Budgeting

1. Budgeting Camille Bash, CPA, FHFMA, MBA, MA Director of Finance Doctors Community Hospital March 30, 2012

2. Discussion Outline • Budget Landscape • Board Strategic Goals • Budget Timeline • Components of an Operating Budget • Benchmarks and Development • Capital Planning • Cash Flow Budget • Board Presentation

3. Impact of Global Economic Crisis • Healthcare providers across the nation facing tremendous financial pressures • Operating revenues severely constrained by shortfalls in volume growth • This includes Maryland hospitals and physicians • Strategic spending priorities still exist (i.e. capital, physicians, info technology) • Healthcare reform/affordability is in the spotlight. • Cost reduction has become a national priority.

4. Healthcare Reform Landscape Near-Term Maryland Environment: • HSCRC constraining hospital rate increases • Maryland state budget still under stress • Medicaid expansion greater than anticipated • HSCRC deploying many new methodologies • Admission-Readmission Revenue (ARR) payment structure (32 hospitals) • Total Patient Revenue (TPR) payment structure (10 hospitals) • Observation / 1 Day Stays • Outpatient case mix system (not the CPV) • Potentially preventable complications Longer-Term: (Federal Reform) • Introduction of new incentive payment systems • Patient centered medical homes , Medicare accountable care, bundled payments • State has embraced healthcare reform • Maryland rate setting system will continue to evolve at an accelerated pace

5. Discussion Outline • Budget Landscape • Board Strategic Goals • Budget Timeline • Components of an Operating Budget • Benchmarks and Development • Capital Planning • Cash Flow Budget • Board Presentation

6. What they’re talking about in the Boardroom? • Strategic Initiatives • New programs, services, technology • Physician integration • Quality, Customer Satisfaction, Patient Safety • Community Wellness • Motivated Workforce • Satisfaction • Wage rates and benefit plan design • Growth and development training • Corporate Compliance • Financial Strength and Stability • Covenants

7. New Roles and Focus • Change in focus: • Volume growth may no longer be a primary performance driver • Frees us to ask: What is the best care setting for the patient? • Broadens our view of services beyond just those provided in the hospital • Incented to: • Eliminate over-utilization and over testing • Reduce re-admissions • Engage in primary care and disease management programs • Promote wellness • Moves us toward being more accountable for care integration and what happens to our patients outside of the hospital

8. Hospital Boards are facing a financially challenging environment Operating Revenues Soft Volumes, Difficult Payment Environment “New Normal” Must operate successfully under very tight financial constraints in the healthcare environment of the future. Cost pressures from multiple sources, physician integration, technology and facilities Operating Expenses Operating Income Declining operating margins

9. Hospital Boards are facing a financially challenging environment Cash Inflows New payment methods and forms Payments to vendors, sister companies, loan and capital payments Cash Outflows Bank Balances fluctuating cash balances

10. Discussion Outline • Budget Landscape • Board Strategic Goals • Budget Timeline • Components of an Operating Budget • Benchmarks and Development • Capital Planning • Cash Flow Budget • Board Presentation

11. Budget Process Timeline • Monthly • Discuss any budget variances with Operational and Finance Staff • February – Executive Team and Finance Department Staff • Assess current year financial performance and develop year-end projection • Develop “Early Outlook” for budget year operating performance • Establish performance improvement targets • Begin quiet phase of budget preparation for high cost areas • Focus on number of admissions and visits assumptions • Discuss CMI results and assumptions • March – Finance and Operational Staff • Management team roll-out of key assumptions used in “Early Outlook” • Departments begin budget preparation in earnest • Submit proposals for new programs and FTE requests • Submit requests for new or replaced capital

12. Budget Process Timeline • April – Finance and Operational Staff • Review departmental budget submissions • Follow-up meetings • Prepare 1st pass of operating budget • Review new program / new position requests • May – Executive Team involvement • Regroup • Assess impact of late breaking information and finalize organizational budget • Present to Finance Committee of Board seeking approval recommendation • June • Board Approval

13. Discussion Outline • Budget Landscape • Board Strategic Goals • Budget Timeline • Components of an Operating Budget • Benchmarks and Development • Capital Planning • Cash Flow Budget • Board Presentation

14. Revenues • Volumes / Utilization • HSCRC Rate Increases • Case Mix • Payor Contracts / Denials • Assessments • Medicare Rate Updates • Other operating revenues (café, rents, etc..) Components of an Operating Budget • Departmental Expenses • Volumes / Utilization • Expense Inflation • Wage Rates / Market Adj. • Benefit Design • Info. Technology • Agency Utilization • New Programs • New Positions • Capital Expenses • Capital Spending • Interest Rates • Existing Debt • New Debt

15. Discussion Outline • Budget Landscape • Board Strategic Goals • Budget Timeline • Components of an Operating Budget • Benchmarks and Development • Capital Planning • Cash Flow Budget • Board Presentation

16. Why do you benchmark? • Compare your departmental activity to: • The state averages • Your competitor or peer groups • Your prior year activity • The current year activity • Plan for changes within your organization • Growth • New business lines • Plan for changes within the state’s goals • Reduce preventable readmissions • Increase observation • Reduce one-day stays • Expand outpatient services

