Improving CAH Financial and Operational Performance

Transcription

1 Improving CAH Financial and Operational Performance Rural Health Symposium, Kansas Hospital Association March 2, 2012 George H. Pink and G. Mark Holmes NC Rural Health Research & Policy Analysis Center This work is funded by federal Office of Rural Health Policy, PHS Grant No. U27RH01080

2 Agenda How did CAHs in KS compare to the to US in 2010? How many CAHs in KS are in financial distress? What do CEOs and CFOs think really works to improve financial performance? What strategies are used by financial high performers? Who were the financial high performers in KS in 2010? 2

3 How did CAHs in KS compare to the US in 2010? 3

4 CAHs in KS and US Ownership: KS US Government-owned 72% (60) 43% Not owned by gov t 28% (23) 57% # of hospitals

5 CAHs in KS and US Net patient revenue: KS US Less than $7.5 million 48% (39) 20% $ million 45% (37) 47% Greater than $20 million 7% (6) 33% # of hospitals

6 CAHs in KS and US Long term care: KS US Provides LTC 36% (30) 29% Doesn t provide LTC 64% (53) 71% # of hospitals

7 Rural Health Clinic: CAHs in KS and US KS US Operates a RHC 66% (55) 47% Doesn t operate a RHC 34% (28) 53% # of hospitals

8 CAHs in KS and US : Summary Compared to the US, a higher percentage of CAHs in Kansas: Have lower net patient revenue Are government owned Provide LTC Operate a RHC 8

9 CAHs in KS and US Indicator: KS median US median Profitability: Total margin -2% 2% Cash flow margin -6% 6% Return on equity -3% 5% Operating margin -9% 1% Liquidity: Current ratio Days cash on hand Days revenue in accounts receivable *Red: worse performance than U.S. median Blue: better performance than U.S. median 9

10 CAHs in KS and US Indicator: KS median US median Capital structure: Revenue: Equity financing 62% 57% Debt service coverage Long-term debt to capitalization 18% 27% Outpatient revenue to total revenue 67% 72% Patient deductions 27% 37% Medicare inpatient payer mix 86% 72% Medicare outpatient payer mix 47% 36% Medicare outpatient cost to charge ratio Medicare revenue per day $1,620 $1,907 10

11 CAHs in KS and US Indicator: KS median US median Cost: Salaries to net patient revenue 54% 45% Average age of plant 16 years 9.7 years FTEs per adjusted occupied bed Average daily census swing/snf beds Average daily census acute beds

12 CAHs in KS and US 2010 Summary Compared to the US, CAHs in KS: Are less profitable Are less liquid Have less debt and are less able to service debt Have lower proportion of outpatient revenue, patient deductions, and Medicare revenue per day Have higher Medicare payer mix and outpatient cost to charge Have much older age of plant Have lower ADC acute but higher ADC swing beds 12

13 Potential reasons from the data: KS CAHs are less profitable than average US CAH. Why? More CAHs with RHC and LTC Lower proportion of outpatient revenue Higher Medicare payer mix (if higher commercial) Higher outpatient cost to charge Older age of plant Higher ADC acute beds Other reasons? 13

14 KS CAHs are less profitable than average US CAH. Why? Other potential reasons: Net revenue is relatively lower (less patient volume, lower rates, worse payer mix, Medicaid) Costs are relatively higher (wage rates, bad debt, charity care, efficiency) Non-operating income is relatively lower (investment income, state or county support, charitable revenue?) System / network Suggestions from the audience? 14

15 How many CAHs in KS are in financial distress? 15

16 Existing financial distress models (a sample list) Financial strength index (FSI): (Cleverly) adds the percentage difference between the hospital s value and a benchmark Altman s z-score: Developed using publicly traded companies Neural networks, logistic regression, mixed logit, stochastic spline: Statistical methods. 16

17 Our proposed model: core principles Develop specifically for CAHs Use scientific approach can we predict bad outcomes? Have high face validity Use data publicly available for all CAHs Focus on identifying CAHs at risk for distress (rather than identify high performers) Make the model parsimonious and easy to understand 17

18 Basic model 18

19 1. Closure 2. Negative fund balance Markers of financial distress 3. Declining (>25%) fund balance 4. 3 years negative operating margin 5. Negative cash flow margin In some circumstances, there may not be financial distress even though the markers suggest otherwise 19

