FY 2012 Operating & Capital Budget (February 2011) 7/19/2011 2 Harris County Hospital District FY2012 Operating & Capital Budget Executive Summary Introduction The past twelve (12) months have been very challenging, as we have seen more patients this year than ever before, while at the same time revenues are less than expected. The current environment is filled with uncertainty related to the development of federal health reform regulations and possible changes, as well as state budget reductions, and the potential financial and operational impact on the District and the health system we operate. While we feel confident in our ability to develop and adjust strategies in response to whatever federal reform and state budget initiatives are eventually implemented, we will continue to carefully monitor and respond to changes as they are introduced. During this past year, there have been numerous positive events which have occurred within our health system. The following list provides a few of these accomplishments. The District achieved the NCQA Medical Home Designation for its community health centers in 2010. A patient-centered medical home is a practice that provides and coordinates care for patients total health care needs in a timely, personal manner that achieves measurable high-quality outcomes. During October and November 2010, the District automated the inpatient physicians and nursing clinical order entry and documentation, completing the transformation of our medical records from paper to electronic medical records (EMR). The integration of certain supporting systems (radiology upgrade, operating room, obstetrics, oncology, etc.) will continue during the next two budget years. In pursuit of its goal to become a paperless environment, the District has implemented processes to scan loose documentation into the EMR so that it is available electronically for clinical and business purposes. Document scanning will be reduced concurrent with the integration of the remaining support systems for the Epic EMR, gradually eliminating virtually all paper documents. The District completed its strategic planning process, and had the plan approved by the Board of Managers in May of 2010. The document Harris County Hospital District, Strategic Plan 2011 to 2015, Positioned for the Future was presented to County Commissioners on June 22, 2010. The plan will be updated annually, based on the need to be flexible in an evolving healthcare environment. 7/19/2011 3 Harris County Hospital District was recognized as a Platinum Start! FitFriendly Company by the American Heart Association in November 2010, noting that Through your ongoing efforts to provide a culture of corporate wellness your organization has demonstrated extraordinary, tangible results. The results were evidenced by a lower than average increase in employee health claims costs for FY 2011. The District increased access to surgical services by increasing outpatient surgery by 18% while reducing inpatient surgeries by 5%. The shift from inpatient to outpatient reduces inpatient cost, reduces length of stay, and performs surgery in a more cost effective manner. The El Franco Lee Community Health Center, which opened in May 2009, saw an increase in patient visits from 33,954 in FY 2010 to a projected 53,735 in FY 2011. Similar growth is expected for FY 2012. Construction of the MLK Community Health Center and adjacent Eligibility Center was completed, and the new clinic opened at the end of May 2010. The new MLK Community Health Center (63,366 square feet) replaces the clinic that was formerly located at Quentin Mease Hospital. The new Southeast Eligibility Center (10,154 square feet), which opened in June 2010, replaced the South Loop Eligibility Center which was located at 5959 Long Drive. Construction on the Outpatient Specialty Clinic/Diagnostic Center on the Holly Hall campus is underway. The parking garage for the project was completed in September 2010. Construction has just been completed on the new LBJ General Hospital Emergency Center (EC). The second phase of the project renovation of the old EC space to support the new construction is currently underway. The new facility is expected to increase EC capacity by 20%. Construction on the Outpatient Specialty Clinic/Diagnostic Center on the LBJ campus should begin in April 2011. The Hospital District opened its ninth school-based clinic, Goose Creek School-Based Clinic, on April 20 at San Jacinto Elementary School in Baytown. The 3,000 square-foot clinic has six exam rooms. The clinics pediatric providers care for newborns to teenagers up to age 18. Working in conjunction with Community Health Choice, the Districts Medicaid HMO, we began a pilot project with two of the FQHCs in Harris County, Denver Harbor and