Incomplete, Rushed, and Risky

That would be my analysis of the proposal that has been laid before the public for the 10/10/11 Board meeting.  This discussion has been going on in closed session much longer, but, even after multiple attempts, I do not have the questions I asked answered.   Hopefully, I can provide a useful framework for people who are trying to get this quickly.

Opportunity:  Skilled Nursing expansion.  The reason this is "expansion" rather then "new" is because the District already operates SNF (Skilled Nursing Facility) beds at South Shore.  You can see those additional beds on page 62 of the packet (page 19 of the August unaudited financials) where, in FY 2008, there was a bed capacity of 135 and it increases to the current 161 in FY 2009.

Revenue:  SNF compensation for the District has 5 (updated from 4) components.
1.  Private pay -  This is very small because, unlike the Hospital,  SNF beds are not allocated without evaluation of ability to pay.  Similar to how you are evicted or foreclosed upon if you do not pay your rent or mortgage, the same would happen if the SNF bill was left unpaid.  Because the District is reimbursed by Medi-Cal at a significantly higher rate (distinct part reimbursement)  than private, freestanding nursing homes (such as how the current Water's Edge) there is little reason for private pay patients to use District beds at a higher cost to them than the alternatives.  This is why virtually all of the private pay clients left South Shore when it was taken over by the District and why the plan presented, similarly, calls for private pay to be reduced to less than 5%.

2.  Medi-Cal - This is the bulk of the beds.  These beds are reimbursed on a cost basis up to a cap.  The current rate is $315, if I read the financial information in the packet correctly.  This is after the AB97 changes have been rolled into the analysis.  I believe that CMS will approve the AB97 reductions, but CEO Stebbins has always expressed the hope that CMS will reject AB97.   [I would like to see this decision delayed until the Board sees whether a pessimistic outlook for reimbursement is appropriate (my view) or a more optimistic one (Stebbins's view).]  The majority of the patients at South Shore and at the proposed Water's Edge will be Medi-Cal.

3.  Medicare - These are Medicare patients who are placed in short term care for, I believe, up to 100 days per incident.  The rules can be complex for both the patient and the facility, but this revenue is higher than that offered by Medi-Cal because Medicare, in general, is a more generous payer, and because these patients need more services so the reimbursement is correspondingly higher.  [I believe the $619 per day average that this proposal uses is overly optimistic.]  Management should provide a comparison to South Shore reimbursement averages to validate the $619 average rate.

4. Other (Updated because I forgot this one in the first iteration of the post) - This would be private, 3rd party insurance.  The numbers are not large and the rate ($450/day)  is half way between the Medi-Cal rate and the Medicare rate.  It is unclear to me what this rate is based upon. 

5.  Dilution - This one is non-intuitive and here I will agree with those who bemoan the complexity of healthcare accounting.  Basically, this component of revenue is embedded in the $315/day Medi-Cal rate because that number is partially cost based.  Since Water's Edge operating as part of the District uses District resources that also are used in operation of the Hospital, the cost allocation for reimbursement is shared between all of the services/operations of the District.  By acquiring the Water's Edge beds, these shared resources can be cost allocated across a broader base.  At the Hospital level, this means cost savings (for the most part).  At the SNF level, it is an additional expense, but an additional expense that is compensated for by the government as a cost of doing business so this dilution of overhead becomes revenue to the District in the form of higher reimbursement rates on SNF beds.  Because it already is revenue in the reimbursement area, it becomes negative revenue when calculated for presentation purposes (because the allocation interacts with a reimbursement cap for Medi-Cal rates).


Expenses:

I do not have to say much about expenses except to observe that Management plans to operate Water's Edge more cheaply than South Shore.  In fact, I wish there was a pro forma comparison of this expense with South Shore's on a per bed basis, but that has not (and my understanding is will not) been provided.
 

Risks:


1.  Overly optimistic budget forecasts:  I think this one is the most obvious.  Stebbins and I may disagree about the quality of her success in meeting budget projections in 2009/2010, but there is no question that 2010/2011 was a failure.  So far, in 2011/2012, the budget projections versus actuals have not been encouraging.  In just two months of reported results, the District is missing its budget by over $500,000.  Projected over the year, that would be a miss of millions which means that the Water's Edge proposal, even if it meets all of the budget projections (formed by the same people who formed the District's budget projections) does not make up the gap.

To put a spotlight on what I mean by overly optimistic, in actual operation, the District has missed its budget projections for revenue in just the first two months of the year in the 6 to 7% range.  When I asked for a sensitivity analysis on the projections in this proposal, the District's pessimistic scenario reduced first year patient days by only 5%.  So in a business that they have been intimate with for years, the District misses budget by 6-7%, but Management considers a "pessimistic" scenario to be one where they only miss budget by less than 5%.   That is just one example.

2.  Acute Care Services are interrupted so Distinct Part Reimbursement is unavailable:  The District must operate acute care services to be entitled to the higher Medi-Cal reimbursement rates.  For me, this is a huge negative to the proposal, but, I suspect, it may be a positive for other Board members because it raises the stakes for changing acute care services.  There are two risks that I can see here.  The first one is that the State finally decides to enforce current seismic retrofit regulations.  There are both NPC and SPC requirements, but the ones that the Hospital is currently not in compliance with

The NPC-2 requirements

"After January 1, 2002, any general acute care hospital
building which continues acute care operation must, at
a minimum, meet the nonstructural requirements of
NPC 2, as defined in Article 11, Table 11.1 or shall no
longer provide acute care services."

If the state were ever to enforce this regulation or subsequent SPC regulations then the Hospital would lose distinct part reimbursement and thus, lose money on the SNF.    The proposal goes out 20 years to 2031/2032.  I think that it behooves the Board to understand the risk of not being able to complete seismic work relative to this proposal.

 The second risk is one I touched on in risk #1 above which is, despite the District's best efforts, acute care services continue to lose so much money that a radical restructure would be needed.  This proposal does not fully incorporate this risk.   In fact, I consider the "ROI/Contract Risk" analysis as to be so wildly misleading that they should be pulled from the packet.  I have never seen anything like that in my career.

3.  Reimbursements are Reduced:  This one speaks for itself.  The California budget crisis is not over.  Beds are available to Medi-Cal at freestanding SNFs at a much lower rate than distinct part rates.  That seems to me to be low hanging fruit for budget people at the State.  Sure there might be challenges for the State if they did that (such as Laguna Honda in San Francisco), but I think those challenges would be overcome by special deals that excluded the District.  There would be little political sympathy for a small, money-losing entity that had still not spent the money to complete seismic retrofit.  I think the Board could get a sense of what direction this might go by, as I suggested above, waiting to see if AB97 is rejected before approving this proposal.

Hopefully this helps people trying to digest the Water's Edge material.  Any comments are welcome (although I understand that blogger has a tendency to swallow comments - movement to wordpress may be  imminent.)  If you have a question and do not wish to or cannot comment here then email me and I will try to respond ASAP.