UMHS Masters Series
Finance & Strategy
April 2013
Introductions
Introductions…
2
3
Today’s Topics
Morning Sessions:
• The UMHS “Economy”
• Accounting & Financial Statements
• UMHS Funds Flow
• Building a Strategic Plan
• Strategic Planning & Deployment at UMHS
4
Today’s Topics (afternoon session)
Afternoon Sessions:
•
•
•
•
Strategic Plans vs. Business Plans
Finance Basics & Capital Process
Business Plan Elements
How to Prioritize?
• UMHS Strategic Financial Plan
• Financial Actions
5
6
Healthcare & Higher Education
Healthcare & Higher Ed at the Crossroads
Higher Ed
UMHS
Healthcare
8
Health Care & Higher Ed as a Business:
Organizational Goals
Profitability
Viability
– Regardless of ownership, health
care and higher education
organizations need to generate
profits to…
– Invest in new technologies
– Replace old buildings and
equipment
– Build equity and financial base
– Achieve other or main health
care missions
“no margin no mission”
9
10
Health Care as a Business:
Profitability Tradeoff
Risk vs. Return
– The greater the risk an
organization incurs, the
greater the return it
requires
– When faced with
alternatives, organizations
need to assess if the extra
profits are worth the risk
11
Viability Trade-Off
Liquidity vs. Solvency
– Liquidity is a measure of
resources (like cash) that can be
used to quickly meet any near
term obligations
– Solvency is a measure of the
organization’s ability to meet its
long term obligations
– Every dollar kept liquid (in cash)
is a dollar that could have been
invested in a longer term, higher
yielding project.
12
University of Michigan
Health System
1848 to 2012
UMHS Vision
Create the future of health care
through discovery
Become the national leader
in health care, health care reform,
biomedical innovation and education
14
UMHS Goals
1. Create the ideal patient care experience.
2. Attain market leadership in key areas.
3. Generate margin for UMHS investment.
4. Translate knowledge into practices and policies that improve
health and access to care.
5. Engage in groundbreaking discovery and innovative scientific
collaboration.
6. Cultivate an interdisciplinary, continuous learning environment.
7. Promote diversity, cultural competency, and satisfaction among
faculty, staff, and students.
15
Cost of Construction:
$9,947
16
Cost of Construction:
$3,395,961
17
Cost of Construction:
$753M
18
Medical School's Cumulative Net Assignable Square Footage (NASF)
UMHS
Planning
2,500,000
2,000,000
Occupied Space (NASF)
• Scheduled open date…
• Fully occupied by…
1,500,000
• Research activity impact…
1,000,000
500,000
19
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
1900
1895
1890
1885
1880
1875
1870
1865
1860
1855
Note: non-clinical lease space
included beginning 2001
1850
0
Medical School's Cumulative Net Assignable Square Footage (NASF)
UMHS
Planning
2,500,000
NCRC
2,000,000
Occupied Space (NASF)
• Scheduled open date…
• Fully occupied by…
1,500,000
• Research activity impact…
BSRB
Kresge
CCGC
MSRB III
1,000,000
MSRB I
KEC
MSRB II
MS II
500,000
MS I
K2
K1 & K3
U Hospital
Catherine
St.
Surgery
Building
20
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
1900
1895
1890
1885
1880
1875
1870
1865
1860
1855
Note: non-clinical lease space
included beginning 2001
1850
0
Revenue Types
• The Health System is a large and complex
organization
• Take five minutes at your table and develop
a list of revenue types at UMHS
– An example is Patient Care Revenue
21
Revenue Types
• Report out by table and compile a
running list…
22
Revenue Types
• Patient Care
• Research
– Direct
– In-direct
• Other sales and
services
• Contracts
• Royalties/Patents
• Tuition
•
•
•
•
•
Lease/rentals
Recharge fees
State funding
Endowment income
Gifts
– Restricted
– Unrestricted
• “Transfers”
23
Health System Revenue – All Sources FY11
$7
$6
Tuition
Sponsored Research
$5.9B
Patient Care
Investment Income
$5
Gifts
Royalties, Sales, Services
$4
Student Housing / Loan Interest
$3.1B
Other
$3
$2.0B
$2
$1.1B
$1
$0
UM
UMHS
HHC
UMHS roughly half the University’s annual revenue
UMMS
24
UMHS Financial Balance
How do we generate cash for ongoing
operations and investments? (“viability”)
• We Earn it…
• Operations
• Investment Income
• Philanthropy
• We Borrow it…
• Debt
26
Health System Financial Overview
• Multiple Revenue Streams:
–
–
–
–
–
Patient Care
Sponsored Research
Investment / Endowment Income
Philanthropy
Tuition / State Appropriations
– Intellectual Property: Royalties, Patent & Trademark Income
• Challenging environment:
– Flat research funding, healthcare reform, investment market variability,
poor state employment statistics
– UMHS maintains a strong balance sheet, but pressure on operating
margins have increased as revenues have flattened and costs increased
– Future investments must be aligned with our strategies and weighed with
the understanding of trade-offs elsewhere in the Health System
27
Breakout
•Read handout Item #1:
“The Interdependence of Revenue
Sources at the University of Michigan
Health System”
28
Breakout
•Discussion
29
The UMHS Financial Formula
Clinical
Research
Margin (loss)
Margin (subsidy)
Biomedical &
Medical
Education
Margin (subsidy)
Philanthropy
Investment
Income
Cash to
Invest in
our Future
•
Sustainable cash margin generation is necessary for UMHS to reinvest
in facilities and human capital over the long-run, as well as maintain its
strong balance sheet and access to capital
•
Total Cash Margin Calculation:
(Total Revenues - Total Expenses w/o Depreciation) / Total Revenues
30
Issue: Balanced Growth
Clinical
Research
Margin (loss)
Margin (subsidy)
Biomedical &
Medical
Education
Margin (subsidy)
Philanthropy
Investment
Income
Cash to
Invest in
our Future
This is a key
relationship related to
growth. Growing the
research enterprise
requires growth in the
clinical business, or
financial difficulty may
result.
31
UMHS Margin by Mission – FY11
UMHS Consolidated Total Margin
Mission Based
FY2011
Patient Care Revenues
General Fund: Research Indirect
General Fund: Tuition
General Fund: Provost Allocation
Research (Direct)
Distributed investment income
Gifts
Rebill, GME & Other
Total Revenues
Clinical
2,433,674,789
7,274,057
2,440,948,846
20,102,104
509,097,841
37,428,707
78,519,244
Faculty Salaries
Non-Instructional Salaries
Fringe Benefits
Subtotal
Supplies & Other Non-Payroll
General Fund: Facility Costs & University Taxes
Interest
Depreciation
Total Expenses
222,119,264
854,034,976
319,908,229
1,396,062,468
697,779,163
16,934,516
145,041,816
2,255,817,963
118,415,559
182,350,957
82,634,082
383,400,597
160,885,286
82,712,927
3,069,182
38,850,149
668,918,141
80,258,327
46,299,842
25,891,329
152,449,497
39,358,070
13,646,248
897,580
1,552,941
207,904,336
185,130,883
7.6%
(159,820,300)
-31.4%
(129,385,092)
-164.8%
47,827,439
100.0%
117,740,728
100.0%
185,130,883
145,041,816
(159,820,300)
38,850,149
(129,385,092)
1,552,941
47,827,439
117,740,728
61,493,658
185,444,906
330,172,699
13.5%
(120,970,151)
-23.8%
(127,832,151)
-162.8%
47,827,439
100.0%
117,740,728
100.0%
246,938,564
7.7%
Margin(Loss)
% of revenues
Cash Margin
Margin
Add Depr
Add OPEB
Total Cash Margin
Research
Education
Philanthropy
Investment
Income
115,922,427
28,277,859
344,795,450
34,021,072
7,069,465
117,740,728
47,827,439
47,827,439
117,740,728
-
-
-
-
TOTAL
2,433,674,789
115,922,427
34,021,072
35,347,324
344,795,450
117,740,728
47,827,439
64,804,869
3,194,134,098
420,793,149
1,082,685,774
428,433,639
1,931,912,562
898,022,519
96,359,175
20,901,277
185,444,906
3,132,640,440
61,493,658
1.9%
32
UMHS Cash Flow Margin %
10.0%
8.0%
9.1%
8.0%
7.6%
6.6%
6.0%
5.2%
4.0%
2.0%
0.0%
-0.8%
-2.0%
FY08
FY09
FY10
FY11
FY12
FY 13 Sept
YTD
33
34
UMHS Interdependence: More Than Money

The stronger our academic programs, the more likely we
are to attract the best faculty, students and staff.

The more outstanding our faculty, students and staff,
the better positioned we are to:
–
Deliver the ideal patient care experience
–
Enhance our research portfolio
–
Strengthen our competitive advantage as the place
where tomorrow’s health care professionals learn
and thrive
35
36
Accounting
& Financial Statements
38
39
Accounting Versus Financial Management
• Accounting concerns the measurement, in
financial terms, of events that reflect the
resources, operations, and financing of an
organization.
• Finance & financial management provides
the theory, concepts, and tools necessary to
help managers make better financial
decisions.
• Are the two disciplines independent?
40
Accounting Basics
• Entity Concept
– The unit for which we want to account
– One accounting entity can exist within larger
entities
– Cannot commingle resources and obligations
across entities
– View all financial events from the standpoint of
the entity’s point of view
41
Accounting Basics (continued)
• All financial events must be recorded in
monetary terms
– The financial history of the organization must be
told via a currency
– Must be careful in the interpretation of an
organization over time due to changes in the
value of the currency used to record the history
42
Assets
• Anything with economic value that can help
the organization fulfill its mission
– Tangible assets have physical form and
substance and typically appear on the balance
sheet
– Intangible assets have no physical form (good
credit, skilled employees, reputation, etc.) and
are not usually recorded on the balance sheet
43
Assets
• Anything with economic value that can help
the organization provide care either directly
or indirectly
– Tangible assets have physical form and
substance and typically appear on the balance
sheet
– Intangible assets have no physical form (good
credit, skilled employees, reputation, etc.) and
are not usually recorded on the balance sheet
44
Liabilities
• Obligations the organization has to outside
creditors
– Salaries owed to employees
– Money owed to suppliers
– Money owed to banks, bondholders, or other
creditors
– Taxes
45
Owners’ Equity / Net Assets
• Equity is the value of the organization to its
owners
– It is the proportion of the assets available after
all liabilities have been paid
•
•
•
•
Sole proprietorship = Owner’s Equity
Partnership = Partners’ Equity
Corporation = Shareholders’ or Stockholders’ Equity
Not-for-profit = Net Assets
46
47
The Accounting Equation
Assets = Liabilities + Net Assets
Organization’s
Resources
Sources of
Resources
48
Elements of Financial Statements
•
•
•
•
•
Balance sheet
Statement of operations (income statement)
Statement of changes in net assets
Statement of cash flows
Footnotes
Rules:
– Generally Accepted Accounting Principles (GAAP)
– Financial Accounting Standards Board (FASB)
– American Institute of Certified Public Accountants (AICPA) Committee on
Health Care
– Healthcare Financial Management Association (HFMA) Principles and
Practices Board (P&PB)
49
Who uses financial statements?
• Management: financial planning, assessing
debt capacity, pricing, assessing competition
• Board of Trustees (Regents)
• Creditors, both current and potential
• Owners/Investors, both current and potential
• Employee unions
• Regulatory agencies
• Philanthropic foundations and potential donors
• Public
50
Important questions they might ask
• Is the organization profitable? Why or why not?
• Is the organization able to pay its bills?
• How efficiently does it collect its accounts
receivables?
• What is the condition of its facilities? Are they
old and in need of replacement?
• How efficiently does the organization use its
assets?
• Is the organization in a good position to take on
more debt?
51
Let’s Dive Right In
• Handout: FY12 University Financial Statements
52
UM FY12 Financial Statements
• How much cash did the University have at the end of FY12?
Endowment Investments?
• What were the top 4 revenue streams? Expense
categories?
• How much did the University spend on capital in FY2012?
• What jumps out as different on the FY2011 income
statement?
53
UM FY12 - Assets
54
UM FY12 – Cash & Investments
55
UM FY12 – Liabilities & Net Assets
56
UMY12
Income Statement
57
UM FY12
Cash Flow
58
UM FY12
Capital
59
60
Interpreting Financial Statements
• Quick tips on financial statement
interpretation & analysis
• Relation of financial performance to
organizational excellence & mission
61
Financial Statement Analysis
• Financial statement analysis focuses on the information in a
business’s financial statements with the goal of assessing
financial condition.
• Operating indicator analysis focuses on operating data with the
goal of explaining financial performance.
Thou shalt not …
1.
use statements in isolation
2.
use statements as the only information on a firm
3.
avoid reading footnotes
4.
focus on a single number
5.
overlook implications
6.
ignore events subsequent to statements
7.
overlook the limitations of the statements
8.
use statements without knowledge
9.
shun professional help
10.
take unnecessary risks
Days Cash =
Debt-to-Capitalization =
Debt Service Coverage =
Average Age of Plant =
Total Margin =
Operating Margin =
ROE =
Liquidity
Cash + Marketable Securities
(Operating Expenses — Depreciation)/365
Leverage
Long-term Debt
Total Assets
Net Revenue
Principal Payments + Interest Payments
Asset Management
Accumulated Depreciation
Depreciation Expense
Profitability
Net Income
Revenue
Net Operating Income
Operating Revenue
Net Income
Total Equity
62
63
How to Use Ratios
• Comparing a firm to itself over time
• Comparing across firms
• Comparing a firm to an industry
• Comparing across industries
64
What do you think are the financial
and operating characteristics of top
performing hospitals?
65
Characteristics of Top Performing Hospitals
• Deliver better quality of care and have better outcomes
(lower rates of complications, lower mortality rates,
better patient safety) even though their patients are
more severely ill (higher case mix index)
• Have higher occupancy rates and lower average length
of stay
• Collect more revenue and incur lower operating
expenses per discharge
• Have more cash reserves and collect their patient
revenues faster
• Invest more in plant modernization and replacement
• Manage their debt better (they have more funds
available to cover their debt service)
More information: http://www.100tophospitals.com
66
Financial Accounting as a Foundation
• Financial Accounting as a universal language
• Necessary context for any career in any industry
• Foundation for managerial accounting (how we
actually manage organizations from within) and
corporate finance (how we actually make and
manage investment decisions for the long-run
viability of an organization)
67
UMHS Financial Statements
69
Levels of Statements
• Financial statements are produced at many
levels within the Health System
– Total Health System
– Components parts
• Hospital
• Medical School
– Departments within the School
» Sections/Divisions of departments
• Programs within sections/divisions
70
UMHS Financial Statements - Overview
• See attached financial packets from June 2012
– Executive Summary (PPT)
– UMHS Statements (PDF)
– HHC Detail (PDF)
– MS Detail (PDF)
71
UMHS Financial Summary
• Total UMHS financial performance
–
–
–
Operating Margin
Total Margin
Total Cash Margin
• Financial Results by entity
–
–
–
–
–
HHC
MS
Shared Services
MHC
“Eliminations”
72
UMHS Financial Update
June FY 12 Results
UMHS Financial Performance
June FY 12 YTD
FY12
YTD
Actual
FY11
YTD
Actual
Total Revenues
$3,260.7
$3,091.1
5.5%
$3,260.7
$3,091.1
5.5%
Operating Expenses
Payroll
Depreciation
Other Operating
Total Expenses
2,078.4
228.9
1,128.0
$3,435.3
1,931.9
185.4
1,021.7
$3,139.0
7.6%
23.5%
10.4%
9.4%
2,078.4
228.9
1,128.0
$3,435.3
1,931.9
185.4
1,021.7
$3,139.0
7.6%
23.5%
10.4%
9.4%
Operating Margin
Margin %
Non Operating Items
Investment Income
Interest Expense - net
Other Non Operating
Pre Transfers / Support Margin
Margin %
UMHS Support
Equity Transfers - Net Campus
Total Margin
Margin %
Total Cash Flow Margin
Margin %
($174.6)
-5.4%
($47.9)
-1.5%
118.3
(20.6)
16.0
117.7
(20.9)
12.9
($60.9)
-1.9%
%
Change
Last 12
Last 12
Months thru Months thru
%
Jun FY12
Jun FY11
Change
($174.6)
-5.4%
($47.9)
-1.6%
118.3
(20.6)
16.0
117.7
(20.9)
12.9
$61.8
2.0%
($60.9)
-1.9%
$61.8
2.0%
(8.7)
(0.3)
(8.7)
(0.3)
($69.6)
-2.1%
$61.5
2.0%
($69.6)
-2.1%
$61.5
2.0%
$168.5
5.2%
$246.9
8.0%
$168.5
5.2%
$246.9
8.0%
0.5%
-1.4%
24.0%
0.5%
-1.4%
24.0%
74
UMHS Financial Performance
FY 12 June YTD by Entity
HHC
Med
School
Total Revenues
$2,257.6
$1,155.9
$100.6
$11.3
Operating Expenses
Payroll
Depreciation
Other Operating
Total Expenses
1,132.5
186.7
945.5
$2,264.7
881.3
41.9
401.0
$1,324.2
60.4
37.4
$97.8
4.2
0.3
8.8
$13.3
Operating Margin
Margin %
($7.1)
-0.4%
($168.3)
-14.6%
Non Operating Items
Investment Income
Interest Expense - net
Other Non Operating
49.1
(16.9)
(1.4)
63.5
(3.7)
16.9
Pre Transfers / Support Margin
Margin %
$23.7
1.0%
($91.7)
-7.9%
UMHS Support
Equity Transfers - Net Campus
(90.3)
(6.5)
Total Margin
Margin %
Total Cash Flow Margin
Margin %
87.0
7.8
Shared
Services
$2.8
2.8%
MHC
($2.0)
-16.0%
UMHS
Eliminations Consolidated
($264.7)
$3,260.7
(264.7)
($264.7)
2,078.4
228.9
1,128.0
$3,435.3
$0.0
($174.6)
-5.4%
2.8
0.5
2.9
-
118.3
(20.6)
16.0
$6.1
6.1%
$1.0
0.0%
(9.2)
3.3
(0.8)
(8.7)
$0.0
($60.9)
-1.9%
($73.1)
-3.2%
$3.1
0.3%
($3.1)
-3.1%
$3.5
31.1%
($69.6)
-2.1%
$115.0
5.1%
$52.8
4.6%
($3.1)
-3.1%
$3.8
36.0%
$168.5
5.2%
75
HHC Summary –
June FY 12
(0.5)%
(0.3)%
June FY 12 Operating Highlights
• June Operating margin = ($1.0M) / (0.5)%
• Full year FY 12 Operating margin = ($6.9M) / (0.3)%
• June EBITDA/Oper Cash Flow margin = 8.9%; YTD=8.0%
• June results favorably impacted by ≈ $5M of unusual items
(non-recurring / timing)
• Strong activity growth (5.1%) compared to June FY 11
– 3rd straight month of adjusted case growth over 5%
– Second half FY 12 activity growth 5.9% vs FY 11 H2
• Appointed FTEs grew in June FY 12 – continuing expense
pressure
– Full year 12 labor productivity metric unfavorably impacted
by FTE increases outpacing activity growth
June
FY12 vs.
