Gapenski's Cases in Healthcare Finance, Sixth Edition

by George Pink

Overview

Student Resources (click here for access)

Instructor Resources: PowerPoint slides, spreadsheets, and case discussion questions and solutions

Sound financial analysis and decision making require a thorough comprehension of theory, plus the insight and judgment that come from experience. Gapenski’s Cases in Healthcare Finance gives students an opportunity to bridge the gap between learning theoretical concepts in the classroom and apply¬ing those concepts in the real world. By working the cases in this book, students who have a basic understanding of healthcare finance can better prepare for the multitude of problems they will face in practice.

The book’s 32 case studies feature a variety of healthcare settings—from hospitals and clinics to medical practices, home health organizations, integrated delivery systems, and more. Each case focuses on a single issue related to a specific area of financial management, including:

• Cost behavior and profit analysis
• Cost allocation
• Pricing, planning, and budgeting
• Capital acquisition and allocation
• Financial condition analysis and forecasting
• Current asset management
• Business valuation

The cases are supported by an extensive array of ancillary resources—including spreadsheet models for both instructors and students, case questions and solutions, and PowerPoint slides—all substantially updated and reorganized for this edition.

Since 2000, this highly regarded book has been used in healthcare finance courses throughout the United States. Original author Louis C. Gapenski was recognized both nationally and internationally as an expert in healthcare finance. In the sixth edition, authors George H. Pink and Paula H. Song carry forward Dr. Gapenski’s legacy to the field of healthcare administration. As the provision of healthcare continues to evolve and advance, this book will help students develop the insight and judgment they need as future leaders.

Product Details

ISBN-13:	9781567939651
Publisher:	Health Administration Press
Publication date:	01/01/2018
Series:	AUPHA/HAP Book
Edition description:	None
Pages:	230
Product dimensions:	8.00(w) x 10.00(h) x 0.60(d)

About the Author

George H. Pink, PhD, is the Humana Distinguished Professor in the Department of Health Policy and Management of the Gillings School of Global Public Health and a senior research fellow at the Cecil G. Sheps Center for Health Services Research at the University of North Carolina at Chapel Hill. Before receiving a doctorate in corporate finance, he spent ten years in health services management, planning, and consulting. Dr. Pink teaches courses in
healthcare finance and is involved in several large research projects, including studies of hospital financial performance. Over the past 30 years, he has served on boards and committees at more than 100 hospitals and other

healthcare organizations. He has written more than 80 peer-reviewed articles and has made more than 200 presentations in 10 countries.

Books published by Health Administration Press:

Understanding Healthcare Financial Management, Seventh Edition


Gapenski's Cases in Healthcare Finance, Sixth Edition


Gapenski's Understanding Healthcare Financial Management, Eighth Edition

Read an Excerpt

CHAPTER 1

CASE 1

NEW ENGLAND HEALTHCARE

PREMIUM DEVELOPMENT

New England Healthcare is a regional not-for-profit managed care company headquartered in Hartford, Connecticut. Currently, the company has more than 1 million enrollees in 25 different plans offered in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Recently, a consortium of employers — including major companies such as IBM, GE, and Prudential — contacted New England to bid on a managed care (health maintenance organization) contract the consortium will offer to its 75,000 employees and family members in and around Nashua, New Hampshire.

New England's approach to premium development starts with the recognition that the premium received from employers must cover two different categories of expenses: (1) the cost of providing required healthcare services (medical costs) and (2) the cost of administering the plan and establishing reserves (other costs). Reserves, which typically are required by state insurance regulators, are necessary to ensure that funds are available to pay providers when medical costs exceed the amount collected in premium payments. As a not-for-profit corporation, New England does not explicitly include a profit element in its premium. However, the reserve requirement is set sufficiently high that income from reserve investments is available to fund product expansion and growth; in effect, a portion of the reserve requirement constitutes profit.

New England uses a multistep approach in setting its premiums. First, a base per-member per-month (PMPM) cost is estimated for each covered benefit of the plan. When the premiums are initially established for a new subscriber group, the base PMPM costs are usually developed on the basis of historical utilization and cost data. If data are available on the specific subscriber group, as with the consortium contract, these data are used. Otherwise, the base PMPM costs are based on utilization and cost data from one or more proxy groups, which are chosen to match as closely as possible the demographic, utilization, and cost patterns that will be experienced under the new contract. In addition, any utilization or cost savings that will result from New England's aggressive utilization management program is factored into the premium.

Second, the base PMPM cost is adjusted to reflect the dollar amount of copayments to providers as well as the estimated impact of copayment and benefit options on utilization and hence medical costs. Copayments, which are an additional source of revenue to the provider panel, reduce New England's medical costs and thus lower the consortium's premium. Furthermore, the higher the copayment, the lower the utilization of that service, especially if it is noncritical.

