Eric Shell, CPA, MBA

1
North Dakota Healthcare Association 72nd Annual
Conference Tomorrows Challenges CAH
Financial Analysis Report on Margins September
8, 2006 Ramada Plaza Suites Fargo, North Dakota

• Eric Shell, CPA, MBA
• eshell_at_stroudwaterassociates.com

2
Project Overview

• Question to be addressed
• Why is the average margin in ND CAHs -(2.33)
  while the average CAH margin in SD is -(.41) and
  MN is 2.55
• Source CAH Financial Indicators Report, July
  2006, Flex Monitoring Team

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

3
Project Overview

• Other Key Financial Indicators Our Neighbors

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

4
Project Overview

• Approach
• Random sample of ten ND CAHs selected by NDHA for
  participation in study
• Review of most recent cost report, financial
  statements, strategic plan, and other relevant
  information
• Conference call with CAH administrators to review
  findings and answer questions
• Memos to each administrator documenting
  improvement opportunities (many still to come)
• Presentation of common findings related to
  financial performance today

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

5
Project Overview

• Overview of CAH Sample
• Margin Analysis
• Sample slightly outperforms state average

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

6
Project Overview

• Common Findings
• Cost reports are well prepared
• Third party payers generally result in marginal
  loss or profit on a fully allocated cost basis
• For most CAHs, operating losses are primarily the
  result of clinics, nursing homes, and other
  non-hospital business
• CAHs generally break even
• Important opportunity related to treatment of
  Swing Bed SNF vs. NF
• Mark up ratios at most CAHs are below peers

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

7
North Dakota Opportunities

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Top 12 North Dakota CAH Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• CAH Departments with RCC gt 1
• Non-Hospital Businesses
• Medicare Skilled Level Care in Swing Beds vs.
  Nursing Homes
• Nursing Home Losses
• Rural Health Clinic Losses
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports or Net Revenue Model
• Physician Recruitment
• Growth in Outpatient Volume

8
Third Party Contracts

• Guiding Principle
• Commercial business is an important source of
  profits and profits generated on this business
  must more than compensate for non-allowable
  costs
• Issue
• One major third party payer in North Dakota with
  limited competition
• Market power or market responsibility?
• Reported that standard contract for all ND CAHs
• Inpatient DRG based system Outpatient Fee
  schedule
• For CAHs that have analyzed allowed amounts
  relative to fully allocated costs, generally
  breakeven to losses
• So how do they compare to other Blue Cross Plans
  across the County?
• It depends on where you live!

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

9
Third Party Contracts

• Peer Comparison
• Medicare Revenue Per Day below peer averages
  WHY?

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

10
Third Party Contracts

• Peer Comparison (continued)
• CAH economics
• Aggressive third party reimbursement forces CAHs
  to be cost efficient as it drives CAH
  profitability
• No margin in Medicare services
• Medicare per unit revenue decreases as CAHs
  become more efficient

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

11
Third Party Contracts

• Outcomes
• ND CAHs are generally more efficient than peer
  CAHs
• How we know look at Medicare revenue per day
• ND strategies to reduce unit costs
• Have gotten into other non-hospital businesses to
  dilute fixed costs (to be continued)
• Limited non employee related costs (e.g.,
  capital)
• Not sustainable

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

12
Third Party Contracts

• Evaluation of Third Party Contracts Marginal
  Cost Analysis

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Growing inpatient non-Medicare volume by 50 days
  paid at an average reimbursed rate of 900
  contributes 5,340 to profit or approximately
  107/day

13
Third Party Contracts

• Evaluation of Third Party Contracts Marginal
  Cost Analysis

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Growing outpatient non-Medicare radiology
  services by 50 tests paid at an average
  reimbursed rate of 82 contributes 2,178 to
  profit or approximately 44/test

14
Third Party Contracts

• Evaluation of Third Party Contracts Marginal
  Cost Analysis

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Growing outpatient non-Medicare PT services by 50
  units paid at an average reimbursed rate of 37
  contributes 406 to profit or approximately
  8/unit

15
Third Party Contracts

• Opportunity
• Essential for all ND CAHs to understand third
  party allowed amounts relative to fully allocated
  costs and marginal costs
• Use cost report ratio of cost to charges on a
  departmental basis to determine profitability of
  services
• Marginal cost analysis based on estimated
  variable costs plus dilution in Medicare
  cost-based reimbursement
• Essential to generate enough profit on marginal
  costs to cover overhead costs
• With full understanding of contract profitability
  (or losses), meet individually with Blue Cross
  representatives
• Appeal for Market Responsibility

