North Dakota Healthcare Association 72 nd Annual Conference – Tomorrow’s Challenges CAH...

North Dakota Healthcare Association72nd Annual Conference – Tomorrow’s Challenges

CAH Financial Analysis Report on Margins

September 8, 2006

Ramada Plaza SuitesFargo, North Dakota

Eric Shell, CPA, [email protected]

2

• Question to be addressed:– “Why is the average margin

in ND CAHs -(2.33%) while the average CAH margin in SD is -(.41%) and MN is +2.55%”

• Source: CAH Financial Indicators Report, July 2006, Flex Monitoring Team

Project Overview

• Project Overview

• ND Opportunities

– Third Party Contracts

– Swing Bed SNF vs. NF

– Departments with >1 RCCs

– Non-Hospital Businesses

– Skilled Care in SNF or NH

– Nursing Homes

– Rural Health Clinics

– County Subsidies

– Bad Debt Expense

– Interim Cost Reports

– Physician Recruitment

– Outpatient Services

• Summary

3

• Other Key Financial Indicators – Our Neighbors

Project Overview








– Nursing Homes







• Summary

4

• Approach– Random sample of ten ND CAHs selected by NDHA for

participation in study

– Review of most recent cost report, financial statements, strategic plan, and other relevant information

– Conference call with CAH administrators to review findings and answer questions

– Memos to each administrator documenting improvement opportunities (many still to come)

– Presentation of common findings related to financial performance – today

Project Overview








– Nursing Homes







• Summary

5

• Overview of CAH Sample– Margin Analysis

• Sample slightly outperforms state average

Project Overview

Operating Total Hospital Margin % Margin (%)

A 2.04% 4.11%B 1.38% 2.71%C -8.42% -7.83%D 1.77% 2.87%E -4.42% -1.14%F -1.80% 1.32%G -5.41% -4.09%H 0.29% 2.65%I -6.57% 0.06%J -2.20% -0.52%Sample Average: -2.33% 0.01%Statewide Average: N/A -2.33%

North Dakota CAHsMargin Analysis








– Nursing Homes







• Summary

6

• Common Findings– Cost reports are well prepared

– Third party payers generally result in marginal loss or profit on a fully allocated cost basis

– For most CAHs, operating losses are primarily the result of clinics, nursing homes, and other non-hospital business

• CAHs generally break even

– Important opportunity related to treatment of Swing Bed SNF vs. NF

– Mark up ratios at most CAHs are below peers

Project Overview








– Nursing Homes







• Summary

7

• Top 12 North Dakota CAH Opportunities1. Third Party Contracts

2. Swing Bed SNF vs. NF

3. CAH Departments with RCC > 1

4. Non-Hospital Businesses

5. Medicare Skilled Level Care in Swing Beds vs. Nursing Homes

6. Nursing Home Losses

7. Rural Health Clinic Losses

8. County Subsidies

9. Bad Debt Expense

10. Interim Cost Reports or Net Revenue Model

11. Physician Recruitment

12. Growth in Outpatient Volume

North Dakota Opportunities








– Nursing Homes







• Summary

8

• Guiding Principle– Commercial business is an important source of profits and profits

generated on this business must more than compensate for non-allowable “costs”

• Issue– One major third party payer in North Dakota with limited

competition

• Market power or market responsibility?

– Reported that standard contract for all ND CAHs

• Inpatient – DRG based system; Outpatient – Fee schedule

– For CAHs that have analyzed allowed amounts relative to fully allocated costs, generally breakeven to losses

– So how do they compare to other Blue Cross Plans across the County?

• It depends on where you live!

Third Party Contracts








– Nursing Homes







• Summary

9

• Peer Comparison– Medicare Revenue Per Day below peer averages – WHY?









– Nursing Homes







• Summary

10

• Peer Comparison (continued)– CAH economics

• Aggressive third party reimbursement forces CAHs to be cost efficient as it drives CAH profitability

– No margin in Medicare services– Medicare per unit revenue decreases as CAHs become more efficient


IP Acute Unit Revenue

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8

Acute and SB SNF ADC

Medicare AcuteRev/Day

Non-MedicareAcute Rev/Day

Total AcuteCosts/Day








– Nursing Homes







• Summary

11

• Outcomes

– ND CAHs are generally more efficient than peer CAHs

• How we know – look at Medicare revenue per day

– ND strategies to reduce unit costs

• Have gotten into other non-hospital businesses to dilute fixed costs (to be continued)

• Limited non employee related costs (e.g., capital)

– Not sustainable









– Nursing Homes







• Summary

12

Model A: Base Case (Information based on 2004 Cost Report)

Medicare Medicare Other Payment OtherADC Total Days Payer Mix Days Days Per Day Payment

Acute (inc Observ) 0.5 189 99% 172 17 900$ 15,300$ Swing Bed - SNF 3.4 1,226 100% 1,226 - 125$ -$ Total Acute/SB SNF 1,415 1,398 17 900$ 15,300$

Inpatient Fixed Costs 1,002,192$ ***Inpatient Variable Costs 160,400$ ** Total Routine Costs 1,162,592$ Inpatient Costs Per Day 821.62$ 821.62$

