Community Health Centers
and Other Primary Care
Service Organizations
FINANCIAL STABILITY
A Governing Board’s Perspective
Presented by: Cynthia Prorok - October 2010
Kentucky Primary Care Association
2010 Annual Meeting
www.kypca.net
Goals of Learning Session:
 Review Importance of Financial Stability for Health Centers
 Board’ Fiduciary Oversight
 Business Plan Changes
 Purpose of the Changes
 When the Changes Apply
 BPHC Required Financial Measures
 Focus on Financial Viability and Costs
 What the Measures/Ratios Mean
 Sample Business Plans
 Alignment of Grant Applications, PAR, UDS, OPR, & BPHC TA
 SAC 2010 - Update on Governance Requirements
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Importance of
Financial Stability:
 To provide for:
 ACCESS: Maximize capacity to serve patients
 QUALITY CARE: Sufficient resources for service delivery
 ACCOUNTABILITY: Oversight of federal grant funds
 VIABILITY: Pay staff, vendors, and creditors on time
 To Remain a ‘good credit risk’
 Continue/Expand Health Center Mission
 Board’s Fiduciary Responsibility: Approve
Policies/Procedures/Budgets, Review Results, Ask Questions
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Measuring
Financial Performance:
 Measuring Financial Results: Systems & Strategies
 Accounting and practice management systems
 Full accrual-basis of accounting (GAAP)
 Base-line budgeting - “Where are we now if nothing changes”
 Accrual & cash flow forecasts, Develop “What if” forecasting tools
 Managing by with the Numbers: Keeping Score




Maintaining the historical record - timely, accurate
Designing the chart of accounts to facilitate analysis
Set up of practice management system “master files”
Report writer - capability, training, utilization
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Monitoring
Financial Performance:
 Turning Raw Data into Decision-making Data
 Identify key measures/ratios to track
 Designing reports to monitor performance – Board & Sr. Management
 Variance Analysis & Determining the Underlying Story
 Identify underlying cause(s) for poor results
 Develop action plans to: Improve Performance
POLICIES
PEOPLE
PROCEDURES
RESULTS
SYSTEMS
“The Business Plan is an Important Tool”
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Business Plan:
BPHC Business Plan Changes
Purpose of the Changes:
 Change and simplify the business plan
 Track basic measures of financial viability & costs
 Focus on individual improvement versus standards
When the New Business Plan Changes Apply:
 Service Area Competition (SAC) Applications
 All grantees with SAC applications starting in 2009 - required New Business Plan
 Mid-Project Period Grantees
 New Business Plan Format & Financial Measures are OPTIONAL, but encouraged
 Uniform Data System Reports
 Starting in 2009 – Measures from Audited Data Added to EHB UDS Trend Reports
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Business Plan:
BPHC Required Financial Measures
Focus on Financial Viability & Costs:
 Change in net assets as a percent of expense
 Financial results from operations in relationship to total expenses
 Working capital to monthly expense ratio
 Liquidity in # of months - ability to pay bills on time - current financial condition
 Long-term debt to equity ratio
 Portion of net assets tied up in long-term debt - long-term financial condition
 Total cost per patient
 Annual average cost per patient served - value of service provided based on costs
 Medical cost per medical encounter
 Average cost per billable medical encounter (less: lab & pharmacy) - cost efficiency
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New BPHC Required
Financial Measures
“Calculations and Samples”
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Change in Net Assets as a Percent of Expense
Measures Financial Results in Relationship to Expense
Calculation:
Change in Net Assets
(Audited Stmt of Activities)
- divided by -
Total Expenses
(Audited Stmt Activities)
The Change in Net Assets can be positive (a net surplus) or negative (a net loss) for the
period being measured. The measure includes non-operating changes to net assets.
This measure can be calculated for month -to-date & year-to-date results utilizing the
Interim Statement of Activities.
A breakeven or better performance is needed for financial stability. If the trend shows
decreases in net assets, particularly when the balance sheet reports a weak financial
condition, there is cause for concern.
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National Average Trend
Change in Net Assets as a % of Expense
2004
Change in Net Assets as
a Percent of Expense
4.99
 National average
Positive
Stable
Reasonable
2005
2006
4.80
2007
4.95
2008
5.71
4.21
7
6
4.99
5
4.8
4.95
5.71
4.21
4
2004
2005
2006
2007
2008
Change in Net Assets as a % of Expense
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Working Capital to Monthly Expense Ratio
Measures Financial Liquidity
Minimum of 1 month - with 2 months preferred
Calculation:
Working Capital (Audited Balance Sheet)
- divided by -
Average Monthly Expense (Audited Stmt Activities)
(Total Expense - divided by 12 Months)
This measure can be calculated for month -to-date & year-to-date results utilizing the
Interim Statement of Activities.
If Working Capital is negative then current liabilities exceed current
assets, liquidity is very tight, and financial stability is in question.
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Working Capital
Measures Financial Liquidity
$ Range Based on Size - Sufficient to Meet Current Obligations
Calculation:
Current Assets (Audited Balance Sheet)
- minus -
Current Liabilities (Audited Balance Sheet)
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Definition of:
Current Assets & Current Liabilities
 Current Assets - Cash or Readily Converted to Cash




