Center for Advanced Health Care Strategic Plan Tiber Group Business Plan
Contents I. Process Overview II. Business Concept III. Financial Projections a. Surgery Center b. Diagnostic Imaging Center IV.Overview of Risks V. Next Steps 2
I. Process Overview 3
Background USF College of Medicine and USFPG identified an opportunity to develop a state-of-the-art ambulatory services facility (Center for Advanced Health Care) as a principal practice site. NBBJ/Tiber Group was engaged to: Evaluate market/community needs and internal USF COM capabilities Define options for the facility that complement the Health Science Center s new vision and USF COM future strategic goals Identify programming consistent with the above and that serves to integrate the CRISPS concept Develop a high level financial model to assess feasibility and sensitivity Engage Moffitt Cancer Center in the planning process to identify how Moffitt might want to participate in the development, financing and/or usage of the new Center. The Center is currently modeled to accommodate future growth and allows for substantial flexibility in responding to Moffitt s potential interest. Market analysis and utilization projections were presented in February 2005. Today s session will focus on the refined business concept and associated financial projections. 4
II. Business Concept 5
CAH Surgery Center and Diagnostic Imaging Center The discussion today will focus on one (1) floor of the Center for Advanced Health. This floor will include the surgery center and the diagnostic imaging center. The Surgery Center will have the following capacity: Day 1: 4 Finished ORs, 2 Shelled ORs, 2 Finished Procedure Rooms and 2 Shelled Procedure Rooms Year 2: 5 Finished ORs; 2 Finished Procedure Rooms Year 3: 6 Finished ORs; 3 Finished Procedure Rooms This leaves one (1) shelled Procedure Room that can be finished when needed The Surgery Center will conduct surgeries/procedures 8 hours per day, 5 days per week The Diagnostic Imaging Center will include the following modalities (operational Day 1): MRI (1) CT (1) Ultrasound (2) Digital Mammography (2) The Diagnostic Imaging Center will be open 12 hours per day, 5 days per week The scenario presented today does not include the movement of any surgeries/procedures currently performed at Moffitt. 6
III. Financial Projections A. Surgery Center B. Diagnostic Imaging Center 7
Volume Assumptions The Surgery Center volume projections include volumes from the following: 1. Moveable Cases Cases currently performed at other hospitals or surgery centers 2. New Program Development Cases that require physician recruitment 3. Growth in Existing Programs Programs with opportunities to grow due to demographic trends, treatment trends and/or new program development 8
Moveable Cases This includes cases that could be moved from other service sites to the USF Surgery Center. The following were reviewed to determine the number of potential cases that could be moved. Number of credentialed physicians by specialty Estimated percentage of time spent on academic vs. clinical activities Estimated distribution of outpatient vs. inpatient surgical cases It was assumed that physicians operating at the Surgery Center would be performing at the MGMA median for outpatient surgical volumes. In many cases this represents an increase in current productivity. It was assumed that no volume would be moved from the Moffitt facility, the VA or FOI. We assumed only 10% of cases performed at Tampa General would be moved. Cases performed at any other site by USF physicians would be moved to the Surgery Center. Case Surgical Endoscopy Pain Management Total Moveable Cases 4,621 2,485 250 7,356 9
New Program Development Assumptions: New physicians will be 100% clinical Physicians will have productivity at the MGMA median (adjusted for outpatient activity) New physicians will require three (3) years to ramp-up (50% of median productivity in Year 1, 75% of median productivity in Year 2 and 100% of median productivity in Year 3) Recruitment Schedule and Projected Volumes Specialty Year 1 Year 2 Year 3 Year 4 Year 5 General Surgery 1.0 General Orthopedics 1.0 1.0 Ophthalmology (Cataracts) 1.0 1.0 Plastics 1.0 Urology 1.0 1.0 Gastroenterology 2.0 2.0 Pain Management 0.5 Total Recruited 5.5 4.0 1.0 1.0 1.0 New Volume (Surgical Cases) 745 1,530 2,267 2,762 3,322 New Volume (Procedures) 1,541 2,312 3,083 3,083 3,083 Estimated cost to recruit a physician: $ 10
