Attributes of Success Critical Access Hospitals

1. Attributes of Success Critical Access Hospitals September 9, 2010 Wyoming Critical Access Hospital Network Workshop Casper, Wyoming Eric K. Shell, CPA, MBA

2. 5 Monday “to do’s” as a result of this presentation

3. Presentation Overview • Attributes of Successful Critical Access Hospitals • Understand Rural Hospital Economics • The “Right” Medical Staff • Focus on both Inpatient and Outpatient Volume • Effective Organizational Design • Strong Revenue Cycle Practices • Understand Physician Practice Management • Facility Design that Supports Patient Care Model • Developing Information Technology Systems • Current Third Party Contracts and Charge Master • Accurate Medicare cost report • Know their Market Service Area • Summary/Discussion

4. Rural Economics Medical Staff IP/OP Volume Organizational Design Revenue Cycle Practices Practice Management Facility Design Information Technology Third Party Contracts Cost Reports Service Area Summary

5. Rural Economics Understand Rural Hospital Economics • Common Findings • Over emphasis on cost report management • Managing the “RCCs” • “If we increase our charges, our RCCs will go down” • “How do we increase our Medicare per diems to increase cash flow?” • Over emphasis on expense management • “Revenue management?? That’s what the CEO does!” • Belief that because we are a CAH, we should operate differently than PPS hospitals

6. Rural Economics Rural Hospital Cost Structure • Variable Cost • Definition: Expenses that change with changes in activity • E.g.: Pharmaceuticals, reagents, film, food • Fixed Cost • Definition: Expenses that do not change with changes in activity • E.g.: Salaries and benefits (??), rent, utilities • Mixed Cost (Step Fixed Costs) • Costs that remain fixed through a range of volume growth, then jump to next level • E.g.: Salaries and benefits (??) • Rural hospitals have inordinately high fixed (or step fixed costs) costs relative to revenue • E.g., ER standby, acute care nursing costs, etc.

7. Rural Economics Rural Hospital Cost Structure (continued) • A look at fixed and variable costs Dollars Total Cost Fixed Cost Fixed costs do not change with increased service volumes The difference between fixed and total costs are the “variable costs” Service Volumes

8. Rural Economics Rural Hospital Cost Structure (continued) Understand Rural Hospital Economics Revenue Profit Zone Dollars Cost Loss Zone Service Volumes Profits and Losses

9. Rural Economics Evaluating Rural Hospital Economics: A Model

10. Rural Economics $3,500,000 $3,000,000 $2,500,000 SB SNF Variable $2,000,000 Costs Acute Variable $1,500,000 Costs $1,000,000 Acute Fixed Costs $500,000 $- 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 Acute and Swing Bed Average Daily Census Economic Model: Inpatient Total Costs • Hypothetical example (continued) • Acute Variable Costs = $200/day • Swing Bed Variable Costs = $100/day • Fixed Costs = $2,600,000

11. Rural Economics Outpatient Total Cost Analysis $4,000,000 $3,500,000 $3,000,000 $2,500,000 OP Variable $2,000,000 Costs $1,500,000 OP Fixed Costs $1,000,000 $500,000 $- 12,500 15,000 17,500 20,000 22,500 25,000 27,500 30,000 32,500 35,000 37,500 Outpatient Volume Economic Model: Outpatient Total Costs • Hypothetical example (continued) • Outpatient Variable Costs = $35/unit • Outpatient Fixed Costs = $2,600,000

12. Rural Economics Economic Model: Inpatient Per Unit Costs • Hypothetical example (continued) • As volume increases, fixed costs are allocated over large base • Result  lower Unit Cost Acute Unit Cost Analysis $1,400 $1,200 $1,000 $800 $600 IP Unit Fixed Costs $400 Acute Variable Costs/Day $200 $- 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 Acute and Swing Bed Average Daily Census

13. Rural Economics Outpatient Unit Cost Analysis $250.00 $200.00 $150.00 OP Unit Fixed Exp $100.00 OP Unit Variable Exp $50.00 $- 12,500 15,000 17,500 20,000 22,500 25,000 27,500 30,000 32,500 35,000 37,500 Outpatient Volume (In "Units") Economic Model: Outpatient Per Unit Costs • Hypothetical example (continued) • Same applies to Outpatient costs!

