Financial Forecasting in an Era of Healthcare Reform

Financial Forecasting in an Era of Healthcare Reform

1. Introduction

Dr. Carl sat at his desk staring at the most recent article addressing physician practice trends. One statistic caught his eye, “77% of physicians said selling their practice was the right decision.” He thought to himself, “You know, all I ever wanted to do was practice medicine. But now I find myself spending more and more of my time dealing with administrative hassles.” For several years the practice has been struggling to meet the requirements of Meaningful Use[footnoteRef:1], to adjust to declining reimbursements and shrinking profit margins, and to demonstrate improvement in the quality of care provided. Just yesterday, the practice’s office manager once again raised concern that the annual physician bonus would be significantly less than previous years if measures weren’t taken to control costs and increase revenues. She even hinted that the practice may need to let an employee or two go. [1: The Health Information Technology for Economic and Clinical Health Act (HITECH) of 2009 ties Medicare and Medicaid payments to the achievement of advances in health care processes and outcomes— that is, “Meaningful Use” of electronic health records.]

Dr. Carl reclined in his chair deep in thought. Suddenly the phone rang, startling him. Given the late hour, he knew it could only be Stacey, his wife. He immediately recalls that he was supposed to be home a half hour ago to get ready to attend the benefit dinner that she has been so diligently working on putting together for nearly a year. He picked up the phone and immediately tried to defuse the situation by answering, “Hello Honey!” She was not amused; her displeasure came across loud and clear. With the 20-minute ride home and his notoriously slow ability to get ready, he knew they were going to be late. This wasn’t the first time though. Last week he was late for his daughter’s birthday dinner and the week before his son’s football game, missing him score his first career touchdown. Come to think about it, he had been missing more and more important family functions as of late.

On the drive home, Dr. Carl recalled the phone call he received from the local hospital system inquiring if he would be willing to consider selling the practice and becoming an employed physician of the hospital. At first, he dismissed the idea. His grandmother started this practice, the first woman to practice medicine in the town. He had never considered selling out. However, since the enactment of healthcare reform, he has watched medical practice change dramatically. Independent physician practices like his are facing an increasingly challenging environment as health care delivery and financing begins to shift from a volume-based to a value-based business model. “If I sell I won’t be alone, as over 56% of physicians are employed by health systems. But I won’t be able to live with myself if I don’t at least try to maintain my autonomy and my grandmother’s legacy.” Deep in thought, he begins to question how the practice can offer the best quality services at the lowest possible cost and how he can regain a decent work/life balance. If the practice is going to survive, Dr. Carl needs to determine how the changing healthcare environment impacts the future profitability of Internal Medicine Associates.

2. The U.S. Healthcare Industry

2.1. Healthcare Reform

Physicians are reimbursed for the care they provide on a fee-for-service basis. Fee-for-service is a payment model where health care providers are paid separately for each service (e.g., office visit, test, or procedure). However, this payment models incentivize physicians to provide more treatment because payment is dependent on the quantity of care, rather than the quality of care (i.e., volume versus value). This results in rising costs and discourages the efficiencies of integrated care. Over the years, a variety of government reform efforts have been attempted, recommended, or initiated to rectify these inherent flaws. The most recent legislation, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA aka the “doc fix”), consolidates three prior legislations replacing them with a single Merit-based Incentive Payment System (MIPS). MACRA guarantees a Medicare reimbursement fee schedule increase of .5% per year through 2019. In 2019, MIPS will result in payment adjustments ranging from +4% to -4% in 2019 and incrementally increasing to ±9% by 2022. MACRA serves as a catalyst for Medicare to shift paying physicians for the quality of care provided over the simple volume of care delivered. Payment adjustment assessments will be based on a weighted-average score drawn from four categories of metrics: (1) quality, (2) resource use (or efficiency), (3) meaningful use of electronic health records, and (4) clinical practice improvement activities. The MIPS, however, is confusing and particularly burdensome for independent physicians. As a result, the Medicare Payment Advisory Committee, a federal group tasked to advise Congress on Medicare, voted in January 2018 to eliminate MIPS and replace it with an alternative value-based program.

