Healthcare Finance and Business Plan Thesis

CASE SHASTA FACULTY PRACTICE 5 COST–BENEFIT ANALYSIS SHASTA FACULTY PRACTICE (the Practice) is the not-for-profit corporation that controls the clinical operations of the medical faculty of Shasta University. The Practice provides all physician services for Shasta Health System (the System), which consists of six hospitals plus supporting services that, in total, provide the entire continuum of care. The main inpatient facility is a 650-bed tertiary care academic medical center, although the System also owns two rural 50-bed hospitals, a 125-bed community hospital, and a 250-bed long-term care facility. In addition, the System owns multiple outpatient clinics and has established joint ventures with several other outpatient providers. The Practice’s vice president for outpatient services, Dr. Rudy Mason, is exploring the use of physician extenders in the clinics to enhance physician productivity and, ultimately, the Practice’s profitability. In recent years, the role of physician extenders has evolved to the point where they, for example, can perform more than 80 percent of primary care physicians’ patient care duties. They take medical histories; perform physical examinations; diagnose and treat illnesses; order and interpret laboratory tests; and, in most situations, prescribe medications. The term physician extender remains widely used, but other terms are used to refer to physician extenders, such as advanced practice professionals, midlevel providers, and non physician providers. The use of extenders allows physicians to treat more and higher-acuity patients, expediting patient flow and increasing revenues. In addition, because compensation for physician extenders is less than that for physicians, costs per patient visit can be lowered. Aside from the obvious productivity and economic benefits, studies indicate that patient satisfaction improves when physician extenders are used. In essence, they are willing (and often able) to spend more time with each patient than physicians usually do. This extra attention typically results in better quality of care (real or perceived) and higher patient satisfaction. However, as the role of physician extenders expanded, it was inevitable that some conflicts would arise. The increasing recognition by third-party payers that extenders are as acceptable as physicians in providing many services means extenders are a potential source of direct competition for physicians. Still, physicians at many solo and group practices are using extenders to supplement and complement their work. Adding to the extender-use trend, predicted shortages in primary care physicians (roughly 65,000 by 2025, according to the Association of American Medical Colleges) means that extenders will have to fill the physician void to prevent reduced access to primary care. The two main types of physician extenders are advanced registered nurse practitioners (NPs) and physician assistants (PAs). Although NPs and PAs often perform similar tasks, their training and certification requirements differ. NPs must be licensed in the state in which they practice. To acquire such licensure, an individual must be licensed as a registered nurse, meet additional education and practicum requirements that historically led to a master’s degree, and pass a national certification examination in one of several specialized areas. Now, however, most nursing schools that offer nurse practitioner education are transitioning to programs that lead to doctor of nursing practice (DNP) degrees. This trend has created an expectation that, at some future date, the DNP degree will become a requirement for certification. (For more information on NPs, see the website of the American Association of Nurse Practitioners at www.aanp.org.) PAs must graduate from an accredited physician assistant educational program and then obtain certification by the National Commission on Certification of Physician Assistants. The educational training for a PA is similar to that of a physician but is much shorter—historically only two years. PA programs traditionally offered either associate or bachelor’s degrees, but most programs today are at the master’s level. (For more information on PAs, see the website of the American Academy of Physician Assistants at www.aapa.org.) Although it may appear that NPs and PAs are perfect substitutes for one another, the differences in educational background create differences in philosophies of care.

Because NPs follow the nursing model of care, which focuses on health education and counseling as well as disease prevention, they typically have a special concern for the overall health and welfare of patients. PAs, on the other hand, generally follow the medical model of care, which focuses on diagnosis and treatment. Of course, these are generalizations that do not necessarily apply to specific individuals. Although most NPs and PAs practice in primary care settings, others specialize in such areas as dermatology, pediatrics, geriatrics, anesthesiology, surgery, and emergency medicine. The practice status of physician extenders has been, in large part, driven by state law. Historically, some states allowed NPs to practice independently, while others mandated some physician involvement (collaborative or supervisory). With PAs, most states required that a physician be physically present (or electronically available) when a PA treats a patient. In addition, many states allowed NPs to prescribe all medications independent of physician supervision, while the ability of PAs to prescribe medications was much more limited. However, the Balanced Budget Act of 1997 removed many of the limitations imposed by individual states. Today, both NPs and PAs are allowed to practice without the immediate availability of a supervising physician. Note, however, that NPs are allowed to practice under their own licenses, while PAs must practice under the license of a physician. The reimbursement of physician extenders, like all reimbursement for healthcare services, is complicated by the fact that many different third-party payers use different payment methodologies. For the purposes of this case, assume that all payers use the same system as Medicare, which recognizes several different situations in which extenders provide services. In general, Medicare pays extenders in all settings 85 percent of the physician’s fee schedule. Thus, if an extender provided a service that would result in a $100 payment to a physician, the payment would be $85. However, there are two important exceptions to this rule. First, if the extender and physician both see the patient during an office visit, the combined work of both the extender and physician is reimbursed at 100 percent of the physician fee schedule. But if the patient service is a procedure (as opposed to a visit) and the work is done primarily by the extender, the 85 percent rule applies. Second, extenders are paid at a 100 percent rate if the service provided is “incident to” a previous visit or service provided by a physician. This provision requires that the physician be physically on-site and that the service provided by the extender be related to a diagnosis made earlier by a physician. Note that incident-to billing only applies to services provided in offices and clinics as opposed to services provided in hospitals. In effect, these rules mean that most extender billings in offices and clinics are at the 100 percent rate, so average extender reimbursement falls closer to 100 percent than to 85 percent of the physician rate.