14. Rural Economics IP Acute Unit Revenue $1,600 $1,400 $1,200 Cost-Based Acute Rev/Day $1,000 Non-Cost Based $800 Acute Rev/Day $600 Total Acute Costs/Day $400 $200 $0 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 Acute and SB SNF ADC Acute Per Unit Revenue • Hypothetical example (continued) • Non Cost-Based Per Diems > Cost-Based Per Diems once Acute unit cost falls below $950 • Note: Slightly higher acute variable costs cause higher breakeven

15. Rural Economics Outpatient Unit Cost Analysis $300.00 $250.00 $200.00 OP Total Expense $150.00 Non Cost-Based Rev $100.00 Per Unit $50.00 $- 12,500 15,000 17,500 20,000 22,500 25,000 27,500 30,000 32,500 35,000 37,500 Outpatient Volume (Units of Service) Outpatient Per Unit Revenue • Hypothetical Example (continued) • Non Cost-Based Payment > Cost-Based Payment once Acute unit cost falls below $150

16. Rural Economics Successful Profit Strategies • Strategy 1: Decrease Expenses • Fixed Nature of standby costs, regulatory costs, etc. often make this a difficult option - Most rural hospitals have expenses right • Reducing expenses reduces a portion of total revenue Revenue Profit Zone Dollars Cost Loss Zone Service Volumes

17. Rural Economics Successful Profit Strategies • Strategy 1: Decrease Expenses (continued) • Comparison with national standards example • Note: Caution must be used when evaluating departmental performance

18. Rural Economics Successful Profit Strategies • Cost report improvements • Improved service mix • Strategy 2: Increase Fees • Charge master update • Renegotiate third party contracts • Better Revenue cycle functions Revenue Profit Zone Dollars Cost Loss Zone Service Volumes

19. Rural Economics Successful Profit Strategies • Strategy 3: Increase Volume or Improve Service Mix • More volume reduces the average cost per unit of service by spreading the high fixed costs over more patients Revenues exceed costs at this point Revenue Profit Zone Dollars Cost Loss Zone Total revenue increases as services volumes increase Service Volumes

20. Rural Economics Successful Profit Strategies • Strategy 4: Grow Non-Medicare Business • Strategy assumes incremental margin on non-Medicare offsets reduction in Medicare per unit revenue Dollars Cost Losses Medicare Revenue • Medicare revenue mirrors the total cost, but only covers its share of the total • Medicare revenue will never exceed costs Service Volumes

21. Rural Economics Successful Profit Strategies Understand Rural Hospital Economics • Strategy 4: Grow Non-Medicare Business (continued) • Commercial revenue is the only potential source of profit • Overall services must be increased to exceed unit costs Commercial Revenue Dollars Commercial revenue goes up evenly as service volumes increase. It is directly tied to volumes. Cost Service Volumes

22. Rural Economics Case Study: Kansas CAH • Clinical focus on cost-based reimbursed services, e.g., inpatient acute and swing bed, RHC Medicare and Medicaid patients

23. Rural Economics Medical Staff IP/OP Volume Organizational Design Revenue Cycle Practices Practice Management Facility Design Information Technology Third Party Contracts Cost Reports Service Area Summary

24. Medical Staff Determining Provider Supply as a Planning Tool

25. Medical Staff Provider Supply as a Planning Tool, contd. • Comparison between population based need and actual

26. Medical Staff Successful Hospitals • Medical staff development is a constant strategic priority • Have developed a comprehensive physician recruitment strategy that includes, but is not limited to: • Asking medical staff about additional specialty physician needs; e.g., cardiology, orthopedics, urology • Developing relationships with state residency directors and residents • Contacting the State Office of Rural Health and/or Department of Health for US trained physician recruitment and J-1 Visa recruitment • Asking medical staff about their personal physician contacts • Using contingency fee head hunters only after other avenues exhausted • Recruiting with the local physicians, not independent of them • Engaging community (realtors, newspaper, Chamber of Commerce, etc.) to assist with physician recruitment • Use available population-based tools to evaluate need for additional providers • Present physician needs assessment to current medical staff to obtain buy-in for active and aggressive recruitment of additional full time providers • Reconsider strategy of maintaining independent primary care practices and consider employing local primary care providers through RHC, using production-based employment agreements • Will both stabilize and focus local providers

