The Health Care Environment & Evaluation of … 1 Tuesday, May 6, 2014 | 2 – 3 p.m. Central time...
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5/5/2014 1 Tuesday, May 6, 2014 | 2 – 3 p.m. Central time The Health Care Environment & Evaluation of Strategic Positioning Eddie Marmouget, CPA National Industry Partner BKD, LLP [email protected] Joe Watt, CPA Partner BKD, LLP [email protected] To Receive CPE Credit • Participate in entire webinar • Answer polls when they are provided • If you are viewing this webinar in a group o Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & email address o All group attendance sheets must be submitted to [email protected] within 24 hours of live webinar o Answer polls when they are provided • If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days of live webinar 2
Transcript of The Health Care Environment & Evaluation of … 1 Tuesday, May 6, 2014 | 2 – 3 p.m. Central time...
5/5/2014
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Tuesday, May 6, 2014 | 2 – 3 p.m. Central time
The Health Care Environment & Evaluation of Strategic Positioning
Eddie Marmouget, CPANational Industry PartnerBKD, [email protected]
Joe Watt, CPAPartnerBKD, [email protected]
To Receive CPE Credit
• Participate in entire webinar• Answer polls when they are provided• If you are viewing this webinar in a group
o Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & email address
o All group attendance sheets must be submitted to [email protected] 24 hours of live webinar
o Answer polls when they are provided• If all eligibility requirements are met, each participant will be
emailed their CPE certificates within 15 business days of live webinar
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Overview
• Introduction • Current Industry Trends & Market Activity • Strategic Affiliation Drivers • Strategic & Financial Review • Reform-Based Competency Assessment • Pursuing a Strategic Positioning Process • Closing Summary
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BKD, LLP Breadth & Depth of Resources
• National CPA & advisory firmo Approximately 2,100 personnelo Approximately 250 partnerso Approximately 890 CPAs
• Serving clients for 90 years• $429 million in revenues• 7th largest health care consulting firm• Health care is BKD’s largest industry
o 3,500+ health care provider clients nationwide, with 275 CPAs serving those health care providers
• Experienced merger, acquisition & affiliation services team
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CURRENT INDUSTRY TRENDS AND MARKET ACTIVITYCurrent Industry Trends & Market Activity
Current Industry Trends & Market Activity
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56 58 6052
7785
100
79
0
20
40
60
80
100
120
2006 2007 2008 2009 2010 2011 2012 YTD Nov2013
Hospital Transactions by Year
Source: Irving Levin & Associates, Quarterly & Monthly M&A Reports
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Current Industry Trends & Market Activity
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Long-Term Care (incl. Assisted
Living)30%
Hospitals16%
Managed Care4%
Laboratory, MRI, Dialysis
7%
Physician/PPMC11%
Home Care6%
Behavioral Health3%
Rehabiliation3%
Other20%
2012 Deal Volume
Long-Term Care (incl. Assisted
Living)38%
Hospitals15%
Managed Care2%
Laboratory, MRI, Dialysis
6%
Physician/PPMC11%
Home Care6%
Behavioral Health3%
Rehabilitation2%
Other17%
YTD November 2013 Deal Volume
Source: Irving Levin & Associates, Quarterly & Monthly M&A Reports
Trends in Hospital Affiliations
• Trend 1: Large health systems are looking to expand, but very cautiously
o Large health systems are facing significant challenges as wello Smaller health systems’ value proposition may be limitedo Distressed situations allow health systems to be picky
• Trend 2: Boards are (or should be) thinking about strategic affiliations1. Those currently involved in strategic affiliations 2. Those pursuing strategic affiliations3. Those thinking about strategic affiliations4. Those who should be thinking about strategic affiliations
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Trends in Hospital Affiliations
• Trend 3: Growth of for-profit systems
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All Community Hospitals 5,875 5,008 (867) -15%
