UTILIZATION DATA AND THE PLANNING PROCESS FIGURE VI-6 Kaiser Foundation Health Plan, Southern California Region, Trend of Allied Non-Physician Employees per 1,000 Members, 1961 to 1970 69 RISING COSTS: THE CONTINUOUS CHALLENGE I have described some of the things we have learned about ourselves in the Southern California Region during the past ten years. This does not mean, however, that the ensuing ten years should represent merely an extrapolation of the past decade. If in fact it does, we have failed. In understanding our program and the future, several things should be borne in mind. We do not operate in a world unto ourselves, free from external influences. We are not free from the inflationary spiral; we are as directly affected by certain external economic factors as anybody in the health care field. We compete in the same marketplace for personnel and buy our goods from the same vendors. We must consistently equal or exceed the standards of care in the community. Each new technological advance in medicine must be incorporated into the program as soon as it is generally available. 76 THE HEALTH PLAN-BUSINESS ASPECTS Our options, in deciding to provide a service or not, are exceedingly limited. We know it costs more to build the same kind of space we built ten years ago; we also know that we don't build the same kind of space. We know that in order to incorporate new technology we need more square footage to support each bed. We know that there is a change in the character of the space we build-it's more expensive space, such as intensive care units and coronary care units. We know that the capital requirements for equipment will be greater than in the past. We are also aware that the cost of borrowing money is greater than in the past. Through 1960 the cost of fixed assets per 1,000 members was $47,000. From 1961 through 1965 the figure was $107,000; from 1966 through the middle of 1970, $137,000. In the next five years we forecast this figure to be in the range of $250,000 to $300,000. We know that upon completion these facilities will be more expensive to staff. While the utilization of our services has remained relatively constant over the years, and consequently the physician requirement per 1,000 members essentially unchanged, the number of allied employees per physician and the number of hospital employees per bed have gradually increased over the past five years. This is due in great part to increased requirements for new skills to maintain pace with technological advances and in some part to increased health plan benefits such as home health services. There is little evidence to indicate that substitution of allied personnel for professional contributes to this increase. In 1969 the National Advisory Commission on Health Manpower concluded that "the Kaiser Foundation Medical Care Program has been able to achieve significant economies in the use of scarce resources and in the medical expenses of their subscribers." The commission also commented, however, "on the very traditional manner in which the delivery system is organized." Additionally, it found no “evidence of major innovations in the practice of medicine . . . and there does not appear to be unusual substitution of auxiliary personnel for physicians." This is the area of greatest concern and greatest challenge. We must depart from the traditional and find new ways to utilize allied personnel. We must free the physician to permit him the opportunity to apply his skills more productively. We must challenge all "ratios" that have become routine. We must consciously intervene to make more efficient use of all resources. We must be constantly seeking new ways to organize our resources to continue the delivery of quality care at a price the average family can afford. 3. Report of the National Advisory Commission on Health Manpower, Vol. II (Washington, D C.; US. Government Printing Office, November 1967). VII Finances and Planning WALTER K. PALMER* THE FINANCING OF ANY ENTERPRISE will be chaotic, if not wholly unsuccessful, unless it is built on sound planning. This principle is especially relevant to health care services because of the dynamic nature of the industry and the rapid escalation of costs during recent years. At the Kaiser Foundation Health Plan, we are engaged in a dual function in the areas of planning and financing: (1) the short-term operating program along with financial planning for current sources of revenue to match operating requirements, and (2) the long-range plan for the expansion and development of facilities and the capital or long-term financing to support it. Criteria entering into the development of both the short-term and long-range planning include important factors related to the defined population we serve. While planning for health care services and capitai resources is complex at best, success in providing financial support for our program is greatly enhanced by planning for a defined population. Anticipated growth, demographic characteristics, geographic movements, and patterns of utilization are known and are predictable into the future within tolerances that are reasonable and acceptable for planning purposes. SHORT-TERM PLANNING Short-term planning involves the budget or operating forecast for the coming fiscal period, in our case the calendar year. Each region has responsibility for planning and managing its financial affairs and, therefore, is fully responsible for results. The forecasting process is not one of projecting trends of broad categories of revenues and expenses, but rather involves an in-depth departmental budgeting of staff and every category of nonpayroll costs. QUANTITATIVE CRITERIA The annual operating forecast is based on a number of basic factors developed * Vice-President, Finance, Kaiser Foundation Health Plan and Kaiser Foundation Hospitals. 