The Tale of a Texas-sizedCritical Access Hospital Intervention

David Pearson – CEO, TORCHGregory Wolf – Principal, Stroudwater Associates

September 30, 2016

I. State of Healthcare – CAH Industry Trends and Market Catalysts

II. CAH Financial and Operational Improvement Projects 2015-16Goals and Objectives, Methodology, Scope of Work, Deliverables/Outcomes

III. Baseline Data Analysis, Condition Assessments

IV. Revenue Cycle

V. Market Studies and Outmigration Analysis

VI. Nurse Staffing Assessment

VII. Sidebar Projects and Q&A

Agenda

State of Healthcare

Value-Based Care (Population Health)

Rising Prescription Drug Prices

Rising PremiumsRising Labor Costs and Wages

• Shift from volume to value-based care; shifting risks and accountability will affect CAHs too eventually

• Care model disruptors and innovators: new primary care delivery models (CCM, ACOs, NGACOs CRJ, CPC+), telehealth; post-acute care

• Prevalence of “narrow/ tiered networks”

• Drug prices jumped 12.2% last year (highest rate increase in 10 years)

• Prescription drug prices jumped >10% in 2015 (totaling $446.96B)

• Significant proposed changes to 304B program for CAHs

• Salaries/benefits single largest cost line item for acute care hospitals

• 33% TX CAHs have salaries to net patient revenue >60%

• 14 CAHs >70%• 9 CAHs >90%• 5 CAHs >100%• Highest: 141.09%• Lowest: 24.42%

“Even if we cut all of our salaries and everybody worked for free, we’d still be at a deficit.”

• Problematic individual health insurance policies; overall lowered projected enrollment, combined with expected higher medical utilization by enrollees

• Average deductible for an employer-provided health plan surged nearly 9% in 2015

• BCBS of Texas, the state’s largest insurer, is looking for rate hikes of nearly 60% for individual plans

Some Industry Trends and Market Catalysts

630 TX hospitals w/ 83,000 licensed beds

164 TX hospitals (10 closed since 2013)

27% of Texas hospitals are rural

375 primary care HPSAs

80 CAHs in Texas (1332 in U.S.)

177 out of 254 TX counties are rural

63 TX counties have no hospital; 35 TX counties have no physicians

~70% of ED visits by commercially insured patients are for non-emergencies

291 RHCs in TX (4,099 in U.S., as of Oct.’15); ~half are freestanding practices

71 FQHCs in TX operating >300 sites, plus 1 FQHC-Look Alike (~1,250 FQHCs in U.S., 8,000 clinic sites)

2,000+ school-based health clinics (SBHCs), and ~1,000 free clinics that primarily serve the uninsured

9,000 urgent care centers and 3,200+ retail clinics in 2015 (~1,300 in 2012) putting increased pressure on rural hospitals and clinics for staffing resources and market retention

Texas Healthcare by the Numbers

U.S. Hospitals by Type, 2016

Non-profit For-profit Government

2,904(59%)

1,010(20%)

1,060(21%)

H

Urban3,715

(65.3%)

Rural1,971

(34.7%)

CAHs1,332

(67.6%)

Other Rural(32.4%)

Texas CAHs

80(2 in progress)

84Rural PPS

Rural Hospital Closures

2003 - 2011

195Hospital Closures

2010 - 2015

57Hospital Closures

2016

10+Closed or closing*Wharton, most recent in TX

1iVantage study, Feb 2016, in 42 states; highest in MS, LA, GA268% of hospitals vulnerable to closures are CAHs327.5% of TX’s 153 hospitals are vulnerable to closure

Vulnerable to Closure

283 6731 68%2 27%3

A Hospital Snapshot

• Margin: 25% of all U.S. hospitals had negative margins (Truven Health Analytics, 2013)

• Total margin: 7.6% for all U.S.

hospitals vs. 3.5% for TX CAHs (Sources: Medicare cost report data; Truven Health Analytics, 2013)

• Operating margin: 5.35% for all

U.S. hospitals vs. -.54% TX CAHs (Source: Medicare cost report data)

• Days available cash: 21.9% of TX CAHs w/ <10 days COH (Source: Medicare cost report data)

Source: Federation of American Hospitals, 2014

Hospital Cuts are Adding Up

Source: Federation of American Hospitals, 2014

Medicare Margins Driven to All-time Low• Margins at all-time low -9%• Hospital days ↓ 33% btw 1981-2011

• At any given time, 37% of available bed-days are unused (AHA Chartbook, 2013)

• Avg. cost per IP day rising: 34.2% TX CAHs have Medicare acute IP cost over $3000/day (highest at $17,383, $13,706, $10,253/day)

• Hospital CEO turn-over: 18% nationally in 2014 (higher in TX, closer to 30%)

• Rural Hospitals in TX: have approx. 64%of costs reimbursed under Medicaid.

