Issues Confronting Hospitals: 2012ACHE CEO Survey


Background

Top Issues Confronting Hospitals: 2012ACHE CEO Survey

Specific Financial Issues

Medicaid reimbursement 83%

Government funding cuts 81%

Medicare reimbursement 72%

Bad debt 69%

Decreasing inpatient volume 61%

Increasing cost for staff, supplies, etc. 52%

Inadequate funding for capital improvements 43%

Other commercial insurance reimbursement 40%

Managed care payments 35%

Revenue cycle management 34%


Strategic interest of boards

Relationship to three financial functions

Investment

Financing

Revenue / expense management

Background


Scenario

Methodology / metrics

Benchmarking values

Presentation Structure


Identify the appropriate framework to answer 10 strategic financial policy questions.

Discover financial metrics that best answer these critical financial policy questions.

Learning Objectives


Scenario

A recent board meeting at Community Memorial Hospital focused on the relative financial position of the hospital. One group of trustees argued that the current position was acceptable because the hospital maintained an investment-grade rating from both Moody’s and Standard & Poor’s. A second group argued that current bond ratings reflected debt repayment ability and did not necessarily address overall financial health.

Question # 1: What is our overall financial position?

Financial Position


Financial strength is a short-term concept that evaluates a firm’s ability to withstand financial shock and/or to capitalize on opportunities




Profits Cash & Investments

Debt Position

Age of Physical Facilities

Total Margin Days Cash on Hand

Debt Financing Percentage

Average Age of Plant

Four Dimensions of Financial Strength


Financial Strength Index®

Total Margin

Days Cash on Hand*

Debt Financing %

Average Ageof Plant

TARGET VALUE

n/a 4.0 120 50 9.0

Community Memorial

-1.4 2.1 78 70 10.4

Peer A 0.9 5.8 171 52 8.8

WV 2012 -1.0 2.4 24 74 11.4

US 2012 -0.4 4.4 38 47 10.3

Financial Strength Index® Metrics


* Values based upon filed Medicare Cost Reports (Worksheet G) and may be understated.


Scenario

The board of directors for Spriggs Regional Hospital is reviewing the five-year financial plan for the hospital. Debate is taking place regarding the adequacy or inadequacy of projected profit levels. One group of directors has argued that profit levels should be reduced to enhance the community image of the hospital as a non-profit provider. Another group has related profit targets to bond-rating standards. No clear consensus regarding profit targets has emerged.

Question # 2: How much profit should we target as our goal?

Profit Targets



2010 2011 2012

Total Margin – US 4.1 4.0 4.4

Total Margin – WV 2.8 1.3 2.4

Profitability Measures


Growth rate in assets What levels of investment are

needed to meet our mission?

Debt financing (financial leverage) How much debt (risk) should we

include in our capital structure?

Key is “Sustainable Growth”

Establish appropriate profit targets




Sustainable Growth

The path to long-term financial success:

GRIE > GRIAgrowth rate

in equitygrowth rate

in assets


Revenues

Assets

Debt

Equity

Total Debt + Equity

Year 1 Year 5

$1,000 $2,000

Growth

$1,000 $2,000

Debt Policy

$500 $1,000

Profitability Goal

$500 $1,000

$1,000 $2,000

Income Statement

Balance Sheet: Assets

Balance Sheet: Debt + Equity

Sustainable Growth Example



Target Net Income =

(1 + Asset Growth Rate))x (1 - Debt Financing %)][(Beginning Assets x - Beginning Equity

Asset Growth Rate increases

Use this model for target net income at facility:

Debt Financing % decreases

Targeted net income must increase when:



2007 2012

Assets $574 $677

less Liabilities - 312 - 357

Equity $262 $319

Asset growth rate (annual) = 3.4% Liabilities growth rate (annual) = 2.7% Equity growth rate (annual) = 4.0%

Spriggs Regional Growth Rates (millions)



