Agenda Information Item Memo April 20, 2018 TO: FROM: Board of Trustees Ishwari Venkataraman/ VP Strategy and Business Planning Donna Carey/ Interim Chair, Department of Pediatrics SUBJECT: Agenda Item: [Number] Meeting Date: April 28, 2018 Item Description: Neonatal Intensive Care Unit (NICU)- A Case Study BOARD ACTION: None; Information An important part of improving economic performance is insuring our work aligns with our resources and conforms to needs that warrant investment of our resources. As we look for ways to lower costs and to improve value it is essential that we avoid continuing work/programs because of precedent and focus on value/need. This presentation is designed to inform the Board of our process to conduct such analysis through a case study of a current evaluation - and obtain feedback that will assist the Board when staff presents recommendations for program changes. This presentation is for information only and does not reflect a current request for action by the Board. BACKGROUND: AHS is conducting a comprehensive analysis of inpatient and outpatient contribution margin of all its services to understand opportunities to improve sustainability and fiscal accountability, either through improved revenues, better operational efficiencies, or improved access (volumes). These analyses also include evaluating alternate program structures and models, through collaboration, and/or program closure to reflect community need, or lack thereof. In the process of analyzing all inpatient services, the Neonatal Intensive Care Unit (NICU), offered the opportunity for further exploration and understanding of its cost structure.
In an aggregate analysis of AHS inpatient service lines using Fiscal 2017 data, the Neonatal Intensive Care Unit (NICU) was estimated to operate at a loss of ($2.7M/year). This presented an opportunity to further examine the NICU program structure, its cost structure, forecast future volumes, and develop options for a future model that can best address community need and support sustainable operations. The NICU at AHS, is an 8 bed Level 2a certified unit, located at Highland Hospital. The NICU serves in excess of 300 neonates annually. Approximately 23% of deliveries at AHS, utilize the NICU. This program however has experienced declining volume trends, and has an average daily census of 3.8, running an occupancy of 48%. National trends further confirm a declining forecast for NICU volumes over the next ten years; primarily driven by improved obstetrics care, payer pressures, and advanced diagnostics to detect and prevent preterm births. Against this backdrop, the NICU was studied to determine its yearly financial contribution margin, historical and projected internal volume trends, revenue and expenses. A market analysis of existing community models was conducted. This study presents future options for consideration that reflects community demand, need and recommends future options to sustain operations. ANALYSIS Contribution Margin Total Contribution Margin is used to determine the profitability of a program and it includes the total net patient service revenue minus the total direct costs of a program. Contribution Margin is defined as the amount per unit revenue that is available to cover fixed costs and then contribute to profitability. In this analysis, actual inpatient service revenue and payment was calculated using Medi-Cal managed care contracted rates and Medi-Cal Fee for Service rates for which expected adjustments from cost report were applied. The calculated revenue does not include any lump sum supplemental allocations. Actual direct expenses were also calculated for FY2017. The definition of direct costs for a program included the following: Total program direct costs: Fixed direct program cost + Variable direct program cost. Fixed costs are known and predictable regardless of volume. Typically include salaries for administrators, program managers and salaried clinicians. Variable costs depend on the volume of services supplied including staff, supplies and ancillary expenses. Overall costs include salaries, benefits, and other supplies and ancillary expenses attributed to the program. It does not include the overhead allocations (support services). Support Services, include overhead functions like IT, Finance, Quality, HR, etc. This model was then applied to projected revenues for FY 2019 (based on forecasted volumes) and the expenses included the budgeted staff for FY2019, and the operating (contribution) margin was estimated.