This reimbursement volatility leaves independent physician practices caught in the crossroads as health care delivery and financing shifts from a volume- to a value–based model. Whatever reimbursement model emerges, one thing is ceratin, medical provider success will be measured by offering services with the best possible quality, outcome, and access for the lowest possible cost. Furthermore, the existing model of patient care, characterized by patients receiving care from a single provider, is being replaced by a team-based approach across multiple facilities and sites, including the patient’s home. This new medical delivery system focuses on reducing fragmentation of care to improve health outcomes and will significantly impact the bottom line. The combination of staff costs, the need for technology improvements, potential underperformance penalties, and the future of physician reimbursement is driving small independent physician practices to consider employment opportunities with health systems or to merge with other practices.

2.2. Insurance Reimbursement

The amount of reimbursement a physician receives for patient encounters provided in their office, commonly referred to as evaluation and management (E/M) services, is based on the use of the appropriate current procedural terminology (CPT) code[footnoteRef:2]. The different levels of E/M CPT codes for new patients are determined based on the history, examination, and medical decision making. Medical decision making refers to the complexity of establishing a diagnosis and/or selecting a management option. Table 1 provides a listing of common practice CPT codes for new patients, established patients, and preventive/well-visits for new and established patients. Also provided is what the Practice charges for the service and what Medicare[footnoteRef:3] reimburses. Medicare does not reimburse for preventive medicine service CPT codes. The difference between what is charged and what insurance reimburses is either considered a contractual allowance or a discount and deducted from gross revenue or is billed to the patient for payment. Generally, examining an older patient takes longer as just getting undressed and positioned for a new exam requires significant effort and communications may be challenging, particularly if the patient has dementia or memory problems. Thus, having a greater number of Medicare patients has the potential to significantly impact a practice’s volume and subsequent revenue. [2: Reimbursements rates are determined using the appropriate CPT code. CPT codes are published and maintained by the American Medical Association (AMA) and are used to describe tests, surgeries, evaluations, and any other medical procedure performed by a healthcare provider on a patient. ] [3: Medicare is the basic health care program for those over the age of sixty-five and those with disabilities and provides for reimbursement of physician services on a fee-for-service basis. A primer on Medicare reimbursement can be found at: http://kff.org/report-section/a-primer-on-medicare-how-does-medicare-pay-providers-in-traditional-medicare/]

3. The Case

3.1. Practice background

Internal Medicine Associates (the Practice), is a medical group practice organized as a for-profit professional corporation. For tax purposes, the Practice has elected to be treated as an S corporation subject to tax on a pass-through basis. Originally a multi-specialty medical practice providing services in cardiology, gastroenterology, pulmonology, family practice, and internal medicine, physician retirements between 2000 and 2005 resulted in a shift in services to primarily non-urgent primary care. It no longer provides advanced medical treatment, rather patients are referred to local specialists. Moving forward, the Practice is committed to providing compassionate, patient-centered, high quality care to adult patients.

The Practice operates in a facility that is approximately 2 miles from a major hospital and is conveniently located on the main road in approximately 5,000 square feet of rented space with nine patient exam rooms, ample free off-street parking, and room for expansion. The office is open Tuesday through Saturday from 8:00 a.m. to 6:00 p.m. and closed on Memorial Day, the Fourth of July, Labor Day, Thanksgiving, Christmas, and New Year’s Day. After business hours, all telephone inquiries are handled by an answering service, which contacts the on-call physician as needed.

The Practice accepts most insurance, including Medicare, Medicaid, commercial insurance, Blue Cross/Blue Shield, and workers’ compensation. Furthermore, the Practice collects all patient out of pocket payments at the time of service, therefore, they incur no bad debt. An analysis of payer data for the past four years shows that Medicare and Medicaid cover most of the practice’s patients.

3.2. Practice reimbursement rates and volumes

Table 2 provides the 2017 total revenue by payer and CPT code with the respective patient reimbursement rate and volume. For Medicare and Medicaid patients, the 2018 through 2020 reimbursements rates will increase by 0.50 percent annually. In 2019 and forward, the Practice anticipates that they will be compliant with MIPS (if it still enacted) and earn a positive 2 percent payment adjustment (i.e., reimbursement with increase a total of 2.5%). For all other patients, the reimbursements rates are expected to increase at an annual rate of 4.9 percent.