2012 2013 2014 2015 2016

Assets $677 $731 $790 $853 $921

less Total Liabilities -357 $380 $403 $426 $451

Equity $319 $351 $387 $426 $470

Required net income $32 $36 $39 $43

Debt Financing % 53% 52% 51% 50% 49%

• assets growing at 8.0% annually

Spriggs Regional Target Net Income (millions)



Scenario

The board of Kyle Regional Health System is concerned about the declining level of cash-and-investment reserves, which are currently $660 million, or 170 days of cash. While concerned about the cause of the decline, some members still feel the reserve level is too high in light of economic hardships in the community. However, no one is certain what level of cash reserves should be held.

Question # 3: How much cash is enough?

Cash Levels


1. Working-capital needs

2. Capital-investment needs

3. Contingencies

4. Supplementing operating earnings

Reasons for Holding Cash and Investments



30 Days cash on hand

$116,720,000

Working Capital Needs



Estimated total capital need at present

Allowance for depreciation x

(1 + inflation) average age of plant

Required cash-and-investment balance

Capital need x (100 - debt anticipated %)

Capital Investment



Allowance for depreciation in 000s (12/31/12): $747,310Average age of plant = 9.3

REQUIRED CAPITAL FUNDS (000)

Debt Used

Inflation Factor

4% 6% 8%

30% $753,371 $899,380 $1,070,138

40% 645,747 770,897 917,261

50% 538,122 642,415 764,384


Capital Investment


Investment Need Desired Balance

Working capital $116,720

Capital asset 770,897

Contingency

Supplement operating earnings

Total required $887,617

less Presently available funds - 660,966

Surplus (deficiency) ($226,651)

Required days cash on hand 228

Required Cash-and-Investment Position (000)



Scenario

Two board members of Matthew Health System are engaged in a heated debate over the merits of a proposed capital financing. One has argued that the financing will expose the hospital to

significant levels of risk and raise its operating costs. The second board member contends that the financing is needed to provide a new service that the community needs.

Question # 4: What should be our capital structure?

Capital Structure


Return from debt-financed assets Financial arbitrage

Mission attainment

Risk analysis

Bond-rating criteria Investment-grade minimum

Drivers of Capital-Structure Decisions



High

Samaritans Stars

Low

Dogs Cash cows

Low High

Co

mm

un

ity

Nee

dRevised Portfolio Analysis Matrix

Return on Investment




Matthew Health S&P’s 2012Type Measure 2010 2011 2012 AA A BBB+Size Net patient revenue 676 723 774 998 426 249Debt Coverage Cash flow to debt 11.3 10.9 4.9 20.7 18.9 13.8

ProfitOperating margin 0.8 0.1 1.6 5.2 2.9 2.5Total margin 3.0 2.8 -1.0 6.9 5.0 4.2

Liquidity Days cash on hand 90 86 75 387 226 167Capital Structure

Long-term debt to capitalization 57.7 57.5 62.0 24.3 29.8 37.0

Facility Age Average age of plant 9.7 10.5 10.6 9.0 10.5 11.4


Question # 5: What is the value that we provide to the community?

Several board members at Allen Memorial have been reviewing policy articles which discuss the tangible benefits that non-profit hospitals provide to the community. The articles have

challenged the position of non-profit facilities – especially, in light of the favorable tax benefits enjoyed by the providers. As a result, the board members have requested that management evaluate the community value position of the hospital.

Community Value



Healthcare expenses are growing rapidly – “what am I getting for my money?”