Declining Margins/Rising Costs

Hospital CEOs ranked financial challenges as No. 1 issue facing their organization for 11 years straight1

Outmigration is the #1 factor in poor financial performance2

Nurse Staffing is one of the largest expense items

So these are the three areas that participating CAHs chose to address

1According to the American College of Healthcare Executives Annual Survey of Hospital CEOs2Based on lessons learned from the Critical Access Hospital Financial Leadership Summit for two straight years

Bottom Line

2015-16 CAH/Flex Financial and Operational Projects

Agenda

Data Collection & Analysis

Condition Assessments

Strategy Development

Targeted Interventions

Education/ Training

Outcomes Evaluation

Feedback

Diagnostics, Analytics

Services, Consultation, T/A

Information and Resources

Conference and Webinars

Pre/Post Evaluation

Lessons Learned, Reporting

Face-to-face network meetings

Medicare Cost Report Data (7yrs)

22 metrics, 3 levels of analysis

Proprietary Data Sources

Site Visits and Interviews

Observations and Common Threads

Consensus Projects

Project Scope 2015-16

Revenue Cycle Improvement

Market Study Outmigration 2016

Nurse Staffing Analysis 2016

Regional Cohort Development 2016

2015 Participants

Hospitals in Revenue Cycle Project (26)*

Hospitals considering CAH Conversion (2)

*Parkview counts 2x and funds for 1 slot was reallocated to the 5-hospital project

DM Cogdell converted to CAH, retroactive to April 2015

CAHs closed

CAH Network (northern)1. Castro County Hospital District,

Dimmit2. Fisher County Hospital District,

Rotan3. Lynn County Hospital District,

Tahoka4. Parmer County Hospital,

Friona5. Swisher Memorial Hospital,

Tulia6. WJ Mangold Memorial Hospital,

Lockney

CAH Network (southern)1. Jackson County Hospital,

Edna2. Lavaca Medical Center,

Hallettsville3. Memorial Medical Center,

Port Lavaca4. Palacios Community Med Center,

Palacios 5. Rice Medical Center,

Eagle Lake6. Sweeny Community Hospital,

Sweeny F&O Project, 2016 (12)

New CAHs (Cogdell Memorial Hospital, Apr’15and Goodall-Witcher Hospital Authority, Mar’16)

CAHs closed

Total CAHs in Texas: 80

Cogdell Memorial Hospital

Cogdell Memorial Hospital

2016 Participants

Baseline Data Analysis, Condition Assessments

Agenda

Total Margin

(%)

Operating Margin

(%)

Cash Flow Margin

(%)

Return on Equity

(%)

BM: >3 BM: >2 BM: >5 BM: >4.5

Profitability Indicators

Current Ratio

(x)

Days Cash on Hand (days)

Days Rev in AR

(days)

BM: >2.3 BM: >60 BM: <53

Liquidity Indicators

Equity Financing

(%)

Debt Service

Coverage

LT Debt to Capitaliz-

ation

BM: >60 BM: >3 BM: <25

Capital Structure Indicators

O/P Rev to Total Rev

(%)

Patient Deductions

(%)

Medicare I/P Payor Mix (%)

Medicare O/P Payor

Mix (%)

Hospital Medicare

O/P Cost to

Medicare Acute I/P

Cost/Day ($)

BM: <0.55

Revenue Indicators

Salaries to Nt Patient

Rev (%)

Average Age of

Plant (yrs)

FTEs per Adjusted Occupied

Average Salary per

FTE ($)

BM: <10

Cost Indicators

ADC Swing-SNF Beds

ADC Acute Beds

Utilization Indicators

Data Collection & Analysis

Medicare Cost Report Data (FMT)

