Approve Financial Stability Plan (aka Project FIT) for UW Medicine

Transcription

1 STANDING COMMITTEES F 5 Finance and Asset Management Committee Approve Financial Stability Plan (aka Project FIT) for UW Medicine RECOMMENDED ACTION It is the recommendation of the administration and the Finance and Asset Management Committee that the Board of Regents: 1) Approve the UW Medicine Financial Stability Plan, including a revised 5- year proforma; and 2) Suspend the Internal Lending Program loan requirements related to UW Medical Center (UWMC) and Northwest Hospital (NWH) through June 30, Suspended requirements include: a. Debt Service Coverage (1.25x) b. Days Cash (75 days at UWMC and 50 days at NWH) BACKGROUND UW Medicine has ongoing requirements relating to loans at UWMC and NWH. Requirements include operating (debt service coverage) and reserve metrics (days cash). For FY17, UW Medicine experienced an overall loss of 1.5% of revenue. While UW Medicine reserves were sufficient to cover the shortfall, ILP loan requirements for UWMC and NWH were not met. In accordance with Board of Regents policy and in collaboration with the Executive Vice President for Finance & Administration, and the Treasury Office, UW Medicine developed a Financial Stability Plan (Project FIT) that defines current and future financial targets, leading to improved financial performance. The FY18 budget constitutes the first year of the Plan and reflects the impact of defined initiatives. Through September, UW Medicine is meeting its FY18 budget targets. The Plan for FY19 through FY23 incorporates significant financial improvement targets, and UW Medicine will be defining the specific initiative and actions to achieve those targets over the life of Project FIT. F 5/211-17

2 STANDING COMMITTEES Finance and Asset Management Committee Approve Financial Stability Plan (aka Project FIT) for UW Medicine (continued p. 2) PROJECT FIT OVERVIEW The healthcare industry is experiencing rapid change creating the need for transformational change and a sharpened focus on strategic initiatives. Continued reimbursement pressure from commercial and governmental payers as well as inflationary expense increases have resulted in diminishing margins for UW Medicine, along with other providers in our region. The UW Medicine Financial Stability Plan, Project FIT (Financial Improvement and Transformation), represents a multi-year plan designed to achieve financial stability and position UW Medicine for the future. Financial improvement is planned through revenue generation and cost savings while continuing to make certain infrastructure investments. The largest positive financial impact will come from clinical service growth and labor mix and productivity improvements. Additionally, UW Medicine has included two new capital projects in the Plan $25M for a Child Birth Center at Northwest Hospital and $128M for an Enterprise Electronic Health Record Project. These projects have yet to undergo comprehensive due diligence and will require separate approval from the Board of Regents in the future. ASSESSMENT AND NEXT STEPS The Treasury Office has reviewed UW Medicine s plan, conducting both a highlevel financial review of the aggregate targets and initiatives and a confirming assessment of selected variables. Many of the FY19 and FY20 Project FIT initiatives are in the early stages of development, and planning is underway. Specific initiatives and actions to achieve the plan s financial targets are in process. Taken together, these initiatives will be transformative in nature and will represent a significant implementation challenge to UW Medicine. UW Medicine will report on the progress of the plan semi-annually, in conjunction with the Semi-Annual Borrower Reports (SABRe), beginning in March The SABRe reports will focus on the borrowing entity, with current reports for UWMC, NWH, and the consolidated reporting entity. The Board of Regents will revisit the Internal Lending Program loan covenants for the outstanding loans by October F 5/211-17

3 STANDING COMMITTEES Finance and Asset Management Committee Approve Financial Stability Plan (aka Project FIT) for UW Medicine (continued p. 3) ADMINISTRATIVE REVIEWS AND APPROVALS The plan represents a framework for success and depends on the identification and implementation of out-year initiatives and actions to achieve the targets. The UW Medicine Financial Stability Plan has been reviewed and approved by the CEO of UW Medicine, the Executive Vice President for Finance & Administration, the Associate Vice President for Treasury, and the NWH Board. Review and approval by the UW Medicine Board is expected on November 6, Attachment UW Medicine Financial Stability Plan (aka Project FIT) F 5/211-17

4 UW MEDICINE FINANCIAL STABILITY PLAN UW MEDICINE FINANCIAL STABILITY PLAN AKA PROJECT FIT BOARD OF REGENTS NOVEMBER 9, 2017 ATTACHMENT Page 1 of 14

5 EXECUTIVE SUMMARY UW Medicine s FY17 financial performance yielded a 1.5% loss. While UW Medicine s reserves were sufficient to cover FY17 shortfall, ILP loan requirements for UWMC and NWH were not met. UW Medicine, in collaboration with Treasury and Central Administration, has drafted a three year Financial Stability Plan (FSP) aka Project FIT for the Board of Regents approval at the November meeting UW Medicine has embarked on detailed planning that will improve performance over the next three years and beyond. Achieving these planned improvements will require transformational change and accountability. This year s LRFP is focused on Financial Improvement and Transformation (Project FIT) 2

