YOUR INTEGRATED DELIVERY SYSTEM Imagine that it is December 2017, and you have just accepted the chief financial officer (CFO) position at Hays County Integrated Delivery System (IDS), hereinafter referred to as County. You will be reporting to Mr. Salter, County's chief executive officer, a retired schoolteacher who was hired last year. Also reporting to Mr. Salter are Dr. Spok, County's medical director; Mr. Wannabe, County's chief operating officer; Ms. Pincher, County's controller; and Ms. Care, County's director of nursing. When announcing your appointment, Mr. Salter stated that your primary objective in the coming year (2018) would be to reverse the ominous financial trend that began in 2016 with an operating loss and continued in 2017. Previous operating losses were funded with investment income (investment income was $200,000 in 2017); however, your board recently passed a resolution discontinuing that practice and restricting investment income to capital expenditures in 2017. County is a not-for-profit county-owned urban hospital and includes a 130-bed acute care hospital, a 35-bed skilled nursing facility (SNF), a 15-bed rehab facility, a home health care agency, and an outpatient clinic. It has a 40-member medical staff that bills independently. The hospital, Hays County Hospital (HCH), is one of two hospitals in the county (population is 175,000) and the only hospital in San Marcos, Texas, with a population of 50,000. St. Teresa's, a not-for-profit Catholic-owned hospital, is the only other hospital in Hays County. St. Teresa's is about 25 miles from Hays County IDS. To acquire background information, you decide to meet first with each member of the executive team and then with selected members of senior management. 395 396 Case Study: Hays County Integrated Del i very System MEETING WITH DR. SPOK Dr. Spok, hospital medical director, tells you: Most doctors have been on the medical staff for at least ten years. There is little loyalty to the hospital, and most doctors also have admitting privileges at St. Teresa's, a newer hospital with better facilities. While it is a hassle for the doctors to drive the 25 miles from San Marcos to St. Teresa's to see patients, there are a few good reasons for the doctors to admit their patients to St. Teresa's. St. Teresa's has a hospitalist and pays physicians for menial service assignments like committee work (a practice that County has refused to implement). MEETING WITH MR. SALTER Mr. Salter, chief executive officer, states: I just don't understand why we are losing money. I spent a considerable amount of time recruiting new doctors while keeping the existing doctors happy. The new, younger doctors just don't seem to have a sense of loyalty to County. Furthermore, I've tried to establish a "family atmosphere" for our employees that stresses getting along well with others in return for job security. Everyone seems happy-everyone except Mr. Finance Myway, whom you'll be replacing. He and I both started in January 2015 and he seemed increasingly frustrated with the way I do things here-he just didn't fit in. I tried to accommodate him by implementing some of his recommendations, even though they were against my better judgment-like charging visitors for parking, which generated $100,000 in other operating revenue in 2017, but I have discontinued the practice for 2018 because no other organization in San Marcos, other than the university, charges for parking. And when I announced that I was bringing in more business to the hospital by entering into a two-year capitated managed care agreement with the city (it expires this month)-we get $250 per month per family for taking care of the 300 city employees and their families, whether they're sick or not-Mr. Myway threw a fit at an executive team meeting. He claimed that my decisions were driving County deeper into the red, and as a result, I had to show Mr. Myway the highway for insubordination. MEETING WITH MR. WANNABE Mr. Wannabe, the chief operating officer and a recent graduate from a program in healthcare administration, expresses the following concerns regarding the hospital: It's easy to understand how we lost money last year- Mr. Salter just won't say no to the doctors, or the nurses, for that matter. Our revenue is down for a variety of reasons and 400 Case Study: Hays County Integrated Delivery System our expenses continue to increase. I don't know why the board ever picked a schoolteacher to run a healthcare system. MEETING WITH Ms. PINCHER Ms. Pincher, County's controller, in answer to your question regarding last year's loss, believes the following: While acute care days are flat and SNF and rehab days and outpatient visits are up, our real financial problems involve our patient mix by financial class-commercial and self-pay continue to decline and fixed payment and capitation continue to increase, and our board won't approve more than a 2 percent