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

16
Swing Bed SNF vs. NF

• Issue
• Non-Medicare Swing Bed SNF patients should be
  carved out of routine costs at regional rate and
  not average routine cost
• General Principles
• 6-120 Rev. 1843 To calculate SNF-like SB cost
  per day, adjusted routine costs are divided by
  the sum of the total number of inpatient routine
  days and total SNF-like SB days
• S-3 Line 3 should be 100 Medicare
• Adjusted routine costs total routine costs
  less NF-like SB days

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

17
Swing Bed SNF vs. NF

• Memo from CMS to upstate NY CAH
• July 1, 2005

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

18
Swing Bed SNF vs. NF

• Cost Report Impact Worksheet S-3

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

19
Swing Bed SNF vs. NF

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Financial Impact ND Example

20
Swing Bed SNF vs. NF

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Opportunity
• It is essential that SNF-like and NF-like SBs are
  properly classified on Worksheet S-3 as NF-like
  SBs are reimbursed on a PPS basis while
  SNF-like SBs on a cost basis
• High Medicare payer mix for SNF-like beds will
  increase reimbursement
• Review prior period cost reports back to December
  20, 2000

21
Departments with gt1 Ratio of Cost to Charges (RCC)

• Issue
• Outpatient departments with RCCs gt 1 will
  generate losses on all non cost-based volume
• Issues with
• Charge Master not set high enough
• Many ND CAHs use Blue Cross fee schedule as basis
  for charge master
• All charges not being captured
• Volume not adequate to offset department standby
  costs
• Direct expenses too high
• Ancillary departments with costs greater than
  charges often include
• Emergency Department
• Physical Therapy
• Observation beds

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

22
Departments with gt1 Ratio of Cost to Charges (RCC)

• Patient Deductions and Outpatient Cost to Charges

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

23
Departments with gt1 Ratio of Cost to Charges (RCC)

• Ancillary Service Mark-Up Ratio for ND CAHs
• Direct correlation between ancillary service
  mark-up ratio and CAH operating margin

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

24
Departments with gt1 Ratio of Cost to Charges (RCC)

• ND benchmarked to national peer group
• Overall ancillary service mark-up ratio
• Mark-up ratio significantly below 25th percentile
  of peers
• Ancillary service mark-up by key department
• Benchmark source Solucient, Comparative
  Performance of US Hospitals

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

25
Departments with gt1 Ratio of Cost to Charges (RCC)

• Opportunity
• Evaluate charge master
• Formal external charge master review
• Blue Cross fee schedule inflated by ???
• Medicare APCs
• Grow patient volume by working with physicians
• Consider productivity incentives for physical
  therapists
• Reduce expenses
• Purchasing organizations, networks, etc.

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

26
Non-Hospital Businesses

• Sample of Non-Hospital Businesses
• Direct correlation between number of Non-CAH
  businesses and system-wide operating losses
• However, in most rural communities, CAHs are the
  center of healthcare activity and core mission
  supports these services
• Just recognize it!

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

27
Non-Hospital Businesses

• Example 1 Home Health Agency

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

28
Non-Hospital Businesses

• Example 2 Assisted Living Center

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

29
Non-Hospital Businesses

• Guiding Principle
• Important to understand the pros and cons of
  non-reimbursable cost centers (e.g., home health
  agencies, assisted living, nursing homes, etc.)
• Pros Mission objectives, potential direct
  gains/margin, and dilution of overhead costs to
  enable hospital profit on commercial business
• Cons Potential direct losses and decreased
  Medicare cost-based reimbursement from fixed
  costs allocated out of hospital
• Opportunities
• Understand true loss of non-hospital business
  performing analysis similar to prior pages
• If net losses, consider spinning business out of
  hospital
• If losses acknowledged as part of mission,
  maintain business
• May be opportunity to give back to County
• Can consider potential hospital subsidy to
  business

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

30
Skilled Care in CAH or NH

• Issue
• Several CAHs care for a majority of Medicare SNF
  patients in the nursing home vs. the CAH where
  patients may receive better rehabilitative care
• Example
• Financial analysis indicates that CAH would
  improve its overall reimbursement by 45K if
  Medicare patients were cared for in the CAH