27. Rural Economics Medical Staff IP/OP Volume Organizational Design Revenue Cycle Practices Practice Management Facility Design Information Technology Third Party Contracts Cost Reports Service Area Summary

28. IP/OP Volume Inpatient & LTC Breakeven Analysis (IP Growth - Assumes Constant OP Visits) $6,000,000 $5,500,000 $5,000,000 $4,500,000 Total IP Rev $4,000,000 IP Costs $3,500,000 $3,000,000 $2,500,000 $2,000,000 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 Why Both Inpatient and Outpatient? • CAH economics review • All growth in IP services (OP volume remains constant) • IP growth limits both losses and profits

29. IP/OP Volume Outpatient Breakeven Analysis (OP Growth - Assumes Constant Acute and SB ADC) $6,000,000 $5,500,000 $5,000,000 Total OP $4,500,000 Rev $4,000,000 Total OP $3,500,000 Costs $3,000,000 $2,500,000 $2,000,000 12,500 15,000 17,500 20,000 22,500 25,000 27,500 30,000 32,500 35,000 37,500 Outpatient Visits Why Both Inpatient and Outpatient? (contd.) • CAH economics review (continued) • All growth in OP services (IP volume remains constant) • OP growth creates more losses at lower volumes and higher profits at higher volumes

30. IP/OP Volume Focus on Both Inpatient and Outpatient • Controllable factors • Gain of inpatients was due to • Re-establishing relations with physicians • Bringing back the community • More appropriate use of observation services Inpatient Admissions 1,600 1,400 1,200 1,000 800 600 400 200 0 1998 1999 2000 2001 2002 2003 ytd Med/Surg/Pedi Admits Deliveries

31. IP/OP Volume IP Bed Utilization 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2002 2003 2004 2005 532 554 809 972 Med/Surg D/Cs 1,787 1,931 2,389 3,404 M/S Days 32 61 44 81 SB D/Cs 181 333 325 629 SB Days 298 306 244 189 Observation Days Focus on Both IP and OP Volume • Controllable Factors (continued) • Gain of inpatients was due to replacement facility

32. IP/OP Volume Inpatient Services 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY 2006 FY 2007 FY 2008 FY 2009 Acute Discharges Acute Days Swing - Bed Days Observation Days Focus on Both IP and OP Volume • Controllable Factors (continued) • Loss directly related to RAC implications

33. IP/OP Volume Emergency Department Admission Rates 14% 12% 12.9% 10% 8% 5.9% 6% 7.4% 7.1% 4.7% 4% 2.9% 4.6% 3.5% 2% 0% FY 2007 FY 2008 FY 2009 FY 2010 % ER Admissions % ER Transfers Successful Rural Hospitals • Inpatient Acute • Monitor emergency room admission rate by provider • Target between 7% - 10% • Higher if specialty services available (i.e., surgery) • Meet with physicians periodically, individually and informally, simply to inquire about their concerns – ask how we can help them do their job with higher quality, more efficiently, or with greater income

34. IP/OP Volume Successful Rural Hospitals • Inpatient Acute, continued • Recruit and retain nurses who are trained and comfortable with the service mix offered at the rural hospital • At almost any cost! • Reconsider current inpatient space usage and ensure that it meets community expected standards • Recent movement toward ER/Hospitalists model • Are aware of RAC implications

35. IP/OP Volume Successful Rural Hospitals • Swing Bed • Target specific ADC goal and manage to it (e.g., SB ADC of 4) • Develop discharge planning process that begins at admission • Daily discharge planning team meetings • Case manager (DON) to monitor all patients as potential Swing Bed candidates • Case manager (DON) to establish relationships with case mangers from area hospitals • Provide information regarding transfer rule – truly a “win-win” • Ensure physical, occupational, and/or speech therapies 5-7 days/week • Provide physicians assistance with Swing Bed program • Inform physicians regarding financial importance of Swing Bed utilization • Assist physicians with proper billing codes • Ask physicians to assist identify potential Swing Bed transfers that are (or plan to be) hospitalized elsewhere; e.g., CVA and orthopedic surgery patients

