Washington PI Strategies 32603

1
Findings from the Delta (and
elsewhere) CAH Economics A Framework for
Decision Making
August 19, 2003 Grand Hyatt Washington, DC
Eric Shell, MBA EShell_at_Stroudwater.biz
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Objectives

• Better understand
• CAH economic framework for decision making

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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Performance Improvement Assessment (PIA)

• PIA - What is it?
• Comprehensive look at rural hospital strategy and
  operations
• Goal is a set of actionable recommendations that
  result in improved financial and operation
  performance
• Focuses on
• Defining market
• Clinical operations
• Financial/Reimbursement
• Financial/Expense management
• Physician practice management
• Organizational architecture and management
  principles
• Outcomes
• A whole lot of questions

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Overview (1)

• Rural Hospital Cost Structure
• Fixed Cost
• Definition Expenses that do not change with
  changes in activity
• Examples
• Salaries and benefits
• Rent
• Utilities
• Rural hospitals have inordinately high fixed
  costs relative to revenue
• E.g., ER Standby, acute care nursing costs, etc.
• High fixed cost nature of rural hospitals focus
  efforts in several areas
• Volume
• Unit price increases
• Fixed cost reduction or transition to variable
  expenses

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Overview (2)

• Rural Hospital Cost Structure

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Overview (3)

• CAH Benefit Example

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Overview (4)

• Maximizing CAH benefit does not result in
  profitability
• Most profitable year in recent past was FY 2002
  the same year that CAH benefit would have been
  eliminated
• Like any business
• Profits average revenue per unit - average cost
  per unit
• Average revenue per units Total revenue / Total
  Units
• Average cost per units Total costs / Total
  Units
• Unlike other business
• Hospitals cannot control prices as a means of
  increasing revenue
• Achieving profits requires that hospitals reduce
  per unit costs
• Strategy 1 Reducing total costs
• Strategy 2 Increasing units of service

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Findings from the Field (1)

• Quotes from Around the Horn (1)
• MS Delta CAH Administrator
• My Medicare per diems are 1,400. My commercial
  per diems are 950. We are going to exit
  commercial to focus on Medicare.
• MS Delta CAH Administrator
• Why do we want to cut expenses if we lose
  revenue?
• Northeast CAH Administrator
• Our cost based payer mix is nearly 60. If we
  increase our expenses, we generate more revenue
  and margin
• New York CAH Administrator
• My Medicare per diems are 1,500. Our number
  one strategic initiative is to grow acute census
  from 3 to 4 and we will be profitable.
• Important Fact Medicare Acute payer mix 92
• MS Delta CAH Administrator
• It takes four outpatient encounters to equal one
  inpatient day. Our efforts are focused on
  inpatient services.

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Findings from the Field (2)

• Quotes from Around the Horn (2)
• Alaska CAH Administrator
• How can we grow outpatient radiology services
  when these services are costing us 800 per
  study?

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (1)

• Hypothetical Model Used to Evaluate CAH Economics

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (2)

• How does my hospital generate cash reserves?
  (1)
• A look at costs

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

Fixed costs do not change with increased service
volumes
The difference between fixed and total cost are
the variable costs
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CAH Economics Questions and Answers (3)

• How does my hospital generate cash reserves?
  (2)
• A look at Total costs
• Hypothetical example
• Acute Variable Costs 250/day
• Swing Bed Variable Costs 150/day
• Fixed Costs 2,000,000

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (4)

• How does my hospital generate cash reserves?
  (3)
• A look at Per Unit costs
• Hypothetical Example (continued)
• As volume increases, fixed costs are allocated
  over large base
• Result is lower Unit Cost

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (5)

• How does my hospital generate cash reserves?
  (4)
• A look at Total Revenue
• Hypothetical Example
• Medicare Per Diems Tied to Costs
• Non Medicare Per Diems 950/day
• Non Medicare revenue grows disproportionate to
  Medicare Revenue - WHY???