Medicare Payment 1,148,624$ 1,148,624$

Total Payment 1,163,924$ Inpatient Costs 1,162,592$ Net Margin 1,332$

** Assumes $200/day marginal acute costs and $100/day marginal swing bed costs

*** Assumes Medicare fully allocated acute and swing bed costs/Medicare payer mix less variable costs

Model B: 50 additional Commerical Days Paying $900/Day (Assume $200 Variable Costs)

Medicare Medicare Other Payment OtherADC Total Days Payer Mix Days Days Per Day Payment

Acute ** 239 72% 172 67 900$ 60,300$ Swing Bed - SNF 3.4 1,226 100% 1,226 - 125$ -$ Total Acute/SB SNF 1,465 1,398 67 900$ 60,300$

Inpatient Fixed Costs 1,002,192$ Inpatient Variable Costs 170,400$ Total Routine Costs 1,172,592$ Routine Costs Per Day 800.40$ 800.40$

Medicare/TennCare Payment 1,118,965$ 1,118,965$

Total Payment 1,179,265$ Routine Costs 1,172,592$ Net Margin 6,673$

Difference 5,340$

• Growing inpatient non-Medicare volume by 50 days paid at an average reimbursed rate of $900 contributes $5,340 to profit or approximately $107/day









– Nursing Homes







• Summary

Evaluation of Third Party Contracts – Marginal Cost Analysis

13

Model A: Radiology Base Case (2004 Cost Report)

Medicare Medicare Other Payment OtherUnits Payer Mix Units Units Per Unit* Payment

Radiology Services 1,195 33% 399 796 82$ 65,179$

Radiology Fixed Costs 105,632$ ***Radiology Variable Costs 11,950$ ** Total Rad OP Costs 117,582$ Radiology OP Units 1,195 Outpatient Unit Costs 98.39$ 98.39$

Medicare Payment 39,283$ 39,283$

Total Payment 104,462$ Radiology OP Costs 117,582$ Net Margin (13,120)$

* Assume average Charge per unit*average 3rd party payment (80%) and 2005 charge master inc.** Assumes variable costs of an additional X-Ray test of $10*** Assumes fully allocated radiology costs less inpatient cost allocation, less variable costs

Model B: 50 Additional Blue Cross Radiology Tests

Medicare Medicare Other Payment OtherUnits Payer Mix Units Units Per Unit Payment

Radiology Services 1,245 N/A 399 846 82$ 69,274$

Radiology Fixed Costs 105,632$ Radiology Variable Costs 12,450$ Total Rad OP Costs 118,082$ Radiology OP Units 1,245 Outpatient Unit Costs 94.84$ 94.84$ Medicare Payment 37,866$ 37,866$ Total Payment 107,140$ Radiology OP Costs 118,082$ Net Margin (10,942)$ Difference 2,178$

• Growing outpatient non-Medicare radiology services by 50 tests paid at an average reimbursed rate of $82 contributes $2,178 to profit or approximately $44/test









– Nursing Homes







• Summary

Evaluation of Third Party Contracts – Marginal Cost Analysis

14

Evaluation of Third Party Contracts – Marginal Cost AnalysisModel A: Physical Therapy Base Case (2004 Cost Report)

Medicare Medicare Other Payment OtherUnits Payer Mix Units Units Per Unit* Payment

OP PT Services 4,501 63% 2,816 1,685 36.96$ 62,290$

OP PT Fixed Costs 173,446$ ***OP PT Variable Costs 22,505$ ** Total OP PT Costs 195,951$ PT OP Units 4,501 Outpatient Unit Costs 43.54$ 43.54$

Medicare Payment 122,583$ 122,583$

Total Payment 184,873$ PT OP Costs 195,951$ Net PT Margin (11,078)$

* Medicare average charge/unit from PS&R*average 3rd party payment (80%) and 2005 charge master inc.** Assumes variable costs of an additional PT unit of $5.00*** Assumes fully allocated radiology costs less inpatient cost allocation, less variable costs

Model B: 50 Additional Blue Cross PT Billed Units

Medicare Medicare Other Payment OtherUnits Payer Mix Units Units Per Unit Payment

OP PT Services 4,551 N/A 2,816 1,735 36.96$ 64,138$

OP PT Fixed Costs 173,446$ OP PT Variable Costs 22,755$ Total OP PT Costs 196,201$ PT OP Units 4,551 Outpatient Unit Costs 43.11$ 43.11$ Medicare Payment 121,391$ 121,391$ Total Payment 185,529$ PT OP Costs 196,201$ Net PT Margin (10,672)$ Difference 406$

• Growing outpatient non-Medicare PT services by 50 units paid at an average reimbursed rate of $37 contributes $406 to profit or approximately $8/unit









– Nursing Homes







• Summary

15

• Opportunity

– Essential for all ND CAHs to understand third party allowed amounts relative to fully allocated costs and marginal costs

• Use cost report ratio of cost to charges on a departmental basis to determine profitability of services

• Marginal cost analysis based on estimated variable costs plus dilution in Medicare cost-based reimbursement

– Essential to generate enough profit on marginal costs to cover overhead costs

– With full understanding of contract profitability (or losses), meet individually with Blue Cross representatives