36. IP/OP Volume Other Radiology Operating Statistics 3,000 2,500 2,000 1,500 1,000 500 0 99-00 00-01 01-02 2003 proj. Fiscal Years Ending June 30 Ultrasound (OP) Mammography CT Scans (OP) Nuclear Medecine (OP) Outpatient/Ancillary Services • Volume increase over prior years due to • Increased number of employed physicians; and • Improved marketing of available services to physicians and community

37. IP/OP Volume Surgical Cases (Inpatient and Outpatient) 1,400 1,200 1,000 800 600 400 200 0 1998 1999 2000 2001 2002 2003 ytd IP Surgical Cases OP Surgical Cases Endoscopy Outpatient/Ancillary Services, continued • Increased surgical volume • Bringing back the physicians • More efficient OR throughput

38. IP/OP Volume Outpatient/Ancillary Services, continued • Increased Lab volume • Promote services to community physicians • New lab director

39. IP/OP Volume Rehab Services 4,000 3,000 2,000 1,000 - 99-00 00-01 01-02 02-03 proj (IP) (OP) (SB) (NH) (School) Outpatient/Ancillary Services, continued • Physical therapy decrease due to limit on space and new hires

40. IP/OP Volume Outpatient/Ancillary Services, continued • What about other services?? e.g., a nursing home

41. IP/OP Volume FY 2008 Home Health Agency Profitability Analysis Revenue: Visits Revenue Medicare Revenue (MCR WS H-6, H-7) 7,405 $ 115.00 $ 851,544 Other Revenue 2,304 $ 100.00 $ 230,400 * Total 9,709 $ 1,081,944 Operating Expenses: Direct Expenses (Source: 2008 MCR - WS A): Salary expense $ 499,101 $ 499,101 Other $ 137,896 $ 137,896 Total Direct Expense $ 636,997 $ 636,997 Total Home Health Indirect Exp (ICR Stepdown - WS B) Allocation Variable % Capital Costs $ 7,602 50% $ 3,801 Admin and General $ 123,412 20% $ 24,682 Employee Benefits $ 92,479 90% $ 83,231 Maintenance/Repairs/Plant Ops $ 66,891 50% $ 33,446 Nursing Admin $ 24,254 25% $ 6,064 Housekeeping $ 8,776 50% $ 4,388 Total $ 323,414 (a) $ 155,612 (b) Total expenses $ 960,411 $ 792,609 Department Direct Gain $ 121,533 $ 289,336 Overhead exp allocated to Agency away from Hospital (a) - (b) $ 167,803 CAH Cost Based Payer Mix (% assuming Gero-Psych is discontinued) 53% Lost Cost Based Payer Revenue on Allocated Costs (88,935) Department Net Gain $ 200,400 * Estimated as a fraction of Medicare Outpatient/Ancillary Services, continued • What about other services? e.g., home health agency • System to move HHA out of CAH to improve reimbursement • Problem is…. CAH still expected to generate 4% margin

42. IP/OP Volume Successful Rural Hospitals • OP/Ancillary Services • Develop radiology marketing plan that highlights exceptional equipment and staff • Meet with physicians to determine level of satisfaction with current diagnostic tests and results and what can be done if less than 100% satisfied • Investment in having updated diagnostic equipment • Aggressively pursue additional outpatient lab opportunities • Because incremental costs of lab tests low, rural hospital can offer favorable rates and beat reference lab in both price and service (e.g., on-site phlebotomists, frequent pick-up) • Pursue not only clinics, but nursing home and public health • To be competitive with outside reference labs, offer separate lab fee schedule with volume reductions • Accommodate physician needs as best as possible with reporting formats, e.g., panels reported on one page

