Financial Management of Practices Case Studies A case study series Jim Heffernan, Sr. VP Finance & Treasurer MGPO June 2, 2013

Case Review Module 1 – Introduction and Revenue Cycles Case Study

Anemia Case - Describe how the clinical process might apply to financial practice management The clinical process compares observations against expectations: symptoms, test results, observations Test results have target ranges based on the experience of other practices Target ranges need to be evaluated in the context of other factors; age, race, prior illnesses burden vs. financial class mix, service mix, patient acuity Trend may be more important than the absolute result; blood pressure, diabetes, cholesterol levels vs accounts receivable, net income, compensation targets

Anemia Case – Do critical value ranges provide an insight on where to look for issues Hemoglobin A1C range of 7.2 to 7.6% provides an indicator of control; compare with claims denial rate of 4-5% Blood pressure of 138/71 is stable but trending compare with a net collection rate of between 93 to 97% Mean corpuscular volume of 64 to space expense ratio of 5%

Blood test values Source: Mikael Häggström free picture download Wikipedia

DuPont ratio analysis

HFMA Physician Practice Map Keys Source: Healthcare Financial Management Association, HFMA.org Percent of Patient Schedule Occupied Purpose: Identifies opportunity to maximize slot utilization and improve practice productivity Value: Measures available capacity in a patient schedule Calculation: N: Number of patient hours occupied D: Number of patient hours available Primary Physician Practice Operating Margin Ratio Purpose: Measures the financial performance of a primary physician entity on an accrual basis Value: Determines the state of financial health and sustainability of current practice operations Calculation: N: Net income from primary practice operations D: Primary practice operating revenue Point-of-Service (POS) Collection Rate Purpose: Provides opportunity to increase collections, decrease collection costs, and accelerate cash flow Value: Identifies opportunity for increased POS collections Calculation: N: Total POS collections D: Total patient cash collected – all self-pay  Total Primary Physician Compensation as a Percentage of Net Revenue Purpose: Demonstrates an ability to afford primary physician compensation in relation to the revenue of the physician enterprise Value Predicts reasonableness of primary physician compensation relative to revenue (direct contribution of a physician) Calculation: N: Total primary physician compensation D: Total net primary patient service revenue Total Charge Lag Days Purpose: Measures charge capture workflow efficiency and identifies delays in cash Value: Accelerates cash flow Calculation: N: Σ days from revenue recognition date (posting date) less date of service date (by CPT code) D: Σ CPT codes billed  Professional Services Denial Percentage Purpose: Tracks payer denials and impact on cash flow and trends payment opportunity and process improvement Value: Drives root cause accountability in the revenue cycle processes Calculation: N: Σ CPT (units of service) codes denied D: Σ CPT codes billed 

Case Review

Neurology’s days in A/R are 46. 1. Should Mark be worried Neurology’s days in A/R are 46.1. Should Mark be worried? What are the indications? What are the steps that he should take to address the issue effectively? Accounts receivable greater than 35 days should be a concern for a practice is primarily E&M services The benchmark indicates a concern In this case the trend is increasing in recent months as well What other problems might be connected to high A/R days that Mark should pay attention to? Consider the denial rates are increasing The receivable over 90 days may be an indication that clean claims are not being submitted and its taking longer to process appeals

The matched adjudication rate is 79% at 2 months and 85% at 6 months The matched adjudication rate is 79% at 2 months and 85% at 6 months. What is the value of monitoring the matched collection rate? What is the difference between matched and periodic payment analysis? Periodic payments generally compare the cash received this month to the charges posted this month. Matched payments compare the cash received this month to the month the charges for that payment were posted It avoids variation because of seasonality when charges might increase of decrease significantly It allows you to monitor the effectiveness of revenue cycle operation by demonstrating how soon claims are closed whether by full payment, settlement or real bad debt

