1. North Carolina Community Health Center Association Financial Management & Operations Workshop Financial Strategic Planning for Community Health Centers March 3, 2011

2. Today’s Agenda  Why focus on strategic planning and health center sustainability issues?  Sustainability scenarios – a look at the possibilities  Establishing financial health indicators for your organization – financial targets and goals  Development of a financial sustainability model - forecasting financial outcomes  Definition and purpose of a financial forecast model  Understanding key drivers of financial outcomes  Final thoughts

3. Why Focus on Strategic Planning and Sustainability Issues?

4. Health Center Financial Sustainability – Common Myths  Our passion is our mission – the money does not matter (there will always be a third party sympathetic to our cause and willing to provide deficit funding)  A not-for-profit organization can’t make money  We cannot accumulate cash (financial reserves) without negative consequences  If we can make it to the end of the current (start of the next) grant period, everything will be fine  Bigger is always better – a top line vs. bottom line focus

5. Financial Sustainability Defined  Most concise thought – “the capacity for an organization to endure financially”  Provide ongoing services in a financially stable manner  To meet the objectives of this definition, health centers should develop a strategic financial plan that measures the financial outcomes of subsequent decisions

6. Financial Sustainability Plan  Considerations for development of a financial sustainability plan  One size does not fit all – the plan should reflect an organization’s unique circumstances  Organization priorities – does this document dovetail with the health center’s strategic planning process?  Is the plan based on realistic but conservative assumptions?  Does the plan provide for most likely and worst case scenarios?  What information do potential funding partners want to receive?

7. Financial Health Reminders  Financial health should be a priority  BPHC PIN 98-23 includes a focus on financial systems  Community health centers must be proactive (versus reactive) on financial management issues  The BPHC expects the Board of Directors & health center management teams to make prudent & sound business decisions in compliance with applicable rules & regulations

8. Finance - Under the Microscope  Increasing federal investment under the American Recovery & Reinvestment Act of 2009 – the federal stimulus program  Increased scrutiny of health center financial results by the federal granting agency, lenders & donors  Expect reporting requirements to be expanded & closely monitored  OIG audits are now a reality

9. Finance – Under the Microscope  Increased tightening of state budgets resulting in reduced services and/or payments  Be aware of changes in the payer mix that may have a detrimental impact on the financial results of the health center  Strategic financial planning is necessary to identify anticipated financial impact of program changes  Operational results  Cash flow implications

10. Sustainability Scenarios

11.  Existing health centers  Ongoing operations  Addition of new sites Established with ARRA new access point federal grant funding Other new access points receiving federal grant funding  New health centers  Established with ARRA new access point federal grant funding (temporary or permanent funding?)  Other new access points receiving federal grant funding  All health centers – establishment of new programs and/or services  All health centers – capital investment considerations

12. Existing Health Center – Ongoing Operations  Primary issue of concern – the health center must focus on operational profitability, maintaining a positive operating cash flow, and strengthening the balance sheet  Business decisions should be made by management and the Board of Directors based on an educated estimate of the implications on operational profitability and cash flows

13. Existing Health Center – New Sites  Primary issue of concern – the health center must understand the probability of the new site becoming financially self-sustaining  What period of time will this require?  What happens if the primary source of funding is discontinued – does the health center have a financially sound exit strategy?  Sometimes difficult decisions must be made – new sites should not erode the overall financial health of the organization over an extended period of time  Management and the Board of Directors must determine the time frame that will be reserved for evaluation of the ongoing sustainability of new locations

14. All Health Centers – New Programs/Services  Primary issue of concern – the health center must focus on the financial viability of new programs/services on an ongoing basis  Financial analysis should be performed to proactively estimate the impact of new programs/services on operational profitability and cash flows of the health center  What exit strategy exists if new program/service funding streams change due to state and other funding agency budgetary decisions?  There is a need to fully understand the consequences of accepting new grants for programs/services  Does the cost of implementation and ongoing compliance outweigh the benefits to be gained?

15. All Health Centers – Capital Investment Considerations  Significant issue given the level of new federal investment for capital purposes available through ARRA  Primary issue of concern – the health center must focus on the financial implications of new capital investment  Outside financing needs – principal payments on debt issues and related interest expense  Reimbursement considerations of increased capital- related costs (depreciation, lease expense, interest expense, amortization of financing costs, etc.)  Caution – a careful financial analysis must be performed in advance of application for (and receipt of) capital investment funds  Should the health center perform a debt capacity study?

16. Establishing Financial Health Indicators - Financial Targets and Goals

17. Establishing Financial Goals  Financial goals should be established for:  Operational profitability  Balance sheet health (ongoing growth of health center net assets position)  Cash flow targets  Development of key financial indicators can be at an organization-wide level and/or drilled down to much more detailed levels (site specific, program specific, etc.)  What are the key financial indicators that should be monitored?

