Breakeven Analysis of Physical Therapy Services

Physical Therapy Breakeven Analysis Breakeven Analysis of Physical Therapy Services Kasey Quinn Knight St. Elizabeth Medical Center April 20, 2004 ...
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Physical Therapy Breakeven Analysis

Breakeven Analysis of Physical Therapy Services

Kasey Quinn Knight St. Elizabeth Medical Center April 20, 2004

Capstone Committee: Leonard Heller, Ed. D Thomas Samuel, Ph. D Jeffrey Talbert, Ph. D Outside Member: Chris Carle, MSHPA Administrator St. Elizabeth Medical Center Grant County

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Physical Therapy Breakeven Analysis

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Table of Contents Page I.

Executive Summary……………………………………………………………...03

II.

Introduction………………………………………………………………………04 a. b. c. d.

III.

Statement of the Problem Purpose of the Study Research Question Definition of Key Terms

Literature Review………………………………………………………………...07 a. Alternate Site Health Care b. Breakeven Analysis

IV.

Methodology…………………………………………………………………….12 a. Focus b. Participants / Period of Time c. Measurement and Research Design

V.

Limitations……………………………………………………………………….20

VI.

Results……………………………………………………………………………22

VII.

Discussion and Conclusion………………………………………………………24

VIII.

Recommendations and Implementation Strategy………………………………..28

IX.

Acknowledgements and Relevant Courses………………………………………31

X.

References………………………………………………………………………..32

XI.

Appendix…………………………………………………………………………33

Physical Therapy Breakeven Analysis I.

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Executive Summary In order to accommodate increased inpatient demand and overcome capacity

issues, many hospitals are relocating ambulatory services to off-site facilities. St. Elizabeth Medical Center Grant County (SEGC), a 15 bed critical access hospital located in Williamstown, Kentucky, has decided to relocate physical therapy services to an adjacent medical office building. Because this relocation will sufficiently increase the department’s expenses, the purpose of this study is to examine the continuing viability of these services. This will be done by conducting a breakeven analysis to determine the patient volume required to make revenues equal to the expenses of the department (thus, reach the breakeven point). This project will also examine the current operating capacity of the unit and the amount of additional revenue that could be captured by increasing this capacity. The breakeven analysis was conducted by performing a cost-volume-profit analysis on projected revenues for the 2004 Fiscal Year. Financial data was gathered from 2003 performance measures and the 2004 Operating Budget. The breakeven point for physical therapy services was determined to be 3,043 units of service or $100,419 in patient revenue at existing capacity. The capacity evaluation showed that the physical therapy department is currently operating at 57% of its full capacity. Based on these results, I find that the hospital continuously reaches their breakeven point, but has the opportunity to increase capacity beyond projected levels. I recommend that the hospital develop a business plan to tie capacity to employee bonuses. In addition, the hospital should allocate funds in their budget to increase marketing efforts in order to attract more patient visits.

Physical Therapy Breakeven Analysis II.

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Introduction

STATEMENT OF THE PROBLEM Traditionally, hospitals have focused on centralizing medical services into one convenient location to increase patient access. However, with recent financial and spatial constraints, many hospitals are exploring the option of offering outpatient services in offsite facilities (Sands & Rendina, 1992). By relocating hospital-based services into the community, hospitals can increase accessibility to patients, strengthen their presence in the community, and overcome capacity constraints for inpatient services (Advisory Board Company, Pediatric hospitals’ development, 2003). St. Elizabeth Medical Center, located in Grant County (SEGC) is a 15 bed, critical access hospital located in Williamstown, Kentucky. Therapy Services at SEGC provides acute and rehabilitation services to inpatients and outpatients to aid in their recovery from disease, physical injury and/or surgery. Ninety-seven percent of all services provided are on an outpatient basis. Therefore, the financial success of this service relies primarily on the outpatient services provided. In order to accommodate the increasing patient volume for therapy services, SEGC has decided to relocate physical therapy services. Physical therapy, which is currently located within the hospital, will be relocated to an adjacent medical office building. This relocation will provide the physical therapy department with additional office and treatment space as well as a state-of-the-art facility in which to further their business. In addition, the vacant space within the hospital will allow other departments to expand their services. The new space that will be renovated to accommodate physical therapy services is located in the Summit Medical Group office building. Summit Medical Group (SMG) is