Cash
Net Patient Services Accounts Receivable
Grants and Contracts Receivable
Prepaid Expenses (rent, insurance, etc.)
 Current Liabilities - Expenses/Obligations Due in 1 Year





Accounts Payable
Accrued Expenses (payroll taxes/withholdings, uncompensated absences, etc.)
Capital Leases - Current Portion
Lines of Credit
Notes/Mortgage Payable - Current Portion
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National Average Trend
Working Capital to Monthly Expense Ratio
2004
Working Capital to
Monthly Expense Ratio
1.86
2005
2006
1.95
2007
2.10
2008
2.25
2.35
2.6
 National average
Good
Improving
2.35
2.4
2.25
2.2
2
1.95
2.1
1.86
1.8
1.6
2004
2005
2006
2007
2008
Working Capital to Monthly Expense Ratio
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Long-term Debt to Equity Ratio:
Measures Long-term Debt Leverage - Long-term Financial Condition
Calculation:
Long-term Liabilities (Audited Balance Sheet)
- Divided by -
Net Assets (Audited Balance Sheet)
The preference is a Long-term Debt to Equity Ratio below 0.50 (or less than 50%
of Total Assets tied up in Long-term Debt).
A Long-term Debt to Equity Ratio in excess of 0.80 (80%) indicates excessive
long-term debt, the organization may not be able to borrow funds, and is an
indicator financial viability may be in question.
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National Average Trend:
Long-term Debt to Equity Ratio
2004
Long-Term Debt to
Equity Ratio
2005
0.49
National average
Acceptable
Improving
2006
0.62
2007
0.30
2008
0.42
0.46
0.8
0.62
0.6
0.4
0.46
0.42
0.49
0.3
0.2
2004
2005
2006
2007
2008
Long-Term Debt to Equity Ratio
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Total Cost Per Patient:
Value of Services Provided to Patients
Calculation:
Total Accrued Costs before Donations (UDS Table 8A)
- Divided by -
Total Patients (UDS Table 4)
If the total average cost per patient is growing at a rate faster than net patient
services revenue, the financial performance is insufficient to sustain
financial stability and “ACTION” is needed to reverse the trend.
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Total Cost Per Patient:
UDS Data All Grantees CY 2007
Total Cost Per Patient
$700
$652
$650
$600
$597
$562
$560
$550
$568
$517
$504
$500
$450
$405
$400
$350
$300
Nat ion
al
Urban
Rur al
Large
Small
25th
Median
75th
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National Average Trend:
Total Cost Per Patient
Total Cost Per Patient
2004
2005
2006
2007
2008
$
504 $
515 $
538 $
562 $
588
$640
 National Average
Cost increasing
Increase
reasonable
$588
$590
$562
$538
$540
$504
$515
$490
$440
2004
2005
2006
2007
2008
Total Cost Per Patient
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Medical Cost Per Medical Encounter:
Measures Medical Cost Efficiency (excluding lab & Pharmacy)
Calculation:
Total Medical Costs (UDS Table 8A)
- Divided by Total Billable Medical Encounters (UDS Table 5)
Medical costs are after the allocation of overhead and do not include lab or pharmacy
costs. Billable medical encounters do not include nursing encounters or
psychiatrist encounters.
If the average medical cost per medical encounter is growing at a rate faster
than net patient services revenue, the financial performance is insufficient
to sustain financial stability and “ACTION” is needed to reverse the trend.
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Medical Cost Per Medical Encounter:
UDS Data All Grantees CY 2007
Medical Cost Per Medical Encounter
$200
$146
$150
$123
$129
$115
$121
$130
$121
$103
$100
$50
$0
Nat ion
al
Urban
Rur al
Large
Small
25th
Median
75th
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National Average Trend:
Medical Cost Per Medical Encounter
2004
Medical Cost Per
Medical Encounter
$
109 $
 National average
Increasing
Increasing faster
than total cost per
patient
2005
2006
111 $
2007
117 $
2008
123 $
129
$140
$129
$130
$123
$120
$117
$111
$110
$109
$100
2004
2005
2006
2007
2008
Medical Cost Per Medical Encounter
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Business Plan:
Getting Started
Business Plan: Development and Reporting
 Sources of data
 Audited and interim financial statements; UDS and interim PMS reports
 Establishing the baseline measure
 The health centers current measures serve as the basis to track improvement
 Calculating measures for past three years - trends
 Not required, but encouraged - Trended UDS data is available
 Setting realistic goals
 Quantitative and Qualitative progress statements
 Reporting and Monitoring
 Baseline & progress - future grant submissions, POs, UDS, EHB, OPR, & BPHC TA
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Sample Business Plan
Service Area Competition
Please Refer to Sample
SAC - Business Plan Components:
 Performance Measure


