What recommendations would you make?

CAS CASCADES MENTAL HEALTH CLINIC VARIANCE ANALYSIS CASCADES MENTAL HEALTH CLINIC s a not-for-profit, multidisciplinary mental health provider that offers both inpatient and outpatient services on a full-risk (capitated) basis to members of managed care plans. Its clinical staff consists primarily of psychiatrists, psychologists, psychiatric nurses, social workers, and chemical dependency counselors. Currently, Cascades has major contracts with two large managed care organizations in its service area: Pacific Care Plan and Seattle Health Plan. Each of these organizations has both commercial and Medicare health maintenance organization (HMO) contracts with Cascades. Thus, in total, there are four separate product lines. Cascades is partially funded by state and local governments. The agree- ment with the funding agencies is that funds received are to be used to cover overhead and capital expenses. Furthermore, expenses for drugs and other medical and administrative supplies are billed separately to the HMOs at cost. Thus, overhead and supplies expenses are not part of this budget, which means that the analysis focuses on clinical labor expenses. If the assumption is made that other payment mechanisms cover overhead, capital expenses,and supplies at cost, then the profitability of Cascades is solely a function of its ability to create revenues that exceed labor costs. Thus, its operating budget tocuses on enrollment, per member premiums, utilization, and labor costs. Exhibit 10.1 lists the assumptions used to prepare Cascades's 2018 operating budget. Note that the four product lines are expected to provide a total of 4,551,000 member-months of revenue during 2018. Also, note that each product line has a different per-member per-month (PMPM) payment (premium) amount. Exhibit 10.1 also shows expected admission (for inpatients),referral rate (for outpatients),and labor cost and utilization 67 oundation of ACHE, 2018. Reproduction without permission is prohibited Cases in Healthcare Finance data for each product line. Because of the unique employment between Cascades and its clinical staff, in which the staff are basis of the number of patient service units provided, cli are virtually all variable, and hence labor costs are not id or variable. aran ntified as fixed Exhibit 10.2 contains the forecasted 2018 budget. In essen in exhibit 10.1 are used to forecast revenues and costs, both in and by product line. Overall, Cascades expected to earn a total profe $419,379 on the four product lines in 2018. aggregate During the first quarter of 2018, Cascades's managers noted a higher utilization rate than budgeted. To add to their concern, the monthly enroll- ment figures supplied by the contracting managed care plans were less than those budgeted. Together, these trends indicated lower revenues and higher per enrollee costs, and hence lower profits, than forecasted in exhibit 10.2 These concerns were borne out when the first-quarter profits came in under budget. To help stem the adverse trend, the managers instituted a utiliza- tion management system in which all inpatient stays were required to be approved by the medical director--a senior staff psychiatrist. In addition, Cascades made midyear changes to its commercial premiums that increased the average premiums for the year. Unfortunately, the action taken was too little, too late to save the year Exhibit 10.3 provides operating results for 2018, and exhibit 10.4 shows the realized aggregate and product line profit and loss (P8cL) statements. A quick review of exhibit 10.4 reveals that the signals conveyed by the first- er data were indeed correct, although 2018 ended with a profit, the quart profit was much less than the amount forecasted. When the results were submitted to Cascades's CEO, Jennifer Jacobs, she grimaced and said, "1 knew it was coming, but I did not expect the profit number to be so low."It was immediately apparent to Jennifer that Cascades could not afford similar results in 2019.She knew that something had to be done, but the best course of action was not clear. To help plan for next year, Jennifer asked Cascades's finance and account- ing department head, Rob Maldonado, to perform a variance analysis on the data to help identify the problems that led to the poor financial results for 2018. Unfortunately, Rob's area of expertise is dealing with lenders and other capital suppliers, so he passed the assignment on to you, a newly hie financial analyst. Case 10: Cascades Mental Health Clinic you created a diagram (exhibit 10.5) to help under- riance analysis. (Note that this diagram is generic and has not been stomized for this case.) Furthermore, you recognize that because