Spring Branch Community Health Centers. In this pilot, these two health centers are able to sign up patients for district subsidized eligibility, provide services at their sites and receive reimbursement for those patients, based on Medicaid rates, from Community Health Choice. The Hospital District is fully operational on the new web based eligibility system purchased from Network Sciences, Inc. Mental Health Mental Retardation (MHMR) of Harris County is currently utilizing the system and 7/19/2011 4 the other agencies, Harris County and the City of Houston, should be operational by early 2011. The system allows the participating agencies to share, with patient authorization, basic patient demographic data as we work to coordinate services. Patient Satisfaction scores are continuing to improve, especially in the Districts emergency rooms. Based on the latest results, the Districts overall adult inpatient satisfaction score was 68.5% which is better than the national average of 68.0%. Beginning March 2008, in order to avoid a 2% reduction in the annual Medicare payment update, hospitals had to submit and publicly report patient satisfaction data. The adjusted data is posted on the Hospital Compare Web site (http://www.hospitalcompare.hhs.gov). Primary care visits increased by 3.5% from 693,844 in FY 2010 to a projected 718,032 in FY 2011. Harris County Hospital Districts Ben Taub and Lyndon B. Johnson General Hospitals and Quentin Mease Community Hospital were awarded the prestigious Pathway to Excellence designation from the American Nurses Credentialing Center. The Districts Outpatient Orthopedic Rehabilitation Department at Quentin Mease Community Hospital received the Exemplary Site Award for Physical Therapy Clinical Education Experiences from the Texas Consortium for Physical Therapy Clinical Education, recognizing the District for the exceptional clinical mentoring and education it provides to physical therapy students. The proposed annual Operating & Capital Budgets (Exhibits A and D) for the fiscal year ending February 28, 2012 reflect the Districts commitment to provide high quality health care services to Harris County residents in a cost effective manner. This past year, we have seen an increase in the number of Harris County residents coming to the District for their health care services. Driving the increase is the continued high unemployment rate, 8.1% in December 2009 and 8.3% (preliminary) in December 2010 (U.S. Bureau of Labor Statistics, www.bls.gov/bls/unemployment.htm). When people lose their jobs, they generally lose their health insurance. Many turn to the District for help. In FY 2009, the District treated 272,882 unduplicated patients. In FY 2010 that number increased by 9.8% to 299,583 and for FY 2011 it is expected to reach 312,476, a 4.3% increase over FY2010. On January 27, 2011, the Districts Board of Managers approved the Districts Operating Budget, Standard Capital Budget, and affirmed the multi-year Strategic Capital Plan (Exhibit E - initially approved January 31, 2008). The multi-year Strategic Capital Plan outlines the Districts plan to build new or replacement facilities in areas with a demonstrated need and to expand diagnostic and treatment 7/19/2011 5 capability. Exhibit A summarizes the revenues available for the provision of services and the expenses incurred in delivering those services. The Districts budget excludes the operating results for Community Health Choice HMO and the Harris County Hospital District Foundation, except that the Foundations capital campaign is listed as a source of funding for the multi-year capital plan (Exhibit E). The proposed Budget includes FY 2012 Service Initiatives (Exhibit B) and reflects the ongoing commitment to the Districts key strategic priorities, including: Meeting community needs through improved access to care Providing high quality healthcare Improving patient, physician and employee satisfaction Hiring and retaining excellent employees Maintaining financial strength and stability The Operating Budget (Exhibit A) reflects total revenues of $1,061,137,000 available for the provision of health services. The Operating Budget includes expenses of $1,061,137,000 funding the cost of salaries, benefits, supplies, services, and facilities used to provide health services to persons who are sick or injured and come to the District for care. Service Indicators (Exhibit C) Primary care visits are projected to increase by 5.3%, to a total of 755,956 in FY 2012, from the projected 718,032 in FY 2011. The increases are planned for (1) El Franco Lee and MLK clinics, as they reach full provider staffing, (2) the transfer of pediatric primary care visits from Ben Taub Hospital to the planned clinic in Pasadena, and (3) the opening of two group practice primary care clinics in northwest Harris County, which are projected to open during the second half of the fiscal year, increasing our capacity to care for the residents of Harris County. Hospital based clinic visits are expected to remain relatively flat for FY 2012, due to ongoing capacity constraints, as well as the anticipation of a positive impact from the Medical Home initiative focus on disease management in the primary care setting. Emergency room visits are projected to grow a little more than 7%, primarily due to the opening of the new ER facility at LBJ Hospital, as well as the continued high level of unemployment with no health insurance. 