Growth in Existing Programs The following surgical specialties are projected to grow at a rate of 2% per year. Orthopedics Foot Orthopedics Hand Podiatry It is anticipated these specialties would be positively impacted by the recruitment of a new general orthopedic surgeon and the growth in the Medicare population. Endoscopy and Pain Management are projected to grow at a rate of 5% per year. 11
Capacity Determination Projected capacity for the ASC procedure rooms assumes an efficient operation, resembling the expected average utilization for a freestanding ASC. Assumptions include: Hours of operation: Monday through Friday for 8 to 10 hours per day OR average 1,200 cases/or with a range of 1,000 to 2,000 cases/or based on expected procedure length Endo average of 2,500 cases/endo room Future increases in capacity would likely be gained from Increased hours of operation Increased days per year of operation Modification of case mix to higher throughput cases Capacity for the diagnostic imaging center is based on manufacturer/industry standards and assume: 12 Hours per day Monday through Friday 12
Net Revenue Assumptions and Estimates Assumptions: Includes facility fees only Payer mix is 50% Medicare/50% Commercial Commercial payer reimbursement set at 110% of Medicare Reimbursement based on Ambulatory Surgery Center (ASC) Group rates; Medicare payment rates were determined by reviewing the typical distribution of codes by specialty within ASC payer groups No annual increase in reimbursement is assumed; Medicare ASC rates today are at the same level as in 2002 Net Revenues Year 1 Year 2 Year 3 Year 4 Year 5 Surgical Cases $4,267,691 $4,950,333 $5,659,373 $6,080,305 $6,662,046 Endoscopy/Pain Management Cases $2,059,871 $2,478,685 $2,900,894 $2,975,756 $3,054,362 Total $6,327,562 $7,429,018 $8,560,267 $9,056,061 $9,716,408 13
Staffing Assumptions Assumptions: Staffing levels defined based on MGMA and experience with other similar ASCs Full-time Executive Director will manage the business operations of the Surgery Center Medical Director included at 0.25 FTE Clinical staff varies based on the number of ORs and Procedure Rooms open Non-clinical staff is generally fixed and include staff for billing, registration, medical records, patient transportation, sterilization/decontamination and other clerical responsibilities Salaries are based on national market rates and have been reviewed for local comparability Benefits set at 22% of salaries FTE Year 1 Year 2 Year 3 Year 4 Year 5 Clinical 20.00 23.50 28.50 28.50 28.50 Non-Clinical 19.25 19.25 19.25 19.25 19.25 Medical Director 0.25 0.25 0.25 0.25 0.25 Total 39.50 43.00 48.00 48.00 48.00 14
Non-Staffing Expenses Inflation for all expenses is 3% per year Variable expenses Defined based on MGMA and experience with other comparable surgery centers Most expenses set on a per case basis. The exceptions are bad debt expense (based on % of revenues) and utilities (based on square feet). Fixed Expenses The Surgery Center s fixed expenses include marketing, licenses/dues, recruitment, maintenance and repairs and accreditation. The projections are based on experience with other comparable surgery centers. Expense Year 1 Year 2 Year 3 Year 4 Year 5 Non-Staffing Variable $2,411,793 $2,861,091 $3,321,485 $3,604,759 $3,927,851 Fixed Expenses 67,500 60,775 50,238 51,745 53,298 Total $2,479,293 $2,921,866 $3,371,723 $3,656,504 $3,981,149 15
Capital Requirements Assumptions: The capital requirements are based on the following capacity needs Day 1: 4 Finished ORs, 2 Shelled ORs, 2 Finished Procedure Rooms and 2 Shelled Procedure Rooms Year 2: 5 Finished ORs; 2 Finished Procedure Rooms Year 3: 6 Finished ORs; 3 Finished Procedure Rooms The capital estimates include construction costs, furniture and clinical and non-clinical equipment The capital costs are depreciated as follows: Building and improvements 30 years Furniture and equipment 7 years Projected Capital Costs Year 1 Year 2 Year 3 Year 4 Year 5 $14,986,175 $1,018,836 $1,521,128 $75,000 $75,000 16
Debt Service Assumptions Bond issue of $25 million Interest rate of 6% Payment term of 240 months Year 1 Year 2 Year 3 Year 4 Year 5 Principal $667,400 $708,600 $752,200 $798,600 $847,800 Interest $1,481,800 $1,440,600 $1,397,000 $1,350,600 $1,301,400 Total Debt Service $2,149,200 $2,149,200 $2,149,200 $2,149,200 $2,149,200 17
III. Financial Projections A. Surgery Center B. Diagnostic Imaging Center 18
