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Course Project Task 3—Payment for Services

When hospitals are paid for services, it is through payment structures. Payment structures include health maintenance organizations (HMOs), preferred provider organizations (PPOs), and capitation rates.

In this assignment, you will use the information from M2: Assignment 2 andM3: Assignment 1 to develop a strategic plan for the hospital to begin managed care contract negotiations. You can use the SMH data file, which you had downloaded from the Doc Sharing area, to create your plan.

Based on your understanding of the costs, you will develop a plan for contract negotiations with a managed care provider. Include in the plan:

• A strategy for contract negotiation
• Details on each facility’s costs and expected margins
• Comparisons between the three organizations, indicating which is in a stronger or weaker financial position

Using the SMH data file, you will do the following:

• Calculate inpatient gross profit for the major payers at the hospital.
• Calculate GP and GP percentage by payer.
• Comment on the results of your GP calculations.
• In this example, we assumed that patients from each payer incurred costs at the same rate. Is this assumption correct? What level of detail in cost identification should the hospital attempt to obtain? Provide your comments.
• Based on your understanding of your costs, you will develop a plan for contract negotiations with a managed care provider. In your plan, outline a strategy for contract negotiation.
• Based on your comparative analysis of the SMH, FP, and NFP facilities, is SMH in a better or worse position when it comes to contract negotiations? Provide your comments.
• Payers always want to move procedures from an inpatient setting to an outpatient setting. Why might this not be the best strategy for your financial situation? Provide your comments.

Write a 3- to 5-page paper in Microsoft Word format. Apply current APA standards for writing style to your work. 

2

>SMH Introduction

0-bed metropolitan not-for-profit (NFP) hospital in a major city. The hospital competes with other hospitals for its patient base. Managed care is a significant part of its revenue stream and the hospital is not receiving competitive rates. This puts the hospital at a competitive disadvantage.
The hospital has been in existence for over

5 years and there is only a small mortgage on the building. This is an advantage for the hospital.
The hospital sold property and used the funds to build the infrastructure of the organization. While the hospital needs additional funding for major projects, it has no more property available for sale.
In addition, while the hospital has enjoyed the benefits of several significant contributors, these contributors are getting “contributor fatigue.” They are less interested in contributing because the hospital has not turned the corner on operation revenue and expenses. The hospital faces significant issues with the current economic crisis. The issues include a drop in

payments and a number of people in the community losing their insurance coverage.

Sakasegawa Memorial Hospital (SMH) is a

6

5

7

Medicaid

2007 revenue expense data

8

,000.00

enue

08,800.00

Capitation Rev

rev – sale of asset

Rev

Source

$340,900.00

$0.00

.00

$1,005,000.00

	Revenue			Source	Amount
Net Patient revenue non-	Medicare	$260,				1				3	]
	Capitation Rev	$36,829,320.00
Patient Revenue – Medicare Medicaid	$188,			4	three items match line 1 Part 1
Unrelated business revenue
		Other	$5,492,700.00
Rent revenue	$450,000.00
dividends	$3,800,000.00
Investment Income	$1,892,925.00
Other rev – other	$5,290,000.00	Note – see detail
Contributions	$7,722,580.00
Net assets released from restrictions
Ttl	Unrestricted	$510,069,325.00
		Expenses				Total	Clinical Services	management & General	Fundraising
Salaries
Salaries Officers	25a Part II	$5,008,242.00	$540,392.00	$4,135,300.00	$332,550.00
Other Salaries	26 Part II	$176,481,232.00	$158,833,127.00	$16,765,700.00	$882,405.00
Pension	27 Part II	$17,942,172.00	$16,147,964.00	$1,704,508.00	$89,700.00
Fringe Benefits	28 Part II	$23,783,424.00	$21,406,424.00	$2,259,000.00	$118,000.00
Payroll Taxes	29 Part II	$13,336,000.00	$12,002,000.00	$1,266,000.00	$68,000.00
Total Salaries & Benefits				total	$236,551,070.00	$208,929,907.00	$26,130,508.00	$1,490,655.00
Fundraising fees	30 Part II		$0.00
Accounting Fees	31 Part II		$340,900.00
Legal fees	32 Part II	$1,345,300.00	$1,211,300.00	$134,000.00
Supplies & Other	33 Part II	$226,106,126.00	$225,600,500.00 rwmayer: rwmayer: See detail – Hospital costs	$500,210.00	$5,416.00
Telephone	34 Part II	$1,049,247.00	$944,400.00	$99,600.00	$5,247.00
Postage and shipping	35 part II	$339,584.00	$305,626.00	$32,260.00	$1,698.00
Occupancy	36 Part II
Equipment rental and maintenance	37 Part II	$8,967,852.00	$8,071,152.00	$896,700.00
Printing and publications	38 Part II	$177,000.00	$159,200.00	$16,800.00	$1,000.00
Conference conventions and meetings	40 Part II	$78,500.00	$70,000.00	$8,000.00	$500.00
Interest exp (net)	41 Part II	$9,601,800.00	$8,551,800.00	$1,000,000.00	$50,000.00
			Depreciation	42 Part II	$31,083,552.00		$27,975,052	$3,108,500.00
Provision for Bad debt	43a *		$1,005,000.00
Other expenses	43b-*
Ttl exp	$516,645,931.00	$482,823,937.00	$32,267,478.00	$1,554,516.00
Excess of rev over exp	($6,576,606.00)