Total Contractual Adjustments Matched payment analysis relates payments to the period the charges were posted Month Volume Gross Charges 2011/Apr 2011/May 2011/Jun 2011/Jul 2011/Aug 2011/Sep Total Payment Total Contractual Adjustments Total Credits GCR NCR ACR CPU PPU Payment 2009/Sep 8,090 2,824,634 778 452 225 440 86 (598) 1,159,092 1,545,353 117,517 41.04% 95.74% 99.91% 349.15 143.27 FY 2009 Tot 89,601 29,562,957 863 (1,853) 574 697 1,311 1,171 12,197,093 16,057,161 1,294,308 41.26% 95.57% 99.95% 329.94 136.13 2009/Oct 7,868 2,680,917 91 44 (174) (39) (509) 1,098,153 1,457,284 117,400 40.96% 95.32% 99.70% 340.74 139.57 2009/Nov 6,816 2,225,089 (68) (66) 55 (55) 918,542 1,222,879 78,991 41.28% 96.24% 99.79% 326.45 134.76 2009/Dec 2,792,376 (488) (35) 114 72 35 1,005 1,143,938 1,518,980 126,480 40.97% 95.36% 99.89% 345.16 141.40 2010/Jan 7,835 2,653,722 344 49 38 (63) 98 (80) 1,073,896 1,415,917 155,148 40.47% 93.82% 99.67% 338.70 137.06 2010/Feb 6,669 2,392,566 13 57 (346) 36 307 (1,082) 1,012,447 1,271,656 94,063 42.32% 95.47% 99.40% 358.76 151.81 2010/Mar 7,827 2,601,330 185 15 1,419 414 (79) (977) 1,034,607 1,397,330 159,411 39.77% 93.49% 99.62% 332.35 132.18 2010/Apr 7,988 2,713,121 270 232 148 (215) 374 1,280,735 1,338,645 83,694 47.21% 96.54% 99.63% 339.65 160.33 2010/May 8,064 2,718,465 382 5 1,386 173 (150) 1,158,387 1,429,159 118,824 42.61% 95.18% 99.56% 337.11 143.65 2010/Jun 8,449 2,830,828 458 (139) 257 313 474 1,288,409 1,399,434 126,491 45.51% 94.95% 99.42% 335.05 152.49 2010/Jul 7,531 2,664,678 1,887 6,027 1,169 975 353 851 1,136,507 1,365,544 147,526 42.65% 93.90% 99.43% 353.83 150.91 2010/Aug 7,798 2,625,793 4,187 3,169 1,587 182 1,012 349 1,088,203 1,367,280 139,244 41.44% 93.51% 98.82% 336.73 139.55 2010/Sep 7,753 2,667,069 3,634 674 6,022 2,380 (1,842) 71 1,147,864 1,424,949 44,152 43.04% 96.47% 98.12% 344.00 148.05 FY 2010 Tot 92,688 31,565,954 10,895 10,032 11,619 4,228 211 269 13,381,689 16,609,058 1,391,425 42.39% 95.01% 340.56 144.37 2010/Oct 7,817 2,527,051 6,506 1,377 2,066 3,182 2,892 1,052 1,068,785 1,329,638 100,970 42.29% 94.91% 98.91% 323.28 136.73 2010/Nov 7,725 2,596,222 11,831 676 857 2,432 716 1,132 1,114,019 1,330,774 115,147 42.91% 94.17% 98.60% 336.08 144.21 2010/Dec 8,473 2,668,572 16,092 11,381 3,903 5,900 1,592 2,735 1,130,168 1,358,442 134,896 42.35% 93.26% 98.31% 314.95 133.38 2011/Jan 8,087 2,743,737 24,100 9,606 9,042 5,465 6,537 5,417 1,175,088 1,410,346 101,651 42.83% 94.23% 97.94% 339.28 145.31 2011/Feb 7,129 2,294,401 61,611 20,912 10,568 9,267 1,241 1,636 987,519 1,127,007 126,305 92.16% 97.67% 321.84 138.52 2011/Mar 10,088 3,309,079 623,523 77,959 24,239 11,877 10,864 9,096 1,456,763 1,541,845 148,654 44.02% 90.62% 95.11% 328.02 144.41 7,681 2,352,077 447,179 544,694 59,418 18,191 12,171 3,849 1,085,502 1,132,417 23,361 46.15% 94.30% 95.29% 306.22 141.32 8,246 2,611,398 518,833 547,226 41,649 19,333 14,031 1,141,073 1,309,861 57,837 43.70% 93.86% 96.07% 316.69 138.38 9,328 3,001,207 535,998 631,662 86,342 18,143 1,272,144 1,488,547 76,163 91.99% 94.52% 321.74 136.38 7,396 2,387,307 366,564 594,969 56,932 1,018,465 1,183,212 26,095 42.66% 92.22% 93.32% 322.78 137.70 8,011 2,779,006 575,023 508,798 1,083,821 1,316,389 72,991 39.00% 86.37% 89.00% 346.90 135.29 8,365 2,808,607 545,668 618,195 (43,016) 19.43% 39.91% 335.76 65.23 FY 2011 Tot 98,346 32,078,664 1,190,844 1,185,439 1,193,318 1,096,189 1,311,679 1,168,489 13,079,015 15,146,674 941,055 40.77%   326.18 132.99 Grand Total 1,202,457 1,192,387 1,205,132 1,102,114 1,312,949 1,169,778

