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Using Forecasts to Plan for Medicare Reimbursement Gap
- 2. USING FORECASTS AS A TOOL TO PLAN FOR THE FUTURE Andy Kaempfe, CPA, CHFP Senior Managing Consultant akaempfe@bkd.com Eric Lopata, CPA Director elopata@bkd.com July 19, 2017
- 3. • Quantify historical non-recurring transactions to establish a baseline for the forecast • Apply high-level assumptions to the historical baseline in order to estimate forecasted results • Estimate the gap between Medicare reimbursement and debt service payments over the debt term • Analyze the impact of sensitive assumptions on forecasted results LEARNING OBJECTIVES
- 4. Establishing a Baseline for the Forecast
- 5. NORMALIZATION OF PAST RESULTS
- 6. NORMALIZATION OF PAST RESULTS
- 7. NORMALIZATION OF PAST RESULTS
- 8. NORMALIZATION OF PAST RESULTS
- 9. Looking Back to the Past
- 10. WHY GO BACKWARDS TO MOVE FORWARD? • Lessons can be taken from past performance of the organization • Analysis of current operations to assess status of the organization • Use what we have learned to assist in establishing the basis for management’s assumptions that are key to the forecast
- 11. HISTORICAL FINANCIAL ANALYSIS • Start at a global level, and then move into the details as appropriate • Determine the key drivers of the historical trends • If the organization grew substantially or declined substantially in the historical period, what caused it? Closing of another hospital? Economic changes? Payment changes? Service line changes? New program or funding?
- 13. - 100 200 300 400 500 600 700 800 2009 2010 2011 2012 2013 Median Discharges CAH Iowa 2,100 2,300 2,500 2,700 2,900 3,100 3,300 3,500 3,700 3,900 2009 2010 2011 2012 2013 Median Patient Days CAH Iowa VOLUME TRENDS Source: Optum 2015 Almanac of Hospital Financial and Operating Indicators
- 14. 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Charge Inflation Hospital and related services 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Expense Inflation Medical care commodities Medical care services REVENUE AND EXPENSE INFLATION Source: Bureau of Labor Statistics
- 15. 33% 34% 35% 36% 37% 38% 39% 40% 41% 42% 43% 2009 2010 2011 2012 2013 Median Medicare Days % CAH Iowa 0% 1% 2% 3% 4% 5% 6% 7% 2009 2010 2011 2012 2013 Median Medicaid Days % CAH Iowa PAYER MIX TRENDS Source: Optum 2015 Almanac of Hospital Financial and Operating Indicators
- 16. 4.55 4.60 4.65 4.70 4.75 4.80 4.85 4.90 4.95 5.00 5.05 5.10 2009 2010 2011 2012 2013 Median FTEs per Occupied Bed CAH Iowa $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 2009 2010 2011 2012 2013 Median Salaries per Discharge CAH Iowa FTE TRENDS Source: Optum 2015 Almanac of Hospital Financial and Operating Indicators
- 17. Medicare Reimbursement vs Debt Service Payments – Fill the Void
- 18. PROJECT COMPLETE – NOW WHAT? • Forecast complete, debt secured and project completed – great, but what’s next? • The organization should consider the cash flow implications of the capital project • Applies to all healthcare organizations, but particularly important to critical access hospitals (CAH) following a major project
- 19. MEDICARE COST REIMBURSEMENT • CAH incentivized to complete major renovation or replacement facility due to Medicare cost reimbursement • Debt service for the project can be funded through Medicare reimbursement • Extremely important for organizations to understand the relationship between cost reimbursement and future debt service payments
- 20. MEDICARE COST REIMBURSEMENT • Costs from capital project Interest expense – declines over life of project Depreciable life of the capital assets purchased – may be shorter than term of debt issued • Combination creates a declining Medicare reimbursement over term of project debt • The organization’s Medicare payor mix will have an impact on the difference between reimbursement and debt service • BUT HOW LARGE CAN THE GAP BE?
