Slide Deck for Chapter 6 in Medical Quality Management, published by the American College of Medical Quality.

1. American College of Medical Quality Noon Audio-conference Series 2010 Donald Fetterolf, MD, MBA, FACP Rahul Shah, MD, FAAP “ Economics and Finance in Medical Quality Management” The authors have no financial conflicts of interest with the material presented herein.

3. Medical Quality Management Medical Quality Management American College of Medical Quality, 2009 “ Chapter 6: Economics and Finance in Medical Quality Management” Don Fetterolf, MD, MBA Rahul Shah, MD

5. Introduction: The Business Context

11. Historical Perspective

21. Basic Business Concepts MDs, RNs: “Oh, I know all that.” Consider why you would need to read or train in these subjects.

22. Basic Business Concepts Economics

26. Basic Business Concepts Accounting

30. Sample Balance Sheet. Balance Sheet: ABC Medical Corporation Balance Sheet As of December 31, 2002 Assets Current Assets Cash $ 50,000 Accounts Receivable 35,000 Total Current Assets $ 85,000 Non-current Assets Land $ 200,000 Medical Office Building 1,579,000 Equipment (net of depreciation) 250,000 Total Non-current Assets $2,029,000 Total Assets $2,114,000 Liabilities and Shareholders’ Equity Current Liabilities Accounts Payable to Supplier $ 25,000 Salaries Payable to Employees 32,000 Taxes Owed 52,000 Noncurrent Liabilities Notes Payable to Lenders $150,000 Total Liabilities $259,000 Shareholders’ Equity Common Stock $1,500,000 Retained Earnings 355,000 Total Shareholders’ Equity $1,855,000 Total Liabilities and Shareholders’ Equity $2,114,000

31. Income Statements Form of a Regular Income Statement Revenues Revenues $ 100 Expenses Variable Expenses $ 60 Fixed Expenses $ 20 Profit (Loss) $ 20

32. Income Statement: ABC Medical Corporation Income Statement For 2002 Revenues Patient Revenues $ 1,575,000 Consulting Income 85,000 Investment Income 2,000 Total Revenues $ 1,662,000 Expenses Salary of Partners 853,347 Staff Wages 235,645 Laboratory Fees 32,583 Administrative Expenses 75,495 Interest Expense 3,453 Insurance 23,453 Total Expenses $ 1,223,976 Net Income $ 438,024 Note: Categories come from the “chart of accounts” May leave out or in interest, taxes, depreciation, amortization: EBITDA “ Economic Value Added” may subtract the cost of capital.

33. Income Statements Form of a Contribution Income Statement PMPY* Total Members Affected 50,000 Revenues Variable Revenues $ 7 $350,000 Expenses Variable Expenses/Unit $ -5 $250,000 Contribution Margin $ 2 $100,000 Fixed Expenses $46,000 Profit (Loss) $54,000 __________ *PMPY = Per member per year. Note the definitions “at the margin”, “marginal cost” and “marginal profit” Note also the relationship with a “breakeven analysis” – you need at least 23,000 members to break even. Why?

34. Income Statements: Activity Based Cost Accounting – “ABC” Example of activity-based cost accounting. Product A B C Total Revenue Variable Revenue $50 $50 $20 $120 Expense Variable Expense $30 $ 5 $ 5 $ 40 Fixed Expense $15 $30 $ 5 $ 50 Profit (Loss) $ 5 $15 $10 $ 30 Note: The revenues, expenses, and profits can all contribute in various ways. Here, A the most costly item contributes the least profit, but you would still do it. Or would you?

35. Cash Flows: ABC Medical Corporation Statement of Cash Flows For 2002 Cash at the Beginning of the Period : $1,000,000 Operations Cash Flow from Operations $ 1,662,000 Investing Sale of Noncurrent Assets 0 Acquisition of Noncurrent Assets -30, 000 Total Cash Flow from Investing $ -30,000 Financing Issue of Partner Stock 50,000 Dividends - 2,000 Total Cash Flow from Financing $ 48,000 Net Change in Cash Flow $ 1,680,000 Cash at the Beginning of the Period : $ 2,680,000 Why do this? You don’t want to run out of cash even if you have lots of cash and assets.