What are some other key metrics that Mark should monitor regularly What are some other key metrics that Mark should monitor regularly? How does he communicate the information he retrieves effectively with the unit Chiefs? Accounts receivable days - <35 days Net collection rate (periodic) - >80% Net collection rate (matched 6 months) - >90% Adjudication rate (matched 6 months) - >95% Credits as a % of AR - <2% Lag days - <5 days First time denial rate - <5% Gross collection rate is a common metric that doesn’t appear on the list. Why? Often quoted but no actionable information comes from the measure Too many variables are summarized in the measure

“Damn it, Jim! I’m a Doctor, not an Accountant!” Dr. Leonard H. McCoy, MD Chief Medical Officer, USS Enterprise, 2266 - 2364 “Damn it, Jim! I’m a Doctor, not an Accountant!”

Financial Management of Practices Case Studies A case study series Jim Heffernan, Sr. VP Finance & Treasurer MGPO June 2, 2013

Case Review Module 2 - Finance and Budgeting Case Study

Budget and Financial Planning ?

What are the major items affecting a physician practice financial plan? Patient Volumes Service Mix Reimbursement rates Physician comp plans Staffing levels Capital

What items should concern Mark? What would you want to know? Why is there a negative operating margin? Are there barriers to generating a positive margin? What is driving the drop in patient cash? Why is Operational Support decreasing? Are there other opportunities in Other Revenue? Is my staffing ratio adequate? Why are MD Salaries and additional comp increasing so rapidly Is there benchmark data we can review and compare against?

How might you explain the change in Patient Cash How might you explain the change in Patient Cash? How much is volume affecting this? Decrease in patient cash is caused by a combination of a lower payment per unit and lower volume. Of the ($1.3M) total decrease, ($.3M) is related to rate, and ($1.0M) is related to volume. FY11 Actual FY12 Budget Variance Revenue (000’s) $13,096,355 $11,729,517 ($1,366,838) Volume 87,000 80,000 (7,000) Price per Unit $150.53 $146.62 ($3.91) Price Variance: (Actual P – Budget P ) * Actual Q ($150.53 - $146.62) * 80,000 = ($313,108) Lower Price per Unit ($313,108) Lower Total Quantity ($1,053,730) Total ($1,366,838) Volume Variance: (Actual Q – Budget Q ) * Budget P (87,000 – 80,000) * 150.53 = ($1,053,730) Amounts are rounded

What might you do about the “promised” bonus? Determine if “promised” means “guaranteed” Options to tie it more closely to performance? Remove it from the budget Review parameters of comp plans Other ideas?

What opportunities do you see to improve the planned margin? Increase clinical hours Increase volumes via efficiency measures Options to generate non-patient revenue Change in service mix Revert to the 4% benchmark MD salary increases Remove “promised” bonus What else?

Can Mark and Andy get to a positive margin? Possibly. Definitive estimates of specific items were accounted for, but have not been vetted fully. Even with what is presented, there is still a small margin deficit. The idea is to put all the options on the table, measure them, and be deliberate in the approach towards implementation. If they are NOT on the table, then they most likely will never occur. The budget is a perfect place to outline the various scenarios.

Financial Performance Measures Modified cash versus accrual Cash margin Percent of revenue by expense category Percent net distributable income Revenue per physician Staffing per physician Revenue per 1000 square feet Ancillary revenue percent of total revenue Relevant to health system operations and organizations issuing debt Net operating income Days cash on hand Percent operating revenue by category Net patient service revenue Risk contract revenue