20 Predicting variables We considered a broad list of potential variables expected to predict whether a CAH would be in distress within two years: Financial measures Hospital characteristics Market characteristics Plus trends in these values 20

21 Predicting variables Financial 1. EBITA / total expenses 2. Operating margin 3. Operating margin two years earlier 4. Retained earnings / total assets 5. Net patient revenue 21

22 Predicting variables Hospital 6. Distance to nearest hospital with 100 beds 7. Market share (if <25%) Market 8. Unemployment rate 9. Population 22

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25 State Report for KS For the CAHs in KS, what is the current risk of financial distress compared to all CAHs? A well-functioning prediction model can be used by administrators and boards as an early warning system so that remedial action may be taken before financial distress occurs. The model uses financial performance variables (current profitability, reinvestment, and hospital size) and market characteristics variables (competition, economic status, and market size) to predict financial distress (equity decline, unprofitability, and closure) two years later. Risk of Financial Distress Number (Percent) of CAHs Risk KS US Low 22 (27%) 813 (63%) Mid-Low 24 (29%) 232 (18%) Mid-High 17 (21%) 119 ( 9%) High 19 (23%) 124 (10%) 25

26 Next steps Financial Distress Report is on pages 7 and 8 of the CAH Financial Indicators Report for your hospital Explains the model and includes results for your hospital We d like to know if you agree with our model and the results for your hospital 26

27 Specifically: Next steps What do you think of the measures of distress? What do you think about the predicting variables? Is two years the right forecast period? What else would you like to know about the model? Feedback will help us to refine, re-release, refine, re-release 27

28 What do CEOs and CFOs think really works to improve financial performance? GM Holmes and GH Pink. Adoption and perceived effectiveness of financial improvement strategies in Critical Access Hospitals, Journal of Rural Health,

29 Literature review We reviewed existing literature on what works to improve financial and operational performance in rural hospitals Very little, and most of the existing evidence were case studies We did X and our Y increased. Suggestive of potential strategies, but not at all definitive 29

30 On-line survey When CEOs and CFOs downloaded the CAH Financial Indicators Report for their hospital in August and September 2010, they were asked to complete a questionnaire about 44 financial strategies and activities 317 people responded 30

31 Questions We request your help with a 5-minute survey regarding the strategies and activities that your Critical Access Hospital has used to cope with the economy during the past three years. The survey does not ask for data and should take less than 5 minutes to complete. Please be assured that your responses are confidential and that we will not identify you or your hospital. We are hoping that this will be of value to CAHs by identifying strategies and activities that have actually helped other hospitals. Below is a list of strategies and activities that can affect the financial condition of a Critical Access Hospital. Please check off the activities that your hospital has tried with good results, tried with poor results, tried with unknown results, and hasn t tried. 31

32 1. Widely used, good results 2. Widely used, mediocre results 3. Somewhat used, good results 4. Rarely used, good results 5. Rarely used, mediocre results Classification of Financial Improvement Strategies 32

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34 Widely Used, Good Results 1. Acquired/replaced diagnostic equipment 2. Held down wage and salary increases 3. Improved billing and coding training 4. Increased/improved revenue cycle activities 5. Joined purchasing organization/network 6. Recruited allied health personnel 7. Recruited primary care physician(s) 8. Reduced amount of contract labor 9. Updated chargemaster 34

35 Widely Used, Mediocre Results 1. Balanced scorecard / dashboard 2. Benchmarking activities 3. Implemented / improved EHR 4. Implemented / improved other IT 5. Modified charity care / bad debt policies 6. Patient satisfaction activities 7. Quality management activities 35

36 Were Strategies Influenced by CAH Characteristics? Larger CAHs reported trying more strategies CAHs with RHCs reported more service expansion activities CAHs with LTC reported more service reduction strategies CAHs in the South attempted fewer capital strategies and more service reduction strategies Little evidence that characteristics affected perceived success of strategy 36

37 Some Cold Water Using our data, we could not identify any evidence that these strategies led to improved performance among the respondents Perception v. reality? Limitation of available data (cost report data too crude to capture the relevant outcomes)? 37