While uncertainty is significant in future volume estimates, and hence future revenue, the Practice expects the volume of Medicare and Medicaid patient visits to remain constant in 2018. However, two urgent care clinics have recently opened in the area that provide cheaper, more convenient alternatives to the office visits for minor illnesses and well exams. Currently, these clinics do not accept Medicare and Medicaid. The Practice, however, has concern about the future impact of the urgent care clinics on non-Medicare/Medicaid patient volume and estimate a 3 percent annual reduction in these patient visits beginning in 2019.

3.3. Practice financial information

The Practice uses a single-step income statement format. It forecasts expense line items individually. Because this is a S Corporation, no provision is made for income tax. The Practice has provided a comparative income statement for years ended 2017, 2016 and 2015, which can be found in Table 3.

The four physicians who make up the Practice own the business. However, Dr. Carl controls the Practice with a 40 percent interest, the remaining three physicians each own 20 percent. Concerned about the future of the Practice, Dr. Carl is considering selling the business to the local non-profit hospital and becoming a hospital employee. The hospital has offered Dr. Carl $1.7 million for the Practice and compensation comparable to his currently annual salary of $120,000. The other physicians are less than enthusiastic about selling out, but as minority owners their alternatives are limited.

Dr. Carl begins to develop a list of the pros and cons of the decision. He thinks to himself, “Selling means a loss of autonomy and control, I would basically become just another hamster spinning the wheel. On the other hand, my salary would be guaranteed and not worrying about administrative hassles would allow me to focus on my patients, and my work/life balance would most definitely improve.” He sinks deeper into his chair, putting his head in his hands he laments, “I, me! I am only thinking about myself. What about the other physicians and employees? What about the patients we have developed relationships with over the years, would they benefit from this move? Is this decision only about what’s better for me?

Realizing he is not equipped to determine the financial position of the Practice, he has called upon you to provide a recommendation regarding whether the Practice could/should continue or whether he should sell.

4. Case Requirements

Question 1: Using revenue and volume projection information provided in the case along with the data in Tables 1 through 3, prepare projected income statements for the next three years. The following additional forecast assumptions should also be considered:

a. Miscellaneous income increases 1.00% per year

b. Employee benefits are expected to be 13.30% of wages

c. Payroll tax expense will be 7.40% of wages

d. Rent expense will increase by 2.50% per year

e. Depreciation expense will increase 25% per year

f. Insurance is expected to remain at the same percentage of patient service revenues as it was in 2017 (carry to two decimal places)

g. The Practice expects to repay all debt outstanding at the end of 2017 at the end of January 2018. All interest expense relates to this debt. HINT: The Practice incurs one month of interest expense for 2018

h. Professional fees should remain constant at the 2017 rate

i. Miscellaneous operating expenses are expected to increase by $8,000 per year over the next three years. This increase covers the added cost of electronic health record compliance under MACRA

j. All other expenses not specifically listed above should increase by the normal inflation rate of 2% per year.

Question 2: Based on the historical income statements provided in Table 3 and forecasted income statements prepared in Question 1, complete a common size analysis for all years and a horizontal trend analysis using 2015 as the base year. Examine the trends.

Question 3: Draft a memo, in proper format and no longer than 2-pages single-spaced, to Dr. Carl providing your recommendations for his future and the future of the Practice. Discuss major findings and any changes in assumptions that would increase or decrease the doubt about the Practice’s ability to continue. Discuss any ethical and/or social responsibility issues that arise from your recommendation and how Dr. Carl, current and future patients, and employees would be affected.

Question 4: Prepare a minimum 2-page single-spaced reflection that discusses how the case helped in your understanding of the reimbursement challenges physicians face and the complexity of the healthcare industry, increased your ability to prepare a forecasted financial statement and analyze the financial position of an organization, and aided in your understanding that you need to consider both monetary and nonmonetary concepts, and ethical issues and social responsibilities to defend a strategic decision. Be specific as to the knowledge gained. You should also discuss any other issues, concerns, strengths/weaknesses, learning outcomes you feel important. Be blunt.