• Appeal for Market Responsibility









– Nursing Homes







• Summary

16

• Issue– Non-Medicare Swing Bed SNF patients should be carved out

of routine costs at regional rate and not average routine cost

• General Principles– 6-120 Rev. 1843 – “…To calculate SNF-like SB cost per

day, adjusted routine costs are divided by the sum of the total number of inpatient routine days and total SNF-like SB days

– S-3 Line 3 should be 100% Medicare• “Adjusted routine costs = total routine costs less NF-like SB

days”

Swing Bed SNF vs. NF








– Nursing Homes







• Summary

17

• Memo from CMS to upstate NY CAH – July 1, 2005









– Nursing Homes







• Summary

18

• Cost Report Impact – Worksheet S-3









– Nursing Homes







• Summary

19

• Financial Impact – ND Example


Without NF With NF MedicareFY 2005 Actual Cost Report Carveout Carveout Difference

Medicare Impact

Routine Costs (CR, Wkst. B, Pt I, line 25) 1,017,026$ 1,017,026$

NF Carveout -NF Days 1,010 1,137

NF Rate (estimated regional rate) 130.43$ 130.43$

NF Carveout 131,729 148,293

Net Acute Costs 885,297 868,733

Total Days (S-3, Rows 1-4, Column 6):

Acute 605 605

Swing Bed SNF (Medicare Only) 450 450

Swing Bed NF (all non-Medicare SB days) 127 -

Observation 270 270

Total Days 1,452 1,325

Routine Costs Per Day 609.71$ 655.65$

Medicare Acute Days 417 417

Medicare Swing Bed Days 450 450

Medicare Days 867 867

Medicare Routine Costs 528,617$ 568,446$ 39,829$








– Nursing Homes







• Summary

20

• Opportunity– It is essential that SNF-like and NF-like SBs are properly

classified on Worksheet S-3 as NF-like SBs are reimbursed on a “PPS” basis while SNF-like SBs on a cost basis

• High Medicare payer mix for SNF-like beds will increase reimbursement

– Review prior period cost reports back to December 20, 2000









– Nursing Homes







• Summary

21

• Issue

– Outpatient departments with RCCs > 1 will generate losses on all non cost-based volume

• Issues with

– Charge Master not set high enough

» Many ND CAHs use Blue Cross fee schedule as basis for charge master

– All charges not being captured

– Volume not adequate to offset department standby costs

– Direct expenses too high

– Ancillary departments with costs greater than charges often include:

• Emergency Department

• Physical Therapy

• Observation beds

Departments with >1 Ratio of Cost to Charges (RCC)








– Nursing Homes







• Summary

22

• Patient Deductions and Outpatient Cost to Charges









– Nursing Homes







• Summary

23

• Ancillary Service Mark-Up Ratio for ND CAHs

– Direct correlation between ancillary service mark-up ratio and CAH operating margin


Operating Mark upHospital Margin % Ratio

D 1.77% 2.04 H 0.29% 1.84 A 2.04% 1.80 B 1.38% 1.62 C -8.42% 1.56 G -5.41% 1.56 I -6.57% 1.40 J -2.20% 1.40 F -1.80% 1.38 E -4.42% 1.23 Average 1.58

North Dakota CAHsMarkup Ratios








– Nursing Homes







• Summary

24

• ND benchmarked to national peer group– Overall ancillary service mark-up ratio

• Mark-up ratio significantly below 25th percentile of peers

– Ancillary service mark-up by key department

• Benchmark source: Solucient, Comparative Performance of US Hospitals


Ancillary Service Markup Ratio FY 2005Average ND CAH (from Sample) 1.58

Benchmark75th percentile 3.24 Median 2.77 25th percentile 2.36

Benchmark for small, rural hospitals from 2005 Sourcebook (Solucient, based on 2003 data).








– Nursing Homes







• Summary

25

• Opportunity– Evaluate charge master

• Formal external charge master review• Blue Cross fee schedule inflated by ???%• Medicare APCs

– Grow patient volume by working with physicians– Consider productivity incentives for physical therapists– Reduce expenses

• Purchasing organizations, networks, etc.









– Nursing Homes







• Summary

26

• Sample of Non-Hospital Businesses

– Direct correlation between number of Non-CAH businesses and system-wide operating losses

• However, in most rural communities, CAHs are the center of healthcare activity and core mission supports these services

– Just recognize it!

Non-Hospital Businesses

Operating Nursing Assisted Basic Senior Housing/ Clinic/ HomeHospital Margin % Home Living Care Apartments RHC Ambulance Wellness Health Hospice

A 2.04%D 1.77% X X XB 1.38% XH 0.29% X X XF -1.80% X X X X X X XJ -2.20% XE -4.42% X X X X X XG -5.41% X X XI -6.57% X X X X X X XC -8.42% X X X X X

North Dakota CAHsNon-CAH Entities








– Nursing Homes







• Summary

27

• Example 1 – Home Health Agency


Revenue: Revenue

Medicare PPS Revenue 183,757$ Medicare % of Total Visits 27.3% Medicare Revenue Grossed Up (1) 673,497$

