ASC Final Impact Seminar 2009

Calculating the Possible Impacts of Healthcare Reform

Tom EaleyAlma CollegeAlma Michigan

Calculating the Impacts

Tom has three decades of involvement in health care as a CPA, management consultant, practice executive, writer, seminar leader and litigation analyst.

He is an associate professor of business administration, and writes and lectures on a wide range of health care administrative and finance topics.


The contents of the seminar are not intended to be legal or professional advice. Such advice should be obtained from experienced, licensed professionals.

All opinions are those of the seminar leader, and any other person or organization.


Questions are welcome. If I cannot answer your question during the program because it is too long or too complex I will be glad to discuss it after the program, or after the conference.

Follow up questions via email are welcome.


Please do NOT compare your ASC to any of the numbers in this presentation.

The numbers used in the illustrations intentionally do not match any facility or specialty.

Please focus on the techniques, not the numbers.


Learning Objectives:

Participants will:

understand the current status of health care reform and the impact on ambulatory surgery centers

(depends on events in Washington, of course)

discuss the current reform status and share ideas about impacts and coping strategies


Learning Objectives (cont.):

understand Cost-Volume-Profit analysis, contribution margin calculation and the relevance for and impact on the group practice

apply sensitivity analysis and scenario analysis to the group to gauge impacts of reform AND to use the techniques to improve decision making


Reform:

As this program is written health care reform is a hot topic in Washington and around the country. We will take some time to consider the updates before proceeding. Most of the material in this program is useful under any reform scenario, and for other business decisions.


Who will reform healthcare?

• Politicians, economists, lawyers, bureaucrats, lobbyists, Congressional staffers, think tankers, activists, business interests, health care business interests….

So who is missing?


What if there is no reform?Not to worry….

These financial modeling techniques work well at any time, as the techniques are designed to improve decision making in any business environment.


What do we know for certain?

Comparative effectiveness research

(Stimulus Act) SEC. 804. FEDERAL COORDINATING COUNCIL FOR COMPARATIVE EFFECTIVENESS RESEARCH.

“Red pill, blue pill”

from an interview with President Obama, 5/4/2009,New York Times Magazine ©



$1.1 billion was included in the stimulus bill to fund comparative effectiveness research

The Institute of Medicine already has a Top 100 topics list for research projects (and presumably grant money)


Comparative effectiveness researchTop ten items of ASC interest

#1 – cardiology (look out cardiologists)

Others include endoscopy, MRSA prevention, tube and site infections,

prostate cancer



The pop-up plan is already being hinted:

So what is the pop-up plan?

The EMR pops up a “no no” screen for a surgery or procedure.


Reform:

Reform will/could be changing:• patient mix (demographics and financing)• payer mix and amounts per procedure• volume• ancillary revenues (number and fee structure)• relationship with the hospital and other providers• physician practice patterns• physician referral patterns


Reform:Do the numbers add up?• The Obama numbers do not add up• Providers are going to be targets• Volume and fees per procedure are in danger• Pay for performance is a hot concept, although the

clinical/administrative model is fuzzy• Medicare is a target• Medicaid is a chronic problem at state level• This will be an on-going “experiment”


Reform:

The politics of it all……….

There are a lot of advocates for single payer.

This is not going away.


The New Environment

Will require…….

Better financial and statistical information

Better decision making

Better regulatory intelligence gathering and analysis


Faulty (but common) Analysis

Total Expensesdivided by

Total Procedures

equals

“Cost per Procedure”


$5,000,000 expenses

divided by

5000 procedures

equals

$1000 cost per procedure


So

“We lose money on any procedure paying less than $1000.”

N0!


The results - bad analysis

"Doctors say the state-set reimbursement rates are already too low, in some cases covering only one-third of the actual costs of patient visits."

Detroit News June 8, 2009


"Doctors say the state-set reimbursement rates are already too low, insome cases covering only one-third of the actual costs of patient visits."

Detroit News June 8, 2009

While the reimbursement are decidedly too low, the cost analysis is faulty.

Incremental cost per procedure is the key, and understanding cost behavior is the key to incremental cost.


• Within a normal relevant range many costs are fixed within a given year.