Costs, Financial Viability, Other (Access, Maximize Revenue, etc.)
BPHC Required or Other Measure, Is this PM applicable to your organization?
 Target Goal Description, Numerator, & Denominator
 Baseline Data

Baseline, Measure Type, Numerator & Denominator, and Projection (5-year Goal)
 Data Source and Methodology
 Key Factor and Major Planned Action

Key Factor Type: Contributing, Restricting, or Not Applicable
 Key Factor Description
 Major Planned Action Description
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Sample Business Plan
Service Area Competition
Please Refer to Sample
Performance Measure: Change in Net Assets as a Percent of Expense
Is this Performance Measure Applicable to
your Organization?
Target Goal Description
Numerator Description
Denominator Description
Baseline Data
Data Source & Methodology
Key Factor and Major Planned Action #1
Yes
Achieve a Change in Net Assets to Expense Ratio of 3.6% in years 1 and 2, then
4.5% in years 3 through 5 to result in Net Assets of $175,000 by year 5.
Change in net assets (ending net assets - minus - beginning net assets)
Total expense
Baseline Year: 2008
Projected Data (by End
4.5% and Net Assets
Measure Type: Percent
of Project Period)
of $175,000
Numerator: 143610
Denominator: 6746490
Audited Financial Statements
Key Factor Type: [X] Contributing [_] Restricting [_] Not Applicable
Key Factor Description:
Implemented a Financial Recovery Plan including additional RIF of 3 administrative
staff, wage freeze, and new employee health plan with 14.6% lower premium costs
(see detailed FRP).
Major Planned Action Description: Continue FRP activities with focus on increasing
provider productivity, improving patient enrollment in public health plans, and
improving collections.
Key Factor and Major Planned Action #2
Key Factor Type: [_] Contributing [X] Restricting [_] Not Applicable
Key Factor Description: A high debt load with corresponding interest expense.
Major Planned Action Description: Negotiate debt forgiveness/discounts on
balances owed and seek State grant to liquidate debt on Facilities.
Key Factor and Major Planned Action #3
Key Factor Type: [_] Contributing [X] Restricting [_] Not Applicable
Key Factor Description: Records management problems resulting in accuracy and
timeliness problems with financial and operating performance data, and a Medicaid
overpayment.
Major Planned Action Description: Improve financial records management and
reporting including practice management system billing and collections functions.
Comments
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Coordinated Approach:
Performance Improvement
Alignment of Program Requirements with:
 SAC Grant Applications and Project Period Updates
 Future Grant Applications will Incorporate the Business Plan Changes & Measures
 Project Officer Working with Grantees
 Will Utilize Grant Applications, UDS Reports, and Audited Financial Statements
 UDS and EHB
 Will Required Reporting on Measures and Data will be Included in EHB
 BPHC Technical Assistance Consultants
 Will Evaluate Financial Condition, Review Business Plan Progress, & Report on
Findings and Recommendations in the Site Visit Report
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Trend &
Comparative Analysis:
 Why trend & comparative analysis is important:










Raw data and data in isolation does not tell the story
Comparing results to plans identifies trends + or Monitoring trends identifies problems quickly
Timely action can be taken when trends are known
Monitoring trends helps management decision-making
Comparative analysis - to budgets, targets, & industry standards
Establishing Baseline and Goal Setting
Trend analysis over time - by month, by quarter, year-to-year
Formatting reports makes a difference to usefulness
Use of tables, charts, and graphs
 Summary vs detailed analysis - by site, service, payer, provider
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Trend & Comparative Analysis:
Other Considerations
 All of the measures discussed can & should be:





trended by month, by quarter, from year-to-year
compared to baseline, targets/goals - including variance analysis
compared to national, state, size, & rural/urban standards
compared to other industry standards - financial measures
compared to other industry standards - practice performance
 Reports should be user friendly & easy to read
 Level of data reported vs audience
 Board, Finance Committee, Senior Management, Site Managers
 Frequency of reports -
daily, weekly, monthly, quarterly, annually
 Sample CHC Financial Scorecard (available on request)
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Monitoring Marketplace
& Other Changes
 Market Competition and Economic Trends
 Market Competition and Economic Trends
 Have urgent care or other walk-in clinics opened in service area?
Third
Party Payer, Regulatory, & Policy Changes
Have private practices opened or closed, services provided?
 Have major employers opened or closed?
 Are under-served populations increasing or decreasing?
 Has weather/disasters negatively impacted local economy/pop?
 Third Party Payer, Regulatory, & Policy Changes




Has Medicaid eligibility criteria changed, processing procedures?
Is Medicaid implementing managed care, enrollment process?
Have coding, billing, electronic submission procedures changed?
Is the State implementing new billing system, fiscal intermediary?
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Strategies to Remain
Financially Viable





Develop an operating reserve
Maintain current ratio > 2.0 & debt management ratio < 0.50
Maintain general ledger on full accrual basis of accounting
Closely monitor & manage cash flow & financial performance
Monitor performance - baseline, targets/goals, & industry standards
 Track BPHC Required Financial Measures




Improve Payer Mix - increase/maintain Medicaid patients
Monitor changes in marketplace, economy, & other trends
Analyze opportunities to add/increase providers/services
Closely monitor regulatory and policy changes
 Operations must result in financial surpluses, TAKE ACTION
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“Good, Better, Best”
What Gets Measured,
Gets Done
What Gets Incentivized,
Really Gets Done
Be Sure You Are Measuring What is Important;
and Incentivizing the Right Activities
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Governance Requirements
Board of Directors Composition and Responsibilities:
 Composition:
 51% Majority - “Consumers/Patients” who receive their
primary care from the organization
 As a “Group” represent the individuals being served by
the organization - including race, ethnicity, gender,
service area, target population, & special populations
 HCH, PHPC, and MHC must have at least 1 “Consumer/
Patient” from each Special Population
 Special Population requirement can be “waived” by
BPHC (Form 6-B)
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Governance Requirements Continued
 Responsibilities:
 Meet at least once a month - can be “waived” (Form 6-B)
 Selects services and schedules the hours during which such services
will be provided by the organization
 Measures and evaluates progress in meeting annual and long-term
programmatic and financial goals
 Develops plans for long-range viability by engaging in strategic
planning, on-going review of the mission and bylaws, evaluating patient
satisfaction, and monitoring assets and performance
 Approves the annual budget and applications for subsequent grants
 Approves the selection of a director (Program Director or CEO)
 Establishes general policies, except in the case of a governing board of
a public center
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Governance Requirements Continued
 Structure of the Board is Appropriate:
 Size - number of members for needs of organization
 Expertise includes a broad range of skills and perspectives,
including finance, legal affairs, business, health, social services,
etc.
 A co-applicant health center board must meet all the size and
composition requirements, perform the duties of, and retain all
the authorities expected of governing boards, except a public
center is permitted to retain responsibility for establishing
general policies (fiscal and personnel)
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Q & A SESSION
Contact Information:
Cynthia L. Prorok
Management Solutions Consulting Group, Inc.
cprorok@mscginc.com
(724) 355-3188 (cell)
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