6 FACTORS DRIVING DETERIORATION IN FY17 Declining reimbursements from both commercial and governmental payers that has occurred at a faster than anticipated rate Payer mix changes that negatively impacted reimbursement Volume challenges at certain of facilities Inflation rates for labor, benefits and medical supplies that outpaced growth in net revenue Other non-labor expense increases that continue to grow at an unsustainable rate (examples: IT and departmental funding) 3

7 FY18 IS THE FIRST YEAR OF PROJECT FIT BUDGET TARGETS ARE SIGNIFICANT FY18 budget targets are the immediate focus. For UWMC, HMC and NWH combined, the FY18 budget targets represent an improvement of $158 million over FY17 when cost inflation impacts are considered. The FY18 budget process was robust and the initiatives built into our plans are currently in process. Success will be measured by evaluating budget to actual variances and reported out monthly. Medical Center Gaps from FY17 to FY18 Budget Target FY17 $7M FY18 $10M HMC FY18 -$11M FY17 -$26M NWH FY18 $0M FY17 -$44M UWMC FY17 -$22M FY18 $0M VMC ($60.0) ($50.0) ($40.0) ($30.0) ($20.0) ($10.0) $0.0 $10.0 $20.0 4

8 BUDGET TARGETS THROUGH Q1 HAVE BEEN MET Total Income (in $000 s) for the Month of September 2017 and YTD: Month Month Month Variance Month YTD YTD YTD Variance YTD Actual Margin % Budget To Budget Prior Yr Actual Actual Margin % Budget To Budget Prior Yr Actual HMC $ 4,127 5% $ 1,184 $ 2,943 $ 619 $ 4,928 2% $ 6,530 $ (1,602) $ 8,627 UWMC $ (2,150) -2% $ (2,716) $ 566 $ (10,284) $ (588) 0% $ (7,191) $ 6,603 $ (16,289) NWH $ (2,331) -8% $ (1,421) $ (910) $ (2,836) $ (6,500) -7% $ (3,617) $ (2,883) $ (7,025) VMC $ 1,005 2% $ (404) $ 1,409 $ 677 $ 8,623 6% $ (2,426) $ 11,049 $ 1,074 SUBTOTAL $ 651 0% $ (3,357) $ 4,008 $ (11,824) $ 6,463 1% $ (6,704) $ 13,167 $ (13,613) UWNC $ (163) -2% $ (320) $ 157 $ (526) $ (809) -3% $ (1,243) $ 434 $ (1,230) ALNW $ % $ 523 $ 205 $ 622 $ 1,976 13% $ 2,734 $ (758) $ 3,265 UWP** $ - 0% $ - $ - $ - $ - 0% $ - $ - $ - SoM $ 6,272 5% $ 7,714 $ (1,442) $ 10,292 $ (7,091) -2% $ (3,443) $ (3,648) $ 1,802 TOTAL $ 7,488 2% $ 4,560 $ 2,928 $ (1,436) $ 539 0% $ (8,656) $ 9,195 $ (9,776) **Results for UWP are shown after amounts available to the School of Medicine. $25,000 Combined Monthly Total Income as of September 2017 (in 000's) $10,000 $(5,000) $(20,000) $(35,000) Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun FY 2017 $(16,102) $7,712 $(1,436) $(18,710) $(3,828) $11,567 $(5,971) $(24,633) $11,792 $(12,437) $(262) $(26,644) FY 2018 $(14,238) $7,289 $7,488 $- $- $- $- $- $- $- $- $- FY 2018 Budget $(13,033) $(183) $4,560 $(6,691) $(4,012) $7,883 $(5,654) $(13,542) $(12,406) $(5,417) $4,461 $7,785 5

9 LRFP/ PROJECT FIT STEPS STEP ONE: DEVELOP BASELINE LONG RANGE PLAN Budget Directors worked with site System wide global assumptions were also leadership to develop site-specific baseline developed: assumptions: Net Revenue Volumes/Length of Stay Drug and Medical Supply Inflation Inputs specific to site Salaries and Benefits Ongoing capital needs UWNC IT and other allocation areas STEP TWO: DIMENSION THE SIZE OF GAP TO OUR GOAL Our baseline projections will not generate positive margins. Given our target margins, the question is how much in initiatives do we need to get us where we need to be? STEP THREE: CLOSING THE GAP A list of potential opportunities has been generated through discussions with executive leadership over the last few months. These initiatives have been assessed for dimension and timeline for incorporation into the plan. Targets have been assigned to each initiative and will be evaluated throughout the life of the plan as refinement occurs. Identified targeted dollars have been incorporated into each entity s plan and will be presented at the entity board committees, UW Medicine board committees and the Board of Regents. 6

10 FIT PORTFOLIO APPROACH Planning / Deployment Scope / prioritize Financial modeling/tracking Periodic Updates Present to UW Medicine Board & Regents Re-evaluate / refine portfolio Decreasing Uncertainty Deploy / track 7