• Variable costs (with some exceptions) tend to be relatively low per procedure

• Physicians and administrators have varying levels of understanding how this impacts the bottom line


Cost Definitions

Fixed Costs - unchanged by volume within a relevant range

administrator’s salary facility depreciation and interest

Variable costs - changes with each unit of some activity

surgical setupsanesthesia drugs


(cont.)

Mixed cost - a fixed component and a variable component

a copier lease with a per copy charge over ___

Step cost - additional cost incurred every ____ units

adding a rad tech every ___ in x-rays


Understanding the cost behaviors is critical to proper decision making and proper analysis

Once the doors are open, most of the costs are fixed

Increase in volume does not drive an identical increase in costs


Physicians often do not make good use of cost-volume-profit analysis

Many physicians have an intuitive understanding of cost behaviors, but need better information to support decisions


The standard financial statement from your CPA in GAAP format is not very helpful in analysis or decision making.

You need more!


Step #1

Contribution Margin

Collected revenueminus Variable costs

Equals Contribution Margin


This allows

Collected revenueminus Variable costs

Equals Contribution Marginminus Fix Costs

Equals Net Income


Private Medicare Medicaid“Public” *

Collected 1000 650 350 720

Variable 150 150 150 150

Margin 850 500 200 570

* current Medicare + 10% (proposal)


Clearly we prefer private pay patients.

If we cannot fill the practice with private pay, the we have to deal with “patient mix.”

How will reform change the patient mix?


Special situationsmulti-specialty groupsgroup providing heavy ancillary services affiliated surgery center or office surgerygeriatrics (heavy Medicare)urban (heavy Medicaid)poor economy area (Michigan)heavy “public plan” area (if there is a public plan)


Each special situation requires a sophisticated financial model, such as:

• “product line” revenue tracking, product line contribution margins

• ancillary contribution margin keyed to office volume


Budget model

This environment requires a sophisticated flexible budget model.

A budget IS NOT an accounting process.


BUDGET

A management plan expressed in numbers, a decision process requiring a review of every revenue and expense, their behavior, and relationships to other revenues and costs.


Static budget - a budget calculated for a single point - for example - 10,000 office calls

Flexible budget - a model built to calculate costs within a likely range - 9000 to 11000

Target - the most likely point within the range, say 10,500 office calls


Capital budgeting, especially with regard to ancillary services, will require new modeling and new thinking. Adding services will not be an automatic route (it never really was) to increased physician compensation.


Sensitivity Analysis

Measuring the change in contribution margin and net income from the change of a single variable

For example: Medicare fees drop by 20%


Scenario Analysis

Multiple variables change, we project the results of a new scenario

For example: new patients are added with “public plan” insurance, there is a drop in Medicaid patients, Medicare fees drop 10%


The capability to use either sensitivity analysis or scenario analysis is dependant on developing a contribution format statement.

If you do not understand your cost behavior you cannot correctly calculate the changes.


Reform is likely to involve changes in• Patient mix• Payer rates• Covered services (plus and minus)• Ancillary utilization and payment

The ability to project the bottom line impact of these changes will be crucial to the group.


• develop scenario analysis capabilities• calculate changes in

– patient mix– payer contract terms – additional providers, retired providers– additional ancillaries– new facilities– add mid-level services


Groups should design sophisticated budget models in spreadsheet form in order to do scenario analysis quickly, and to do the analysis multiple times.

Lack the spreadsheet skills? Hire an accounting major from a local college.


Keep in mind:

Relevance – only the revenues and expenses that change (+/-) are truly relevant to decisions

Relevant range – from the lowest number you can stay in business to the highest number of services you can provide – your capacity

Sunk costs – if you already spent the money or made a commitment, it is usually irrelevant to future decisions


At this point let’s talk about what we know TODAY about the “reform” plan, future reform plans, failed reform plans and the impact on physicians, and how to build appropriate budget and scenario models.

Financial Decision Models in an Era of Reform

Thank you to the conference staff for their fine work and support.

Seminar Leader

Tom Ealey has three decades of experience in health care,including work as a CPA, management consultant, practiceadministrator, writer, seminar leader and litigation analyst.

Tom is an associate professor business administration at Alma College in Alma Michigan.

Contact: [email protected] or (989) 463-7135

Tom comments on practice management topics at:http://healthcarethinktank.blogspot.com

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ASC Final Impact Seminar 2009

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