CaseStudy.BobcatIntegratedDeliverySystem[1].docx Download Attachment

The Case Method
objectives
•

To facilitate development of the assessment, analytical, and conceptual skills necessary
for effective problem solving and decision making as well as managerial...The Case Method
objectives
•

To facilitate development of the assessment, analytical, and conceptual skills necessary
for effective problem solving and decision making as well as managerial skills associated
with planning and implementing solutions

•

To facilitate synthesis and integration of subject matter and application of theory to actual
situations

•

T encourage among students dynamic and interactive discussion that challenges their
experience and values

•

To provide, in a short period of time, knowledge and insights that would otherwise be
gained much more slowly

INSTRUCTOR’S ROLE & RESPONSIBILITIES
•

Facilitator-Encourage groups to think independently and to formulate and defend with
sound logic and assumptions their work.
Note: As facilitator, the instructor works with groups during the semester. This
interaction in no way guarantees the correct answer or grade on the case.

•

Evaluator –Since case study is dynamic, the criterion used in evaluating student
performance is necessarily general, but takes into account the following.
• Mastery of background information
• Application of appropriate disciplines and analytical methodologies in the assessment

component
• Soundness of assumptions and logic
• Degree and clarity of problems identification and articulation
• Consistency and compatibility of assessment component with problem-solving

component (e.g., degree to which recommendations and implementation plans,
including method of evaluation, reflect the problems identified)

• Presentation of material in a clear, logical manner

The Case Method

71

STUDENT’S ROLE & RESPNSIBILITIES
•

Learner-the major responsibility for learning rests with the student in case study.

•

Participant-The most challenging and sometimes anxiety-laden aspect of case study is

the opportunity for students to present their views to others in their group. For the group to be
productive, students should keep the following in mind:
• Serious and extensive preparation by each student is critical.
• Although student and group work should be independent, students should not
hesitate to discuss the case with others.
• During group discussion, students should expect and tolerate challenges to their
views.
• In both group discussions and the final preparation of the report, remember the
importance of good communication.

CASE ANALYSIS PROCEDURE
•

Assessment component

• Make assumption
• Apply disciplines
• Apply methodologies
•

•
•
•
•

- organizational objectives
- expectations
- present/past results
- current internal situation
- current external situation
- other factors as necessary

Problem-solving component
Identify and describe problems
Formulate alternatives
Evaluate alternatives and make recommendation
Design implementation plan and method of evaluation

Source: Adapted with permission. Rakich, J. S., D.D. Longest, Jr., and K. Darr. 2004. Cases in
Health Services Management, 4th ed. Baltimore: Health Professions Press.
72

Practice Problems and Case Study

CASE STUDY:

BOBCAT

INTEGRATED DELIVERY SYSTEM
YOUR IDS
It is December, 2006, and you have just accepted the CFO position at Bobcat Integrated Delivery
System (IDS). You will be reporting to Mr. Salter, Bobcat IDS chief executive officer, a retired
school teacher who was hired last year. Also reporting to Mr. Salter, and Mr. Wannabe, Bobcat
IDS chief operating officer; Dr. Spok, Bobcat IDS medical director; and Ms. Patty Care, Bobcat
IDS director of nursing. When announcing your appointment, Mr. Salter stated that your primary
objective in the coming year (2007) would be to reverse the ominous financial trend which began
in 2005 with an operating loss and continued in 2006. Previous operating losses were funded
with investment income (investment income was $200,000 in 2006) from restricted net assets;
however, your board recently passed a resolution discontinuing that practice and restricting
investment income to capital expenditures.
Bobcat IDS is a not-for-profit corporation and includes a 120 - bed acute care hospital, a 25 bed skilled nursing facility, a 15 - bed rehab facility, a home health care agency, and an outpatient clinic. The hospital, Bobcat Community Hospital (BCH), is the only hospital in Bobcat,
(name your state), a rural community of 50,000.
To acquire background information, you decide to meet with each member of the executive
team first, and then meet with selected members of senior management.

MEETING WITH DR. SPOK
Dr. Spok, the hospital medical director, told you:
Most doctors have been on the medical staff for at least 10 years. There is little loyalty to the hospital. I
and most doctors also have admitting privileges at County Hospital, a never public hospital with better
facilities 30 miles away. While it is a hassle for the doctors to drive to County Hospital to make rounds,
there are few good reasons for the doctors to admit their patients to BCH. County Hospital has a
hospitalist and pays physicians large amounts of money for menial service assignments like committee
work (a practice that Bobcat has refused to participate in).