7/19/2011 6 Surgery cases are budgeted to increase about 2% in FY 2012 from the prior year, based on continuing throughput improvement. Total outpatient visits are budgeted to increase by 2.7%, from a projected 1.64 million in FY 2011 to 1.68 million in FY 2012. Inpatient cases are expected to decline slightly in FY 2012 due to the transition of inpatient pediatrics out of Ben Taub Hospital. After spiking in FY 2011, observation cases are projected to decline in FY 2012 as enhanced case management protocols identify outpatient cases that can be cared for as true outpatients, not requiring the utilization of observation beds. Budgeted deliveries of 7,643 for FY 2012 are flat compared to FY 2011. As we continue to work with physicians on inpatient case management, we are planning a 4% reduction in inpatient average length of stay, from the projected 5.85 days for FY 2011 to 5.66 days for FY 2012. Observation days should decline commensurately with the reduction in observation cases discussed above, and improved case management. Inpatient Case Mix Index (CMI) is projected to increase 1% in FY 2012 from FY 2011, as the electronic health record facilitates better clinical documentation, and the coding improvements achieved in FY 2011 through enhanced training and accountability are effective for the entire FY 2012. Payor mix is expected to improve, primarily due to better front end tools and processes to identify Medicaid and other third party payors at point of service. We have budgeted a shift of 2% from Charity and Self Pay to Medicaid. The number of new patients and unduplicated patients are expected to increase commensurately with the overall increase in outpatient volumes. Revenues (Exhibit A) Net Patient Revenue is budgeted to increase from the $297 million projected for FY 2011, to $324 million in FY 2012, an increase of 9.0%. The expected growth is due to the improvements in payor mix and inpatient case mix discussed previously, as well as the ongoing improvements in all patient revenue cycle processes at the District. We have better clinical documentation and revenue cycle tools available through EPIC and other supporting software, combined with efforts by revenue cycle management to streamline work flows. 7/19/2011 7 Disproportionate Share and Upper Payment Limit (DSH/UPL) funding is expected to remain flat. Due to statewide cap limitations in FY 2011, the projected DSH/UPL revenue for FY 2011 is $183.4 million. While the extension of the enhanced federal matching does provide the possibility of some increase for FY 2012, it is likely that the statewide cap may again limit the total DSH/UPL funding. Other Operating Revenue budgeted for FY 2012 reflects an increase of approximately $2.0 million from the projected FY 2011 amount of $25.9 million. The increase is primarily due to the anticipated appropriation by the state legislature of a portion of the remaining accumulated red light funds in the upcoming legislative session. Ad valorem tax revenues are projected to be comparable to the current year projection of $503 million. As the economic recovery in Harris County continues very slowly, we do not expect any increase in overall property values for the 2011 tax year/HCHD FY 2012. Tobacco settlement revenue for the District is expected to be around $11 million for FY 2012, roughly the same as FY 2011. Although the overall distribution from the settlement fund is expected to increase, due to improvements in the investment market and the positive impact on the endowment portfolio, approximately 14% ($1.8 million) of the total distribution will be passed through to Harris County, based on the juvenile and jail health costs borne by the County, which are included in the statewide distribution calculation. Interest income and other nonoperating revenue and expenses are budgeted at $9.3 million in FY 2012, which is $1.4 million higher than the projected $7.9 million for FY 2011, since we do not expect the same negative fair market adjustments to investments in FY 2012 that occurred in FY 2011. The total Hospital District revenue budget for FY 2012 is $1.061 billion, an increase of almost $34 million from the projected FY 2011 revenues. The expected increase is primarily attributable to the improvement in revenue cycle operations and the resulting positive impact on patient revenue billing and collections. Working with the Board of Managers, Commissioners Court, as well as with elected officials at the State and Federal levels, the administration and medical staff leadership of the District will actively monitor any changes and communicate their impact to the Board of Managers and Commissioners Court. 