Write an executive summary for the attached case. Please make sure you cover all major points also write the purpose of knowing it, and what we can learn from it.
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Jun. 11, 2013
CAVALIER HOSPITAL
Chief Complaint: Preparing for the Board Meeting
Dr. William Harrison, a cardiologist prominent in the community, peered over the
balance sheets and income statements in Cavalier Hospital’s annual report for 2010. Due to his
role as the director of the recently opened Rotunda Cardiovascular Center, Harrison had been
promoted to Cavalier Hospital’s board of directors, whose next meeting was two weeks away.
Harrison was hoping to bring himself up to speed on the hospital’s overall financial condition.
Past Medical History: Cavalier Hospital
Founded in 1955, Cavalier Hospital was a 610-bed nonprofit hospital whose mission was
to provide high-quality health care to the growing patient population in southern and central
Virginia. Originally set up to serve the poor, nonprofit hospitals now accounted for the majority
of U.S. hospitals. Their nonprofit status granted them an exemption from paying taxes, thus
enabling them to channel the income they generated back into the hospital’s operations—rather
than saving the profits as cash or distributing them to shareholders—with the goal of
encouraging hospitals to continue to expand and provide benefits to the local community.
Most of Cavalier Hospital’s patients were Virginia residents. Nearly 50% of the patients
seen at Cavalier Hospital lived within 30 miles of the facility; another 25% came from the five
surrounding counties, and 10% lived elsewhere in Virginia. About 15% came from out of state,
mostly from West Virginia and North Carolina.
Cavalier Hospital competed for patient traffic with two other regional hospitals, one of
which was the recently expanded Hamilton Hospital. Formed by a merger between the
Washington and Adams hospitals in 2000, Hamilton approached private physician groups with
offers to buy their practices and hire the physicians on salary. Given the growing influence of
health insurers and declining reimbursement rates for physicians’ services, many private
practitioners saw this as an opportunity to partner with a larger hospital system that would have
This case was prepared by Kenan W. Yount, M.D. (MBA ’11) under the supervision of Michael J. Schill, Associate
Professor of Business Administration. The individuals and entities in this case are fictitious but based on actual
entities and events. Copyright 2013 by the University of Virginia Darden School Foundation, Charlottesville, VA.
All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by
any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden
School Foundation.
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more clout in negotiating favorable reimbursement from governmental and private payers. As a
result, Hamilton Hospital had grown to an operation with 9,000 employees and more than $600
million in assets.
History of Present Illness: The Rotunda Cardiovascular Center
Historically, the vast majority of Cavalier Hospital’s patients had been referred by local
physicians; over the past few years, with the expansion of Hamilton Hospital, these referrals had
been in decline. In response, Cavalier’s board of directors had adopted a new growth strategy,
beginning with the creation of a cardiovascular care center that had opened in the beginning of
2008.
The board of directors believed that the trend towards greater obesity, combined with the
aging population in central Virginia, represented a significant market opportunity for Cavalier
Hospital to respond to the increasing competition from Hamilton Hospital. Traditionally, 51% of
new cardiology patients at Cavalier Hospital were referred by non-Cavalier physicians and 30%
by Cavalier primary care physicians or other specialists; the remaining 19% were self-referred.
But in recent years the number of new cardiology patients referred by outside physicians had
declined to 25%.
In 2007, the American Heart Association estimated that cardiovascular disease cost
Americans more than $300 billion in direct costs—including lost productivity, $503 billion.
Physicians at Cavalier Hospital had always excelled in providing state-of-the-art cardiovascular
care, which included treatment for common diseases such as high blood pressure, heart failure,
coronary artery disease, and cardiac rhythm abnormalities. The principal physicians involved in
the care of these diseases included primary care physicians, cardiologists, interventional
cardiologists, cardiac surgeons, and radiologists.
Trends among the nation’s leaders in cardiovascular care confirmed Cavalier Hospital’s
desire to expand into integrated cardiovascular care. The 1,210-bed Cleveland Clinic, ranked
first in ―Heart and Heart Surgery‖ by U.S. News & World Report, had recently opened a new
facility for its multidisciplinary Heart and Vascular Institute. At the institute, physicians from all
of the relevant cardiovascular specialties reported to the head of the institute, who was in charge
of all physicians and activities in the institute. Cavalier Hospital had followed the Cleveland
model when creating the Rotunda Cardiovascular Center.
