BUSINESS PLANNING & ANALYSIS

1. BUSINESS PLANNING&ANALYSIS MaineHealthPhysician Leadership Development Fellowship December 5, 2008

2. BACKGROUND • Begin my career at the public accounting firm of Ernst & Whinney as an auditor and consultant • Joined Regional Memorial Hospital in 1983. Regional later joined with Bath to become Mid Coast Hospital in 1991. • Been the CFO since 1999

3. RELEVANT RESPONSIBILITIES • Develop all of the demand and financial forecasts forMid Coast Heath Services (long range planning) • Oversee the development of the budgets for Mid Coast Health Services (short range planning) • Analyze the feasibility of hundreds of projects per year • Do we buy add additional operating rooms • Do we add a second Neurologist? • How many staff must I reduce to pay for an EMR • Etc, Etc.

4. BRIDGING THE SESSIONS Session 1 Session 2 Actual Historic Future1, 3, 10, 20 YearPlan Pro Forma“As If” FINANCIAL STATEMENTSBalance SheetIncome StatementCash Flow FINANCIAL STATEMENTSBalance SheetIncome StatementCash Flow FINANCIAL STATEMENTSBalance SheetIncome StatementCash Flow

5. OBJECTIVES • To understand why Business Planning & Analysis is important • To understand the basic concepts of Business Planning & Analysis: • Fixed and Variable Costs • RVUs • Economies of Scale • Budgets, ProFormas, Feasibility Study • Breakeven Point and Breakeven Analysis • To apply some of the concepts to “real life” experiences • To understand growth and its relationship to organizational health

6. WHY IS THIS IMPORTANT? • The cost of healthcare is at the root of virtually any discussion about healthcare policy • Every major decision that gets made has cost / economic implications. • Every top healthcare leader that I know, has a solid grasp of financial and economic issues. Cost / Quality

7. FINANCIAL & ECONOMIC CONCEPTS

8. FIXED COSTS • Fixed Costs – Costs that do not vary with volume(of the business) • Examples: • Electric Bill • Office Manager Salary • Lease payment for space • Other Examples?

9. VARIABLE COSTS • Variable Costs – Costs that vary with volume(of the business) • Examples: • Transcription Costs • Medical Supplies • Drug Costs • Other Examples?

10. RELEVANT RANGE At some level of volume even fixed costs become variable Relevant Range

11. FIXED or VARIABLE? Q. Nurse Salary? A. It depends! Q. Nurse Salary in a physician’s practice? A. Usually fixed until you add another provider Q. Fee from your accountant? A. Fixed Q. CEO’s Salary? A. It depends. Q. What do accountants like better fixed or variable costs? A. Variable – no risk. There are zero costs of you have no volume. Q. Can anyone think of a business with all variable costs? A. Real Estate Agency where all employees are paid on a commission.

12. WHY IS THIS IMPORTANT? • Understanding the nature of costs – whether they are fixed or variable – is fundamental to Business Planning & Analysis • In thinking about fixed and variable costs you quickly “discover” the economic “truth” of Economies of Scale, one of the most important economic laws of our time

13. ECONOMIES OF SCALE Economies of scale – as volume increases, total cost per unit decreases

14. BUSINESS PLANNING&ANALYSIS Breakeven AnalysisBudgets Long Range Financial Plans Pro-Formas

15. WHY? Provides answers to the following questions: • If I do nothing, what will my practice look like financially in 5 years? • Do we want to add a new service? • When can we add an additional provider in the practice? • What will be the impact of the aging population on my practice? • At what point can I afford to replace a piece of equipment? • How much does my practice need to grow in order to for my income to grow? • What is the impact of declining government reimbursements? • How much does my productivity need to increase in order to support another exam room? • Should I lease or buy a piece of equipment?

16. CONSERVATISM Half Empty Choose the Most Conservative Range CONSERVATISM PESSIMISM

17. DEFINITIONS Breakeven Point – the level of volume at which revenues and costs are equal. Budgets – One Year Financial Plan. A completed budgeted includes a complete set of financial statements (income statement, balance sheet, and cash flow statement) Long Range Financial Plan – 3, 5, 10, 20 Year Budgets Pro Forma Financial Statements – A set of financial statements that includes the projected impact of a future proposed transaction such as the acquisition of a company, the addition of a service, etc.