MEETING WITH Mr. Salter
MR. Salter, chief executive officer, stated:
73
Practice Problems and Case Study
I just don’t understand why we are losing money. I spent a considerable amount of time
recruiting new doctors while keeping the existing doctors happy. The new, younger doctors just
don’t seem to have a sense of loyalty to BCH. Furthermore, I’ve tried to establish a “family

atmosphere” for our employees, which stresses getting along well with others in return for job
security. Everyone seems happy. Everyone except Ms. Fi Nance Myway, whom you’ll be
replacing. She and I both started January of 2005, and she seemed increasingly frustrated with
the way I do things here—she just didn’t fit in. I tried to accommodate her by implementing
some of her recommendations, even though they were against my better judgment—like
charging visitors for parking (generating $100,000 in other operating revenue for 2006). And
when I announced that I was bringing in more business to the hospital by entering into a twoyear capitates managed care agreement with the city (it expires this month)—we get $300 per
month per family for taking care of the 200 city employees and their families, whether they’re
sick or not—Ms. Myway threw a fit at an executive team meeting. She claimed that my decision
were driving Bobcat IDC deeper into the red, an, as a result, I had to show Ms. Myway the
Highway for insubordination. That happened in November of 2006.
You’ll be reporting to me, and I want you to do the following:
1) Using non-GAAP format, develop a 2006 statement of operations and a 2006 balance sheet
(you can assume the format and numbers are correct on the 2005 balance sheet, and you
can further assume that all balances carry forward to the 2006 balance sheet, with the
exception of accounting for the 2006 loss from the statement of operations).
2) I need your analysis of state law (in your state) regarding our tax-exempt status. Did we
provide our fair share of community benefits in 2006? Related to our non-profit tax status, I
also need an analysis of the tax-exempt issue at the federal level and a detailed and current
list of common hospital practices that might cause us to lose our federal tax-exempt status.
3)

Many of our physicians are now admitting patients at County Hospital because County pays
them for service assignments like committee work. County also provides physicians with a
hospitalist. What can we do for our physicians and how much will it costs us? Please make
sure you explain the typical financial arrangements with hospitalists, whether you
recommend one or not.

4) Analyze the Balanced Budget Act of 1997 as it relates to Medicaid managed care. Using
differential cost analysis, tell me the full cost profit/loss and the differential cost profit/loss
for Bobcat IDS’s 2006 Medicaid business and compare it to the following possible
scenarios:
•
Things remain as is
•
We lose all our Medicaid business to County Hospital (the public facility)
74

Practice Problems and Case Study
•
County Hospital subcontracts with us on a capitates rate (assume a similar capitates
rate and utilization rate as the contract with the city—but remember, with more families!)
5) U.S . attorneys are reviewing our billing practices and physician relationships. Explain to
me what they’re looking for and whether you think we have any liability. What actions
have been brought against hospitals like ours during the last two years? Do we need a
corporate compliance plan, and, if so, what should it include? Do rural hospitals get any
breaks in dealing with physicians?

6)

Review current studies and literature and tell me what percent increases/decreases we
can expect commercial rates, medicare rates, and medicaid rates to be over the next
three years. What impact will those rate increases/decreases have on our operations?

7) Analyze my capitates managed care agreement with the city. Using differential cost
analysis for 2006 data, tell me the full cost profit/loss and the differential cost profit/loss.
Should we renew the contract for next year at present rates, or should we ask for a rate
increase, and, if so, how much of a rate increase do we need to cover our full cost? To
cover our differential cost?
8)

Our radiology department is in violation of the anti-trust statutes by developing a fee
schedule using RVUs developed by the radiologist’s professional society. You must
establish a new RVU system before we can set FY 2007 rates. The radiology manager

has
already completed some of the work and I’ll send it over to you (see Table V). Please
develop a hospital-specific RVU schedule and, using activity-based costing, assign FY
2007 radiology department rates (total radiology expenses for FY 2006 were $4.5
million). Note: use technician minutes and supply expense to assign direct costs and
machine minutes to assign indirect costs.)
9)
in

Ms. Fi Nance Myway told me that financial expediency-based pricing no longer brings
much profit. Was she right? Please explain it to me in terms I can understand. If we
cannot cost-shift from Medicare, Medicaid, bad debt, and charity care to other payers,
what are our alternatives?