43. IP/OP Volume Attributes of Successful Rural Hospitals • Physical therapy • Develop physical therapy marketing strategy • Measure and continuously improve patient satisfaction • Interview physicians regarding rehabilitation service needs • Remind physicians of the good work of rehabilitative services • Provide patient outcomes to physicians and “thank you” notes for referrals • Measure PT productivity to determine when to increase staffing • 12 visits/therapist/day is general guideline, but variable depending on number of neurology vs. Ortho cases seen and payer mix • Another guideline is 6.5 billable hrs per therapist per day • Aggressively recruit therapist(s) to expand service and free Director for marketing activity • Establish rehabilitation as an integral part of swing bed patient determination (Care Management Team) and swing bed patient care • Regularly evaluate non core hospital services for profitability and fit with mission

44. Rural Economics Medical Staff IP/OP Volume Organizational Design Revenue Cycle Practices Practice Management Facility Design Information Technology Third Party Contracts Cost Reports Service Area Summary

45. Org. Design Theoretical Overview • An effective organization, through sound leadership, will enable its employees to make decisions taking into account relevant data and hold employees accountable for these decisions. The key elements of this OA are as follows: • Leadership • Maintaining visionary leadership while giving managers the tools to make effective decisions and holding accountable managers to improve the performance and value of the organization • Decision Making/Accountability • The goal within an organization is to place decision making at a level that leverages local information while improving overall hospital value • Compensation • Compensation must be set at market rates and reward risk taking by managers and other employees • Performance Measurement • Provides regular and timely information to managers to use in effective decision making as well as to provide administrator with organizational results

46. Org. Design Common Findings • Governance/Leadership • Board involved in operations rather than strategy • Lack of strategic plans/direction • Decision Making and Responsibility • Administrators with numerous direct reports • Department managers disconnected from decision making and accountability and unaware of their contribution to hospital performance • Compensation • Salaried staff with raises based on longevity • Performance Measurement • Department managers not involved in annual budget • Performance information not presented to managers • Lack of performance information tied to organizational strategy • Performance Improvement (PI) • PI as a “department” • Department directors design PI projects without administration input • Board member not conversant in strategic quality metrics • PI Director or Compliance Officer do not attend Board meetings

47. Org. Design Successful Rural Hospitals • Leadership • Board’s focus on: • Strategic direction • Assure effective management • Fiduciary responsibility • Achieve quality goals • Represent community interests • Develop action oriental strategic/operating plans which often focus on: • Facility planning • Medical staff development planning • Growing patient volume • Human resource development and alignment with current strategies • Information technology vision and strategy • Quality improvement/patient safety • An affiliation strategy

48. Org. Design Organizational Performance and Strategic Options Financial Performance Example Survive Sustain Grow Excel Performance 15 1.0 DSCR + 1.0x - Depreciation + 4% Operating Expense 10 1.0 DSCR + 1.0x - Performance Thresholds Depreciation 5 - 1.0 DSCR 0 Many Some Few Strategic Options Affiliation Strategy: Common Findings • Health reform will drive rural – urban affiliations • Most CAHs wait too long to begin discussing affiliation needs/ options

49. Org. Design Clinical Integration Commitment H Physician Integration Technology Rural Integration Clinical Management Support Capital Integration Service Coordination Investment Purchased Services L Image H Gap Value Gap Franchise L H Support Services Regional Focused Service Linkage Investment Distributed Overhead Financial & Clinical Transparency Urban Broad Physician Deployment Integrated H System Capacity Successful Rural Hospitals • Affiliations • Regularly assess value of a potential affiliation • Understand value they bring to a relationship

50. Org. Design Successful Rural Hospitals • Decision Making and Responsibility • Create accountabilities for performance at the departmental levels through use of budget-to-actual reports and regularly scheduled meetings with Administrator • Convene a “senior management team” that meets on a weekly/bi-weekly basis • Reduce the number of administrator direct reports • Compensation • Create entrepreneurial incentives for the senior management team and department managers to focus on enhancing service volumes within key ancillary service centers including: • Jointly establish performance targets with department managers and reward managers for obtaining results • E.g., prior year +10% or a moving average that is trending upward • Structure department manager compensation to reward enhanced market share, customer satisfaction, and other appropriate attributes • Regularly measure and trend ancillary operating statistics to shift focus to profit-generating services