June
FY11
June FY12
YTD vs.
June FY
11 YTD
FY11 12
mos. vs.
FY10 12
mos.
Activity - Adjusted
Cases
5.1%
4.6%
3.3%
Short Term
$44.4/
8
$120.8 /
24
Facility Rev per case
Fav /(Unfav)
4.9%
2.9%
0.9%
Long Term
$981.0 /
176
$1,043.0
/ 204
Total Exp per case
(Fav) / Unfav
14.8%
5.9%
1.3%
Total
$1025.4 /
184
$1,163.8
/ 228
Labor Efficiency(Fav)/Unfav
6.8%
1.7%
(0.1)%
40.4%
36.1%
Key Metrics:
Balance Sheet:
June
30,2012
June 30,
2011
Unrestricted Cash ($ M / Days)
Debt to Capitalization Ratio
76
MS Summary –
June FY 12
June FY 12 Operating Highlights:
(3.6)% 0.3%
Key Metrics
June FY12
June FY11
Clinical YTD Operating
margin ($ M / %)
$126.4 /
20.8%
$114.0 /
20.1%
IDC / sq. ft. ($)
$115.0
$123.0
FTEs
Faculty
% Change vs prior year
2,165.8 /
4%
2,075
Staff
% Change vs. prior year
4,021.2 /
3.0%
3,922.1
• June month Total Margin = ($4.0M)
• Full year FY 12 Total Margin = $3.1M
• Net Patient Care Revenue up $33.6M YTD (9.5%), $7.1M
June FY 12 vs. June FY 11
• Increase in charges primarily driven by an increase in
activity and change in procedure mix.
• Overall research revenue is down $18.9M YTD driven by
decline in Federal Revenue for ARRA run-out.
• General Fund unfavorable YTD (-9.1M) but favorable June
FY 11 vs. June FY 12 by $5M. Favorable utilities due to mild
winter and higher than anticipated undergraduate tuition
account for positive June adjustment.
• Total Compensation has increased by $25.8M YTD (6.3%)
Balance Sheet:
June
30,2012
June 30,
2011
Short Term
$304.8 /
137.0
$321.0 /
158.0
Long Term
$601.6 /
270.0
$596.7 /
293.0
Total Unrestricted
$906.4 /
407.0
$917.7 /
451.0
Unrestricted Days Cash
on Hand ($ M / Days)
77
Shared Services Summary –
June FY 12
June FY 12 Operating Highlights
$11.7
$10.9M
• June FY 12 monthly expense = $10.9M
• Payroll = $5.7M Non-Payroll = $5.2M
• Increase in expenses for month of June attributable to:
• $1.9 M for the outsourcing of legacy IDX / Healthquest
AR collections
• Higher monthly advertising expenses as compared to
previous months
• Adjustment to accrued PTO liability
• YTD Shared Service expense = $91.1M
• FY 12 Original Plan = $94.7M
FTEs
173
692.5
• Shared Service FTE levels consistent for much of FY 12
• Average Yearly Shared Service FTEs = 685
• July FTE levels higher as a result of 3 bi-weekly payrolls.
• September number includes an accrual adjustment of
173 related to process change for monthly bi-weekly
payroll accruals. Excluding this adjustment average
yearly FTEs decline to 671
78
Consolidated UMHS Summary –
June FY 12
June FY 12 Operating Highlights:
• Full year FY 12 UMHS Total Cash Flow margin = 5.2%
10.7%
• Original FY 12 Plan = 5.7%
5.2%
• Q4 long term investment market value adjustment
$(18)M unfavorable QTD and $(71)M unfavorable YTD
• MS unfavorable $(10)M QTD and $(38)M unfavorable YTD
• HHC unfavorable $(8)M QTD and $(33)M unfavorable YTD
• Impacts reflected in cash & investment balances but not in
total margins
• Memo: FY 11 total year market value adjustment was
$355M favorable
June
30,2012
June 30,
2011
Unrestricted Days Cash on
Hand ($ M / Days)
$2,039.2 /
232
$2,192.2 /
271
Total Net Assets ($ M)
$3,708.0
$3,835.7
Balance Sheet:
79
80
Historic Margin Performance
• UMHS Cash Flow Margin
• HHC Operating Margin
• MS Total All Funds Margin
81
UMHS Total Cash Flow Margin
10.0%
8.0%
9.1%
8.0%
7.6%
6.6%
6.0%
5.2%
4.0%
2.0%
0.0%
-0.8%
-2.0%
FY08
FY09
FY10
FY11
FY12
FY 13 Sept
YTD
82
82
HHC Operating Margin Trend
HHC Operating Margin Trend
A Long Term Perspective
10.0%
8.0%
6.0%
UH Opened
Cancer Center Opened
4.0%
2.0%
0.0%
-2.0%
-4.0%
CVC Opened
MNA Strike Year
Balanced Budget Act
C&W Opens
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
FY Margin 3.1% -0.9 2.2%8.7%6.1% -3.0 -2.0 -0.1 1.2%0.3%2.0%4.4%5.7%2.7% -1.4 1.5%2.6%0.7%0.6%1.3%1.1%2.2%4.3%5.7%5.8%3.6%1.7%1.0%3.2%2.1% -1.1 -0.1 2.4%3.9%
83
Medical School Total Margin Trend
(excluding unrealized market changes and extraordinary items)
$millions
$100
12.0%
10.0%
$80
$87.9
8.0%
$64.6
$72.8
$60
$78.7
$74.5
$52.2
6.0%
$40
4.0%
2.0%
$20
$32.5
$21.0
$15.5
0.0%
$3.1
$-2.0%
$(19.2)
$(20)
84
Total Margin normalized to exclude one time and unusual items (MCare sale, NCRC Purchase & OPEB)
FY12
FY11
FY10
Total Margin %
FY13 Forecast
Total Margin
FY09
FY08
FY07
FY06
FY05
FY04
FY03
-4.0%
HHC Financial Framework
What are the “timeless” parameters/drivers of the HHC Financial Framework?
• Liquidity:
– Adhere to a minimum 150 days cash on hand floor (Target 187 – 243, per Moodys A & Aa)
– Note: Fluctuations in market value of LT Cash can cause significant variability (+/-) outside of
–
–
–
our control.
Note: For major inpatient replacement ($1-1.5B investment required), 300-350 days cash on
hand required (100-150 days cash for the investment + 200 days cash target minimum)
Hence, average days cash across the next 20 years should be at or above 275.
Note: A similar but alternative benchmark is that unrestricted cash should be >45% of HHC
assets.
• Debt:
– Meet required Debt Ratios (primarily Debt to Cap of 38-40%)
– Note: UM HHC should seek to borrow to single A median hospital levels (38%-40% debt to
cap). Timing will vary as new debt must be secured by fixed/tangible assets and fit within the
UM campus debt portfolio.
• Operating Margin:
– Achieve 3-4% sustained annual operating margins, strive for 5%
– Generating cash flow from operations is vital to achieving our investment aspirations (vs.
relying on cash flow from investments & philanthropy)
85
FY13-FY22 HHC Days Cash on Hand
Unrestricted Days Cash on Hand
250
Moody's Aa
200
Moody's A
179
168
154
150
150
125
100
107
85
50
22
0
FY10
FY11
FY12
150 DCOH Floor
FY13
FY14
FY15
All Projects
FY16
FY17
FY18
FY19
Updated FY 12 Base
FY20
FY21
FY22
FY 12 Base
86
FY13-FY22 HHC Operating Margin %
Operating Margin %
6.0%
5.0%
4.6%
4.5%
4.5%
4.2%
Moody's Aa
4.0%
3.0%
Moody's A
2.0%
1.0%
0.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
-1.0%
150 DCOH Floor
All Projects
Updated FY 12 Base
FY 12 Base
87
FY13-FY22 HHC Debt to Capital %
Debt to Capitalization Ratio
50%
40%
Moody's A
36.5%
31.7%
Moody's Aa
30.5%
29.7%
30%
20%
10%
0%
FY10
FY11
FY12
150 DCOH Floor
FY13
FY14
FY15
All Projects
FY16
FY17
FY18
FY19
Updated FY 12 Base
FY20
FY21
FY22
FY 12 Base
88
HHC Financial Statements - Exercise
• Questions:
– How is the HHC’s liquidity in June? (hint: find the
days cash on hand metric)
– What explains the YTD HHC margin performance of
$63.4M vs. last year’s YTD margin of $57.0M? (hint:
see FY11 vs. FY10 variance page)
89
Deconstructing Margin Trends
90
Questions
What explains the $91.2M increase in revenues
from 2010 to 2011?
What explains the $97.6M increase in expenses
from 2010 to 2011?
91
Revenue Increase Deconstruction
(FY11 to FY10 Variances)
92
Expense Increase Deconstruction
(FY11 to FY10 Variances)
93
Medical School Financial Statements
• Each component has its own more detailed
financial statements
• Medical School statement also has a
summary page of items that are tracked for
management purposes
• In addition it includes how the departments
are doing from an operations perspective
94
UMHS Wealth &
Funds Flow Overview
Dollar Bills
• Where do the dollars sit?
• How do the dollars flow?
97
All dollars are maize and blue
98
Cash Balances
99
UMHS Unrestricted Days Cash on Hand
100
FY12 Medical School Cash & Investments
Medical School Cash & Investments 6/30/12
$millions
Medical School
Dean's Office
Total: $1,862.1 M
Total: $563.0
FGP
$58.1
3.1%
MSA Discretionary
$151.4
26.9%
Departments
$1,241.0
66.6%
MSA Restricted
$307.6
54.6%
Dean
$563.0
30.2%
MSA Designated
$51.6
9.2%
Capital & Debt
$52.3
9.3%
See next slide
101
Total Unrestricted
$255.4 M
FY12 Departmental Cash & Investments
Medical School Departments
Total UIP Cash & Investments and Unrestricted Days Cash & Investments on Hand
as of June 2012
$180.0
1100
Restricted
1000
Unrestricted
$160.0
949
2012 Unrestricted Days cash on hand
900
$140.0
800
700
614
$100.0
564
600
556
520
$80.0
451
451
500
431
405
$60.0
$40.0
397
383
400
342 329
317
291
284
270
265
265
251
300
239
223
190
200
160
$20.0
114 107
104 98
91
Millions
52
$0.0
Days Unrestricted Cash on Hand
$120.0
100
0
10
2
UMHS Funds Flow
In practice, we have to work through
long histories, politics and silos to get
$’s in the right spot
UMHS Executive Leadership
105
UMHS Funds Flow Overview
UM Central
Campus
Funds Flows between Campus & UMHS:
•
•
•
Mission/academic support
Activity-based pass through (UBM)
Payments for services and overhead
$
Funds Flows between MS & HHC:
Health System
Medical
School
Dean/
FGP
$
Depts
$
Hospitals and
Health
Centers
•
•
•
•
Equity
Payments for services
UMHS shared services
Strategic investments
Funds Flows within the Medical School:
•
•
•
•
Academic activity/base allocations (FAM III)
Clinical activity-based (RVU Model)
Payments for overhead & capital
Commitments
106
HHC & MS Funds Flow Models
Equity
Transfers
• Academic Support Payment
• Ambulatory Care Margin Share
• Limited Remaining Local Arrangements (ex:
MLabs, Livonia Surgery Center)
• Revenue Reimbursement (ex: Primary Care RVUs)
Operating Payments
for Services
• Service Coverage (ex: Radiology night coverage, Hospitalists)
• Split Administrative Expense & Provider Support (ex: Department Administrators)
• Medical Director Pay (FASA and ACU)
• Graduate Medical Education
Shared
Administrative
Operating Expenses
Other
• Shared Services Expense (ex: Communications, Revenue Cycle, EVPMA, etc.)
• Shared Space Arrangements (ex: use of internal rent model and/or depr. allocation)
• Select Strategic Investments
107
Funds Flow Summary
• In FY11 we finalized multiple funds flow model changes
within UMHS:
• FAM III (MS Dean  MS Departments)
• Academic Support Payment (HHC  MS)
• Ambulatory Care Margin Share (HHC   MS)
• RVU Model (FGP  MS Clinical Departments)
• Multiple “local” arrangements
108
Funds Flow Implementation Framework
Funds Flow
Mechanism
Intended Uses
Administrative
Oversight
HHC  Medical School Models
Academic Support Payment
• Investment and support of the academic mission
• Includes: academic program support, faculty recruitment and retention, chair recruitment and
retention, capital investments, one-time commitments, etc.
MS Dean
Ambulatory Care Margin Share
• ACU incentives
• Funding the RVU model
• Supplemental Clinical faculty recruitment & retention
•Clinical quality, safety and customer service initiatives
FGP
Payments for Services
•
Shared Services
• Services under direction of an integrated UMHS leader whose services support all UMHS divisions.
MS CAO , MS FGP
Exec. Dir. & HHC COO
Service Coverage, Medical Directors, etc.
EVMPA, MS Dean &
HHC CEO
Dean/FGP  Department Models
RVU Model
• Activity-based clinical productivity payments to support faculty effort
FGP
FAM Model
• Activity-based flow for research IDC effort & overhead
• Activity-based flow for tuition/education mission effort
• Activity-based charge for cost of space & capital recovery
• Base allocations & select supplements
MS Dean
Dean’s Commitments &
MS Investment process
• Faculty/Chair recruitment & retention
• Research Center/Program support
• Facilities Renovations, Research/Education Equipment Purchases
• New/expanded operating units (Academic or overhead support)
MS Dean
NCRC Tax
• NCRC capital renovations and safe mode operations
MS Dean/Exec.
Director NCRC
• Annual allocation for HHC Capital needs
HHC CEO
HHC Internal Models
HHC Capital Allocations
109
Linking Strategy & Investments to Funds Flow
Strategy Drives Investment
Strategy
Process for Decision Making
Governance
• UMHS Leadership sets funds flow
parameters and adjusts periodically to
align with strategic objectives
• Both ongoing funds flow and existing
allocation processes of reserves dictate
where and how much dollars can be
spent on new investments (capital &
operating, central & local)
Allocation
Big
Oversight
• Existing groups (committees, leads, etc)
evaluate new proposals at multiple levels
of the organization, with varying degree
of process rigor
Specific
Investments
• Ongoing monitoring of prior investments
and reallocation of funds flow and
processes as needed
Evaluation
110
University of Michigan
Health System
FY 13 March Operations and
Financial Update
Provided to:
Health Affairs Committee
April 18, 2013
Agenda
• HHC
o Performance Metrics
o March Financial Results
• Medical School
o March Financial Results
112
Executive Summary
UMHS March FY 13 Results
• HHC March operating margin = $12.3M / (6%). YTD operating margin
loss of ≈ ($16.0)M / (0.9)%.
o March results continue to benefit from strong revenue per case trends, as
well as expense management initiatives
 Monthly facility revenue per case up 5.4% over March FY 12, and up 5.1% YTD
vs original FY 13 plan of 1.3%
 FTE levels stable throughout Q3 with strong revenue / activity
o Robust segment financial performance (Amb Care March op margin = 15%)
o HHC organizational goal to achieve breakeven results for FY 13.
• Med School reported March total margin loss of $(1.3)M / (1)%.
total margin loss of ≈ ($55.4M) / (6.3)%
YTD
o MS March results improved vs February due to stronger net patient care
revenues and higher Ambulatory Care margin sharing payments
o MS expects improved second half financial performance relative to first half
of FY 13, which included impacts of MiChart launch (Aug FY 13)
113
HHC YTD Operating Margin
Quarterly / Monthly Trend Detail
Amounts in $M
Business Days
FY 13 Q1
63
October
23
Total Operating Revenue
$555.8
$204.4
Payroll Expense
Supply Expense
Depreciation Expense
Other Operating Expense
Total Operating Expense
300.6
116.6
49.7
114.3
581.2
Operating Margin
Operating Margin
November
20
December
20
FY 13 Q2
63
January
22
February
20
March
21
$193.1
$187.0
$584.5
$209.0
$186.9
$207.2
$603.1
103.8
42.9
16.7
41.3
204.7
103.2
40.0
16.7
38.6
198.5
97.5
39.4
17.4
36.8
191.1
304.5
122.3
50.8
116.7
594.3
103.9
40.5
17.6
40.3
202.2
95.2
38.9
17.7
35.1
186.9
90.1
39.3
17.6
47.9
194.9
289.2
118.7
52.9
123.3
584.0
($25.4)
($0.3)
($5.4)
($4.1)
($9.8)
$6.8
$0.0
$12.3
$19.1
p
(4.6%)
(0.1%)
(2.8%)
(2.2%)
(1.7%)
3.3%
0.0%
3.2%
p
6.0%
FY 13 Q3
63
Trend
114
HHC Key Metrics
Monthly FY 13 Metrics
FY 13 Q1
October
24,398
8,825
Facility Net Revenue Per Case $
$20,846
Total Expense per case $
Adjusted Cases
FTE per UOS
Supply Expense per Case $
November
January
February
March
FY 13 Q3
Trend
December
FY 13 Q2
8,232
8,106
25,163
8,580
7,843
8,758
25,181
p
$20,834
$21,272
$20,928
$21,055
$22,063
$21,459
$21,592
$21,712
p
$23,147
$22,955
$23,383
$22,822
$22,909
$22,751
$23,154
$21,626
$22,485
q
1,521
1,428
1,576
1,466
1,490
1,462
1,629
1,304
1,459
q
$4,773
$4,794
$4,854
$4,847
$4,860
$4,720
$4,960
$4,487
$4,714
q
Monthly Metric Percentages:
Adjusted Cases (% vs PY)
2.4%
10.5%
6.1%
1.8%
6.1%
7.3%
1.9%
1.9%
3.7%
p
Facility Net Rev Per Case (% vs PY)
3.7%
3.0%
5.7%
6.4%
5.2%
7.2%
5.6%
5.3%
6.0%
p
11.5%
10.1%
2.2%
-0.7%
2.5%
-0.4%
0.2%
-0.5%
-0.2%
q
FTE per UOS (% vs PY)
5.7%
0.0%
2.0%
-1.0%
0.4%
-1.5%
3.1%
-3.2%
-0.5%
q
Supply Expense per Case (% vs PY)
8.4%
8.9%
3.7%
-0.8%
4.6%
-3.7%
9.0%
-2.1%
0.8%
q
Total Expense per case (% vs PY)
"PY" - Prior Year
115
HHC Mar FY 13 Month Results
Comparisons to Prior Year / Plan
Amounts in $ M
March Month
FY 13
FY 12
Actual
Actual
Variance
FY 13
Actual
March Month
FY 13
Plan
Variance
Operating Revenue
$207.2
$193.1
$14.1
7.3%
a)
$207.2
$197.3
$9.9
Operating Expenses
Payroll
Supplies
Depreciation
Shared Services
Other Non-Salary
Total Expenses
90.1
39.3
17.6
5.5
42.4
$194.9
96.4
39.4
17.4
6.1
33.5
$192.8
(6.3)
(0.1)
0.2
(0.6)
8.9
$2.1
1.1%
b)
90.1
39.3
17.6
5.5
42.4
$194.9
99.2
40.7
16.5
5.6
30.8
$192.8
(9.1)
(1.4)
1.1
(0.1)
11.6
$2.1
b)
Operating Margin
Margin %
$12.3
5.9%
$0.3
0.2%
$12.0
$12.3
5.9%
$4.5
2.3%
$7.8
Operating Cash Flow Margin
Margin %
$29.9
14.4%
$17.7
9.2%
$12.2
$29.9
14.4%
$21.0
10.7%
$8.9
a) March FY 13 revenue favorably impacted by a 1.9% increase in activity, as well as higher monthly facility collection rates
leading to an increase in facility revenue per case of 5.4%. March revenue also includes $1.1M of meaningful use incentive
accruals.
b) Decrease in payroll and increase in other non-salary expense primarily due to margin neutral reclassification of expense
related to transfer of Security Services employees to main campus department control. Total amount of reclassification is
approximately $8.5M.
