Welcome to the 2018 Iowa Small Hospital Improvement Program (SHIP) Workshop Service Line Profitability (SLP) September 19, 2018 About Draffin & Tucker 1
Quick Facts Founded in 1948, Draffin & Tucker is a privately held, limited liability partnership headquartered in Albany, Georgia with a second office in Atlanta primarily serving clients throughout the Southeast. It is ranked among the top 250 largest CPA firms in the country (out of over 40,000 CPA firms across the nation). With approximately 80 professionals, of which 40 are CPAs, our firm is comprised of 14 partners, one principal, 15 managers and the remaining supporting staff. • Firm Size: Approximately 80 Professionals • Firm Office Locations: Albany, Georgia and Atlanta, Georgia • Firm Service Area: Predominantly Southeastern United States • Audit Clients: Approximately 160 Organizations • Firm Longevity: Since 1948 (70 years) • International Professional Association: Leading Edge Alliance Healthcare Focus • Draffin & Tucker has a strong specialization in the healthcare industry, particularly in the not-for-profit and government sectors of the industry. • Since 1965, our healthcare practice has grown from approximately four (4) hospitals in the southwest Georgia area to over one hundred and fifty (150) healthcare providers throughout the southeastern states. • We specialize in providing a full range of services to hospitals and hospital systems, hospices, nursing homes, home health agencies, rural health clinics, community health centers, physician practices, and other healthcare related entities. 2
Healthcare by the Numbers • 11 partners dedicated to the healthcare industry • 260 combined years of healthcare experience • 150+ current healthcare clients • 65 healthcare audits in 2017 • 40+ service offerings for healthcare • 80 firm members supporting our healthcare clients on a daily basis • 93% of our clients would recommend us (based on an independent survey) Learning Objectives • Why understand the cost of specific services • Use of Medicare Cost Report • Service line costing methodologies • Opportunities to use Service Line Profitability for tactical purposes 3
What is this? What is this? 4
Why is an Understanding of Service Line Profitability Important? Begin with the End in Mind to Avoid the End! Current Environment • Uncertainty surrounding health care reform – Health Insurance Exchanges – ACOs – Population Health Management • Declining volumes • Declining reimbursement • Increasing pressure to reduce costs • Increasing pressure to streamline processes 5
Helps Answer the Following Questions • What drives institutional profitability? • What is the physician-specific profitability? • Which services produce value? • How do service costs compare to negotiated and fixed reimbursement arrangements? • Are services being provided in an efficient manner? • At what level of operating capacity are services being provided? • Do feasible growth opportunities exist? Presents a Fantastic Opportunity to Direct the Hospital’s… 6
Poll Question Does your hospital use a cost accounting system? Poll Question Does your hospital operate a Business Intelligence or Decision Support department? 7
Significant Considerations Information Overload! What You Need to Know • Market awareness • Definition of “service lines” • Costing methodologies • How the hospital is paid for services • Level of contribution to the hospital’s mission 8
Market Awareness • Service area – What population are you serving? – Who are your customers? – Ability to analyze current and recent historical patient service data to determine primary and secondary service areas • Government data sources are typically dated Market Awareness • Community Health Needs – Identify service opportunities – Identify educational opportunities – Identify wellness opportunities – Enhance image • Are county officials receptive to providing financial support? 9
Market Awareness • Major Employers in the Service Area – Insurance status • Who are they purchasing coverage from? – Build relationships – Business development – Direct contracting opportunity? – Are there opportunities to help them control their costs without adversely affecting the hospital’s bottom line? Market Awareness • Competition – Institutional • Neighboring hospitals – Freestanding Diagnostic and Specialty • Lab, Imaging, Surgical, Orthopedic • Physician owned and operated entities – Outmigration • Services provided to primary market by competitors – Differentiation opportunities 10