Number of uninsured is growing – “access to the healthcare system is closing”



Life expectancy is lower in the US – “outcomes are not as favorable”

Rank CountryLife

Expectancy1 Monaco 89.62 Macau 84.53 Japan 84.24 Singapore 84.15 San Marino 83.16 Andorra 82.67 Guernsey 82.38 Switzerland 82.39 Hong Kong 82.2

10 Australia 82.051 United States 78.6



Nonprofit hospitals, once for the poor, strike it richBy John Carreyrou, Wall Street Journal

Cost Efficiency at Hospital Facilities in CaliforniaReport Shows Hospital Costs and Charges Vary Widely Throughout The State - Health care purchasers call for standardized reporting, more transparencyMilliman/CalPERS

Hospital-Acquired Superbug Infections Soar in Newborn Babies By Sherry Baker, Health Sciences Editor – Natural News

Originally Reported in: Pediatric Infectious Disease Journal



Nonprofit hospitals, once for the poor, strike it richBy John Carreyrou, Wall Street Journal

FINANCIAL PERFORMANC

E PRICING

Cost Efficiency at Hospital Facilities in CaliforniaReport Shows Hospital Costs and Charges Vary Widely Throughout The State - Health care purchasers call for standardized reporting, more transparencyMilliman/CalPERS

COSTS

Hospital-Acquired Superbug Infections Soar in Newborn Babies By Sherry Baker, Health Sciences Editor – Natural News

Originally Reported in: Pediatric Infectious Disease Journal

QUALITY



The Community Value Index® is a part of an annual examination of the US hospital industry.

Results of the study are published in the State of the Hospital Industry.

The 2013 study marks the tenth edition of the CVI analysis.

The CVI has four key dimensions:1. Financial viability & reinvestment2. Cost structure3. Charge structure4. Quality performance



Community Value Index® Comparison

Allen Memorial

West Virginia Median

CVI Median

Five-Star Median

CVI Finance 67.2 45.9 50.1 59.6

CVI Cost 71.7 33.2 50.6 76.6

CVI Charge 65.6 66.8 50.2 68.8

CVI Quality 102.1 98.2 100.5 101.1

Overall Community Value Index® 76.6 59.4 62.6 75.0

21% of WV hospitals included in study were Community Value Five Star™


Scenario

Brendan Alexander, CEO of Grace Valley Hospital, has been under intense pressure from his board and local media to justify his prices. There is concern that the hospital’s prices are out of line. Board members have suggested a one-year pricing freeze, but Mr. Brendan has been advised by his CFO that a rate increase is needed to maintain the hospital’s financial integrity.

Question # 6: Are our prices defensible?

Defensible Prices



Medicare Provider Charge Data

May 2013As part of the Obama administration’s work to make our health care system more affordable and accountable, data are being released that show significant variation across the country and within communities in what providers charge for common services. These data include information comparing the charges for the 100 most common inpatient services and 30 common outpatient services. Providers determine what they will charge for items and services provided to patients and these charges are the amount the providers bills for an item or service.


1) The COSTS of providing care

2) The REQUIRED PROFIT needed by the hospital

Debt service, working capital, and funded depreciation requirements will impact this target.

3) The PAYER MIX AND PAYER TERMS at the hospital

As examples, higher levels of Medicaid and indigent patients will necessitate higher prices. Conversely, favorable commercial contract payment terms will permit lower prices.

Hospital pricing is impacted by three factors:3



Relate your pricing to Return On Investment (ROI)

We will examine a model used in setting rates for

public utilities.

Relate your pricing to those of peer hospitals

Our assessment will include comparisons at the:

1) Facility level

2) Department level

3) Inpatient case level

4) Outpatient case level

5) CPT®/procedure level

2 Waysto defend pricing



(volume x price) - (volume x cost) investment

ROI FormulaROI =

Relating pricing to ROI: the public-utility approach

Public utilities have used a Return on Investment (ROI) model to justify price increases to rate regulatory boards. The approach isolates the price variable from the ROI formula (below) and “tests” the remaining elements. If it can be proved that ROI, Cost, and Investment are not excessive, then price must also not be excessive. In the following pages, we present these tests.

Tests

1. Is ROI excessive?

2. Is cost excessive?

3. Is investment excessive?

If “no” to all three, price is not excessive.

Price defense



EBIDA to Assets %

Peer median 14.0

Is ROI excessive?

U.S. median 9.7

?