Operating Expenses:Direct Expenses (2005 ICR - WS A): 615,117$ 615,117$

Total Home HealthIndirect Expenses (ICR Stepdown - WS B) Allocation Variable %

Capital Costs 4,786$ 50% 2,393$ Admin and General 85,649$ 20% 17,130$ Employee Benefits 74,503$ 90% 67,053$ Plant Operations 10,674$ 25% 2,669$ Total 175,612$ (a) 89,244$ (b)

Total Home Health expenses 790,729$ 704,361$ Home Health Direct Gain (117,232)$ (30,864)$

Overhead expenses allocated to Home Health away from Hospital (a) - (b) 86,368$ Estimated CAH Cost Based Payer Mix 40% Lost Cost Based Payer Revenue on Allocated Costs (34,547)

Home Health Net Loss (65,411)$

(1) Grossed up Medicare revenue assumes other payers pay at approximately Medicare rates.

Home Health Profitabilty Analysis








– Nursing Homes







• Summary

28

• Example 2 – Assisted Living Center

Revenue:2003 Cash Receipts 610,000$

Operating Expenses:Direct Expenses (2003 ICR): Salary expense 255,022$ Other 310,541$ Total Direct Expense 565,563$

Total Day CareIndirect Expenses (ICR Stepdown) Allocation Variable %

Admin and General 89,299$ 10% 8,930$ Employee benefits 76,979$ 90% 69,281$ Total 166,278$ (a) 78,211$ (b) Total Day Care Variable Expenses 643,774$

Day Care Direct Loss (33,774)$ Overhead expenses allocated to Center away from Hospital (a) - (b) 88,067$ Estimated Cost Based Payer Mix 60% Lost Cost Based Payer Mix Revenue on Allocated Costs (52,840)

Total Assisted Living Loss (86,614)$

Assisted Living Center









– Nursing Homes







• Summary

29

• Guiding Principle– Important to understand the pros and cons of non-reimbursable

cost centers (e.g., home health agencies, assisted living, nursing homes, etc.)

• Pros – Mission objectives, potential direct gains/margin, and dilution of overhead costs to enable hospital profit on commercial business

• Cons – Potential direct losses and decreased Medicare cost-based reimbursement from fixed costs allocated out of hospital

• Opportunities– Understand true loss of non-hospital business performing

analysis similar to prior pages

– If net losses, consider spinning business out of hospital• If losses acknowledged as part of mission, maintain business

• May be opportunity to give back to County

– Can consider potential hospital subsidy to business









– Nursing Homes







• Summary

30

• Issue– Several CAHs care for a majority of Medicare SNF patients in

the nursing home vs. the CAH where patients may receive better rehabilitative care

– Example

• Financial analysis indicates that CAH would improve its overall reimbursement by $45K if Medicare patients were cared for in the CAH

Skilled Care in CAH or NH

Swing Bed vs. Distinct Part SNF Model1/1/05-12/31/05 Actual (Base Case) Acute Swing LTC Total

Fully Allocated Cost/Day or PPS 1,081$ $ 795 $ 217 Medicare Days 381 696 831

Medicare Revenue 411,775$ 553,128$ 180,693$ 1,145,596$

Example 1: LTC In Swing Beds Acute Swing LTC Total

Fully Allocated Cost/Day 889$ $ 558 $ 217 Medicare Days 381 1,527 -

Medicare Revenue 338,710$ 852,101$ -$ 1,190,811$ Incremental Medicare Reimbursement over Base Case 45,215$

* Assume that incremental costs of swing bed services are $75/day for routine *Assume that incremental overhead expenses allocated to swing beds are $75/day for routine








– Nursing Homes







• Summary

31

• For the CFOs


Medicare Acute Impact Actual Inc SB ADC

Acute costs (CR, Wkst. B, Pt I, line 25) 1,023,758 1,023,758

Incremental Swing Bed Costs - 124,650

Total Acute Costs 1,023,758 1,148,408

NF Carveout -NF Days 1,379 1,379

NF Rate 138.75$ 138.75$

NF Carveout 191,336 191,336

Net Acute Costs 832,422 957,072

Total Acute Days (Excludes ICU, includes Obs, SB SNF) 1,298 2,129

Routine Costs Per Day 641.31$ 449.54$

Medicare Acute Days 381 381

Medicare Routine Costs 244,340 171,275

Medicare inpatient ancillary costs (Wkst. D-4, col 3, line 101) 167,435 167,435

Total Medicare costs 411,775 338,710

Total Medicare Days (Acute and ICU) 381 381

Total Costs per day 1,080.77 889.00

Swing Bed Impact

SB ancillary costs (Wkst. D-4, col 3, line 101) 106,776 106,776

SNF ancillary costs (Wkst. D-4, col 3, line 101) - 58,877

Total SNF ancillary costs 106,776 165,653

Medicare SB Days (CR S-3, col. 4, line 3) 696 1,527

Ancillary costs per day 153.41 108.48

CAH routine rate 641.31 449.54

CAH ancillary rate 153.41 108.48

CAH SB rate 794.72 558.02

Long Term Care Impact

Medicare Long Term Care Days (Wkst. S-3) 831 0Medicare PPS Payments (Wkst. E-3) 180,693$ -$ Medicare Payment per Day 217.44 -