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (6)

• How does my hospital generate cash reserves?
  (5)
• A look at Per Unit Revenue
• Hypothetical Example (continued)
• Non Medicare Per Diems gt Medicare Per Diems once
  Inpatient unit cost falls below 950

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (7)

• How does my hospital generate cash reserves?
  (6)
• Margin Unit Revenue gt Unit Costs
• Hypothetical Example (continued)
• Margin occurs when IP Unit Revenue exceeds IP
  Unit Expense
• ADC of 3.5

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (8)

• How does my hospital generate cash reserves?
  (7)
• Margin Unit Revenue gt Unit Costs
• Hypothetical Example (continued)

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (9)

• How does my hospital generate cash reserves?
  (8)
• Strategy 1 Decrease Expenses
• Fixed Nature of standby costs, regulatory costs,
  etc. often make this a difficult option
• Reducing expenses reduces a portion of revenue
• Medicare Revenue paid on a cost basis

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

Total Revenues
Profit Zone
Dollars
Total Cost
Loss Zone
Service Volumes
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CAH Economics Questions and Answers (10)

• How does my hospital generate cash reserves?
  (9)
• Strategy 2 Increase Volume
• More volume reduces the average cost per unit of
  service by spreading the high fixed costs over
  more patients

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

Revenues exceed costs at this point
Total Revenues
Profit Zone
Dollars
Total Cost
Loss Zone
Total revenue increases as services volumes
increase
Service Volumes
Service Volumes
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CAH Economics Questions and Answers (11)

• How does my hospital generate cash reserves?
  (10)
• Strategy 3 Grow Non-Medicare Business

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

Medicare revenue mirrors the total cost, but only
covers its share of the total
Additional Medicare volume shifts the line to
reduce losses . . .
Cost
Dollars
Losses
Revenue
. . . Medicare revenue will never exceed costs
Service Volumes
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CAH Economics Questions and Answers (12)

• How does my hospital generate cash reserves?
  (11)
• Strategy 3 Grow Non-Medicare Business
  (continued)
• Commercial revenue is the only potential source
  of profit
• Overall services must be increased to exceed unit
  costs

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

Commercial Revenue Are Tied Directly to Volumes
Revenue
Dollars
Cost
Commercial insurance is the only way that revenue
will exceed costs for WMH
Service Volumes
Commercial revenue goes up evenly as service
volumes increase
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CAH Economics Questions and Answers (13)

• If our Medicare per diems are higher than our
  commercial per diems, should we focus on growing
  Medicare and decreasing commercial? (1)
• A look at Medicare Per Diems
• Difference between Interim Per Diems and Settled
  Per Diems
• As Volume changes, Medicare Per Diems Change

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (14)

• If our Medicare per diems are higher than our
  commercial per diems, should we focus on growing
  Medicare and decreasing commercial? (2)
• Hypothetical Example
• Impact of all acute growth in Medicare

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (15)

• If our Medicare per diems are higher than our
  commercial per diems, should we focus on growing
  Medicare and decreasing commercial? (3)
• Hypothetical Example (continued)
• Impact of all acute growth in non-Medicare

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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CAH Economics Questions and Answers (16)

• If our Medicare per diems are higher than our
  commercial per diems, should we focus on growing
  Medicare and decreasing commercial? (4)
• Observations
• Medicare Interim Per Diems are not Actual Per
  Diems
• At lower volumes, higher Medicare acute payer mix
  reduces loss
• At higher volumes, higher Medicare acute payer
  mix reduces profits
• Breakeven point for both models is similar
• When unit costs Commercial Per Diems
• Answer NO!
• Growing all business is important to reduce unit
  costs
• Growing commercial business is essential to
  increase margin

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field

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Lessons from the Field

• Dos and Donts of a CAH
• Michael Nester, COO, SE Lackey Hospital, August
  7, 2003
• Dont think of yourself as a limited service
  hospital
• Grow services focusing on outpatient
• Do understand your market and your hospitals
  position
• Have a strategy
• Dont think that changes in reimbursement will
  mean success or be a quick fix
• Dont let the reimbursement tail wag the
  operational dog
• Call on resources for help

• Objectives
• Performance Improvement Assessment
• CAH Economics
• Overview
• Findings from the Field
• Questions Answers
• Lessons from the Field