2007 asset liab data

Source

.00

Less Allowance

Unrestricted

$573,833,500.00 $591,414,000.00

Beginning of year	End of Year
ASSETS	2005	2006
Cash	line 45 Part IV	$6,787,000.00	$2,210,000.00
Cash investments	line 46 Part IV	$19,850,000.00	$32,808,000.00
Accounts Receivable	Line 47a Part IV	$117,500,000.00
	Less Allowance	Line 47b Part IV	$47,948,000.00
Net Accounts Receivable	Line 47 Part IV	$63,330,	160	$69,552,000.00
Pledges Receivable	Line 48a Part IV	$4,700,900.00
Line 48b Part IV	$576,000.00
Net Pledges Receivable	Line 48 Part IV	$6,123,000.00	$4,124,900.00
Other Note receivables	Line 451cPart IV	$13,378,061.00	$22,606,100.00
Inventory	Line 52 Part IV	$8,443,379.00	$10,362,000.00
Prepaid expenses	line 53 Part IV	$9,917,000.00	$7,705,000.00
Investments (FMV)	line 54a Part IV	$74,180,000.00	$78,800,000.00
Land	line 57a Part IV	$617,314,000.00
Accoumulated Depreciation	line 57b Part IV	$328,568,000.00
Net Land	line 57c Part IV	$290,824,900.00	$288,746,000.00
Other Assets	line 58 Part IV	$81,000,000.00	$74,500,000.00
Total Assets		$573,833,500.00		$591,414,000.00
Liabilities
Accounts Payable	line 60 Part IV	$83,829,885.00	$87,118,742.00
Tax exempt bond	line64a part IV	$139,233,400.00	$136,451,800.00
Mortgage and Note Payable	line 64b Part IV	$17,210,000.00	$17,900,000.00
Other Liabilities	line 65 Part IV	$122,683,500.00	$133,556,958.00
Total Liabilbites	$362,956,785.00	$375,027,500.00
Fund Balances
line 67 Part IV	$155,132,000.00	$158,866,000.00
Temporarily restricted	line 68 Part IV	$38,523,000.00	$40,208,000.00
Permanently restricted	line 69 Part IV	$17,221,715.00	$17,312,500.00
Fund balance	$210,876,715.00	$216,386,500.00
Liabilities and Net Assets

Detailed revenue

Medicare Medicaid

total

Cardiology

Orthopedic

160

Medicine

Other services

6%

2%

Cardiology Orthopedic Medicine Other

Inpatient Revenue

$407,909,342.40

Part III Form 990
						Patient days	Inpatient	164,972
Ambulatory service visits	outpatient	148,617
Patient days distribution	% distribution	total days
						Cardiology		6%	9,145
						Orthopedic	10%	15,959
						Medicine	7	2%	119,246
				Other services	13%	20,622
distribution of				patient days	Managed care/Insurance	Private pay	Column1
3658	457	4481	549	9145
5905	9097	798	15959
41736	9540	66778	1192	119246
9223	496	10401	502	20622
60522	10653	90756	3041	164972
% distribution Roger Mayer: Roger Mayer: use this allocation basis to allocate expenses between payers in Module 3 assignment 2.	37%	55%			100%
Revenue Distribution
Payer	Column2		Total Revenue				Inpatient Revenue		Outpatient Revenue
	Medicare Revenue	$179,567,920.00		$154,045,694.40	$25,522,225.60
	Medicaid Revenue	$16,840,880.00		$14,956,792.00	$1,884,088.00
	Managed Care	$274,162,320.00		$226,729,856.00	$47,432,464.00
	Private Pay	$14,850,000.00		$12,177,000.00	$2,673,000.00
$485,421,120.00			$407,909,342.40	$77,511,777.60
Inpatient Revenue Distribution
				Totals
$39,612,365.72	$41,460,795.08	$284,847,513.80	$41,988,667.80