116
b)
b)
HHC Mar FY 13 YTD Results
Comparisons to Prior Year / Plan
Amounts in $ M
9 Months thru March
FY 13 YTD FY 12 YTD
Actual
Actual
Variance
9 Months thru March
FY 13 YTD
FY 13
Actual
YTD Plan
Variance
Operating Revenue
$1,743.5
$1,596.2
$147.3
9.2%
a)
$1,743.5
$1,723.5
$20.0
Operating Expenses
Payroll
Supplies
Depreciation
Shared Services
Other Non-Salary
Total Expenses
894.3
357.6
153.3
51.3
303.0
$1,759.5
839.0
328.7
134.7
49.1
268.3
$1,619.8
55.3
28.9
18.6
2.2
34.7
$139.7
8.6%
b)
894.3
357.6
153.3
51.3
303.0
$1,759.5
895.6
352.0
148.6
50.2
271.4
$1,717.8
(1.3)
5.6
4.7
1.1
31.6
$41.7
Operating Margin
Margin %
Operating Cash Flow Margin
Margin %
c)
d)
($16.0)
-0.9%
($23.6)
-1.5%
$7.6
($16.0)
-0.9%
$5.7
0.3%
($21.7)
$137.3
7.9%
$111.1
7.0%
$26.2
$137.3
7.9%
$154.3
9.0%
($17.0)
a) FY 13 Mar YTD revenue increase due to increases in revenue per case of 5.1%, as well as increases in activity / adjusted
cases which are up 4.0% YTD
b) FY 13 Mar YTD FTE levels 806 higher than Mar FY 12 YTD FTEs due to staff additions for C&W and other HHC departments.
Note that salary expense is also favorably impacted by reclassification to other non-salary expense related to Security Services
transfer to main campus department control (reclassification margin neutral in total)
c) Incremental depreciation for C&W facility launched in Q2 FY 12 (no corresponding depreciation in July – Oct FY 12 YTD).
d) Variance primarily due to increase in contract services. Includes ≈ $10M non-recurring activation support expenses for
MiChart launch. Transfers related to Security Services as described above in the amount of $8.5M also impacting this line item.
117
d)
March FY 13 YTD Activity Summary
March
March
FY 13 YTD FY 12 YTD
Discharges
Y2Y%
FY13 Plan
% Change
33,996
33,415
1.7%
3.2%
6.27
6.26
0.2%
1.1%
Observation Cases
11,870
9,753
21.7%
14.8%
Total Cases
45,866
43,168
6.3%
5.9%
229,634
220,230
4.3%
4.7%
5.01
5.10
(1.8%)
(1.2%)
86.1%
85.8%
0.4%
3.6%
ED Visits
72,981
67,213
8.6%
5.3%
Radiology
404,632
402,691
0.5%
N/A
OR Cases
36,805
35,972
2.3%
3.8%
Total Clinic Visits
1,417,393
1,455,493
(2.6%)
3.2%
Adjusted Cases
74,699
71,807
4.0%
4.5%
Average Length of Stay (Discharges)
Total Patient Days
Average Length of Stay (Discharges + Obs)
Occupancy %
118
HHC
FY13 Operating Margin Trend
$15
12.3
$10
6.8
(In Millions)
$5
0.0
$0
$5.3 Mil Monthly
Margin to achieve
Break-Even
(0.3)
($5)
(3.5)
(5.4)
(4.1)
($10)
(10.3)
(11.6)
($15)
119
HHC
FY13 Adjusted Discharge Trend
12.0%
10.8%
MTD YOY % Chng: Adjusted Discharges
10.0%
7.3%
8.0%
6.2%
6.0%
5.0%
4.3%
4.0%
4.0%
2.1%
2.0%
4.5%
1.9% 1.9%
0.0%
-2.0%
-1.7%
-4.0%
120
HHC
FY13 Total Net Revenue per Case Trend
8.0%
MTD YOY % Chng: Total Net Revenue per case
7.2%
7.0%
6.4%
5.7%
6.0%
5.0%
4.4%
5.6% 5.4%
5.1%
4.3%
4.0%
3.0%
2.0%
3.0%
2.4%
1.3%
1.0%
0.0%
121
HHC
FY13 Total Expense per Case Trend
MTD YOY % Chng: Total Expense per Case
17.0%
15.0%
15.2% 15.0%
13.0%
11.0%
9.6%
9.0%
7.0%
5.9%
4.5%
5.0%
3.0%
2.2%
-1.0%
0.9%
0.2%
1.0%
-0.7% -0.4%
-0.4%
-3.0%
122
HHC
FY13 Total Paid FTEs per Case Trend
MTD YOY % Chng: Total Paid FTEs per Case
11.0%
9.7%
9.0%
7.0%
5.0%
5.8%
3.5%
3.1%
3.0%
1.0%
-1.0%
2.0%
1.7%
0.0%
-1.0% -1.5%
-3.0%
-5.0%
-3.2%
-2.6%
123
HHC Appointed and Paid FTEs
15,100
14,900
OIP FTE Target
14,700
14,723
14,570
14,546
14,500
14,334
14,300
FTE's Appointed
•
FTEs Paid
OIP Forecast
Appointed FTE levels reduced by 155 FTEs from January back to July to reflect January transfer of HHC
Security Services staff to campus Department of Public Safety. Paid FTE levels reduced from February back
to July to reflect this move, as payroll responsibility was transferred in March business.
Jun FY 13
May FY 13
Apr FY 13
Mar FY 13
Feb FY 13
Jan FY 13
Dec FY 13
Nov FY 13
Oct FY 13
Sept FY 13
Aug FY 13
July FY 13
13,900
14,092
June FY 12
14,100
Medical School Mar 13 Month Results
Amounts in $ M
FY 13
Actual
Operating Revenue
Operating Expenses
Payroll
Supplies
Depreciation
Shared Services
Other Non-Salary
Total Expenses
March Month
FY 12
Actual
Variance
$97.6
$92.2
$5.4
5.9%
73.9
8.6
3.4
3.7
27.3
$116.9
72.7
8.8
3.5
2.3
24.2
$111.4
1.2
(0.2)
(0.0)
1.4
3.1
$5.5
4.9%
Operating Margin
($19.3)
($19.3)
Margin %
-19.8%
-20.9%
a)
b)
($0.1)
Non-Operating Items
Net Interest Inc / (Exp)
5.5
5.1
0.4
11.3
6.5
4.8
Endowment gifts
0.7
0.4
0.4
Other non operating
0.6
0.5
0.0
UMHS Support
Total Margin
Margin %
($1.3)
-1.3%
($6.8)
-7.4%
c)
$5.5
a) Increase in monthly Operating Revenue primarily driven by increase in Net Patient Care Revenue as well as incentive payments for
Meaningful Use Attestation
b) Increase in monthly Other Non Salary Expense due to increase in NCRC facility & maintenance expense, as well as higher
subcontract expenses on federal funds research..
c) Increase in UMHS Support due primarily to favorable Ambulatory Care Margin Sharing vs March FY 12, and inflationary increases
on Academic Support Payments.
125
Medical School Mar 13 YTD Results
Am ounts in $ M
Operating Revenue
Operating Expenses
Payroll
Supplies
Depreciation
Shared Services
Other Non-Salary
Total Expenses
Operating Margin
Margin %
9 months thru March
FY 13
FY 12
Actual
Actual
Variance
$879.1
$853.7
$25.4
3.0%
a)
676.3
81.2
31.4
34.2
228.8
$1,051.9
650.8
75.5
31.1
18.9
209.2
$985.5
25.5
5.7
0.3
15.3
19.6
$66.4
6.7%
b)
($172.9)
($131.8)
($41.0)
-19.7%
-15.4%
b)
c)
Non-Operating Items
Net Interes t Inc / (Exp)
47.7
45.0
2.7
UMHS Support
56.3
63.2
(6.9)
Endowm ent gifts
8.7
12.5
(3.8)
Other non operating
4.7
7.4
(2.6)
Total Margin
Margin %
($55.4)
-6.3%
($3.7)
-0.4%
d)
($51.7)
a)
Increase in YTD Net Patient Care Revenue of $15M / 5.1%. Sponsored Research up $4.5M / 1.9%
b)
FY 13 YTD actuals include transfer of staff to Shared Services (margin neutral to MS), not reflected in prior year actuals. Had the
transfer not taken place, payroll variances would have increased by $16.5 M. with reduction to Shared Services variance of
($16.5)M
c)
Includes ≈ $12.3M of NCRC “safe mode” facility & maintenance expenses
d)
Reduction in UMHS Support primarily related to lower margin sharing payments from HHC due to lower YTD Ambulatory Care
margin performance in FY 13
126
Medical School Only
FY13 Total Margin Trend
$10
6.8
$5
(In Millions)
$0
(0.8)
($5)
($10)
(4.0)
(4.4)
(8.8)
(7.6)
(10.2)
(11.2)
($15)
(16.0)
($20)
127
Unrestricted Days Cash on Hand
HHC
March 31, 2013
June 30, 2012
Short Term ($ Mil / Days)
$ 75.5 / 13
$44.4 / 8
Long Term ($ Mil / Days)
$ 983.5 / 172
$981.0 / 183
$ 1,059.0 / 185
$1,025.4 / 191
March 31, 2013
June 30, 2012
$210.8 / 87
$304.8 / 137
$870.1 / 361
$906.4 / 407
Unrestricted Days Cash on Hand
Total ($ Mil / Days)
Medical School
Unrestricted Days Cash on Hand
without FFAE (Quasi Restricted)
Investments
($ Mil / Days)
Unrestricted Days Cash on Hand
w / FFAE Investments
($ Mil / Days)
128
Appendix
129
Glossary of Terms
Item
Operating Margin (%)
Description / Computation
•
•
•
= (Total Operating & Patient Care Revenues – Operating
Expenses such as payroll, supplies, depreciation) / Total
Operating Revenue
Excludes investment income and interest expense
Primary financial metric for HHC operations
Total Margin (%)
•
•
•
= (Total Revenues – Total Expenses) / Total Operating Revenue
Includes investment income and interest expense
Primary financial metric for MS operations given reliance on
investment income to fund expenses
Operating Cash Flow Margin (%)
•
= (Total Operating Revenues – Operating Expenses + non cash
depreciation expense) / Total Operating Revenue
Provides measure of cash generation capability (akin to
‘EBITDA’)
•
Contractual Allowance
•
•
Reductions / discount to gross charges to arrive at net revenue
levels stipulated by contractual arrangements with payors such
as Medicare, Medicaid, Blue Cross etc.
Typical HHC contractual ≈ allowance 50-60%
130
Glossary of Terms (con’t)
Item
Case Mix Index (CMI)
Description / Computation
•
•
Average Length of Stay (ALOS)
•
•
•
Observation Case
•
•
Relative measure of inpatient case severity for Medicare
patient activity
Higher CMI = Higher severity
= Total Patient Days / Inpatient discharges
Increases or decreases to average length of stay are
oftentimes evaluated according to changes in CMI
Medicare typically pays a defined procedural fee irrespective
of length of stay
Short duration patient encounters classified and paid as
outpatient activity (many of which were previously deemed
inpatient admissions)
Per CMS, Observation care is a “well-defined set of specific,
clinically appropriate services…while a decision is being made
regarding on requiring further treatment as hospital inpatients
or discharge from the hospital”
131
Glossary of Terms (con’t)
Item
Full Time Equivalent (FTE)
Description / Computation
•
•
Days Cash on Hand
•
•
•
Calculated value of employee efforts against standard,
reflecting overtime and partial appointment status
Typical standard: 80 hrs worked / 2 weeks = 1 FTE
= (Unrestricted Cash & Investments) / Daily Cash spend
Daily cash spend = (Total Operating Expenses - Depreciation)
/ 365
Liquidity measure used by rating agencies
132
Cash Balance Trends
UMHS Cash Balance
3,600.0
3,400.0
(in millions)
3,200.0
3,000.0
2,800.0
2,600.0
2,400.0
2,200.0
2,000.0
FY08
FY09
FY10
FY11
FY12
HHC Cash Balance
Med School Total Cash Balance
1,600.0
1,500.0
(in millions)
(in millions)
1,400.0
1,300.0
1,200.0
1,100.0
1,000.0
900.0
800.0
FY08
FY09
FY10
FY11
FY13 Feb YTD
FY12
FY13 Feb
YTD
2,000.0
1,900.0
1,800.0
1,700.0
1,600.0
1,500.0
1,400.0
1,300.0
1,200.0
FY08
FY09
FY10
FY11
FY12
FY13 Feb
YTD
133
Net Asset Trends
Total UMHS Net Assets
4,200.0
4,000.0
(in millions)
3,800.0
3,600.0
3,400.0
3,200.0
3,000.0
FY08
FY09
FY10
FY 11
FY 12
FY 13 Feb
YTD
Med School Total Net Assets
HHC Net Assets
2,050.0
2,000.0
2,000.0
1,900.0
1,950.0
(in millions)
(in millions)
1,800.0
1,700.0
1,600.0
1,500.0
1,900.0
1,850.0
1,800.0
1,400.0
1,750.0
1,300.0
1,700.0
1,200.0
1,650.0
FY08
FY09
FY10
FY11
FY12
FY13 Feb
YTD
FY08
FY09
FY10
FY11
FY12
FY13 Feb
YTD
134
135
Strategic Planning
137
Day 4
Afternoon Sessions
139
Strategic Plans vs. Business Plans
• A strategic plan outlines where an organization is going and
what actions it will take to get there in the context of its
environment and capabilities
• A business plan is more detailed as to how a specific
strategy will be implemented, and always includes
– Projections related to revenue and operating expenses (“business
model” for margin generation)
– Identification of capital investment
– Quantification of return on investment
– Assessment of risks and countermeasures
– More detailed tactics for implementation
140
Your role in developing business plans
• You generate the ideas
• You know the business
• You provide the information for the financial
analyses – assumptions about costs,
volumes, market conditions
• You provide the expertise
141
Business Plans - Examples
Bigger Projects
Smaller Projects
-
-
-
Build a new Children’s and
Women’s
Expand the Kellogg Eye Center
Build a new Data Center
Expand Central Sterile Supply
Purchase NCRC
Expand Emergency Department
Buy/lease a fixed wing aircraft
Add 2 OR’s
Establish a new Research Center
Convert med-surgical supply
distribution process
-
Establish an Incident Command
Center
Add a visitor badging station at the
ED
Add another DNA sequencer
Upgrade infant protection system
Add 1 or 2 new dryers to Laundry
production floor
Expand a destination program
Buy several new buses
Upgrade patient food distribution
process
Upgrade Pneumatic tube system
Lease additional off-site office
space
142
Finance Basics &
UMHS Processes
Topics
• Time value of money
• Project valuation (informational)
• Components of a Business Plan
• HHC & MS capital processes
144
Time Value of Money
• A dollar tomorrow is not worth as much as a
dollar today!
145
Discounted Cash Flows
• One of the main problems in finance is determining what
value we should place on prospective profits that will accrue
to a project.
• This has two components: time and uncertainty. For now
we will assume away uncertainty and concentrate on how to
devise techniques for evaluating the worth of certain profits
that will come in various future dates.
• This is crucial, because it will allow us to compare the value
of profits that may be coming in at very different times.
146
Future Value
• Think of your 401(k)…. What will the value of
your current contribution to TIAA/Fidelity be
at the time of your retirement?
– Present value - amount of your contribution
– Interest rate - rate will you earn at
– Time - how many years until you retire
147
Present Value
• Think about winning the Mega Millions
Lottery…..What is the stream of future
payments worth today
– Future value – amount of your winnings paid over time
– Discount interest rate – how much inflation will be
– Time – how many years to get your payment
• How much is this worth in today’s dollars?
148
Meaning of Future and Present Values
• All that present values and future values do
is to put cash flows which come in at
different times on a COMPARABLE BASIS
149
Net Present Value (NPV)
• How do we know what to invest in?
• Calculating the NPV allows us to compare
many different options for investment, using
a standard scoring system
– Need to know the discounted expected inflows
of cash
– Need to know the discounted expected outflows
of cash
150
Formulas
• FV = PV(1+i)T
• PV = FV/(1+i)T
• NPV = Discount cash inflows – discounted
cash outflows
151
Saving for Retirement: Example
• How much do I need to save a year from age 30 to
55 to retire at age 65 and received $100,000 a year
until I die? Assume return on investment = 12%
Start
Saving
30
25 Years
Quit
Saving
55
Retire
10 Years
65
Die
15 Years
80
• To solve this problem, we need to use a systematic
approach. We will move backward along the time
line.