36. Basic Business Concepts Finance

38. Other General Principles

41. Business Planning: Project Mgmt Note the column headings: Goal-Objective-Tactic-Accountable person- Dates-Metric

42. Financial Pro Forma: Income Statements over Time

44. The Business Case for Medical Quality

49. Return on Investment in Quality and Medical Management P = Probability of Outcome $$$ Profitability/Impact of the Initiative Soft Hard Intangible

52. Business Case for Quality: Case Studies Rahul K. Shah Assistant Professor of Otolaryngology and Pediatrics George Washington University Medical Center Children’s National Medical Center Washington, D.C.

54. Case 2: QAPI project

65. Case 6 – Macroeconomic issues Health plan actuaries predict a flattening in the health care cost trend because costs “can’t keep getting higher.” They also note that economic analyses by the federal government (in a CMS report) suggest considerable debate about the leveling of costs in the near future. They admit that “provider reform” efforts by the federal government to control costs are doomed to failure, and that costs could keep going up. The Chief Medical Officer is asked to comment. He notes that costs are up in every category. He also notes that various classes of emerging technologies continue to arrive in increasing numbers, and that the demographics of the plan suggest that the aging population will continue to have a great effect on cost. The Vice President of Provider Relations observes that vertical and horizontal market consolidation in the area, as well as declining hospital margins, will make it unlikely that simple price controls will be effective, because reimbursements to hospitals may need to go up this year. He admits that providers also have not had a fee increase for some time, are being hit with rising malpractice premiums, and are unlikely to settle for any reduction in fees. He concedes that physicians may be leaving the state because of low reimbursement and high malpractice premiums and that Medicare recently had to retreat from a planned reduction in physician payment. In his view, multiple economic factors seem to point to continuously increasing costs. The group concludes that the percentage of the gross national product attributed to health care, now edging to 14%, will rise even higher. These national trends are likely to be reflected in local health plans as well cost drivers. The Chief Medical Officer is asked to participate in a workgroup in the plan to “brainstorm” methods of cost control. Several managers believe that cutting payments to physicians is the only way to reduce consumption of medical services. Others argue that better management of individuals will be the most cost-effective method. Still others maintain that the days of managed care are over, and that real cost savings will come through reducing unnecessary variation by applying quality tools. What should the Chief Medical Officer’s advice to the group be?

67. Questions? References on Next Slides

68. References

69. “ Estimating Clinical and Economic Impact in Case Management Programs.” Fetterolf, D. et al. Population Health Management. 13(2): 73-82 April/May 2010

70. The Business Case for Quality: Combining Medical Literature Research with Health Plan Data to Establish Value for Nonclinical Managers Fetterolf, D and West, R AJMQ, 2004

71. Presentation Advice From the Experts Fetterolf, D.. "Commentary: Presenting the Value of Medical Quality to Nonclinical Senior Management and Boards of Directors.." American Journal of Medical Quality. (18)1. Jan/Feb 2003. pp. 10-14.

72. Bibliography --Academy for Healthcare Management. Health Plan Finance and Risk Management. Atlanta, GA. Academy for Healthcare Management. 1999. --Baker, Judith. Activity-Based Costing and Activity-Based Management for Health Care. Aspen Publishers. 1998. --Berwick, D. Curing Health Care. New Strategies for Quality Improvement. San Francisco. Jossey-Bass. 1990. --Blissenbach, H. "Use of Cost-Consequence Models in Managed Care." Pharmacotherapy. (15)5. 1995. pp. 59s-61s. --Carey, R. and Lloyd, R. Measuring Quality Improvement in Healthcare. New York. Quality Resources. 1995. --Clancy, C. and Kamerow, D. "Evidence-Based Medicine Meets Cost-effectiveness Analysis." JAMA. (276)4. July 24/31, 1996. pp. 329-330. --Couch, JB. Health Care Quality Management for the 21st Century. Tampa, FL. Hillsboro Printing Co for the American College of Physician Executives. 1991. --Crosby, P. Quality is Free. New York. New American Library. 1979. --Crosby, P. Quality Without Tears. New York. McGraw Hill Book Company. 1984. --Donabedian, A. Explorations in Quality Assessment and Monitoring. Volume II. The Criteria and Standards of Quality. Health Administration Press. Ann Arbor. 1982. --Drummond, M. and McGuire, A. Economic Evaluation in Health Care. Merging Theory with Practice. Oxford University Press. 2001. --Drummond, M., O'Brien, B., Stoddart, G. and Torrance, G. Methods for the Evaluation of Health Care Programmes, 2nd Ed.. New York. Oxford Medical Publications. 1998.