The effect of extenders on physician costs and revenues is highly variable. After some acclimation time, which is required for the extender to become fully productive, several financial effects are realized. First, the physician becomes more productive (sees more patients) because the extender can provide the service for a portion of the visit that is billed by the physician. On average nationwide, this increase in the number of billed visits by the physician is estimated to be 10 to 15 percent. Second, the physician’s average reimbursement amount increases because the extender is handling the less complex cases. The national average impact on physician billing amount is estimated to be 5 to 10 percent. Finally, the extender can see patients independently and bill for those services. On average, extenders see 10 to 20 percent fewer patients than do physicians. In addition, because some of these visits are joint with the physician and billed by the physician, the extender can bill only for the remaining visits, which represent 85 to 90 percent of the visits. Of course, the extent to which these synergies are realized depends on demand (volume). Healthcare Finance and Business Plan Thesis

The greater the demand for physician services, the faster an extender can become fully productive and the greater the impact on physician productivity and reimbursement amounts. At this time, the Practice does not use extenders. However, Dr. Mason believes that extenders can play an important role in many, if not all, of the Practice’s clinics. As a start, three clinics have been identified for evaluation: the outpatient surgery preoperative and postoperative clinic, the internal medicine (family practice) clinic, and the eldercare clinic. Dr. Mason then developed the selected data regarding each clinic’s physician staffing, productivity, revenues, and costs (shown in exhibit 5.1). For example, the preoperative and postoperative clinic has 2.5 physician FTEs (full-time equivalents) who handle 7,560 patient visits annually, which generate $842,481 of revenue (collections). Annual compensation for the physician FTEs totals $485,000. You have been hired as a consultant by the Practice to look into the use of physician extenders. Specifically, Dr. Mason has asked you (1) to estimate the financial impact of using one physician extender at each of the three clinics and (2) to recommend the type of extender that is most appropriate for each setting. These tasks are not trivial and might require assumptions and information to supplement the data presented in the case. As a start, you conclude that the national financial impact data presented earlier must be modified to reflect the actual impact on physician productivity in the three settings. Next, you plan to estimate how many additional visits might be generated at each clinic if one extender is employed. Then, the impact on costs and revenues must be examined. Of course, it might be possible to use an extender to reduce the number of physician FTEs rather than to increase volume. This outcome should be explored if appropriate. Healthcare Finance and Business Plan Thesis

Regarding physician extender costs, annual compensation for both NPs and PAs falls into the $80,000 to $100,000 range, depending on geographic location, clinical setting, and work experience. One of the keys to the analysis is an estimate of the volumes that could be realized at each clinic should an extender be added. Unfortunately, Dr. Mason has only anecdotal evidence (office watercooler speculation) on future demand. The best estimate is that patient volume at the preoperative and postoperative clinic is increasing at a 15 percent annual rate as outpatient surgery volume increases. The situation at the internal medicine clinic is quite different. There is a several-month backlog in scheduling, and hence a physician extender could be fully used in a relatively short time. Finally, volume at the eldercare clinic has been sporadic and growing very slowly, so there is some doubt about whether another clinician is needed at this time. Dr. Mason recognizes that you are working with a minimum amount of hard data. Thus, you must very clearly express and support the assumptions used in your analysis. Model CASE 5 SHASTA FACULTY PRACTICE: Cost-Benefit Analysis Copyright 2018 Foundation of the American College of Healthcare Executives. Not for sale. Model with Questions, Student Version This case analyzes the use of physician extenders in three settings: an outpatient surgery preoperative and postoperative clinic, an internal medicine (family practice) clinic, and an eldercare clinic. The model is designed to focus on one setting at a time. Thus, each clinic has to be analyzed independently. The model consists of a complete base case analysis–no changes need to be made to the existing MODEL-GENERATED DATA section. However, values in the INPUT DATA section of the student spreadsheet have been replaced by zeros. Students must select appropriate input values and enter them into the cells with values colored red. Healthcare Finance and Business Plan Thesis

