CEO First Round

Ben Melson

Our strong revenue growth at Texas Children’s Hospital (TCH) in FY 2009 was the result of four main drivers:

1.  Net patient revenue in the hospital:
Our inpatient growth was relatively small in ’09. A 9% growth in net patient revenue was primarily driven by an increase in outpatient activity.  We believe this increased activity was at least partially a result of our Texas Children’s Physician Services Organization (PSO), which began operations at the beginning of FY ’09 (see #4 below).   We also had positive results from our patient throughput initiatives in our outpatient clinics.

2.  Increased DSH payments to the hospital:
Stimulus funding played an important role in allowing DSH funding in Texas to grow in 2009. At Texas Children’s our DSH grew by $19 million in FY’09.  However, this is not the case in 2010. Our DSH has dropped and will continue to drop — the state of Texas has a $14 billion budget shortfall this year and Medicaid funding will be on the chopping block.

3.  Premium revenue growth in the Texas Children’s Health Plan:
Membership in our Medicaid HMO grew by 13% in FY ’09, leading to very strong revenue growth. One of the reasons why our plan grew was a statewide initiative — Texas phased out their Primary Care Case Management (PCCM) program in urban areas.  Families in Texas had to join a Medicaid managed care plan and we are the biggest one in Houston. We promoted our plan throughout the Houston area, in our primary care clinics and in the hospital.  The economy also helped our plan grow as more kids became eligible for Medicaid. We are experiencing similar double-digit growth in 2010.  We see several benefits of owning our own CHIP/Medicaid HMO — it has a positive margin, provides better medical management between the hospital and HMO, and we can coordinate care better and improve care to keep kids healthier. Currently, 30% of our Health Plan expenditures are happening at TCH.  We continue to evaluate the right mix of HMO business at the owner hospital level.

4.  Physician Service Organization:
The PSO, which began operations in FY ’09, provides billing, collections and managed care contracting for Baylor College of Medicine’s (BCM) 700+ pediatric specialists and sub-specialists as well as OB/GYN faculty who practice at TCH.  The collections are passed through to BCM after we cover our administrative costs.  All of this represents new revenue and new fees paid to BCM.

The PSO has added transparency and enhanced our partnership with both BCM and our faculty.  One way we saw results of this improved collaboration was through increased activity in the hospital-based outpatient clinics. There has been a dramatic improvement in accountability and reporting.  The more transparent we are in showing Relative Value Units, collections, gross billings, etc. in real time, the better our business decisions.  We are sharing this information with the faculty and having strategic discussions with them.  Our incentives are also aligned and we now have increased strength in negotiating managed care contracts.

This transformation wasn’t immediate.  We went live with the PSO in Oct. 2008, so we now have nearly two years of operations under our belts.  It took a year to negotiate this new PSO arrangement with BCM and another year to convert the managed care contracts and set up our physician billing systems.  Historically, we had sent a lot of money to BCM and didn’t always know what programs it was being invested in.  We now know exactly where the money goes as we take risk on all BCM operations that include TCH-based faculty and staff.  Our relations with our faculty and BCM have never been better.

2010 Outlook:
Our 2010 financial outlook is not nearly as positive as last year.  Our volumes in general are down at the hospital this year including our neonate patient days.  Although our outpatient volumes continue to rise, our length of stay is falling, as are our patient days.  We’ll still have a nice positive margin and good operating cash flow, but we do anticipate a shortfall of our budgeted 2010 operating margin of between $15-20 million.

To counteract our reduced revenue, we are involved both in cost containment measures and revenue enhancement strategies.  We’re committed to decreasing our operating expenses and are involved in several strategies including selective hiring, reducing overtime and eliminating temporary labor costs.

Other plans for 2010 include launching outpatient operations at our new TCH West Campus in Katy, TX in December, with inpatient operations to follow in the spring of 2011.  Our health plan and PSO continue to exceed their operating margin budgets.

Plans for the Future:
We are currently constructing a new maternity care center to be open by 2012 and recruiting OB and Maternal Fetal Medicine doctors to attract high risk deliveries as part of our “inborn deliveries” strategy.  Currently, we receive 24-25% of births from partner hospital St. Luke’s into our NICU. As we recruit MFMs, we attract high-risk deliveries. We are also investing in IVF faculty — the beginning part of the continuum of “inborn deliveries.”

The goal is to make sure our referral streams continue to grow. We currently run NICUs in several hospitals in the Houston area and provide transfers both to TCH and back to community hospitals.

ACO strategy on the horizon?
Right now we are still interpreting the law and regulations regarding Accountable Care Organizations. We might consider becoming a pilot for an ACO and we are very interested in learning from others.