FINANCIAL HEALTH WITHIN THE REHAB UNIT

FINANCIAL HEALTH WITHIN THE REHAB UNIT 2013 UDSMR Annual Conference August 8, 2013 Presented by: Donna Cameron Chris Scotten Donna.cameron@navigant.com Chris.scotten@navigant.com 317.341.3389 317.217.5395 UDSMR is a trademark of Uniform Data System for Medical Rehabilitation, a division of UB Foundation Activities, Inc. GETTING TO KNOW YOU» How many of you have a Rehabilitation Unit? Freestanding Rehabilitation Hospital?» When you get your financial reports: Is an allocation of overhead included? Are the costs of ancillary services (lab, radiology, etc.) accounted for? Are therapy costs on your financial statements? Is actual reimbursement on your financial statements? Page 2 THE PRESSURE TO MONITOR AND MAINTAIN FINANCIAL HEALTH IS GREATER THAN EVER» Update facility-level adjustors (rural, LIP [low income population] and teaching status adjustment)» Equalize payments for certain conditions commonly treated in inpatient rehabilitation facilities and Skilled Nursing Facilities (SNFs)» Update the CMG relative weights» Update/clarify the 60% compliance and presumptive eligibility» What are your current costs and how do they compare to other units or facilities? Labor and Benefits Supplies Depreciation Cost of Ancillary Services Overhead Cost Administration Finance Billing Etc. Page 3 1

5 KEY FINANCIAL QUESTIONS TO BE ABLE TO ANSWER 1. How do you know the true financial performance of your IRF unit? 2. How is your IRF financial success defined? Contribution Margin vs. Net Income? 3. How do your costs benchmark to your competitors? 4. What is your therapy staff productivity level? What are your nursing hours per patient day? 5. Do you know how to calculate your reimbursement, cost, and margin by CMG? Page 4 BE ABLE TO TALK FINANCE» Gross Charges actual charges generated for each patient; not what is actually collected» Reimbursement actually or expected to be collected (CMG rate for Medicare) sometimes referred to as collections or net revenue» Total Direct Cost all cost of care for the patient including therapy and ancillary costs (lab, radiology, pharmacy, etc.)» Variable and Fixed Cost variable cost varies with volume; fixed cost remains the same regardless of volume» Contribution Margin reimbursement less total direct cost» Overhead costs not directly related to patient care, i.e., administration, finance, IT these costs are allocated across all services» Net Income contribution margin less overhead allocation» Medicare Cost Report publicly available report filed annually by all Medicare-certified facilities Page 5 1. HOW DO YOU KNOW THE TRUE FINANCIAL PERFORMANCE OF YOUR IRF UNIT?» Challenge Complete operational information is often included in multiple departments Cost center reports usually include gross charges and departmental expense for the unit (may include an allocation for benefits and equipment depreciation): Gross charges may only reflect room and board Only nursing unit expenses may be captured these do not include therapy costs, ancillary costs, drug costs, etc. Terminology is confusing Reports that provide a true picture of an IRF may be elusive, at best Cost accounting systems may not have all the data elements you need (CMG) Page 6 2

