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HPA 451 HEALTHCARE FINANCE TAKE HOME QUIZ #1: SEPTEMBER 29, 2011

DUE SUNDAY OCTOBER 9TH, 2011 AT 12PM (NOON) NAME: Michael Aponte

NOTE: Show all work and attach all spreadsheets that I can readily print and follow!!!!

1) ( 20 pts) Sterling HMO is a new entrant into the Minnesota commercial market and has come to your hospital, Twin Cities Memorial requesting a provider contract. They have offered three payment methodologies for inpatient reimbursement for Twin Cities’ services.

a. Per diems that vary (are stratified) for each service but average $1,800 per day. b. A per discharge (per case) under a Diagnosis Related Group (DRG) method with the

following financial components: i. Base Rate (Case mix = 1.0) of $5,400 ii. Estimated Case mix index for anticipated membership of 1.20

c. Capitates agreement with the following assumptions: i. Membership of 5000 members (covered lives) ii. Annual Admission Rate per year of 15% or .15 of the Membership

iii. Length of Stay per admission of 3.5 days iv. Reimbursement of $75 per member per month for each member

d. Average cost per day at Twin Cities as follows: i. $1500 per day at a Case Mix Index of 1.2 ii. $1400 per day at a Case Mix Index of 1.1 or less

Answer the following questions:

A) Of the payment methodologies offered above assess the level of risk of each to Twin Cities?

Each method of payment carries inherent risks to the Hospital in terms of cost overruns. For instance, per diem has both price and intensity risk that must be dealt with for fiscal planning. The risk is their negotiated payment may not even cover their costs, and what’s more is they may provide more high cost care than the payment was designed to cover i.e. new technologies, specialist consults. The method of DRG per discharge has even more risk. DRG includes price, intensity, and severity risk. The additional risk with DRG is that patients have intensive or severe medical diagnosis. Finally, capitation has price, intensity, severity, and frequency risk. Capitation shares the same risks as per diem and DRG per discharge, whereas here in addition to the already stated risks, the added risk is that members will seek services more often than is anticipated.

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B) With the facts provided above create an income statement that will compare the financial outcomes of each of the reimbursement options provided. Which option would you choose?

I’d choose Per Discharge DRG!! C) Again with the facts provided above assume that the case mix index drops to 1.0 with a

corresponding drop in length of stay to 3.0 days. Create a revised income statement and does you decision change as to which option?

I’d choose Capitation!! D) Utilizing the facts above you as Twin Cities Memorial Director of Analysis questioned Sterling

about the utilization and cost of member inpatient utilization of members outside of Twin Cities Hospital. Sterling reluctantly noted that their network payment rates outside of Twin Cities averaged $2700 day and that 40% of Twin Cities assigned members would in all likelihood use hospitals other than Twin Cities. In other words Twin Cities should anticipate 40% lesser utilization within it as the home hospital than was provided in B above. With this new information does this change your decision from that determined in both B and C above?

I’d choose Per DRG!!

January February March April May June July August September October November December TotalsAdmissions 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 750

LOS 218.75 218.75 218.75 218.75 218.75 218.75 218.75 218.75 218.75 218.75 218.75 218.75 26250

Per Diem 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 393,750.00$ 4725000DRG 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 4821120

Capitation 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 45000001,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$

Total Cost 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 328,125.00$ 3937500

Per Diem 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 65,625.00$ 787500DRG 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 73,635.00$ 883620

Capitation 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 46,875.00$ 562500

Costs

Revenues

Net Profit (Loss)

January February March April May June July August September October November December TotalsAdmissions 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 62.5 750

LOS 187.5 187.5 187.5 187.5 187.5 187.5 187.5 187.5 187.5 187.5 187.5 187.5 22500

Per Diem 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 337,500.00$ 4050000DRG 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 334,800.00$ 4017600

Capitation 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 45000001,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$

Total Cost 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 281,250.00$ 3375000

Per Diem 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 56,250.00$ 675000DRG 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 53,550.00$ 642600

Capitation 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 93,750.00$ 1125000

Revenues

Costs

Net Profit (Loss)

January February March April May June July August September October November December TotalsAdmissions 37.5 37.5 37.5 37.5 37.5 37.5 37.5 37.5 37.5 37.5 37.5 37.5 450

LOS 131.25 131.25 131.25 131.25 131.25 131.25 131.25 131.25 131.25 131.25 131.25 131.25 15750

Per Diem 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 236,250.00$ 2835000DRG 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 401,760.00$ 4821120

Capitation 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 375,000.00$ 45000001,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$

Total Cost 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 196,875.00$ 2362500

Per Diem 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 39,375.00$ 472500DRG 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 204,885.00$ 2458620

Capitation 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 178,125.00$ 2137500

Costs

Revenues

Net Profit (Loss)

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E) BONUS: (2 points) what might you want to add to the proposed rate structures/negotiations

to mitigate the risk to Twin Cities?