Detailed costs

patient days

patient days

Depreciation $27,975,052

patient days

patient days

square feet

totals Inpatient allocated expenses Allocation basis

Patient days

Patient days

Total

Totals

Allocation basis

100% to cardiology

100% to Orthopedic

pharmaceuticals

Patient days

Patient days

Patient days

Total

Totals

Allocation basis

Cardiology

100% to cardiology

Orthopedic

100% to Orthopedic

Medicine

Other services

Patient days

Total

total

Cardiology

Orthopedic

Medicine

Other services

Cardiology

Orthopedic

Medicine

Other services

total 100%

Table I
	Personnel and other		totals		Inpatient allocated expenses				Allocation basis
		Officers Salaries& Fringe	$708,424.15	$566,739.32
		Clinical Salaries & Fringes	$208,221,482.85	$197,810,408.70	hours of service	41.6779152919
		Other clinical expenses	$20,318,478	$16,254,782
$22,380,042		square feet
		Physician Fees	$14,850,673.89	$11,880,539.11
		Other supplies	$9,433,511.95	$7,546,809.56
		Utilities	$17,289,172.12	$13,831,337.69
Total Personnel and other	$298,796,794.96		$270,270,658.39
Table II
			Direct Patient Care Expenses
Cardiology	$12,506,205.80	$10,004,964.64			100% to cardiology
Orthopedic	$12,339,125.41	$9,871,300.33			100% to Orthopedic
	pharmaceuticals	$23,391,254.11	$18,713,003.29	$69,545,157.89
Ancillary (lab x-ray)	$63,540,193.25	$50,832,154.60
$111,776,778.57		$89,421,422.85
Table III
			Indirect Patient Care expenses	Inpatient Allocated expenses
Cardiology medical supplies	$2,659,459.72	$2,127,567.78
Orthopedic medical supplies	$2,393,513.75	$1,914,811.00
$5,318,919.44	$4,255,135.55	$31,913,516.65
general medical supplies	$21,275,677.77	$17,020,542.21
ancillary expenses	$13,297,298.60	$10,637,838.88
$44,944,869.28		$35,955,895.43
Table IV
			Malpractice	Inpatient Allocated Expenses
$5,263,709.72	$4,210,967.78
$6,908,619.01	$5,526,895.21
$14,804,183.60	$11,843,346.88	100% medicine
$328,981.86	$263,185.49
$27,305,494.19		$21,844,395.35
Table V
Clinical Salaries & Fringes – Inpatient Allocation
324,648
478,770
3,458,134
484,617
4,746,169
average rate per hour – $41.68
Table VI
Square feet allocation – Inpatient services
21%
26%
49%
4%

Module 3 Asgn 1 Instructions

1

Inpatient Revenue Outpatient Revenue Total Revenue
2

3

4

5

6

7

The SMH financial statement contains additional data that will allow you to conduct an analysis of revenue efficiency factors.
In this assignment, you will calculate direct expenses including labor, supply, and drug costs.
			Assignment detail
			Tabs to reference:
			“Detailed Revenue” allocates revenue by inpatient and outpatient
			“Detailed Expenses” allocated direct expenses by inpatient and outpatient
“2007 Revenue Expense Data” provides data on other income sources and indirect expenses.
Create a table that shows gross profit (patient revenue – direct expenses) for inpatient and outpatient services.
See example:
Inpatient direct expenses	Outpatient direct expenses	Total Expenses
IP Gross Profit	OP Gross Profit
	Total Gross Profit
Calculate Gross Profit (GP) margin for both services.
Calculate GP per patient day and per operating theater (OT) procedure.
Compare your expenses to your benchmark data. (Because some of the comparative data does
not have sufficient detail this may be a high-level review.)
Comment on the services from the perspective of expense and revenue distribution and explain why
there are differences between gross profit margins
Complete a table that includes other expenses and other revenue. The table should clearly
distinguish between direct and indirect expenses
Comment on why other income and contributions are critical to the survival of the organization.
Does the reliance on investment income mean that the organization will take a higher risk in order
to increase income?

Module 3 Assgn 2 Instructions

Assignment detail
Tabs to reference:
“Detailed Revenue” allocates revenue by inpatient and outpatient
“Detailed Expenses” allocated direct expenses by inpatient and outpatient

1

Medicare Revenue Medicaid Revenue Managed Care Private Pay Totals

$154,045,694.40 $14,956,792.00 $226,729,856.00 $12,177,000.00 $407,909,342.40

Expenses

Roger Mayer: Roger Mayer:
Allocate expenses based upon patient day distribution %.