17. Volume: Key Definition Definitions: Volume is the activity that can be counted in a department and is used to apply rates to develop the revenue for services. Examples of volumes or statistics are: patient days admissions visits RVUs tests or procedures treatments

18. Review Departmental Activity to develop next year Budgeted Volumes

19. FTE: Key Definition Definitions: FTE - Full Time Equivalent 1.0 FTE = 40hrs per wk or 80hrs per pay or 2,080hrs per year Worked Hours - Regular and Overtime Hours paid NPPD Hours – (nursing per patient day) Education, PTO, Holiday

20. New Position/Program SubmissionJustification • Result in improved customer satisfaction • Result in improved quality outcomes • Meet regulatory compliance requirement • Result in improved patient care • Result in improved associate satisfaction • Result in future cost avoidance • Generate new revenue • Result in current cost reduction

21. New Position/Program SubmissionJustification • Submission should specifically address: • Goals/Objectives • What data have you reviewed? • What alternatives have you considered? • Is there an opportunity to restructure your organizational structure? • Workload impact (patient volumes or non-patient volume measure) • Financial impact • Three to one ROI much better than one to one • Timing: Implementation plan • Staffing: Internal or external recruitment • Impact to other departments • Space or I/T or equipment requirements • Coordination with other providers • Hours of operation • What is your measure of success?

22. New Position/Program SubmissionJustification • Submission should specifically address: • Goals/Objectives • What data have you reviewed? • What alternatives have you considered? • Is there an opportunity to restructure your organizational structure? • Workload impact (patient volumes or non-patient volume measure) • Financial impact • Three to one ROI much better than one to one • Timing: Implementation plan • Staffing: Internal or external recruitment • Impact to other departments • Space or I/T or equipment requirements • Coordination with other providers • Hours of operation • What is your measure of success? • Result in improved customer satisfaction • Result in improved quality outcomes • Meet regulatory compliance requirement • Result in improved patient care • Result in improved associate satisfaction • Result in future cost avoidance • Generate new revenue • Result in current cost reduction • Have your submission as fully developed as possible • Encourage you to collaborate with other departments in developing your submission: • FinanceHuman Resources • Business Development • Supply Chain – Materials Management • Information Systems • Facilities

23. Develop an FTE Budget (Staffing Plan) based on Departmental Activity or Fixed Components: • 3 Lab Technicians (working 8 hour shifts) required M-F - number of tests to accomplish tests • 2 Lab Technicians (working 12 hour shifts) required on Sa-Su - number of tests to accomplish tests • 1 FT Department Manager (FIXED) • 1 FT Admin. Assistant (FIXED)

24. Develop Other Expense based on Departmental Activity or Fixed Components: • Based on Departmental Activity levels, such as • Supplies • Equipment repairs • Fixed Activity, such as • Equipment maintenance • Staff functions

25. Develop Overhead Expenses • Depreciation • Interest Expense • Rent and leases • Employee Benefits • Support Departments: • Accounting • Plant Ops • Executive Management

26. Benchmarking – Planning - Budgeting • “Plans are of little importance, but planning is essential” – Winston Churchill • “Plans are worthless, but planning is everything” - Dwight D. Eisenhower • “The success of a project will depend critically upon the effort, care, and skill you apply in the initial planning” - Gerald M. Blair, U.S. writer • “Preparation is everything. Noah did not start building the ark when it was raining.” - Warren Buffet

27. 1.5% Growth 3.0% Growth 3.0% Growth 3.0% Growth Budget Year 2013 Early Outlook

28. 1.5% Growth 4.0% Growth 4.0% Growth 4.0% Growth Budget Year 2013 Early Outlook

29. Discussion Outline • Budget Landscape • Board Strategic Goals • Budget Timeline • Components of an Operating Budget • Benchmarks and Development • Capital Planning • Cash Flow Budget • Board Presentation

30. Capital Planning Process • Evaluation of health system’s ability to fund future capital spending needs • Five year forecast (Budget is 1st year of the forecast) • Quantifies funding capacity in terms of projected cash flow, borrowing, and fund raising • Matches projected funding sources with spending needs • Analyzes potential impact on credit rating

31. Capital Planning Goals • Support development of services and programs • Generate sufficient capital resources to meet future spending needs • Position health system to be financially strong • Maintain strong investment grade credit rating

32. Sources and Uses

33. Discussion Outline • Budget Landscape • Board Strategic Goals • Budget Timeline • Components of an Operating Budget • Benchmarks and Development • Capital Planning • Cash Flow Budget • Board Presentation

34. Cash Receipts and Disbursements

35. Discussion Outline • Budget Landscape • Board Strategic Goals • Budget Timeline • Components of an Operating Budget • Benchmarks and Development • Capital Planning • Cash Flow Budget • Board Presentation

36. Board Presentation • Executive Summary • who we are and where we are going • General Assumptions • HSCRC Assumptions • Stretch Goals not in Budget but possible • Covenants and Credit Ratings • Today, Projected Year-end, Budget • Volume • Operating Statement • Capital Budget • Cash Flow

37. Credit Rating Profile

38. BudgetingQuestions and DiscussionsNext – Case Study Camille Bash Director of Finance Doctors Community Hospital March 30, 2012