38 What strategies are used by financial high performers? A Kirk, GM Holmes, and GH Pink. Achieving benchmark financial performance in Critical Access Hospitals: Lessons from high performers, forthcoming in Healthcare Financial Management, April

39 Benchmarks Included in CAH Financial Indicators Report Developed from survey of CEOs and CFOs: cash flow margin > 5% days cash on hand > 60 days debt service coverage > 3 long-term debt to capitalization < 25% Medicare outpatient cost to charge ratio <

40 Number of Indicators Meeting Benchmark

41 How many CAHs perform better than benchmark? Medicare Cost Report data Out of 1300 CAHs, only 32 hospitals performed better than benchmark: On all five indicators For all three years Structured interviews of CEOs and / or CFOs to determine strategies 19 hospitals agreed to participate 41

42 Top Performing CAHs between 2006 and 2008 Hospital Town State CEO CEO Tenure CFO Bear Lake Memorial Hospital Montpelier ID Rod Jacobson 27 N/A Beatrice Community Hospital Beatrice NE Thomas Sommers 7 Jon McMillan Decatur County Memorial Hospital Greensburg IN Bill Alloy 5 N/A Door County Memorial Hospital Sturgeon Bay WI Gerald Worrick 24 Bob Scieszinski Gothenburg Memorial Hospital Gothenburg NE John Johnson 13 Taci Bartlett Hardin Memorial Hospital Kenton OH Mark Seckinger 10 Ronald Snyder Humboldt General Hospital Winnemucca NV Jim Parrish N/A Larry Hutcheson Life Care Medical Center Roseau MN Keith Okeson 6 Cathy Huss Madison Community Hospital Madison SD Tamara Miller 15 Teresa Mallett Morris County Hospital Council Grove KS Jim Reagan 13 Ron Christenson Muncy Valley Hospital Muncy PA Chris Ballard 5 Charles Santangelo Murray County Medical Center Slayton MN Mel Snow 6 Renee Logan Perry Memorial Hospital Princeton IL Rex Conger 2 Tricia Ellison Regional Health Serv of Howard County Cresco IA David Hartberg 4 Brenda Moser Salem Township Hospital Salem IL S Hilton-Siebert 2 Teresa Stroud Shenandoah Memorial Hospital Shenandoah IA Susan McGough 4 Sandra Chesshire Tri Valley Health System Cambridge NE Roger Steinkruger 3 Diana Rippe United Hospital District Blue Earth MN Jeff Lang 5 N/A Windom Area Hospital Windom MN Gerri Burmeister 11 Kim Armstrong 42

43 How different are the environments of the high performers? They look similar to other CAHs based on their market share, hospital size, and market population They are, however, generally located in higher SES areas (poverty: 17.3% v. 22.8%; unemployment 4.6% v. 5.8%) 43

44 1. Educate and use the Board Strategies Used by High Performers 2. Meet the needs of your physicians 3. Take strategic planning seriously 4. Don t leave cash on the table 5. Look and look again for cost reduction opportunities 44

45 Strategies Used by High Performers 6. Provide services that the community needs and wants 7. Take advantage of network affiliations 8. Communicate and hold people accountable 9. Boards should hang on to good CEOs and CFOs 45

46 Who were the financial high performers in KS in 2010? 46

47 New Benchmarks Will be included in this year s issue of the CAH Financial Indicators Report Developed from Fall 2011 survey of CEOs and CFOs 47

48 New Benchmarks Profitability indicators: Total margin >3% Cash flow margin >5% Return on equity >4.5% Operating margin >2% Liquidity indicators: Current ratio >2.3 times Days cash on hand >60 days Days revenue in accounts receivable <53 days 48

49 New Benchmarks Capital structure indicators: Equity financing >60% Debt service coverage >3 times Long-term debt to capitalization <25% Revenue indicator: Medicare outpatient cost to charge <0.55 Cost indicator: Average age of plant <10 years 49

50 Top Performing Kansas CAHs in 2010 Wamego Hospital Association Shannon Flach, CEO Hiawatha Community Hospital John Moore, CEO Abilene Memorial Hospital, Mark Miller, CEO 50

51 Contact information CAH Financial Indicators Report Team Flex Monitoring Team website 51

52 Appendix How did CAHs in KS compare to the US in

53 CAHs in KS and US Profitability: Total margin Missing: 1 Outliers: -300%, -100% 20% 0% US Median -20% -40% -60% -80% -100% Net income Total revenue 53