18. Key Financial Indicators  Current ratio  Measure of the health center’s ability to liquidate current obligations (current assets divided by current liabilities)  2:1 is a healthy current ratio  Anything less than 1:1 could indicate serious issues that need to be addressed

19. Key Financial Indicators  Net days revenue in net accounts receivable  Important to calculate periodically as growth of accounts receivable can hide poor operating performance  30 to 45 days of net revenue in net accounts receivable is reasonable  Anything higher could indicate any number of potential problems in the revenue/cash receipts cycle

20. Key Financial Indicators  Days cash on hand - calculated as follows:  Total operating expenses minus non-cash expenses (depreciation, etc.) divided by 365 = average day’s expenses  Total cash plus unrestricted investments divided by average day’s expenses = days of cash on hand  30 - 120 days of cash on hand a good target

21. Key Financial Indicators  Days in accounts payable - calculated as follows  Total operating expenses minus non-cash expenses (depreciation, etc.) and wage- related expenses (salaries, benefits, etc.) divided by 365 = average day expenses  Accounts payable divided by average day expenses = days in accounts payable  Target should be < 30 days

22. Key Financial Indicators  Debt to equity ratio - calculated as follows  Long-term debt divided by long-term debt plus unrestricted net assets = debt to equity ratio  Generally target less than.40

23. Key Financial Indicators  Operating income to total revenue ratio  Calculated by dividing total revenue by operating income  Target should be 2% to 4% to generate necessary operating cash flow to use as follows: Replacement of fixed assets Payment of debt obligations Funding of cash reserves

24. Monitoring Key Financial Indicators  Once goals are established for key financial indicators, ongoing monitoring must occur  Monthly financial statement review  Development of dashboards  Periodically with reconsideration of financial sustainability plan scenarios (best case, most likely, and worst case)

25. Developing A Financial Forecast Model

26. What is Financial Forecasting?  A forecast of the expected financial position and the results of operations and cash flows based on management’s expected course of action

27. Importance of Forecasting  To achieve ongoing sustainability, it is important to be able to see the train coming down the tracks and have the ability to move rather than being ran over and have no idea what hit you  Critical development tool for all health centers regardless of size or life cycle  To perform due diligence on the financial feasibility of projects under consideration

28.  Can be a very useful tool in making operational decisions  Used in the budgeting process  Used in long-term strategic financial planning (development and ongoing maintenance of the financial sustainability plan) Importance of Forecasting

29. Purposes  Financing  Traditional financing  Grant applications  Donor requests  Large capital expenditures/projects  Replacement facility  New/additional site  Major equipment purchase Software Medical/dental equipment

30.  Strategic financial planning (development of the financial sustainability plan)  New site  New program or service  New provider(s)  Potential change in revenues Medicare Medicaid Payer mix Federal and state grants Purposes

31. Financial Model - Key Elements  Accuracy – the model is only as good as the data you put into it  Objectivity – do not skew the data to arrive at a predetermined answer  Appropriate level of detail – there should be enough detail to accurately forecast, but not so many details that the model becomes confusing and cumbersome

32. Financial Model - Key Elements  Flexibility – model should allow for updates based on changes in assumptions  Presentation – end product should reflect the intended end user

33. Forecasting Financial Outcomes – Key Driver Considerations

34. Key Drivers Of Financial Outcomes  Volume  Revenue  Third-party payer reimbursement considerations  Grants, contracts, contributions, etc.  Expenses  Cash flow assumptions

35. Volume  Encounters, prescriptions, etc.  Site Service Type –Provider »Payer mix  Ability to adjust volume growth  Assessment of demand?

36. Third-Party Payer Reimbursement  Medicare FQHC cost-based reimbursement considerations  Projected reimbursement rates  Additional costs Type of costs  Additional encounters/charges  Pro-forma cost report can be a useful tool

37. Third-Party Payer Reimbursement  Medicaid Prospective Payment System (PPS) considerations  Do you know the details of your state’s plan as included in the Medicaid state plan amendment (SPA)?  PPS rate setting alternatives for new sites  Scope change opportunities for PPS rate reconsideration

38. Other Revenue  Grants  Federal, state and local sources How stable are these sources of health center funding and how dependent is the health center on each source? Warrants a sensitivity analysis for sources that are of a material nature to health center financial goals and objectives  Community benefit grant – certain situations

39. Other Revenue  Contracts  Donations/contributions  Income on investments

40. Expenses  Personnel  FTEs  Wage rates  Employee benefits  Non-personnel  Variable  Fixed  Other

41. Cash Flow Assumptions  Working capital assumptions  Days in Accounts receivable Prepaid expenses Supplies inventory Accounts payable Accrued payroll items  Due to/from third party payers

42. Cash Flow Assumptions  Sources and uses of cash other than from operational activities  Receipt of capital grant funds  Financing transactions Lines of credit Issuance of long-term debt  Acquisition of property, plant, and equipment assets  Repayment of principal on long-term debt obligations  Funding of cash reserves  Other

43. Final Thoughts

44.  Remember – the “tone at the top” should reflect a commitment to sound business principles & ethics  Underlying principle to consider – to achieve ongoing financial health and sustain the mission of the health center, operational profitability is a “must”

45. 910 E. St. Louis St. Springfield, MO 65801-1190 Office: 417.865.8701 Fax: 417.865.0682 www.bkd.com Jeffrey Allen, CPA Partner jeallen@bkd.com

46. Thank You