Finally, limitations are set on the benefits package. The more restrictive the benefits package, the lower the costs associated with medical services. The result of these adjustments is an adjusted PMPM cost for each service. The costs are then summed to obtain the total medical PMPM amount.

To estimate the total nonmedical PMPM amount, New England typically adds 15 percent to the total medical PMPM amount for administrative costs and 5 percent for reserves. The sum of the total medical and total nonmedical amounts — called the total PMPM amount — is the per member amount New England must collect each month from the consortium to meet the total costs of serving the healthcare needs of the plan subscribers (the employees).

After the total PMPM amount is calculated, it must be converted into actual premium rates for individual and family coverage. Using data provided by the consortium, New England estimates that 45 percent of subscribers will elect individual coverage, while the remaining 55 percent will choose family coverage. New England plans to offer the consortium a two-rate structure, under which employees may elect either single or family coverage. Data from the consortium indicate that family coverage, on average, includes 3.5 individuals; thus, all else the same, the premiums for family coverage should be 3.5 times as much as for individual coverage. However, children typically consume fewer healthcare services, on a dollar basis, than do adults, so the final premiums must reflect such differentials.

Here are the factor rates for obtaining individual and family premium rates:

Single factor: 1.216 Family factor: 3.356

In setting the specific premium rates, New England must ensure that the total premiums collected, which would be paid by both employer and employees, equal the estimated total calculated using the PMPM rate. The 75,000 members who would be served by the contract consists roughly of 12,000 individuals and 18,000 families. Thus, 75,000 × Total PMPM amount must equal (12,000 × Single premium) + (18,000 × Family premium). (Note that all the data in this case are for illustrative purposes only and do not reflect current healthcare costs.)

Exhibit 1.1 is a partially completed copy of the worksheet New England uses to establish the total PMPM amount and the premium rates on any contract. The worksheet is a relatively easy guide for implementing the procedures just described. Exhibit 1.2 contains the relevant cost and utilization adjustment factors for a variety of service and copayment options. Adjustment factors are the decisions made on the appropriate service and copay structure, which feed into the calculations for each service's medical PMPM amount, as shown in Exhibit 1.1.

The consortium has furnished New England with a significant amount of data on its employees' current utilization of healthcare services. The employees' inpatient cost and utilization data are as follows:

Average daily fee-for-service charge $2,800
Utilization ($100 copay) 500 days per year per 1,000 members

Note, however, that a recent survey of New Hampshire hospitals indicates that most managed care contracts call for per diem payments in the range of $2,000 to $2,400. In addition, New England's experience with similar employee groups indicates that moderate utilization management would result in 400 to 450 inpatient days per 1,000 plan members.

Exhibit 1.3 shows the current cost and utilization data for other facility services, including skilled nursing care, inpatient mental health care, hospital surgical services, and emergency department care. The employees' utilization data for primary care services are as follows:

EXHIBIT 1.3
Consortium Employee Utilization and Cost Data:
Other Facility Services

Current number of primary care visits ($5 copay) 3.4 per year per member

Skilled nursing facility care 25.2 days per year per 1,000 members Current average daily cost $650

Inpatient mental health care ($0 copay) 64.4 days per year per 1,000 members Current average daily cost $740

Hospital-based surgery ($0 copay) 41.7 cases per year per 1,000 members Current costs $1,800 per case

Emergency department care ($15 copay) 132 visits per year per 1,000 members Current costs $250 per visit (see note)

New England routinely pays primary care physicians a capitated amount based on an annual cost of $200,000. It assumes that one primary care physician can handle 4,000 patient visits per year. The employees' utilization and cost data for specialist office visits are as follows:

Current number of specialist office visits ($0 copay) 1.5 per year per member Current cost per visit $92.65

Note that the total PMPM amount shown in exhibit 1.1 may be modified to reflect anticipated medical cost inflation. This adjustment is especially critical if the total PMPM premium is based on relatively old cost data. The cost data provided in this case can be assumed to be two years old: The data are from the previous year, and the contract would not be in place for yet another year. Also, note that the premium calculation in exhibit 1.1 does not include certain medical services, such as routine vision and dental care, chiropractic services, durable medical equipment, out-of-network services, and pharmacy benefits. The consortium specifically requests that the initial premium bid exclude such "rider" services. However, if New England is chosen to submit a final premium bid, the consortium will likely request pricing on one or more riders.

Finally, with no guidance from the consortium regarding the level of services desired or the copay structure, New England intends to offer three choices to the consortium: low cost, moderate cost, and high cost. The low-cost (to the consortium) plan requires higher copays from employees and has more limitations on covered services. The high-cost plan has lower copays and fewer limitations. The moderate-cost plan falls between the two extremes.

You have recently joined New England Healthcare as its marketing analyst. Your first task is to develop the bid presentation to the consortium.