Breakdown:Non-Governmental, Non-Profit 3,339 57% 2,918 58% (421) -13%Governmental 1,761 30% 1,092 22% (669) -38%For-Profit 775 13% 998 20% 223 29%
Source: AHA Hospital Statistics, 2011 Edition
Change1975 2009
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Strategic Affiliation Drivers
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Hospital Affiliation Drivers
• Macroeconomic issueso Recent recession – people w/o jobs & health insuranceo State & Federal budget issues
• Reimbursement pressures from payers• Financing pressures
o Difficult for smaller hospitals to raise financing for capital projects• Operating & capital cost pressures
o Difficulty recruiting physicianso Desire to offer more advanced serviceso Increasing ER visits by uninsured patients
• Increasing demand from aging population• Financial impact of Affordable Care Act
o More covered lives – 30 million uninsured lives in transitiono More Medicaid/Medicare payers
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Strategic Affiliation Drivers
• Downstream strategic affiliation drivers for large health systems
o Obtain benefits of operational scaleo Spread fixed costs & IT investments over larger population baseo Solidify long-term status within market areao Position organization for success under population health
management & move from volume to value-based payments
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Strategic Affiliation Drivers
• Upstream strategic affiliation drivers for community hospitalso Stabilize & grow long-term health care delivery in communityo Protect &/or expand market positiono Access to capital for IT investments Facility improvements
o Strengthen payor negotiating positiono Access to forming narrow networkso Leverage purchasing power of larger organizationo Reduced overhead costo Access technology & expertise to implement new models of
care
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Health Care Reform
• Affordable Care Act (ACA) passed in March 2010• Primary goal – reduce uninsured• Medicare spending trends are not sustainable• Cost of health care reform largely paid for by PPS hospital
reimbursement cuts• October 1, 2013 – Open enrollment began for health insurance
exchanges in each state• January 1, 2014 – Health insurance coverage within exchanges
begin• Estimated 25 million Americans are expected to gain health care
coverage
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Health Care Reform
• Critical Access Hospitals initially avoided some of the paino Few direct CAH payment cut provisions
• PPS providers were not quite as fortunate • All providers will be impacted by changes to insurance
marketplace
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Health Care Reform
• Quality & outcomes impacting PPS hospital reimbursemento Hospital acquired conditions adjustmentso Readmission rate adjustmentso Value-based purchasing
• Delivery system reformso Bundled paymentso Accountable Care Organizations
• CAHs included in several demonstrationso Three-year demonstration on value-based purchasing for CAHso CMS to consult with CAHs in developing post-acute bundling
demonstration
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Health Care Reform – ACA Cuts
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Provision Details of ProvisionProductivity Adjustment 0.10%-0.75% reductions over next 10 years starting in 2012
DSH – Medicare Provides for 75% reduction in DSH payments in 2015
DSH – Medicaid CBO indicates approximately 50% eliminated over 8 years starting 2014
Hospital Quality Initiative 2% payment reduction in payment update for hospitals failing to report
Readmission Rates 3% in 2015 & thereafter for excess admissions
Value-Based Purchasing Sets aside 1% pool in 2013, increasing to 2% by 2017 &thereafter. Returned based on quality
Hospital Acquired Conditions Adds 1% cut for hospitals in top quartile effective in 2015
Reform – Known Inpatient Prospective Payment System (IPPS)Hospital Changes
• 2% sequestration cutso Medicare claims with dates of service on or after April 1, 2013, incur a
2% reduction due to sequestration cutso Includes EHR incentive payments
• Medicare bad debt reimbursemento Effective October 1, 2012, Medicare bad debt reimbursement for PPS
hospitals was reduced from 70% to 65%• Medicare DSH payments (ACA mandated)
