2010 UBO/UBU Conference Title: Depreciation Session: W

Objectives Understand why Depreciation is reported in the Medical Expense Performance Reporting System (MEPRS) Understand the components of Depreciation and the current data quality issues Provide a status update of MMIG actions to resolve data quality issues Demonstrate Simulation Study on direct tracing of costs for depreciation to improve accuracy in unit costing 2

Overview Background of Depreciation in MEPRS MEPRS Policy Issues on Depreciation Depreciation Policy Changes Work in Progress 3

MHS-MEPRS Execution Model MEPRS Model

5 MEPRS Management Improvement Group (MMIG) – Established in 1999 – Provides Functional Oversight – Tri-Service Integration, Standardization, and Compliance—now includes JTF CAPMED representatives – Automated Information System Oversight – Coordinates Policy / Action with Resource Management Steering Committee (RMSC) – Meeting Minutes and Information on Background of Depreciation Reporting MEPRS

6 TMA Program Offices (DHIMS / DHSS) Chartered Workgroups (UBU / UBO) HA / TMA Directorates MMIG Background of Depreciation Reporting MEPRS Issue Identification / Resolution “This organization doesn’t turn on a dime…and for good reason” Ms. Jean Storck, former TMA/RM

SFFAS 4, Managerial Cost Accounting Standards for the Federal Government Statement of Federal Financial Accounting Standards (SFFAS) Generally Accepted Accounting Principles (GAAP) 7 The Medical Expense and Performance Reporting System (MEPRS) is the MHS’ Managerial Cost Accounting System Private Sector Federal Gov’t MEPRS Federal Accounting Standards Advisory Board (FASAB) Financial Accounting Standards Board (FASB) American Institute of Certified Public Accountants (AICPA) Background of Depreciation Reporting MEPRS

What is Depreciation? – Depreciation: The systematic and rational allocation of the acquisition cost of an asset, less its estimated salvage or residual value, over its estimated useful life. —DoD Financial Management Regulation (FMR) R, Glossary Why do we capture Depreciation in MEPRS? – SFFAS Number 4: MEPRS supports MTFs and all entities within the MHS in approximating and reporting full cost of resources used to produce output by responsibility segments/functional cost centers. – The full cost data derived from MEPRS may be used by the department in developing the actuarial liability estimates for the Military Retirement Health Benefits Liability in the Other Defense Organization General Funds. This information is included in the department’s annual agency-wide audited financial statements. – According SFFAS 4: Full costs include Depreciation – The method we use to capture equipment expenses above the $100K capitalization threshold, including those centrally purchased and bought with other procurement funds. 8 Background of Depreciation Reporting MEPRS

MEPRS Policy Issues on Depreciation Navy identified policy conflict between MEPRS Manual and DoD FMR – MEPRS equated depreciation threshold with investment equipment threshold ($250K) – DoD FMR policy is that equipment above $100K will be capitalized regardless of “color of money” (O&M or OP) Services reported that it is very rare that an MTF purchases equipment costing more than $100K with O&M, but it does happen Army identified GFEBS use of DMLSS and data quality concerns for depreciation capture Air Force and Navy requested study on “Direct Charging” depreciation 9

MEPRS Policy Issues on Depreciation IAW MEPRS Issue Paper Resolution Process, MEPRS PO formed Depreciation sub-working group: – Depreciation must be reported in MEPRS as part of “Full Costs” – TMA OCFO fact-finding study on DMLSS as an auditable source for depreciation for Service Medical Activity (SMA) financial statements and MEPRS was initiated – Study on updating depreciation distribution percentage thresholds – Study on Direct Charging depreciation versus indirect via overhead – MEPRS Manual policy update with threshold change, depreciation definitions, and new distribution percentages 10

MEPRS Policy Issues on Depreciation Depreciation problems in MEPRS: – Depreciation policy had not been updated to reflect current DoD FMR reporting processes – Standardized Investment Equipment/Capitalization Equipment threshold criteria $100K vs. $250K – Inconsistencies of reporting depreciation affecting cost/expenses in each MTF 11

12 Service-Level Analysis DoD policy change System Changes ERP Data Quality Issue/Fix MEPRS Business rule Interpretation MEPRS Policy Issues on Depreciation