Personnel and other $270,270,658.39
Direct Patient Care Expenses $89,421,422.85
Indirect Patient Care expenses $35,955,895.43
Malpractice $21,844,395.35

Total Gross Profit

100%

2

3

4

5

6

7

You will use the information from M3: Assignment 1, develop a gross profit analysis for managed care payers
to develop a strategic plan for a managed care contract negotiation.
Calculate inpatient gross profit for the major payers at the hospital.	gross profit (patient revenue-direct expenses)
Inpatient analysis
Patient Revenue Roger Mayer: Roger Mayer: use revenue distribution table
		Total Direct Expenses	$417,492,372.03
Gross profit percentage by Payer
Calculate gross profit and gross profit percentage by payer.
Comment on the results of your GP calculations.
In this example we assumed that patients from each payer incurred costs at the same rate.
Is this assumption correct? What level of detail of cost identification should the Hospital attempt to obtain?
Based on your understanding of your costs, you will develop a plan for contract negotiations with a managed care provider. In your plan,
outline a strategy for contract negotiation.
Based upon your analysis of the other organizations are you in a better or worse position when it comes for contract negotiations?
Payers always want to move procedures from the Inpatient setting to an Outpatient setting.
How does this affect the hospital strategy?

Module 4 Assgn 1 Instructions

Assignment detail
Tabs to reference:
“Detailed Revenue” allocates revenue by inpatient and outpatient
“Detailed Expenses” allocated direct expenses by inpatient and outpatient

1

Cardiology Orthopedic Medicine Other Totals
Inpatient Revenue

Expenses

Officers Salaries& Fringe
Clinical Salaries & Fringes
Other clinical expenses
Depreciation
Physician Fees
Other supplies
Utilities
Direct Patient Care Expenses
Indirect Patient Care expenses
Malpractice
Total Direct Expenses
2

3

You will analyze the SMH Data Set to identify costs associated with specific clinical product lines and measure gross profit.

You will compare results your analysis and become familiar with activity based costing and managed care contracting in this study.

The “Detailed Cost” tab provides inpatient costs and the allocation basis for each cost. You will put this information into a model

and a model that analyzes costs by product line. In this case we have for product lines including Cardiology, Orthopedic Medicine, and Other.

Calculate inpatient gross profit for each product line. The template that students can use is as follows:

Note: Allocate revenue based upon patient day distribution between product lines

Gross profit by Product Line

Comment on the results of your inpatient GP calculations. What product line is most profitable by dollar amounts and gross profit percentage?

Is there value in separating product lines into more detail? What detail would you recommend?

For example, what is the value in separating revenue and expenses by physician? Surgery type? And others?

Module 4 Assgn 2 Instructions

Assignment detail
Tabs to reference:
“Detailed Revenue” allocates revenue by inpatient and outpatient
“Detailed Expenses” allocated direct expenses by inpatient and outpatient

1

Revenue

Expenses

Clinical Salaries & Fringes
Other clinical expenses
Physician Fees
Other supplies
Direct Patient Care Expenses
Indirect Patient Care expenses

Officers Salaries& Fringe

Depreciation

Utilities
Malpractice

Total Direct Expenses

2

3

4

5

6

In this assignment, students will carry out a profit analysis for a specific product line.
We are using the example of Cardiology. However, students can use another product line
Students will develop a Cost-Volume-Profit template to help measure costs and changes to variable and indirect costs using SMH data.
“Module 4 Assgn 1 Instructions” for baseline cost information
Develop a template of costs.
You should separate expenses between variable and fixed expenses.
To assist, the template provides some guidance:
Inpatient Cardiology	Cardiology total	Patient days	Per patient day
Variable
Total Variable Expenses
Fixed
Roger Mayer: Roger Mayer: do not calculate fixed costs on a per patient day basis.
Total Fixed Expenses
Gross profit for Inpatient Cardiology
Calculate the break even point in patient days
Note: Break even point
Total Fixed cost / (per patient day revenue – per patient day variable expenses)
Calculate the break even point assuming a 5 percent increase in clinical salaries and a 4 percent increase in officer salaries.
A physician wants to add a new procedure that will increase direct patient care expense by $200 per day.
What is the impact on gross profit and the breakeven point?
The hospital is considering hiring a physician. This will increase annual costs by $250,000. However, with the addition of this
physician it is anticipated that patient days will increase by 6 percent. Is this a good move for the Hospital?
Many times it is difficult to determine if a cost is variable or fixed. In addition, costs may be variable, but only in a relevant range.
Do you agree with the categorization of costs as they are presented on this template? Would you recommend changes? What additional
information would help you analyze the data?