CHAPTER 2

CASE 2

ORLANDO FAMILY PHYSICIANS

PAY FOR PERFORMANCE

Orlando Family Physicians is a medical group practice located in Orlando, Maine. The practice has four family practice physicians and a medical support staff consisting of a practice manager, two receptionists, four nurses, two medical assistants, two billing clerks, and one laboratory technician. Data relevant to the practice are shown in exhibits 2.1 through 2.3.

Orlando is organized as a partnership, with each physician having an equal share. Although the practice manager has the authority to make the day-to-day business decisions, all strategic decisions are made jointly by the partners. In addition, Orlando uses a local certified public accountant (CPA) to prepare and file its taxes and to act as a financial advisor when needed.

At Orlando, the current policy is to provide equal compensation to all four physicians. Last year, each physician was paid the same monthly salary ($12,500). At the end of the year, profits that were not needed for reinvestment in new assets were divided equally among the partners ($30,000 each). Although this "equal pay for equal work" policy has been in place since Orlando was founded in 1996, it has caused growing discontent among the partners. Not surprisingly, each of the physicians believes that he or she works harder than the others and hence should receive greater compensation. In addition, the physicians recognize the importance of putting away some profits to pay for new medical equipment that will replace aging items and expand the range of services offered.

A recent survey by the Medical Group Management Association indicated that less than 10 percent of group practice family physicians are compensated on a straight salary basis, while the majority are compensated on the basis of productivity. Of those compensated according to productivity measures, about half are paid solely on productivity and half receive a base salary plus a bonus component based either on productivity alone or on productivity and other measures. (For more information on the Medical Group Management Association, see www.mgma.com.)

To reward those physicians who truly work harder and to create the incentive for all physicians to be as productive as possible, the partners instructed the practice manager to assess the current compensation system and to recommend any changes that would improve the system.

You are the practice manager at Orlando Family Physicians. As a start, you scheduled a meeting with the partners to gain some initial guidance. At this meeting, the partners agreed that any proposed system must have the following five characteristics:

1. The system must be trusted. Physicians must trust not only the data used but also the integrity and competency of the individuals who administer the system. The compensation model itself may be sound, but a lack of faith in either the data or the administration of the system will lead to a lack of confidence in the entire system.

2. The system must be clearly understood. In the search for the perfect system, practice managers tend to create a model that is overly complex, and hence the links between pay and performance cannot be easily identified. If the physicians cannot easily identify what performance is necessary to increase pay, the system will not have the desired results.

3. The system must be perceived to be equitable. If the physicians do not believe that the system is fair — that is, those physicians who contribute more are paid more — it is doomed to fail.

4. The system must create the proper incentives. A fundamental objective of any compensation plan is to maintain the financial viability of the organization. Thus, the model must create incentives that promote behavior that contributes to the success of the group. Furthermore, the incentives offered must be large enough to encourage physicians to change behavior.

5. The system must be affordable. The costs of implementing and administering the system must be reasonable. Furthermore, the total amount of incentive compensation paid must not impair the ability of the practice to cover its operating costs, replace existing assets, or acquire new assets.

The general agreement among the physicians is that the compensation system should consist of a base salary plus some form of pay-for-performance scheme. For example, each physician might receive a base salary of $6,000 per month, and the remaining compensation would be based on some measure(s) of performance.

Even with this agreement, the task of making recommendations for change in the physician compensation system is daunting. After all, many systems are available, each with its own strengths and weaknesses. To gain a better appreciation of the possible choices, you downloaded from the Internet several articles about pay for performance. Then, you met with Jennifer Wong, Orlando's CPA, to learn about the alternative systems used at other practices. After several meetings with Jennifer, you conclude that the following potential measures might be appropriate for Orlando's pay-for-performance plan.

Productivity Measures

• Number of patient visits. This measure is a simple count of the annual number of patient visits for a physician, regardless of the time per visit or type of patient. More patient visits indicate higher physician productivity.

• Work relative value units (RVUs). Jennifer consulted with another group practice that uses RVUs to measure productivity. RVUs form the basis of physician compensation for Medicare services. Under this system, each physician service has three relative value components: (1) physician work, (2) practice expense, and (3) malpractice expense. More work RVUs indicate higher productivity.

• Professional procedures. This measure is a simple count of the annual number of procedure codes (such as injections), regardless of the time per procedure, type of procedure, or reimbursement amount. More professional procedures indicate higher productivity.

Financial Measures

• Gross charges. This measure is the total gross charges generated by a physician during the year (discounts, allowances, and costs are ignored). Gross charges are easily identified from the current billing system used by the practice. More gross charges indicate higher physician financial performance.

• Net collections. This measure is the total collected revenue generated by a physician during the year (gross charges minus discounts and allowances; again, costs are ignored). Net collections are also easily identified from the current billing system used by Orlando. More net collections indicate higher financial performance.