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a physician management practice owned by St. Elizabeth Medical Center, with offices located throughout Northern Kentucky. The space at the SMG building is currently vacant and efforts to lease this space to other providers have been unsuccessful. Since the hospital owns this building and SMG has a master lease for the space, the hospital, by relocating physical therapy services, will assist in covering lease obligations. Because the space is vacant, SMG is struggling to meet their overhead costs, yet remain profitable. Therefore, this relocation will increase the profitability of SMG while vacating space within the hospital that will be used to expand existing ancillary services. Furthermore, this building although technically “off-site” is located in close proximity to SEGC, therefore; if desired, will allow for future development of a “hospital campus” in the future. PURPOSE OF STUDY The relocation of physical therapy services to an off-site facility will result in additional expenditures for the department. The new space will be renovated for physical therapy services to be provided in the building. In addition, there will be new office and medical equipment to prepare the new location for business. These additional expenses require a reassessment of profitability of the services at the current operating level. This study was conducted to examine the viability of physical therapy services. A critical first step requires a cost-volume-profit analysis in order to determine the level of operations necessary for this service to breakeven. This project also addresses the operating capacity of the department to determine the revenue potential of this operation RESEARCH QUESTION

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The primary research question that will be answered is: What will the patient volume of physical therapy services need to be in order for this unit to breakeven at the end of fiscal year 2004 at current reimbursement rates and payer mix? The secondary question is: How much additional revenue can be captured if the physical therapy department is operating at a higher capacity? DEFINITION OF KEY TERMS Critical Access Hospital: Critical Access Hospital designation is provided to hospitals located in a rural county more than 35 miles from another acute care facility. These hospitals are certified to receive cost based reimbursement from the Centers for Medicare and Medicaid Services. (www.cms.gov) Fixed Costs: Fixed costs are not directly associated with patient volume. These costs are constant regardless of the units of service provided or the number of patients treated. Physical Therapy: Therapy services at St. Elizabeth Medical Center (SEMC) provides acute and rehabilitation services to inpatients and outpatients at all three hospitals to aid in their recovery from disease, physical injury and/or surgery. Services include: physical therapy for acute conditions, including for orthopedic and neurological patients; hand therapy including both physical and occupational therapies; work rehabilitation, available at a separate work rehabilitation center; electromyography and nerve conduction velocity; educational services. (www.stelizabeth.com) Variable Costs:

Variable costs (primarily medical/surgical supplies and physical

therapists’ salaries and benefits) are directly associated with patient volume. These costs fluctuate depending on the units of service provided.

Physical Therapy Breakeven Analysis Contribution Margin per Unit of Service: The amount of each dollar of revenue that is available once variable costs are deducted. Contribution margin per unit is equal to the sales price per unit minus the variable costs per unit.

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Physical Therapy Breakeven Analysis III.

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Literature Review

ALTERNATE SITE HEALTH CARE The development of off-site medical treatment facilities has had a drastic effect on the hospital industry. Not only has the development of alternate site health care facilities been crucial to the financial viability of hospitals, it has also provided an opportunity for hospital growth and development within the community. In examination of literature, the most beneficial information came from studies of rehabilitation services. Rehabilitation services parallel those of physical therapy and can be applied to issues facing physical therapy departments. Services that are parallel include traction, cryotherapy, and gait training. A study entitled Pediatric Hospitals’ Development of Off-Site Rehabilitation Clinics, examines the benefits associated with relocating the rehabilitation department of a pediatric hospital to an off-site clinic. This study profiled four hospitals ranging in size from 30 to 100 patient beds. Each of the profiled hospitals were not-for-profit, pediatric specialty hospitals emphasizing in rehabilitation services, with clinics located between 3 to 25 miles from the main campus of the hospital. After following these hospitals through development and operations of the off-site clinics, it was determined that moving rehabilitation services to an off-site facility, is generally a very successful endeavor for hospitals. With an off-site rehabilitation facility, the hospital has the opportunity to improve patient access to services, thus, can increase their patient volume (Advisory Board Company, 2003). Other benefits gained by the hospitals include: expanded market area, increased capacity of hospital, increased number of new patients due to convenience (Sands & Rendina, 1992). Hospital A (50 beds, 3 off-site clinics) reported having a significant increase in patient volume in the first three years of operation of their off-site

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clinic. These increases occurred in physical therapy, occupational therapy, and speech therapy. Patient volumes increased during the first three years by 50, 25, and 11 percent respectively. However, the administrator at Hospital A reported that there were serious staffing and management challenges associated with the operation of the clinic. Because therapy patients often prefer early morning and late night appointments, the administrators had difficulty staffing these hours. Hospitals B, C, and D in this study also reported an increase in patient volume by at least 40 percent in the first year (Advisory Board Company, Pediatric Hospitals’, 2003). This study was particularly beneficial to my project because it provided insight into how patient volume may be affected by the relocation of physical therapy services to this off-site location. A study involving the development of satellite physician offices by hospitals in order to meet patient demands examines the business model used by four not-for-profit hospitals (Advisory Board Company, Business Models, 2002). The size of the hospital ranged from 50 to 400 beds. The significant findings of this study include key factors that should be taken into consideration when developing an off-site clinic. One of these factors is the business model. A hospital must determine whether they will build the clinic from scratch, affiliate hospital and independent physicians, or purchase the clinic from the physicians. The results of this study suggest that hospitals prefer to own the property and buildings of their off-site facilities, rather than leasing the office space. However, based on the results of cost benefit analysis, it is not always financially viable for the hospital to own the clinic property and building. In these types of cases, it is best for the hospital to make a leasing arrangement with the owner of the building, yet be solely responsible for the staffing and operations of the clinic. While this study does not

