CASE STUDY CHISOS MOUNTAINS MEDICAL CENTER YOUR MEDICAL CENTER Imagine that it is December 2020 and you have just accepted the chief financial officer (CFO) position at Chisos Mountains Medical Center (CMMC), which includes a 25-bed critical access hospital, a 36-bed long-term care facility, and a separate freestanding 24-hour emergency facility. You will be reporting to Mr. Chief, the CEO. Also reporting to Mr. Chief are Mr. Operator, the chief operating officer (COO); Dr. Doctor, the chief medical officer (CMO); and Ms. Nurse, the chief nursing officer (CNO). When announcing your appointment, Mr. Chief stated that your primary objective in the coming year, which begins January 1, 2021, would be to reverse the ominous financial trend that began in 2019 and continues in 2020 with a $50,000 budgeted operating loss. CMMC was built with Hill-Burton Funds in 1948 as a 25-bed rural hospital. With the help of Medicare and Medicaid funds, 36 long-term care beds were added in 1968. In 1998, after almost going bankrupt, CMMC was designated a critical access hospital and has been cost-based reimbursed from Medicare and Medicaid ever since. In 2010, Chisos Mountains Hospital became Chisos Mountains Medical Center with the addition of the freestanding 24-hour emergency facility 40 miles west of the hospital in the rugged Chisos Mountains of western Texas. CMMC is accredited by The Joint Commission and licensed by the Texas Depat tment of State Health Services. To acquire background information, you decide to meet with executive team members individually first as well as with other key personnel such as the controller, the human resources director, and the materials manager. MEETING WITH DR. DOCTOR The CMO Dr. Doctor tells you: We only have eight physicians who practice at CMMC, but they have been very loyal to the medical center and the community. Most of the physicians are in family practice, though we have one general surgeon and one orthpedic surgeon who also runs a physical therapy clinic. MEETING WITH MR. OPERATOR Mr. Operator, the COO and a recent graduate from a program in healthcare administration, expresses the following concerns regarding the hospital: It's easy to understand how we lost money last year—Mr. Chief just won't say no. Our revenues are down because of the pandemic and our expenses continue to increase. While we have applied for COVID-19 relief, that probably will not be enough to get us out of financial trouble. Furthermore, we need your help on some potential problems. Mr. Operator asks you to do the following. [Note: For reference, see corre- sponding chapters in this textbook as noted at the end of each step, and use the additional information in the tables at the end of the case study.] 1.After reading the case, provide a list of questions, concerns, or requests for additional information to Mr. Chief and copy me. Develop a non-GAAP [generally accepted accounting principles] statement of operations (start with gross patient service revenue) and balance sheet for 2020 (you can assume the format and numbers are correct on the 2019 bal- ance sheet, and you can further assume that all balances carry forward to the 2020 balance sheet with the exception of accounting for the profit or loss from the 2020 statement of operations). With the exception of starting with gross patient service revenue, please ensure that you prepare the financial statement in current GAAP. Please use ratio analysis to analyze the ratios (use data from Optum's 2018 Almanac of Hospital Financial and Operating Indi cators for comparative statistics—use the median for critical access hospitals which is provided in Table II [at the end of this case study]). [See chapter 3.] 2. I just received a letter from the Texas Department of State Health Services, stating that our license is in jeopardy because we did not provide sufficient community benefits in FY [fiscal year] 2020. How much community benefits did we provide in FY 2020, and how much does Texas [or your state] require we provide? What is your recommendation for FY 2021? What is going on at the federal level regarding tax-exempt status? Please provide me with brief descriptions of the federal cases that have been in the news over the last couple of years that we should be concerned about here at CMMC. [See chapter 4.] 3.On June 24, 2019, President Trump signed an executive order requiring hospitals and health plans to release prices. On November 15, 2019, the US Department of Health and Human Services (HHS) released two regulations for review and comment related to the earlier executive order with an anticipated effective date of compliance of January 1, 2020, which was later changed to January 1, 2021. The American Hospital Association (AHA), representing the hospital industry, appealed the HHS final ruling and implementation date. On December 29, 2020, a federal appeals court ruled against the AHA legal challenge. Why was the Trump administration for the executive order and why is the hospital industry against it? [See chapters 5 and 9.] 4.US attorneys are reviewing our billing practices and physician relationships. I took a healthcare financial management class before fraud and abuse be- came such a big issue. Explain to me what the attorneys might be looking for and whether you think a hospital like ours has any liability. What actions have been brought against hospitals like ours in the last couple of years? Do we need a corporate compliance plan and if so, what should it include? [See chapter 6.] 5.Several states have passed "surprise billing" legislation. The federal govern- ment included surprise billing legislation in the COVID-19 relief package tied to the spending bill that President Trump signed on December 27, 2020. What is in our state's [or your state's] surprise spending legislation and what is in the federal government's surprise spending legislation? What actions should CMMC take to protect our patients from surprise billing? [See chapter 9.] 