10)

Does our state have pricing transparency laws, and, it not, when do we expect them?
Should we begin releasing pricing now in anticipation of the legislation? What should
we do in preparation of either a mandated release or a voluntary release?

11) Analyze 2006’s financials using ratio analysis and identify strengths, weaknesses, and
recommendations for improvement.
12)

Develop a 5-year strategic plan for Bobcat IDS (including benchmarked financial
metrics).

Case Study Bobcat Integrated Delivery System
75
13) For 2007, develop a statistical budget and then develop a revenue budget (using a financial
model, determine whether to increase rates, and, if so, how much) and an expense budget
in statement of operations format, including detailed footnotes explaining any changes in
the numbers.
I would like to see at least four different expense scenarios:
i)

Maintain expenses at 2006 levels after adjusting for volumes and mandated

expenditures identified in earlier steps
ii) Maintain expenses at 2006 levels after adjusting for volumes and mandated
expenditures identified in earlier steps and honoring all requests(i.e., raises, additional
personnel, etc)
iii) Cut expenses (from expense scenario #1) to break even in 2007
iv) Cut expenses (from expense scenario #1) to break even in 2007 and recover FY 2006
losses
14) Calculate the financial impact of buying an MRI unit that could cost $2.0 million, would
have a five-year useful life, would have a 10 percent salvage value, would have a profit
per procedure of $500, and would generate an estimated volume of 400 procedures per
year. The bank tells me the discount rate should be 10 percent. If the project loses
money, let me know how many procedures in addition to the 400 projected per year we
would need to generate to break even.
15) Our long-term debt represents the remaining balance on a 30 – year loan taken out 20
years ago at 11 percent with options to refinance every 10 years. If we refinance for the
remaining 10 years at 7 percent, how much interest expense will we save over the
remainder of the loan?
16) I also need your assistance in calculating the following EOQ given new data for 2007. Our
inventory generally follows Pareto’s Law; therefore, I have emphasized controlling those
items representing the majority of our inventory activity. One of those items is IV setups.
Our current situation is as follows:
2006 price
= $40
2007 projected demand = 60,000
2007 projected ordering cost
= $25
2007 projected interest
= 6.25%
2007 projected holding cost
= $.50
The IV distributor would like to distribute a new model setup in 2007 at the same price, but is
willing to reduce our carrying costs by making equal monthly deliveries. After discussing the
proposal with Ms. Care, I discovered that in-service training will be required for the new model.
I believe that each RN will be required to attend a two-hour
76
Practice Problems and Case Study
seminar. I’m not quite sure where to put this training cost in the EOQ formula. Ms. Care also
tells me that there are significant quality advantages with the new model, and she thinks we
should order and stock the new model. What do you think? If we lose money on the new model,
what price can we negotiate with the IV distributor to cover our loss?

MEETING WITH MR. OPERATOR
Mr. Operator, chief operating officer and a recent graduate from a program in
healthcare
administration, expressed the following concerns regarding the hospital:

It’s easy to understand how we lost money last year-Mr. Salter just won’t say “no” to the
doctors…or the nurses, for that matter. Our revenue is down for a variety of reasons, and
our expenses continue to increase. I don’t know why the board ever picked a school teacher
to run a healthcare system.

MEETING WITH MS. PINCHER
Ms. Penny Pincher, Bobcat IDS controller, in answer to your question regarding last
year’s
loss, believes the following:
While acute care days are flat and SNF and Rehab days and outpatient visits are up our real
financial problems involve our patient mix by financial class. Commercial and self-pay
continue to decline and fixed payment and capitation continue to increase, and our board
won’t approve more than a 5 percent rate increase for 2007 (which affects collections for
only commercial and managed care with discount-you need to make assumptions regarding
Medicare and Medicaid collections).
2006
Collectio
n/dischar
ge
E
Medicare
Medicaid
Private
insurance
Managed
care
w/20%
discount*
Managed
care
w/capiatio
n**

Acute
2,800
2,400

SNF
2,000
2,150

Rehab
4,000
4,150

4,800

2,600

3,840

2,080

Ou

Home R
70
60

t
175
170

95
90

5,000

125

200

100

4,000

100

160

80

*Managed care contracts with discounts call for an 1% discount for every 1% increase in rates.
**Managed care contract with capitation includes only the agreement with the city.
Case Study Bobcat Integrated Delivery System
77
MEETING WITH MS. CARE
Ms. Patty Case, director of nursing, seeks your support in the following proposal:

While our financial loss is serious-most of it is attributable to low rates-we need to increase our rates to
reflect our quality services. Our nurses are overworked and underpaid. I’ve
been working on two
solutions that I would like your support on. First, I believe strongly in
primary care nursing, and, as a
result, 90 percent of the nursing staff are RNs. RNs can
perform more tasks than LPNs and nursing
assistants and therefore are more efficient. This
can be further justified by the acuity of our patients.
Using the DRG scale as a severity
index, our patients are sicker than at the average hospital.
However, I am having some
difficulty getting the RNs to administer meds, empty bed pans, and feed
patients.
Therefore, I have developed a TQM program designed to convince the RNs that all their
tasks are important. All RNs are required to attend five hours of TQM training each week.
Even
though patient days are down, I would like to hire 10 more RNs to help cover the floors when the other
RNs are in training. To recruit these RNs in light of the nursing shortage, we need to increase their
average hourly rate to $25.00, which is competitive with County Hospital (see Table VI-A). This, of
course, would be in addition to the cost-of- living raises already announced by the personnel director. I
also would like for you to include a doctorally prepared entry-level nurse in our strategic plan for 10 years
from now. If physical therapy can require a doctorate for entry level, then so should we!
MEETING WITH MS. PERSONAL
Ms. Personal, personnel director, reluctantly admits the following to you:
Hospital practice in the past has been to give the employees a cost of living raise equal to the previous
year’s percent increase in the consumer price index. Also, historically, we have allocated 5 percent of total
wages to a merit pool to be awarded to meritorious employees based on their annual evaluations. Because
Mr. Salter treats the employees like family, virtually everyone gets the raise. Because of the shortage in
nursing, I am recommending that all nursing personnel receive a market raise of 5 percent, in addition to
the above raises, to keep us competitive.
Here is a wage comparison to the facilities that we compete with for new hires (see Table VII-A). Mr.
Salter asked us not to announce raises until your financial analysis is complete (Step #11). In the event we
can’t give the expected raises, I need an explanation from you giving the reason.
MEETING WITH MR. MATERIALS
Mr. Materials, materials manager, reports the following information to you:
I am projecting a 3 percent increase in supply and food prices for 2007 and a 12 percent increase in drug
prices. All other prices should remain constant.

78

Practice Problems and Case Study

TABLE I
Bobcat IDS balance Sheet as of December 31, 2005
2005
Assets
Current Assets
Cash and cash equivalents

$

178,750

Marketable securities
Inventories at cost
Other current assets
Total Current Assets
Land and improvements

1,100,500
3,368,000
992,500
16,889,750
3,250,000

Buildings
Fixed equipment
Moveable equipment
Property, Plant & Equipment
Less accumulated depreciation
Total Property, Plant & Equipment

36,485,750
8,063,250
4,466,750
52,265,750
(18,080,750)
34,185,000

TOTAL ASSETS

$

51,074,750

Liabilities and Net Assets
Current Liabilities
Current portion of long-term debt
Accounts payable and accrued expenses
Estimated amounts due to third-part payers
Other current liabilities
Total Current Liabilities

$

Long-term debt, net of current portion

2,151,000
5,400,000
1,423,750
1,500,000
10,474,750
37,000,000

TOTAL LIABILITIES
Net Assets
Unrestricted
Temporarily restricted
Permanently restricted

47,474,750
2,100,000
1,000,000
500,000

TOTAL NET ASSETS
TOTAL LIABILITIES AND NET ASSETS

3,600,000
$ 51,074,750

Case Study: Bobcat Integrated Delivery System

TABLE II
Bobcat IDS Actual Expenses through December 31, 2006
Wages, taxes, benefits
Professional fees and commissions
Drugs
Medical and other supplies
Food

$ 21,000,000
1,500,000
2,000,000
2,000,000
1,000,000

79

Purchased services
Repairs and maintenance
Utilities

1,000,000
1,000,000
1,000,000

Interest
Depreciation

4,019,000
3,500,000

TOTAL EXPENSES

80

$

38,019,000

Practice Problems and Case Study

Table III
Selected Industry Financial and Productivity Ratios For “A+”
Rated Hospitals
A+ S&P Rated
Financial Ratios
Liquidity ratios
Current ratio
Days cash-on-hand, short-term sources
Days cash-on-hand, all sources
Accounts receivable
Capital structure ratios
Net asset financing ratio

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