18. BREAKEVEN ANALYSIS • Breakeven Analysis is often used when analyzing a new business or a new service • It provides a baseline of your business over a whole range of volumes • In order to do it, you need to have a pretty good understanding of your fixed and variable costs. • It is also a great teaching tool for understanding the impact of fixed and variable costs

19. BREAKEVEN CHART Breakeven Point PROFIT LOSS

20. BREAKEVEN CHART – FIXED Breakeven Point PROFIT LOSS

21. BREAKEVEN CHART - VARIABLE Breakeven Point PROFIT

22. PRIVATE DUTY BREAKEVEN Breakeven Point

23. HOSPITALIST BREAKEVEN Breakeven ???

24. BUDGETS (ONE YEAR PLAN) • Budgets are an organization’s road map for the year – their short-term financial plan. • The Budget incorporates an organization’s best thinking relative to: • Volumes and growth • Pricing strategy relative to competition • Appropriate staffing levels relative to patient needs and best practices • Compensation and benefits relative to the market • Appropriate technologies – both IT and Clinical • The end product is a set of Budgeted Financial Statements that hopefully maintain or improve the organization’s financial health

25. THE BUDGET PROCESS The Environment Budget Components The Market Health Policy Reimbursement Volume/Trends Technology Staffing Fixed & Variable BUDGET IncomeStatementBalanceSheet Cash Flow Wage & BenefitSurvey OperatingExpenses Fixed &Variable StrategicPlan PricingStudy Capital Budget

26. WHY BUDGET? • Again, a budget is simply a one year plan • “If you don’t know where you are going, how are you going to get there?” • Provides discipline and context for decisions that get made during the year. Was this is in plan? If not, how are we going to pay for it? • Must be flexible to account for a rapidly changing environment

27. LONG RANGE FINANCIAL PLANS HOW MANY OF YOU KNOW….. • What the aging of the population will do to your practice? • What the impact of flat Medicare reimbursement is on your practice? • How you will implement an EMR without impacting your income? • When the major pieces of equipment in your office will need to be replaced? • When your partners are planning to wind down and the plan for succession?

28. LONG RANGE FINANCIAL PLANS • Although we can’t predict the future (especially in healthcare), at a minimum we must understand how our business will change simply with the passage of time • A Long Range Plan provides the answers to all of the questions on the previous slide • Modeling different scenarios provides “virtual experience”. We can model the impact of a decline in governmental reimbursement – we don’t have to live through it.

29. LONG RANGE FINANCIAL PLANS ABILITY TO FORECAST WITH PRECISION ABILITY TO MAKE MAKE REASONABLE ASSUMPTIONS HARD TO PREDICT Current: Volumes Payer Mix Reimb Rates Staffing Pay Rates Fringe Benefits Operating Expenses Equip. Useful Lives Future:Population Changes Payer Mix Reimb Rates Wages Increases Fringe Ben. Changes Expense Increases Payment System Changes New Technologies EconomicDownturns

30. FORECASTING Population Payer Mix Current RVU Levels Conversion Factors Reimbursement Changes Revenue Forecast Minus Fixed & Variable Staffing Levels Current Pay Rates Wage Inflation Current Fringe Benefits Fringe Benefit Inflation Fixed & Variable Operating Expenses Expense Inflation Expense Forecast Equals Income

31. PRO FORMAS • Pro Formas - A set of financial statements (income statement, balance sheet and cash flow) that includes the projected impact of a future proposed transaction such as the acquisition of a company, the addition of a service, etc. • Board of Directors / Finance Committee will typically want to see a “set of pro formas” before authorizing the transaction • Pro Formas are almost always required by a lender in order to obtain financing

32. PRO FORMAS

33. DISCUSSION Q. What is happening to the cost structure (fixed, variable) of healthcare institutions? A. More fixed costs - IT, safety, quality, care management Q. All things being equal, what does our breakeven chart look like in the future?

34. DISCUSSION Q. How can we mitigate the impact of rising fixed costs? A. Growth - economies of scale.Make smart investments.“Clean out the attic”.Be willing to say “no”.Constant performance improvement.Systematize.

35. SUMMARY Hopefully you have learned something about…. • The nature of costs and how they impact of financial health of your organization • The types of analysis that are available to help you make decisions • The importance of planning – your organization needs one! • Love your CFO – he or she is not a pessimist, just conservative!

36. Relative Value Units (RVUs) 101 • RVU’s – a measure of the relative resources, by cpt code, necessary to provide the service • Broken down between: • Work RVUs – the portion of the total RVU that represents provider time • Practice Expense RVUs – the portion of the total RVU that represents all other practice expenses • Malpractice RVUs the portion of the total RVU that represents the cost of malpractice insurance

37. Relative Value Units (RVUs) 101 Example - 99213

38. Utilization of RVUs • Work RVUs are the basis for many physician compensation systems • Work RVUs are often used to compare a provider’s productivity to his peers or to an external benchmark