Case Study: a cardiologist prominent in the community

Case Study: a cardiologist prominent in the community ORDER NOW FOR CUSTOMIZED AND ORIGINAL ESSAY PAPERS ON Case Study: a cardiologist prominent in the community Write an executive summary for the attached case. Please make sure you cover all major points also write the purpose of knowing it, and what we can learn from it. The summary must be at least 1.5 pages. please make sure no plagiarism. Case Study: a cardiologist prominent in the community attachment_1 UV6677 Jun. 11, 2013 CAVALIER HOSPITAL Chief Complaint: Preparing for the Board Meeting Dr. William Harrison, a cardiologist prominent in the community, peered over the balance sheets and income statements in Cavalier Hospital’s annual report for 2010. Due to his role as the director of the recently opened Rotunda Cardiovascular Center, Harrison had been promoted to Cavalier Hospital’s board of directors, whose next meeting was two weeks away. Harrison was hoping to bring himself up to speed on the hospital’s overall financial condition. Past Medical History: Cavalier Hospital Founded in 1955, Cavalier Hospital was a 610-bed nonprofit hospital whose mission was to provide high-quality health care to the growing patient population in southern and central Virginia. Originally set up to serve the poor, nonprofit hospitals now accounted for the majority of U.S. hospitals. Their nonprofit status granted them an exemption from paying taxes, thus enabling them to channel the income they generated back into the hospital’s operations—rather than saving the profits as cash or distributing them to shareholders—with the goal of encouraging hospitals to continue to expand and provide benefits to the local community. Most of Cavalier Hospital’s patients were Virginia residents. Nearly 50% of the patients seen at Cavalier Hospital lived within 30 miles of the facility; another 25% came from the five surrounding counties, and 10% lived elsewhere in Virginia. About 15% came from out of state, mostly from West Virginia and North Carolina. Cavalier Hospital competed for patient traffic with two other regional hospitals, one of which was the recently expanded Hamilton Hospital. Formed by a merger between the Washington and Adams hospitals in 2000, Hamilton approached private physician groups with offers to buy their practices and hire the physicians on salary. Given the growing influence of health insurers and declining reimbursement rates for physicians’ services, many private practitioners saw this as an opportunity to partner with a larger hospital system that would have This case was prepared by Kenan W. Yount, M.D. (MBA ’11) under the supervision of Michael J. Schill, Associate Professor of Business Administration. The individuals and entities in this case are fictitious but based on actual entities and events. Copyright ? 2013 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. -2- UV6677 more clout in negotiating favorable reimbursement from governmental and private payers. As a result, Hamilton Hospital had grown to an operation with 9,000 employees and more than $600 million in assets. History of Present Illness: The Rotunda Cardiovascular Center Historically, the vast majority of Cavalier Hospital’s patients had been referred by local physicians; over the past few years, with the expansion of Hamilton Hospital, these referrals had been in decline. In response, Cavalier’s board of directors had adopted a new growth strategy, beginning with the creation of a cardiovascular care center that had opened in the beginning of 2008. The board of directors believed that the trend towards greater obesity, combined with the aging population in central Virginia, represented a significant market opportunity for Cavalier Hospital to respond to the increasing competition from Hamilton Hospital. Case Study: a cardiologist prominent in the community Traditionally, 51% of new cardiology patients at Cavalier Hospital were referred by non-Cavalier physicians and 30% by Cavalier primary care physicians