TYPICAL COST CENTER REPORT Gross Revenue not Reimbursement Monthly Departmental Budget Variance Report VP: For the Month Ended November 30, 2012 Director: Manager: Current Month - November Year to Date - November 2013 Nov-12 Actual Nov-12 Flex Budget Nov-12 Nov-12 Actual Nov-12 Flex Budget Nov-12 Annual Actual Per Unit Flex Budget Per Unit Variance Budget Account Description Actual Per Unit Flex Budget Per Unit Variance Budget Budget Department Volumes 484-484 - - 722 Total Patient Days 3,547-3,547 - - 3,582 8,760 484 484-722 Total Volume 3,547 3,547-3,582 8,760 524,460 1,083.60 532,275 1,099.74 (7,815) 794,014 Inpatient Revenue 3,847,441 1,084.70 3,900,785 1,099.74 (53,344) 3,939,276 9,633,740 524,460 1,083.60 532,275 1,099.74 (7,815) 794,014 Total Patient Revenue 3,847,441 1,084.70 3,900,785 1,099.74 (53,344) 3,939,276 9,633,740 524,460 1,083.60 532,275 1,099.74 (7,815) 794,014 Net Patient Revenue 3,847,441 1,084.70 3,900,785 1,099.74 (53,344) 3,939,276 9,633,740 524,460 1,083.60 532,275 1,099.74 (7,815) 794,014 Total Revenues 3,847,441 1,084.70 3,900,785 1,099.74 (53,344) 3,939,276 9,633,740 Operating Expenses 118,032 243.87 126,865 262.12 8,833 167,084 Salaries & Wages 784,196 221.09 806,900 227.49 22,704 813,055 1,979,487 8,912 18.41 12,899 26.65 3,987 12,899 Employee Benefits 56,861 16.03 63,037 17.77 6,177 63,037 153,114 13,952 28.83 10,016 20.70 (3,936) 14,942 Medical Supplies 66,755 18.82 73,405 20.70 6,650 74,129 181,288 1,400 2.89 2,664 5.50 1,264 2,664 Other Supplies 10,756 3.03 13,544 3.82 2,788 13,544 32,341 321 0.66 1,180 2.44 859 1,180 Lease and Rental 4,780 1.35 5,900 1.66 1,120 5,900 14,160 998 2.06 615 1.27 (383) 615 Maintenance and Repairs 2,285 0.64 3,076 0.87 790 3,076 7,382 1,978 4.09 2,277 4.70 299 3,169 Other Expenses 12,789 3.61 15,727 4.43 2,938 15,851 38,040 8 0.02 20 0.04 12 20 Utilities 347 0.10 101 0.03 (246) 101 240 145,601 300.83 156,535 323.42 10,934 202,572 Total Operating Expenses 938,768 264.67 981,689 276.77 42,921 988,694 2,406,053 378,859 782.77 375,740 776.32 3,119 591,441 Income from Operations 2,908,673 820.04 2,919,096 822.98 (10,423) 2,950,582 7,227,688 *** Per Unit Summary *** 1,083.60 1,099.74 (16.15) 1,099.74 Revenue Per Unit 1,084.70 1,099.74 (15.04) 1,099.74 1,099.74 300.83 323.42 22.59 280.57 Expense Per Unit 264.67 276.77 12.10 276.02 274.66 8.890 9.015 0.125 8.905 Worked Hours Per Unit 8.719 8.784 0.065 8.785 8.740 10.589 10.784 0.194 10.091 Paid Hours Per Unit 9.496 10.015 0.519 10.004 9.929 $23.03 $24.31 $1.28 $22.93 Average Hourly Rate $23.28 $22.71 ($0.57) $22.69 $22.76 Costs are related only to the Income reported has little relationship rehab/nursing unit do not include with actual Contribution Margin or Net therapy, ancillary, drug, etc., costs Income of your IRF. Page 7 1. HOW DO YOU KNOW THE TRUE FINANCIAL PERFORMANCE OF YOUR IRF UNIT? How do you develop a true IRF program financial statement? Cost accounting systems (TSI, EPSi, McKesson, etc.) should be able to provide this information (find out who owns the cost accounting system and make a friend) Request that Finance create an integrated IRF financial statement at least once per quarter Ask for a patient level report for patients discharged during a month/quarter/year in Excel with the following information: Patient ID, discharge date, payer, patient days, CMG including tier, total charges by department (room and board, therapy, radiology, pharmacy, etc.), total collections and/or estimated reimbursement, total direct variable and fixed cost by department Calculate and trend: CMI (Case Mix Index) = Average CMG weight (acuity level) Total collections per case Total direct variable cost per case by department Contribution margin per case Page 8 2. HOW IS YOUR IRF FINANCIAL SUCCESS DEFINED BY CONTRIBUTION OR NET INCOME?» Challenge Each CEO and CFO may have a different measure of program success: Departmental revenue and expense must meet budget Program must produce a defined contribution margin Contribution margin should be the measure, as a program has little or no control over overhead Even though you have no control over overhead, the organization as a whole must make a profit to succeed (you are all in this together)» Solution Manage your contribution margin to expectations Understand that even if you make your contribution margin, there may be other pressures that force additional pressure to increase contribution margin Page 9 3

3. HOW DO YOUR COSTS BENCHMARK TO YOUR» Challenge There are no readily available national benchmarks for all aspects of your IRF (ancillary, supply, therapy, and nursing cost per day)» Solution: Use the best resource available The Medicare Cost Report All Medicare Certified facilities file an annual Medicare Cost Report Everyone follows the same standards to capture information This information, along with claims data, is the basis for setting Medicare rates Medicare cost reports are publicly available: How do you get cost reports? Some are online on state websites, some you must request from the state and they may charge for copies, or databases that have all cost reports Rehabilitation Hospitals can be compared to other Rehabilitation Hospitals IRF units can be compared to other IRF units Page 10 3. HOW DO YOUR COSTS BENCHMARK TO YOUR» Key Schedules Worksheet S-3 Part 1 Beds, Days, and Discharges Medicare Discharges 322 Total Discharges 547 Page 11 3. HOW DO YOUR COSTS BENCHMARK TO YOUR» Key Schedules Worksheet A Total Salaries and Other Expense Total Direct Cost for IRF Unit Selected Items: Salaries $1,976,546 Other $326,848 Page 12 4

