The Hunter Group

South Carolina HFMA 2004 Annual Meeting

Tom HonanTHonan@huntergroup-nci.com

The Hunter Group, a unit of Navigant ConsultingJune 3, 2004

Identifying the financial bumps

and managing through them!

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Agenda

• Introduction• Sizing the gap• Identifying the interventions and making them

stick• Critical components to management reporting

– Opportunity and risk assessment– Daily flash report– Rolling budget

• Confronting the barriers• Accountability and changing course in the

environment

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Managing the gap

• Track your key indicators• Identifying the gap• Size the gap• Identify the required interventions• Assign the accountabilities• Monitor the progress• Be prepared to identify alternative

interventions

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Performance Indicator Warning signs

Cost per adj. discharge, CMI & WI adj. > $5,000

Supply cost per adj. discharge, CMI adj. > $900

Overtime as a % of productive hours > 2.0%

Paid hours per adj. discharge, CMI adj. > 110

Benefits as % of total salary & wages > 22%

FTEs per AOB > 5.0

Days in accounts receivable > 65 days

Days cash on hand < 60 days

Bad debt as % of gross revenue > 4.5%

Be alert to changes in indicators

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Critical components of identifying the gap

• Committed team leadership

• Document the long-term performance objectives that the gap initiatives must achieve– Reasonable operating

margin– Organizational priorities– Ability to meet:

• Capital needs• Access to skilled labor• Technology advancements

• Focus on quality of earnings

• Be realistic

“Would you please elaborate on ‘Then something bad happened’.”

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Passing the realism test

• When is the last time your organization met its budget target?– Last year?– Before PPS?– Before Medicare?

• Do you have in your projections?– Full impact of Drug Bill going forward?– Volume increases greater than market growth and that of your

last several years?– One time settlements? Transactions?– Revenue fairy dust?– Interventions absent accountabilities and timelines?

• Actually believe your budget projections are good for a year?

• How involved is your medical staff leadership in doing budget volume projections? Are your department directors truly held accountable for failing to meet budget targets (i.e., does it impact their earnings?)

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Sizing the gap

• Forecast should go out three years• Establish the targeted outcome• Keep it simple and directionally correct

Demo Hospital 2004 2005 2006 2007GAP Analysis Budget Baseline Baseline Baseline

Net Operating Revenue 87,804$ 93,091$ 98,968$ 104,117$ Total Expense 86,680 92,461 97,612 102,522QOE - Operating Income (Loss) 1,124 630 1,356 1,595 Operating Margin 1.28% 0.68% 1.37% 1.53%

Expense (Reductions)/Increase to Achieve an Operating Margin of:

3.00% (1,510) (2,163) (1,613) (1,529) 5.00% (3,266) (4,025) (3,593) (3,611) 7.00% (5,022) (5,887) (5,572) (5,694)

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Identify the required interventions

• Set an expectation of better performing standards for cost and quality• Utilize both internal and external benchmarks to identify the opportunity

but:– Don’t benchmark to bankruptcy– Don’t let the benchmarks become the excuse

• Net out costs of accomplishing the intervention• Document the realistic timeline of the impact of the intervention• Components of a successful intervention:

– Accountability• Is it owned by committee?

– Measurability• Do not lose the accountability by overaggressive cost accounting

– Ability to Report• Will it track to the general ledger

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Summarizing the Plan

Demo Hospital

Summary of Interventions 2003 2004 2005

Baseline Beginning (20,806) (26,042) (27,781)

M anaged Care Contract Revenue Increase 7,000 12,000 15,000

Reduction in Bad Debts 750 1,200 1,700

Reduce Labor 3,000 11,000 13,000

Reduce Supply Expense 3,886 4,080 6,000

Total Interventions 14,636 28,280 35,700

PIP Ending Gain (Loss) (6,170) 2,238 7,919

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Getting the interventions to stick

• Accountability• Focus on actionable

items• Credible

management reporting

• Reporting tools• Prospective

management, not retrospective management

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Assign the accountability

• Managing during a performance improvement plan is a team sport, but each player has different responsibilities

• Single responsibility for each intervention• Reasonable timeline with phase in impacts• Requirement and ability to update and

change as needed• Stay true to the objective

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Assign the accountability

• Sample

Finance Department Consolidation

Consolidate the Finance Departments of the tw o hospitals and UMC.CFO

Fourth Quarter

Systems Interface Develop true system interfaces w herever possible. CFO Third Quarter

Daily Flash ReportDevelop a Daily Flash Report for ZLUH and SPUH to provide very specif ic summary information (see Appendix E1 for Sample Flash report).

CFO Third Quarter

Debt Service Coverage Ratio

Calculate the DSCR monthly, both for YTD and a tw elve-month rolling average and report it through the monthly f inancial reports to Management and the Board.

CFO Fourth Quarter

Self-Insurance FundEngage bond counsel to review bond requirements related to ZLUH becoming self-insured.