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directly address the set up of a rehabilitation clinic, it does provide useful considerations that should be made when moving services off-site (Advisory Board Company, Business Models, 2002). The relocation of hospital services to off-site medical buildings is often most beneficial to the hospital due to the increased revenue opportunity from inpatient services. Initial relocation of the service requires major capital expenses with potential long-term financial rewards. Like many studies have suggested, the development of offsite clinics can cause rapid growth in patient volumes. In addition, these new patient visits also create a new referral base for hospital inpatient services. In a study conducted at two competing hospitals, Sands and Rendina compare the financial benefits of developing medical office buildings for each of these hospitals (Sands & Rendina, 1992). The first hospital examined was a for-profit hospital with a competing hospital located approximately three miles away. This facility is an urban, not-for-profit hospital. Sands and Rendina’s analysis show that the not-for-profit hospital was the first to benefit from the development of the medical office building. This hospital began to realize large increases in referrals from physicians. These additional referrals generated nearly $2.2 million of revenue increases for the hospital in the first year after development. In this study, the hospital constructed a medical office building in order to lease space to independent physicians. In an urban setting, each physician generates an estimated 130 admissions per year, with estimated revenue to the hospital of $550,000 per referring physician. Local physicians were responsible for half of all referrals to the hospital. Following the opening of the medical office building, administrators believed it would be realistic to assume that the number of referrals to the hospital would increase by 50

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percent (Sands & Rendina, 1992). Furthermore, having local physicians in the medical office building makes it more convenient for them to send patients to the hospital for ancillary services. The conclusion of the study most relevant to this project is that the development of a medical office building “creates additional space in the hospital for inpatient services by relocating outpatient facilities to ancillary medical office buildings.” (Sands & Rendina, 1992). Similarly, SEGC is hoping that their presence in the community and increased convenience for patients will increase the number of referrals by local physicians. Also, by relocating the physical therapy services to an adjacent medical office building, the hospital can make use of the vacated space in order to expand current inpatient services. BREAKEVEN ANALYSIS Breakeven analysis is a financial tool often used for management decision making. The breakeven point (derived from a cost-volume-profit analysis) is the level of operations necessary for revenues to be equal to expenses (Ervin et al, 1998). This is the patient volume at which there is no profit for a department. Breakeven analysis is particularly useful for starting up new units or product lines and for planning changes in the current service levels. In a study conducted at a community nursing center, breakeven analysis was used to determine the number of primary care visits necessary in an eight month period to achieve a breakeven situation (Ervin et al, 1998). Financial data was collected over a seven month period and other important variables were identified from the organization’s income statement. In order to perform the breakeven analysis, administrators determined the fixed costs for the center, as well as expected revenues and variable cost per unit.

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These figures were used to determine the contribution margin ratio and then the breakeven point. After performing the breakeven analysis it was determined that the community nursing center must have 4,818 primary care visits (at current charges) in order for revenues and expenses to be equal.

In order to reach the breakeven volume determined

by the analysis, the community nursing center can increase patient volume, decrease operating costs (fixed and variable), increase revenue, or recruit a different mix of patient payer sources. This center concluded that decreasing operating costs and recruiting patients with different payer sources would be the only possible way to reach the breakeven point. The center could not increase patient volume because in order to reach the projected volume, they would have to serve nearly one-third of their entire service area. In addition, the nurse practitioners present would not be able to sufficiently treat patients (Ervin et al, 1998). By determining the breakeven point, the community nursing center could determine what changes in operations needed to be made in order for the center to remain financially viable.

Physical Therapy Breakeven Analysis IV.

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Methodology

FOCUS For the purposes of this project, I focused on the expected revenues and expenses for the physical therapy department. Expenses were categorized as either fixed or variable costs in order to determine the contribution margin. Because SEGC is designated as a critical access hospital (thus receiving cost-based reimbursement from Medicare and Medicaid and comparable reimbursement from private insurances), I was able to use patient revenue per unit as the sales price per unit. PARTICIPANTS / PERIOD OF TIME In order to complete the breakeven analysis for physical therapy services, financial data was collected for SEGC Fiscal Year 2003 as well as the 2004 Operating Budget. Estimates for utility expenses in the new location were gathered from the 2003 Operating Budget of Summit Medical Group Williamstown. Construction and renovation estimates were given by Century Construction, Inc. The purchase price of new office equipment was estimated by physical therapy staff and the Purchasing Department of St. Elizabeth Medical Center. MEASUREMENT AND RESEARCH DESIGN BREAKEVEN ANALYSIS The first step in performing a breakeven analysis is to determine whether expenses are fixed or variable. Fixed expenses are those that do not vary with changes in patient volume. These include business travel, communications, janitorial services, maintenance, marketing, office supplies, repairs/maintenance on medical equipment,