The new Rotunda Cardiovascular Center co-located all of the physicians involved in the
treatment of cardiovascular disease in one center to provide one-stop shopping for
comprehensive treatment of cardiovascular disease. It housed a welcoming lobby and atrium on
the first floor for visiting patients and families. The second floor contained the outpatient clinic
rooms, rehabilitation facilities, and treadmill testing rooms. The third floor contained hybrid
operating suites, catheterization labs, clinical laboratories, and imaging facilities. Patients could
receive almost any diagnostic cardiac test, from the newest 3-D nuclear stress test to cardiac
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magnetic resonance imaging (cardiac MRI). The fourth floor contained 60 state-of-the-art, hotelstyled inpatient suites that were ICU-adaptable. The goal of the hotel-style suites was to allow
families to have a more active role in the healing process. All in all, the new four-story, 188,000
square-foot center had cost approximately $70 million. There was some discussion regarding
whether the center met the hospital’s specified 8% hurdle rate of investment.1
Harrison, who had run his own private cardiology practice for many years in the
community, was recruited to Cavalier Hospital to serve as director of the new center. He
successfully pulled in a number of local cardiology practices, and Cavalier Hospital was already
witnessing a rebound in patient traffic (Exhibit 1). A regional newspaper had recently published
a story lauding the hospital’s growth and new additions:
It all began with the Rotunda Cardiovascular Center. Despite suffering a decline
in patient traffic from 2000 to 2006, Cavalier Hospital has recently seen a 10%
increase in inpatient volume and a 25% increase in outpatient visits. Revenue
growth has jumped from $90 million to $137 million in only 4 years.
Dr. William Harrison explained, ―We realized that cardiovascular disease was
growing at an alarming rate in the state of Virginia and hoped to utilize state-ofthe-art equipment and a multidisciplinary team-centered approach to treat heart
disease. We are excited that patients in the area are beginning to take an active
interest in what we’re doing—we’re paving the way for a healthier society.‖
As part of his role as director, Harrison had been involved in negotiations with several of
the region’s major health insurers to determine new terms for reimbursement rates. In addition to
attracting the attention of physicians and patients, the front-page press covering the Rotunda
Cardiovascular Center resulted in several new health insurance companies approaching Cavalier
Hospital, each hoping to include the hospital in its network of physician providers. Historically,
50% of the hospital’s revenue came from third-party payers.2 Traditionally, third-party payers
reimbursed hospitals at a premium to Medicare on most procedures; consequently, Cavalier
Hospital hoped to increase its market share among third-party payers to improve profit margins
on many of its services. Another 30% of revenues came from Medicare and 15% from self-pay
patients. It was estimated that 5% of revenues represented Medicaid and uncompensated care.
A common health policy criticism of fee-for-service payments, particularly prevalent in
cardiovascular care, was that physicians were ordering more expensive tests (e.g., nuclear stress
test imaging and catheterizations) because they were more profitable than older diagnostic tests.
1
The hurdle rate of investment was used to set a threshold for the expected rate of return for any investment
proposal. Ideally the hurdle rate reflected the market’s prevailing risk-adjusted cost of capital. A project whose
expected internal rate of return exceeded the hurdle rate was expected to generate economic profit, whereas one that
did not was not.
2
Third-party payers referred to private, nongovernmental health insurance companies.
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Consequently, the fee-for-service system was seen as creating incentives for cardiologists to
utilize new equipment preferentially to help generate revenue that would offset the equipment’s
high initial cost.
Fee-for-service payment schemes were in contrast to capitated payment arrangements, in
which insurance companies paid health care providers for the number of patients treated rather
than per specific procedure. However, many health policy experts felt that these arrangements
caused hospitals to undertreat patients, because once the hospital had collected payment it had
little incentive to order additional tests or treatments for the patient.
An emerging trend in reimbursement negotiations for integrated care units, such as the
Rotunda Cardiovascular Center, was for third-party payers instead to use bundled payments to
hospitals for assuming the care of a certain number of a health plan’s patients with a given
condition (e.g., hypertension, stable angina, myocardial infarction, congestive heart failure).