IMA Case Study 1

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TABLE 1 COMMON PRACTICE CPT CODES
E/M VISIT
	CPT CODE	HISTORY	EXAM	MEDICAL DECISION MAKING	TYPICAL FACE-TO-FACE TIME (Minutes)	OFFICE CHARGE	MEDICARE REIMBURSEMENT RATE
NEW PATIENT - All three key components must be met
	99201	Problem-focused	Problem-focused	Straightforward	10	$ 75.00	$ 43.89
	99202	Expanded problem-focused	Expanded problem-focused	Straightforward	20	$ 95.00	$ 74.51
	99203	Detailed	Detailed	Low	30	$ 125.00	$ 108.19
	99204	Comprehensive	Comprehensive	Moderate	45	$ 185.00	$ 164.67
	99205	Comprehensive	Comprehensive	High	60	$ 200.00	$ 203.80
ESTABLISHED PATIENT - Two key components must be met
	99211	Not required	Not required	Not required	5	$ 50.00	$ 20.41
	99212	Problem-focused	Problem-focused	Straightforward	10	$ 70.00	$ 43.89
	99213	Expanded problem-focused	Expanded problem-focused	Low	15	$ 85.00	$ 72.81
	99214	Detailed	Detailed	Moderate	25	$ 140.00	$ 106.83
	99215	Comprehensive	Comprehensive	High	40	$ 175.00	$ 142.90
PREVENTIVE/WELLNESS VISIT
NEW PATIENT
	99385	18 - 39 Years of Age				$ 140.00
	99386	40 - 64 Years of Age				$ 160.00
	99387	65 Years of Age and Older				$ 160.00
ESTABLISHED PATIENT
	99395	18 - 39 Years of Age				$ 175.00
	99396	40 - 64 Years of Age				$ 175.00
	99397	65 Years of Age and Older				$ 175.00

TABLE 2
IMA REVENUE
Year Ended December 31, 2017
CPT Code	Reimbursement Rate	Medicare & Medicaid Patient Volume	Other Payer Patient Volume	TOTAL REVENUE (Rounded)
99201	$43.89	657	198	$37,526
99202	$74.51	486	180	$49,624
99203	$108.19	349	562	$98,561
99204	$164.67	544	367	$150,014
99205	$203.80	543	599	$232,740
99211	$20.41	374	318	$14,124
99212	$43.89	624	454	$47,313
99213	$72.81	461	150	$44,487
99214	$106.83	677	481	$123,709
99215	$142.90	650	328	$139,756
99385	$140.00		78	$10,920
99386	$160.00		50	$8,000
99387	$160.00		64	$10,240
99395	$175.00		433	$75,775
99396	$175.00		339	$59,325
99397	$175.00		280	$49,000
Totals	5892	4881	$1,151,114

	TABLE 3
	Internal Medicine Associates
	Income Statement
	For the years ended December 31, 2017, 2016, 2015
		2017	2016	2015
	Revenue
	Patient Service Revenue	$1,151,114	$983,979	$992,431
	Miscellaneous Income	1120	1,200	895
	Total Revenue	$1,152,234	$985,179	$993,326
	Expenses
	Wages	$709,086	$700,291	$630,093
	Employee benefits	93,492	94,542	58,249
	Payroll taxes	51,388	53,297	50,068
	Rent expense	62,050	66,600	48,000
	Depreciation	7,482	5,589	6,528
	Insurance	40,434	47,887	28,408
	Utilities	15,511	15,131	10,624
	Interest	623	1,560	1,832
	Office supplies	14,757	12,147	9,773
	Service contracts	13,921	10,563	8,965
	Cleaning & Maintenance	12,718	14,333	7,280
	Telephone/pager	11,825	13,840	8,667
	Professional fees	11,720	4,975	3,450
	Misc. operating expenses	53,712	59,584	37,440
	Total Expenses	$1,098,719	$1,100,339	$909,377
	Net Income (Loss)	$53,515	$(115,160)	$83,949

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