6.Analyze Mr. Chief's managed care agreement with the city. Using differential cost analysis, tell me the full cost gain/loss and the differential cost gain/ loss for two scenarios: keeping the agreement and killing the agreement (use FY 2020's financials). In the event that the city will negotiate a rate in- crease, what percent increase do I need to ask for to cover our full costs and what percent increase do I need to ask for to cover our differential costs? What is your recommendation? [See chapter 8.] 7. As of the end of 2020, 38 states had expanded Medicaid based on the recommendations and incentives in the Affordable Care Act and 12 states had not expanded Medicaid, among them our state of Texas. From the hospital and physician perspectives, what are the advantages and disadvantages of expansion? From the state's perspective, what are the advantages and what are the disadvantages of expansion? [See chapter 7.] 8.Our radiology department is in violation of the antitrust statutes by developing a fee schedule using College of American Radiology relative value units (RVUs). You must establish a new RVU system before we can set FY 2021 rates. The radiology manager has already completed some of the work and I'll send it over to you [see Table IV at the end of this case study]. Please develop a hospital-specific RVU schedule and assign 2021 radiology depart- ment rates. (Total radiology expenses for 2021, including hospital indirect costs, which must be covered by the department, are projected to be $20 million.) [See chapters 8 and 9.] MEETING WITH MR. CHIEF The CEO Mr. Chief states: I think we are losing money because of the COVID-19 pandemic and low in- vestment returns (investment income is 2 percent of long-term investments). Once everyone is vaccinated, I think business will be back to normal. Every- one seems happy—everyone except Ms. Fi Nance, whom you'll be replacing. She started last January and seemed increasingly frustrated with the way we do things here—she just didn't fit in. I vetoed most of her recommendations, especially the recommendations regarding increasing other operating revenues. And when I announced that I was bringing in more business to the hospital by entering into a capitated managed care agreement with the city— we get $400 per month per family for taking care of the 20 city employees and their families, whether they're sick or not—Ms. Nance threw a fit at an executive staff meeting. She claimed that my decisions were driving the medical center deeper into the red, and as a result, I had to fire Ms. Nance for insubordination. That happened in November. Mr. Chief tells you that while you'll be reporting to him, he expects you to respond to the requests of Mr. Operator, Dr. Doctor, and Ms. Nurse. Specifically, he wants you to do the following: 1.For FY 2021: Develop a statistical budget. Develop a revenue budget and four expense budgets in statement of operations format including detailed footnotes explaining any changes in the numbers. (1) Increase rates the maximum allowed and increase expenses the maximum requested. (2) Increase rates the maximum allowed and maintain expenses at FY 2020 levels after adjusting for volumes. (3) Increase rates the maximum allowed and cut expenses to break even in FY 2021. (4) Increase rates the maximum allowed and cut expenses to recover FY 2020 losses. [See chapter 14.] 2. Calculate the financial impact of buying a mobile C-Arm and accessories that would cost $100,000, would have a five-year useful life, would have a 10 percent salvage value, would have a profit per procedure of $50, and would generate an estimated volume of 200 procedures per year. The bank tells me the discount rate should be 10 percent. If the project loses money, let me know how many procedures per year we would need to generate to break even. [See chapter 15.] 3.Ms. Nurse has requested more money for nursing. I told her that you would evaluate her proposal and give me a full report. [See chapter 14.] 4.Our long-term debt represents a 30-year loan taken out in 2000 at 5 percent with options to refinance every ten years. If we refinance for the remaining ten years at 2 percent, how much interest expense will we save over the remainder of the loan? [See chapter 15.] 5.Provide strategic planning input addressing the following steps in the strategic planning process (assume a ten-year planning horizon and the following mission statement: "The mission of Chisos Mountains Medical Center is to provide high-quality, low-cost healthcare to everyone"). Note that the board would like to replace our very old hospital with a newer facility during the planning horizon. Assess the external environment. Assess the internal environment. Formulate the vision. [See chapter 13.] MEETING WITH MS. CONTROLLER Ms. Controller, the hospital controller, in answer to your question regarding last year's loss, believes the following: While patient days are decreasing and outpatient visits are limited to the emergency room because the physicians are seeing outpatients in the physician office building next door, the COVID-19 pandemic has further reduced our volumes because the state health department, on the advice of the CDC [Centers for Disease Control and Prevention], in the spring asked hospitals to defer elective cases and only take care of COVID cases (our medical center saw very few COVID cases during this time). Our real financial problems involve our patient mix by financial class—in 2020, 25 percent of our total volumes were Medicare; 22 percent were Medicaid; 36 percent were