7/19/2011 8 Expenses (Exhibit A) From the perspective of resource utilization, the budgeted increase in outpatient volume is balanced by a commensurate decrease in inpatient utilization. Therefore, overall District expenses will remain stable, as we balance productivity and utilization improvements against inflationary increases, with the exception of the cost of certain strategic initiatives and the intergovernmental transfers (IGT) related to the Harris UPL program. Those variances will be highlighted in the following discussion. Salaries are budgeted to decrease by 0.9% in FY 2012 from FY 2011 projected expense. An average merit increase program of 1.5% has been included in the budget, to keep the District in line with the healthcare industry. The increase will be offset by planned reductions in overtime and contract labor utilization, meeting all productivity targets, and a decrease in FTEs through work flow redesign. The reduction should be achieved through normal attrition and a soft hiring freeze. Total Full-time Equivalent staff (FTEs) are budgeted to decline by 2.5% from the projected FY 2011 of 7,411 to 7,229 in FY 2012. Nursing and other vacancy rates are expected to remain relatively low. Employee Benefit costs are expected to increase with the conversion of the environmental services contract to in-house staff, and an expected increase in health claims costs for our self-funded plan. Based on preliminary discussions with our actuaries, pension and post-retirement health benefit costs are assumed to be slightly lower in FY 2012 than in FY 2011, due to positive investment performance in the pension plan, and the approved increase in the monthly retiree contributions for the health plan. Supply expenses are budgeted to decrease to $159.0 million in FY 2012 from FY 2011 projected expense of $160.7 million. The improvement is based primarily on taking over management of the patient assistance program for pharmaceuticals, which is projected to improve the replacement benefit by $2 million (from $6 million in FY 2011 to $8 million for FY 2012). Other, smaller, improvements are expected from numerous supply chain and utilization management initiatives that offset the expected inflationary increases. The Medicaid Services IGT is budgeted to increase to $127 million for FY 2012, up from the projected but not yet finalized FY 2011 estimate of $112 million. The increase is due to the declining federal matching percentage for the Harris UPL program, as the enhancements provided by the stimulus bill gradually wind down. This represents the majority of the budgeted expense increases for FY 2012. 7/19/2011 9 Purchased services are budgeted to increase 4.2% in FY 2012; including $1.8 million more for contract software and hardware maintenance, covering our expanding information technology platform. Other increases include nursing magnet activities, additional lease and utility costs related to the planned primary care clinics, and other miscellaneous expenses. Depreciation expense is budgeted to increase by $1.1 million, to a total of $42.6 million in FY 2012, due to ongoing capital purchases and project completions. Interest expense is budgeted at $7.6 million for FY 2012, about $700 thousand less than FY 2011, reflecting a small increase in the capitalized interest offset, as the Holly Hall and LBJ ambulatory care buildings construction gets underway. Total operating expenses for the Hospital District are budgeted to increase from the $1.046 billion projected for FY 2011, to $1.061 billion for FY 2012, an increase of 1.5%. The resulting margin is a breakeven budget for FY 2012, compared to the projected loss of $18.3 million for FY 2011. As discussed earlier, managements goal of a breakeven margin will be achieved through ongoing revenue cycle improvement, as well as numerous initiatives and redesign and reengineering efforts currently being evaluated. Included in those initiatives are the following: Work with medical staff to prioritize, develop and implement evidence based protocols for high volume, high cost admissions and outpatient procedures. Goals include timely services, elimination of medically unnecessary procedures or visits, and timely patient discharge or dismissal. Creation