Bundled care was a variation on capitation with one crucial difference: payment was contingent
on the health care provider achieving an aggregate level of acceptable health outcomes
negotiated by both the insurance company and the provider. By tying payment to health
outcomes, some experts believed it would correct the perverse incentives created by older
capitation arrangements.
In negotiating with the new health insurance companies that had approached Cavalier,
Harrison decided that it would be best to seek this capitation-based bundled payment. Harrison
explained:
In the past it was difficult to use bundled payment schemes, because the
cardiologists and the cardiac surgeons were in different departments. Now that we
have adopted an integrated-systems-based approach to cardiac care, we can begin
to offer bundled packages to health insurers. We think it makes more sense. Why
not get paid the same amount for the same medical condition? That way, it
doesn’t matter if we decide to use a nuclear stress test or an exercise stress test for
a given patient because we aren’t charging the insurance company for the test. In
fact, we can go ahead and use the state-of-the-art technology without having to
seek insurance approval each time because it doesn’t cost the insurance company
or patient extra money if we use the equipment. We get paid for assuming the
total cardiac care of the patient each year so long as our risk-adjusted outcomes
beat the national averages for outcomes data. For those patients in our capitationbased packages, we have yet to miss any of those benchmarks.
Excited by the prospect of both not having to authorize payment for every diagnostic test
a patient received and using a payment scheme that would encourage better health outcomes (and
reduce longer-term costs for the health plan’s patients), four insurance companies had decided to
negotiate for bundled pricing; the rest remained on the traditional fee-for-service model.
Harrison remarked, ―We’re really excited about this. We offered very competitive rates to these
insurance companies to encourage adoption. Some decided to take advantage of it.‖
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Diagnosis and Treatment: Preparing for the Board Meeting
As Harrison contemplated both the challenges the hospital faced and the success of the
new Rotunda Cardiovascular Center, which had now been open for three years, he peered over
several of the slides (Exhibits 1 and 2), annual report exhibits (Exhibit 3), and financial
statements (Exhibits 4 and 5) that had been prepared for the next board meeting. Using the
financial statements, he conducted a financial and operating ratio analysis of the hospital to
better understand the data (Exhibits 6 and 7). The newly negotiated contracts had resulted in an
incredible expansion of both patient volume and hospital revenue. He hoped to use his analysis
to assess the current financial condition of the hospital and the true significance of the hospital’s
recent growth. In conducting the financial analysis, he was reminded of the debate in a recent
issue of the New England Journal of Medicine regarding the proper identification of value in
health care (Exhibit 9).
With information at hand, he hoped to help the board review the performance of the
hospital and be able to assess the Rotunda investment so as to decide whether the hospital should
continue to expand the Rotunda model to additional specialties.
-6Exhibit 1
CAVALIER HOSPITAL
Sample Slides on Hospital Growth
from the 2010 Presentation to the Cavalier Hospital Board
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Exhibit 2
CAVALIER HOSPITAL
Sample Slide on Hospital Revenue Classification
from the 2010 Presentation to the Cavalier Hospital Board
2006
2010
Uncompensated 4%
Medicaid 3%
Uncompensated 6%
Medicaid 3%
Self-Pay 14%
Self-Pay 12%
Medicare 25%
Medicare 28%
Th rd-Party Payer
50%
Third-Party Payer
55%
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Exhibit 3
CAVALIER HOSPITAL
Sample Outcomes Data from the 2010 Cavalier Hospital Annual Report
Door-to-Balloon Time, 20101
90
Minutes
85
80
A HA Goal
National
Average
75
Cavalier
70
PCI Complications, 20102
Cavalier
National A
verage
3.7%
3.0%
2.6%
2.0%
1.3%
1.0%
0.2%
Mortality
1
Reinfarction
0.3%
Emergency CABG B lood Transfusions
Door-to-balloon time is the time interval that begins when a patient having a heart attack arrives at an E.R.
with chest pain and ends with the implantation of a stent to reopen a blocked coronary artery.