152
Solution – Step 1
1. How much will you need at age 65? The answer is the
present value of a 15-year $100,000 annuity:
PV65 = C×PAF(r,n) = $100,000×PAF(12,15) = $681,086
12% Return
Year
Income
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
$ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
PV today $ 89,286 $ 79,719 $ 71,178 $ 63,552 $ 56,743 $ 50,663 $ 45,235 $ 40,388 $ 36,061 $ 32,197 $ 28,748 $ 25,668 $ 22,917 $ 20,462 $ 18,270
153
Solution Step 2
1. How much will you need at age 65? The answer is the
present value of a 15-year $100,000 annuity:
PV65 = C×PAF(r,n) = $100,000×PAF(12,15) = $681,086
2. How much will you need at age 55? The answer is the
PV of the sum you need at age 65. Thus, we simply take
the PV of PV65 for 10 years:
PV55 = F×PF(r,n) = $681,068.45×PF(12,10) = $219,291
154
Solution Step 3
3. Finally, How much will you need to put away every year
for the next 25 years? Using a sinking funds calculation:
C
FV
$219,291.61

 $1,644.68
PMT (r, n) PMT (12,25)
– Thus, if you put away $1,644.68 every year for the
next 25 year, you will have $100,000 per year during
your 15 retirement years. This is a powerful
demonstration of time value of money!
155
156
Project Valuation
Project Valuation
• To maintain our position as a leading academic
institution, we must utilize standard methods for
making financial decisions at all levels of the
organization.
• Resources are limited, and so they must be allocated
in ways that optimize value in each of our missions:
education, research and patient care.
• Project valuation consists of both quantitative and
qualitative techniques
158
Project Valuation – in 3 Steps
Estimate “r”: The Opportunity Cost of Capital
Separate presentation on UMHS cost of capital
Forecast Cash Flows
All relevant expected cash flows generated by the project
Evaluate
Quantitative
Qualitative
Discounted Cash Flows (DCF)
Strategic Positioning
Net Present Value (NPV)
Missions: Clinical, Education, Research
IRR (Internal Rate of Return)
Replacement vs. Growth
Profitability Index (Benefit-Cost Ratio)
Other Intangible Benefits
Break-even (Payback)
Option Value
159
Quantitative Project Valuation
• See resource packet for additional details…
• Consult your friendly finance contact for how
and when to apply these techniques!
160
161
Qualitative Evaluation
Qualitative Evaluation
• The UMHS mission requires weight be placed
on non-quantitative factors for capital planning.
• Start with Quantitative-Based Allocation to
protect financial position.
Project
Cost ($)
Expected NPV ($)
Project A
400,000
4,400,000
Project B
1,000,000
4,100,000
Project C
700,000
3,000,000
Project D
600,000
2,000,000
Project E
2,000,000
1,500,000
Project F
1,250,000
0
$5,950,000
$15,000,000
$2.7M
Capital
Constraint
Portfolio
NPV
$13.5M
163
Qualitative Evaluation
• Adjust quantitative portfolio for key qualitative
issues. Focus on organization’s strategic plan
and mission.
• Evaluate all projects with weighted, standard,
qualitative criteria.
• Sample criteria might include:
–
–
–
–
–
Physician alignment
Educational experience
Customer Value
Market positioning
Workforce development
25%
25%
20%
15%
15%
Purely
qualitative, no
ROI or other
financial
metrics here.
• Strategic Fit
164
Qualitative Evaluation
• Rank again using qualitative score
Project
Project C
Project A
Project F
Project B
Project E
Project D
Cost ($)
700,000
400,000
1,250,000
1,000,000
2,000,000
600,000
$5,950,000
Expected NPV ($)
Qualitative Score
3,000,000
4,400,000
0
4,100,000
1,500,000
2,000,000
$15,000,000
95
77
60
50
35
20
$2.7M
Capital
Constraint
Portfolio
NPV
$11.5M
165
Qualitative vs. Quantitative
• Take Home: If a project makes both lists, then
it’s in. Further debate/consideration must take
place for those projects that made one of two
lists
• Weighting both qualitative and quantitative
factors leads to a comprehensively informed
portfolio
– Protects missions and community initiatives
– Ensures overall investment will generate returns
166
Final Remarks: Common Pitfalls
• Be mindful of capacity constraints in your
assumptions.
– “Can we fit 2x the patients on this unit?”
• Is there enough demand in the market?
– “We plan to grow service line by 10% per year, can
the market bear it?”
• Can your competition counter quickly enough to
negate some of your assumptions?
167
Final Remarks: Tracking Progress
• A business case is a comparison of a base case to an
alternative case.
• Without investment, the base case is subject to
change. It is often difficult to prove what would have
happened  e.g. lost revenue or expenses incurred
if no investment made.
• You cannot always track the theoretical, only the
tangible shows up in incremental analysis.
• The theoretical is in the business case.
• When the CFO asks, “How are you tracking against
the business case?” You will only be able to show
real revenue and losses, not theoretical revenue and
losses (the dog that didn’t bark).
168
169
Business Plan Components &
Example
Business Plans - Components
• Strategic Planning
–
–
–
–
Mission/Vision/Values
Goals
Metrics
Action Plans
• Business Plans
– About developing or expanding a
business line, a product, or service
– Includes some financial analyses –
ROI, NPV
– Needs to consider:
• Volumes
• Costs
• Expected outcomes/deliverables
• Identity time frames
• Mission fit
171
New Research Center Template
Center Plan Components:
– Mission statement and goals
– Description of center initiatives and timing
of implementation
– Academic peer assessment
– Clearly defined operational structure,
including administration, governance and
key faculty
– Milestones and timeline
– Resource requirements, including any
commitments and agreements made with
other stakeholders (i.e., departments,
schools, colleges, OVPR, centers, etc.)
– Financial overview, including 3-5 year
financial forecast
– Metrics towards independent sustainability
and success
172
Exercise
• Read through the new Center Template and example
MCTP Center Proposal
• Sketch out the business plan framework for your
project
– What steps are needed to gather each component?
– What central units would you need to information from to
complete?
– What type of financial outputs would you need to
generate?
– What would be the approval path for your idea?
173
Capital/Investment Processes
HHC & MS
Project Approvals
• HHC Capital
– Strategic (>$5M)
– Routine Capital Process: $500K to $5M projects – Capital
Oversight Group (COG)
– Below Threshold: < $500K
• MS Capital & Investments
– Dean’s Office:
• Strategic & routine:
– Facilities, Equipment, IT, Faculty/Initiatives
• Below Threshold & via Funds Flow
– Departments:
• Varies
– Other
• FIGs, MICHR/EBS, etc.
175
HHC Routine Capital Plan Process
Capital Oversight Group (COG):
Determines $ for : Sub-Committee Budgets
Institutional Contingency
Below Threshold Budget
Clinical
ITSAC
Bldg/Other
Sub-committees review Above Threshold projects & recommend to
COG for approval
COG:
Uses committee information to make recommendations to HHCEB
HHCEB Approval
176
FY12 HHC Routine Capital Plan
Request
Board Approval of the FY12 Routine Capital Plan
Background
Above Threshold = $500K - $5M
Below Threshold = < $500K
-
Above Threshold:
- Capital Oversight Group (COG) sets budgets and guidelines for subcommittees
– Three sub-committees review/analyze project submissions
– COG and Committees included 54 different people, including 31 faculty
members
– Committees submit their recommendations to COG
– COG assesses major projects, routine capital, margins and trade-offs
when making their recommendations to HHCEB
-
Below Threshold:
- Decentralized
– Funds allocated directly to Departments (60%) and AHDs (40%)
– Allocations determined by 3-year average of assets becoming fully
depreciated
177
Routine Capital Plan Over-Arching Priorities
COG asked committees to give higher priority to projects
with the following attributes:
– Critical/Emergent Replacement
– Maintain or improve patient safety, service and quality
of care
– Financial Return
Quality, Safety and Customer Service are not mutually
exclusive from financial return.
178
Medical School Investment Decisions
Investment decisions related to:
1. Research Equipment
2. Information and Communications Technology
3. Physical Infrastructure
4. Faculty Recruitment and Retention
Must be accounted for and prioritized by:
1. Cash Available
2. Significance / Order of Magnitude
3. Responsibility – Dean’s Office or Departments
4. Replacement vs. Strategic
5. Forecasted vs. Unanticipated
179
Linking Strategy with Investments - UMMS
Strategy Drives Investment
Making it Happen at UMMS –
Functional Components*
Strategy
Process for Decision Making
Process for Decision Making
Governance
Strategic Investment Planning and Allocation
Allocation
Investment Process and Policy Oversight
Big
Evaluation
Faculty
Investment
Physical
Information &
Research
Infrastructure Communications Equipment
Technology
Oversight
*New or existing committees could cover each component
Specific
Investments
180
Large Strategic Decisions
• UMHS Executive Group along with Campus
Leadership ultimately the Regents
• Sell MCare?
• Purchase NCRC?
• Build the new C&W?
…
181
Linking Business Plans to Strategy
How to Prioritize?
Our Success Hinges Upon Key Processes
Targeted
Strategy
Prudent
Investment
Make choices and position
Invest prudently to
UMHS for sustainability
optimize reach and impact
and competitive
of limited funds
advantage
Strong
Operating
Performance
Generate operating return
to invest in our future
183
Where did we invest?
FY06-FY10 Actual &
Committed ($M)
UMHS FY06-FY10 Actual and Committed Investments ($M)
Ambulatory Capacity
17.6%
Faculty Investment
Faculty Salary Gap
Chair Recruitments
Other Central Faculty/Dept Committments (all other)
Faculty Investment
12.7%
IT Investment
Routine
Data Center
Orders Management Project (OMP)
IT Investment
13.9%
Research Investment
Rountine Capital / Capital Equipment
Kresge Demolition
NCRC Aquire
Research Infrastructure
KEC
Benefit to
the
Community
Education Investment
Rountine Capital / Capital Equipment
Research Investment
11.4%
Hospital Capacity
44.2%
Hospital Capacity
Routine & Equipment
C&W
CVC
Ambulatory Capacity
Routine & Equipment
C&W
CVC
KEC
Depression Center (EAA)
EAA Surgical Ctr
Education
Investment
0.1%
184
Total Health System Investment
$34
$100
$149
$283
$152
$51
$107
$310
$50
$10
$77
$55
$63
$255
$3
$3
$198
$628
$159
$985
$85
$126
$68
$69
$20
$26
$393
$2,229
184
UMHS Strategic Investments Over the next
Five Years?
• Leveraging our recent investments
• Trade-offs among new opportunities
• Evaluation against UMHS Strategic Plan
• Weighing the mix of routine vs. new/growth
and our capacity to fund
185
FY12-FY21 SFP Capital Investments and
Connection to UMHS Strategic Goals
$millions
$144 , 4%
HHC Routine Capital
$372 , 10%
UMMS Routine Capital
UMHS Core Capabilities
$1,091 , 29%
Mkt Leadership
Discovery
Create Learning Environment
$1,493 , 40%
Policy to Practice
IPCE
$508 , 14%
Diversity
$20 , 1%
$10 , 0.3%
$86 , 2%
$10 , 0.3%
186
The UMHS Financial Formula
Clinical
Research
Margin (loss)
Margin (subsidy)
Biomedical &
Medical
Education
Margin (subsidy)
Philanthropy
Investment
Income
Cash to
Invest in
our Future
•
Sustainable cash margin generation is necessary for UMHS to
reinvest in facilities and human capital over the long-run, as
well as maintain its strong balance sheet and access to capital
•
How do we generate cash for ongoing operations and
investments?
• We Borrow it (Debt)
• We Receive it (Philanthropy)
• We Earn it (Investments & Operations)
 focus on importance of operations to our success
187
188
189
Appendix:
UMHS Finance Overview
UMHS Finance Landscape
Med School
Department
Based
Finance
Hospital
Unit based
Finance
Revenue
Cycle
Research
Admin
Michigan
House
Corporate
Finance
Other Units
Contracting,
Procurement, IT,
HR, Compliance,
etc..
Health System Finance Professionals
191
UMHS Corporate Finance Today
• UMHS Finance exists as a service-oriented administrative support group
for all UMHS units, departments, and executive administration
• Finance functions as a critical component for both ensuring smooth daily
operations and for shaping the strategic direction of the entire Health
System, and currently divides these functions among several teams:
–
–
–
–
–
–
–
–
–
–
Revenue Cycle
Contracting
Enterprise Financial Reporting
Enterprise Budget & Forecasting
Managerial Reporting & Analysis
Strategic Finance & Business Consulting
Academic Financial Planning & Analysis
Financial Systems
Reimbursement
ICD-10
192
UMHS Finance Overview
193
UMHS Finance Overview
194
UMHS Finance Guiding Principles - We are…
•
Institutionally Minded
–
–
•
Stewards of Resources
―
―
•
With our organization, leaders, peers, patients and families
Service Oriented
–
–
•
Establish a culture of openness & trust
Act as agents of best practices & fundamentals at all levels
Partners First
–
•
Promote fiscal responsibility and accountability
Spread lean principles and a culture of continuous improvement
Champions of Compliance and Integrity
–
–
•
The perspectives of the health system and its strategic direction guide our work
All dollars are maize and blue
Model service excellence for our patients, families and internal customers
Strive to deliver first time quality
Committed to Continuous Growth, Improvement and Engagement of our staff
195
FY13 UMHS Finance Goals: Top Level
•
Maintain Compliance, Integrity, Controllership & Excellence in Finance Deliverables
–
•
Enhance our Stewardship of Capital & Other Major Investments
–
•
( see team specific projects )
Focus on Customer Service
–
•
Revenue Cycle Assessment, Key Indicators, Optimize MI Chart, ICD-10 plan, Lean at all levels
Deliver on Major Projects
–
•
Examples include: ACOs, Affiliations, Research Expansion, Health Care Reform, Insurance Exchanges
Deliver on Revenue Cycle Initiatives
–
•
Improve Processes, Develop Robust Business Cases, Conduct Retro Reviews, Ensure Sound Strategic Financial Management
Support Future Growth Strategies
–
•
Financial Reporting, Audit, Cost Report, General Fund, Governance Packages, SFP, Financial Systems, etc.
Be Reliable Business Partners, Improve Response Times, Accurate & Timeliness of Analyses, and Managerial Reports
Enhance Professional and Staff Development
–
Increase professional development opportunities, focus on MI House work environment and engagement
196
Appendix:
Getting Paid in Healthcare
Getting Paid:
We make it complicated
Getting Paid
• Third party payment system dominates US
health care system
– Patient often caught in the middle
• Providers may have a charge, but…
– Insurers negotiate discounts
– Government sets payment rates
• Difference between charges and rates is the
contractual allowance
199
200
Variety of Insurance Plans
• Key components:
–
–
–
–
Co-pays
Deductibles
In-plan / out of plan variations
Capitation
• Variety leads to individual patients paying different
amounts for same service
• Charity care and bad debts lead to unique financial
issue for health care organizations
201
202
Variation in Insurance Payments
203
Implications for Financial Accounting
• Charges are not the same as revenues
– No expectation of getting paid full charges
– Net Patient Revenue is what matters
– Margin by Payer critical to understand
204
A $1 Direct Expense  A $10 Charge
What does the average health care provider bill
for a service that has a $1 variable direct cost?
Variable Allocated
Cost Overhead
$1.00
$0.00
219% Average Markup
$2.00
$2.00
$6.57
$4.00
$6.00
Total Cost
$8.00
$10.00
Total Charge
Actual Payment? It Depends!
Charity
Medicaid Medicare
Commercial
Self Pay
Example: Net Patient Care Revenue
Rush University Medical Center (source: AHD.com):
Income Statement
Data are annualized for periods other than twelve months.
Period ending date
Number of months in period
Cost report status
Inpatient Revenue
Outpatient Revenue
Total Patient Revenue
Contractual Allowance (Discounts)
Net Patient Revenues
Total Operating Expense 1
Operating Income
Other Income (Contributions, Bequests, etc.)
Income from Investments
Governmental Appropriations
Miscellaneous Non-Patient Revenue
Total Non-Patient Revenue
Total Other Expenses
Net Income or (Loss)
____________
1
Depreciation Expense (included above)
Total Contractual Allowance / Gross Patient Revenue
6/30/2009
12
Amended
$1,832,662,583
$1,447,780,896
$3,280,443,479
$2,186,354,251
$1,094,089,228
6/30/2008
6/30/2007
6/30/2006
12
12
12
As Submitted Settled With Audit Settled With Audit
$1,661,932,902
$1,265,776,037
$2,927,708,939
$1,941,251,239
$986,457,700
$1,633,762,361
$975,070,100
$2,608,832,461
$1,673,235,255
$935,597,206
$1,542,483,612
$863,849,854
$2,406,333,466
$1,510,507,995
$895,825,471
6/30/2005
12
Reopened
$1,471,604,678
$748,175,610
$2,219,780,288
$1,332,196,752
$887,583,536
$1,264,857,181
$1,154,991,884
$1,116,348,708
$1,023,704,715
$1,060,478,150
($170,767,953) ($168,534,184) ($180,751,502) ($127,879,244) ($172,894,614)
$0
$0
$0
$0
$0
($24,149,583)
$10,693,420
$29,883,084
$14,560,166
$9,637,402
$0
$0
$0
$0
$0
$245,896,091
$233,651,908
$269,146,328
$179,464,823
$193,569,158
$221,746,508
$244,345,328
$299,029,412
$194,024,989
$203,206,560
$12,542,625
$12,410,476
$5,488,105
$5,220,590
$0
$38,435,930
$63,400,668
$112,789,805
$60,925,155
$30,311,946
$62,457,326
$57,386,639
$49,457,327
$50,245,882
$53,308,57
66.65%
66.31%
64.14%
62.77%
60.01%
…varies significantly by payer!
206
Variation in Insurance Payments
• Most hospitals lose money on Medicare and
Medicaid.
• For a hospital to generate an overall positive
margin, the total margin performance of its
private insurance payments must make up
the difference.
207
Aggregate Hospital Payment-to-cost Ratios for Private
Payers, Medicare, and Medicaid, 1989 – 2009
Private Payer
140%
130%
120%
110%
100%
Medicare
90%
Medicaid(1)
80%
70%
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2009, for community hospitals.
(1)
Includes Medicaid Disproportionate Share payments.
Aggregate Hospital Payment-to-cost Ratios for Private
Payers, Medicare, and Medicaid, 1989 – 2009
Chart 4.7: Hospital Payment Shortfall Relative to Costs for Medicare,
Medicaid, and Other Government, 1997 – 2009(1)
$5
$0
Medicare
-$5
Medicaid
Other Government
Billions
-$10
-$15
-$20
-$25
-$30
-$35
-$40
97
98
99
00
01
02
03
04
05
06
07
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2009, for community hospitals.
(1)
Costs reflect a cap of 1.0 on the cost-to-charge ratio.