National and Local Trends National projections from Sg2, estimate overall neonatology volumes to grow in short-term before flattening. Neonatology volumes is projected to decrease nationally by 3% (by 2027), primarily due to improved OB care. Neonatology length of stay also is anticipated to decline, driven by protocols for respiratory support, family centered care models and genetic testing. Locally, given the persistent disparities in pre-term and low birth weight infants in communities of color, and our high immigrant population and low-income women in our community, AHS does not predict a significant decline in volume in the future. However, the short-term growth anticipated nationally, due to the opioid epidemic is not a significant driver for Alameda County. At AHS, practice guidelines are continually updated to reflect best practices and patient-centered care. Over the past few years, practice guidelines have changed to allow lower-acuity/risk infants to room in with Mom instead of admitting these infants to the NICU. Local Forecast and Market Analysis In Alameda County, neonatology is forecasted to decline 1.6% in the next five years and 3% by 2027, in keeping with the national forecast. For the types of patients seen at AHS, based on demographic and healthcare utilization trends, volumes at AHS are forecasted to decline 2% over next five years, and decline 4% by 2027. This forecast needs to be tempered with the physician opinion that due to the localized factors described above, we may continue to maintain existing volume. Despite noting 5% drop in NICU days from FY2017-2018, FY2019 is forecast with a 4% decline in patient days. ACTUAL 2016 ACTUAL 2017 BUDGET 2018 FORECAST 2018 2019 PROJ 113-Neonatal ICU Days 1,359 1,487 1,460 1,416 1,354 813-NICU Discharges - 344 329 318 302
NICU Models and Levels of Care in Alameda County Levels of NICU range from Level 1(Basic), to Level 4, which is equipped and staffed to provide the highest levels of sub-specialty care. AHS is a Level 2a certified NICU. A Level 2 NICU is capable of resuscitating and stabilizing preterm and/or ill infants before transfer to a facility. Level 2 is also able to provide care for infants born at >32 weeks' gestation and weighing 1500gms. Alameda County has all Levels of NICU care available and many of the Level 2s are in affiliated models with other providers. LOCATION LEVEL IN HOUSE PED AFFILIATION WHAT IF BABY IS SICK? Childrens Benioff 4 YES IN HOUSE NEONATOLOGIST Alta Bates 3 YES Sutter East Bay Medical Foundation (SEBMF) IN HOUSE NEONATOLOGIST SF General 3 YES UCSF IN HOUSE NEONATOLOGIST John Muir Hospital 3 YES STANFORD IN HOUSE NEONATOLOGIST Sequoia Hospital 2 YES STANFORD AHS (Highland Hospital) 2 YES None ON CALL NEONATOLOGIST/ TRANSFER TO CHILDRENS Washington Hospital 2 YES UCSF/CHO ON CALL NEONATOLOGIST/ TRANSFER TO CHILDRENS San Ramon Regional 2 YES UCSF/CHO TRANSFER TO CHILDRENS Valley Care Hospital 2 YES STANFORD ON CALL NEONATOLOGIST Eden Hospital 1 NO St. Rose Hospital 1 NO Good Samaritan TRANSFER TO CHILDRENS Program Financial Analysis The NICU program is staffed (FY 2018) by 13.48 AHS FTEs and neonatologist coverage, contracted through Oakcare. This program predominantly serves a Medi-Cal population (98%). The programmatic loss in FY 2017 was $2.7 M/year. The program is operating at a 48% occupancy to licensed beds, and has the capacity to see increased volumes. Through the course of programmatic review and budgeting for FY 2019, the staffing for this unit has been adjusted in accordance with regulations, to reflect the anticipated volumes for FY 2019. This has reduced the anticipated contribution margin loss to ($1.88M/year). For the projected volumes and patient days, the net operating revenue per patient day is $1,872 and the total program expense per patient day is $3,265 which leads to a contribution margin loss of ($1,393) per patient day.
Other Statistics (FY 2019): Acute patient days 1,354 Acute average daily census 3.71 Net Operating Revenue per Day $ 1,872.48 Expense per Day $ 3,265.85 Operating Income per Day $ (1,393.37)
Options for Consideration: The contribution margin loss and the programmatic review of NICU services at AHS presents two options for consideration: Programmatic closure Re-structure program through re-evaluating cost structure Programmatic closure is not recommended for the following reasons: This program is tied to the Maternal Obstetrics program at AHS. A program closure would mean that the mother and NICU baby potentially separated in different facilities, which is not a preferred option. The NICU provides a positive patient experience, and influences customer choice for selection of a birthing facility. A program closure would adversely impact patient choice for selecting AHS as their birthing center. It serves as a gateway for families to continue care in our system. Mothers who deliver here and have their infants receive care here tend to expand their care to themselves and other family members. Through this analysis and developing the budget for FY 2019, AHS has already restructured its NICU staffing, and for FY 2019 this unit is staffed to manage its anticipated volume. However, the projected contribution margin still is a loss. For the program to be financially sustainable in the future, the NICU at AHS is working on options to restructure its existing cost structure, outlined below: Consider application to a higher level of NICU Level IIb. This would entail higher revenues, but also add cost to the program structure. This needs to be further explored. Apply for certification with California Children s Services (CCS). This would allow for higher rate of reimbursement (thus shrinking the daily loss margin). The certification will require a financial investment from AHS. The certification requirements and financial benefits are still being analyzed. Explore partnership options with other community partners, to leverage consolidation of levels of NICU (using existing structures), and thereby realize service efficiencies. Potential Next Steps We will further explore the options outlined above in partnership with the appropriate clinical leaders and model the pro-forma based on the viable options. We will keep the Board of Trustees
appropriately apprised of our efforts to resolve the contribution margin opportunity. This includes notifying this Board of any recommendation to consider any significant program adjustments that may require your approval.