WV = 8.9


Peer median 106.0

Is cost excessive?

U.S. median 101.5

Hospital Cost Index® ─ 2012

?


WV = 111.7


Peer median 115.2

Is cost excessive?

U.S. median 100.0

Inpatient Cost Index ─ 2010

?


WV = 110.9


Peer median 102.6

Is cost excessive?

U.S. median 100.0

Outpatient Cost Index ─ 2010

?


WV = 103.9


Revenue to Net Fixed

Assets (FAT)Average Age

of Plant

Grace Valley 3.06 9.3

Peer 1 1.31 7.4

Peer 2 1.52 7.6

Peer 3 2.62 9.1

Peer 4 2.86 9.2

US MEDIAN 2.48 10.3

WV MEDIAN 2.50 11.4

Is investment excessive??



Comparing your pricing to peer facilities

The second method used to assess the defensibility of your pricing is direct comparison with peers. The following pages will highlight comparison at these levels:

1) Facility level

2) Department level

3) Inpatient case level

4) Outpatient case level

5) CPT®/procedure level

CPT® is a registered trademark of the American Medical Association.

Price defense



Hospital Charge Index® ─ 2012

Peer median 76.3

Facility Level

U.S. median 103.7


WV = 85.3


Inpatient Charge Index ─ 2010

Peer median 80.2

Facility Level

U.S. median 100.0


WV = 76.9


Outpatient Charge Index ─ 2010

Peer median 72.0

Facility Level

U.S. median 100.0


WV = 84.3


Medicaid Days %

Peer median 19.0

Facility Level

U.S. median 16.1


WV = 18.6


Scenario

Reagan Montgomery is reviewing the Payer Z managed-care contract with Allen Hospital prior to upcoming negotiation. Her financial team has told her that the current contract payment rates are well below cost in a number of areas. Payer Z personnel have told Reagan that her hospital is receiving its highest payment rates and it has little room for negotiation.

Question # 7: Do we have managed-care opportunities?

Managed Care


Payer Z Managed-Care Contract Summary

51 comparison plans, 2012 & 2013 Payer ZAverage Value*

Allen Hospital

INPATIENT SERVICES

All services % of Billed Charges 73.87% 85%

DRG Base Rate $11,774

Per-Diem Rates

Medical $2,906

Surgical $2,777

ICU $3,782

Step Down $3,088

CCU $3,360

Psych $1,052

Alcohol/ Chemical Dependency $1,131

Rehab $1,952

Contract Comparison



Payer Z Managed-Care Contract Summary

51 comparison plans, 2012 & 2013 Payer ZAverage Value*

Allen Hospital

OUTPATIENT SERVICES

All services % of Billed Charges 78.02% 85%

Radiology (% BC) 59.78% 85%

Laboratory (% BC) 57.67% 85%

Emergency Department (% BC) 69.89% 85%

Level 1 $276

Level 2 $483

Level 3 $1,166

Level 4 $1,273

Level 5 $2,110



Scenario

Immense financial pressure is being placed on Grace Hospital due to the increasing volume of uninsured patients and less-

than-expected increases in governmental payments. To achieve financial solvency, cuts in costs must be made, but there are significant differences among staff regarding the overall magnitude of cost savings, depending upon the facility-wide measure of cost that is used.

Question # 8: What is our overall cost position?

Cost Position



Why one facility metric of comparison?1) Evaluates complete hospital cost position

2) Permits trending over time

3) Allows for comparative benchmarking

Traditional facility-level hospital cost metrics:1) Cost per adjusted patient day (with or without CMI adjustment)2) Cost per adjusted discharge (with or without CMI adjustment)

H


Total Costs (000)

Patient Days

Gross OP Rev

(000)

Gross IP Rev (000)