– Nursing Homes







• Summary

32

• Opportunities– Have Swing Beds– Perform analysis on preceding pages to ensure swing beds will

be financially beneficial relative to the distinct part skilled unit– If Medicare patients have flexibility, consider rehab services in

the CAH swing beds– Target growth in swing bed services and promote services to

larger community hospitals









– Nursing Homes







• Summary

33

• Sample of Losses in Nursing Home

– Losses in Nursing Homes are likely to create an overall negative operating margin

• CAH cannot generate enough margin to cover nursing home losses

Nursing Home Losses

Operating Fully AllocatedHospital Margin % Charges Costs Gain (loss) *

D 1.77% 1,411$ 1,396$ 15$ E -4.42% 2,153$ 1,984$ 169$ F -1.80% 1,911$ 2,024$ (113)$ G -5.41% 3,918$ 4,110$ (192)$ I -6.57% 3,245$ 3,406$ (161)$ * Does not reflect any contractual allowances that may exist

North Dakota CAHsSample Nursing Home Performance








– Nursing Homes







• Summary

34

• Losses – Its all in the definition of “losses”

Nursing Home Losses

Revenue: Days Rate Revenue

Medicare Revenue 831 154.00$ 127,974$ Medicaid Revenue 10,701 154.00$ 1,647,954$ Self Pay Revenue 9,548 154.00$ 1,470,392$ Total Days/Cash Receipts 21,080 3,246,320$

Operating Expenses:Direct Expenses (2003 ICR - WS A): Salary expense 1,232,963$ 1,232,963$ Other 392,491$ 392,491$ Total Direct Expense 1,625,454$ 1,625,454$

Total Nursing HomeIndirect Expenses (ICR Stepdown - WS B) Allocation Variable %

Capital Costs 244,470$ 80% 195,576$ Admin and General 256,643$ 50% 128,322$ Employee benefits 42,077$ 90% 37,869$ Plant Operations 169,670$ 80% 135,736$ Dietary 616,482$ 75% 462,362$ Social Services 132,718$ 75% 99,539$ Central Services 82,853$ 75% 62,140$ Nursing Admin 67,929$ 75% 50,947$ Housekeeping 77,890$ 75% 58,418$ Laundry and Linen 90,261$ 75% 67,696$ Total 1,780,993$ (a) 1,298,603$ (b)

Total Nursing Home expenses 3,406,447$ 2,924,057$ Nursing Home Direct Gain (160,127)$ 322,263$

Overhead expenses allocated to Nursing Home away from Hospital (a) - (b) 482,390$ Estimated Cost Based Payer Mix 50% Lost Cost Based Payer Mix Revenue on Allocated Costs (241,195)

Nursing Home Net Gain 81,068$

Nursing Home Profitabilty Analysis








– Nursing Homes







• Summary

35

• Opportunities– Using analysis on prior slide, determine true Nursing Home

losses– Grow Resident Volume

• Adult day care programs• Senior exercise programs

– Increase Charges – not allowed in ND as set by costs• Will only affect non-Medicaid reimbursement• Market may not allow

– Ensure costs are below direct, other direct, and indirect caps– Differentiate room rate charges between private and semi-

private – Hospital to “takeover” unused nursing home space

Nursing Home Losses








– Nursing Homes







• Summary

36

• Losses in Rural Health Clinics (RHCs)

– Similar to Nursing Homes, losses created in RHCs are likely to create overall negative operating margin• CAH cannot generate enough margin to cover RHC losses

– However, not a business to exit for most rural communities• Base primary care• Recruitment vehicle• Consolidation of key diagnostic services

Rural Health Clinic Losses

Operating Clinic Clinic ClinicHospital Margin % Charges FAC Gain (loss) *

C -8.42% 683$ 875$ (192)$ D 1.77% 718$ 849$ (131)$ E -4.42% 658$ 684$ (26)$ F -1.80% 255$ 330$ (75)$ I -6.57% 393$ 603$ (210)$ J -2.20% 1,256$ 1,296$ (40)$ * Does not reflect any contractual allowances that may exist

North Dakota CAHsSample Clinic Performance








– Nursing Homes







• Summary

37

• Opportunities– Understand operations and incrementally improve


ORGANIZATIONAL STRUCTURE

REVENUE EXPENSE

Visits Price Non-Provider Provider

Collections

Fee Schedule

RVU Benchmarks

Visit Benchmarks

New Patients Payer Mix

Staff Ratios

Overhead Expenses

Coding

FINANCIAL PERFORMANCE

Throughput








– Nursing Homes







• Summary

38

• Realities of Successful Private Practice– Have had to keep overhead to a minimum

– 130-140 patient encounters per week

– Have had to control payer mix

– Have had to add ancillary services

– Tight collection policies

– Current with Coding

– For Hospital to pay physician private practice salary must meet all of the above criteria – otherwise you lose

– Salary is always right because revenue-expenses = salary









– Nursing Homes







• Summary

39

• Provider Compensation– Benchmarking example

– Benchmarking is essential for providers to understand their productivity relative to peers

• “Scientific” data


12 monthperiod ended 25th 75th 90th

Productivity Measures 12/31/2005 Percentile Mean Percentile PercentileFP (w/OB) Benchmarks:

Charges (excludes TC) 381,993 505,852 597,288 723,336 Ambulatory Encounters 2,935 3,992 4,783 5,940 Work Relative Value Units 3,486 4,339 5,104 5,980

Dr. ACharges (excludes TC) 302,392 XAmbulatory Encounters 2,066 XWork Relative Value Units 5,094 X

Dr. BCharges (excludes TC) 356,140 XAmbulatory Encounters 2,037 XWork Relative Value Units 3,097 X

Dr. CCharges (excludes TC) 342,147 XAmbulatory Encounters 2,195 XWork Relative Value Units 2,861 X

MGMA (2005 Report - 2004 Data)Family Health Center








– Nursing Homes







• Summary

40

• Provider Compensation (continued)– Create productivity-based compensation models

• Best Performing Practices (BPP) frequently include physician incentives in provider compensation formulas to encourage physician efficiency and control costs

– Positive effects• Revenue enhancement

– If structured well, physicians like them

– Rewards effort

– Last patient seen

– Accepting larger patient panels

– Achieving higher efficiencies through better use of staff

– Retaining more cases with less referrals

• Expense management– Converts a portion of fixed costs to variable costs









– Nursing Homes







• Summary

41

• Charge Master– Establish appropriate charge master


EMHS - Evaluation of Clinic Fee Schedule:2003 2003 Conversion Medicare % of

Code Description Charges Charge RVUs** Factor Con Fact MedicareEvaluation and Management Codes:

99201 Office Visit New 1 3,905$ 40.00$ 0.95 42.11$ 36.32$ 116%99202 Office Visit New 2 10,275$ 65.00$ 1.70 38.24$ 36.32$ 105%99203 Office Visit New 3 7,700$ 100.00$ 2.52 39.68$ 36.32$ 109%99204 Office Visit New 4 1,960$ 140.00$ 3.59 39.00$ 36.32$ 107%99205 Office Visit New 5 125$ 180.00$ 4.58 39.30$ 36.32$ 108%99211 Office Visit Established 1 28,222$ 25.00$ 0.56 44.64$ 36.32$ 123%99212 Office Visit Established 2 276,255$ 40.00$ 0.99 40.40$ 36.32$ 111%99213 Office Visit Established 3 624,483$ 60.00$ 1.39 43.17$ 36.32$ 119%99214 Office Visit Established 4 28,088$ 85.00$ 2.17 39.17$ 36.32$ 108%99215 Office Visit Established 5 17,942$ 130.00$ 3.18 40.88$ 36.32$ 113%

Total E&M Reviewed 998,955$

Total 2003 Charges 1,872,788$ % Reviewed 53%

** 2003 Fully Implemented Non-Facility Total








– Nursing Homes







• Summary

42

• Establishing an Appropriate Fee Schedule (continued)– Goal

– Establish charges that reflect overall market conditions including:– Third party payer fee schedules– Resource based standardization of fees– Community perception

• CF below market rates = leaving “money on the table”– EOMBs tell the story

– Opportunities

• Consider developing a standardized conversion factor for E&M codes in a range between $42-$47 that is reasonable given local market conditions

• Using RBRVS information, standardize Charge Fee schedule using these conversion factors

• Continue to evaluate EOMBs to ensure charges are above “allowed” amount for all primary payers

– Caution: Must meet market conditions









– Nursing Homes







• Summary

43

• E&M Coding Relativity– An estimated 50-60% of visits are actually under-coded

• Overall distribution of E&M codes is often skewed towardslower level services when compared to rural peers

E&M Visits, Established Patients

0%

20%

40%

60%

80%

100%

120%

99211 99212 99213 99214 99215

% o

f A

ll V

isit

s

Provider A

Provider B

Provider C

Provider D

Combined

Rural Peer









– Nursing Homes







• Summary

44

• E&M Coding Relativity (continued)– Opportunities

– Work with the providers to develop a systematic, scientific review process that will identify physician-specific trends and target feedback

– Evaluate coding relativity performance on a quarterly basis

– Chart coding relativity– Standardize coding practices from provider to provider

and site to site– Coding is also a compliance issue

– Assigning an improper code is abuse/fraud – whether too high or too low









– Nursing Homes







• Summary

45

• Practice Expenses - BenchmarkingDr. Overby's Clinic - Analysis of Overhead Expenses:

MGMA**Dollars % of Net Rev Median % Diff

Gross Charges 498,114$ 196% 129%Contractual Allow/Bad Debt/Free Care (244,122) -96% -29% Net Revenue 253,992 100% 100% 0%

Non-Provider Payroll Costs: Total Non-Provider Salary 41,547 16%

Non-provider Benefits costs 6,232 2% Total Non-Provider Payroll Costs 47,779 19% 31% 12%

Operating Expenses:Building and occupancy 3,641 1% 9% 8%Professional liability insurance 19,966 8% 1% -7%Telephone/information systems 2,664 1% 2% 1%Medical supplies 9,548 4% 3% -1%Administrative supplies 2,654 1%Miscellaneous operating cost 352 0%