AHS Contribution Margin program Analysis NICU- A CASE STUDY 1
CURRENT STATE Continuous demand for expansion and growth driven by patient access needs, or provider feedback Clash Leading to Financial reality of limited resources Limited organizational bandwidth to execute Lack of prioritization to identify needs Fragmented and siloed resource allocation. No review at a programmatic level to evaluate and compare mission/strategic need/resource utilization. 2
PROPOSED PROCESS PRINCIPLE: Ensure alignment with community need/ahs strategic direction through an evaluation process that evaluates every program (existing or new) to justify investment of our scare resources. Evaluate services portfolio across Strategic Business Units and develop a phased plan, for optimal growth/consolidation under population health management. Using a continuous cycle of improvement under the Plan, Do, Study, Act model (PDSA): 1) ANALYSIS OF AHS PROGRAMS: Review existing programs, to potentially consolidate services and programs, or develop alternate delivery models as appropriate, to improve clinical quality, capacity utilization and cost efficiency. 2) GROWTH: Identify and develop plans for service growth opportunities for managed care, to either grow in AHS, or work through community partners to enable access and high quality care for target populations. 3
AHS Program Analysis- Existing Programs Financial Contribution Margin Historical Trends Quality, Access and Experience Community need Future growth projections Alternate Models/ Structure Questions: 1) Are there opportunities to consolidate services across campuses, for optimal efficiencies and highest quality of care? 2) Are there programs that might be evaluated for discontinuing services based on quality, and efficiency of operations? What are the implications to AHS/Community? 3) What is future growth projections to best prioritize services for growth and where should it be located? 4
Program Analysis of the Neonatal Intensive Care Unit at AHS (NICU) 5
Assumptions for Financial Analysis Definition of Contribution Margin: Total net patient service revenue - Total direct program costs Total program direct costs: Fixed direct program cost + Variable direct program cost. Fixed costs are known and predictable regardless of volume. Variable costs depend on the volume of services supplied including staff, supplies and ancillary expenses. What this does not include: Lump sum supplemental revenue Overhead costs 6
Neonatal Intensive Care Unit Current State 8 Beds in Highland Hospital Level 2a Certified STATISTICS CURRENT STATE Annual Volume 344 (in FY 2017) Percentage of Deliveries that use NICU 24.6% (in FY 2017) Average Daily Census 4.07 (in FY 2017) Contribution Margin FY 2017 ($2.7M) 7
NICU Market Demand Projection National Forecast National projections from Sg2, estimate overall neonatology volumes to grow in short-term before flattening. Neonatology volumes is projected to decrease nationally by 3% (by 2027). 8
NICU Market Demand Projection- Alameda County and AHS -3% In Alameda County, neonatology is forecasted to decline 1.6% in the next five years and 3% by 2027, in keeping with the national forecast. For the types of patients seen at AHS, based on future demographic and healthcare utilization trends balanced with historical volumes trends at AHS; future projections forecast a 4% decline in patient days for FY 2019. However, is possible, given national trends in the births of low birth weight infants, that volume trends may even remain flat. 9
Alameda County Levels of NICU LOCATION LEVEL IN HOUSE PED AFFILIATION WHAT IF BABY IS SICK? Childrens Benioff 4 YES IN HOUSE NEONATOLOGIST Alta Bates 3 YES Sutter East Bay Medical Foundation (SEBMF) IN HOUSE NEONATOLOGIST SF General 3 YES UCSF IN HOUSE NEONATOLOGIST John Muir Hospital 3 YES STANFORD IN HOUSE NEONATOLOGIST Sequoia Hospital 2 YES STANFORD AHS (Highland Hospital) 2 YES None ON CALL NEONATOLOGIST/ TRANSFER TO CHILDRENS Washington Hospital 2 YES UCSF/CHO ON CALL NEONATOLOGIST/ TRANSFER TO CHILDRENS San Ramon Regional 2 YES UCSF/CHO TRANSFER TO CHILDRENS Valley Care Hospital 2 YES STANFORD ON CALL NEONATOLOGIST Eden Hospital 1 NO SEBMF St. Rose Hospital 1 NO Good Samaritan TRANSFER TO CHILDRENS AHS is a Level 2a certified NICU. A Level 2 NICU is capable of resuscitating and stabilizing preterm and/or ill infants before transfer to a facility. Level is also able to provide care for infants born at >32 weeks' gestation and weighing 1500gms. 10