11 IDENTIFY OPPORTUNITIES DEVELOP BUS. PLAN DEPLOY RESOURCES LAUNCH REALIZE BENEFIT (FY19-FY20) MAINTAIN Approval stage gate Revenue Generation Clinical Service Growth Maximize Capacity RevUP and Other Revenue Cycle Improvements Philanthropy Labor Mix & Prod. Cost Savings Supply Chain Property/Space Admin Efficiencies EHR Infrastructure Child Birth Center (CBC) at NWH Appropriations 8

12 ACHIEVING OUR TARGETS The initiatives that have been identified will be monitored and measured as we work through operationalizing them. At each measurement point, initiatives that that are not on track with the goal will require immediate action steps or alternative initiatives will need to be identified. We will be primarily focused on achieving our margin target. Initiatives are the tactics toward achieving that goal. The process will be iterative and is intended to evolve as we continue to work toward our goal. 9

13 FY2020 FORECAST Project FIT is intended to improve margins over the next three years so that by FY2020 we are able to strengthen our balance sheet and our cash levels. UW Medicine Combined Forecast - FY2020 Statement of Revenue and Expenses $ in (000's) Consolidated Clinical Enterprise Harborview Medical Center Valley Medical Center UW School of Medicine Total Combined UW Medicine Operating Revenues $ 2,336,823 $ 1,076,990 $ 675,398 $ 1,459,300 $ 5,548,511 Operating Expenses 2,283,971 1,052, ,781 1,458,335 5,501,597 Operating Income (Loss) 52,852 24,480 (31,383) ,914 Non Operating Income (Loss) 3,392 (13,849) 31,383-20,926 Total Income $ 56,244 $ 10,631 $ - $ 965 $ 67,840 Total Margin % 2.4% 1.0% 0.0% 0.1% 1.2% Interest Expense is included in Operating Expenses in the Financial Plan to facilitate comparisons to Moody's benchmarks. The UW Medicine Consolidated Clinical Enterprise includes UWMC, NWH, ALNW, UWNC, UWP, Shared Services and Consolidated Laundry 10

14 UW CONSOLIDATED CLINICAL ENTERPRISE Statement of Revenue & Expenses UW Medicine Consolidated Clinical Enterprise $ in (000's) Audited Audited Budget Projected Total Operating Revenue 1,886,206 1,968,019 2,081,324 2,218,765 2,336,823 2,426,004 2,512,036 2,605,662 Operating Expenses Salaries and Benefits 1,038,228 1,104,419 1,140,339 1,193,007 1,251,760 1,305,167 1,356,936 1,409,914 Supplies 346, , , , , , , ,577 Depreciation & Amortization 86,776 92,784 91,826 93,985 91, , , ,008 Other Expense 481, , , , , , , ,298 Total Operating Expenses 1,953,241 2,051,272 2,099,335 2,191,424 2,283,971 2,372,890 2,457,945 2,550,797 Excess of Revenue over Expenses (67,035) (83,253) (18,011) 27,341 52,852 53,114 54,091 54,865 from Operations Net Nonoperating Revenue 35,891 15,748 8,983 2,820 3,392 5,968 6,595 8,393 Excess of Revenue over Expenses ($31,144) ($67,505) ($9,028) $30,161 $56,244 $59,082 $60,686 $63,258 Total Margin % -1.62% -3.40% -0.43% 1.36% 2.40% 2.43% 2.41% 2.42% Interest Expense is included in Operating Expenses in the Financial Plan to facilitate comparisons to Moody's benchmarks. 11

15 PLANNED DEBT FUNDING We plan to bring forward to the UW Board of Regents a request to finance two of our key FIT projects: 1. Electronic Health Record (EHR), $128 million 2. Childbirth Center at Northwest Hospital, $25 million Additional debt of $153 million is included in the LRFP at an interest rate of 4.5%. The debt profile of the consolidated clinical enterprise would still be favorable when compared to Moody s medians. 12

16 RECOMMENDED ACTIONS UW Medicine has a top priority focus on continued development and execution of the three-year Financial Stability Plan and we are committed to ongoing semi-annual measurement and reporting. We recommend the following actions to the Board of Regents: 1. Approval of the UW Medicine Financial Stability Plan, aka Project FIT, including approval to start detailed planning for two key strategic initiatives that will require access to capital 2. Temporary suspension of Internal Lending Program (ILP) requirements through June 30, During FY20, in partnership with Treasury, requirements will be revisited and reset. 13

17 NEXT STEPS UW Medicine leadership will continue to focus on the strategic directives of the organization, prioritizing our key initiatives as identified in our work. We are committed to improving our financial results through revenue generation and cost savings initiatives while always ensuring high quality care is provided with a focus on UW Medicine Patients are First principles. Periodic briefings to the BOR including SABRe reporting will occur as appropriate. UW Medicine leadership will continue to keep Treasury and Central Administration updated on the plan development as more information is available. 14