08
09
Variation in Insurance Payments, between
providers too…
MEDICARE
Example: Hip
Replacement
Medicare Payment
Example: Hip
Replacement
Differences:
27% and 18%
Allegiance
$ 5,600
$ 5,600
2.1
2.1
2.1
11,800
11,800
11,800
Indirect medical education
4,300
1,500
-0-
Disproportionate share
1,700
-0-
-0-
$ 17,800
$ 13,300
$ 11,800
DRG weight
Adjusted payment
MEDICAID
St Joe AA
$ 5,600
National DRG rate
Base payment
Differences:
34% and 51%
UMHHC
Medicaid Payment
Hospital specific rate
DRG weight
Base payment
Capital add-on
Adjusted payment
UMHHC
St Joe AA
Allegiance
$ 4,200
$ 4,000
$ 3,800
2.1
2.1
2.1
8,800
8,400
8,000
3,600
1,400
2,500
$ 12,400
$ 9,800
$ 10,500
FY10 Margin by Payer: HHC
Revenue
(millions)
Margin
(millions)
Margin
Percent
$1,154,264
$ 261,977
22.7%
Medicaid
223,774
(68,833)
-30.7%
Medicare
411,409
(90,451)
-21.9%
Medicare Advantage
80,979
(13,593)
-16.8%
Self-pay and Charity
5,217
(25,740)
-
$1,875,643
$ 63,370
Commercial/Other
Total
3.4%
Highlights
• Commercial contracts have sustained UMHS margins
• Increases in Medicare and Medicaid activity will further deplete UMHS margins
Revenue Outlook
• A tremendous amount of pressure nationally and locally to
bend the health care cost curve
– Consensus that rate of growth cannot be sustained
– Applies to all purchasers: gov’t, employers, individuals
• UMHS is paid more – on a per unit basis – than most others.
– Therefore, the target on our back is bigger …
… Even if the payment difference is completely justified
• “Value” is being redefined
– Old: per-unit rate (fee for service)
– New: per-unit rate x number of units x service
• Number of units or amount of care (appropriateness), applies to populations and
episodes
• Service = quality, safety, outcomes, satisfaction
•
Success requires action on many fronts
Appendix:
Regulatory Updates
University of Michigan Health System
Regulatory Update: Finance View
Prepared by UMHS Finance
October 2012
Summary
• UMHS continues to experience regulatory risks and financial
pressures across all components of its tripartite mission.
• Our latest Strategic Financial Plan, and corresponding sensitivity
analyses, reflects our outlook based on many (but not all) of these
pressures continuing.
• Our patient care revenue outlook is influenced by the Affordable
Care Act, other Medicare legislation, state of Michigan Medicaid
funding and other regulatory requirements and changes.
• Our biomedical research and education outlook is influenced by
the NIH, the growing cost of research compliance and a desire to
keep net tuition low.
• Our long term strategy of investment and growth remains intact, yet
these market forces require close monitoring and adaptation of our
plans to remain within fiscal guidelines.
215
Overview
Patient Care
Biomedical Research
• Affordable Care Act
• NIH budget pressure
• Other Federal Legislation
• Compliance mandates
• Medicare Fee Schedule
• IME
• State of Michigan Legislation
• Medicaid
• GME
• No Fault Auto Insurance
• Required investments
• ICD-10
• Meaningful Use
• Population Management
•
•
•
•
•
Clinical research billing
Security risk assessments
Animal research protocols
Human subject protection
Honest broker
Biomedical Education
• LCME accreditation
• State Higher Ed Funding
• Tuition Pressure
216
Affordable Care Act*
Title/Topic
Medicare Rate
Reduction
Description
Timing
UMHS Impact
Status
Collectively reflected
in conservative 1.5%
Medicare inflation
rate in HHC Strategic
Financial Plan (SFP)
Relative to current
std for rate increases
FY 2013
($300M) over 10
years
Readmission
Maximum penalty of Reduction Program 2%
FY 2013
($3-5M) /year
Value Based
Purchasing
+/- 2% based on
performance
FY 2013
$1M / year
increase
Medicare
Disproportionate
Share Hospital
(DSH)
Support for hospitals
meeting threshold for
disproportionate
share of charity care
FY 2015
($6M) / year
Insurance
Exchanges
• Potential offload by
employers to
exchanges
• Will increase overall
insured, particularly
Medicaid
FY 2014
• Reimbursement • HHC SFP 5% shift
pressure but
to gov’t pay over 10
higher volume
years
• Greater patient
self pay
• Additional
sensitivity of
commercial rate
decline
217
*Assuming US Supreme Court decides not to overturn in June 2012
Other Federal Legislation
Title/Topic
Budget Control Act
of 2011
Description
Timing
Policy discussion,
Not yet enacted
UMHS Impact
Status
2% / year reduction in
Medicare Spending
Effective 2013
through 2021
pending add’l
legislation
($15M) / year
Not yet
explicitly
tied to
HHC SFP
“base”
scenario
Medicare IME Reduction
60% cut under
consideration
TBD
Every 10%
reduction worth
($6M) / year
Hospital
Outpatient Dept.
(HOPD) Physician
E&M Payment
MedPac proposal and
House Bill 3630. Reduce
reimbursement to that of
freestanding MD office
TBD
($15-20M) /
year
Physician
ReimbursementSustainable
Growth Rate (SGR)
Medicare Part B payment
legislation from BBA ‘97 –
Added legislation has
stemmed the impact to
date but if could decrease
TBD
TBD
Sensitivity
modeled
in MS SFP
Recovery Audit
Contracts (RAC)
and other audits
Identify improper payments Ongoing
made on claims of health
care services provided to
Medicare beneficiaries.
TBD
Not
explicitly
modeled
218
State of MI Legislation
Title/Topic
Description
Timing
Policy discussion,
Not yet enacted
UMHS Impact
Status
Medicaid GME
Reductions to GME
payments by the
state
2012 budget
reduced by
10% and
targets added
10% for 2013
each 10% =
$3.3M / year
Incorporated into
revenue forecasts
No-fault auto
legislation
Proposed no-fault
legislation to reduce
auto insurance
medical payments to
workers comp fee
schedule
TBD
($18M) / year
Not included in
latest models
State of MI
Healthcare
Insurance
Exchange
Stipulated in
Affordable Care Act.
Will likely increase
Medicaid enrollment
and expense
FY 2014
• Reimbursement • HHC SFP 5%
pressure but
shift to gov’t pay
higher volume
over 10 years
• Greater patient
self pay
• Additional
sensitivity of
commercial rate
decline
219
Required Investments
Title/Topic
Description
Timing
UMHS Impact
Status
ICD-10
International
Classification of
Diseases Version 10 –
Maintained by World
Health Organization. US
Dept. of Health and
Human Services original
adoption mandate for
7/1/2013.
Delayed from
7/1/2013 to
7/1/2014
$15-20M
investment.
Incorporated
in capital
forecast
HITECH ACT Meaningful
Use
Incentives for both
eligible hospitals and
providers to invest in
and/or certify existing
Electronic Health
Records, and prove
Meaningful Use per
Medicare and Medicaid
criteria.
Earliest
opportunity for
maximum
incentives –
90 day period
prior to
calendar year
2013.
$30-$40M
opportunity for
Eligible Physicians
(EPs) across 5 years.
Seeking
maximum EP
incentives.
Contingent
upon
Ambulatory
EPIC “go live”
in August
2012.
$2M hospital
incentives base on
2015 Epic inpatient
installation plan.
220
Population Management
Title/Topic
Pioneer
Accountable Care
Organization
(ACO)
Description
UMHS + Integrated
Health Associates (IHA)
joint ACOdemonstration initiative
through Center for
Medicare and Medicaid
Innovation (CMMI).
Timing
Effective
1/1/12
3 -5 year
demonstration
period
UMHS Impact
Status
• Approximately 20K
Medicare lives
prospectively attributed to
Pioneer ACO.
• Estimated range of +/$6M in Medicare revenue
based on shared savings
in first year (likely FY 13)
POM ACO
- Medicare
Shared Savings
Program (MSSP)
Proposed ACO
partnership with
Physicians of Michigan.
Engages physicians
outside of local market.
Application due
end of March,
2012
TBD
State of Michigan
Primary Care
Transformation
(MiPCT) Project
A multi-payer
demonstration of
advanced primary care
practices, also known as
patient-centered medical
homes (PCMH).
Effective
11/1/11
TBD
Risk &
Impact
Analysis in
progress
(for HHC
and FGP)
3 year
demonstration
project
221
UMHS Patient Care Opportunities
New Care Delivery Models
• CMS Pioneer Accountable Care Organization (ACO) and Medicare
Shared Saving (MSSP) programs
• Multi-Payer primary care medical home pilot
• Dual Eligible demonstration
• Bundled and Episode Based payment experiments
Incentives for quality, efficiency, outcomes
• Medicare Value Based Purchasing
• Meaningful Use incentives/penalties
In parallel, commercial payer / BCBSM opportunities
• Rational pricing objective
• Leveling the playing field on GME/IME/Severity
222
Budget Control Act of 2011
UMHS impact of Sequestration
EVPMA Cabinet
April 2012
Included Contents:
• Overview of Federal Budget, Appropriations
and Deficit Issues in 2012
• UMHS Impact of Sequestration
• UMHS Regulatory Update
Congress Has Not Followed the Annual Budget and
Appropriations Process in Recent Years
Fall
House and Senate
must pass final
appropriations bills
If a budget is not passed,
continuing resolutions
are used as a stop-gap
until appropriations are
finalized
Summer
March/ April
Congress passes
budget resolutions,
setting program
spending levels
Early February
President’s budget
proposal presented to
Congress
Budget resolution
informs appropriations
for discretionary
programs
If a continuing resolution
does not get passed then
the Federal Government
will be shut down
Congress has relied heavily on continuing resolutions to fund the government
in the absence of budget resolution agreements and timely appropriations bills.
© Avalere Health LLC
Page 224
2012 Presents an Even More Complicated Budget and
Appropriations Picture Than In Recent Years
 While the annual budget and appropriations picture has been complex the last several years, 2012
presents even more complications
Sustainable Growth
Rate (SGR)
 Latest SGR fix expires at
the end of 2012
 Another patch will require
new budget offsets
Sequestration
 Lack of Supercommittee
agreement at end of
2011 triggers
sequestration in January
2013
 Any attempt to avoid
sequestration will require
new budget offsets
2013 Deficit
Reduction
 Congress and policy
stakeholders are
debating long-term
deficit reduction
proposals, such as
Medicare premium
support, in anticipation
of possible efforts to
act in 2013
© Avalere Health LLC
Page 225
Avoiding Sequestration Will Require Sizable Budget Offsets
 If Congress fails to approve savings by January 15, 2012 then across the board cuts
totaling $1.2 trillion from 2012-2021 will take effect starting January 2013
Projected Savings from Sequestration (in Billions), 2013-20211
$47.1
$123
Other2
Medicare
$169
Reduced Debt Service Costs
$294
Nondefense Discretionary
$454
Defense
1. Congressional Budget Office. “Estimated Impact of Automatic Budget Enforcement Procedures Specified in the Budget
Control Act”, September 12, 2011.
2. Other includes mandatory budgetary resources for nonexempt defense programs and nonexempt nondefense programs
and activities
© Avalere Health LLC
Page 226
President’s Budget Proposal and House Budget Resolution
Set the Stage for 2013 Deficit Reduction Talks
President’s FY2013 Budget Proposal
 Most proposals in the FY2013 Budget have been included in other deficit reduction
commissions and negotiations; however, savings estimates for many of the
pharmaceutical and provider proposals are significantly higher than in the past
 The President’s Budget did not include some of the more significant beneficiary savings
proposal , indicating there are more savings to be had from federal health programs
House FY2013 Budget Resolution
 The House Budget Committee should pass a FY2013 Budget Resolution this spring
 The House FY2013 Budget Resolution is likely to include some version of Medicare
premium support1 – most likely the recent Ryan-Wyden proposal2
 A bipartisan premium support proposal could have significant ramifications for any deficit
reduction negotiations in 2013
Policy proposals in the President’s and House budgets could help offset
spending or avoid sequestration in 2012, and preview 2013 deficit negotiations
1. In premium support beneficiaries would receive a defined contribution that they could use to purchase private
coverage. Congressional Budget Office (2006) Designing a Premium Support System for Medicare.
2. Senator Ron Wyden (D-OR) and Representative Paul Ryan (R-WI). Guaranteed Choices to Strengthen Medicare and
Health Security. Released December 15, 2011.
© Avalere Health LLC
Page 227
End of Year Legislation Will Necessitate Search for Health
Savings
 Following the November elections, Congress will need budget offsets to :
» Pass another SGR fix
» Avoid entirely1 or blunt the impact of, sequestration
President
proposed
budget
February
House likely to
pass a Budget
Resolution;
Senate action
unlikely
House &
Senate may
act on select
appropriations
bills
FY2013 begins;
continuing
resolution likely to
fund government
Omnibus
Appropriations
Bill, SGR Fix, and
Sequestration
Legislation
Possible
April May
JuneSeptember
October
1st
December
Industry stakeholders will have to monitor budget, appropriations, and deficit
reduction developments through at least the end of 2012 to identify threats and
opportunities from fluid negotiations and discussions.
1. Avoiding sequestration entirely would require Congress to agree to $1.2 trillion in federal savings.
© Avalere Health LLC
Page 228
UMHS impact of Sequestration
Budget Control Act of 2011
•
The Budget Control Act of 2011 (BCA) requires that Congress identify approximately
$1.2 trillion in federal spending reductions from 2012 through 2021. A bi-partisan
committee was established to develop recommendations to Congress. If the Committee
fails to achieve a plan or Congress fails to act on the plan, automatic cuts are required
to achieve a $1.2 trillion reduction from 2013 through 2021. The cuts are referred to as
sequestration.
•
The cuts are required to be applied across-the-board (same percentage, estimated at
~7.8%) against all discretionary spending, with exceptions:
– Medicare reductions shall be no more than 2%
– Select programs for low-income people, including Medicaid, are exempt
– 50% of the reduction is from defense spending
•
Congress could overturn sequestration, or replace it with a targeted spending reduction,
but if Congress does not act the reductions will be repeated annually through 2021.
230
Medicare
• Between now and January 2013, the percentage
reductions will be computed including the Medicare
reduction. It is assumed that the Medicare reduction
will be 2%.
• CMS has yet to determine how to implement the
Medicare reduction. Industry experts expect that all
remittances will be reduced and a 2% reduction will
be included in hospital cost report settlements.
231
Sequestration Impact on UMHS (in millions)
Projected Revenue
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
Total
Medicare – Hospital
$534
$570
$619
$662
$704
$746
$784
$819
$850
$6,288
Medicare – Professional
$100
$109
$119
$131
$142
$155
$168
$182
$196
$1,303
Total
$634
$679
$739
$793
$847
$901
$952
$1,001
$1,046
$7,591
2.0% of above totals Medicare
Estimated Sequestration
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
FY2020
FY2021
Total
Medicare – Hospital
$5
$11
$12
$13
$14
$15
$16
$16
$17
$120
Medicare – Professional
$1
$2
$2
$3
$3
$3
$3
$4
$4
$25
Total
$6
$14
$15
$16
$17
$18
$19
$20
$21
$145
FY13 Partial Year, FY14
full reduction
Note: Should the SGR also fail to be
extended, Medicare professional payments
to the FGP by ~30% or $33M in FY14
232
Impact to UMHS Research Funding
• Only NIH has made a notable public comment on how they might
implement for research
– Funding appropriation cut at 7.8% will give NIH the same amount to work
with as FFY 2004 (~$28.4B)
– Implementation options are restricted due to the mid-year introduction and
noncompetitive awards already committed in prior years
– Collins: Likely the number of competitive awards will be reduced by 2,300
over all awardees in FFY 2013
– Under the NIH grant awardee structure, this cannot be applied as an across
the board reduction to institutions. We would expect phased financial impact
based on policy above.
• No official comment yet from:
– DoD Cancer Programs – significant funding for school, but defense program
may compete in plan
– NSF - limited funding at the school
– Other HHS Agencies: DoEd, CDC, FDA, etc.
233
UMMS Projected Landscape:
Assuming Equal Impact – 30 Less Competitive Awards* FFY 2013
FFY
NIH Competitive
Awards to
Medical School s
UMMS
Competitive
Awards
UMMS Market Share
(# of Competitive
Awards)
UMMS Competitive
Award Total
2008
6,942
192
2.77%
$ 69,946,544
2009
6,600
188
2.85%
$ 69,571,321
2010
6,808
187
2.75%
$ 75,034,900
2011
6,344
173
2.73%
$ 62,641,556
2013 Possible
5,593
143
2.77%
$52,088,730
*Competitive awards are defined as Fund Type 1 (New) or 2 (Competing Renewal)
awards.
NIH & UMMS Competitive Award Count, Market Share and Award Dollar Total -- FFY
2009 & 2010 do not include ARRA applications & awards
Data Source: NIH Awards by Location Line Data
~ $10M drop of awards
as early as FFY13. We
would see expenditures
falter starting FFY14.
234
UMMS NIH Financial Landscape:
Model: Impact Over Time – Reductions Gradual until a Steady State in FFY 2017
350
Competitive Awards Sequestration
300
In $M
250
Competitive Awards Regular
200
150
Non-Competitive
Awards - Sequestration
100
50
Non-Competitive
Awards - Regular
0
FFY11
FFY13P FFY14P FFY15P FFY16P FFY17P FFY18P
Most of the UMMS impact will be immediately felt by individual
investigators and measured in lost opportunity from historical growth.
Distribution will not be equal across departments or investigators.