A change in compensation that is equal in adjustment to the number of patients admitting to Hospitals other than Twin Cities.

2) (8pts) A graduating hospitalist is contemplating two different offers of employment , one in

Nebraska and one in New York City. He is evaluating many items beyond lifestyle and reimbursement is one of the major factors. Compute the amount that he would generate in collections from Medicare at each location. If it came down to money which location should he choose? Remember take note of the components of the payment.

The CPT is 99223 (Complex full admission)

Medicare conversion factor: $37.90

Nebraska New York City

RVU Geography Geography

Work Factor 3.78 1.0 1.065

Practice Expense 1.11 .876 1.30

Malpractice Exp .13 .447 1.48

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3) (12 pts) You have been asked to audit the computer system’s calculation of Medicare’s payment for Cataract procedures With and Without IOL would be for this outpatient surgery performed at Mile High Hospital as some computations have not been agreeing to what Medicare has paid the hospital.

Cataract Cataract

Without IOL With IOL

APC: 0245 0246

Conversion Factor: 52.251 52.251

Relative weight: 14.8702 23.6313

Wage Index: 1.05 1.05

Charges for the case: $4,225 $9,655

Cost to Charge Ratio .438 .438

Medicare conversion 37.9RVU NEB NYC

Work factor 3.78 1 1.065Practice Expense 1.11 0.876 1.3Malpractice Ins 0.13 0.447 1.48

Totals 4.81047 5.6611

NEB 3.78*1+1.11*.876+.13*.447Conversion Rate*Total RVU37.9*4.81047

182.32

NYC 3.78*1.065+1.11*1.3+0.13*1.48Conversion Rate*Total RVU37.9*5.6611

214.56

The Hospitalist should go to NYC, he will be reimbursed at a higher rate from Medicare

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System Calculated Payment $800 $1,238

Labor/Non Labor 60%/40% 60%/40%

a) Recalculate the Medicare payment for the above two APC cases and determine whether the payment as calculated is correct or not? If not what is the correct payment and what is causing the difference?

Cataract CataractWithout IOL With IOL

APC 0245 0246Rel. Weight 14.87 23.63Conversion Factor 52.25 52.25Wage Index 1.05 1.05Labor 0.60 0.60

489.50 777.90

Rel. Weight 14.87 23.63Conversion Factor 52.25 52.25Non-Labor 0.40 0.40

310.7931 493.9036

Tot Reimbursement 800.292 1271.802System Calc. Pmt 800 1238

Charges for Case 4225 9655Cost to Charge Rat. 0.438 0.438

Only the payment for Cataract with IOL was mis computed. The payment ought to be $1,271.80.

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4) ( 35 pts) Coldwater Health System located in Denver is a two hospital non teaching health system with a nonteaching acute care hospital located in an impoverished area and a rehabilitation hospital located in the suburbs. The CFO would like you to determine whether to expand its current orthopedic service to include Hip & Knee replacement and thus the payment that can be expected from Medicare for one its most prevalent DRGs. You have been provided with the following information:

MSDRG: 468 (Hip and Knee Replacement; W/O CC)

Case Weight: 2.5167

Medicare Labor Portion: $3,594

Non-labor Portion: $1,630

Wage Index- Denver 1.0332

Federal rate for Capital: $430

Geographic Adjustment factor 1.0433

SSI Percentage 8.56%

Medicaid Percentage 31.04%

a) Calculate the Medicare Payment anticipated from Medicare. Be sure to address all components.