54 CAHs in KS and US Profitability: Cash flow margin Missing: 1 Outliers: -600%, -153% 40% 20% 0% -20% -40% -60% -80% US Median -100% Net income (Contributions, investments, and appropriations) + Depreciation expense + Interest expense Net patient revenue + Other income (Contributions, investments, and appropriations) 54

55 CAHs in KS and US Profitability: Return on equity 40% 30% Missing: 1 Outliers: -346%, -276%, 20% -176%, -120%, 100%, 448% US Median 10% 0% -10% -20% -30% -40% -50% -60% Net income Net fixed assets 55

56 CAHs in KS and US Profitability: Operating margin 20% Missing: 1 Outliers: -724%, -165% 0% -20% US Median -40% -60% -80% -100% Operating income Operating revenue 56

57 12 CAHs in KS and US Liquidity: Current ratio Missing: US Median 0 Current assets Current liabilities 57

58 CAHs in KS and US Liquidity: Days cash on hand 450 Missing: 1 Outlier: Cash + Marketable securities + Unrestricted investments (Total expenses Depreciation) / Days in period 58 US Median

59 CAHs in KS and US Liquidity: Days revenue in accounts receivable 120 Missing: 1 Outliers: 254, 242, 175, 160, 157, US Median Net patient accounts receivable (Net patient service revenue) / Days in period 59

60 Missing: 1 Outliers: -665%, -139%, -8%, 0%, 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CAHs in KS and US Capital Structure: Equity financing Net fixed assets Total assets 60 US Median

61 CAHs in KS and US Capital Structure: Debt service coverage 80 Missing: 13 Outliers: -413, -178, US Median Net income + Depreciation + Interest expense Current portion of long-term debt + Interest expense 61

62 CAHs in KS and US Capital Structure: Long-term debt to capitalization 120% Missing: 1 Outliers: -140%, 100%, 114%, 269% 100% 80% 60% 40% 20% US Median 0% Long-term debt Long-term debt + Net fixed assets 62

63 CAHs in KS and US Revenue: Outpatient revenue to total revenue 90% 80% 70% US Median 60% 50% 40% 30% 20% 10% 0% Total outpatient revenue Total patient revenue 63

64 CAHs in KS and US Revenue: Patient deductions 70% Missing: 1 60% 50% 40% US Median 30% 20% 10% 0% Contractual allowances and discounts Gross total patient revenue 64

65 CAHs in KS and US Revenue: Medicare inpatient payer mix 120% 100% 80% US Median 60% 40% 20% 0% Medicare inpatient days Total inpatient days Nursery bed days NF Swing bed days 65

66 CAHs in KS and US Revenue: Medicare outpatient payer mix 70% 60% 50% 40% US Median 30% 20% 10% 0% Outpatient Medicare charges Total outpatient charges 66

67 CAHs in KS and US Revenue: Medicare outpatient cost to charge US Median 0 Outpatient Medicare costs Outpatient Medicare charges 67

68 CAHs in KS and US Revenue: Medicare revenue per day $6,000 $5,000 $4,000 $3,000 $2,000 US Median $1,000 $0 Medicare revenue Medicare days SNF Swing bed days 68

69 CAHs in KS and US Cost: Salaries to net patient revenue Missing: 1 Outliers: 142%, 340% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Salary expense Net patient revenue US Median 69

70 CAHs in KS and US Cost: Average age of plant Missing: 5 Outliers: 58, 64, 72, 78, 80, 80, 81, 86, 109, Accumulated depreciation Depreciation expense US Median 70

71 CAHs in KS and US Cost: FTEs per adjusted occupied bed Outlier: US Median Number of FTEs Adjusted occupied beds** ** (Inpatient days NF Swing days Nursery days) * (Total patient revenue / (Total inpatient revenue Inpatient NF revenue Other LTC Revenue)) / Days in period 71

72 CAHs in KS and US Utilization: Average daily census swing/snf beds Inpatient swing bed SNF days Days in period US Median 72

73 CAHs in KS and US Utilization: Average daily census acute beds US Median 2 0 Inpatient acute care bed days Days in period 73