235
Impact of Research Reductions
Individual
Investigator
Departments
UMHS
Stagnation of
Research Plans
Further Absorb Faculty
Salaries
Bridging and Cost Share
Programs
Difficulty in Lab
Sustainment
Bridging
Reduction of IDC
Recovery
Core / Infrastructure
Support to Sustain
Highly Productive
Environment
Necessity to Increase
Mentoring
Reduction of IDC
Recovery
Reductions in Force
Tenure Implications
236
NIH Projected Landscape:
Impact of 2,300 Less Competitive Awards
National Competitive Applications Success Rates
90,000
80,000
40%
Period of NIH Doubling
35%
Competitve Grants (#)
70,000
30%
60,000
Competitive
Applications
25%
20%
Competitive
Awards
15%
Success Rate
50,000
40,000
30,000
10%
20,000
2013P
2012P
2011
2010
2009
Federal Fiscal Year
2008
2007
2006
2005
2004
2003
2002
0%
2001
0
2000
5%
1999
10,000
Projected
success rate
drop under
initial year of
sequestration
Data Source: NIH Data Book Success Rate (%) through FFY 2011 -- FFY 2009 & 2010 do not include ARRA applications & awards
* FFY 2012 & 2013 predictions based on application & award trends; modifications to FFY 2013 awards assumes a 7.8% cut from
estimated FFY 2012 numbers
237
The Financial State of the
Medical School
August 2012
• Historic Perspective
• FY13 Outlook
• Margin Improvement
• The Next Ten Years
September 2012
• FY13 YTD Results
• Dean’s Cash & Investments
October 2012
• FY13 YTD Results
• Process Updates on Forecasting
and Planning
• Stress Test Exercise
November 2012
• FY13 YTD Results
•
•
October 2012
~ Ongoing Discussion Series ~
Today’s Updates
• FY13 YTD Financial Results
• Financial Planning Processes
– Overview
– Department Stress Test Exercise
• Discussion
23
9
UMHS Consolidated
FY13 September MTD Cash Flow Margin
HHC
Med
School*
EVPMA &
Shared
Services
MHC
FY13 UMHS
Eliminations Consolidated
Total Revenues
$173.9
$95.8
$9.6
$0.0
($22.7)
$256.7
Operating Expenses
Payroll
Depreciation
Other Operating
Total Expenses
96.7
16.6
72.1
$185.5
73.7
3.5
41.1
$118.3
6.9
0.0
2.6
$9.5
0.0
0.3
$0.4
(22.7)
($22.7)
177.3
20.1
93.5
$290.9
Operating Margin
Margin %
($11.6)
-6.6%
($22.5)
-23.5%
$0.2
1.8%
($0.4)
0.0%
4.0
(2.9)
0.2
5.3
(0.2)
1.1
0.7
0.0
0.0
Pre Transfers / Support Margin
Margin %
($10.3)
-5.9%
($16.2)
-16.9%
$0.9
9.5%
($0.4)
0.0%
UMHS Support
Equity Transfers - Net Campus
(7.7)
(0.1)
7.7
(1.5)
0.1
0.4
($18.1)
-10.4%
($9.9)
-10.4%
$1.0
10.6%
$0.0
0.0%
$0.0
0.0%
($27.0)
-10.5%
($1.5)
-0.9%
($5.9)
-6.1%
$1.0
10.7%
$0.0
0.0%
$0.0
0.0%
($6.3)
-2.5%
Non Operating Items
Investment Income
Interest Expense - net
Other Non Operating
Total Margin
Margin %
Total Cash Flow Margin
Margin %
$0.0
0.0%
$0.0
0.0%
-
($34.2)
-13.3%
10.0
(3.1)
1.3
($25.9)
-10.1%
(1.0)
* Med School totals include both Med School All Funds as well as NCRC
•
Subject to change once reconciled to Everest.
240
UMHS Consolidated
FY13 September YTD Cash Flow Margin
HHC
Med
School*
EVPMA &
Shared
Services
MHC
FY13 UMHS
Eliminations Consolidated
Total Revenues
$555.8
$292.2
$24.3
$0.0
($67.4)
$804.9
Operating Expenses
Payroll
Depreciation
Other Operating
Total Expenses
300.7
49.7
230.8
$581.2
223.6
10.5
117.9
$351.9
21.1
0.1
6.5
$27.8
0.1
0.6
$0.7
(67.4)
($67.4)
545.5
60.3
288.4
$894.2
Operating Margin
Margin %
($25.4)
-4.6%
($59.7)
-20.4%
($3.4)
-14.2%
($0.7)
0.0%
12.0
(9.0)
0.1
16.3
(0.5)
2.8
Pre Transfers / Support Margin
Margin %
($22.4)
-4.0%
UMHS Support
Equity Transfers - Net Campus
Non Operating Items
Investment Income
Interest Expense - net
Other Non Operating
Total Margin
Margin %
Total Cash Flow Margin
Margin %
$0.0
0.0%
-
($89.3)
-11.1%
0.7
1.5
0.0
-
($41.2)
-14.1%
($1.2)
-5.1%
($0.7)
0.0%
(20.0)
(1.5)
19.6
(1.4)
(0.1)
1.3
0.5
(1.1)
($43.9)
-7.9%
($23.0)
-7.9%
($0.0)
-0.2%
($1.3)
0.0%
$0.0
0.0%
($68.3)
-8.5%
$5.8
1.1%
($10.9)
-3.7%
$0.1
0.2%
($1.3)
0.0%
$0.0
0.0%
($6.4)
-0.8%
$0.0
0.0%
-
29.0
(9.6)
4.4
($65.6)
-8.1%
(2.7)
* Med School totals include both Med School All Funds as well as NCRC
•
Subject to change once reconciled to Everest.
241
MS September FY13 YTD Results
FY13
FY12
YTD variance
Revenue
General Fund Allocation
20.5
19.5
1.0
Revenue Changes- Year to Date
FY13 Allocation is $81.9M vs $79.8M FY12. FY13 doesn't include $14M NCRC Auxiliary
facilities & maintenance costs, reported in Supplies, Services & Other expenses. Under
previous GF model, FY13 would be $67.9M.
Sponsored Research
83.9
81.7
2.2
Federal revenue increase $1.8M, 2.5%, Non Federal $440K, 3.6%
Patient Care Revenue
105.0
105.5
(0.6)
Overall Flat Patient Care. Favorable Net Patient Care Revenue ($1M), off-set by
unfavorable RVU's (Primary Care & Cancer Center) and Off-Site revenue.
Other
79.4
288.8
65.0
271.8
14.4
17.0
Expenses
Payroll
Expense Changes- Year to Date
222.7
213.8
8.9
Supplies, Services & Other
70.7
55.5
15.1
Malpractice & Payments to UMHS
22.6
16.8
5.8
11.7
327.7
12.0
298.2
(0.3)
29.5
(38.9)
(26.3)
(12.5)
15.4
20.6
(5.2)
(23.4)
(5.7)
(17.7)
Other
Operating Income (Loss)
Non Operating Revenue (Expense)
Change in Net Assets w/o Unrealized Gain(Loss)
Increase to FGP-QMP receipts of $6.6M and YTD Gift Revenue of $4.0M
Unfavorable Payroll primarily an increase in Faculty Comp of $7.6. Non-Instructional
remains favorable by $1.7M (FGP Billers, HR and Development to Shared Services). YTD
OPEB accrual in Fringe Benefits of $1.6M.
Supplies increase in Subcontracts over $25K of $3.2M & Lab Animal Usage of $1.7M
(predominantly Fed Funds). Other Services increase of $7.9M includes $3.5M NCRC
facilities & maintenance
Shared Services allocation increase of $4.4M. Malpractice expense unfavorable $1.4M
(Gross Premium increase, elimination of Premium Credits)
Unfavorable Endowment Gifts, $(2.3)M YTD vs FY12. Non-Operating expense for NCRC
for Administrative Operations $(1)M, $(500)K to MHC for Dean's support of Paradigm
24
2
MS September FY13 YTD Results
Cash and Investments (in Millions):
FY13-Sept
FY12-June
FY Change
Unrestricted UIP Cash
$283.6
$304.8
-$21.2
FFAE(Quasi-unrestricted) Investments
$603.1
$601.6
$1.5
Restricted Cash, Endowments & Quasi-restricted
$957.7
$955.7
$2.0
$1,844.4
$1,862.1
-$17.7
Unrestricted Days Cash on Hand w/o FFAE
123.0
137.0
-14.0
Unrestricted Days Cash on Hand + FFAE
386.0
407.0
-21.0
Total
Financial Trends
FY13-Sept
FY12-Sept
FY11-Sept
$115.0
$115.0
$123.00
Clinical Operating Margin $'s in Millions
$22.0
$24.4
$24.1
Clinical Operating Margin Percent
15.2%
17.5%
18.4%
Operating Margin (GF,DAF & CO) $'s in Millions
-$0.9
-$4.2
$2.5
IDC/ sq. ft.
24
3
FY03 – FY13 All Funds Total Margin
$millions
$100
12.0%
10.0%
$80
$87.9
8.0%
$64.6
$72.8
$60
$78.7
$74.5
$52.2
6.0%
$40
4.0%
2.0%
$20
$32.5
$21.0
$15.5
0.0%
$3.1
$-2.0%
$(19.2)
$(20)
Total Margin normalized to exclude one time and unusual items (MCare sale, NCRC Purchase & OPEB)
FY12
FY11
FY09
FY10
Total Margin %
FY13 Forecast
Total Margin
FY08
FY07
FY06
FY05
FY04
FY03
-4.0%
24
4
What are we doing about it?
• Balancing our new investments while also addressing structural
expense difficulties creates several challenges
• To meet our margin targets in the future, we must:
–
–
–
–
–
–
–
Continue healthy growth of the Clinical Operating Margin
Focus on productive use of research space
Focus on unproductive internally supported research time
Relentlessly strive to drive out waste
Ensure the success of the UMHS Development reorganization
Work w/ campus on appropriate funds flow changes
Continue to partner w/ the HHC to ensure financial success for all of
UMHS
24
5
Processes & Actions
• New Dean’s Office Investment/Capital Process
• New MSA Budget Process
• New Departmental Stress Test Exercise
• Enhanced Forecasting & FY13/FY14 Planning
• Additional Efforts & Actions
24
6
new
Medical School Financial Planning: Updates
Process
Timeline
Objectives
Dean’s Office Investment Process
New Quarterly
Process
• Enable trade-off decisions and careful
evaluation and prioritization of
investment needs
• Allow for business case development
• Enable methodical, equitable and
transparent decision making
Commence
October 1st
• Achieve improved process cost savings in
baseline business operations
• Improve understanding of the resource
requirements necessary for all of MSA’s
activities.
• Final Medical School investment decisions reside with the Dean. Trade-off is
constantly required among competing projects in facilities capital,
equipment, IT, faculty and center commitments and new operating units
• For FY13, non-critical discretionary investments >$500K will be deferred and
reviewed in Dean’s Cabinet with final decisions by the Dean in early 2013
new
MSA Hierarchal Budget Process
• MSA unit’s budget will be built in hierarchical layers from the baseline
business services provided by each unit, to higher level mission critical
activities that are important to baseline business
• For FY13, commence in October with full new process in place FY14
new
Departmental Financial Stress Test Exercise
• Multiple regulatory decisions could negative impact Medical School revenue
streams across all categories
• The stress test will be conducted in lieu of a Q1 forecast, and will include a
what-if scenario related to a 10% revenue reduction
enhanced
Enhanced Forecasting & FY13/FY14 Planning
• Continued improvement of rolling forecast by reintroducing a more rigorous
annual component to the process
• For FY13, a top-level forecast will be produced in the fall, with a bottoms-up
Departmental forecasts to commence in January
• Includes select enhancements to Hyperion
• Departmental presentations to Dean’s Cabinet to commence in March
ongoing
Additional Ongoing Processes:
•
•
•
•
•
Position Control Committee
Administrative Modernization Efforts
MSA Expense Initiatives
Linkage to HHC Actions & Decisions
Continues review of System wide HR policies
New Annual
Process
Commence MidOctober
One-time exercise
Late January to
March
• Preparedness planning exercise for
potential declines in revenue streams
• Develop short-term and long-term plans
for adjusting to new revenue realities
• Share knowledge and plans across all
departments for best practices
• Enable enhanced planning for FY14
• Enable enhanced Dean/Department
level of understanding via forecast
presentations and dialogue
• Include a school-wide gap closure
process for margin improvement
• Continue to enhance Hyperion tools for
Departmental managerial reporting
Ongoing
24
7
Internal & External Challenges
• Internal Pressures
– Overhead Expense
– Faculty & Staff Salaries
– Decentralized Decision Making
– Funds Flow
• External Pressures
– All Sources Revenue Pressures
– Budget Control Act & Other Federal Legislation
•
NIH, Medicare
•
Medicare Fee Schedule (SGR), IME
– State of Michigan Legislation
•
Medicaid, GME
– Mandated & Compliance Investments
•
Animal research protocols | Human subject protection | Clinical research billing
•
Revenue Cycle (Meaningful use)
•
Ongoing LCME
24
8
Revenue Challenges Ahead
24
9
What is a Financial Stress Test?
• A planning exercise for potential declines in
revenue streams
Stress testing reveals how well an entity is
positioned in the event forecasts prove true.
Stress testing also lends insight into vulnerabilities.
Though events are never certain, studying their
performance implications strengthens
understanding and focuses on preparedness.
25
0
Departmental Stress Test Objectives
• To develop short-term and long-term plans for
adjusting to new revenue realities
• To share knowledge and plans across all
departments for best practices
• To construct a consolidated set of responses to
inform leadership discussions and actions
25
1
Stress Test Details
• In order to ensure that the Medical School is prepared
for the potential impacts of the financial constraints,
each department is being asked to determine how they
will manage their operations under a new revenue
reality.
• The first scenario is specific to clinical departments only
and relates mostly to the proposed SGR rule to reduce
Medicare professional payment rates by up to 30%.
Such a reduction would necessitate an adjustment to
RVU payments to departments. For modeling purposes
we assumed a 10% reduction to department’s FY12
RVU and GME payments.
25
2
Financial Stress Test Exercise
• The second scenario impacts all academic departments
and relates to continued declines in state funding and
the potential sequestration impact on federal research
funding. For modeling purposes we assumed a 10%
reduction to each department’s FY12 general fund
allocation.
• We are requesting that Departments provide details of
how they will adapt to these reductions in the short term
as well as over a longer period of revenue source
challenges.
25
3
Stress Test – Revenue Cut Methodology
1. Determine revenue
reduction for what-if
scenario modeling
2. Using FY12 year-end
income statements, a
10% reduction to a
Department’s General
Fund Revenue, RVU
and GME Payments
was calculated
3. Total reduction shown
as the sum of GF, RVU
and GME calculations
All Funds
Jun 2012 YTD
10% Revenue
Reduction
OPERATING REVENUE
General Fund Allocation
$587,810
58,781
Sponsored Research Revenue (Net)
3,167,044
Department
Auxiliary Enterprises:
Net Patient Care Revenue
Patient Care Contract Agreement
Primary Care RVU
Cancer Center RVU
Cancer Center Tier III
Livonia Facility Revenue
PhD
Total Patient Care Revenue
UMHS Partnership Agreement
GME
Hospital Admin Reimbursement
UMHS Services - Billing, Physician (Tech Rev), Oth
UMHS Pmts for Operating Activities
Operating Transfers from UM Units
Gifts
Other Income
Rebill Revenue
Departmental Sales/Other Reimbursements
TOTAL OPERATING REVENUE
35,278,590
3,073,529
0
0
0
0
0
38,352,119
0
3,258,803
589,186
6,085,801
9,933,790
3,527,859
-
325,880
16,253
7,690
5,955
0
5,955
52,070,661
3,912,520
25
4
Stress Test – Departmental Requirements
A template will be provided
for Departments to capture
actions required to meet the
proposed revenue reduction.
Departments are asked to fill
out the following two
sections of the template:
One Time Annual Reduction of $3,912,520
(1) Category
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Must
1)
2)
3)
4)
(2) Description
Select 1 of 4 Categories:
Revenue Enhancement
Expense Reduction
Use of Reserves
Other
Provide a high-level description of the
action being taken for each line item.
Please note this field will stay yellow
until a description has been entered.
Please limit explanation to 10
line items or less.
NOTE: $3,912,520 of reduction still left to be taken
(3) Amount
Enter $ amount
per line item.
This box will
stay red until the
target has been
hit, in which
case it will turn
green.
Total
-
Additional Notes/Comments for Annual One Time Reduction (Optional)
The first section is for a
short-term (one year).
Departments are able to
indicate that they would
spend down reserves to
cover the revenue reduction.
The second section is how
they would adapt to a
revenue reduction in future
years without the option of
spending down reserves.
Text box available for additional details or departments can prepare a separate document if necessary.
Go Forward Annual Reduction of $3,912,520 (without the use of Reserves)
(1) Category
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Must
1)
2)
3)
(2) Description
Select 1 of 3 Categories:
Revenue Enhancement
Expense Reduction
Other
Provide a high-level description of the
action being taken for each line item.
Please note this field will stay yellow
until a description has been entered.
Please limit explanation to 10
line items or less.
NOTE: $3,912,520 of reduction still left to be taken
(3) Amount
Enter $ amount
per line item.
This box will
stay red until the
target has been
hit, in which
case it will turn
green.
Total
-
Additional Notes/Comments for Go Forward Beyond Annual Reduction (Optional)
Text box available for additional details or departments can prepare a separate document if necessary.
25
5
Stress Test – Due Date & Support
Departments will receive their stress test template on 10/11/12 and will have
until 11/02/12 to complete and submit to UMHS Finance.
UMHS Finance’s Academic and Financial Planning & Analysis Team and Doug
Duwe, ACAO in the Medical School will be available during this time frame to
assist departments in the completion of these templates and can be reached at
the following:
• Michelle Peregord (peregord@med.umich.edu or 3-3439)
• John Larin (jtlarin@med.umich.edu or 3-6232)
• Kim Norris (krnorris@med.umich.edu or 3-9201)
• Jean Polyachenko (jpolyach@med.umich.edu or 7-8882)
• Dan Robertson (rdaniel@med.umich.edu or 3-1246)
• Doug Duwe (dduwe@med.umich.edu) or 4-7896
25
6
Collective Response
• Actions are required across the School:
–
–
–
–
–
–
Medical School Administration
Shared Services
NCRC
Centers & Institutes
Basic Science Departments
Clinical Departments
• Local and school-wide actions will be part of the
solution….
25
7
Shared Action / Final Comments
• Together we are committed to maintaining a strong financial
position
• Shared accountability to meeting on vision and stewarding our
resources
• Many Departments and units already strong; explore opportunities
to share best practices and think institutionally about savings
• Look to you for guidance and active participation in trade-off
decisions and policies:
–
–
–
–
RBOD
FGP Board
HHC Operations
Etc.
25
8
FY13-FY22 HHC Capital Investments
Follow Up and Messaging
Follow up to EVPMA Cabinet on August 27, 2012
Presented on October 8, 2012
Context
• In February 2012, a 10-year governance plan was
reviewed by Regents.
• Since that time, multiple new capital projects and
requests have emerged.
• Recently, UMHS Finance was engaged by EVPMA
Cabinet to re-confirm investment principles and
financial constraints to guide leadership decision
making.
26
0
Key Themes from EVPMA Cabinet
• Since 2007, UM HHC has converted ~150 days cash into other strategic assets
and clinical capacity (CVC, C&W, Kellogg and NCDC). This is a rate of investment
near 200% of depreciation.
• In the near future, UM HHC plans to further invest in clinical capacity through UH
South and the Northville Health Center, and in strategic IT replacement through
MiChart Stage 3 (still unapproved yet represents a quality & regulatory
imperative, e.g. HITECH, ICD-10).
• Therefore, additional unapproved routine and strategic investments (e.g. Clinical
Pathology and Translational Research and Ambulatory Care Center (TRACC))
should continue to be planned and vetted, yet current and projected capital
constraints (per the SFP) necessitate a:
Critical review of scope and dollars to be invested
Delay of major project starts (i.e. significant cash outflows) until FY 2017
• The rallying cry for FY 13-17 should be on operations, optimization and execution
to establish a more solid baseline amidst an uncertain environment, and a target
26
operating margin of 5%.
