A Key to Success: Business Strategies Aligned with Markets

1. A Key to Success: Business Strategies Aligned with Markets • Thomas E. Lucking, Ed.S. • Lucking Consulting • http://www.Luckingconsulting.com • Tom@Luckingconsulting.com • Observations from 38 states, 35 years in field

2. Overview • Themes and general considerations • Business strategies and mental models • Changing market conditions bring opportunities and threats • 12 recommendations

3. Themes and General Considerations • The business acumen of substance abuse treatment providers is under-rated • Tendency to blame nonprofits when stress hits • Stigma • Changing environments challenge all types of organizations • Examining and challenging strategic assumptions is healthy and difficult • Look for one or two suggestions that have relevance to your circumstances

4. Business strategies • Many strategies can go wrong, a handful succeed • Strategic assumptions • Means the same here as Senge mental models • Guiding beliefs and assumptions

5. Rick Ross’ Ladder of Mental Models • From the Fifth Discipline Fieldbook • Senge, Peter M. et. al. The Fifth Discipline Fieldbook Doubleday, New York, 1994 • Our beliefs are the truth. • The truth is obvious. • Our beliefs are based on real data. • The data we select are the real data. • Models functional in one market may lead to disaster in another.

6. As difficult to recognize and realign in substance abuse treatment as it is elsewhere • Wisdom at dusk • Initial focus on the transaction system work • Leaving little time for strategy formulation • Tendency to go over-rely on what has worked • Purchasers – may do things that stress providers: • Not understanding implications • Having different goals • Being unable to modify practices

7. Examples of changing markets that test business models • Public purchaser introduces purchasing modifications: • From grant to fee-for-service • Providers retain below cost contracts that are no longer directly subsidized • Fee-for-service to managed without a predictable threshold of revenue • Individual provider rates to uniform statewide rates • Medicaid from fee-for-service to managed or managed/ capped • Criminal justice services • Insurance plan opportunities • Healthcare reform?

8.  12 Recommendations for Business Strategies and Practices (Caveat: Their usefulness depends on market conditions)

9. 1. Only accept contracts that cover all costs of the service. • Unit costs, including administration costs • Provide or contribute to an adequate base of revenue • Cover transaction costs

10. Some considerations when evaluating rates paid by insurance plans • Rates paid by public purchasers are “better” but not necessarily more • Higher bad debt w/insurance: • Uncollected co-pays • Failure to obtain authorization • Added transaction costs for authorization and billing systems • Costs of money (advances versus payments that take 30 to 90 days)

11. Use activity to assign the costs of billing systems • Often asset-draining billing systems are used mainly to support an outpatient service line • Charge proportionate costs to the programs using it

12. 2. Consider dropping courtesy billing if low rates, bad debt, or billing costs are problems. • Alternative: client pays and turns over to insurance • Loss of market share versus lower rates and transaction costs

13. 3. Require service lines to break even with operating revenue • Fewer “cash cows” these days • Cross subsidies draw away resources, staff compensation from healthy service lines • Include administrative costs when evaluating rates and costs

14. 4. Do not apply private fundraising to costs of contracted service features. • Fundraising could theoretically plug any shortfall • In practice, it is best applied to: • Service enhancements beyond those specified by the purchasers • Staff development • Capital needs • Facility upgrades • Charity care

15. 5. Protect yourself when expanding • Eager to increase market share—but weigh the risks • Assume startup difficulties • Plan scenarios with volume below projections • Would lower demand result in loss? • If so, would the purchaser step up? • A history – with you - of doing so? • If not, address that in the contract? • Temporary grant for startup?

16. Benchmarks for new mid-sized or rural outpatient offices • One outpatient provider per 10,000 in easy (30 minute) transportation range • Volume of 12 to 14 outpatient FTEs needed to sustain outpatient in low-rate / high transaction cost environments • Much lower volume of clients needed when rate is good and IOP is in the mix • For extremely rural, negotiate subsidy grant to go with uniform rates

17. 6. Define program success in terms of outcomes for the population • Defining success as continuing historically-important service lines can be demoralizing and harmful to financial health • Keep responsibility for funding with the purchaser

18. 7. Be a safety net provider of services only when funded as a safety net • Making up for gaps in the health system is outside the capacities of providers • Taking such responsibility jeopardizes the organization • It “enables” those who are responsible to avoid their obligations

19. 8. Provider networks can be helpful • Require time and enlightened leadership • Need to be funded for its network functions • Networking Administrative Service Organizations (ASOs) to share administration costs is better in theory than in practice • Similar savings – without entanglements - from outsourcing back office functions

20. 9. Current ratio: 3 or more is suggested for volatile environments • Definition: current assets divided by current liabilities • 2 is the benchmark for most endeavors • 3 is suggested to consider expansion in a changing or volatile environment

21. 10. Measure, recognize, and reward contributions to profitability • At least quarterly • Outpatient • Productivity (billable hours per month) • Volume of revenue per month • Individual profit/loss? • Residential • Retention by therapist

22. 11. Insurance plan rates are negotiable according to market conditions • Uniform rates vary depending on: • The purchaser requires a certain array • The provider’s position can leverage the market for a better rate • Cannot collude with other providers regarding rates but can negotiate individually

23. 12. Trend analyses, organization • Annual, review past 5 year trend in: • Net assets or change in net assets/expenses • Working capital or current ratio • Profitability of main service lines • Annual, review past 2/3 year trends • Days of operating expense • Days in receivable • Quarterly/monthly • Profit/loss of each major service line accrued • If cash is tight, current ratio or current assets • Change in net assets

24. Example Net Assets • Program X net assets: • At FYE 2007: $1,411,220 • At FYE 2008: $1,410,088 • Very close to break even year, but look at trends

25. Net Assets Trend • Trend adds more information, but performance issues not too urgent, until we look at . . .

26. Trend reveals a major cause for concern. Trend, Change in Net Assets Divided by Expenses