CFO Third Quarter

Bad DebtsModify the method of reporting bad debts to consider the real-time information available from PFS.

CFO Fourth Quarter

Contractual Calculations

Continue to utilize new methodology for estimating contractuals in future periods.

CFO Fourth Quarter

Budgeting ProcessDevelop an rolling budget and use it to set targets for departmental managers.

CFO Fourth Quarter

Monthly Financial Reports

Expand the monthly f inancial report to include a w ide variety of standard reports w hich provide key f inancial indicators and trend analysis to assist management in identifying deteriorating performance before it becomes a problem.

CFO Fourth Quarter

FY05FY04Report AreaReport Section

FINANCIAL BASELINE WITH INTERVENTIONSResponsibility FY03

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Components of GAP monitoring

• It must be measurable• It must be timely• Trends, trends, trends• It must tie to source

documents• It must reflect

accountability• Focus the effort on data

that can result in actionable interventions

• Maintain a forward-looking discipline

• Credibility - don’t manipulate the results

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Management reporting process

• Provide simple tracking information daily– Include operational, clinical and financial indicators – Assess the quality of data utilized in decision making

• Implement an FTE report on a bi-weekly basis • Instill discipline for monthly budget reports

– Expect monthly variance reports with corrective action plans

– 20%-20%-60%

• Hold quarterly management retreats to review trends and project forward

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Barriers common to GAP planning: clear definitions

• Accrual– An entry the finance

staff makes to make a manager look bad!!

• Filled versus vacant positions– Are you reducing

from an inflated budget number or from an actual run rate?

– Reduce the same social security number only once

“It’s up to you now, Miller. The only thing that can save us is an accounting breakthrough”

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Defining the budget

Budget

A document in healthcare which most organizations take several months to prepare and is out of date when it is

adopted!!

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Manage the business daily: flash reports

Ambulatory Total Days in Days in Days inTreatment Agency Overtime Patient DNFB DNFB DNFB

DayCash

Balance A/R Days Discharges Patient Days Patients I/P O/P Total FTE's Dollars Costs $ Receipts Med Rec Finance Total

1 TUE

2 WED

3 THU

4 FRI

5 SAT

6 SUN

7 MON

8 TUE

29 TUE

30 WED

Total - - - - - - - -

1) VARIANCE AGAINST ROLLING AVERAGE FORECAST:

CM Projection

CM Rolling Forcast

% Increase/Decrease(-)

2) VARIANCE AGAINST PRIOR MONTH:

CM Daily Average

PM Daily Average

% Increase/Decrease(-)

3) PRIOR MONTH TRENDED AVERAGES:

May

April

March

February

January

December

November

October

September

August

July

June

(Charges posted daily in Eagle)

Day of Week

Gross Charges ($ in 000s) Payroll Accounts Receivable ($ in 000s)

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Institute the rolling budget

Business Unit Name Prev Month Prev Month Prev Month Current Current Future Month Future Month Future Month Current Year Current YearResponsibility 3 2 1 Month Act Budget 1 2 3 Forecast Budget

DischargesAOBOutpatient VisitsFTEs

Net Revenue

Labor CostsResident CostsPhysician ServicesSuppliesPurchase ServicesUncollectible ExpenseDepreciationInterest Total Expenses

Operating IncomeOperating Margin

Non Operating Income

Gain (Loss)

“Three Months Make a Trend” “Keep a PIP in the Pocket”

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Summary of opportunities and risks

• Create a document which summarizes each major opportunity not budgeted in the the plan and risks to those that are in the plan– Objective: no major event that should have been

foreseen will occur that has not been put on this list

– Sensitivity: Calculate the sensitivity of the financial impact should it occur

– “PIP in the Pocket”: Create the PIP in the pocket prior to the event occur minimizing the chance of the anxiety and paralysis that could occur

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Confront the barriers

• “All programs have a positive contribution yet the organization is tanking!”

• “My department would be making money if it wasn’t for the corporate overhead”

• “ You haven't accounted for the downstream impact I have on the organization”

• “We are not billing for everything”

• “We are not coding appropriately”

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Key challenges facing the Finance Executive

• Ability to reverse wrong decisions• Avoiding the use of “gimmicks” in the

development of a plan• Resist the temptation to find accounting

solutions to operating problems• Have so many operating departments that

you become part of the conflicted?• Do your board and CEO see you as a

financial visionary, or simply a recorder of past events?

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Key challenges facing the Finance Executive

• Are you truly still a finance executive or are the range of responsibilities given to you result in not enough time to:– Allow a detail review of the financial statements?– Understand the details of your revenue cycle?– Spend enough time analyzing the financial risks to

your organization?– Truly understand the strategic value of your

balance sheet?– Understand the financial drivers of your program

profit and loss statements– Have we provided the financial leadership to drive

the evaluation of new technologies?– Understand the details of your treasury functions?

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Discussion and questions