managed care with discount; 1 percent were managed care with capitation (the city agreement); 5 percent were bad debt; 1 percent were implicit price concession; 2 percent were charity care; and only 5 percent were self-pay or commercial insurance [see Table III-B at the end of this case study]. Since we are designated a critical access hospital, we have opted for cost- based reimbursement from Medicare and Medicaid (both programs reim- burse our cost for Medicare and Medicaid patients). Our average managed care discount from charges is 50 percent. Our managed care capitated agreement with the city covers 20 employees and their families and reimburses $400 per family per month. Currently we collect nothing from our bad debt patients and nothing from our charity care patients. Our self-pay/ commercial patients reimburse 100 percent of charges. Our average acuity using DRGs [diagnosis-related groups] as a severity index is 1.00. Ms. Nurse has always convinced Mr. Chief that CMMC is a major trauma center and should be staffed with all RNs [registered nurses] as a result. Our new capitated managed care agreement pays us $400 per month for each of the city's 20 employees and their families. We agreed to maintain that rate for the duration of the two-year contract, which started January 1, 2018. Although self-pay/commercial patients pay our charges, it would be difficult to justify to the board any rate increase while we're still suffering from COVID-19's economic impact on our community. The hospital board, in response to public pressure and COVID-19, changed the charity care eligibility policy in 2020 for the hospital from 100 percent of federal poverty guidelines to 140 percent of federal poverty guidelines. We expect our charity care to continue to increase in 2021 as a result, and with the new GAAP on bad debt, we expect bad debt expense to decrease. MEETING WITH MS. NURSE The CNO Ms. Nurse seeks your support in the following proposal: While our financial loss is serious; most of it is attributable to low rates—we need to increase our rates to reflect our quality services. Our nurses are over- worked and underpaid. I've been working on two solutions that I would like you to support. First, I believe strongly in primary care nursing and as a result, 100 percent of the nursing staff is RNs. RNs can perform more tasks than LPNs [licensed practical nurses] and nursing assistants and therefore are more efficient. This can be further justified by the acuity of our patients. Using the DRG scale as a severity index, our patients are sicker than those in the average hospital. However, I am having some difficulty getting the RNs to administer meds, empty bedpans, and feed patients. Therefore, I have developed a TQM [total quality management] program designed to convince the RNs that all their tasks are important. All RNs are required to attend five hours of TQM training each week for one year at the medical center's expense. Even though patient days are down, I would like to hire ten more RNs to help cover the floors when the other RNs are in training. To recruit these RNs, we need to increase their average hourly rate from $36 to $40. This, of course, would be in addition to the cost-of-living raises already announced by Human Resources. MEETING WITH MS. PEOPLE Ms. People, the human resources director, reluctantly admits the following to you: Hospital practice in the past has been to give the employees a cost-of-living raise equal to the year's percent increase in the CPI [consumer price index]. Also, historically, we have allocated 5 percent of total wages to a merit pool to be awarded to meritorious employees based on their annual evaluations. Because Mr. Chief treats the employees like family, virtually everyone gets the raise. One of our cost problems may be our labor costs—specifically productivity. Some productivity measures I have listed in Table II [at the end of this case study]. You may want to consider others when developing next year's budget. [See chapter 14.] MEETING WITH MR. MATERIALS Mr. Materials, the materials manager, reports the following information to you: I am projecting a 3 percent increase in all nonlabor prices next year, with the exception of drugs and insurance, which should go up about 5 percent. [See chapter 12.] TABLE I Chisos Mountains Medical Center Balance Sheet as of December 31, 2019 TABLE II Selected Ratios for 25- to 99-Bed Hospital Source: Optum. 2018. Almanac of Hospital Financial and Operating Indicators: A Comprehensive Benchmark of the Nation's Hospitals. Salt Lake City, UT: Optum 360. TABLE III-A CMMC Volumes by Acute, Skilled Nursing Facility (SNF), Emergency, per Fiscal Year (FY) TABLE III-B CMMC Volumes by Percentage, by Payer TABLE III-C CMMC Acute Care Days by Service, Fiscal Year 2020 TABLE III-D CMMC Average Charges per Day, Fiscal Year 2020 TABLE IV CMMC Radiology Department Procedures TABLE V-A CMMC Salary Expense, Average Hourly Rates, December 2020 Note: Average hourly rate does not include benefit expense at 30 percent of salary expense and does not include CEO's total compensation package of $200,000. Nursing average includes $40.00 per hour for head nurse, $36.00 for staff registered nurse, $22.00 for staff licensed practical nurse, and $13.00 per hour for nursing assistant. TABLE V-B CMMC Staffing as of December 31, 2020 Note: FTEs: full-time equivalent positions. Nursing staff includes one chief nurs- ing officer, four head nurses, and 50 staff registered nurses. TABLE VI CMMC City and County Ad Valorem Property Tax Schedule, per $100 Assessed-sessed TABLE VII CMMC Operating Expenses 2020 Note: Salaries, wages, and benefits includes $200,000 for salaries, $8,205,724 for wages, $1,758,370 for required benefits, and $1,758,370 for voluntary benefits.