2
PCI is percutaneous coronary intervention, the procedure through which a stent is inserted through the leg up
into a coronary artery to treat a hear attack. Although usually successful and far less invasive than open-heart
surgery (coronary artery bypass grafting [CABG]), the procedure can result in death (mortality), further heart attacks
(reinfarction), conversion to open-heart surgery (emergency CABG), and blood loss (requiring transfusion).
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Exhibit 4
CAVALIER HOSPITAL
Cavalier Hospital Income Statement (in millions of dollars)
1
REVENUE
Gross Patient Revenues
Contractual Allowances1
Charity Care2
Net Patient Revenues
Trust/Endowment Income
Auxillary Income3
Total Revenue
2006
151.3
-64.9
-6.4
80.0
10.5
3.6
94.1
2007
152.4
-64.6
-7.4
80.4
9.7
5.3
95.4
2008
185.4
-85.9
-9.5
90.0
12.7
5.2
107.9
2009
205.4
-94.9
-11.4
99.2
14.4
7.3
120.9
2010
240.2
-114.2
-14.0
112.0
16.6
8.3
136.8
EXPENSES
Operating Expenses
Depreciation and Amortization
Interest
Provision for Bad Debt
Total Expenses
2006
70.7
4.9
1.2
1.5
83.0
2007
72.7
5.0
3.5
1.5
85.3
2008
84.0
5.9
5.2
1.8
98.5
2009
96.7
6.7
5.8
2.0
113.5
2010
113.4
7.8
4.9
2.3
129.6
Net Income
11.1
10.1
9.3
7.4
7.2
Amounts discounted from listed rates as a result of agreements with third-party payers, including Medicare,
Medicaid, and private insurers.
2
Uncompensated care for the indigent.
3
Funds received from dining facilities, parking fees, gift shop sales, and vending machine sales.
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Exhibit 5
CAVALIER HOSPITAL
Cavalier Hospital Balance Sheet (in millions of dollars)
ASSETS
2006
Cash and Cash Equivalents
2.7
Accounts Receivable (Net)
18.2
Inventories
1.4
Total Current Assets
22.6
Plant, Property, and Equipment (Net) 78.5
Total Assets
100.9
2007
2.4
19.5
1.4
23.3
113.6
136.9
2008
5.9
24.5
1.9
32.4
143.5
175.9
2009
4.8
28.4
2.1
35.3
150.3
185.7
2010
7.9
30.1
2.4
40.3
147.8
188.1
LIABILITIES
Accounts Payable
Current Portion of Long-Term Debt
Total Current Liabilities
Long-Term Debt
Total Liabilities
2006
10.1
2.2
12.3
19.1
27.3
2007
10.3
2.0
12.3
49.2
61.6
2008
13.6
2.6
16.2
64.6
80.8
2009
15.0
4.7
19.7
78.8
98.6
2010
16.5
2.7
19.2
76.6
95.8
EQUITY
Total Equity (Net Assets)
2006
73.6
2007
75.3
2008
95.1
2009
87.1
2010
92.3
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Exhibit 6
CAVALIER HOSPITAL
Cavalier Hospital Financial Ratio Analysis
PROFITABILITY RATIOS
Profit Margin
Return on Assets (ROA)
Return on Equity (ROE)
2006
11.8%
11.0%
15.1%
2007
10.5%
7.3%
13.3%
2008
8.6%
5.3%
9.8%
2009
6.1%
4.0%
8.5%
2010
5.3%
3.8%
7.8%
Comparables 1
6.0%
4.2%
12.8%
NET REVENUE RATIOS
Contractual Allowance Percentage
Charity Care Percentage
2006
42.9%
4.2%
2007
42.4%
4.9%
2008
46.3%
5.1%
2009
46.2%
5.5%
2010
47.5%
5.8%
Comparables 1
43.2%
5.0%
ASSET MANAGEMENT RATIOS
Days Cash on Hand
Accounts Receivable Turnover
AR Days Until Collected
Inventory Turnover
Current Asset Turnover
Plant, Property, and Equipment Turnover
Total Asset Turnover
2006
12.6
5.2
70.7
65.4
4.2
1.2
0.9
2007
10.9
4.9
74.6
68.1
4.1
0.8
0.7
2008
23.4
4.4
83.1
57.4
3.3
0.8
0.6
2009
16.5
4.3
85.8
57.9
3.4
0.8
0.7
2010
23.5
4.5
80.4
58.0
3.4
0.9
0.7
Comparables 1
16.1
6.3
57.9
60.1
4.1
1.5
0.9
LIABILITY AND LIQUIDITY RATIOS
Accounts Payable Turnover
AP Days Until Paid
Current Ratio
Debt-to-Equity Ratio
Asset-to-Equity Ratio
2006
7.0
52.2
1.8
0.3
1.4
2007
7.0
51.9
1.9
0.7
1.8
2008
6.2
59.0
2.0
0.7
1.8
2009
6.5
