Financial Management of Practices Case Studies A case

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

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Case Review Module 2 - Finance and Budgeting Case Study 3

Budget and Financial Planning ? 4

What are the major items affecting a physician practice financial plan? ü ü ü 5 Patient Volumes Service Mix Reimbursement rates Physician comp plans Staffing levels Capital

What items should concern Mark? What would you want to know? ü Why is there a negative operating margin? ü Are there barriers to generating a positive margin? ü What is driving the drop in patient cash? ü Why is Operational Support decreasing? ü Are there other opportunities in Other Revenue? ü Is my staffing ratio adequate? ü Why are MD Salaries and additional comp increasing so rapidly ü Is there benchmark data we can review and compare against? 6

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 ($1. 3 M) total decrease, ($. 3 M) is related to rate, and ($1. 0 M) is related to volume. FY 11 Actual Revenue (000’s) Volume Price per Unit FY 12 Budget $13, 096, 355 $11, 729, 517 ($1, 366, 838) 87, 000 80, 000 (7, 000) $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) Volume Variance: Lower Total Quantity ($1, 053, 730) (Actual Q – Budget Q ) * Budget P Total ($1, 366, 838) (87, 000 – 80, 000) * 150. 53 = ($1, 053, 730) Amounts are rounded 7 Variance

What might you do about the “promised” bonus? ü Determine if “promised” means “guaranteed” ü Options to tie it more closely to performance? ü Remove it from the budget ü Review parameters of comp plans ü Other ideas? 8

What opportunities do you see to improve the planned margin? ü ü ü 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 ü Remove “promised” bonus ü What else? 9

Can Mark and Andy get to a positive margin? ü 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. ü The idea is to put all the options on the table, measure them, and be deliberate in the approach towards implementation. ü If they are NOT on the table, then they most likely will never occur. ü The budget is a perfect place to outline the various scenarios. 10

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