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seminars, utilities, waste disposal, and water. For the purposes of this project salary and benefits for the department director are fixed. In a typical lease arrangement, a lease or rental rate for space would be included in the fixed costs. However, the ownership of the Summit Medical Group building is quite unique. SEMC owns the property and building occupied by SMG. SMG leases this space from SEMC for $20.42 per square foot. SEMC will lease 1,230 square feet of this building back from SMG in order to locate physical therapy services. The lease rate that has been arranged by the administration of SEMC and SMG is $20.42 per square foot. Therefore, because SEMC is paying the same lease rate as SMG, there is no exchange of cash for this expense. SEMC does not include this additional revenue from rental property on the physical therapy budget. Based on this information, I have chosen to include the lease expense as $0 in my analysis. In addition, the physical therapy department must also consider the costs of capital improvements and all other start-up cost related to the relocation of this service. These fixed expenses are amortized over the length of the lease. The variable costs (calculated assuming 9,200 units of service) associated with the physical therapy department are the medical/surgical supplies and the salary and benefits of the therapists (with the exception of the director). Medical/surgical supplies includes medical supplies necessary for direct patient treatment, such as therabands, pulleys, heel lifts, crutches, etc. These expenses will vary depending upon the amount of services provided in the physical therapy department. Once all variable and fixed costs were determined, I calculated the variable costs per unit of service. In order to do this, I divided the total variable costs by the units of service estimated in the 2004 budget (9,200 units of service).

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The next step is to determine the expected revenues for the unit. Revenue data was collected from the 2004 Final Budget. The revenue on a per unit basis was calculated by dividing the total revenue by the estimated units of service (9,200), Determining the contribution margin per unit is the next phase in determining the breakeven point. The contribution margin is the amount of each dollar in revenue available for use once all variable costs have been paid. This is calculated by subtracting the variable costs per unit from the revenue per unit. Contribution margin per unit is constant for most volumes (Neumann et al, 1988). The final step in breakeven analysis is to divide the fixed costs by the contribution margin per unit. This calculation represents the units of service necessary for physical therapy services to breakeven. All revenue acquired prior to reaching the breakeven point, will be used to cover fixed and variable expenses associated with operations. All addition revenues (once variable expenses are covered) after the breakeven point is profit for the department. CAPACITY EVALUATION In addition to performing the breakeven analysis for physical therapy services, an evaluation of their capacity was performed. In order to evaluate capacity, it was necessary to determine the average length of a patient visit and the number of hours the department provides patient services. The physical therapy department is staffed approximately 94 hours per week (assuming 30 minute lunch breaks). However, the Director of Physical Therapy must allocate a portion of her time to completing administrative tasks. It is assumed that the director allocates 80% of her time to treating patients and the other 20% to administrating the department. Thus, the department is only staffed to provide therapy services 88 hours per week. Based on information given

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by the physical therapists, each patient visit takes an average of one hour to complete treatment. The benchmark data for length of treatment is approximately one hour per patient (Advisory Board Company, Benchmarking Costs, 1998). An evaluation of past performance measures, indicates that each patient visit generates approximately 3.5 units of services. Therefore, if therapists are available 88 hours per week, each patient visit takes one hour, and each visit is an average of 3.5 units of service, the physical therapists should be able to provide 307 units of service per week (88 patient visits). In a study conducted by the Advisory Board Company, data indicates that each patient visit will generate approximately 3 units of service (Advisory Board Company, Benchmarking outpatient, 1998). This data is an average of those hospitals included in the study, yet may not be an industry standard. To calculate the annual capacity these amounts were multiplied by 49 weeks per year. It is estimated that physical therapy is providing service 49 out of the 52 weeks each year. The three weeks not staffed are related to holidays, sick time, personal time, and continuing education. This calculation identifies the current operating capacity of the department. Many assumptions were made in order to determine all calculations. Should these assumptions change, the breakeven point and the operating capacity calculations would also change. The following assumptions have been made throughout this analysis: •

There will be no staffing changes in 2004. The physical therapy department will operate with 2.6 FTEs. The department director allocates 80% of her time to treating patients.



There are no expenses related to marketing, communications, and lease amount.

Physical Therapy Breakeven Analysis •

One patient visit generates approximately 3.5 units of service and therapists can perform 1 patient visit per hour (Advisory Board Company, Benchmarking Costs, 1998).



There will be no treatment time forfeited to relocate this service. Physical therapy will vacate their current space and occupy the new space on days when the department is not operating.