1
10-year SFP Investment Themes
A characterization of UM HHC investment for the next 10 years can be described as follows:
FY 13-14
• Operations and
execution
• Resume positive
operating margin
performance
• Planned investment in
• MiChart Stage 3
• UH South
• Northville Hlth Ctr
$290M / year cash outflow
FY 15-17
FY 18-22
• Operations and
execution
• Continue to improve
positive operating margin
and conserve cash
• Focused investment in
• Vital routine
investments and
critical infrastructure
• Ambulatory support
• MI Partnerships
• Assess:
• Operating margin
strength, 5%
• endowment / non
operating return, 9%
• If appropriate, resume
strategic investment
<$190M / year cash outflow
$300M + / year cash outflow
26
2
HHC Financial Framework / Constraints
What are the “timeless” parameters/drivers of the HHC Financial Framework?
• Liquidity:
– Adhere to a minimum 150 days cash on hand floor (Target 187 – 243, per Moodys A & Aa)
– Note: Fluctuations in market value of LT Cash can cause significant variability (+/-) outside of
–
–
–
our control.
Note: For major inpatient replacement ($1-1.5B investment required), 300-350 days cash on
hand required (100-150 days cash for the investment + 200 days cash target minimum)
Hence, average days cash across the next 20 years should be at or above 275.
Note: A similar but alternative benchmark is that unrestricted cash should be >45% of HHC
assets.
• Debt:
– Meet required Debt Ratios (primarily Debt to Cap of 38-40%)
– Note: UM HHC should seek to borrow to single A median hospital levels (38%-40% debt to
cap). Timing will vary as new debt must be secured by fixed/tangible assets and fit within the
UM campus debt portfolio.
• Operating Margin:
– Achieve 3-4% sustained annual operating margins, strive for 5%
– Generating cash flow from operations is vital to achieving our investment aspirations (vs.
relying on cash flow from investments & philanthropy)
26
3
Protecting 150 DCOH Floor w/o Named Unapproved Projects
HHC Projects $Millions
C&W Completion
Routine Capital (Approved)
Northville Health Center
MiChart Stages 1&2
Taubman Backfill
Taubman 3rd Flr Rennovation (Chair Commit.)
Scheduling & Timekeeping
Revenue Cycle Investment
Clinical Database
Adult Inpatient Expansion / UH South
Offices - UH South
Winding up projects
Closed Project grants
Uncommitted Routine/Strategic Balances
AHD/BT Capital balance carryforard
Institutional contingency uncommitted balances
HHC Approved Sub Total
Routine Capital / Future Allocation
Other Strategic Projects
Chair Package Capital
MiChart Stages 3&4
Remaining Capital Available
FY13
$12.8
$107.4
$0.8
$26.6
$10.4
$5.2
$0.4
$0.0
$2.1
$0.9
$10.0
$1.1
$1.7
$179.4
$8.3
$3.0
$29.0
$72.3
FY14
$0.6
$40.5
$22.2
$3.7
$0.6
$1.4
$6.0
$4.0
$1.6
$95.7
$8.0
$0.2
$6.5
$8.6
$9.8
$209.4
$65.0
$8.3
$3.0
$53.0
($46.7)
FY15
FY16
FY17
FY18
FY19
$0.0
$143.4
$20.0
$5.0
$0.0
$152.4
$20.0
$5.0
$0.0
$157.5
$20.0
$5.0
$51.5
$99.2
$130.9
FY20
FY21
FY22
$0.0
$167.9
$20.0
$5.0
$0.0
$173.9
$20.0
$5.0
$0.0
$186.7
$20.0
$5.0
$120.5
$114.5
$101.7
FY13-22
$13.4
$151.6
$28.8
$30.3
$11.0
$6.6
$6.5
$6.0
$4.1
$141.9
$18.0
$1.3
$1.7
$19.5
$25.8
$29.4
$495.9
$1,214.5
$164.9
$44.0
$115.6
$634.3
$3.7
$5.8
$0.2
$2.0
$0.4
$45.3
$6.5
$6.5
$8.6
$8.6
$9.8
$9.8
$82.2
$24.9
$65.0 $114.0
$8.3
$20.0
$3.0
$5.0
$26.0
$7.6
($29.5) $19.7
$67.4 M available from ‘13-’17 (assuming section above orange is fixed)
HHC Unapproved Sub Total
$112.6
$82.6
$72.8
$166.3
$220.0
$276.6
$313.4
$313.4
$313.4
$313.4
$2,173.3
HHC Total Capital
$292.0
$292.0
$155.0
$191.2
$220.0
$276.6
$313.4
$313.4
$313.4
$313.4
$2,669.2
175
150
150
150
150
150
152
158
162
168
HHC Days Cash
264
Protecting 150 Day Cash in FY 12–17
• Financial constraints are based on the underlying operating assumptions
of the FY 2012 SFP.
• It is plausible that certain key variables could impact when cash
constraints are alleviated (or increased), i.e. raising (or lowering)
investment capacity prior to FY 2018.
• Specifically, actions or items that could improve investment capacity
include:
–
–
–
–
Improve underlying HHC operating margin
Supplement project philanthropy
Attain superior endowment returns
Lower project investment required for key projects
• Importantly, positive NPV projects identified prior to FY 2018 will not help
short term liquidity constraints, since payback periods will likely be
greater than 3-5 years.
26
5
Specific Investment Scenarios
1) FY ‘12 Regents Base
2) FY ‘12 Revised Base
•
Updated approved capital and future routine spend forecast
•
Moved MiChart Stages 3&4 earlier by 2 years
•
Increased Clinical Pathology to revised capital investment request of $280M
3) “All Projects”
•
Included $488M of additional capital projects identified
•
Demonstrates fundamental financial constraints
4) 150 Days Cash Floor
•
Portion of routine and strategic capital spend delayed until post 2018
•
Illustrates delay required in capital spending to adhere to principle of a 150 DCOH floor
26
6
FY13-FY22 HHC Days Cash on Hand
Unrestricted Days Cash on Hand
250
Moody's Aa
200
Moody's A
179
168
154
150
150
125
100
107
85
50
22
0
FY10
FY11
FY12
150 DCOH Floor
FY13
FY14
FY15
All Projects
FY16
FY17
FY18
FY19
Updated FY 12 Base
FY20
FY21
FY22
FY 12 Base
26
7
FY13-FY22 HHC Operating Margin %
Operating Margin %
6.0%
5.0%
4.6%
4.5%
4.5%
4.2%
Moody's Aa
4.0%
3.0%
Moody's A
2.0%
1.0%
0.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
-1.0%
150 DCOH Floor
All Projects
Updated FY 12 Base
FY 12 Base
26
8
FY13-FY22 HHC Debt to Capital %
Debt to Capitalization Ratio
50%
40%
Moody's A
36.5%
31.7%
Moody's Aa
30.5%
29.7%
30%
20%
10%
0%
FY10
FY11
FY12
150 DCOH Floor
FY13
FY14
FY15
All Projects
FY16
FY17
FY18
FY19
Updated FY 12 Base
FY20
FY21
FY22
FY 12 Base
26
9
Summary
• FY 13-17 represents a narrow window of liquidity to maintain unrestricted
cash above 150 days. During this period, leadership emphasis should be to:
– Improve operating financial performance, resume 3-4% operating margin, strive for 5%.
– Exercise discipline and rigor with existing investments, e.g. routine and strategic projects (UH
South, MiChart, Northville Health Center)
• By FY 17, a “new baseline” will be known, both operating and non-operating.
Actual results from recent and near term investments (C&W, MiChart) and
external market factors will inform what we can afford and how we should
invest in FY 18 and beyond.
• In the long run, we aspire to go north. Existing financial projections indicate a
major inpatient facility replacement could begin circa 2028-2032, at which
point 300-350 days cash will be required. Building reserves of this
magnitude will require astute trade offs and investment choices across the
next 20 years.
27
0
University of Michigan
Hospitals & Health Centers
FY 13 September Operations and
Financial Update
Presented to:
Hospitals and Health Centers Executive Board
October 29, 2012
FY13 September Financial Update
September FY 13 YTD Results:
• YTD operating margin loss of ($25.4) M / (4.6)%
• Operating results negatively impacted by ≈$12M for unusual items
(non-recurring / timing), related principally to MiChart
implementation
• FTE labor productivity challenges driving higher expense per case
levels
272
FY13 YTD Actual & Plan
September YTD (3 Months)
FY 13
FY 12
Actual
Actual
Y2Y %
Twelve Months
FY 13
FY 12
Plan
Actual
Y2Y %
Operating Revenue
$555.8
$524.6
5.9% $2,313.9
$2,179.2
6.2%
Operating Expenses
Payroll
Supplies
Depreciation
Shared Services
Other Non-Salary
Total Expenses
$300.7
$116.6
$49.7
$15.7
$98.5
$581.2
$270.7
$104.9
$36.5
$14.7
$82.1
$508.9
11.1% $1,197.8
11.2%
$473.4
36.2%
$198.6
6.8%
$67.0
20.0%
$366.3
14.2% $2,303.1
$1,132.5
$443.0
$186.6
$65.1
$359.0
$2,186.2
5.8%
6.9%
6.4%
2.9%
2.0%
5.3%
Operating Margin
($25.4)
$15.7
$10.8
Margin %
Operating Cash Flow Margin
Margin %
•
($7.0)
-4.6%
3.0%
0.5%
-0.3%
$24.3
4.4%
$52.2
10.0%
$209.4
9.0%
$179.6
8.2%
FY 13 Q1 Plan Operating Margin = $1.4 M.
273
FY13 Performance Metrics
September YTD (3 Months)
FY 13
FY 12
Twelve Months
FY 13
FY 12
Plan
Actual
Y2Y %
Y2Y %
-4.6%
3.0%
0.5%
-0.3%
4.4%
10.0%
9.0%
8.2%
24,431
23,815
2.6%
101,618
97,247
4.5%
Total Facility Revenue per Adj Case
$ 20,846 $ 20,109
3.7%
$ 20,680 $ 20,410
1.3%
Total Expense per Adj Case
$ 23,147 $ 20,752
11.5%
$ 22,005 $ 21,811
0.9%
Total Supply cost per Adj Case
$
$
Operating Margin
EBITDA / Operating Cash Flow Margin
Total Adjusted Cases
FTE per Adj Case*10000
•
4,773 $
4,405
8.4%
1,521
1,438
5.7%
4,659 $
4,555
2.3%
1,423
1,461
-2.6%
Unfavorable YTD Expense per case variance due in part to C&W costs reflected in FY 13 YTD
(depreciation, FTEs), yet not included in FY 12 YTD given ramp up to December FY 12 facility opening
274
September FY 13 Activity Summary
September September
FY 13 YTD FY 12 YTD
Y2Y%
Discharges
11,444
11,205
2.1%
Observation Cases
3,751
3,140
19.5%
Total Cases
15,195
14,345
5.9%
75,930
73,233
3.7%
Average Length of Stay
5.00
5.11
(2.2%)
Occupancy %
86.0%
85.1%
1.1%
Total Patient Days
ED Visits
24,205
21,923
10.4%
OR Cases
12,196
12,040
1.3%
Clinic Visits
446,209
481,405
(7.3%)
275
HHC Reported v. Adjusted
Operating Margin Trend
$15
11.9
$10
September results adversely
impacted by unusually low
business days relative to prior
months
5.7
(In Millions)
$5
0.3
$0
(0.3)
(1.1)
(2.2)
($5)
(3.7)
(5.7) (5.7)
($10)
(2.3)
(3.5)
(1.4)
(4.8)
(9.9)
(11.6)
(10.3)
(9.3)
(11.6)
($15)
(15.2) (15.2)
($20)
Dec FY Jan FY 12 Feb FY March FY Apr FY
12
12
12
12
Reported Operating Margin
•
May FY
12
June FY
12
July FY
13
Aug FY
13
Sept FY
13
Adjusted Operating Margin
After adjusting operating margin for non-recurring items, HHC continues to operate at a less than
276
breakeven margin during periods of favorable seasonality
HHC
Adjusted Operating Margin Trend
$6
$1
(In Millions)
(0.3)
(2.2)
($4)
(2.3)
(1.4)
(3.7)
(4.8)
(5.7)
($9)
(9.3)
(9.9)
September results adversely
impacted by unusually low
business days relative to prior
months
($14)
(15.2)
($19)
Dec FY
12
Jan FY
12
Feb FY
12
March
FY 12
Apr FY
12
May FY June FY July FY
12
12
13
Aug FY Sept FY
13
13
Adjusted Operating Margin
277
HHC Operating Margin Trend
Restated for Bad Debt Reclassification
4.0%
3.0%
3.3%
2.8%
2.0%
1.0%
0.5%
1.0%
0.0%
-0.3%
-1.0%
-2.0%
-3.0%
-4.0%
-4.6%
-5.0%
FY 09
FY 10
FY 11
FY 12
FY 13 Plan
FY 13 YTD
Sept
Operating Margin
•
FY 13 September YTD operating loss of ($25.4)M or (4.6)%
o Margin pressured by a predominately fixed expense base and lower revenue levels
o Revenue favorably impacted by modest activity growth and approximately 5% price
increase effective July 1, 2012
278
Adjusted Cases Trend
105,000
10.0%
101,618
9.0%
100,000
97,247
95,000
8.0%
93,003
7.0%
90,075
6.0%
90,000
85,797
5.0%
5.0%
85,000
4.6%
4.3%
80,000
4.5%
4.0%
3.0%
3.3%
2.6%
2.0%
75,000
1.0%
70,000
0.0%
FY 09
FY 10
FY 11
% Change
• IP Discharges: +2.1%
FY 12
FY 13 Plan
FY 13 Sept YTD
Adjusted Cases
OP Clinic Visits: (7.3%)
• Outpatient clinic visits unfavorably impacted by EpicCare (MiChart) go-live in August
279
FY 13.
Net Facility Revenue
Per Adjusted Case Trend
Restated for Bad Debt Reclassification
$25,000
$20,000
10.0%
$19,355
$19,776
$19,878
$20,410
9.0%
$20,680
8.0%
7.0%
$15,000
6.0%
5.0%
3.7%
$10,000
2.7%
3.0%
2.2%
$5,000
1.6%
4.0%
2.0%
1.3%
1.0%
0.5%
$0
0.0%
FY 09
FY 10
% Change
FY 11
FY 12
FY 13 Plan
FY 13 Sept YTD
Facility revenue per adjusted case
• Net facility revenue per case favorably impacted by FY 13 rate increases.
280
Total Expense
Per Adjusted Case Trend
24,000
15.0%
$21,811
22,000
$20,514
$20,469
$22,005
11.5%
10.0%
$20,574
20,000
6.0%
5.0%
18,000
2.2%
0.9%
0.5%
0.0%
16,000
-0.2%
14,000
-5.0%
FY 09
FY 10
FY 11
% Change
FY 12
FY 13 Plan
FY 13 Sept YTD
Expense per Adjusted Case
• FY 13 September YTD includes activation costs that did not impact FY 12 until December (i.e.
Depreciation)
• FTE growth as well as supply cost per case increases impacting FY 13 performance
281
HHC FTEs
Appointed (including C&W Activation)
FTE's Appointed
14,750
Capacity Creation
Emergency Dept, 8A,
Operating Room Renovations
14,500
14,250
14,377
14,247
14,000
13,750
C&W Activation / Launch
13,500
Sept FY 13
Aug FY 13
July FY 13
June FY 12
MiChart
Ambulatory
Care
Launch
May FY 12
Jan FY 12
Dec FY 12
Nov FY 12
Oct FY 12
Sept FY 12
Aug FY 12
July FY 12
June FY 11
May FY 11
Apr FY 11
Mar FY 11
Feb FY 11
Jan FY 11
Dec FY 11
Nov FY 11
Oct FY 11
12,500
Sept FY 11
12,750
MiChart
Emergency
Dept
Launch
Apr FY 12
13,000
Mar FY 12
MiChart
Revenue
Cycle
Launch
13,065
Feb FY12
13,250
FTE's Appointed
282
FTE’s Per Adjusted Case Trend
1,550
10.0%
1,500
8.0%
1,461
1,492
1,450
1,431
1,437
5.7%
1,423
1,400
6.0%
4.0%
1.7%
1,350
2.0%
0.4%
1,300
0.0%
1,250
-2.0%
-2.2%
-2.6%
1,200
-4.0%
-4.1%
1,150
-6.0%
FY 09
FY 10
FY 11
% Change / Labor Efficiency
FY 12
FY 13 Plan
FY 13 Sept YTD
FTE's Per Adjusted Case
• While FTE management measures have helped to slow growth in headcount, labor efficiency
continues to be pressured by the 800+ FTE’s added during FY 12.
283
HHC Next Steps
/ Action Plans
• Immediate need for action – given Sept YTD results:
o Current cost base levels require attention
o Actions to be concurrent with MiChart stabilization efforts
o Margin focus necessary today to ensure return to sustained profitability
as called for in longer term plan
o Prolonged gaps in near term margin performance may impact ability to
fund future capital needs
• Next Steps / Action Items
o Communication mandating department profit improvement – plans due
back by November 2nd
 Plans to reflect steps for attainment of 2.5% labor productivity levels
o Minimize overtime levels
o Reduce temporary employees
o Margin targets by HHC business segment
 UH/CVC, C&W, Ambulatory Care, Home Care, Overhead
o Optimize supply chain expense management
o Capital freeze
284
FY13 HHC Margin Management Actions
Overview
• With expenses greatly exceeding revenues, the
challenge to achieve our FY13 plan is greater than
expected.
• Detailed unit level plans and actions are being
developed to reduce expenses.
• In October we are developing plans to reduce expenses
by $30 Mil for remainder of FY13; $60 Mil / 2.5%
annualized expense reduction.
• Plans will be submitted on or before November 2nd;
with final review, discussion, and decision period to be
complete mid November. Implementation to occur in
November / December.
285
FY13 HHC Margin Management Actions
Administrative and non-patient care positions
• The hold and approval procedure on all administrative
and non-patient care positions (incremental and
replacement), which was established in April 2012,
remains in effect.
• Future approval to post is considered approval to fill,
unless otherwise modified.
286
FY13 HHC Margin Management Actions
Capital
• A hold has been placed until operating performance
demonstrates the appropriate upward trend on:
– new capital projects greater than $150K
– previously approved projects greater than $150K that do not
have committed spend
• While projects less than $150K are not included in hold, you
should continue to utilize discretion in prioritizing the timing
of capital spending.
• Weekly review and prioritization of capital projects will be
completed by segment executive directors and CEO Cabinet
members.
• The FY14 Annual Routine Capital Process will be deferred
until February 2013.