3. HOW DO YOUR COSTS BENCHMARK TO YOUR» Key Schedules Worksheet D-3 Medicare Charges and Cost By Ancillary Services Medicare Cost for IRF Patients Selected Items: Physical Therapy $2,008,715 Drugs Chgd to Pts $371,604 Page 13 3. HOW DO YOUR COSTS BENCHMARK TO YOUR From the cost reports, you can compare your costs to other facilities: Comparison Cost per Discharge Opportunity Your Compared to IRF 1 IRF 2 IRF 3 IRF 4 IRF 5 IRF 6 Average Hospital Average Nursing $ 4,980 $ 2,589 $ 5,772 $ 4,741 $ 5,859 $ 5,346 $ 4,881 $ 4,703 $ - Radiology 211-146 106 95 155 119 271 83,363 Lab 261 230 264 350 353 236 282 481 108,477 Respiratory Therapy 258 265 273 182 107 401 248 312 34,918 Physical Therapy 1,962 1,487 1,931 3,966 3,812 2,424 2,597 6,238 1,303,395 Occupational Therapy 921 1,289 1,609-15 1,903 956 - Speech Therapy 436 304 354-27 694 302 - Medical Supplies Charged to Patients 129 212 73 479 1,000 192 348 488 76,562 Drugs Charged to Patients 1,260 834 1,017 892 1,049 1,213 1,044 1,154 60,129 IV Therapy - - 3-28 - 5 - - Other 82-90 280 256 1 118 140 12,142 Total Direct Expense 10,500 7,211 11,534 10,996 12,599 12,565 10,901 13,787 $ 1,678,986 Overhead 5,095 4,307 6,831 4,565 5,995 7,331 5,687 4,260 Total 15,595 11,517 18,364 15,561 18,595 19,895 16,588 18,047 $ $ $ $ $ $ $ $ Total Therapies $ 3,319 $ 3,080 $ 3,894 $ 3,966 $ 3,854 $ 5,021 $ 3,855 $ 6,238 $ 1,303,395 Average Medicare Reimbursement per Case 18,345 $ 16,542 $ 14,521 $ 15,720 $ 15,969 $ 18,874 $ 16,325 $ $ 15,115 0.75271 2011 Labor Share 0.75271 0.75271 0.75271 0.75271 0.75271 0.75271 2011 Wage Index 1.0373 1.0373 0.9742 0.9742 0.9742 0.9742 0.8284 Wage Adj. Medicare Reimbursement Per Case 17,849 16,094 14,810 16,033 16,288 19,251 17,471 $ $ $ $ $ $ 16,495 $ $ 7/1/11-6/30/12 Cost Report Date 1/1-12/31/11 1/1-12/31/10 1/1-12/31/11 1/1-12/31/11 1/1-12/31/10 1/1-12/31/11 Number of Beds 30 53 58 24 21 91 36 46 Total Discharges 480 1,233 748 469 396 1,494 803 547 Total Patient Days 6,896 16,917 11,989 6,195 4,515 24,715 11,871 8,406 ADC 18.9 46.3 32.8 17.0 12.4 67.7 32.5 23.0 Occupancy Percentage 62.98% 87.45% 56.63% 70.72% 58.90% 74.41% 68.52% 63.97% Length of Stay 14.37 13.72 16.03 13.21 11.40 16.54 14.21 15.37 FTEs Reported On Cost Report 35.00 178.20 72.12 52.06 27.12 284.09 108.10 41.25 Manhours 72,800 370,656 150,010 108,285 56,410 590,907 224,845 85,800 Calculated 10.56 21.91 12.51 17.48 12.49 23.91 16.48 10.21 Manhours per Patient Day Selected Items: Physical Therapy Medicare Cost - $2,008,715/322 Medicare Discharges = $6,238 Drugs Chgd to Pts Medicare Cost - $371,604/322 Medicare Discharges = $1,154 Detail handouts will be provided. Page 14 4. WHAT IS YOUR THERAPY STAFF PRODUCTIVITY LEVEL? NURSING HOURS PER PATIENT DAY?» Challenges Often therapy staff are integrated with acute care and outpatient staff Tracking therapy staff hours associated with your IRF may be difficult Work with the Therapy Manager to determine the FTEs associated with providing services on the IRF (include all worked time) Work with Finance or Billing to produce a report that provides the total billed time by therapist if this is not practical, ask for billed time by therapy discipline (PT, OT, Speech) Compare the total worked time to the total billed time Target needs to be defined: 26-28 quarter-hour units per day? 85% billable hours? Other internal benchmarks? Page 15 5