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Physical Therapy Breakeven Analysis V.

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Limitations A limitation of this study is that it does not take payer mix into consideration.

Because SEGC has a large percentage of Medicare / Medicaid patients, I assume throughout these calculations that the hospital is receiving cost-based reimbursement for services. Under cost-based reimbursement, hospitals are reimbursed the same amount they charge for services, based on cost reports. However, in reality, the reimbursement from private insurance companies is actually much less that received from government payers. The breakeven point will vary based on the payer mix of the hospital. Further analysis of payer mix would allow for a more accurate calculation of breakeven point.

Physical Therapy Breakeven Analysis VI.

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Results In order to examine the financial viability of physical therapy services, a

breakeven analysis was performed. The goal of this analysis was to determine the units of service necessary for the department to have equal revenues and expenses. Because physical therapy services will soon be relocated to an adjacent medical office building, the department will be accruing many additional expenses. It is crucial for administrators to understand the effects these additional expenses will have on the financial feasibility of the operation. Based on the outcome of the breakeven analysis, administrators can better plan for future purchases and determine whether patient volumes need to be increased, and to what extent. BREAKEVEN ANALYSIS Based on the 2004 Final Budget (Appendix, Table 5), variable operating expenses related to supplies is $1,209 and variable expenses related to labor are $100,878. The total variable expenses for physical therapy services are estimated to be $102,087 for the 2004 Fiscal Year. Variable cost per unit of service is $0.13 associated for medical / surgical supplies. Labor is an additional $10.97 per unit of service. This is a total of $11.10 in variable expenses per unit of service provided. Benchmark data indicates that the average supply costs vary depending on the patient volume, but averages $12.00 per case (Advisory Board Company, Benchmarking Costs, 1998). Thus, SEGC has variable costs per unit of service below industry standards. Total fixed costs for the department are $66,642. Century Construction, Inc. estimated that it would cost $60,375 to renovate the space at Summit Medical Group to be suitable for occupancy of physical therapy services. Although this is a one time cost,

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it must be considered when determining the patient volume necessary for the department to breakeven. This amount also includes estimates for purchasing additional office and medical equipment. Pricing information for such equipment was provided by the Purchasing Department of SEMC. Since this estimate will not change regardless of patient volume, it will be considered a fixed cost. This capital improvement expenditure is amortized over the length of the leasing period to determine the annual expense related to this investment. Given a ten-year lease arrangement between SEGC and SMG, the annual expense related to this capital improvement is $6,038. In order to determine the utility expenses for the new space, I used utility information from SMG. The entire building occupied by SMG is 8,789 square feet. Physical therapy will be occupying on 1,230 square feet of this space (approximately 13.99% of the building). Therefore, SEMC will be responsible for 13.99% of the utility expenses for SMG. Total utility expenses for SMG for the 2003 Fiscal Year were $22,986. Physical therapy will be responsible for approximately $3,216.00 per year for utilities. Table 1 is a summary of the utility expenses for Summit Medical Group and the portion of these expenses which physical therapy will be responsible for. Table 1 YTD Utility Expenses 2003

Building Maintenance Janitorial Services Utilities Water Waste Disposal TOTAL

Totals $1,675 $9,076 $9,171 $546 $2,518 $22,986

PT Portion $234 $1,270 $1,283 $76 $352 $3,216

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There are no marketing expenses related directly to the physical therapy department because all marketing is conducted through the Marketing Department of the hospital. Individual departments within the hospital do not allocate funds for marketing services. Thus the marketing expense is $0 for the department. Communication expenses (telephone, facsimile, internet) will be $0 because these expenses are also allocated on a hospital-wide basis. The new space is already wired for telephone services and will only require the phone numbers to be switched to the existing phone lines. The total expenses for the department (fixed and variable) are $168,729. Revenue projections for 2004 indicate that the hospital physical therapy will charge $17,344 in inpatient revenue and $664,534 in outpatient revenue, for a total of $681,878 in revenue. The physical therapy department, after allowances, will collect 55% of all patient revenue. Once this deduction is taken into consideration, the expected revenue is $306,845. The revenue per unit of service is found to be approximately $33.00. In order to validate this information, I determined the top 14 physical therapy services the hospital is reimbursed for and the average revenue associated with each procedure. This calculation found that average revenue per unit of service would be $30.54 per unit of service. This amount and the amount found from the budget showed a $2.46 variance. This variance is related to rounding numbers and averaging amounts calculated. To be consistent with other calculations throughout the project, I used the revenue per unit of service amount from the 2004 budget ($33.00 per unit of service). Table 2 outlines the most common procedures performed by the physical therapy and their associated reimbursements.