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

31
Skilled Care in CAH or NH

• For the CFOs

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

32
Skilled Care in CAH or NH

• Opportunities
• Have Swing Beds
• Perform analysis on preceding pages to ensure
  swing beds will be financially beneficial
  relative to the distinct part skilled unit
• If Medicare patients have flexibility, consider
  rehab services in the CAH swing beds
• Target growth in swing bed services and promote
  services to larger community hospitals

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

33
Nursing Home Losses

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Sample of Losses in Nursing Home
• Losses in Nursing Homes are likely to create an
  overall negative operating margin
• CAH cannot generate enough margin to cover
  nursing home losses

34
Nursing Home Losses

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Losses Its all in the definition of losses

35
Nursing Home Losses

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Opportunities
• Using analysis on prior slide, determine true
  Nursing Home losses
• Grow Resident Volume
• Adult day care programs
• Senior exercise programs
• Increase Charges not allowed in ND as set by
  costs
• Will only affect non-Medicaid reimbursement
• Market may not allow
• Ensure costs are below direct, other direct, and
  indirect caps
• Differentiate room rate charges between private
  and semi-private
• Hospital to takeover unused nursing home space

36
Rural Health Clinic Losses

• Losses in Rural Health Clinics (RHCs)
• Similar to Nursing Homes, losses created in RHCs
  are likely to create overall negative operating
  margin
• CAH cannot generate enough margin to cover RHC
  losses
• However, not a business to exit for most rural
  communities
• Base primary care
• Recruitment vehicle
• Consolidation of key diagnostic services

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

37
Rural Health Clinic Losses

• Opportunities
• Understand operations and incrementally improve

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

38
Rural Health Clinic Losses

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Realities of Successful Private Practice
• Have had to keep overhead to a minimum
• 130-140 patient encounters per week
• Have had to control payer mix
• Have had to add ancillary services
• Tight collection policies
• Current with Coding
• For Hospital to pay physician private practice
  salary must meet all of the above criteria
  otherwise you lose
• Salary is always right because revenue-expenses
  salary

39
Rural Health Clinic Losses

• Provider Compensation
• Benchmarking example
• Benchmarking is essential for providers to
  understand their productivity relative to peers
• Scientific data

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

40
Rural Health Clinic Losses

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Provider Compensation (continued)
• Create productivity-based compensation models
• Best Performing Practices (BPP) frequently
  include physician incentives in provider
  compensation formulas to encourage physician
  efficiency and control costs
• Positive effects
• Revenue enhancement
• If structured well, physicians like them
• Rewards effort
• Last patient seen
• Accepting larger patient panels
• Achieving higher efficiencies through better use
  of staff
• Retaining more cases with less referrals
• Expense management
• Converts a portion of fixed costs to variable
  costs

41
Rural Health Clinic Losses

• Charge Master
• Establish appropriate charge master

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

42
Rural Health Clinic Losses

• Establishing an Appropriate Fee Schedule
  (continued)
• Goal
• Establish charges that reflect overall market
  conditions including
• Third party payer fee schedules
• Resource based standardization of fees
• Community perception
• CF below market rates leaving money on the
  table
• EOMBs tell the story
• Opportunities
• Consider developing a standardized conversion
  factor for EM codes in a range between 42-47
  that is reasonable given local market conditions
• Using RBRVS information, standardize Charge Fee
  schedule using these conversion factors
• Continue to evaluate EOMBs to ensure charges are
  above allowed amount for all primary payers
• Caution Must meet market conditions

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

43
Rural Health Clinic Losses

• EM Coding Relativity
• An estimated 50-60 of visits are actually
  under-coded
• Overall distribution of EM codes is often skewed
  towardslower level services when compared to
  rural peers

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

44
Rural Health Clinic Losses

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• EM Coding Relativity (continued)
• Opportunities
• Work with the providers to develop a systematic,
  scientific review process that will identify
  physician-specific trends and target feedback
• Evaluate coding relativity performance on a
  quarterly basis
• Chart coding relativity
• Standardize coding practices from provider to
  provider and site to site
• Coding is also a compliance issue
• Assigning an improper code is abuse/fraud
  whether too high or too low

45
Rural Health Clinic Losses

• Practice Expenses - Benchmarking

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

46
Rural Health Clinic Losses

• Practice Expenses Benchmarking (continued)
• Various methods to consider clinic support staff

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

47
County Subsidies/Non Operating Revenue

• Issue
• Few CAHs in ND access county subsidies to support
  operations
• Due to low patient volumes resulting from limited
  population, CAHs often do not have enough volume
  to offset high fixed cost of maintaining a
  profitable CAH
• MT CAHs often rely on County Subsidies

