2. USING FORECASTS AS A TOOL
TO PLAN FOR THE FUTURE
Andy Kaempfe, CPA, CHFP
Senior Managing Consultant
akaempfe@bkd.com
Eric Lopata, CPA
Director
elopata@bkd.com
July 19, 2017

3. • Quantify historical non-recurring transactions to establish a
baseline for the forecast
• Apply high-level assumptions to the historical baseline in
order to estimate forecasted results
• Estimate the gap between Medicare reimbursement and debt
service payments over the debt term
• Analyze the impact of sensitive assumptions on forecasted
results
LEARNING OBJECTIVES

4. Establishing a Baseline for the Forecast

5. NORMALIZATION OF PAST RESULTS

6. NORMALIZATION OF PAST RESULTS

7. NORMALIZATION OF PAST RESULTS

8. NORMALIZATION OF PAST RESULTS

9. Looking Back to the Past

10. WHY GO BACKWARDS TO MOVE FORWARD?
• Lessons can be taken from past performance of the
organization
• Analysis of current operations to assess status of the
organization
• Use what we have learned to assist in establishing the basis
for management’s assumptions that are key to the forecast

11. HISTORICAL FINANCIAL ANALYSIS
• Start at a global level, and then move into the details as
appropriate
• Determine the key drivers of the historical trends
• If the organization grew substantially or declined substantially
in the historical period, what caused it?
 Closing of another hospital?
 Economic changes?
 Payment changes?
 Service line changes?
 New program or funding?

12. HISTORICAL FINANCIAL ANALYSIS

13. -
100
200
300
400
500
600
700
800
2009 2010 2011 2012 2013
Median Discharges
CAH Iowa
2,100
2,300
2,500
2,700
2,900
3,100
3,300
3,500
3,700
3,900
2009 2010 2011 2012 2013
Median Patient Days
CAH Iowa
VOLUME TRENDS
Source: Optum 2015 Almanac of Hospital Financial and Operating Indicators

14. 0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Charge Inflation
Hospital and related services
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Expense Inflation
Medical care commodities Medical care services
REVENUE AND EXPENSE INFLATION
Source: Bureau of Labor Statistics

15. 33%
34%
35%
36%
37%
38%
39%
40%
41%
42%
43%
2009 2010 2011 2012 2013
Median Medicare Days %
CAH Iowa
0%
1%
2%
3%
4%
5%
6%
7%
2009 2010 2011 2012 2013
Median Medicaid Days %
CAH Iowa
PAYER MIX TRENDS
Source: Optum 2015 Almanac of Hospital Financial and Operating Indicators

16. 4.55
4.60
4.65
4.70
4.75
4.80
4.85
4.90
4.95
5.00
5.05
5.10
2009 2010 2011 2012 2013
Median FTEs per Occupied Bed
CAH Iowa
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
2009 2010 2011 2012 2013
Median Salaries per Discharge
CAH Iowa
FTE TRENDS
Source: Optum 2015 Almanac of Hospital Financial and Operating Indicators

17. Medicare Reimbursement vs Debt Service
Payments – Fill the Void

18. PROJECT COMPLETE – NOW WHAT?
• Forecast complete, debt secured and project completed –
great, but what’s next?
• The organization should consider the cash flow implications of
the capital project
• Applies to all healthcare organizations, but particularly
important to critical access hospitals (CAH) following a major
project

19. MEDICARE COST REIMBURSEMENT
• CAH incentivized to complete major renovation or
replacement facility due to Medicare cost reimbursement
• Debt service for the project can be funded through Medicare
reimbursement
• Extremely important for organizations to understand the
relationship between cost reimbursement and future debt
service payments

20. MEDICARE COST REIMBURSEMENT
• Costs from capital project
 Interest expense – declines over life of project
 Depreciable life of the capital assets purchased – may be shorter than
term of debt issued
• Combination creates a declining Medicare reimbursement
over term of project debt
• The organization’s Medicare payor mix will have an impact on
the difference between reimbursement and debt service
• BUT HOW LARGE CAN THE GAP BE?

21. MEDICARE COST REIMBURSEMENT
Sources of Funds Uses of Funds
Costs Useful Life
Project debt $10,000,000 Construction costs $6,000,000 30 years
Term 30 years Building
improvements
3,000,000 15 years
Interest rate 5.0% Equipment 1,000,000 7 years
Annual payment $650,514 Total $10,000,000

22. MEDICARE COST REIMBURSEMENT
• Additional assumptions – average overall cost reimbursement
for the CAH is 50%
 Every $1 of additional expense on Medicare cost report yields 50 cent
of additional reimbursement
• Expenses related to the project over 30-year term of debt
Expense
Reimbursement
Factor
Total Cost
Reimbursement
Depreciation expense $10,000,000 50% $5,000,000
Interest expense 9,515,431 50% 4,757,715
Total $19,515,431 $9,757,715

23. MEDICARE COST REIMBURSEMENT
• Cost-based reimbursement declines over the term of the
project debt service
 Creates a cash SHORTFALL for the annual debt service that is not
covered by increase reimbursement
• Cost-based reimbursement covers 80% at onset, decreasing to
18% in final year of debt
Cash Shorftall
Project Debt Service
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Project Year
Annual Cost Reimbursement

24. MEDICARE COST REIMBURSEMENT
• Cash flow from reimbursement – not equal to debt service
• Organization should establish savings plan to supplement cash
flow in later years of the debt service
 Average cost reimbursement over debt term in example – compared to
expected cost reimbursement ($9,757,715 / 30 years = $325,257)
$(250,000)
$(200,000)
$(150,000)
$(100,000)
$(50,000)
$-
$50,000
$100,000
$150,000
$200,000
$250,000
1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930
Project Year
Cashflow Excess (Shortfall)

25. MEDICARE COST REIMBURSEMENT
• Cash savings in first half of project will help organization in
second half project
• Organization can alleviate financial burden over term of the
project debt – PLAN FOR THE FUTURE!
$-
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031
Project Year
Accumulated Savings

26. MEDICARE COST REIMBURSEMENT
• KEY – Organization should strive to stabilize cash flow over life
of project
• Why should we develop a savings plan? – Will have an
immense impact on the organization’s cash outflow
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930
Project Year
Annual Cash Flow
Cash Flow without Savings
Cash Flow with Savings

27. Key Assumptions Impacting Forecasts

28. SENSITIVITY ANALYSES
• Required for certain forecasts, but useful for planning
purposes too
• Quantify the impact of both positive or negative changes to
operations

29. IDENTIFICATION OF SENSITIVE ASSUMPTIONS
• Historical budget variances
• Historical fluctuations
• Uncertain assumptions
• Significant forecasted changes

30. Top 5 Takeaways for your Organization

31. TOP 5 TAKEAWAYS
1) How can your organization accumulate cash to minimize
shortfall through project debt service term?
2) Does your organization understand the cash flow impact of
the capital project over the ENTIRE term of the project, not
just the three to five year forecast period?
3) Do normalized financial statement trends look similar as
reported trends?
4) How can your organization utilize the forecast more
effectively moving forward?
5) Do you know the impact of 10% decrease in revenue, or a
10% increase in expense?

32. QUESTIONS?

33. FOR MORE INFORMATION
THANK YOU!
Eric Lopata, CPA
Director
elopata@bkd.com
816.489.4273
Andy Kaempfe, CPA, CHFP
Senior Managing Consultant
akaempfe@bkd.com
816.489.4322