For the exclusive use of K. Bauman, 2017.

HBSP Product Number TCG 125

THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC.

Bandon Medical Associates (A)

Preparing this budget requires a lot of assumptions, and Im not even sure that were using the right ap- proach. But if the group is to have something thats realistic, and if were going to survive within the IDS [integrated delivery system], weve got to push ahead.

Charlene King, M.D., the senior physician member of Bandon Medical Associates (BMA), a small physician group practice located in Oregon, was commenting on the frustration she felt in trying to prepare the groups budget for the upcoming fiscal year. She realized that, although BMAs budget process had come a long way in just a few months, much remained to be done.

BACKGROUND

Bandon Medical Associates (BMA) had been established about 20 years ago by Dr. King and a colleague she had met during her residency. Over the years, the group had grown, and currently comprised six physicians and two medical assistants, who functioned as extenders for the phy- sicians. The extenders assisted the physicians by completing a variety of tasks such as taking pa- tients blood pressure, drawing blood samples, and so forth. They did not bill for their time.

Two years ago, BMA had joined Coos Bay Health System, a large IDS that included several primary care and multi-specialty group practices, a freestanding laboratory, a freestanding radiology unit, two acute care hospitals, a nursing home, a home health agency, and a hospice. Coos Bay co- ordinated care, negotiated contracts with third party payers, and provided some central services, such as information systems support.

FINANCIAL MATTERS

Recently, Coos Bays chief financial officer, had told Dr. King that BMA along with the other physician practices in the IDS were going to be treated as profit centers. He had emphasized that, even though Coos Bay was a nonprofit organization, each provider entity nevertheless would be required to generate sufficient revenue from its outpatient activities to cover its own expenses plus the costs of the Coos Bay central services that would be allocated to it. Each entity also would need to generate an operating surplus to provide the cash required for any capital purchases (such as office and testing equipment) that it wished to make to support its outpatient activities.

The CFO also pointed out that, in accordance with the contracts signed with various provider en- tities at the time they had been purchased by Coos Bay, all inpatient revenuefrom both hospital and physician billings would be retained by the hospital, and a portion distributed to physicians in accordance with the compensation formulas negotiated with them as part of Coos Bays bundled-pricing and sub-capitation arrangements with its payers.

Additionally, the CFO had reminded Dr. King that, as had been the practice for the past two years, revenue from all outpatient laboratory and radiological testing would be retained by the free- standing facilities. Thus, all of the physician groups would need to earn a surplus on the basis of the revenue generated from their outpatient visits only. Stunned by this news, Dr. King had held a retreat for the groups physicians and extenders at which they had discussed a wide variety of mat- ters related to the new financial arrangements. After considerable debate, some of it acrimonious, they had reached the following conclusions:

Different visit types required different levels of physician intensity, and although there were several different approaches to measuring productivity, revenue generation was the best method. Everyone agreed that, since the payment for each visit type was a rough reflection of its intensity, revenue generation was both a good and simple way to measure each physician's productivity.

While most third-party payers classified visits by precise codes, the BMA physicians had agreed that four visit types (initial consultation, routine physical, intensive visit, and routine visit) were sufficient for budgeting purposes.

Physicians would be available to see outpatients for 32 hours a week (eight 4-hour sessions). They also had agreed that, with time off for continuing medical education and vacations, they would be available for a total of 1,500 hours a year (about 47 weeks).

The extenders would be expected to see patients for 1,400 hours a yearless than the physi- cians since they had some other responsibilities in the group.

Physicians would be paid by a combination of base salary and bonus. The extenders would be on a straight salary with no bonus, although physicians could share their bonuses with one or more extenders who they thought were especially helpful.

Each physicians base salary would be set at 42 percent of his or her expected revenue gen- eration. Ten percent of that amount would be kept in reserve until the end of the year, and paid out as a year-end bonus if the group reached at least 95 percent of its total revenue target.

The remaining revenue would be used to cover the group's operating expenses and to provide the surplus needed to fund office renovations, equipment purchases, and other similar items.

With these decisions in mind, Dr. King had met with each physician to discuss his or her plans for the upcoming year, and to arrive at a forecast for the different visit types. She and BMAs ad- ministrator, Gordon Hawkins, had then summed the individual physician forecasts to get the groups total volume forecast.

Dr. King and Mr. Hawkins next developed expense estimates. To do this, they decided to treat physicians, extenders and the groups medical supplies as variable expenses. Dr. King com- mented:

Clearly, the only truly variable expenses are the medical supplies, but if were to find out how were doing, we need to know both physician and extender costs for the different visit types. If we use straight salaries, and essentially treat the providers as fixed costs, we wont be able to do that. So I need to compute per- minute rates for both physicians and extenders, and then multiply those rates by the number of minutes that each provider type spends for each visit type. As I look at this, it all seems pretty daunting, and its not something that Gordon has done before either, so were $ both struggling a little.

Medical supplies, on the other hand, are pretty easy. They include a wide variety of disposable items that we use in conjunction with a visit. To keep the budget simple, weve decided to measure them in terms of units, and Gordon has computed an average cost per unit. We just need to multiply those out to get the budget for each visit type.

The groups fixed expenses included rent, cleaning, administrative staff, receptionists, office supplies, and similar items, which Dr. King expected to total $300,000 for the year. Allocated over- head was for a variety of administrative services provided by Coos Bay, such as billing, collections, and information services. Coos Bays CFO had told Dr. King that he thought the allocations would total about $250,000, but since they were based on the formulas from Coos Bays full cost alloca- tion system, he could not be completely certain.

The Current Years Budget

The elements of the current years budget that Dr. King and Mr. Hawkins had developed are shown in Exhibit 1. This exhibit contains the anticipated revenue for each visit type, the anticipated provider time and medical supply units per visit, and the corresponding unit variable expense fig- ures. Dr. King commented: I think were almost there. We now need to calculate the total variable expense per visit for each visit type, multiply the revenue and total variable expense per visit by the anticipated number of visits to give total revenue and total variable expenses by visit type, deduct the latter from the former to get the contribution to fixed expenses from each visit type, and finally, deduct our anticipated fixed expenses and allocated over- head from the total contribution to give our total budgeted surplus for the year.

Assignment

1. Using the information contained in the case and Exhibit 1, prepare a budget for BMA for the four visit types shown. Use the approach suggested by Dr. King at the end of the case, and organize your figures so that she will find them understandable and useful.*

2. Assuming Dr. King is unhappy with the bottom line of this budget, what options are available to change it? Which options seem the most feasible to implement?

3. What problems do you think Dr. King will encounter in attempting to implement this budget? What should be done about those problems?

* Try to set up a spreadsheet to calculate the budget. Make it as formula-driven as possible. This will allow you to easily test assumptions in answering Question 2.

BANDON MEDICAL ASSOCIATES (A)

Exhibit 1. Budget Data

Type of Visit

Initial consultation Routine physical Intensive visit Routine visit

Expected Number of visits

3,000 4,000 6,000 6,000

Expected Revenue per visit

$150 $110 $80 $60

Expected Physician Time per visit (1)

60 45 20 10

Expected Extender Time per visit (2)

15 10 10 15

Expected Medical Supplies per visit (3)

3 2 2 1 Notes: 

1. In minutes at $1.35 per minute. 2. In minutes at $0.90 per minute. 3. In units at $4.00 per unit.