Total Operating Expenses 38,825 15% 28% 13%

Total Operating Costs 86,604 34% 59% 25%

Net Income before Provider Comp 167,388 66% 41% 14%

Provider Compensation and Benefits:Provider compensation 117,522 46%Provider benefits 19,288 8% Total Physician Expense 136,810 54% 54% 0%

Net Practice Income (Deficit) 30,578$ 12% -8% 20%

** MGMA Cost Survey: Family Practice-Hospital Owned, Median Information (1999 Report)

10 Months ended 7/31/02

Compensation Proposals

0

2

1

% Increase in Charges

Tota

l P

hysi

cian

Com

pens

atio

n

Inland Proposal

NHG Proposal

Charge Method









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• Practice Expenses – Benchmarking (continued)– Various methods to consider clinic support staff

Dr. Overby's Clinic Staffing Per FTE Provider:Practice Benchmark

Total FTE Support Staff (excludes bus office, admin, lab, rad,etc.) 2.50 **Total Number of Providers 1.00

Existing Support Staff per Provider 2.50 2.97 Support Staff Below Benchmark (0.47)

** Benchmark MGMA1999 Cost Survey - Single Specialty, FP, Hosp owned, Median level

Dr. Overby's Clinic Support Staffing Per 10,000 RVUs*:

Practice BenchmarkTotal FTE Support Staff (excludes bus office, admin, lab, rad,etc.) 2.50 **Total Number of Practice Work RVUs 5,660

Support Staff per 10,000 Work RVUs ** 4.42 5.82 Support Staff Below Benchmark (0.79)

** BenchmarkMGMA1999 Cost Survey - Multispecialty, Median level









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• Issue– Few CAHs in ND access county subsidies to support operations

• Due to low patient volumes resulting from limited population, CAHs often do not have enough volume to offset high fixed cost of maintaining a profitable CAH

– MT CAHs often rely on County Subsidies

County Subsidies/Non Operating Revenue

Operating Operating Operating CountyHospital Revenue Expense Margin Subsidy

A 995$ 1,296$ (301)$ 287$ B 1,309$ 1,504$ (195)$ 112$ C 1,497$ 1,788$ (291)$ 500$ D 1,638$ 1,993$ (355)$ 122$ E 2,531$ 3,461$ (930)$ 77$ F 2,965$ 3,182$ (217)$ 79$ G 3,118$ 3,440$ (322)$ 64$ H 3,127$ 3,319$ (192)$ -$ I 3,236$ 3,273$ (37)$ -$ J 3,384$ 3,632$ (248)$ 61$ K 4,656$ 5,545$ (889)$ 534$ L 9,867$ 10,593$ (726)$ 231$ M 13,708$ 13,242$ 466$ -$

Montana CAHsCounty Subsidies (amounts in 000's)








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• Non-Operating Revenue

– No correlation between non-operating revenue and total margin– Varying degree of non-operating revenue by CAH, however

critical for some CAHs

County Subsidies/Non-Operating Revenue








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Operating Total Non OperatingHospital Margin % Margin (%) Revenue %

I -6.57% 0.06% 6.64%E -4.42% -1.14% 3.28%F -1.80% 1.31% 3.12%H 0.29% 2.57% 2.28%A 2.04% 4.01% 1.97%J -2.20% -0.50% 1.70%G -5.41% -4.02% 1.39%B 1.38% 2.65% 1.27%D 1.77% 2.84% 1.07%C -8.42% -7.72% 0.70%Sample Average: -2.33% 0.01% 2.34%Statewide Average: N/A -2.33% N/A

North Dakota CAHsNon-Operating Revenue %

49

• Opportunity– Consider approaching county and present information to

demonstrate CAH economics as rationale for a subsidy• In particular, non-hospital businesses that the organization has taken

on as the community healthcare hub

– Outreach to community for contributions either directly through hospital or foundation

County Subsidies/Non-Operating Revenue








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• Issue– Varying degree of performance when comparing Bad Debt

Expense relative to hospital and Clinic gross charges

• No strong correlation between CAH operating margin and Bad Debt Expense

Bad Debt Expense

Operating Bad DebtHospital Margin % To Gross Rev

J -2.20% 4.61%G -5.41% 2.97%H 0.29% 2.22%A 2.04% 1.77%B 1.38% 1.75%I -6.57% 1.47%D 1.77% 1.38%C -8.42% 1.05%E -4.42% 0.80%F -1.80% 0.51%

North Dakota CAHsBad Debt Analysis








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• Opportunity– Many CAHs have explored options for reducing bad debt

expense– Strategies have included:

• Establish process to collect co-payments and deductibles from all patients

– Process will require patient registration staff to be trained in collection techniques as well as providing additional information to staff including charge master, etc.