After this is done, any error cells will be corrected and the base case solution will appear. The KEY OUTPUT section includes the most important output from the MODEL-GENERATED DATA section. Outpatient Surgery Preoperative and Postperative Clinic INPUT DATA: KEY OUTPUT: Clinic Data: Number of days per year Number of visits annually Number of physician FTEs Physician costs Physician revenues Cost, Productivity, and Reimbursement Assumptions: Assumed total volume increase Extender annual compensation Extender assists physician: Physician productivity gain Physician billing gain Extender replaces physician: 0 0 0.00 $0 $0 Historical Using one extender to* Assist/work alone Replace one phys. Act independently Expected volume** Maximum Volume 0 #DIV/0! #DIV/0! #DIV/0! 0 *Assumes historical physician productivity **Assumes physician productivity increases can handle hig 0.0% (Assumed total increase in clinic volume) $0 0.0% (Increase in number of physician billings due to extender) 0.0% (Increase in physician billing amount due to extender) Healthcare Finance and Business Plan Thesis

Page 1 Extender productivity Extender reimbursement % Assists/works alone mix Model 0.0% (Extender visits as a percentage of average physician volu 0.0% (Percentage of physician reimbursement paid to extender) 0.0% (100% = used only to assist physician; 0% = used only to w in-between indicate mix of both roles) MODEL-GENERATED DATA: Current (Historical) Situation Baseline physician revenues Baseline physician costs Contribution $0 0 $0 Using One Extender to Both Increase Physician Productivity and Bill Separately (Assumes Historical Physici as Enhanced by Exte Baseline physician revenues $0 Incremental physician revenues #DIV/0! Extender revenues #DIV/0! Total revenues #DIV/0! Baseline physician costs $0 Extender costs 0 Total costs $0 Contribution #DIV/0! Change from historical: Dollar change Percentage change #DIV/0! #DIV/0! Using One Extender to Replace One Physician (Assumes Historical Physician Productivity) Baseline physician revenues Incremental physician revenues Extender revenues Total revenues Baseline physician costs Incremental physician costs Extender costs Total costs Contribution $0 #DIV/0! #DIV/0! #DIV/0! $0 #DIV/0! 0 #DIV/0! #DIV/0! Change from historical: Dollar change Percentage change #DIV/0! #DIV/0! Page 2 Model Adding One Extender to Practice Independently (Assumes Initial Physician Productivity) Baseline physician revenues Extender revenues Total revenues Baseline physician costs Extender costs Total costs Contribution $0 #DIV/0! #DIV/0! $0 0 $0 #DIV/0! Change from historical: Dollar change Percentage change #DIV/0! #DIV/0! Volume Growth Without Using Extenders (Assumes that Physicians Can Increase Productivity to Meet Inc Baseline physician revenues Incremental physician revenues Total revenues Baseline physician costs Contribution Change from historical: Dollar change Percentage change $0 0 $0 0 $0 $0 #DIV/0! Healthcare Finance and Business Plan Thesis

Page 3 Model 12/1/2017 ves. Not for sale. nt surgery c, and an eldercare clinic. o be analyzed made to the existing tion of the student ut values and enter be corrected and important output Contribution $0 #DIV/0! #DIV/0! #DIV/0! $0 Dollar Change #DIV/0! #DIV/0! #DIV/0! $0 Percentage Change from Historical #DIV/0! #DIV/0! #DIV/0! #DIV/0! productivity vity increases can handle higher volume nic volume) an billings due to extender) mount due to extender) Page 4 Model Page 5 Model ase Productivity to Meet Increased Volume) END Page 6 Question 1 Describe the differences between nurse practitioners and physician Question 2 Consider the Outpatient Surgery Preoperative and Postoperative Clinic. a. What type of extender is most suitable for this clinic? Justify your answer. b. Assume that one extender is hired and that the number of physicians remains at the level given in exhibit 5.1. Furthermore, the extender can be used both to increase physician productivity and to increase volume. What would be the financial effect on the clinic? c. Now repeat the analysis, but assume that the extender replaces one physician. d. Repeat the analysis again, but now assume that the extender is used solely to increase the clinic’s capacity. (The extender acts independently to increase patient volume.) e. Which of the three scenarios (increasing physician productivity/capacity, replacing a physician only, or increasing capacity only) appears to be best at this point? f. Suppose that the expected volume increase could be met by increasing the productivity of the current physician staff. How would this fact influence the final decision? increase eplacing Question 3 Consider the Internal Medicine Clinic. Repeat Question 2 in this setting. Question 4 Consider the Eldercare Clinic. Repeat Question 2 in this setting. Question 5 Compare the relative attractiveness of using extenders at the three clinics. Explain your results. Question 6 Considering all your findings, what are your conclusions and recommendations regarding the use of physician extenders? Question 7 In your opinion, what are three key learning points from this case? …Healthcare Finance and Business Plan Thesis