of project management teams to facilitate evaluation, work flow redesign and implementation of each plan for high impact improvement opportunities. Goals are to substantially reduce rework and to eliminate work flow barriers to timely service. Ongoing evaluation of fixed positions which are not directly involved in patient care, in conjunction with the work flow redesign, to reassign existing staff, or not replace departing staff, as the improvements are realized. Standard Capital Expenditures (Exhibit D) For the FY 2012 Capital Budget, the District conducted an assessment of its facilities, equipment and technology to determine the priorities for replacement, repair and any new acquisitions. The assessment and prioritization process included representatives of the medical staff from both Baylor College of Medicine 7/19/2011 10 and The University of Texas Health Science Center. The assessment and prioritization process addressed patient safety, obsolescence, new technology, building safety and code compliance requirements. Given the projected margin for FY 2011 and the uncertainty for FY 2012, and the resulting cash flow impact, the regular capital budget recommendation is being limited to $29 million in FY 2012, about 70% of the prior year depreciation of $41 million. Multi-year Capital Plan (Exhibit E) In addition, the Hospital District expects to commit approximately $60 million of capital funds related to the strategic capital projects during FY 2012, while the total cash outflow for the strategic capital projects is forecast to be $83 million (most of the commitments for the Holly Hall project were made in FY 2011, with much of the cash outflow to occur in FY 2012). Exhibit E provides a listing of Phase I, II and III projects, as well as the source of financing for those projects. In addition to the 2007 bond funds of $158 million, the District plans to fund the projects from a combination of internally generated funds and the capital campaign being conducted by the Harris County Hospital District Foundation. Conclusion Together, the FY 2012 Operating Budget, FY 2012 Capital Budget, and Multi-year Capital Plan represent the Districts continuing progress to improve the health status of the residents of Harris County. Administration recommends the approval of the proposed FY 2012 Operating Budget, FY 2012 Capital Budget, and Multi-year Capital Plan for the Harris County Hospital District. 7/19/2011 11 EXHIBITS 7/19/2011 12 EXHIBIT A Summary Statement of Operations (In Thousands) FY2012 Budget Net Patient Revenue $ 324,000 Net Ad Valorem Tax Revenue 505,000 Other Operating Revenue [UPL, DSH, Trauma] 211,837 Tobacco Settlement Revenue 11,000 Interest Revenue & Other 9,300 Total Net Revenue $ 1,061,137 Total Salaries and Benefits 618,991 Total Drugs and Supplies 158,959 Medicaid Services IGT 127,000 Purchased Services 37,015 Utilities 13,091 Maintenance and Repairs 23,270 Rentals and Leases 8,042 Other Services 24,516 Depreciation, Amortization, Interest 50,252 Total Operating Expenses $ 1,061,137 Net Revenue Over Expenses $ 0 Note: Community Health Choice, HMO budgeted net income for calendar year 2011 is $4,487,516. This amount is not included above. 7/19/2011 13 EXHIBIT B FY2011 Service Initiatives Grow the primary care services at the El Franco Lee Health Center in the Alief community, the Martin Luther King Health Center, and the new pediatric clinic being established in Pasadena. Develop more robust chronic disease management programs, as a component of the NCQA Patient-Centered Medical Home Designation for the Districts Community Health Program and Ambulatory Care Services. Continue to improve throughput in the emergency centers, reducing wait times, reducing left without being seen and reducing time on divert. Improve CMS mandated quality measures (CORE indicators) to meet national benchmarks. Implement evidence-based guidelines utilizing protocols to achieve National Healthcare Safety Network (NHSN) standards. Expand healthcare Effectiveness Data and Information Set (HEDIS) to incorporate 2011 indicators. Continue to reduce inpatient length of stay and re-admission rates by working with the medical staff leadership, providing scorecards comparing to benchmarks by DRG and best practices. Work with medical staff to prioritize, develop and implement evidence based protocols for high volume, high cost admissions and outpatient procedures. Goals include timely services, elimination of medically unnecessary procedures or visits, and timely patient discharge or dismissal. Improve processes throughout the District in order to continue providing cost effective/high quality care in a difficult economic climate. Create project management teams to facilitate evaluation, work flow redesign and implementation of each plan for high impact improvement opportunities. Goals are to substantially reduce rework and to eliminate work flow barriers to timely service. Ongoing evaluation of fixed positions which are not directly involved in patient care, in conjunction with the work flow redesign, to reassign existing staff, or not replace departing staff, as the improvements are realized. 