Poll Question When was the last time the hospital performed an in-depth market analysis? Defining “Service Lines” • Foundation should be based on patient encounter attributes • Source of patient visit: – Emergency Room – Observation – Inpatient Admission – Diagnostic Test 11
Defining “Service Lines” • Payer – Medicare, Medicaid, Commercial, Uninsured • Physician – A, B, C • Service Area – Zip Code – County Defining “Service Lines” • Any combination of all of the preceding – Inpatient by service by payer by physician – Outpatient by service by payer by physician – Inpatient by service by physician by zip code – Outpatient by service by physician by zip code – Inpatient by MDC by physician – Inpatient by DRG by physician – I think you get the point. 12
Poll Question Does defining service lines at this level of detail appear feasible for your hospital? Mechanics 13
Mechanics Net Revenue – Cost = Profit What’s the Goal? • To match up and allocate costs to the service being provided at the lowest service transaction level possible. • Lower service level = Higher reporting capability 14
What’s the Goal? • Match and Allocate: – Data often housed in separate components of the hospital’s information system – Cost (operating expense) • General ledger module – Patient service records • Patient accounting module Cost Operating Expense An expense by any other name is still an expense. 15
Operating Expenses • Revenue Producing • Direct • Overhead • Indirect • Functional Classification – Departmental – Where • Natural Classification – Type – What 31 Natural Classification – Salaries and Wages – Employee Benefits – Contract Labor – Medical Supplies – General Supplies – Drugs – Professional Fees – Depreciation – Rent – Etc. 32 16
Departmental Direct Expense (Revenue Producing) • Patient Care – Nursing Care – Operating Room – Radiology – Lab – Therapies – Emergency Room 33 Departmental Indirect Expense (Overhead) – Capital – Human Resources – Administrative – Plant – Laundry – Housekeeping – Dietary – Medical Records 34 17
Hospital Departmental Expenses 45% Indirect Direct 55% 35 Direct and Indirect Cost 18
How do we accomplish our goal? “A goal without a plan is just a wish.” Costing Methodologies • Ranked in order of common use: 1. Ratio of Cost to Charge (RCC) (Focus) 2. Hybrid (RVU/RCC) 3. Relative Value Unit (RVU) 4. Activity Based Costing (ABC) 19
Costing Methodologies • Ranked in order of accuracy of output: 1. Activity Based Costing (ABC) 2. Relative Value Unit (RVU) 3. Hybrid (RVU/RCC) 4. Ratio of Cost to Charge (RCC) Costing Methodologies • Ranked in order of resource consumption: 1. Activity Based Costing (ABC) 2. Relative Value Unit (RVU) 3. Hybrid (RVU/RCC) 4. Ratio of Cost to Charge (RCC) 20
Poll Question Which of the preceding costing methodologies is your hospital using? Ratio of Cost to Charge (RCC) • Most commonly used • Based on an assumed relationship of costs to charges • Begins with charges and assumes that costs are a certain % of this amount • Charge amount is the measure used to allocate cost at the procedural service level 21
TERMINOLOGY • CHARGES = GROSS REVENUES – Amounts billed to patients at the facility’s established rates for services rendered – Gross patient service revenue • FULLY ALLOCATED COSTS = EXPENSES – Expenses incurred in rendering services to patients – Operating expenses excluding bad debt expense TERMINOLOGY • RATIO OF COST TO CHARGE (RCC) – Departmental costs divided by departmental charges to patients. Ancillary Department Cost Charges CCR Radiology $ 1,900,000 $ 6,500,000 = 29% ÷ Lab 1,600,000 3,150,000 = 51% ÷ Pharmacy 660,000 1,850,000 = 36% ÷ Aggregate $ 4,160,000 $ 11,500,000 36% 22
TERMINOLOGY • INPATIENT COSTS = Routine + Ancillary – Routine • Primarily nursing salaries and overhead – Ancillary • Salaries and overhead related to inpatient revenue producing departments: – Operating Room – Radiology – Medical supplies – Etc. TERMINOLOGY • SWING BED COSTS = Routine + Ancillary – Routine (same as Inpatient) • Primarily nursing salaries and overhead – Ancillary (not the same as Inpatient) • Salaries and overhead related to swing bed revenue producing departments: – Physical Therapy – Drugs – Lab – Etc. 23
TERMINOLOGY • OUTPATIENT COSTS – Ancillary • Salaries and overhead related to outpatient revenue producing departments: – Operating room – Radiology – Medical supplies – Etc. Overhead Allocation 24
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