4. WHAT IS YOUR THERAPY STAFF PRODUCTIVITY LEVEL? NURSING HOURS PER PATIENT DAY?» Challenges Small units may require fixed staffing on evenings and nights Set up a staffing matrix at various levels of Average Daily Census (ADC) Put in place a monitoring process to ensure staffing matched the actual ADC matrix Utilize industry benchmarks to set targets» Target Nursing Hours per Patient Day (HPPD) Need to be Defined Example Benchmarks Compare %tile %tile %tile Sample Group Average Report Name Data Period Standard Department Name Measure Compare Group 25th 40th 50th Size Compare Group Batch FYE 1Q 2013 Acute Rehabilitation Unit Hours Worked per Patient Day All Hospital Peers 9.24 9.89 10.27 182 10.53 Compare Group Batch FYE 1Q 2013 Acute Rehabilitation Unit RN Hours Worked per Patient Day All Hospital Peers 4.72 5.14 5.55 177 5.48 Source: Truvan ActionOI ; the largest database of client-supplied data in the healthcare industry. Page 16 5. DO YOU KNOW HOW TO CALCULATE YOUR REIMBURSEMENT, COST, AND CONTRIBUTION MARGIN BY CMG» Challenges Same challenges as question #3 Improving operations requires a push-and-pull strategy After you understand your reimbursement, direct cost, and contribution margin per case, focus on the same information at a CMG level provides you with further opportunity to understand your reimbursement versus cost challenge Calculate and trend: Reimbursement by CMG compare sample to Medicare and commercial rates Cost by CMG Net margin by CMG Are there winners you should focus on from a marketing standpoint? Are there losers that need further analysis? Page 17 MARGIN BY CMG In this illustration the CMGs/RICs have been grouped and summarized. The detail by CMG is available as a drill down. Percentage to Average C/A, B/D, Direct Cont. Charges/ Charity/ Reimburse- Cost/ Margin/ Reimbursement/Case Direct Case Type Cases Case Case ment/case Case Case Cost/ Case Brain Injury 82 42,665 22,361 20,303 11,651 8,652 123% 113% Amputation 19 34,221 18,701 15,521 9,209 6,312 94% 89% Stroke 165 42,739 25,106 17,633 11,498 6,135 107% 111% Complex medical, Debility 85 35,089 20,104 14,985 9,133 5,852 91% 88% Arthritis, Pain, Cardiac, Pulmonary, Burns, Congenital, Major Multiple Trauma, Guillian Barre 73 36,201 21,003 15,198 9,417 5,781 92% 91% Spinal Cord 43 38,280 22,983 15,297 10,181 5,116 93% 98% Neuro 28 45,315 28,367 16,947 11,924 5,023 103% 115% Orthopaedics 49 26,750 15,304 11,446 7,393 4,053 70% 71% Total 544 38,698 22,254 16,444 10,340 6,104 $ $ $ $ $» Questions One way to analyze the data: Look for where reimbursement % per case varies from the cost % per case Cost per case for brain injury and stroke is approximately the same (~$11,500), but the reimbursement per case for brain injury is 15% greater. Cost reduction opportunity for stroke? Neuro reimbursement per case is 103% of the average, while costs are 115% of the average. Cost reduction opportunity for Neuro? Page 18 6

ACT NOW» Develop or work with Finance to obtain a true financial performance of your IRF unit» Gain a clear understanding of how financial success is defined and develop information to track and measure the success indicators» Benchmark your performance to your competitors» Compare therapy staff and nursing hours per patient day to benchmarks and targets» Calculate your reimbursement, cost, and contribution margin by CMG Page 19 No one s ever achieved financial fitness with a January resolution that's abandoned by February. Suze Orman CONTACT INFORMATION THANK YOU! Presented by: Donna Cameron Chris Scotten Donna.cameron@navigant.com Chris.scotten@navigant.com 317.341.3389 317.217.5395 Page 21 7