• Net income. This measure is the total net income (before physician compensation) generated by a physician during the year. As stated, gross charges and net collections are easily identified from the current billing system used by Orlando. However, this measure requires allocation of practice costs to individual physicians. With limited data at hand, one possible solution is to divide the total costs of the practice into fixed and variable components and then allocate the fixed component equally to all four physicians and allocate the variable component on the basis of some measure of resource utilization, such as professional procedures. Higher net income indicates higher financial performance.

Quality Measures

• Average patient satisfaction. This measure is an average of the patient satisfaction scores for a physician. Higher patient satisfaction scores indicate higher physician quality.

• Blood pressure control. This measure indicates whether a physician met a target for blood pressure control among the patients seen during the year. The Centers for Medicare & Medicaid Services (CMS) sponsored the Physician Group Practice (PGP) Demonstration, which ended in 2010 but has been extended under the program PGP Transition Demonstration (see https://innovation.cms.gov/initiatives/physician-grouppractice -transition/). Under the PGP, participating physicians are eligible to earn separate quality payments if they meet performance targets on a variety of quality measures. Blood pressure control is one of the quality measures that apply to all Medicare beneficiaries who meet age and sex criteria. Attaining the target indicates higher quality.

• Breast cancer screening. This is another PGP Demonstration quality measure that applies to all Medicare beneficiaries who meet age and sex criteria. Attaining the target indicates higher quality.

Of course, any combination of these measures could be used, making a wide variety of solutions possible.

Armed with this information, you held another meeting with the partners and Jennifer to understand their views regarding physician compensation. The meeting had three agenda items: (1) Should pay for performance be based on productivity, financial performance, and/or quality? (2) What total dollar amount should be allocated to performance pay versus base salary? (3) What amount of net income (after physician compensation) should the practice target?

(Continues…)

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Excerpted from "Gapenski's Cases in Healthcare Finance"
by .
Copyright © 2018 Foundation of the American College of Healthcare Executives.
Excerpted by permission of Health Administration Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Preface for Instructors,
Preface for Students,
Case Descriptions,
PART I THE HEALTHCARE ENVIRONMENT,
1 New England Healthcare (Premium Development),
2 Orlando Family Physicians (Pay for Performance),
3 Santa Fe Healthcare (Capitation and Risk Sharing),
PART II COST BEHAVIOR AND PROFIT ANALYSIS,
4 Tulsa Memorial Hospital (Break-Even Analysis),
5 Shasta Faculty Practice (Cost — Benefit Analysis),
PART III COST ALLOCATION,
6 Big Bend Medical Center (Cost Allocation Concepts),
7 Eagan Family Practice (Cost Allocation Methods),
8 Dallas Health Network (Activity-Based Costing Analysis),
PART IV PRICING, PLANNING, AND BUDGETING,
9 Cambridge Transplant Center (Marginal Cost Pricing Analysis),
10 Cascades Mental Health Clinic (Variance Analysis),
PART V FINANCIAL MANAGEMENT CONCEPTS,
11 Gulf Shores Surgery Centers (Time Value Analysis),
12 Mid-Atlantic Specialty, Inc. (Financial Risk),
PART VI CAPITAL ACQUISITION,
13 Pacific Healthcare (A) (Bond Valuation),
14 Senior Care Enterprises (Bond Refunding),
15 Pacific Healthcare (B) (Stock Valuation),
16 Seattle Cancer Center (Leasing Decisions),
PART VII COST OF CAPITAL AND CAPITAL STRUCTURE,
17 Southeastern Homecare (Cost of Capital),
18 RN Temps, Inc. (Capital Structure Analysis),
PART VIII CAPITAL ALLOCATION,
19 Jones Memorial Hospital (Competing Technologies with Backfill),
20 Coral Bay Hospital (Traditional Project Analysis),
21 National Rehabilitation Centers (Staged-Entry Analysis),
22 Northwest Suburban Health System (Outsourcing Decisions),
PART IX FINANCIAL CONDITION ANALYSIS AND FORECASTING,
23 Commonwealth Health Plans (Assessing HMO Performance),
24 River Community Hospital (A) (Assessing Hospital Performance),
25 River Community Hospital (B) (Financial Forecasting),
PART X CURRENT ASSET MANAGEMENT,
26 Mountain Village Clinic (Cash Budgeting),
27 Foster Pharmaceuticals (Receivables Management),
28 Clarinda Community Hospital (Inventory Management),
29 Milwaukee Regional Health System (Revenue Cycle Management),
PART XI BUSINESS VALUATION,
30 St. Benedict's Teaching Hospital (Merger Analysis),
31 Beachside Health Partners (Joint Venture Analysis),
32 Bedford Clinics (Practice Valuation),
About the Authors,
Remembering Louis C. Gapenski, PhD,