56.5
1.8
1.0
2.1
2010
6.9
53.0
2.1
0.9
2.0
Comparables 1
6.5
56.5
2.0
0.7
1.6
Calculation Formulas
Profit Margin
(Net Income) / (Total Revenue)
Return on Assets (ROA)
(Net Income) / (Total Assets)
Return on Equity (ROE)
(Net Income) / (Total Equity)
Contractual Allowance Percentage
(Contractual Allowance) / (Gross Revenue)
Charity Care Percentage
(Charity Care) / (Gross Revenue)
Days Cash on Hand
(Cash) / (Total Expenses − Depreciation) * 365
Accounts Receivable Turnover
(Total Revenue) / (Accounts Receivable)
AR Days Until Collected
(Accounts Receivable) / (Total Revenue) * 365
Inventory Turnover
(Total Revenue) / (Inventory)
Current Asset Turnover
(Total Revenue) / (Total Current Assets)
Property, Plant, and Equipment Turnover (Total Revenue) / (Property, Plant, and Equipment)
Total Asset Turnover
(Total Revenue) / (Total Assets)
Accounts Payable Turnover
(Operating Expenses) / (Accounts Payable)
AP Days Until Paid
(Accounts Payable) / (Operating Expenses) * 365
Current Ratio
(Current Assets) / (Current Liabilities)
Debt-to-Equity Ratio
(Total Debt) / (Total Equity)
Asset-to-Equity Ratio
(Total Assets) / (Total Equity)
1
Comparables are defined as regional hospitals of similar size and objective.
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Exhibit 7
CAVALIER HOSPITAL
Cavalier Hospital Operating Statistics
INPATIENT ACTIVITY
Total Discharges
Third-Party Payer Discharges
Medicare Discharges
Self-Pay Discharges
Medicaid Discharges
Uncompensated Discharges
Third-Party Payer
Medicare
Self-Pay
Medicaid
Uncompensated
Average Daily Census
Total Hospital Beds
Hospital Bed Occupancy Rate (%)
Patient Days
Average Length of Stay
2006
28,680
14,346
8,155
4,051
918
1,211
50.0%
28.4%
14.1%
3.2%
4.2%
482
610
79%
158,983
5.5
2007
26,776
13,575
8,010
3,508
803
1,301
50.7%
28.3%
13.1%
3.0%
4.9%
451
610
74%
145,506
5.4
2008
30,828
16,586
8,207
3,730
904
1,586
53.8%
26.0%
12.1%
2.9%
5.1%
516
670
77%
173,977
5.6
2009
30,519
16,441
8,371
3,689
864
1,689
53.9%
25.7%
12.1%
2.8%
5.5%
549
670
82%
166,428
5.5
2010
31,388
17,325
8,539
3,610
908
1,835
55.2%
24.6%
11.5%
2.9%
5.8%
556
670
83%
179,648
5.7
AMBULATORY ACTIVITY
Total Outpatient Clinic Visits
Cardiac Center Visits
Total Laboratory Procedures
Per Outpatient Visit
Total Imaging Studies
Per Outpatient Visit
2006
90,226
7,061
408,202
4.52
71,996
0.80
2007
96,550
7,405
432,441
4.48
74,730
0.77
2008
98,469
7,938
459,795
4.67
84,859
0.86
2009
101,233
8,319
477,884
4.72
88,856
0.88
2010
114,365
9,606
550,802
4.82
99,927
0.87
OTHER
Number of Full-Time Employee Equivalents
Average Salary (Including Benefits)
2006
1,517
$46,625
2007
1,521
$47,791
2008
1,698
$49,463
2009
1,890
$51,195
2010
2,074
$53,242
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Exhibit 8
CAVALIER HOSPITAL
Rotunda Cardiovascular Care Financial Statements (in millions of dollars)
REVENUE
Gross Patient Revenues
Contractual Allowances1
Charity Care
Net Patient Revenues
Additional Revenue1
Total Revenue
2008
14.9
-7.5
-0.9
6.6
1.4
8.0
2009
16.9
-8.4
-1.0
7.5
1.8
9.3
2010
20.2
-9.9
-1.3
9.0
2.1
11.1
Approximate Expenses1
7.9
9.5
10.9
Net Income
0.1
-0.2
0.2
70.0
70.0
70.0
2008
1.3%
0.1%
2009
-2.6%
-0.3%
2008
49.9%
6.0%
2009
49.9%
5.9%
Approximate Assets2
PROFITABILITY RATIOS
Profit Margin
Return on Assets (ROA)
NET REVENUE RATIOS
Contractual Allowance Percentage
Charity Care Percentage
1
2010 Formula
2.2% (Net Income) / (Total Revenue)
0.3% (Net Income) / (Total Assets)
2010 Formula