MSDRG 468Case Weight 2.5167

Medicare Labor 3594Non-Labor 1630

Wage Index-Denver 1.0332ederal Rate for Capital 430Geographic Adj Factor 1.0433

SSI% 8.56Medicaid% 31.04

Reimbursement DSH CapitalLabor 3594 SSI% 8.56 Fed Rate 430

Wage Index 1.0332 Medicaid 31.04 Geographic Adj Factor 1.04333,713.32$ 39% 448.62$

Non-Labor 1630 Qual Threshold -20.2 Case Weight 2.5167Adj Nat Rate 5,343.32$ 19% Capital Pmt 1,129.04$

Adj Factor 0.825Case Weight 2.5167 16%

Tot Nat Adj Rate 5,343.32$ Min Adj 0.0588Base Reimbursement 13,447.53$ DSH Share% 22%

DSH 2,942.99$ DSH Reimbursement 2,942.99$ Capital 1,129.04$

Total Reimbursement 17,519.56$

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b) The CFO stated that the capital investment necessary to add this new expanded service would be equipment specific to the service (including drills and instruments) totaling $450,000 with a life of three ( 3) years and operating room support equipment of $550,000 (table, lights, etc) with a life of eight (8) years. Therefore the total capital equipment outlay would be $1,000,000. The anticipated payer mix/inpatient admissions of this new service is as follows:

Compute the annual cash flows for the first six (6) years.

PAYOR ADMISSIONS NET PROFIT (CASH) PER ADMISSION Medicare 40 $6000 Medicaid 15 $3000 Other 5 $7000

Costs Amount Life Cycle Salvage Straight Line Dep/ YrEqpt (drills, etc) 450,000.00$ 3 yrs 50000 133,333.33$

Eqpt (tables, lights) 550,000.00$ 8yrs 50000 62,500.00$

Revenues Totals Admissions Net CashMedicare 240,000.00$ 40 6,000.00$ Medicaid 45,000.00$ 15 3,000.00$

Other 35,000.00$ 5 7,000.00$

Time 0 1 2 3 4 5 6Costs

Eqpt (drills, etc) (450,000.00)$ 0 0 (450,000.00)$ 0 0 (450,000.00)$ Eqpt (tables, lights) (550,000.00)$ 0 0 0 0 0 0

RevenuesMedicare 0 240,000.00$ 240,000.00$ 240,000.00$ 240,000.00$ 240,000.00$ 240,000.00$ Medicaid 0 45,000.00$ 45,000.00$ 45,000.00$ 45,000.00$ 45,000.00$ 45,000.00$

Other 0 35,000.00$ 35,000.00$ 35,000.00$ 35,000.00$ 35,000.00$ 35,000.00$ Net Revenue (1,000,000.00)$ 320,000.00$ 320,000.00$ (130,000.00)$ 320,000.00$ 320,000.00$ (130,000.00)$

Straight Line Dep/ YrEqpt (drills, etc) 0 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$

Eqpt (tables, lights) 0 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ Oper Income 0 124,166.67$ 124,166.67$ (325,833.33)$ 124,166.67$ 124,166.67$ (325,833.33)$ Taxes 0 0 0 0 0 0 0Non-cash

Dep-Eqpt (drills, etc) 0 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ Dep-Eqpt (tables, lights) 0 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$

SalvageEqpt (drills, etc) 0 0 0 50000 0 0 50000

Eqpt (tables, lights) 0 0 0 0 0 0 0Net Cash Flow (1,000,000.00)$ 320,000.00$ 320,000.00$ (80,000.00)$ 320,000.00$ 320,000.00$ (80,000.00)$

Statement of Cash Flows

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c) Assuming a corporate cost of capital to be 10% and a salvage value of $50,000 Compute/Determine the following:

a. Net Present Value (NPV) b. Payback c. Internal Rate of Return (IRR); after computing IRR what does this computation represent

to you as the analyst and the CFO. d. What should you recommend to the CFO in regards to the Coldwater expansion?

d) As you did more research you discovered that approximately 50% of the new service Medicare patients would need inpatient rehabilitation and furthermore based upon previous internal experience at Coldwater approximately 60% of all rehabilitation eligible Medicare patients do choose Coldwaters’ rehabilitation affiliated hospital. You have determined that the patients that will utilize the rehabilitation hospital would be coded into the following CMG:

CMG A 0803

Relative weight: .8789

Base Rate: $13,627

Labor/Non Labor 75%/25%

Wage Index 1.0332

Cost per Admission $8,389

COC 10%Salvage 50,000.00$ NPV 88,612.20$ Time 0 1 2 3 4 5 6Payback 4.375 yrs (1,000,000.00)$ 320,000.00$ 320,000.00$ (80,000.00)$ 320,000.00$ 320,000.00$ (80,000.00)$ IRR 4% (680,000.00)$ (360,000.00)$ (440,000.00)$ (120,000.00)$ 200,000.00$ 120,000.00$ Recommendation

Take the project, the NPV is good, and while the IRR is a little lower than may be prefferable, it is none the less still a positive indicator and tremendously higher than the current risk free rate of T-bills (~0.02% WSJ).