NICU- AHS Volume Analysis Sub Account ACTUAL 2016 ACTUAL 2017 BUDGET 2018 FORECAS T 2018 2019 In Develop m 113-Neonatal ICU Days 1,359 1,487 1,460 1,416 1,357 813-NICU Discharges - 344 329 318 303 ADC 3.71 4.07 4.00 3.88 3.72 ALOS 4.32 4.44 4.45 4.48 Percentage of deliveries that end up in NICU Total Deliveries 1144 1396 1441 1351 1359 Discharges - 344 329 318 302 24.6% 22.8% 23.5% 22.2% 11
Contribution Margin Analysis 16070 - Neonatal ICU Pro Forma - DRAFT PROJECTED 2019 FY 2019 Pro Forma 1. Payer mix is 98% Medi-Cal. Total Inpatient service revenue $ 20,890,024 Gross Patient Service Revenue 20,890,024 Deductions from Charges (18,354,680) Net Patient Service Revenue 2,535,343 Medi-Cal Waiver 0 Total Supplemental Revenue 0 Net Operating Revenue $ 2,535,343 Management 174,035 RN, Registry 1,993,778 Employee benefits 715,378 Contracted physician svcs - Oakcare 153,600 Purchased services 7,000 Medical Supplies 25,000 Ancillary and other direct costs 1,353,172 Total operating expense 4,421,963 2. Projected Net Patient Services Revenue in this analysis is modeled on Medi-Cal Managed care contracted rates, and Medi-cal FFS rates, adjusted to cost report settlements. 1. Salaries: In FY 2017 and 2018, the program was supported by 13.48 FTE staff. Through this analysis and budgeting for FY 2019, the program structure has been re-structured to staff with 10.11 FTEs. 2. Physician neonatology coverage is provided through CHO. 3. Ancillary and other direct costs include: Pharmacy, Lab and Respiratory Therapy. Operating Income (1,886,619) 12
Options The contribution margin loss and the programmatic review of NICU services at AHS presents two options for consideration: 1) Programmatic closure 2) Re-structure program through re-evaluating cost structure Programmatic closure is not recommended for the following reasons: This program is tied to the Maternal Obstetrics program at AHS. A program closure would mean that the mother and NICU baby potentially separated in different facilities, which is not a preferred option. The NICU provides a positive patient experience, and influences customer choice for selection of a birthing facility. A program closure would adversely impact patient choice for selecting AHS as their birthing center. It serves as a gateway for families to continue care in our system. Mothers who deliver and have their infants receive care here, tend to expand their care to themselves and other family members. 13
Options to Re-Structure Program Cost For the program to be financially sustainable in the future, the NICU at AHS is working on options to re-structure its existing cost structure, outlined below: Consider application to a higher level of NICU Level IIb. This would entail higher revenues, but also add cost to the program structure. This needs to be further explored. Consider certification with California Children s Services (CCS). This would allow for higher rate of reimbursement (thus shrinking the daily loss margin). The certification will require a financial investment from AHS. The certification requirements and financial benefits are still being analyzed. Explore partnership options with other community partners, to leverage consolidation of levels of NICU (using existing structures), and thereby realize service efficiencies. 14
Next Steps: As we continue to explore the options outlined earlier and model the pro-forma based on the options, we will bring our recommendations back to the Board of Trustees for implications for program modifications/or closure. Questions? 15