Finance Of Health Care

HS440 – INDIVIDUAL PROJECT

OUTLINE: During this course, each student will work independently on a comprehensive project based upon the financial implications of adding an in-office nuclear cardiac stress lab to an existing 8-physician cardiology practice. The project will encompass the entire course, addressing all aspects of healthcare finance including calculating revenue for procedures, estimating payor mix, actual reimbursement, and bad debts, determining capital and operating expenditures, as well as start-up costs for a new venture. The student will calculate estimated volumes, contribution margin per procedure and a break-even volume for the venture. The student will become acquainted with compliance issues such as coverage requirements and the Stark physician self-referral laws. The project will culminate with a written recommendation to accept or reject the project based upon the assumptions and variables introduced throughout the course. The project spreadsheet is “read-only”, so you will need to immediately save it to your computer using the following naming format: HS440PROJECT.YEAR.FIRSTNAME.LASTNAME.xls UNIT 1 Most group physician practices are for-profit, and therefore subject to income tax. In the INCOME TAX tab of the project spreadsheet, enter a 33% federal income tax rate, a 5% state income tax rate, and a 2% local income tax rate. UNIT 2 In the REVENUE tab of the project spreadsheet, incorporate the following payor mix, payment terms, and bad debt estimates to be used later to calculate gross revenues.

PAYOR % OF PATIENTS % OF MEDICARE FEE SCHEDULE BAD DEBT

ESTIMATE % Medicare 51 100% 5% Medicaid 12 40% 3% Blue Cross/Blue Shield 16 85% 4% Aetna 6 80% 6% Cigna 4 82% 4% United Healthcare 5 70% 8% Other commercial 2 75% 3% Workers’ Comp 1 60% 7% Self pay 2 Gross charge 40% Charity care 1 Gross charge 100%

UNIT 3 In the EXPENSES tab of the project spreadsheet, calculate the needed staffing pattern and costs based upon the following assumptions. FTE counts will be calculated later when volume are estimated.

STAFF TYPE AVG HOURLY RATE HOURS/TEST STAFF COUNT Physician $160.00 .5 8 Registered Nurse $28.00 1.0 10 Respiratory Technician $24.50 .5 6 Nuclear med technician $32.00 1.0 2 Receptionist $9.50 .2 6 Insurance verifier $13.50 .3 4 Biller $11.00 .1 4 Collector $12.00 .2 4 Benefits as % of salary costs 24% In the EXPENSES tab of the project spreadsheet, input the additional operating costs based upon the following cost estimates:

DESCRIPTION COST/UNIT Routine medical supplies $15 per test Radiopharmaceuticals $190 per test Nuclear license $425 per year Radiation safety consultant $3,500 per year Radiation exposure monitors $300 per employee per year First-year marketing expense $20,000 per year Clinician education (one-time) $40,000 per year Equipment insurance coverage $800 per year Liability insurance coverage $3,000 per year per physician Patient education materials $200 for 600 pieces

UNIT 4 No additional work is required on the project this unit. UNIT 5 In the REVENUE tab of the project spreadsheet, look up the Medicare physician fee schedule for each of the codes listed (http://www.cms.hhs.gov/pfslookup/) and enter the fees where indicated. Use the Baltimore, MD (location of CMS headquarters) geographic area. After reviewing the Medicare fee schedule, you decide to use $1,250 per exam as the gross charge for each stress test. Enter this charge amount as indicated.

UNIT 6 In the EXPENSES tab of the project spreadsheet, identify and enter the following capital expenditures. Assume that $1,250,000 is financed at 8% for a term of 20 years, entering this information where needed.

DESCRIPTION COST USEFUL LIFE Dual-headed nuclear camera $560,000 8 years “Hot lab” renovations $ 220,000 12 years Additional plumbing $ 40,000 15 years Electrical & data cabling $ 30,000 15 years Treadmill, exam table, etc. $50.000 5 years Computer equipment $ 20,000 5 years Structural renovations $ 600,000 30 years

In the EXPENSES tab of the project spreadsheet, identify operating expenses as fixed, variable or semi-variable by indicating the appropriate type in the expense grid. UNIT 7 In the REVENUE tab of the project spreadsheet, include the following volume estimates in each of three scenarios:

PHYSICIAN CASELOAD % NEEDING STRESS TEST LOW MEDIUM HIGH

2,000 5 10 20 2,500 5 10 20 3,000 5 10 20 3,500 5 10 20

In the REVENUE tab of the project spreadsheet, input a present population of 8 cardiologists, a per-physician caseload of 3,000 patients, and a medium volume of patients needing stress testing to calculate the remaining projections. Based upon these assumptions, review and verify the results in the PRO FORMA INCOME STATEMENT and CONTRIBUTION MARGIN and BREAK-EVEN tabs. UNIT 8 Use the internet to research (http://www.cms.hhs.gov/center/coverage.asp) CMS coverage issues on nuclear cardiac stress testing, such as a National Coverage Decision (NCD). Search the Medicare Administrative Contractor (MAC) website for Maryland (home of CMS headquarters) (http://www.highmarkmedicareservices.com/policy/index.html), Highmark

Medicare, for coverage issues on nuclear cardiac stress testing, such as a Local Coverage Decision (LCD). Use the internet to research the “Stark” law and the “in-office ancillary exception”; a good resource from the Oklahoma Bar Association is: http://www.okbar.org/obj/articles07/080407rogers.htm UNIT 9 Research the CMS website (http://www.cms.hhs.gov/mcd/indexes.asp?clickon=index) for coverage of cardiac CT angiography (CCTA) as a possible competitive diagnostic tool which could affect volumes of cardiac stress testing. Check for both a National Coverage Decision (NCD) and National Coverage Analysis (NCA). Search the Medicare Administrative Contractor (MAC) site for Maryland (home of CMS headquarters) (http://www.highmarkmedicareservices.com/policy/index.html) for coverage rules for cardiac CT on a local basis. UNIT 10 Summarize your recommendation in a written report to the practice administrator, addressing the following issues.

1. Estimated net revenue and volume projections 2. Payor mix and contract rates, including bad debt assumptions 3. Capital expenditures and start-up costs 4. Staffing patterns and expenses 5. Ongoing operating expenses 6. Contribution margin and break-even point 7. Income tax implications 8. Compliance issues, such as coverage issues (both stress testing and cardiac CTA) and Stark

self-referral laws Begin your report with a basic practice description and identify all assumptions. Include your completed project spreadsheet for supporting financial information. Conclude with a recommendation as to whether your analysis indicates the practice will earn additional after-tax profits with the additional of an in-office nuclear stress testing laboratory.