- 21. MEDICARE COST REIMBURSEMENT Sources of Funds Uses of Funds Costs Useful Life Project debt $10,000,000 Construction costs $6,000,000 30 years Term 30 years Building improvements 3,000,000 15 years Interest rate 5.0% Equipment 1,000,000 7 years Annual payment $650,514 Total $10,000,000
- 22. MEDICARE COST REIMBURSEMENT • Additional assumptions – average overall cost reimbursement for the CAH is 50% Every $1 of additional expense on Medicare cost report yields 50 cent of additional reimbursement • Expenses related to the project over 30-year term of debt Expense Reimbursement Factor Total Cost Reimbursement Depreciation expense $10,000,000 50% $5,000,000 Interest expense 9,515,431 50% 4,757,715 Total $19,515,431 $9,757,715
- 23. MEDICARE COST REIMBURSEMENT • Cost-based reimbursement declines over the term of the project debt service Creates a cash SHORTFALL for the annual debt service that is not covered by increase reimbursement • Cost-based reimbursement covers 80% at onset, decreasing to 18% in final year of debt Cash Shorftall Project Debt Service $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Project Year Annual Cost Reimbursement
- 24. MEDICARE COST REIMBURSEMENT • Cash flow from reimbursement – not equal to debt service • Organization should establish savings plan to supplement cash flow in later years of the debt service Average cost reimbursement over debt term in example – compared to expected cost reimbursement ($9,757,715 / 30 years = $325,257) $(250,000) $(200,000) $(150,000) $(100,000) $(50,000) $- $50,000 $100,000 $150,000 $200,000 $250,000 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930 Project Year Cashflow Excess (Shortfall)
- 25. MEDICARE COST REIMBURSEMENT • Cash savings in first half of project will help organization in second half project • Organization can alleviate financial burden over term of the project debt – PLAN FOR THE FUTURE! $- $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000 $2,000,000 1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031 Project Year Accumulated Savings
- 26. MEDICARE COST REIMBURSEMENT • KEY – Organization should strive to stabilize cash flow over life of project • Why should we develop a savings plan? – Will have an immense impact on the organization’s cash outflow $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930 Project Year Annual Cash Flow Cash Flow without Savings Cash Flow with Savings
- 27. Key Assumptions Impacting Forecasts
- 28. SENSITIVITY ANALYSES • Required for certain forecasts, but useful for planning purposes too • Quantify the impact of both positive or negative changes to operations
- 29. IDENTIFICATION OF SENSITIVE ASSUMPTIONS • Historical budget variances • Historical fluctuations • Uncertain assumptions • Significant forecasted changes
- 30. Top 5 Takeaways for your Organization
- 31. TOP 5 TAKEAWAYS 1) How can your organization accumulate cash to minimize shortfall through project debt service term? 2) Does your organization understand the cash flow impact of the capital project over the ENTIRE term of the project, not just the three to five year forecast period? 3) Do normalized financial statement trends look similar as reported trends? 4) How can your organization utilize the forecast more effectively moving forward? 5) Do you know the impact of 10% decrease in revenue, or a 10% increase in expense?
- 32. QUESTIONS?
- 33. FOR MORE INFORMATION THANK YOU! Eric Lopata, CPA Director elopata@bkd.com 816.489.4273 Andy Kaempfe, CPA, CHFP Senior Managing Consultant akaempfe@bkd.com 816.489.4322
Editor's Notes
- Excess cash that is received in the first half of the project, should be set aside in a savings plan to assist in repayment of the debt service in the later years when the cost reimbursed through the Medicare cost report declines. As excess cash is set aside in the early part of the amortization period, the savings will be accumulated over time. This savings would then be used to supplement the cost reimbursement received in the cost report in the early years to pay the debt service. On the backside of the amortization period, the accumulated savings will be relied upon more extensively as evidenced in this chart on the slide.
- If your organization has ever secured financing through the USDA, you have likely engaged an outside consultant to prepare either a compiled or examined forecast. Within that forecast, the USDA requires sensitivity analysis on the results in the forecasted periods. Because several of the key assumptions in these forecasts are so impactful to the bottomline, if there are slight changes one way or the other it has a huge impact. So, these are sensitivities that the USDA likes to see in forecast reports. Not only are these sensitivity analysis’ required by several lenders in feasibility studies, these can be extremely useful to your organizations for internal planning purposes. When budgeting and planning, you should analyze the impact of not only positive changes in the assumptions but more importantly the negative changes. You should avoid what’s called “incremental budgeting” when forecasting these assumptions. Incremental budgeting means to simply take last year’s results and adding an inflation factor. Instead, take into account what you know will be anticipated changes to your facilities operations. For instance, consider the impact on reimbursement due to expected changes in charge inflation and payer mix. An accurate depiction of the changes in payer mix will provide a detailed picture of how your facility will be reimbursed. Patient volumes and prices are key assumptions impacting forecasted revenues for healthcare organizations. In addition to simply analyzing historical volume trends for the entity, management should complete an overall market assessment of the service area. Knowing the service area’s demographic trends can help management determine volume forecasts. For instance, many rural hospitals face decreasing populations and declining inpatient use rates. In order to keep patient volumes steady in this scenario, the entity would need to increase its market share. However, the opposite is also true, as an increasing population may help an entity sustain increasing volume levels without increasing market share. Once the market assessment and volume/revenue forecast are completed, management should ensure the expenses necessary to support any changes in revenues are included in the forecast. These would be employee and other operating expenses in the forecast. Staffing costs typically are the largest cost incurred by a health care entity, and these costs should be evaluated in comparison to expected revenue changes. Management can evaluate trends in ratios compared to industry benchmark amounts, including salaries and wages as a percentage of net patient service revenue and full-time equivalent employees per adjusted occupied bed. In addition, analyzing the fixed and variable portions of expenses becomes essential as volume changes are implemented into a forecast.