o Effective October 1, 2013, Medicare DSH hospitals will receive 25% of their DSH payments based upon traditional methodology for determining Medicare DSH payments, & 75% of their Medicare DSH payments will be determined based upon hospital’s uncompensated care cost as a percentage of all hospital’s uncompensated care costs
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Reform – Known IPPS Hospital Changes
• FFY 2014 market basket adjustments/offsetso (0.5%) ACA mandated productivity adjustmento (0.3%) ACA mandated market basket reductiono (0.8%) American Taxpayer Relief Act mandated coding
adjustment reductiono (0.2%) “Two Midnight Rule” offset
• Readmissions Reduction Programo Reduce payments to IPPS hospitals with excess readmissionso Maximum penalty of 2% in FFY 2014 & 3% in FFY 2015o List of conditions measured will increase in FFY 2015
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• Value-based purchasing programo Reward hospitals that provide high-quality careo Maximum effect for FFY 2014 is 1.25% (adjustment factor ranging
between 0.9875 & 1.0125)o Increases to a maximum of 2% (adjustment factor ranging between
0.98 & 1.02) by FFY 2017• Hospital Acquired Conditions (HAC)
o Effective October 1, 2014, IPPS hospitals with a historic risk-adjusted HAC ranked in top quartile of all hospitals will be subject to a 1% reduction in IPPS payments
• Medicaid DSH reductionso ACA Medicaid DSH reductions have been delayed from FFY 2014 to
FFY 2016o Doubles DSH reduction that would have applied in FFY 2016
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Reform – Known IPPS Hospital Changes
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Reform – Known CAH Changes
• 2% sequestration cutso Medicare claims with dates of service on or after April 1, 2013,
incur a 2% reduction due to sequestration cutso Includes EHR incentive payments
• Medicare bad debt reimbursemento After October 1, 2012, Medicare bad debt reimbursement for
CAHs will be reduced from 100% to 88% in 2013, 76% reimbursed in 2014 & 65% reimbursed in 2015
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Health Care Reform – Medicaid Expansion
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Source: The Henry J. Kaiser Family Foundation
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Health Care Reform
• Health Care Reform Unknowns – Medicaid Expands
• Previously Uninsured• Currently MCD Eligible
but Uninsured
• Commercial Insured• Previously Insured
• Medicaid Eligible• Medicaid Eligible
• Health Care Exchanges
• Medicaid
Payment Rate
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Health Care Reform
• Health Care Reform Unknowns – No Medicaid Expansion
• Currently MCD Eligible but Uninsured
• Commercial Insured
• Medicaid Eligible
• Health Care Exchanges
Payment Rate
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Strategic & Financial Review
Strategic Positioning
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Strategic & Financial Review
Reform-Based Competency Assessment
Review Alternative
Approaches & Partnership
Options
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Strategic & Financial Review Components
• Market assessment
• Competitor analysis
• Key performance indicators
• Service line/department evaluation
• Pro forma analysis
• Debt capacity assessment
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Market Assessment – Population & Income Trends
$38,000
$40,000
$42,000
$44,000
$46,000
$48,000
$50,000
$52,000
2000 2013 2018Source: Claritas Site Reports
Median Household Income
250,000,000
260,000,000
270,000,000
280,000,000
290,000,000
300,000,000
310,000,000
320,000,000
330,000,000
2000 2010 2013 2018Source: Claritas Site Reports
U.S. Population Trends
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Market Assessment – Use Rates & Population by Age
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
Under 15 years 15-44 years 45-64 years 65 years andolder
Source: Claritas Site Reports
Population Trends by Age
2000 2013 2018
0
50
100
150
200
250
300
350
400
Under 15years
15-44 years 45-64 years 65 years andolder
Total
Source: National Health Statistics Report
Use Rates by Age & Sex
Male Female Overall
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Competitor Analysis
• Assess strengths & weaknesses of competitorso What drives competition?o What is competition doing or capable of doing?o What are their competitive advantages? Disadvantages?