Adj Pt Days

Cost/ Adj Pt

Day

Data prior to rate

increase60,000 12,000 70,000 60,000 26,000 2,308

10% OP rate

increase60,000 12,000 77,000 60,000 27,400 2,190

Issues with traditional measures of cost: Adjusted Patient Days


Case mix adjustment issues Medicare vs. all payer Outpatient case mix similarity


•CREATE LOW COST PATIENT ENCOUNTERS

•Inpatient CostsCost per Discharge

•Outpatient CostsCost per Visit

The ultimate goal in understanding and addressing cost issues

Patient Encounter Cost:Cost = (Q1 X C1) + (Q2 X C2) + … + (Qn X Cn)

Where Q = quantity of units and C = cost per unit


Facility-level cost measure:

Hospital Cost Index®

Outpatient Costs

Outpatient Cost IndexFormula:

Your Medicare Cost per Visit (RW/WI adj)

US Median Medicare Cost per Visit (RW/WI adj)

Inpatient Costs

Inpatient Cost IndexFormula:

Your Medicare Cost per Discharge (CMI/WI adj)

US Median Medicare Cost per Discharge (CMI/WI adj)


Grace Hospital

Competitor Peer Group Median

Hospital Cost Index® 114.5 91.8 103.2

Inpatient Cost Index 126.5 99.7 103.6

Outpatient Cost Index 88.1 80.3 99.1

Hospital Cost Index® Analysis



Scenario

Grace Hospital now believes there are $20 million of savings opportunities, primarily in the inpatient area. It needs some direction about possible areas to review to determine where opportunities may be present.

Question # 9: In what specific areas do cost-savings opportunities exist?

Cost Savings



Level of Comparison

Metric Purpose

FACILITY Hospital Cost Index® Identify position and extent of cost opportunity

Medicare Cost per Discharge (CMI/WI adj)

Determine level of inpatient opportunity

Medicare Cost per Visit(RW/WI adj)

Determine level of outpatient opportunity

INPATIENT CASE Cost by MS-DRG Are certain MS-DRGs higher cost

OUTPATIENT CASE Cost by APC Are certain APCs higher cost

DEPARTMENT Department Relative Value Unit Comparisons

Are certain departments driving costs higher

LINE ITEM Costs by item code Are certain items higher cost

PHYSICIAN Costs by physician Are certain physicians higher cost



Understanding the three spheres of influence on cost

COST



Example 1: Intensity issue

MEDICARE LOS



Example 2: Productivity issue



Example 3: Resource Price


Scenario

Elizabeth Jones has been reviewing billing and coding policies at her hospital to determine if there are any opportunities for cash-flow improvement. Upon review of a sample of Medicare claims, she noticed a large number of claims with CPT code 88305 (level IV surgical pathology), but no biopsy or specimen-removal

procedure was present in the claim. The inclusion of the surgical procedure would impact payment from Medicare patients and many other payers.

Question # 10: Are there immediate coding/billing issues that might increase our cash flow?

Coding/Billing Issues



Title Descriptor

Drug AdministrationA pharmaceutical item requiring injection or infusion is present without the administration procedure. This indicator excludes surgery, cardiac catheterization lab, and gastrointestinal service claims.

Specimen RemovalA pathology exam is present without a biopsy or specimen removal procedure.

Specimen ExamA surgical procedure requiring the removal of a specimen is present without the pathology examination charge.

VenipunctureA laboratory test requiring a venous blood draw is present without venipuncture.

Transfusion A blood product is present without a transfusion procedure.

Emergency Department E/M Revenue code 45X is present without an E/M Level.

Chemo Administration A chemotherapy drug is present without chemotherapy administration.

Pharmacy ChargeA chemotherapy or non-chemotherapy drug administration procedure is present without pharmacy charges in revenue code 25X or 63X.

Device Charge A device-dependent procedure is present without revenue code 27X or 62X.

Bladder Instillation A BCG Live Drug is present without the instillation procedure.

Pacemaker Procedure Revenue code 275 is present without the associated pacemaker procedure.



Title Descriptor

IOL Insertion Procedure Revenue code 276 is present without an associated IOL procedure.