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Table 2 Procedure 1/4 Hr. Therapy Initial Evaluation Traction Cryotherapy Gait Training Manual Therapy WEIGHTED AVERAGE Less: Contractual Adjustments Average Net Revenue

Per Unit Revenue $67.50 $125.00 $55.25 $50.00 $67.50 $67.50 $67.86 $37.32 $30.54

The contribution margin per unit is $21.90. Thus, for revenue of $33 per unit of service provided, $21.90 is available to cover fixed costs and for various use in the department. Based on the financial analysis performed, Physical Therapy will need to provide 3,043 units of service in order to reach a breakeven situation (Appendix, Table 6). The breakeven point is particularly significant in determining the financial viability of a service and for making short-term decisions. Breakeven analysis is helpful when choosing between alternative actions or minimum prices for an output (Neumann et al, 1988). If at any point throughout operations the physical therapy department begins to have decreased patient volume, the breakeven point will identify the volume necessary for the unit to begin making a profit. The physical therapy department is currently providing an average of 711 units of service per month (17 inpatients, 694 outpatients). (Appendix, Table 7, Charts 1 and 2) Based on the 3,043 units of service required annually to breakeven, the physical therapy department will need to provide approximately 254 units of service each month. This equates to nearly 73 patient visits per month. Roughly 97% of all patient revenue is generated from the outpatient therapy services provided. In order to reach the breakeven

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point, physical therapy will need to provide 2,952 outpatient units of service (843 outpatient visits) per year. Inpatient volume would equal 91 units of service or 26 patients per year. The following table (Table 3) indicates volumes per unit of services and the associated revenue for each unit. This graph can be used to estimate variable expenses, fixed expenses, and revenue for any given unit of service level. Volumes beyond the breakeven point will generate profit for the department, and those below this point result in loss. In addition, this graph illustrates the current operating capacity of the department and the revenue potential should the department operate at full capacity.

Breakeven Analysis

$550,000

100% Capacity

$500,000

Revenue per Unit of Service

$450,000 $400,000 $350,000 $300,000

2003 Volume 57% of Capacity

$250,000 $200,000

Profit $150,000

Breakeven $100,000 $50,000

Loss

$0 0

2000

4000

6000

8000

10000

Volume per Unit of Service

12000

14000

16000

Fixed Costs Variable Costs Revenue

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CAPACITY EVALUATION The physical therapy department is capable of providing 15,043 units of service per year (approximately 4,298 patients). In 2003, there were a total of 8,531 units of service provided or 2,437 patients treated by the physical therapy department. This indicates that the physical therapy department is reaching only 57% of its possible operating capacity. This department is therefore only capturing 57% of the possible revenue. At full capacity (15,043 units of service) the physical therapy department would generate $496,419 in patient revenue. At current capacity of 57%, they are only capturing $281,523 in revenue. Based on the volume projections for 2004, the department will be operating at 61% of capacity (9,200 units of service / 15,043 units at full capacity), thus generating approximately $306,845 in revenue. By not operating at full capacity, the physical therapy department is losing roughly $189,574 in patient revenue (prior to covering expenses) each year. The following table (Table 4) summarizes these results and indicates the potential for increased revenue opportunities.

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Table 4 St. Elizabeth Medical Center Physical Therapy Capacity Evaluation

Monday Tuesday Wednesday Thursday Friday TOTAL

Therapist 1 8 8 8 8 0 32

Therapist 2 10 0 10 0 10 30

Director 0 6.4 6.4 6.4 6.4 25.6

TOTAL 18 14.4 24.4 14.4 16.4 87.6

hours per week

1 Patient Visit = 1 Hour (a) 87.6 Patient Visit Capacity per Week 1 Patient Visit = 3.5 Units of Service (b) Capacity Per Week 307 88 Annual Units of Service Capacity 307 Units of Service 49 Weeks Per Year 15043 Units of Service Per Year

8531 15043 57%

Units of Service in 2003 Unit Capacity of Capacity in 2003

Units of Service Patient Visits

Annual Revenue Capacity 15043 Units of Service $33 Average Net Revenue Per Unit $496,419 Average Net Revenue Per Year

$496,419 $306,845 $189,574

Average Net Revenue at Capacity Projected Net Revenue in 2004 Average Net Revenue Loss

Physical Therapy Breakeven Analysis VII.

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Discussion and Conclusion

BREAKEVEN ANALYSIS It is apparent from the results of the breakeven analysis that the profitability of physical therapy services relies primarily upon the outpatient services provided. Approximately 97% of the services provided are on an outpatient basis. Because the financial stability of this service relies so heavily upon the performance of the outpatient services, administrators need to pay close attention to the patient volumes for these services. Any decrease in outpatient services could drastically affect the unit’s financial performance. If at any point it appears that the physical therapy department is not going to reach its breakeven point, there are alternative approaches the department can take to reach this point. Breakeven is an analysis of a unit’s costs, volumes, and profits. If the breakeven point is too high for a department, it can be decreased by addressing these three factors. Any reduction in the costs of operating the physical therapy department will decrease the breakeven volume. Another technique for reaching breakeven is to increase revenue from services. This can be achieved by recruiting a different mix of patient payer sources or by recruiting more physician referrals. Patient volumes need to be monitored closely. In order to breakeven, physical therapy will need to provide 3,043 units of service (869 patient visits) per year or approximately 254 units of service per month. In a given month, if this goal is not being reached, therapists should examine their operations and determine what is preventing them from providing the units of service necessary to breakeven. Any of these approaches can assist the physical therapy department in attaining the breakeven volume.