or other specialists; the remaining 19% were self-referred. But in recent years the number of new cardiology patients referred by outside physicians had declined to 25%. In 2007, the American Heart Association estimated that cardiovascular disease cost Americans more than $300 billion in direct costs—including lost productivity, $503 billion. Physicians at Cavalier Hospital had always excelled in providing state-of-the-art cardiovascular care, which included treatment for common diseases such as high blood pressure, heart failure, coronary artery disease, and cardiac rhythm abnormalities. The principal physicians involved in the care of these diseases included primary care physicians, cardiologists, interventional cardiologists, cardiac surgeons, and radiologists. Trends among the nation’s leaders in cardiovascular care confirmed Cavalier Hospital’s desire to expand into integrated cardiovascular care. The 1,210-bed Cleveland Clinic, ranked first in ?Heart and Heart Surgery? by U.S. News & World Report, had recently opened a new facility for its multidisciplinary Heart and Vascular Institute. At the institute, physicians from all of the relevant cardiovascular specialties reported to the head of the institute, who was in charge of all physicians and activities in the institute. Cavalier Hospital had followed the Cleveland model when creating the Rotunda Cardiovascular Center. The new Rotunda Cardiovascular Center co-located all of the physicians involved in the treatment of cardiovascular disease in one center to provide one-stop shopping for comprehensive treatment of cardiovascular disease. It housed a welcoming lobby and atrium on the first floor for visiting patients and families. The second floor contained the outpatient clinic rooms, rehabilitation facilities, and treadmill testing rooms. The third floor contained hybrid operating suites, catheterization labs, clinical laboratories, and imaging facilities. Patients could receive almost any diagnostic cardiac test, from the newest 3-D nuclear stress test to cardiac -3- UV6677 magnetic resonance imaging (cardiac MRI). The fourth floor contained 60 state-of-the-art, hotelstyled inpatient suites that were ICU-adaptable. The goal of the hotel-style suites was to allow families to have a more active role in the healing process. All in all, the new four-story, 188,000 square-foot center had cost approximately $70 million. There was some discussion regarding whether the center met the hospital’s specified 8% hurdle rate of investment.1 Harrison, who had run his own private cardiology practice for many years in the community, was recruited to Cavalier Hospital to serve as director of the new center. He successfully pulled in a number of local cardiology practices, and Cavalier Hospital was already witnessing a rebound in patient traffic (Exhibit 1). A regional newspaper had recently published a story lauding the hospital’s growth and new additions: It all began with the Rotunda Cardiovascular Center. Despite suffering a decline in patient traffic from 2000 to 2006, Cavalier Hospital has recently seen a 10% increase in inpatient volume and a 25% increase in outpatient visits.Case Study: a cardiologist prominent in the community Revenue growth has jumped from $90 million to $137 million in only 4 years. Dr. William Harrison explained, ?We realized that cardiovascular disease was growing at an alarming rate in the state of Virginia and hoped to utilize state-ofthe-art equipment and a multidisciplinary team-centered approach to treat heart disease. We are excited that patients in the area are beginning to take an active interest in what we’re doing—we’re paving the way for a healthier society.? As part of his role as director, Harrison had been involved in negotiations with several of the region’s major health insurers to determine new terms for reimbursement rates. In addition to attracting the attention of physicians and patients, the front-page press covering the Rotunda Cardiovascular Center resulted in several new health insurance