287
Segment View
FY 12 Actuals and FY 13 Targets
UH/CVC/
Other
CW
FY 12 Op Margin Actual
$91.9
$32.9
$124.8
FY 13 Op Margin Targets
$103.5
$37.0
$140.5
(Amounts in Millions)
UH/CVC/Other Ambulatory
+ CW Subtotal
Care
Home
Care
Overhead
HHC
Totals
$76.4
$2.4
($210.6)
($7.0)
$82.5
$2.5
($214.7)
$10.8
288
HHC Balance Sheet
Key Metrics
September 30, 2012
June 30, 2012
Short Term ($ Mil / Days)
$37.2 / 7
$44.4 / 8
Long Term ($ Mil / Days)
$993.9 / 180
$981.0 / 176
FY 13 Plan
$1,031.1 / 187
$1,025.4 / 184
185 days
39
37
Debt ($ Mil)
$1,025.6
$1,025.6
Unrestricted Fund Balance ($ Mil)
$1,482.8
$1,513.8
FY 13 Plan
40.9%
40.4%
42%
Unrestricted Days Cash on Hand
Total ($ Mil / Days)
Days in Accounts Receivable
Total HHC Debt / Capitalization
Debt to Capitalization Ratio
289
Linking Strategy & Finance at
UMHS
Highlights from our February 2012
Governance Presentations
UMHS SFP Goals & Approach
• We developed a UMHS multi-year financial plan including HHC
and Medical School activity to produce a comprehensive
UMHS outlook.
• Joint strategic financial projections allow us to monitor longrange financial health and facilitate UMHS strategic decision
making and investment considerations.
• The SFP starts with a UMHS view to provide perspective on
projections, based on currently approved projects and current
view of new investments. We then separate HHC and MS
analyses to highlight scenario modeling.
• Since a multi-year plan has many projections and
assumptions, it should be viewed for directional purposes and
not be used as a budget.
291
Strategic and Operating Plan Cycle
Targeted
Strategy
Make choices that support
UMHS Strategic Plan
Prudent
Investment
Invest prudently to
optimize capital and
human resources
Strong
Operating
Performance
Generate cash flow margin
to make investments
29
2
Financial Summary
• UMHS is financially strong with historical positive margin.
• Expenses associated with recent major investment will lower
margins in the short term (FY12-14) with projection to reach
target levels beginning FY 15.
• Long term strategy of investment and growth remains intact,
yet market realities require close monitoring and adaptation
of our plans to remain within fiscal guidelines.
• To accomplish the desired plan and maintain sufficient
liquidity, a continued focus on improving operating cash flow
will be necessary.
293
Critical High Level Assumptions FY13-FY22
• Invest $3.7B in initiatives and capital across UMHS to meet our
strategic objectives.
• HHC operating margins lowered in near term due to C&W
activation, with a bounce back to an average of 3-4%
thereafter.
• Includes year-over-year productivity improvements.
• Medical School research, faculty and space growth rates are
consistent with historical patterns.
• Stronger than historic philanthropy growth.
• Borrowing in the out-years tied to current overall UM campus
debt plan.
294
UMHS Strategic Investments Over the next
Five Years?
• Leveraging our recent investments
• Trade-offs among new opportunities
• Evaluation against UMHS Strategic Plan
• Weighing the mix of routine vs. new/growth
and our capacity to fund
295
UMHS FY13 - FY22 Consolidated Investment List
HHC Projects $Millions
C&W Completion
Routine Capital (Approved)
Northville Health Center
MiChart Stages 1&2
Taubman Backfill
Taubman 3rd Flr Rennovation (Chair Commit.)
Scheduling & Timekeeping
Revenue Cycle Investment
ED Expansion
HHC Approved Sub Total
Routine Capital / Future Allocation
Adult Inpatient Expansion / UH South
Offices - UH South
Clinical Pathology
Faculty Offices - Arbor Heights
MiChart Stages 3&4
Additional Ambulatory Care Expansion
Partnerships in Michigan
HHC Unapproved Sub Total
FY12
$137
$100
$54
$2
$3
$6
$303
FY13
$11
$74
$19
$24
$9
$3
$7
$4
$0.1
$151
$64
$50
$10
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
$0
$199
$0
$212
$90
$91
$198
$289
$303
FY13-22
$11
$78
$39
$25
$9
$3
$7
$6
$0.1
$178
$1,446
$145
$18
$155
$20
$116
$301
$170
$2,371
$4
$20
$1
$0
$2
$27
$81
$95
$8
$0
$108
$0
$120
$0
$135
$0
$153
$0
$183
$0
$193
$52
$52
$10
$37
$6
$50
$30
$238
$5
$5
$188
$0
$20
$144
$9
$20
$30
$244
$30
$20
$30
$239
$30
$249
$51
$10
$24
$30
$30
$279
$303
$295
$271
$239
$249
$279
$238
$188
$198
$289
$303
$2,549
FY12
$6
$5
$0
$21
$0
$9
$0
$21
$8
$12
$3
$10
$5
$100
FY13
$6
$0
$23
$16
$9
$3
$0
$21
$29
$13
$3
$23
$5
$150
FY14
$6
$0
$23
$11
$6
$0
$30
$20
$22
$13
$7
$23
$5
$165
FY15
$6
$13
$0
$24
$0
$0
$30
$21
$20
$13
$14
$23
$5
$168
FY16
$7
$14
$0
$13
$0
$0
$0
$19
$21
$11
$13
$23
$5
$125
FY17
$7
$14
$0
$19
$0
$0
$0
$20
$21
$9
$13
$0
$5
$107
FY18
$7
$14
$0
$22
$0
$0
$0
$21
$18
$9
$12
$0
$5
$107
FY19
$7
$14
$0
$20
$0
$0
$0
$22
$9
$9
$12
$0
$5
$97
FY20
$7
$14
$0
$7
$0
$0
$0
$23
$9
$9
$9
$0
$5
$83
FY21
$7
$14
$0
$2
$0
$0
$0
$23
$10
$9
$7
$0
$5
$76
FY22
$7
$14
$0
$2
$0
$0
$0
$23
$10
$9
$7
$0
$5
$76
FY13-22
$67
$114
$46
$135
$15
$3
$60
$213
$169
$102
$97
$90
$46
$1,156
UMHS Total Investments
$403
$446
$437
$407
$374
$386
$345
$285
$281
$365
$379
$3,705
UMHS Debt $millions
HHC Borrowing
MS Borrowing
UMHS Debt
$125
$28.5
$40
$60
$72
$50
$50
$0
$37.5
$38
$0
$37.5
$38
$40
$60
$72
$50
$50
HHC Total Capital
MS Investments $Millions
Core Campus Routine Renovations
Core Campus Major Renovations
Health Education Space Renovation (Taubman Library)
NCRC Renovations / Deferred Maintenance
NCRC Air Handling Replacement (B20E)
NCRC Health Services Research (B16)
Clinical Research Capacity
Department / Cores Equipment
Academic IT (Research & Education)
Future New Dean's Commitments
New Departmental Chair Packages
Strategic Research Investment
Service Expansion / Other
MS Total Investment
$125
$29
$301
$75
$376
296
FY13 - FY22 SFP Capital Investments and
Connection to UMHS Strategic Goals - $3.7B
$Millions
UMMS Routine
Capital, $328 , 9%
Routine or
undesignated
capital remains
50% of future
investment
provision
Mkt Leadership,
$712 , 20%
Discovery, $607 ,
17%
HHC Routine
Capital, $1,516 ,
41%
UMHS Core
Capabilities ,
$370 , 10%
IPCE, $86 , 2%
Policy to Practice,
$10 , 0.3%
Create Learning
Environment, $46 ,
Diversity, $10 ,
1.2%
0.3%
297
UMHS Cash Flow
• Sustainable cash margin generation is necessary for UMHS to
reinvest in facilities, technology and human capital over the
long-run, as well as to maintain a strong balance sheet and
access to capital.
• Near-term cash margins are expected to be lower than recent
history as we enter into a period of operationalizing large
investments (C&W), and draw down Medical School reserves to
invest in faculty, education space improvements and research
enterprise infrastructure, including NCRC.
• Longer-term, total UMHS cash margins are expected to
improve to sustain our investment plans and to meet our
strategic objectives.
298
299
UMHS Total Cash Margin - Base Model
UMHS Total Cash Margin (%)
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
UMHS Total Cash Margin (%)
UMHS Total Cash Margin = (Total Revenue - Total Expense+ Non Cash Expense) / Total Revenue
*Does not include unrealized market gains or losses
300
UMHS Days Cash on Hand
UMHS Days Cash on Hand (Unrestricted )
300
277
255
253
250
228
209
198
197
200
185
177
174
178
FY17
FY18
FY19
184
186
FY20
FY21
150
100
50
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY22
UMHS Days Cash on Hand (Unrestricted)
Days cash decline is a result of HHC capital investments and MS
spend down of reserves, and could be altered with a lesser capital
spend since we maintain debt capacity at benchmarks.
Note: Due to investment market fluctuations, the
range around any of these points is +/- 30 days
301
UMHS Strategic Financial Plan (SFP)
Supporting the UMHS Strategic Plan
Hospitals & Health Centers
FY13-FY22 Model Overview
February 2012
Noteworthy HHC Model Updates
• The HHC SFP is explicitly aligned with the UMHS
Strategic Plan.
• Key financial elements include:
– Attainment of a 4% operating margin.
– Inclusion of per year through revenue cycle enhancement.
– Growth in reimbursement per case due to high acuity and
complex care.
– Targeted investment to support activity growth.
303
HHC Operating Source of Cash
Activity Growth
Facility Revenue
per Case Growth
Total Expense
per Case Change
Margin Success
Strategy and Investment
Operations
• Michigan market leadership, destination
programs and high acuity cases
• Capacity and throughput improvement
• Population based management
• Productivity improvement (2.5% / year)
• Disciplined investment planning and
accountability to business cases
• Expense management
• Revenue cycle management
• Lean thinking & process improvements
(Michigan Quality System)
304
HHC Key Assumptions
•
The projection includes a 5% shift to governmental payers over the decade. This
represents a 3% operating margin shift. A sensitivity model is also shown to reflect
further commercial erosion.
•
Projection assumes Medicare reimbursement inflation of 1.5% per year for the decade.
Medicaid is assumed at 1%, and BCBSM and other commercial payers assumed at 3%
per year. The model is very sensitive to these assumptions.
•
Inpatient and outpatient activity in line with historic trends and investment plans: 2.5%
inpatient CAGR vs. 1.5% (historical discharges) and 5.6% outpatient CAGR vs. 5.6%
(historical outpatient equiv. cases).
•
The impact of healthcare reform is included in this analysis via the combination of
payer mix shifts, reduced reimbursement rates and outpatient activity.
•
The combination of the above assumptions results in a revenue growth projection that
is different than past experience.
Base ($'s)
Operating Revenue / Adj Discharge
Total Op Expense / Adj Discharge
2008
$22,802
$22,421
Key Operating Assumptions and Financial Metrics
2012 '08 - '12 CAGR
2013
2022 '13 - '22 CAGR
$25,573
2.9%
$25,954
$29,308
1.4%
$25,732
3.5%
$25,847
$28,063
0.9%
305
Additional Key Assumptions
• Projection includes a 2.5% FY year-over-year labor efficiency
improvement.
• Projection includes philanthropy of $15M per year on average,
slightly higher than the $11M per year that we have
experienced over the last five years.
• Projection includes institutional revenue cycle optimization.
• Projection includes investment returns at typical University
long-term estimates.
• Borrowing tied to current overall campus debt plan.
306
Future HHC Capital
HHC Projects $Millions
C&W Completion
Routine Capital (Approved)
Northville Health Center
MiChart Stages 1&2
Taubman Backfill
Taubman 3rd Flr Rennovation (Chair Commit.)
Scheduling & Timekeeping
Revenue Cycle Investment
ED Expansion
HHC Approved Sub Total
Routine Capital / Future Allocation
Adult Inpatient Expansion / UH South
Offices - UH South
Clinical Pathology
Faculty Offices - Arbor Heights
MiChart Stages 3&4
Additional Ambulatory Care Expansion
Partnerships in Michigan
HHC Unapproved Sub Total
FY12
$137
$100
$54
$2
$3
$6
$303
FY13
$11
$74
$19
$24
$9
$3
$7
$4
$0.1
$151
$64
$50
$10
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
$0
$199
$0
$212
$90
$91
$198
$289
$303
FY13-22
$11
$78
$39
$25
$9
$3
$7
$6
$0.1
$178
$1,446
$145
$18
$155
$20
$116
$301
$170
$2,371
$2,549
$4
$20
$1
$0
$2
$27
$81
$95
$8
$0
$108
$0
$120
$0
$135
$0
$153
$0
$183
$0
$193
$52
$52
$10
$37
$6
$50
$30
$238
$5
$5
$188
$0
$20
$144
$9
$20
$30
$244
$30
$20
$30
$239
$30
$249
$51
$10
$24
$30
$30
$279
$303
$295
$271
$239
$249
$279
$238
$188
$198
$289
$303
$40
$34
$14
$88
$42
$32
$14
$88
$45
$33
$47
$35
$50
$37
$53
$39
$56
$42
$60
$44
$63
$47
$67
$50
$71
$53
$78
$82
$87
$92
$98
$104
$110
$117
$124
HHC Total Capital + Investment in MS
$391
$384
$349
$322
$336
$372
$336
$291
$308
$406
$426
$3,530
HHC Borrowing / Debt $millions
$125
$29
$0
$0
$0
$0
$40
$60
$72
$50
$50
$301
HHC Total Capital
Academic Support Payment
Ambulatory Care Margin Share
Prior Period Chair Package Commitments
HHC Investment in Med School
$555
$411
$14
$981
•At this time, 7% of HHC capital spending shown above is “committed”
•This is a schedule of cash outflow of one set of capital projects, not timing of approval
•Includes impact of recent funds flow changes with the Medical School
307
HHC Operating Margin
Operating Margin %
6.0%
5.0%
Moody's Aa
4.0%
3.0%
Moody's A
2.0%
1.0%
0.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
-1.0%
Base + Revenue Low
Base
308
Sidebar: HHC Operating Margin History
HHC Operating Margin Trend
A Long Term Perspective
10.0%
8.0%
6.0%
UH Opened
Cancer Center Opened
4.0%
2.0%
0.0%
-2.0%
-4.0%
CVC Opened
MNA Strike Year
Balanced Budget Act
C&W Opens
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
FY Margin 3.1% -0.9 2.2%8.7%6.1% -3.0 -2.0 -0.1 1.2%0.3%2.0%4.4%5.7%2.7% -1.4 1.5%2.6%0.7%0.6%1.3%1.1%2.2%4.3%5.7%5.8%3.6%1.7%1.0%3.2%2.1% -1.1 -0.1 2.4%3.9%
309
Sidebar: Relationship of Margins
Chart 4.2: Aggregate Total Hospital Margins,(1) Operating Margins,(2)
and Patient Margins,(3) 1991 – 2009
8%
Total Margin
6%
4%
Operating Margin
2%
0%
Patient Margin
-2%
-4%
-6%
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2009, for community hospitals.
(1)
(2)
(3)
Total Hospital Margin is calculated as the difference between total net revenue and total expenses divided by total net revenue.
Operating Margin is calculated as the difference between operating revenue and total expenses divided by operating revenue.
Patient Margin is calculated as the difference between net patient revenue and total expenses divided
by net patient revenue.
310
HHC Days Cash on Hand
Unrestricted Days Cash on Hand
250
Moody's Aa
200
Moody's A
150
100
50
0
FY10
FY11
FY12
FY13
FY14
FY15
Base + Revenue Low
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Base
Note: Due to investment market fluctuations, the range around any of these points is +/- 30 days.
311
Context of Historical Capital Spend
Days Cash on Hand vs. Capital Spend Ratio
(Base + Version 1 Capital)
V1 Days Cash on Hand
600
Base + V1 Projects Ratio
250%
200%
Moody's Aa, 150%
150%
V1 Proj 24 Yr Avg, 137%
300
Moody's A, 130%
100%
Capital Spend Ratio
Days Cash on Hand
450
150
50%
*Capital spend ratio = $ capital investment / current year depreciation
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0%
1999
0
312
HHC Debt to Capitalization
Debt to Capitalization Ratio
50%
40%
Moody's A
Moody's Aa
30%
20%
10%
0%
FY10
FY11
FY12
FY13
FY14
FY15
Base + Revenue Low
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Base
313
Risks and Counter-Measures
• Our ability to make new investments depends on our ability to generate
sufficient cash margins.
• Risks:
– Failure to achieve labor efficiency and/or reach annual growth rates.
– Acceleration of payer mix and uncompensated care deterioration, due to
economy or healthcare reform.
– Credit market and rating deterioration so we cannot borrow per plan
(although there is not much additional borrowing built into this plan).
• Counter measures:
– Closely monitor the actual results vs. plan and adjust accordingly.
– Reduce capital spending.
– Lengthen time frames.
– Marked change in our operating cost structure.
314
UMHS Strategic Financial Plan (SFP)
Supporting the UMHS Strategic Plan
Medical School
FY13-FY22 Model Overview
February 2012
Noteworthy MS Model Updates
• The MS SFP is explicitly aligned with the UMHS
Strategic Plan.
• Key financial elements include:
• Effect of expansion of the research enterprise.
• Shift in Faculty Group Practice (FGP) payer mix and inflation
rates, similar to HHC model assumptions.
• Year-over-year improvement in research and clinical productivity.
• $75M in new Medical School debt
• A draw down of unrestricted reserves to fund strategic
investments, in particular investment in new faculty, educational
space and research enterprise infrastructure.
316
Medical School - Base Model
UMMS Total Margin (All Funds)
6%
5%
4%
3%
2%
1%
0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
-1%
Total Margin
317
Medical School - Base Model
UMMS Days Unrestricted Cash on Hand
500
450
400
350
300
250
200
150
100
50
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
Days Unrestricted Cash on Hand
Note: The Medical School SFP model assumes all unrestricted cash and investments of the Dean and Departments are fungible
31
8
Medical School Summary
• MS cash and investment balances are strong (benchmarked to the 90th
percentile of all Medical Schools) and can support a strategic spend down
period.
• Yet a more sharp decline in margins and net assets could arise should
operational performance trend downward due to depressed research
productivity and/or continued clinical margin threats.
• Faculty & staff compensation account for ~70% of all operating expenses
at the School. Ongoing trends in total compensation per faculty FTE must
not outpace total revenues per faculty FTE.
• We must make wise strategic investment choices now to enable the longterm success of the Medical School. This includes weighing the growth
strategies of the research and education enterprises against our ability to
sustain via clinical operations, academic support from the HHC and
philanthropy.
319
UMHS Strategic Financial Plan
Summary
UMHS SFP Summary
• We are a financially healthy organization.
• Our financial plan supports our strategic plan.
• We are well positioned to respond to the
changing environment.
• We must act decisively and assertively, but
also be nimble, to be successful.
• With targeted strategy, prudent investment and
proper execution we will ensure our success
for years to come.
321