1. A Businessman’s View of the Role of the CFO in the Uncertain Health Care Future Bob Kayser Board Member Memorial Hospital Converse County HFMA Spring Conference March 19, 2015

2. Consumer Product Safety Warning! The opinions expressed here have not been approved by any recognized healthcare governing authority. Over-reliance on these opinions may result in the bankruptcy of your organization, or worse, loss of your job.

3. The Role of the Hospital CFO The CFO is the financial conscience of the organization. At a minimum the CFO must provide a set of financial statements accurately reflecting the performance of the organization. Income Statement, Balance Sheet, Cash Flow, etc. The financial controls must be robust and lead to a clean annual audit report. The CFO has the primary responsibility for analysis of the financial condition of the hospital and is the key early warning individual of financial stress. The CFO is the lead individual in preparing the annual budget and forecast of performance. The CFO must evaluate the impact of adding expense items, capital items and debt to the hospital financial condition. The CFO must take the lead in evaluating the financial impact of new regulations and/or new pricing arrangements. You must be proactive so you can prepare the organization before they occur rather than scrambling after they occur.

4. The Challenge of the New Healthcare Financial World Costs are increasing, reimbursements are decreasing. Competition is increasing, captive markets are eroding. Consumers/Patients are becoming better informed and price conscious. Payers are pushing narrow networks or preferred provider networks which may exclude you. Higher patient co-pays will make the patient shop for lowest price. Price/charge transparency is coming! So is quality transparency. How will you advise your Board and CEO to respond?

5. The Evolution of Hospital/Physician Pricing Models 1. Traditional Fee For Service: Hospitals and physicians submit bills to third party payer with all services listed and billed individually. Patient clueless about charges in advance. 2.Reference Pricing: The insuring payer sets a maximum price they will pay the providers for the total service provided. Self insured employers moving to this. Patient still clueless about charges. (i.e. CalPERS, Walmart, Loews and others) 3. Bundled Pricing: The providers – hospital and physicians – charge one all encompassing price for the service provided. Increasingly demanded by insurers. Patients experience lower copays and know the charges in advance. 4.Price Transparency: The providers publish their prices for comparison by the consuming public prior to their receiving the service. This can include a bundled price for the service provided. “Retailization” of healthcare pricing – patients and insurers know and compare prices in advance. 5.Capitation: The payer pays the provider a set amount for each enrolled person per period of time regardless of how much or how little that person seeks care. The risk of overuse is transferred from the payer to the provider. This is the future. The patient is an engaged customer!

6. How to Explain Your Finances to the Non-financial Members Volume × Price = Revenue 10 surgeries x $10,000 = $100,000 Revenue - Cost = Margin (profit) $100,000 - ($97,000) = $3,000 (3%) What do these simple equations tell us? 1.There are three things we can influence – Volume, Price and Cost. We have more control over Cost than Volume or Price. 2.A dollar of cost reduction falls right to the margin/profit line. 3.At a 3% margin for every $1.00 of cost increase we must increase price and/or volume by $33.00 to stay even. We need to grow margins in a market of declining revenue and increasing costs.

7. Financial Measures We Find Useful Cash Flow Forecast – from this we plan our growth and capital expenditures. What can we pay for without increasing debt. Cash is our security. Debt service is a fixed cost! “Do not run out of cash!” Revenue cycle – especially net AR days and days cash on hand. Operating margin and net or total margin. The operating margin is what the business is actually making. (CAH median operating margin in 2011 was 0.68% - barely breakeven) Growth in expenses vs. growth in revenues. Nationally expenses have outpaced revenues. Debt Service Coverage Ratio – should be > 4. Debt service is first call on cash. Employee Equivalent per adjusted occupied bed; a productivity measure. (target is > 5.0 for EEOB)

8. How do we survive in a commodity pricing market? Common surgeries such as total knees and hips, hernias, hysterectomies, gall bladders, and simple procedures are becoming commoditized. Everyone is doing them, how are yours better? If we have to compete on price can we win on quality? In a commodity market the average price is equal to the average cost over a period of time. To survive in this market we must be a low-cost supplier. Target a 6-10% annual cost reduction. We will have to be price competitive in our market and we must have demonstrable quality to attract and keep our patient customers. Financial success follows quality care. No one is going to bring money to save us. It is up to us to save ourselves!

9. Final Thoughts All businesses are difficult. Health care is a particularly complex business but the principles are the same across all businesses. You may think we have it bad but imagine you are in the oil business and have lost 55% of your product price in the last six months. We cannot simply do what we have done in the past. Improve what we have been doing while transitioning to the new realities of our business. Nearly all business are doing this. We are the delivery system for healthcare in our communities. They depend on us and expect us to sustain the system and provide high quality care regardless of the difficulties. Let’s embrace our “Guardianship” health care responsibility and plan now to adapt to the new realities of reduced reimbursements. Always focus on what’s best for our patients! I have watched our hospital change and adapt and I am optimistic that we can all do what is necessary. Thank you for this invitation to speak to you. We are all in this together. By combining our knowledge we will successfully transition to a new health care world.