• Quantify competitors’ market share & illustrate trend over time
o Evaluate for potential threats & opportunitieso Are trends favorable or unfavorable?o Evaluate drivers of trends
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Key Performance Indicators (KPIS)
• Determine key financial & operational metrics
• Identify trends
• Benchmark KPIs against peers & any debt covenants
• Create dashboard to clearly identify areas of focus
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Source: http://dashboardspy.com
Service Line/Department Evaluation
• Peel back the oniono Quantify revenues, expenses & other KPIs by inpatient,
outpatient & any specialty service lineso Peel back another layer to evaluate performance by
department in context of your overall strategic plan
• This evaluation will allow your management team & board to better understand how services provided by your organization impact your results & financial position
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Service Line Profitability Analysis – Medical
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IP OP Total
RevenueGross charges 12,500,000$ 22,900,000$ 35,400,000$ Deductions from revenue (3,700,000) (10,100,000) (13,800,000)
Net patient service revenue 8,800,000 12,800,000 21,600,000
ExpensesDirect salaries and wages 2,800,000 2,600,000 5,400,000 Direct other expenses 2,300,000 3,200,000 5,500,000 Direct overhead 3,100,000 2,300,000 5,400,000
Total direct expenses 8,200,000 8,100,000 16,300,000
Contribution margin 600,000 4,700,000 5,300,000
Indirect overhead 1,600,000 1,600,000 3,200,000
Net profitability (1,000,000)$ 3,100,000$ 2,100,000$
Collection % 70.40% 55.90% 61.02%% direct expense to revenue 93.18% 63.28% 75.46%% total expense to revenue 111.36% 75.78% 90.28%
Medical
Pro Forma Analysis
Year 1 Year 2 Year 3
Excess of revenues over expensesDepreciation and amortizationInterest expense
Reported income available for debt service (IAFDS)
One-Time AdjustmentsRecast allowable bad debtsReduced DSH payments340B program additional reimbursement
Total one-time adjustments
Impact of Known Health Care Reform ChangesSequestration adjustmentAllowable bad debts reduction
Total known changes
Adjusted IAFDS
Impact of Potential Health Care Reform ChangesAdditional Medicaid insuredAdditional exchange insuredTransfer from commercial to exchange
Total potential changes
Pro Forma IAFDS
• Evaluate historical results in light of expected future changes
o Adjust for any on-time items impacting historical results
o Adjust for impact of known & potential health care reform changes
o Adjust for impact of strategic initiatives
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Debt Capacity Review
3.43 3.33
1.58
2.78
-
1.00
2.00
3.00
4.00
5.00
2010 2011 2012 Average
Debt Service Coverage Ratio
State Median
US CAHMedianBondCovenantBBB
• Your organization’s strategic plan may require issuance of new debt
• Before issuing new debt, you will want to evaluate your ability to absorb additional debt based upon historical & adjusted results
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50.7% 48.9% 48.0% 49.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
2010 2011 2012 Average
Debt to Capitalization Ratio
State Median
US CAHMedianBondCovenantBBB
Reform-Based Competency
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Information Technology
Cost Management
Competitive Facilities & Equipment
Access to Capital
Quality & Patient
Satisfaction
Recruiting Retention
Medical Staff
Growth
Market Position
Geographic Proximity
Critical Success Factors in
Health Care Reform
Environment
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Medical Staff/Clinical Integration/ Care Management
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Estimated & Projected Physician Visits & FTEs
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Physician Office Visits & FTE Coverage
Age 2013 Community PopulationPhysician
Office Visits per Person
Estimated Physician
Office Visits
% Primary Care Visits
Estimated Primary Care
Visits
Mean MGMA Visits per FTE
Estimated Primary Care
FTE
Estimated 20130 - 14 1,333 2.37 3,159 0.79 2,489 4,608 0.5415 - 44 2,510 1.92 4,819 0.56 2,694 4,313 0.6245 - 64 2,421 3.20 7,747 0.56 4,331 4,313 1.0065+ 1,874 5.74 10,757 0.56 6,013 4,313 1.39TOTAL 8,138 26,482 15,527 3.56
Projected 20180 - 14 1,251 2.37 2,965 0.79 2,336 4,608 0.5115 - 44 2,334 1.92 4,481 0.56 2,505 4,313 0.5845 - 64 2,106 3.20 6,739 0.56 3,767 4,313 0.8765+ 1,966 5.74 11,285 0.56 6,308 4,313 1.46TOTAL 7,657 25,470 14,916 3.42
URGENT CARE VISITS 2,224 4,400 0.51
TOTAL PROJECTED 17,140 3.93
Source: The National Center for Health Statistics and the Nielsen Company
Physician Integration & Alignment
• Considerations o Physician leadership norms