49.2% (Contractual Allowance) / (Gross Revenue)
6.2% (Charity Care) / (Gross Revenue)
Allocated based on outpatient and inpatient cardiac patient volume as a percentage of patient volume for the
entire hospital.
2
Based on the $70 million investment in the center.
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Exhibit 9
CAVALIER HOSPITAL
Excerpt from Michael E. Porter, ―What Is Value in Health Care?,‖1 and Response
In any field, improving performance and accountability depends on having a shared goal that unites the
interests and activities of all stakeholders. In health care, however, stakeholders have myriad, often
conflicting goals, including access to services, profitability, high quality, cost containment, safety,
convenience, patient-centeredness, and satisfaction. Lack of clarity about goals has led to divergent
approaches, gaming of the system, and slow progress in performance improvement.
Achieving high value for patients must become the overarching goal of health care delivery, with value
defined as the health outcomes achieved per dollar spent. This goal is what matters for patients and unites
the interests of all actors in the system. If value improves, patients, payers, providers, and suppliers can all
benefit while the economic sustainability of the health care system increases.
Value—neither an abstract ideal nor a code word for cost reduction—should define the framework for
performance improvement in health care. Rigorous, disciplined measurement and improvement of value
is the best way to drive system progress…Value should always be defined around the customer, and in a
well-functioning health care system, the creation of value for patients should determine the rewards for all
other actors in the system…
Outcomes, the numerator of the value equation, are inherently condition-specific and multidimensional.
For any medical condition, no single outcome captures the results of care. Cost, the equation’s
denominator, refers to the total costs of the full cycle of care for the patient’s medical condition, not the
cost of individual services. To reduce cost, the best approach is often to spend more on some services to
reduce the need for others.
Letter to the editor from Tilburt, Montori, and Shah of the Mayo Clinic:2
In his Perspective article, Porter defines ―value‖ as ―outcomes relative to cost.‖ His views represent a
payer-centered perspective rather than a patient-centered one and reduce caring to ―services‖ in a
(mythical) health care marketplace. His ―value‖ could reward mediocre outcomes delivered cheaply—a
bargain for payers, not patients. Moreover, paying for value on the basis of long-term outcomes in
patients with chronic disease will remain an important challenge for the foreseeable future.
Value from patients’ perspective—if we were to ask them—should reward high-quality, affordable care,
no doubt. But it would also reward practitioners whose care centers around the patient, not solely ―value‖
based on cost, measurable outcomes, and efficiency metrics. Judged by Porter’s metric, ―amenities‖ such
as chaplain services, fine art, and an unhurried examination would quickly become extinct.
1
Michael E. Porter, ―What Is Value in Health Care?,‖ New England Journal of Medicine 363 (December 2010):
2477–81.
2
Jon C. Tilburt, M.D., Victor M. Montori, M.D., and Nilay D. Shah, Ph.D., letter to the editor, New England
Journal of Medicine 364 (March 2011): e26.
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