companies approaching Cavalier Hospital, each hoping to include the hospital in its network of physician providers. Historically, 50% of the hospital’s revenue came from third-party payers.2 Traditionally, third-party payers reimbursed hospitals at a premium to Medicare on most procedures; consequently, Cavalier Hospital hoped to increase its market share among third-party payers to improve profit margins on many of its services. Another 30% of revenues came from Medicare and 15% from self-pay patients. It was estimated that 5% of revenues represented Medicaid and uncompensated care. A common health policy criticism of fee-for-service payments, particularly prevalent in cardiovascular care, was that physicians were ordering more expensive tests (e.g., nuclear stress test imaging and catheterizations) because they were more profitable than older diagnostic tests. 1 The hurdle rate of investment was used to set a threshold for the expected rate of return for any investment proposal. Ideally the hurdle rate reflected the market’s prevailing risk-adjusted cost of capital. A project whose expected internal rate of return exceeded the hurdle rate was expected to generate economic profit, whereas one that did not was not. 2 Third-party payers referred to private, nongovernmental health insurance companies. -4- UV6677 Consequently, the fee-for-service system was seen as creating incentives for cardiologists to utilize new equipment preferentially to help generate revenue that would offset the equipment’s high initial cost. Fee-for-service payment schemes were in contrast to capitated payment arrangements, in which insurance companies paid health care providers for the number of patients treated rather than per specific procedure. However, many health policy experts felt that these arrangements caused hospitals to undertreat patients, because once the hospital had collected payment it had little incentive to order additional tests or treatments for the patient. An emerging trend in reimbursement negotiations for integrated care units, such as the Rotunda Cardiovascular Center, was for third-party payers instead to use bundled payments to hospitals for assuming the care of a certain number of a health plan’s patients with a given condition (e.g., hypertension, stable angina, myocardial infarction, congestive heart failure). Bundled care was a variation on capitation with one crucial difference: payment was contingent on the health care provider achieving an aggregate level of acceptable health outcomes negotiated by both the insurance company and the provider. By tying payment to health outcomes, some experts believed it would correct the perverse incentives created by older capitation arrangements. In negotiating with the new health insurance companies that had approached Cavalier, Harrison decided that it would be best to seek this capitation-based bundled payment.Case Study: a cardiologist prominent in the community Harrison explained: In the past it was difficult to use bundled payment schemes, because the cardiologists and the cardiac surgeons were in different departments. Now that we have adopted an integrated-systems-based approach to cardiac care, we can begin to offer bundled packages to health insurers. We think it makes more sense. Why not get paid the same amount for the same medical condition? That way, it doesn’t matter if we decide to use a nuclear stress test or an exercise stress test for a given patient because we aren’t charging the insurance company for the test. In fact, we can go ahead and use the state-of-the-art technology without having to seek insurance approval each time because it doesn’t cost the insurance company or patient extra money if we use the equipment. We get paid for assuming the total cardiac care of the patient each year so long as our risk-adjusted outcomes beat the national averages for outcomes data. For those patients in our capitationbased packages, we have yet to miss any of those benchmarks. Excited by the prospect of both not having to