• Analyze the process of physicians triaging patients in the ED – Establish a non-emergent co-payment amount of $50 or $100 for

all emergency room patients determined to be non-emergent (after medical screening by an approved clinician)

• Target 100% of elective procedures to be pre-registered– Use the pre-registration process to begin conversations regarding

payment for services at time of service as well as to verify insurance

• Establish weekly process to monitor collected upfront co-payments and deductibles

• Provide expanded financial counseling to assist self-pay patients in filling out Medicaid applications and to set up payment arrangements

Bad Debt Expense








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• Issue– Without an understanding of current year volume and expense

changes on Medicare revenue, year end surprises may occur

– Interim financial statements can be meaningless and allow inaccurate operating decisions

• Example:

Interim Cost Reports or Net Revenue Model

Scenerio 1 Scenerio 215% Volume 15% Volume

Prior Year Decrease IncreaseMedicare Acute Costs 1,716,000$ 1,716,000$ * 1,801,800$ **Medicare Acute Days 1,844 1,567 2,121 Cost Per Day 930.59$ 1,094.81$ 849.67$

Interim Rate 930.59$ 930.59$ Difference 164.22$ (80.92)$ Settlement 257,400$ (171,600)$

* Assumes 0% costs increase due to higher nursing and benefits offset by a lower ancillary cost allocation** Assumes 5% increase in costs related to higher nursing and benefits as well as additional ancillary costs

CAH Interim Payments and Revenue Recognition








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• Guiding Principle– Interim reimbursement is not final reimbursement

• Understand the difference from both a cash flow perspective and from an operational decision-making perspective

• Opportunity– Quarterly calculation of Medicare cost-based reimbursement– Work with cost report preparer or CPA to either develop tool for

internal analysis prepare quarterly/semi-annual interim cost reports

Interim Cost Reports or Net Revenue Model








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• Expected physician complement

Physician Recruitment

Physician FTEs Area Area Surplus Area Surplus

Total1 Need2 (Shortage) Need2 (Shortage)

Primary care specialties

Family practice31.50 1.53 (0.03) 1.79 (0.29)

General internal medicine 0.00 0.82 (0.82) 0.96 (0.96)

General pediatrics 0.00 0.35 (0.35) 0.41 (0.41)

Primary care total (1.20) (1.66)

Medical subspecialties

Cardiology 0.00 0.09 (0.09) 0.10 (0.10)

Gastroenterology 0.00 0.06 (0.06) 0.07 (0.07)

Medical subspecialty total (0.21) (0.25)

Surgical specialties

General and other surgery 0.00 0.18 (0.18) 0.20 (0.20)

Obstetrics/gynecology 0.00 0.30 (0.30) 0.35 (0.35)

Ophthalmology 0.00 0.11 (0.11) 0.13 (0.13)

Orthopedics 0.00 0.13 (0.13) 0.15 (0.15)

Surgical specialty total (0.85) (1.00)1 Physician FTEs calculated as 18 days per month = 1.0 FTE. Mid-level provider FTE calculated as 0.75 FTE and added to Family practice total.

2 Based on 2000-2002 physician to population ratio data from three prepaid group practices that serve over eight million consumers. Source: Weiner JP, Prepaid Group Practice Staffing and U.S. Physician Supply: Lessons for Workforce Policy, Health Affair

3 Family practice calculated need calculated by averaging Weiner data and a state-specific ratio of self-labeled generalist physicians to population. Source: Flowers L et al. State Profiles: Reforming the Health Care System. AARP Public Policy Institute

Physician Need CalculationsCurrent Service Area Potential Service Area

3,000 3,500








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• Issue

– Communities do not have enough providers to meet expected community demand

• Result is patients leave the community for health care services

• Opportunity– Evaluate current community demand using information

provided in previous slide• Use information as a basis for a Medical Staff Plan• Meet with local providers to understand their thoughts

– Recruit providers to meet expected demand of the community

Physician Recruitment








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• Issue

– Outpatient volume is necessary to generate profit in a CAH

– Many communities have below expected levels of charges for outpatient departments

• Radiology, PT, Lab, etc.

– High RCCs are often an indicator of outpatient volume leaving the community

Growth in Outpatient Volume








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• CAH Economics - Hypothetical Model– All growth in inpatient services

• Growth in inpatient services increases margin, but not much

– Why?


Inpatient & LTC Breakeven Analysis(IP Growth - Assumes Constant OP Visits)

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

$5,500,000

$6,000,000

3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0

Acute and Swing Bed ADC

Total IP Rev

IP Costs








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• CAH Economics - Hypothetical Model (continued)– All growth in outpatient services

• Growth in outpatient services increases margin substantially

– Why?


Outpatient Breakeven Analysis(OP Growth - Assumes Constant Acute and SB ADC)

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

$5,000,000

$5,500,000

$6,000,000

12,50

0

15,00

0

17,50

0

20,00

0

22,50

0

25,00

0

27,50

0

30,00

0

32,50

0

35,00

0

37,50

0

Outpatient Visits

Total OPRevTotal OPCosts








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• Opportunity

– Ensure patients are staying in the community for all appropriate outpatient services

– Promote services in the community– Work with physicians to better understand their requirements for

referring additional services to the CAH









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• Third party contracts are aggressive and have forced ND CAHs to be efficient

– Partially responsible for underperformance relative to neighboring states (SD and MN)

• Many opportunities for ND CAHs to pursue financial improvement independent of third party contracts

– Charge master

– Non-hospital businesses

– Care for Medicare skilled patients

– Etc.

Summary








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Thanks for listening!

Eric Shell, CPA, [email protected]

North Dakota Healthcare Association 72 nd Annual Conference – Tomorrow’s Challenges CAH...

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