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Based on past performance, the outpatient volumes will be easily achieved by the department. However, the inpatient volumes, although achievable, will require much more attention. In 2003, physical therapy treated a total of 58 inpatients. In order to achieve breakeven, the unit will have to provide approximately 91 units of inpatient services (26 patients) in 2004. Therefore, inpatient volumes will need to be closely monitored. Any decrease in inpatient volumes will need to be compensated for with an increase in the number of outpatient physical therapy visits. Because awareness of the physical therapy department will be greater within the community, inpatient volumes may increase. With increase accessibility and awareness of outpatient treatment, physicians may be more likely to refer patients to SEGC for inpatient physical therapy care. The new location will provide easier access for follow-up visits and convenient registration for patients upon arrival. CAPACITY EVALUATION The most interesting finding of this project is the operating capacity of the department. The current staff is providing only 57% of the units of service they are capable of. This low efficiency could be the result of many factors. At the current location, therapists have inadequate space to treat patients. In addition, what limited space is available has poor design for this type of service. Therefore, therapists are continuously struggling to overcome the limitations caused by the current space. Once the physical therapy department moves to the off-site location, patient registration may become an issue that affects the department’s efficiency. Patients currently register through the main hospital registration and all billing and eligibility concerns are handled by a registration clerk. At the off-site location, there will not be a registration clerk on

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staff. Physical therapists will gather registration information from the patient and then facsimile this information to a registrar at the hospital for approval. The physical therapists will have to assume the role of registrar in addition to performing their current duties. This new registration process, using therapists instead of staff, while more convenient for patients, will further reduce therapist’s capacity. Furthermore, by not operating at full capacity, the physical therapy department is losing approximately $189,574 in patient revenue. Capturing this additional revenue would almost double the revenue generated by the department. Based on the 2004 budget, the physical therapy department will be operating at 61% capacity. This is a 4% increase from 2003. This relocation is costing SEGC approximately $60,000 and is the department is gaining nearly 400 addition square feet of space. Furthermore, the new space is far more efficient for providing services. With this in mind, the physical therapy department should be capable of increase capacity by more than 4% in the first year. This can be achieved many ways. One way to increase capacity is to make the registration process more efficient. As previously mentioned, the hospital will need to consider hiring a registrar for the physical therapy department. If this is not possible, registration should take place at the hospital. Although this method will not be convenient for patients, it will allow therapists to provide services in the most efficient manner possible. Capacity can also be reached without increasing the number of patients. If the average units of service generated by each patient increases, it will be easier for the physical therapy department to operate at capacity. This would occur if the patients being treated required more services to treat their illness. Another way to reach capacity

Physical Therapy Breakeven Analysis without treating more patients is if the average revenue per unit of service increased. If payers began to reimburse larger amounts for each service provided, the department could reach its revenue capacity. In order to achieve higher charge capture, the administration would have to renegotiate their contracts with the payers. Capacity can also be increased if the entire treatment process was evaluated for efficiency. As previously mentioned, therapists need to set up the new facility in manner that allows them to treat patients efficiently.

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VIII. Recommendations and Implementation Strategy Based on the findings of this breakeven analysis and capacity evaluation, I make the following recommendations to the administration of SEGC. Because the physical therapy currently exceeds breakeven volumes, I do not recommend any actions be taken to address this issue. This department achieves positive net income at current levels of patient volumes, payer mix, and reimbursement rates. My second recommendation is for the physical therapy department to increase their operating capacity. The hospital has the opportunity to increase capacity beyond the 4% increase that is projected in the 2004 Budget. Increasing operations by 4% in 2004 still leaves $189,574 in patient revenue that is not being captured due to operating below full capacity. A third recommendation is for the administrators of the hospital and physical therapy staff to develop a bonus policy related to capacity increases. This policy would need to be added to the business plan for the department and would be used to empower therapists to increase operational capacity and would reward them for their achievements. Offering financial rewards based on performance will empower the therapists to work more diligently to increase capacity. The administrators and physical therapy staff need to determine realistic capacity levels and set these as targets over the next year of operations. Once the target levels are identified, a monetary bonus should be tied to each level. For each level achieved, therapists should receive a bonus for increasing capacity. The bonus expenses would be off-set by the additional revenue generated by the increased capacity. The capacity level should be measured quarterly and bonuses would be given to the therapist on the basis of their increased capacity.