• Data Sources: Medicare Cost Report Data (FMT), Truven Analytics, AHA Data

• 7 years of data; 22 metrics, 6 F&O areas; 3 levels of analysis

• 78 TX CAHs, 12 CAHs in project (2 cohorts)

Selected Findings – Data Collection & Analysis

• 32 (41.0%) TX CAHs have negative Total Margin • 3 lowest: -23.10%, -21.82% and -15.86% • 3 highest: 33.96%, 25.62% and 25.47%

• 34 (43.6%) TX CAHs have negative Operating Margin • 3 lowest: -86.87%, -63.75% and -58.91%• 3 highest: 51.72%, 33.17% and 25.59%

• 26 (32.9%) TX CAHs have negative Cash Flow Margin• 3 lowest: -86.87%, -49.96% and -48.68%• 3 highest: 43.37%, 37.20% and 36.52%

• 22 (29.3%) TX CAHs with Cash On Hand <15 days; • 16 with COH <10 days; 6 with COH < 1 day• 13 TX CAHs with COH > 300 days

• 26 (32.9%) TX CAHs have Salaries to Net Patient Revenue >60%, Avg. Salary $44,496

• 16 (20.3%) TX CAHs have Average Daily Census <1 bed/day

INPATIENT PAYER MIX OUTPATIENT PAYER MIX

• TX med CAH is 73.77%• US med CAH is 73.01%

• 22 (27.8%) TX CAHs have Medicare IP payer mix >80%

• Highest: 94.40%, 93.65% and 92.41%

• Lowest: 17.63%, 36.73% and 44.33%

• TX med CAH is 33.15%• US med CAH is 37.90%

• 21 ( 26.6%) TX CAHs have Medicare OP payer mix >40%

• Highest: 60.26%, 55.80% and 52.26%

• Lowest: 2.60% 6.75% and 11.46%

OP REV TO TOTAL REV

• TX med CAH is 76.38%• US med CAH is 74.43%

• 31 (39.2%) TX CAHs have Medicare OPR/TR >80%; 5 have Medicare OPR/TR >90%

• Highest: 92.21%, 91.92% and 91.69%

• Lowest: 57.04%, 58.90% and 60.46%

n=79 TX CAHs

Medicare Payer Mix

Future State Finance Operations

Condition Assessments / Interviews

• Death by a thousand cuts

• Loss of autonomy

• Rural limitation

• Leadership

• Workforce productivity and management

• Shift from volume- to value-based care

• A way out from under

• Rev: tax $, OP and ancillary, swing bed, sup. programs (DSH, DRIP, UC, 340-B, wind, oil, NH UPL)

• IP & ED - sink hole

• Cost-savings: cutting benefits

• Lack comp. data or benchmark

• No financial analysis

• Challenges: labor recruitment, management; access to care/ specialty care

• Op: control cost; already lean

• Can’t cut your way to sustainability

• Leadership, turnover

• Board, physician support

• No operational analysis

Observations and Common Threats

Market Share Utilization

Quality Education, Training

Condition Assessments / Interviews

• IP decline, OP growth

• Market share - same / shrinking;

• Really need market share and outmigration data

• Marketing and competition vary

• Patient engagement is very important

• No utilization or market share analysis

• Small numbers challenge

• A crowded field

• Perception vs. reality (Hill Burton)

• HCAHPS - good score

• “Triple Aim” - linked challenge of pop health, experience of care (quality) and per capita cost

• Additional work being done by THA and RCHI

• CAH financial overview; CoP,policies

• Physician credentialing, contracting, alignment

• BO, RCM, billing, coding

• Swing bed

• Marketing/ communication training

• Leadership dev, board education

Observations and Common Threats

• Leadership matters: focus on culture and engagement; continuity, alignment, engagement, support and reinforcement

• Learning, engaged culture: educate, educate, educate! Desire to constantly improve

• Generating positive metrics: performance management, data and insight into patient market share

• Technology, a game-changer: optimizing use to convert cost to value; broadband, connectivity, compatibility, interoperability, meaningful exchange; will consume a growing portion of capital expenditure

• Cost containment, labor management: squeezing cost out of the organization remains a top priority

• Focus on value/quality and primary care: hospital and physician alignment will continue to be a top priority