the volume variance consists of differences in both enrollment and utilization, it is necessary to create two flexible budgets: one flexed (adjusted) for actual enrollment only, and the other flexed for both actual enrollment and actual utilization. In addition, to help with the calculations, you jotted down an equation list for calculating variances (exhibit 10.6). (Note that not all of To start the analysis, the equations listed are necessarily applicable to this analysis.) Of course, both Jennifer and Rob are more concerned with what the numbers mean than what the numbers are. Therefore, your variance analy- sis should include a great deal of interpretation along with the numbers. Finally, because you want to use this assignment to help advance your career at Cascades, you plan to go one step further by offering recommendations for management action along with the numbers and their interpretation. Cases in Healthcare Finance HIBIT 10.1 tal Health Operating sumptions Expected Enrollment imember-months 3,365,000 PC Commercial PC Medicare SH Commercial SH Medicare 469,000 502,000 215,000 4,551,000 Total Expected Premium Data (per member per month) PC Commercial PC Medicare SH Commercial SH Medicare $0.70 0.85 0.75 0.80 Expected Labor Data per Admission or Session Inpatient Outpatient No. of Hours Hourly Rate No. of Hours Hourly Rate PC Commercial PC Medicare SH Commercial SH Medicare 53.74 68.43 4777 56.86 $35 35 35 35 1.04 1.30 1.15 1.14 $100 100 100 100 Case 10: Cascades Mental Health Clinic 71 EXHIBIT 10.1 continued Cascades Mental Health Clinic: 2018 Operating Budget Assumptions Cases in Healthcare Finance 72 Profits SH EXHIBIT 10.2 Cascades Mental Health Clinic 2018 Operating Budget MedicareTota $172,000 $3 $2.335,500 $ 398.650 $376.500 $1 836 281.709 152.763 2,067 964 s 287536 S 17,814 $ 94.791 S 19.237 11.2% EXHIBIT 10.3 Cascades Mental Actual Enroliment 3,073,133 485,000 547,105 257000 4,362.238 PC Commercial 018 Operating Results PC Medicare SH Commercial SH Medicare Actual Premium Data (per member per month) PC Commercial PC Medicare SH Commercial SH Medicare 0.85 0.80 Actual Labor Data per Admission or Session Inpatient No of Hours Hourly Rate Outpatient No. of Hours Hourly ate PC Commercial PC Medicare SH Commercial 47 32 58.66 52.06 84.85 0.95 $109.50 1.15 0.98 2 10 ed es Cli pe leon puelo LLE.OLZ.ES ILO8Z IS z96.azL $ 60029 8828tL $ 9ZC.IZ $ 695.08z SL.l 8vv.ELZ oreopalN 8 8 0 z69.9p :HS seozzszs 989, 901$ 2 981 919. ize 6zzz 89 968060.ZS EIZ.L6 S POIS 99 Z8L'E66.IS 86/.L$ v60-99Z 2 uosses (spuesnoul uy saguaywo ay dity adAL ueld ad 1800 uossuupy iueaedro eaeg iso0 pue uou ezren jeruov Cases in Healthcare Finance 74 EXHIBIT 104 Product Line and Agpregate Profit Results Cascades Menta Health Clinic: 2018 Actual P&L Statements SH PC MedicareTotal Revenue$2304850 $ 412.250 $437,684 $205,600 Costs Profit (loss)213,584 18.837) 30035) ($ 74 969 Margin $3,360.384 2.090.996 431.087 467.719 280 589 Note These dsta were generated on a spreadsheet, and hence some rounding differences occut EXHIBIT 10.5 Variance Analysis Summary Total (Profit Variance Revenue Cost Enrollment Rate VarianceVariance Variance Enrollment Utlization Variance Variance Variance Variance Variance Fixed Cost Staffing Supplies Rate Variance Hint Ths exhibit format might be useful for presenting your numerical resuits Case 10: Cascades Mental Health Clinic 75 Total variance Revenue variance - Actual profit - Static profit = Actual revenue-Static revenue EXHIBIT 10.6 Generic Equation List ment variance Flexible (enrollment) revenue - Static revenue Rate variance Cost variance Volume variance = Actual revenue-Flexible (enrollment) revenue - Static costs-Actual costs = Static costs-Flexible (enrollment/utilization) costs rollment variance Static costs -Flexible (enrollment) costs Utilization variance Flexible (enrollment) costs-Flexible (enrollment/ utilization) costs Management variance Flexible (enrollment/utilization) costs - Actual costs Fixed cost variance Staffing variance = Actual fixed costs-Flexible fixed costs = Actual staffing costs-Flexible (enrollment/utilization) staffing costs Rate variance - (Static hourly labor rate-Actual hourly labor rate)x Actual number of hours per episode x Actual utilization rate x Actual enrollment Efficiency variance = Expected number of hours per episode-Actual number of hours per episode) x Expected hourly labor rate x Actual utilization rate x Actual enrollment Supplies variance = Flexible (enrollment/utilization) supplies costs-Actual supplies costs - (Static price - Actual price) x Actual units Price variance Usage variance Flexible units - Actual units) x Static price Note: Not all of the above equations are necessarily useful to all product lines