Volumes and Revenues Assumptions: Volumes for the center ramp-up over a three (3) year period. In Year 1 the center will be at 50% of the imaging equipment capacity, 75% in Year 2 and 100% by Year 3. Growth beyond Year 3 will require the purchase of additional equipment. Payer mix is 50% Medicare/50% Commercial Net revenues include the technical component only; the technical component is based on a review of Medicare reimbursement Commercial reimbursement is set at 105% of Medicare and is based on a review of current market rates in the Tampa region. This is significantly lower than many other markets. Projected Revenues Year 1 Year 2 Year 3 Year 4 Year 5 $2,020,784 $3,091,800 $4,204,848 $4,288,945 $4,374,724 19
Expenses Operating Expense Assumptions: Staffing requirements were based on similar diagnostic imaging centers The Diagnostic Imaging Center will require 15 FTEs including techs, manager, billing/collections staff and other clerical staff All major diagnostic equipment (MRI, CT, 2 Ultrasound and 2 Digital Mammorgraphy units) will be leased (5 year operating lease) Inflation for medical supplies is 4% per year; all other expenses are inflated at 3% per year Expenses were based on experiences with other diagnostic imaging centers Capital Expense Assumptions: Beyond the operating lease the Diagnostic Imaging Center will require $2.6 million in capital for construction and other minor equipment The $2.6 million will be financed at a rate of 6% over 20 years 20
Diagnostic Imaging Center Pro-Forma Year 1 Year 2 Year 3 Year 4 Year 5 Revenues $2,020,784 $3,091,800 $4,204,848 $4,288,945 $4,374,724 Expenses $2,814,454 $3,073,356 $3,575,894 $3,674,952 $3,691,585 Operating Income ($793,670) $18,444 $628,954 $613,993 $683,139 21
Overall Projected Financial Performance INCOME STATEMENT Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Volume Surgical cases 5,366 6,173 6,932 7,450 8,035 Endoscopy/pain management cases 4,276 5,184 6,098 6,249 6,407 MRI 2,016 3,024 4,032 4,032 4,032 CT 2,016 3,024 4,032 4,032 4,032 Ultraound 3,024 4,536 6,048 6,048 6,048 Screening Mammography 7,560 11,340 15,120 15,120 15,120 Operating Revenue Net patient service revenue - ASC 6,327,562 7,429,018 8,560,267 9,056,062 9,716,408 Net patient service revenue - Diagnostic Imaging 2,020,784 3,091,800 4,204,848 4,288,945 4,374,724 PM&O Revenue Total Operating Revenue 8,348,346 10,520,818 12,765,115 13,345,007 14,091,132 Operating Expenses Salaries and wages 2,415,500 2,674,395 3,019,852 3,110,447 3,203,761 Employee benefits 531,410 588,367 664,367 684,298 704,827 Medical supplies 1,693,074 2,129,244 2,582,955 2,796,402 3,036,634 Other Expenses 981,900 1,106,249 1,461,311 1,541,147 1,629,545 Operating Leases (Diagnostic Imaging) 1,075,000 1,107,250 1,140,468 1,174,682 1,209,922 Interest expense ($25 million bond) 1,481,800 1,440,600 1,397,000 1,350,600 1,301,400 Interest expense (diagnostic imaging loan) 153,800 149,400 145,000 140,200 134,900 Depreciation and amortization expense 1,099,797 1,187,979 1,327,505 1,342,529 1,272,564 Provision for bad debts 250,196 313,806 378,055 392,929 412,739 Total Operating Expenses 9,682,478 10,697,290 12,116,512 12,533,235 12,906,292 NPV Income (Loss) from Operations (1,334,132) (176,472) 648,603 811,772 1,184,839 Operating Margin -1.7% 5.1% 6.1% 8.4% The project has a Net Present Value (NPV) of $960,000 (at a discount rate of 15%). 22
IV. Overview of Risks 23
Potential Risks USFPG s inexperience operating an ASC and/or Imaging Center It will be critical for USFPG to recruit individuals with ASC and Imaging Center experience to manage these facilities Volumes are lower than projected This financial model assumes a higher level of productivity for existing physicians Requires physicians to move volumes from existing facilities and change practice patterns New program development and the associated volumes require significant physician recruitment (12 physicians over the next five years) Physicians do not utilize the diagnostic imaging capabilities The ambulatory surgery business is competitive in this market Efficiency is lower than projected The model assumes a moderately to highly efficient operation for room use and turnover If the facility is less efficient then it will not be able to handle the capacity projected and will not be able to generate the projected income 24
Potential Risks Reimbursement is lower than expected The model includes conservative estimates for reimbursement, however, there is a risk that commercial reimbursement could decline. Every 10% shift in commercial reimbursement has a $385,000 impact on the net income Operating expenses are higher than expected Staffing costs have steadily increased in recent years and if a shortage continues these costs could increase more Every 5% increase in operating expenses has a negative $500,000 impact on the bottom line 25