Condition Assessments

Observations and Common Threads

Revenue Cycle Improvement

2015 project aimed at a majority of the lowest financial performers

2015 Revenue Cycle Components

• Chargemaster Review• Assess essential components of chargemaster, utilization, pricing, revenue recognition and

business office productivity• Training on revenue capture methodologies and processes, coding processes and business

office operational controls

• Revenue Cycle Assessments• Multidisciplinary review of components of RC, including operational parameters, business

office, targeted departments, and policies and procedures• Establish a strong revenue cycle process that encompasses all aspects of participation and

generates consistent, compliant outcomes

• Revenue Cycle Team Development• Create RC teams, mission, templates and tools, based on best practice and quality data• Implement audit processes for payment cycle review criteria for denials, self-pay, bad debt

and customer service

• Pricing Strategy Development• Review department-specific prices, utilization, policies and procedures to identify process

vulnerabilities, eliminate process variability and make pricing an administrative priority• Develop patient-centric, defensible pricing strategy

2015 Revenue Cycle Project Outcomes

Never viewed or difficulty generating electronic data files

Before Project

All participants can now generate, download and review electronic data files

Vast variability or inconsistency in codes and prices

Rec, guidelines and processes for eliminating variability proper reimbursement, compliance and patient satisfaction

Code modifications and deletions

Consistency and accuracy proper reimbursement, compliance and patient satisfaction

Lack of or ineffective revenue cycle process/accountability

Structured RC process and guidelines

Insufficient staff knowledge, accountability, communication

Education, training and team development

After Project

2016 CAH Market Studies

Evaluate the market position of 6 Texas CAHs Hospitals in a defined geographic area

Purpose: Evaluate the market position of 6 Texas CAHs Hospitals in a defined geographic area

• Market dynamics• Market share• Outmigration

Methodology:

• Analytics based on publicly-available data• Delivered via Tableau Reader files to each CAH• Regional roll-up file provided for all 6-CAH market• Market share methodology: primary service area defined as any zip code with

greater than 10% of IP Medicare market share

Data Sources:

• CMS Data File 2014, Truven Health Analytics, CMS Gov. Shared Savings

Purpose and Methodology

Northern Cluster Overview

Source: Truven Health Analytics and CMS.gov

Primary Service Area Population Summary

Source: Truven Health Analytics and CMS.gov

Inpatient Care Forecast by Service Line (Northern Cluster)

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Inpatient Care Forecast by Service Line (Southern Cluster)

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I/P Medicare Market Share, 5-Year Vol. Trend

I/P Medicare Market Share, 5-Year Vol. Trend (Southern Cluster)

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Inpatient Medicare Market Share

Source: Truven Health Analytics and CMS.gov

I/P Medicare Market Share

Summary

I/P Medicare Service Line

Summary (2015)

Southern Cluster

Medicare Spend Summary, 2014 (Northern Cluster)

Source: CMS.gov

State Totals by Type

Service Area Totals by Type

Medicare Spend Summary, 2014 (Southern Cluster)

Source: CMS.gov

State Totals by Type

Service Area Totals by Type

Insurance Mix Forecast

Source: Truven Health Analytics and CMS.gov

2016 Outmigration Analysis

Data driven analysis of the market capture for each cohort, strategy and action planning

The Trends:

• Inpatient-to-Outpatient Migration: shifting trend to O/P services

• Outpatient Competition: rising defection of specialists to freestanding facilities—and almost every local market reporting intense competition for profitable outpatient procedures

• Patient bypass: local residents LIVING in your primary service area LEAVING to get care elsewhere

The Problem:

We needed to better understand the most vulnerable parts of our business (where we may be losing business, which service lines are impacted and which are posting weaker returns). In short, we need to know where our residents are going for their care (if not us) and why. And, more importantly, how do we earn their trust, loyalty and support?