Current: Participation optional/informal Future: “Physician co-leadership”
o Physician compensation norms Current: Productivity based &/or salary Future: Aligned with “triple aim” goals, strategic initiatives &/or
prevailing reimbursement modelo Physician strategy norms
Current: Ad-hoc, largely employment focused Future: Systematic, with greater emphasis on nontraditional
partnering opportunities
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Care Coordination
• Considerations o Electronic Health Record system
Current: Primarily utilized as a substitute for paper records in early stages of implementation
Future: Actively mined for best practice applications & hub for population management
o Population management Current: Geographic protections create a cohesive market for
population management Future: Health care reform will likely drive care coordination needs
(i.e., Patient Centered Medical Home, Bundled Payment models, etc.)
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Quality/Patient Satisfaction
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Quality/Patient Satisfaction
• Focus of health care reform will be on quality, value & outcomes• Shift from volume-based payment models & cost-based models
to value-based patient-centered payment modelso Pay-for-performanceo Quality data reporting
• Quality & outcomes currently impacting reimbursement for PPS hospitals & could potentially impact CAH reimbursement in future
o Hospital acquired conditionso Readmission rateso Value-based purchasing
• Three-year demonstration project on value-based purchasing for CAHs
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Quality/Patient Satisfaction
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Quality / Patient Satisfaction Indicator
Effective Pneumonia Care
Appropriate Initial Antibiotic Selection
Patient Survey Results
Nurses Communicated Well - Always
Doctors Communicated Well - Always
Help Received Quickly - Always
Pain Controlled Well - Always
Staff Explained Medicines - Always
Compared to Peer Group
Median
Compared to Missouri State
Average
Compared to National Average
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Cost Management
Cost Management
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Status of accounting & budget information at hospital, departmental level & service line level
Development of cost accounting methodologies to encompass service line, case costing & care protocol (linked with EHR data) & payor contract bases
Regular reporting & education on cost accounting analyses to leaders on departmental basis for operations, on case costing & care protocol basis to provider-led care coordination teams & on service line basis for strategic management
Cost accounting ratios & comparisons to peer groups
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Information Technology
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Information Technology
IT Strategies & Business Objectives
Identification of IT Risk Areas
Compare Risks to IT Strategies & Goals
IT Gap Analysis
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Pursuing A Strategic Positioning Process
Affiliations Options Analysis – Strategic Readiness Assessment
• Analyze organization’s position relative to other providers in primary & secondary service area
• Interview regional health care systems regarding outlook on health care in the region, affiliation strategy & view of organization undergoing strategic readiness assessment
• Provide a high-level overview of strengths & weaknesses of select group of regional health care systems
• Educate board & management on range of potential affiliation structures
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Strategic Affiliation Goals
• Identification of strategic affiliation goalso Asking hard questions leads to o Organization’s goals for affiliation
Capital Financial performance Operating performance Health care reform & population health management Cultural Physician alignment Payor access Competitive advantage
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Strategic Affiliation Evaluation Considerations
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Control Retained by Local Community/Board
More Less
Integration Level
Low High
Affiliation
Loose Strong
Joint Operating
Agreement
Management Agreement Merger Lease Acquisition
Strong Organization
Weak Organization
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Affiliation Process
• Affiliation processes vary depending on hospital’s desire to influence a variety of important factors, including
o Confidentialityo Timingo Operational disruptiono Value maximization
• Types of affiliation processeso Limited Affiliation Processo Broad Affiliation Process