authorize payment for every diagnostic test a patient received and using a payment scheme that would encourage better health outcomes (and reduce longer-term costs for the health plan’s patients), four insurance companies had decided to negotiate for bundled pricing; the rest remained on the traditional fee-for-service model. Harrison remarked, ?We’re really excited about this. We offered very competitive rates to these insurance companies to encourage adoption. Some decided to take advantage of it.? -5- UV6677 Diagnosis and Treatment: Preparing for the Board Meeting As Harrison contemplated both the challenges the hospital faced and the success of the new Rotunda Cardiovascular Center, which had now been open for three years, he peered over several of the slides (Exhibits 1 and 2), annual report exhibits (Exhibit 3), and financial statements (Exhibits 4 and 5) that had been prepared for the next board meeting. Using the financial statements, he conducted a financial and operating ratio analysis of the hospital to better understand the data (Exhibits 6 and 7). The newly negotiated contracts had resulted in an incredible expansion of both patient volume and hospital revenue. He hoped to use his analysis to assess the current financial condition of the hospital and the true significance of the hospital’s recent growth. In conducting the financial analysis, he was reminded of the debate in a recent issue of the New England Journal of Medicine regarding the proper identification of value in health care (Exhibit 9). With information at hand, he hoped to help the board review the performance of the hospital and be able to assess the Rotunda investment so as to decide whether the hospital should continue to expand the Rotunda model to additional specialties. -6Exhibit 1 CAVALIER HOSPITAL Sample Slides on Hospital Growth from the 2010 Presentation to the Cavalier Hospital Board UV6677 -7- UV6677 Exhibit 2 CAVALIER HOSPITAL Sample Slide on Hospital Revenue Classification from the 2010 Presentation to the Cavalier Hospital Board 2006 2010 Uncompensated 4% Medicaid 3% Uncompensated 6% Medicaid 3% Self-Pay 14% Self-Pay 12% Medicare 25% Medicare 28% Th rd-Party Payer 50% Third-Party Payer 55% -8- UV6677 Exhibit 3 CAVALIER HOSPITAL Sample Outcomes Data from the 2010 Cavalier Hospital Annual Report Door-to-Balloon Time, 20101 90 Minutes 85 80 A HA Goal National Average 75 Cavalier 70 PCI Complications, 20102 Cavalier National A verage 3.7% 3.0% 2.6% 2.0% 1.3% 1.0% 0.2% Mortality 1 Reinfarction 0.3% Emergency CABG B lood Transfusions Door-to-balloon time is the time interval that begins when a patient having a heart attack arrives at an E.R. with chest pain and ends with the implantation of a stent to reopen a blocked coronary artery. 2 PCI is percutaneous coronary intervention, the procedure through which a stent is inserted through the leg up into a coronary artery to treat a hear attack. Although usually successful and far less invasive than open-heart surgery (coronary artery bypass grafting [CABG]), the procedure can result in death (mortality), further heart attacks (reinfarction), conversion to open-heart surgery (emergency CABG), and blood loss (requiring transfusion). -9- UV6677 Exhibit 4 CAVALIER HOSPITAL Cavalier Hospital Income Statement (in millions of dollars) Case Study: a cardiologist prominent in the community 1 REVENUE Gross Patient Revenues Contractual Allowances1 Charity Care2 Net Patient Revenues Trust/Endowment Income Auxillary Income3 Total Revenue 2006 151.3 -64.9 -6.4 80.0 10.5 3.6 94.1 2007 152.4 -64.6 -7.4 80.4 9.7 5.3 95.4 2008 185.4 -85.9 -9.5 90.0 12.7 5.2 107.9 2009 205.4 -94.9 -11.4 99.2 14.4 7.3 120.9 2010 240.2 -114.2 -14.0 112.0 16.6 8.3 136.8 EXPENSES Operating Expenses Depreciation and Amortization Interest Provision for Bad Debt Total Expenses 2006 70.7 4.9 1.2 1.5 83.0 2007 72.7 5.0 3.5 1.5 85.3 2008 84.0 5.9 5.2 1.8 98.5 2009 96.7 6.7 5.8 2.0 113.5 2010 113.4 7.8 4.9 2.3 129.6 Net Income 11.1 10.1 9.3 7.4 7.2 Amounts discounted from listed rates as a result of agreements with third-party payers, including Medicare, Medicaid, and private insurers. 