72-759 O -72 - 18 72 THE HEALTH PLAN-BUSINESS ASPECTS at length in discussions involving the medical groups and health plan and hospitals management: 1. Membership forecast 2. Forecast of physicians 3. Hospital utilization rates 4. Hospital occupancy rates 5. Changes in staffing patterns 6. Hospitals Medical offices Ancillary services Administrative offices Changes in scope of services 1. The membership forecast is detailed by major groups and separately for each coverage that carries a different subscription rate. 2. The forecast of physicians follows, as a guide, the current ratio of physicians per 1,000 members but, more importantly, is based on the medical groups' evaluation of their capability to successfully recruit new physicians during the coming year. The forecast of membership growth can be, and is, limited by the forecast of physicians. Because these two elements of the annual forecast bear directly on the level of patient care, they are subjected to more discussion between the medical groups-health planhospitals management than any other quantitative factors contributing to the fore cast. 3 and 4. Hospital utilization and occupancy rates are generally based on current trends but are reviewed in detail in the event some recent changes in medical practices must be considered and to determine whether backlogs of elective admissions are at acceptable levels. 5. Because of a general desire on the part of supervisors and administrators throughout the program to improve the level of service, whether it be medical or administrative, the screening of requested staff increases is the most time consuming phase of the forecasting process. Every request is measured against three basic standards: (a) necessary to support increased membership, (b) required because of an increased scope of medical services, or (c) needed to correct a recognized deficiency in present levels of service. Increases in administrative staff are particularly difficult to measure against these standards but they are, nevertheless, applied. 6. Changes in scope of services might include the addition of extended care benefits or a hemodialysis and kidney transplant benefit to some or all coverages which would add identifiable costs to the coming year's operations. COSTING CRITERIA Following are the factors necessary to translate the operating plan into a financial requirement: 1. Physicians' compensation 2. Salary and wage rates 4. Escalation of supplies and expense 5. Levels of plant maintenance 6. Depreciation, taxes, interest 1. Compensation of individual physicians is not subject to mutual agreement between medical groups and health plan and hospitals, but is determined solely by medical group management. The compensation structure for physicians and increases in levels of compensation by categories of specialties are, however, mutually agreed upon as a part of the annual review and revision of contractual per member per month and contingent payments to be made to the medical groups. 2. The majority of hourly wage rates are governed by union contracts with in FINANCES AND PLANNING 73 creases either already stipulated for the next year or estimated by employee relations personnel. Salary levels and merit increase budgets are set by management. 3. Employee benefits may be affected by law or may be increased as management may enlarge the employee benefits package to remain competitive. 4. Supplies and other nonpayroll expenses are developed in detail for each department based on current costs, anticipated changed conditions, and escalation factors provided by the purchasing department. 5. Budgets for plant maintenance and noncapital remodeling and minor improvements are set following management review of requests submitted by administrators and medical directors. Management sets a level of expenditure the region can afford, since in this area it is never possible to fully satisfy all requests. 6. Depreciation, taxes, and interest are estimated based on the long-range facilities programs underway and planned for completion in the coming year. 1971 OPERATING REQUIREMENTS Table VII-1 is a highly condensed summary of the actual forecasts for 1971 of the two large California regions where we expect to serve 2,000,000 members by yearend. Substantially all the medical service costs represent contract payments to medical groups for services for which they are responsible. These services include operation of medical offices, inpatient and outpatient laboratories, xray departments, and other ancillary services. Hospital services cover all institutional costs in acute facilities and in a number of extended care facilities operated as part of the program. Pharmacy and optical costs include outpatient drugs and the operation of optical departments throughout both regions. Essentially all the other benefits are made up of ambulance costs and reimbursement of members for out-of-area emergency expenditures. Since inception of its operations, Kaiser Foundation Hospitals has carried on a program of community service consisting of medical education, clinical research, and care for minority and other disadvantaged persons. Health plan administration covers membership enrollment, dues billing, membership records, and membership service functions. Current operating requirements must include earnings to develop capital re |