73. Bibliography --Fetterolf, D. "Commentary: Presenting the Value of Medical Quality to Nonclinical Senior Management and Boards of Directors." American Journal of Medical Quality. (18)1. Jan/Feb 2003. pp. 10-14. --Fetterolf, D. Costs from a Third Party Payer Perspective, Chapter 20 in Quality and Cost in Neurological Surgery. Philadelphia. Lippincott, Williams and Wilkins. 2001. --Fetterolf, D. and West, R. “The Business Case for Quality: Combining Medical Literature Research with Health Plan Data to Establish Value for Non-Clinical Managers.” American Journal of Medical Quality. (19)2. March/April 2004. pp. 48-55. --Fetterolf,D. “Notes From the Field – The Economic Value Chain in Disease Management Organizations”. Disease Management . December 2006. pp 316-327. --Fetterolf, D., “Application of Disease Management Principles to Pregnancy and Delivery.” Stanziano, G. and Istwan, N. Disease Management. Disease Management. (11)3. 2008. pp 161-168. --Fetterolf, D. and Tucker, T. “Assessment of Medical Management Outcomes In Small Populations.” Disease Management. Population Health Management (11)5. 2008. pp. 233-239. --Fetterolf, D. et al. “Estimating Clinical and Economic Impact in Case Management Programs.” Population Health Management. 13(2): 73-82 April/May 2010 --Gafni, A. "Willingness to Pay in the Context of an Economic Evaluation of Healthcare Programs: Theory and Practice." Am. J. Man. Care. (3(suppl))S21-S32. 1997. --Galvin, R. "The Business Case for Quality. Developing a business case for quality will require a deliberate approach, with all economic parties at the table.." Health Affairs.Nov/Dec 2001. pp. 57-58. --Gladowski,P., Fetterolf, D, Beals, S., Holleran, MK, and Reich, S. “Analysis of a Large Cohort of HMO Patients with Congestive Heart Failure.” American Journal of Medical Quality . (18)2 April 2003.

74. Bibliography --Gold, M. et. al. Cost Effectiveness in Health and Medicine. Oxford University Press. 1996. --Hubbell, W. "Combining Economic Value Added and Activity Based Management." Journal of Cost Management. Spring 1996. pp. 18-29. --Plocher, D. and Brody, R. "Chapter 31, Disease Management and Return on Investment. In Best Practices in Medical Management." 1998. pp. 397-406.Santerre, R. and Neun, S. Health Economics: Theories, Insights, and Industry Studies. Chicago. Irwin. 1996. --Stephens, K. et al. "What is Economic Value Added? A practitioner's view. (corporate performance measure)." Business Credit. (99)4. pp. 39(4). --Torrance, G. "Preferences for Health Outcomes and Cost-Utility Analysis." The American Journal of Managed Care. (3(Suppl)). 1997. pp. S8-S20. --Walton, M. The Deming Management Method. New York, NY. Perigee Books. 1986. --Weinstein, M., Siegel, J., et al. "Recommendations of the Panel on Cost-Effectiveness in Health and Medicine." JAMA. (276)15. October 16, 1996. pp. 1253-1258.Wessels, WJ. Economics . Second Edition 1993.