2 Uncompensated care for the indigent. 3 Funds received from dining facilities, parking fees, gift shop sales, and vending machine sales. -10- UV6677 Exhibit 5 CAVALIER HOSPITAL Cavalier Hospital Balance Sheet (in millions of dollars) ASSETS 2006 Cash and Cash Equivalents 2.7 Accounts Receivable (Net) 18.2 Inventories 1.4 Total Current Assets 22.6 Plant, Property, and Equipment (Net) 78.5 Total Assets 100.9 2007 2.4 19.5 1.4 23.3 113.6 136.9 2008 5.9 24.5 1.9 32.4 143.5 175.9 2009 4.8 28.4 2.1 35.3 150.3 185.7 2010 7.9 30.1 2.4 40.3 147.8 188.1 LIABILITIES Accounts Payable Current Portion of Long-Term Debt Total Current Liabilities Long-Term Debt Total Liabilities 2006 10.1 2.2 12.3 19.1 27.3 2007 10.3 2.0 12.3 49.2 61.6 2008 13.6 2.6 16.2 64.6 80.8 2009 15.0 4.7 19.7 78.8 98.6 2010 16.5 2.7 19.2 76.6 95.8 EQUITY Total Equity (Net Assets) 2006 73.6 2007 75.3 2008 95.1 2009 87.1 2010 92.3 -11- UV6677 Exhibit 6 CAVALIER HOSPITAL Cavalier Hospital Financial Ratio Analysis PROFITABILITY RATIOS Profit Margin Return on Assets (ROA) Return on Equity (ROE) 2006 11.8% 11.0% 15.1% 2007 10.5% 7.3% 13.3% 2008 8.6% 5.3% 9.8% 2009 6.1% 4.0% 8.5% 2010 5.3% 3.8% 7.8% Comparables 1 6.0% 4.2% 12.8% NET REVENUE RATIOS Contractual Allowance Percentage Charity Care Percentage 2006 42.9% 4.2% 2007 42.4% 4.9% 2008 46.3% 5.1% 2009 46.2% 5.5% 2010 47.5% 5.8% Comparables 1 43.2% 5.0% ASSET MANAGEMENT RATIOS Days Cash on Hand Accounts Receivable Turnover AR Days Until Collected Inventory Turnover Current Asset Turnover Plant, Property, and Equipment Turnover Total Asset Turnover 2006 12.6 5.2 70.7 65.4 4.2 1.2 0.9 2007 10.9 4.9 74.6 68.1 4.1 0.8 0.7 2008 23.4 4.4 83.1 57.4 3.3 0.8 0.6 2009 16.5 4.3 85.8 57.9 3.4 0.8 0.7 2010 23.5 4.5 80.4 58.0 3.4 0.9 0.7 Comparables 1 16.1 6.3 57.9 60.1 4.1 1.5 0.9 LIABILITY AND LIQUIDITY RATIOS Accounts Payable Turnover AP Days Until Paid Current Ratio Debt-to-Equity Ratio Asset-to-Equity Ratio 2006 7.0 52.2 1.8 0.3 1.4 2007 7.0 51.9 1.9 0.7 1.8 2008 6.2 59.0 2.0 0.7 1.8 2009 6.5 56.5 1.8 1.0 2.1 2010 6.9 53.0 2.1 0.9 2.0 Comparables 1 6.5 56.5 2.0 0.7 1.6 Calculation Formulas Profit Margin (Net Income) / (Total Revenue) Return on Assets (ROA) (Net Income) / (Total Assets) Return on Equity (ROE) (Net Income) / (Total Equity) Contractual Allowance Percentage (Contractual Allowance) / (Gross Revenue) Charity Care Percentage (Charity Care) / (Gross Revenue) Days Cash on Hand (Cash) / (Total Expenses ? Depreciation) * 365 Accounts Receivable Turnover (Total Revenue) / (Accounts Receivable) AR Days Until Collected (Accounts Receivable) / (Total Revenue) * 365 Inventory Turnover (Total Revenue) / (Inventory) Current Asset Turnover (Total Revenue) / (Total Current Assets) Property, Plant, and Equipment Turnover (Total Revenue) / (Property, Plant, and Equipment) Total Asset Turnover (Total Revenue) / (Total Assets) Accounts Payable Turnover (Operating Expenses) / (Accounts Payable) AP Days Until Paid (Accounts Payable) / (Operating Expenses) * 365 Current Ratio (Current Assets) / (Current Liabilities) Debt-to-Equity Ratio (Total Debt) / (Total Equity) Asset-to-Equity Ratio (Total Assets) / (Total Equity) 1 Comparables are defined as regional hospitals of similar size and objective. -12- UV6677 Exhibit 7 CAVALIER HOSPITAL Cavalier Hospital Operating Statistics INPATIENT ACTIVITY Total Discharges Third-Party Payer Discharges Medicare Discharges Self-Pay Discharges Medicaid Discharges Uncompensated Discharges Third-Party Payer Medicare Self-Pay Medicaid Uncompensated Average Daily Census Total Hospital Beds Hospital Bed Occupancy Rate (%) Patient Days Average Length of Stay 2006 28,680 14,346 8,155 4,051 918 1,211 50.0% 28.4% 14.1% 3.2% 4.2% 482 610 79% 158,983 5.5 2007 26,776 13,575 8,010 3,508 803 1,301 50.7% 28.3% 13.1% 3.0% 4.9% 451 610 74% 145,506 5.4 200 …Case Study: a cardiologist prominent in the community Get a 10 % discount on an order above $ 100 Use the following coupon code : NURSING10