The Challenge:

• Outmigration is driven largely by outpatient services• There’s an incredible dearth of available data• Market retention adds directly to the bottom line

Outmigration: The Trends, the Problem, the Challenge

Unmatched Clinical Service Categories to Truven data

Lynn County Hospital

Null 2,301CT SCAN 370

Clinical Service Category

Service Area Estimate 2014

Lynn County 2015

Estimated Market Share

ANESTHESIA 701 0%CARDIOLOGY 4,994 770 15%CDTHORACIC 2 0%COLORECTAL 37 0%DERMATOLOGY 1,975 12 1%DIAG RAD 12,923 2,048 16%EM 4,199 4,590 109%GASTRO 843 5 1%GEN SURG 462 16 3%HEMONC 7,220 2,210 31%LABS 85,145 14,624 17%MEDICINE 60,217 4,186 7%MISC 3,868 2,086 54%MRI 957 74 8%NEPHROLOGY 2,111 0%NEUROLOGY 1,460 0%NEUROSURGERY 24 0%OB/GYN 1,173 8 1%OPHTHAL 10,788 11 0%ORAL SURG 36 0%ORTHO 495 153 31%OTOLARYNG 821 7 1%PAIN MGMT 778 0%PATHOLOGY 3 0%PET 59 0%PHYS THER 11,173 2,741 25%PLAST SURG 67 0%PODIATRY 390 33 8%PSYCH 5,412 0%PULMONARY 850 324 38%RAD THER 462 0%SPECT 330 0%UROLOGY 569 35 6%VASCULAR 70 26 37%Grand Total 220,612 33,959 15%

The Service Area estimate is the total projected volumes by Clinical Service Category for the Zip codes that make up the target hospital, (this is considered the denominator)

Then Target Hospital volumes were provided by CPT code, which was then cross-walked to the Truven data by CPT code, then rolled up to the Clinical Service Category (this is considered the numerator)

Alpha-CPT codes (A,J,G) where matched when possible, or they fell in the NULL field.

Truven only tracks the most common CPT codes, so some less used CPT codes or old CPT codes from the hospital data would also fall in the NULL count

Source: Truven Health OP estimates and Hospital provided data

Swisher Memorial Healthcare

O/P Market Capture

12-25%

2016 Outmigration Project Outcomes

• Hospital success is a function of demographics and provider to patient ratio

• CAHs in markets with higher rates of population declines face elevated difficulty to remain financially viable given the high fixed cost associated with inpatient services

• Changes in health insurance pricing will have a big effect on small, rural providers

• Outmigration control of primary care is critical, because it represents volume and referral capacity for the hospital and local specialists

• Quality perceptions have a cause and effects relationship with outmigration

• With revenue sliding, margins thinning and cash flow very light, facilities can still offset volatility through market capture.

• Aggressive use of Swing Beds adds is a great tool to increase market capture

• Think like a large hospital: Look at the data and have a growth strategy

2016 Nurse Staffing Analysis

An onsite consultative analysis of nurse staffing costs, facility needs and potential solutions

• A systematic approach to review nurse staffing at participating Texas CAHs including a review to ensure that “staff coverage is sufficient to provide essential services at the facility” and “nursing staff schedules to ensure that a registered nurse, clinical nurse specialist or licensed practical nurse is on duty whenever the CAH has one or more inpatients”.

• Each CAH cohort was studied separately. We analyzed data such as:Hourly rates, Swing Bed ADC, ED Volume, Admits, Inpt. ADC, Agency nurse costs, Overtime, Tenure, Staffing ratios andProductivity as well as similar metrics for lab and radiology

• Each CAH now has comparative data for the facilities in their region and also other state and national nursing benchmarks.

• Presentations were followed by group discussion and an invitation to continue to meet and to strategize and share tools, tips and resources

2016 Nurse Staffing Analysis Project

Due to the sensitivity of the data, we have not provided specific examples.

However, in both CAH cohorts there were some significant cost overruns in all three of these departments that we studied

2016 Nurse Staffing Analysis Project

The consultants on the project identified several opportunities for improvement among the participating facilities:

• Reduce agency nursing expenses

• Decrease nursing overtime

• Improve CPOE utilization for all physicians

• Increase Swing Bed Utilization

• Review radiology staffing levels

• Review radiology modality offerings

• Review laboratory staffing levels

• Establish outpatient patient care measures

• Utilize benchmarking and dashboards for comparative standards

2016 Nurse Staffing Analysis Project

Sidebar Projects

Working with the SORH and ORHP to creatively address the unique needs of Texas CAHs

• Leadership Initiative

• Texas Midwest Healthcare Network

• Acute Financial Intervention

• FLEXIBILITY is the key!

So, any questions for Greg or I?

THANK YOU FOR YOUR TIME AND SAFE TRAVELS

David Pearson – dpearson@torchnet.orgGreg Wolf – gwolf@stroudwaterassociates.com

Sidebar Projects

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