MEPRS working group objectives for Depreciation: – Ensure depreciation expense in EAS is captured IAW with SFFAS 4 / DoD FMR guidelines and is auditable back to the source system/SMA financial statements – DoD FMR 5-year depreciation schedule and $100K depreciation capitalization threshold – Auditable back to Source System Defense Medical Logistics Standard Support (DMLSS) General Fund Enterprise Business System (GFEBS)–Army 13 MEPRS Policy Issues on Depreciation

Depreciation Policy Changes Update to Depreciation Functional Description in DoD M para C2.5.8 – Change “Investment Equipment” to “Capitalized Equipment”—threshold corrected to $100K – Add new depreciation-related definitions from DoD FMRs and DoD Instructions – Changes to Depreciation Distribution Percentages table (C2.T5) Drop from 4 to 3 categories—No MTF with ADPL above 250 in over 10 years Split groupings based on 40/60, 20/80, and 0/100 for inpatient and outpatient 14

15 Original Depreciation policy was developed in mid 90s Based on inpatient-heavy healthcare delivery model – More Inpatient Care – More MTFs MTF Average Daily Patient Load (ADPL) used to determine Depreciation split between Inpatient and Outpatient FCCs FY08 EASIV Expense Analysis Depreciation Policy Changes Distribution Percent Study

16 New Policy reflects delivery of healthcare changes – Less Inpatient Care – Fewer Occupied Bed Days – Fewer Hospitals, More Clinics – Much greater Outpatient expenses New Policy Effective 1 October 2010 (FY2011) – New ADPL thresholds; New Percentages – Consult your Service for Guidance – To be Included in Change 1 to DoD M Ambulatory Surgery Care Depreciation Policy Changes Distribution Percent Study

Work In Progress Depreciation Direct–Charging Simulation–System Background – In early 2010, Services provided FY09/10 depreciation reports from DMLSS for Ft. Riley, Portsmouth, San Diego, Keesler, and Wilford Hall – Cost of equipment – Year equipment purchased – Ordering FCC – Data were used to conduct EAS IV depreciation validation studies – summary outcomes were reported at June 2010 MMIG meeting – FY09 Keesler and FY11 Bethesda data were used to simulate impact of direct-charging Inpatient / Outpatient depreciation expenses to FCCs specifically benefitting from purchased equipment

Keesler Results – Most Inpatient and Outpatient Post-Stepdown Total Expenses by FCC decreased by less than 2% – Post-Stepdown Total Expenses at six Inpatient/Outpatient FCCs where equipment purchases could be directly linked increased from 1% to 21% – Equipment depreciation expenses linked to Ancillary or Support FCCs were distributed using current business rules (IP/OP percentage split and on the basis of OBD and total visits) – Simulation analysis was performed using 4 th -level FCCs. Results were summarized by 3 rd -level and 2 nd -level FCC for presentation simplicity Work In Progress Depreciation Direct–Charging Simulation–System

Bethesda Results – FY11 EAS Depreciation input spreadsheets provided by Navy were used for this analysis – Inpatient FCCs were unaffected. Generally, Outpatient Total Expenses by FCC decreased by less than 2% – Total Expenses at FCCs where equipment purchases could be directly linked increased from 0% to 16% – Equipment depreciation expenses linked to Ancillary or Support FCCs were distributed using current business rules (IP/OP percent split and on the basis of OBD and total visits) – Simulation analysis was performed using 4 th -level FCCs Work In Progress Depreciation Direct–Charging Simulation–System

Analysis – Keesler and Bethesda simulation results were almost identical: Total Expenses across most IP/OP FCCs decreased between 0 and 2% Modestly increased expenses at FCCs where equipment was purchased – Radiation Therapy Clinic (BAS) total expenses increased the most at both Keesler (21%) and Bethesda (16%) Depreciation is still an open MMIG discussion : – Should additional analysis be conducted (additional sites, Army data) to assess consistency of results? – Should status quo be maintained? – Should other analysis variables be considered? – Should we leverage Service ERPs for solutions? Work In Progress Depreciation Direct–Charging Simulation–System

Summary Understand why Depreciation is reported in the Medical Expense Performance Reporting System (MEPRS) Understand the components of Depreciation and the current data quality issues Provide a status update of MMIG actions to resolve data quality issues Demonstrate Simulation Study on direct tracing of costs for depreciation to improve accuracy in unit costing 21

22 Q&A Questions?