Calculating the Possible Impacts of Healthcare Reform Tom Ealey Alma College Alma 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.
Calculating the Impacts
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.
Calculating the Impacts
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.
Calculating the Impacts
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.
Calculating the Impacts
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
Calculating the Impacts
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
Calculating the Impacts
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.
Calculating the Impacts
Who will reform healthcare? • Politicians, economists, lawyers, bureaucrats, lobbyists, Congressional staffers, think tankers, activists, business interests, health care business interests‌. So who is missing?
Calculating the Impacts
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.
Calculating the Impacts
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 ©
Calculating the Impacts
Comparative effectiveness research $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)
Calculating the Impacts
Comparative effectiveness research Top ten items of ASC interest #1 – cardiology (look out cardiologists) Others include endoscopy, MRSA prevention, tube and site infections, prostate cancer
Calculating the Impacts
Comparative effectiveness research 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.
Calculating the Impacts
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
Calculating the Impacts
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”
Calculating the Impacts
Reform: The politics of it all………. There are a lot of advocates for single payer. This is not going away.
Calculating the Impacts
The New Environment Will require‌‌. Better financial and statistical information Better decision making Better regulatory intelligence gathering and analysis
Calculating the Impacts
Faulty (but common) Analysis Total Expenses divided by Total Procedures equals “Cost per Procedure�
Calculating the Impacts
$5,000,000 expenses divided by
5000 procedures equals
$1000 cost per procedure
Calculating the Impacts
So “We lose money on any procedure paying less than $1000.� N0!
Calculating the Impacts
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
Calculating the Impacts
"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
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.
Calculating the Impacts
• 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
Calculating the Impacts
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 setups anesthesia drugs
Calculating the Impacts
(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
Calculating the Impacts
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
Calculating the Impacts
Physicians often do not make good use of costvolume-profit analysis Many physicians have an intuitive understanding of cost behaviors, but need better information to support decisions
Calculating the Impacts
The standard financial statement from your CPA in GAAP format is not very helpful in analysis or decision making. You need more!
Calculating the Impacts
Step #1 Contribution Margin Collected revenue minus Variable costs Equals Contribution Margin
Calculating the Impacts
This allows Collected revenue minus Variable costs Equals Contribution Margin minus Fix Costs Equals Net Income
Calculating the Impacts
Private
Medicare
Collected
1000
650
350
720
Variable
150
150
150
150
Margin
850
500
* current Medicare + 10% (proposal)
Medicaid“Public� *
200
570
Calculating the Impacts
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?
Calculating the Impacts
Special situations multi-specialty groups group providing heavy ancillary services affiliated surgery center or office surgery geriatrics (heavy Medicare) urban (heavy Medicaid) poor economy area (Michigan) heavy “public plan� area (if there is a public plan)
Calculating the Impacts
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
Calculating the Impacts
Budget model This environment requires a sophisticated flexible budget model. A budget IS NOT an accounting process.
Calculating the Impacts
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.
Calculating the Impacts
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
Calculating the Impacts
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.
Calculating the Impacts
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%
Calculating the Impacts
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%
Calculating the Impacts
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.
Calculating the Impacts
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.
Calculating the Impacts
• develop scenario analysis capabilities • calculate changes in – – – – – –
patient mix payer contract terms additional providers, retired providers additional ancillaries new facilities add mid-level services
Calculating the Impacts
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.
Calculating the Impacts
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
Calculating the Impacts
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, practice administrator, writer, seminar leader and litigation analyst. Tom is an associate professor business administration at Alma College in Alma Michigan. Contact: ealey@alma.edu or (989) 463-7135 Tom comments on practice management topics at: http://healthcarethinktank.blogspot.com