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My final recommendation is for the physical therapy department to allocate resources for marketing expenses into their budget and include this allocation in the business plan. Although physical therapy has the potential to substantially increase operating capacity, this can only be achieved by recruiting new patients. With creative marketing approaches, community awareness of the new facility could increase physician referrals and encourage patients to choose St. Elizabeth Medical Center as their primary provider of physical therapy services. Although St. Elizabeth Medical Center has a marketing department, it may be helpful to have a local firm work in conjunction with the physical therapy department and the hospital marketing department. The use of an additional marketing firm would compliment the efforts of the hospital marketing department and allow more emphasis to be placed on the physical therapy project. Because St. Elizabeth Medical Center is such a large organization, physical therapy could benefit from having an outside marketing source to assist with the physical therapy relocation. Additional marketing tactics could be developed to communicate the benefits of the new facility to physicians and patients. The relocation of physical therapy services has provided the hospital with numerous advantages. The new location of the department is highly visible to the community. The SMG building has direct access to Interstate 75 and the physical therapy department will be the first building seen when exiting the interstate. Not only is the new space more geographically convenient, but the operations in the facility are more convenient. Furthermore, the design of the new space is much more user-friendly for both patients and clinicians. There will be more space between medical equipment and more private treatment rooms available for patients. The facility

Physical Therapy Breakeven Analysis will have a more state-of-the-art appearance and will provide the physical therapy department to expand services if needed. Recommendations: * Increase Operating Capacity * Challenge and Empower Staff * Increase Marketing Efforts

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Physical Therapy Breakeven Analysis IX.

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Acknowledgements and Relevant Courses This project could not have been completed without the assistance of many

generous people. I would first like to thank Chris Carle and the staff of St. Elizabeth Medical Center. Mr. Carle and his staff (especially Sue Whaley) were extremely helpful in gathering needed information for my research and offering support throughout this project. Special thanks to the staff of the Physical Therapy Department for allowing me to interrupt daily operations and work flow to perform my site evaluation and collect data. Their assistance with this project was considerable. In addition, I would like to extend my appreciation to Dr. Leonard Heller, Dr. Jeff Talbert, and Dr. Tom Samuel. Their advice and assistance is most appreciated. Without their collaborative efforts, I could not have successfully completed this project. Throughout my education in the Martin School of Public Policy and Administration, there were numerous courses that assisted me in the completion of this capstone. These courses include: Health Finance (HA 637), Health Economics (HA 636), Organizational Change and Strategic Planning (HA 602), Decision Making in Healthcare Organizations (HA 660), and Decision Analysis and Decision Support Systems (HA 623).

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X. References Advisory Board Company. (1998). Benchmarking costs for rehabilitation services (Fact Brief). Washington, DC: Marketing and Planning Leadership Council. Advisory Board Company. (1998). Benchmarking outpatient rehabilitation services (Fact Brief). Washington, DC: Marketing and Planning Leadership Council. Advisory Board Company. (2002). Business models for satellite physician offices (Original Inquiry Brief). Washington, DC: Marketing and Planning Leadership Council. Advisory Board Company. (2003). Pediatric Hospitals’ Development of Off-Site Rehabilitation Clinics (Original Inquiry Brief). Washington, DC: Marketing and Planning Leadership Council. Advisory Board Company. (1997). Rehabilitation therapy staffing (Fact Brief). Washington, DC: Marketing and Planning Leadership Council. Boles, K.E, & Fleming, S.T. (1996). Breakeven under capitation: pure and simple? Health Care Management Review, v21, p38. Ervin, N.E., Wen-Yin, C., & White, J. (1998). A cost analysis of a nursing center’s services. Nursing Economics, p307. Lopopolo, R.B., Schafer, D.S., & Nosse, L.J. (2004). Leadership, administration, Management, and professionalism (LAMP) in physical therapy: a Delphi study. Physical Therapy, v84, n2, p137. Neumann, B.R., Clement, J.P., Cooper, J.C. (1988). Financial management: concepts and applications for health care organizations. Kendall/Hunt Publishing Company, 4ed. Nordin, John R. (1992). Systems implications of alternate site healthcare. Journal of Systems Management, v43, p6. Sands, D.A., & Rendina, B.A. (1992). Medical office buildings – the challenges and the rewards. Healthcare Financial Management, v46, i12, p20. Suver, J.D., & Neumann, B.R. (1977). Patient mix and breakeven analysis. Management Accounting, v58, i7, p38.

Physical Therapy Breakeven Analysis XI. Appendix Table 5:

2004 Final Budget

Table 6:

Breakeven Analysis

Table 7:

2003 Patient Volumes

Chart 1:

2003 Units of Service

Chart 2:

2003 Patient Visits

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