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Confidential Memorandum (CM)
Request For Proposal (RFP)
Receive & Evaluate RFP Responses
Conduct Affiliation Presentations & Additional Due
Diligence
Negotiate RFP Responses
Develop List of Potential Partners
Develop List of Potential Partners
• Identify potential partners that could meet affiliation objectives. Organizations identified should each have a rationale for pursuing an affiliation with the hospital
Affiliation Process
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Confidential Memorandum (CM)
Request For Proposal (RFP)
Receive & Evaluate RFP Responses
Conduct Affiliation Presentations & Additional Due
Diligence
Negotiate RFP Responses
Develop List of Potential Partners
Confidential Memorandum (CM)
• CM is primary information disclosure document from hospital
Affiliation Process
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Confidential Memorandum (CM)
Request For Proposal (RFP)
Receive & Evaluate RFP Responses
Conduct Affiliation Presentations & Additional Due
Diligence
Negotiate RFP Responses
Develop List of Potential Partners
Request For Proposal (RFP)
• RFP should be designed to allow hospital to objectively evaluate proposals received, based on specific qualitative & quantitative information requested in RFP
Affiliation Process
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Confidential Memorandum (CM)
Request For Proposal (RFP)
Receive & Evaluate RFP Responses
Conduct Affiliation Presentations & Additional Due
Diligence
Negotiate RFP Responses
Develop List of Potential Partners
Receive & Evaluate RFP Responses
• Board & senior management compare & contrast proposals & evaluate degree to which each partner is likely to fulfill desired affiliation goals & objectives
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Affiliation Process
Confidential Memorandum (CM)
Request For Proposal (RFP)
Receive & Evaluate RFP Responses
Conduct Affiliation Presentations & Additional Due
Diligence
Negotiate RFP Responses
Develop List of Potential Partners
Conduct Affiliation Presentations & Additional Due Diligence
• Hospital invites potential partners under final consideration to provide in-person presentations to board & senior management
• Hospital will also be doing additional due diligence, as necessary• Reference calls• Site visits• Additional information requests
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Affiliation Process
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Confidential Memorandum (CM)
Request For Proposal (RFP)
Receive & Evaluate RFP Responses
Conduct Affiliation Presentations & Additional Due
Diligence
Negotiate RFP Responses
Develop List of Potential Partners
Negotiate RFP Responses
• Aim of such negotiation is to obtain best-possible “deal” related to goals & objectives as previously established by board & senior management
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Affiliation Process
Successful Affiliations
The most successful affiliations are based upon
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Jointly pursuing a “win-win”
affiliation solution
Developing clear affiliation goals &
objectives
Asking & answering hard
questions
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Closing Summary
Strategic Positioning – Key to Future
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BKD Can Help
• Advisory Serviceso Strategic planning, financial & operating assessments, financial modeling & forecasting
• Consulting Serviceso Review performance indicators, provider productivity, billing processes & procedures
• Merger, Acquisition & Affiliation Serviceso Strategic options analysis, target identification, structure, negotiation & more
• Financing Services o Identification of financing sources that align with your strategic objectives
• Transaction Management & Due Diligence Services o Evaluation of cash flow, forecast review, analysis of working capital, carve-out issues
• Sell-Side Due Diligence Services o Identify issues, liabilities & exposures that could have an adverse impact on deal
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Questions?
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Thank You!
Eddie Marmouget | [email protected] | 417.865.8701
Joe Watt | [email protected] | 816.221.6300
Continuing Professional Education (CPE) Credits
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The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any
matters covered in these webinars.
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CPE Credit
• 1 CPE credit may be awarded upon verification of participant attendance
• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at [email protected]
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