Cash Flows

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Profit per Admission $4,000

1) Utilizing the information above recreate the computation that gave you the net profit (cash) per discharge of $4,000.

CMG A0803Rel Weight 88%Base Rate 13,627.00$ Labor 75%Non-Labor 25%Wage Index 1.0332Cost per Admit 8,389.00$ Profit per Admit 4,000.00$

LABOR NON-LABORBase 13,627.00$ Base 13,627.00$ Labor 75% Non-Labor 25%Rel Weight 88% Rel Weight 88%Wage Index 1.0332

9,280.80$ 2,994.19$

Labor + Non Labor 12,274.99$ 12,274.99$ Cost per Admission 8,389.00$ 8,389.00$ Profit per Admission 4,000.00$ =~= 3,885.99$

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2) How does this additional rehabilitation revenues impact your cash flows computed in (b) above and be sure to recompute the new NPV, Payback, and IRR? Does this change your recommendation to the CFO?

Costs Amount Life Cycle Salvage Straight Line Dep/ YrEqpt (drills, etc) 450,000.00$ 3 yrs 50000 133,333.33$

Eqpt (tables, lights) 550,000.00$ 8yrs 50000 62,500.00$ Revenues Totals Admissions Net Cash Addtl Medi Rehab Rev

Medicare 240,000.00$ 40 6,000.00$ 50% of Medicare Rehab 20Medicaid 45,000.00$ 15 3,000.00$ Profit per Admission 4,000.00$

Other 35,000.00$ 5 7,000.00$

Time 0 1 2 3 4 5 6Costs

Eqpt (drills, etc) (450,000.00)$ 0 0 (450,000.00)$ 0 0 (450,000.00)$ Eqpt (tables, lights) (550,000.00)$ 0 0 0 0 0 0

RevenuesMedicare 0 320,000.00$ 320,000.00$ 320,000.00$ 320,000.00$ 320,000.00$ 320,000.00$ Medicaid 0 45,000.00$ 45,000.00$ 45,000.00$ 45,000.00$ 45,000.00$ 45,000.00$

Other 0 35,000.00$ 35,000.00$ 35,000.00$ 35,000.00$ 35,000.00$ 35,000.00$ Net Revenue (1,000,000.00)$ 400,000.00$ 400,000.00$ (50,000.00)$ 400,000.00$ 400,000.00$ (50,000.00)$ Straight Line Dep/ Yr

Eqpt (drills, etc) 0 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ Eqpt (tables, lights) 0 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$

Oper Income 0 204,166.67$ 204,166.67$ (245,833.33)$ 204,166.67$ 204,166.67$ (245,833.33)$ Taxes 0 0 0 0 0 0 0Non-cash

Dep-Eqpt (drills, etc) 0 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ 133,333.33$ Dep-Eqpt (tables, lights) 0 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$ 62,500.00$

SalvageEqpt (drills, etc) 0 0 0 50000 0 0 50000

Eqpt (tables, lights) 0 0 0 0 0 0 0Net Cash Flow (1,000,000.00)$ 400,000.00$ 400,000.00$ -$ 400,000.00$ 400,000.00$ -$

(600,000.00)$ (200,000.00)$ (200,000.00)$ 200,000.00$ 600,000.00$ 600,000.00$ COC 10%Salvage 50,000.00$ NPV $196,171.62Payback 3.5IRR 18%

Time 0 1 2 3 4 5 6(1,000,000.00)$ 400,000.00$ 400,000.00$ -$ 400,000.00$ 400,000.00$ -$

(600,000.00)$ (200,000.00)$ (200,000.00)$ 200,000.00$ 600,000.00$ 600,000.00$ Recommendation- No change in recommendation other than it is now much more encouraged. Take the project, the NPV is very positive, and the IRR is quite impressive!

Statement of Cash Flows

Cash Flows