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

48
County Subsidies/Non-Operating Revenue

• Non-Operating Revenue
• No correlation between non-operating revenue and
  total margin
• Varying degree of non-operating revenue by CAH,
  however critical for some CAHs

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

49
County Subsidies/Non-Operating Revenue

• Opportunity
• Consider approaching county and present
  information to demonstrate CAH economics as
  rationale for a subsidy
• In particular, non-hospital businesses that the
  organization has taken on as the community
  healthcare hub
• Outreach to community for contributions either
  directly through hospital or foundation

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

50
Bad Debt Expense

• Issue
• Varying degree of performance when comparing Bad
  Debt Expense relative to hospital and Clinic
  gross charges
• No strong correlation between CAH operating
  margin and Bad Debt Expense

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

51
Bad Debt Expense

• Opportunity
• Many CAHs have explored options for reducing bad
  debt expense
• Strategies have included
• Establish process to collect co-payments and
  deductibles from all patients
• Process will require patient registration staff
  to be trained in collection techniques as well as
  providing additional information to staff
  including charge master, etc.
• Analyze the process of physicians triaging
  patients in the ED
• Establish a non-emergent co-payment amount of 50
  or 100 for all emergency room patients
  determined to be non-emergent (after medical
  screening by an approved clinician)
• Target 100 of elective procedures to be
  pre-registered
• Use the pre-registration process to begin
  conversations regarding payment for services at
  time of service as well as to verify insurance
• Establish weekly process to monitor collected
  upfront co-payments and deductibles
• Provide expanded financial counseling to assist
  self-pay patients in filling out Medicaid
  applications and to set up payment arrangements

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

52
Interim Cost Reports or Net Revenue Model

• Issue
• Without an understanding of current year volume
  and expense changes on Medicare revenue, year end
  surprises may occur
• Interim financial statements can be meaningless
  and allow inaccurate operating decisions
• Example

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

53
Interim Cost Reports or Net Revenue Model

• Guiding Principle
• Interim reimbursement is not final reimbursement 
• Understand the difference from both a cash flow
  perspective and from an operational
  decision-making perspective
• Opportunity
• Quarterly calculation of Medicare cost-based
  reimbursement
• Work with cost report preparer or CPA to either
  develop tool for internal analysis prepare
  quarterly/semi-annual interim cost reports

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

54
Physician Recruitment

• Expected physician complement

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

55
Physician Recruitment

• Issue
• Communities do not have enough providers to meet
  expected community demand
• Result is patients leave the community for health
  care services
• Opportunity
• Evaluate current community demand using
  information provided in previous slide
• Use information as a basis for a Medical Staff
  Plan
• Meet with local providers to understand their
  thoughts
• Recruit providers to meet expected demand of the
  community

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

56
Growth in Outpatient Volume

• Issue
• Outpatient volume is necessary to generate profit
  in a CAH
• Many communities have below expected levels of
  charges for outpatient departments
• Radiology, PT, Lab, etc.
• High RCCs are often an indicator of outpatient
  volume leaving the community

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

57
Growth in Outpatient Volume

• CAH Economics - Hypothetical Model
• All growth in inpatient services
• Growth in inpatient services increases margin,
  but not much
• Why?

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

58
Growth in Outpatient Volume

• CAH Economics - Hypothetical Model (continued)
• All growth in outpatient services
• Growth in outpatient services increases margin
  substantially
• Why?

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

59
Growth in Outpatient Volume

• Opportunity
• Ensure patients are staying in the community for
  all appropriate outpatient services
• Promote services in the community
• Work with physicians to better understand their
  requirements for referring additional services to
  the CAH

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

60
Summary

• Project Overview
• ND Opportunities
• Third Party Contracts
• Swing Bed SNF vs. NF
• Departments with gt1 RCCs
• Non-Hospital Businesses
• Skilled Care in SNF or NH
• Nursing Homes
• Rural Health Clinics
• County Subsidies
• Bad Debt Expense
• Interim Cost Reports
• Physician Recruitment
• Outpatient Services
• Summary

• Third party contracts are aggressive and have
  forced ND CAHs to be efficient
• Partially responsible for underperformance
  relative to neighboring states (SD and MN)
• Many opportunities for ND CAHs to pursue
  financial improvement independent of third party
  contracts
• Charge master
• Non-hospital businesses
• Care for Medicare skilled patients
• Etc.

61

• Thanks for listening!

Eric Shell, CPA, MBA eshell_at_stroudwaterassociates.
com