Supervision/Interpretation for Angiography/Atherectomy

A surgical procedure (angiography or atherectomy) is present without the supervision and interpretation service.

Angiography/AtherectomyA supervision and interpretation service is present without the surgical procedure.

Surgery Add-on Code without Parent Code

A surgical add-on procedure (CPT codes 10000-69990) is present without an appropriate primary procedure.

Radiology Add-on Code without Parent Code

A radiology add-on procedure (CPT codes 70000-79999) is present without an appropriate primary procedure.

Laboratory Add-on Code without Parent Code

A laboratory add-on procedure (CPT codes 80000-89999) is present without an appropriate primary procedure.

Other Add-on Code without Parent Code

Another add-on procedure (CPT codes 90000-99602, excluding E/M services) is present without an appropriate primary procedure.

Skin Replacement Procedure A skin substitute product is reported without a skin replacement procedure.



Title Descriptor

Immune Globulin ProductA pre-administration IVIG procedure code is present without charges for an immune globulin product.

Pre-Administration IVIGAn intravenous immune globulin (IVIG) product & administration is present without the pre-administration procedure.

IVIG Administration Procedure

An immune globulin product is present without the procedure code for immunization administration.

Contrast MaterialA contrast-related procedure is reported without associated charges in revenue codes 25X or 636.

Fracture/Dislocation Repair

A fracture diagnosis code is present on an emergency room claim without a fracture treatment procedure.

Wound RepairA laceration- or wound-related diagnosis is present on an emergency room claim without a wound repair procedure.

Skin Substitute ProductA skin replacement procedure is reported without charges for the skin substitute product (by HCPCS code) or surgical supplies (revenue codes 25X or 636).



National Billing Statistics ─ 2006

DescriptionError Rate Lost Revenue

All US All USDrug Administration 31% $67,130,958Specimen Removal 2% 21,316,175Specimen Exam 50% 48,875,696Venipuncture 38% 14,558,379Transfusion 18% 16,773,039Emergency Department E/M 1% 16,978,214Chemo Administration 10% 3,359,146Pharmacy Charge 6% Device Charge 0% Bladder Instillation 11% 188,514Pacemaker Procedure 7% 32,483,531IOL Insertion Procedure 0% 46,362Super/Inter for Angiography/Atherectomy 12% 13,515,418Angiography/Atherectomy 7% 14,924,142Surgery Add-on Code without Parent Code 2% 2,625,069Skin Substitute Product 66% 10,500,677



DescriptionError Rate Lost Revenue

All US All USRadiology Add-on Code without Parent Code 6% 31,943,838Laboratory Add-on Code without Parent Code 7% 134,854Other Add-on Code without Parent Code 2% 3,016,653Skin Replacement Procedure 24% 1,702,357Immune Globulin Product 1% Pre-Administration IVIG 50% 3,067,272IVIG Administration Procedure 9% 876,484Contrast Material 22% Contrast Procedure 82% 13,468,739Fracture/Dislocation Repair 60% 30,056,197Wound Repair 41% 21,425,674Skin Substitute Product 66% 10,500,677

TOTAL 368,967,388

National Billing Statistics ─ 2006


Financial managers and senior executives need information in a number of critical areas

Investment Financing Revenue / expense

Relevant and timely information must be available and valid to answer critical questions

Comparative data on competitors and industry peer groups are often essential to accurately answer these questions

Summary


Additional Resources ACHE CEO Survey

http://www.ache.org/PUBS/research/ceoissues.cfm

Cleverley, Song, Cleverley. Essentials of Health Care Finance, Seventh Edition. Boston: Jones and Bartlett, 2011.

Cleverley, Cleverley, LaFortune. The State of the Hospital Industry, 2013 Edition. Columbus: Cleverley + Associates, 2013.

Hospital Comparative Data

http://www.hospitaldx.com

Presented by Scott Houk, CPA 438 e wilson bridge road, suite 200 worthington, oh 43085-2382...

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