rate increase for 2018 (which affects collections for only commercial and managed care with discount-you need to make assumptions regarding Medicare and Medicaid collections). Ms. Pincher provides the following table to show what the patient financial mix was for 2017: 2017 Collections/Discharge Acute SNF Rehab Home ER Out Medicare 13,000 10,000 13,000 130 525 200 Medicaid 15,000 12,000 15,000 150 550 225 Commercial 40,000 30,000 40,000 400 1,600 600 Managed care contracts include a 40% discount from charges. The contracts call for an additional 1% discount for every additional 1% increase in charges. Managed care with capitation reimburses $250 per month per family and includes only the agreement with the city. Hospital collects 18 percent of cost for both bad debt and charity care. MEETING WITH Ms. CARE Ms. Care, the director of nursing, seeks your support in the following proposal: While our financial loss is serious, most of it is attributable to low rates-we need to increase our rates to reflect our quality services. Our nurses are overworked and underpaid. I've been working on two solutions that I would like your support on. Case Study: Hays County Integrated Delivery System 401 First, I believe strongly in primary care nursing, and as a result, 80 percent of the nursing staff is RNs [registered nurses]. RNs can perform more tasks than LPNs [licensed practical nurses], nursing assistants, and clerks; therefore, RNs are more efficient. This can be further justified by the acuity of our patients. Using the DRG [diagnosis-related group] scale as a severity index, our patients are sicker than those of the average hospital. RNs perform clerical duties, in addition to administering medication, emptying bedpans, and feeding patients. However, some RNs complain about performing clerical duties, and I am having difficulty getting RNs to administer meds, empty bedpans, and feed patients. Therefore, I have developed a TQM [total quality management] program designed to convince the RNs that all their tasks are important. All RNs are required to attend five hours ofTQM training each week. Even though patient days are down, I would like to hire ten more RNs to help cover the floors when the other RNs are in training. To recruit these RNs in light of the nursing shortage, we need to increase their average hourly rate to $50, which is competitive with County Hospital (see Table VI-A). This, of course, would be in addition to the costof-living raises already announced by the personnel director. I also would like for you to include a doctorally prepared entry-level nurse in our strategic plan for ten years from now. MEETING WITH Ms. PERSONNEL Ms. Personnel, the human resources director, reluctantly admits the following to you: Hospital practice in the past has been to give the employees a cost-of-living raise equal to the previous year's percent increase in the CPI [Consumer Price Index]. Also, historically, we have allocated s percent of total wages to a merit pool to be awarded to meritorious employees based on their annual evaluations. Because Mr. Salter treats the employees like family, virtually everyone gets the raise. Because of shortages in nursing, I am recommending a market raise of 3 percent, in addition to the other raises, to keep us competitive. Here is a wage comparison to the facilities that we compete with for new hires (see Table VI-A). Mr. Salter asked us not to announce raises until your financial analysis is complete. MEETING WITH MR. MATERIALS Mr. Materials, materials manager, reports the following information to you: I am projecting a 3 percent increase in supply and food prices for 2018 and a 5 percent increase in all other prices.MEETING WITH Ms. PINCHER Ms. Pincher, County's controller, in answer to your question regarding last year's loss, believes the following: While acute care days are flat and SNF and rehab days and outpatient visits are up, our real financial problems involve our patient mix by financial class-commercial and self-pay continue to decline and fixed payment and capitation continue to increase, and our board won't approve more than a 2 percent rate increase for 2018 (which affects collections for only commercial and managed care with discount-you need to make assumptions regarding Medicare and Medicaid collections).

1. Dr. Garcia is thinking about retiring this year and has asked us if we want to buy her practice. She would like annual income of $250,000 for the next 30 years. If we can put the purchase price in an annuity that earns 4 percent per year compounded annually, what is the purchase price necessary to guarantee her desired income? What other factors should we consider before buying a physician practice? What is your recommendation?

2. What is the best ratio for measuring accounts receivable performance? How is our hospital doing? What are your recommendations on improving our accounts receivable performance?