7/19/2011 14 EXHIBIT C Service Indicators (Utilization) FY2012 Budget Adjusted Patient Days 502,957 Adjusted Admissions 88,816 Unduplicated Patients 331,345 Outpatient Service Related Statistics Emergency Visits Ben Taub 109,273 Lyndon B. Johnson 78,264 Total Emergency Visits 187,537 Clinic Visits Ben Taub & Quentin Mease 187,334 Lyndon B. Johnson 104,880 Community Health Programs 755,956 Total Clinic Visits 1,048,170 Total Emergency Room and Clinic Visits 1,235,707 Inpatient Service Related Statistics Admissions Ben Taub 23,512 Lyndon B. Johnson 12,505 Quentin Mease 582 Total Inpatient Admissions 36,598 Observation Stays 8,292 Patient Days Ben Taub 137,006 Lyndon B. Johnson 58,084 Quentin Mease 12,162 Total Inpatient Days 207,252 Average Length of Stay 5.66 Newborn Deliveries Ben Taub 4,261 Lyndon B. Johnson 3,382 Total Deliveries 7,643 7/19/2011 15 EXHIBIT D Capital Budget Summary (In Thousands) FY2012 Category Totals Budget Facility Projects $ 8,685 Information Technology Ongoing Projects 8,675 Information Technology New Projects 2,664 Medical Equipment 3,571 Other (Pyxis Capital Leases, Emergency Capital) 5,001 Community Health Choice (HMO) Capital 375 Total FY2012 Capital Budget $ 28,971 Notes: FY2011 Projected Depreciation is $41.5 million Community Health Choice strategic capital budget of $5 million for replacement of the managed care system is not included above. 7/19/2011 16 EXHIBIT E Multi-Year Capital Plan (In Thousands) Current Cost Phase I Capital Projects Projected Status (Planned Completion) El Franco Lee Health Clinic $ 16,821 Completed April 2009 Southwest Eligibility Center 2,800 Completed October 2009 MLK Primary Care Clinic and Eligibility Center 21,500 Completed June 2010 Holly Hall Parking Garage 17,025 Completed September 2010 Holly Hall Ambulatory Care Center 101,378 Construction in progress (August 2012) LBJ Emergency Center Expansion 49,188 Construction in progress (February 2012) Total Phase I 208,713 Phase II Capital Projects Ben Taub - Old Tower Renovation 46,105 Design development (October 2012) LBJ Ambulatory Care Center 60,092 Design development (May 2013) QM - Physical Therapy Rehab Center 2,535 Completed June 2010 Total Phase II 108,733 Phase III Capital Projects Ben Taub 2nd Floor - Day Surgery 19,000 A&E funding approved (October 2013) Ben Taub EC Remodel - Holding Area 41,751 A&E funding approved (October 2013) Ben Taub and Holly Hall Data Centers 12,395 A&E funding approved (October 2012) Total Phase III 73,146 Total Estimated Cost of Strategic Projects $ 390,592 ($83.761 million projected cash expenditures for strategic projects in FY2011) Projected Cash Funding of Projects Series 2007A Bond Funds $ 158,003 Bonds issued October 2007 Board Designated for Future Expansion 32,818 As of February 28, 2007 Set Aside from FY2008 Operating Income 87,631 75% of Actual Margin for FY 2008 Set Aside from FY2009 Operating Income 43,095 75% of Actual Margin for FY 2009 Set Aside from FY2010 Operating Income 10,868 75% of Actual Margin for FY 2010 Investment income - Bond & Designated Funds 36,973 As of December 2010 HCHD Foundation 20,000 TOTAL Funds Available for Projects $ 389,388 7/19/2011 17 EXHIBIT F Projected FY2011 Compared to FY2012 Budget Summary Statement of Operations (In Thousands) FY 2011 FY 2012 Projected Budget Variance Net Patient Revenue $ 297,229 $ 324,000 $ 26,771 Net Ad Valorem Tax Revenue 502,567 505,000 2,433 Other Operating Revenue 209,274 211,837 2,563 Tobacco Settlement Revenue 11,154 11,000 (154) Interest Revenue 7,290 9,300 2,010 Total Net Revenue 1,027,514 1,061,137 33,623 Total Salaries and Benefits 621,726 618,991 (2,735) Total Drugs and Supplies 160,747 158,959 (1,788) Medicaid Services IGT 111,922 127,000 15,078 Purchased Services 36,227 37,015 787 Utilities 12,596 13,091 495 Maintenance and Repairs 21,316 23,270 1,954 Rentals and Leases 7,938 8,042 105 Other Services 23,548 24,516 968 Depreciation, Amortization, Interest 49,800 50,252 451 Total Operating Expenses 1,045,821 1,061,137 15,316 Net Revenue Over Expenses $ (18,308) $ 0 $ 18,308

Evaluate this budget and budgeting process used to develop it.

1. How does the budget reflect the characteristics of good budgeting discussed in your readings and the presentations of this lesson? How might it not reflect the model process or budget?

2. What recommendations might have for improving the budget or budgeting process used by Harris County?