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Duke University Health System Internal Controls Over Financial Reporting February 2010 Agenda DUHS Financial Update and Current Plans DUHS Control Environment Service Level Agreements (SLA’s) with DU Expenditure and Investment Transaction Cycles Revenue Cycle

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duke university health system internal controls over financial reporting february 2010

Duke University Health SystemInternal Controls Over Financial Reporting February 2010

agenda
Agenda
  • DUHS Financial Update and Current Plans
  • DUHS Control Environment
      • Service Level Agreements (SLA’s) with DU
      • Expenditure and Investment Transaction Cycles
      • Revenue Cycle
financial profile
Financial Profile
  • DUHS is coming off two of its most successful operating financial years
  • Despite significant investment losses and liquidity challenges, DUHS maintained its Aa2/AA credit ratings in FY 09

($ millions)

five year capital plan
Five Year Capital Plan
  • DUHS plans to invest $1.2 billion in capital projects over the next 5 years
      • DUH Ambulatory Cancer Center $220 million
      • DUH Duke Medicine Pavilion $559 million
      • Other projects $421 million
  • Major projects are now committed
what does it take to support this five year plan of finance
What Does It Take to Support this Five Year Plan of Finance?
  • Annual Operating Margins of $150+ million for 5 years
  • Annual Cash Flow From Operations of $200+ million for 5 years
  • DUHS’ balance sheet “buffer” is current balance of $1.3 billion in cash and investments
  • DUHS will borrow $300 million in tax-exempt debt financing
  • Potential development campaign
margin improvement initiative update
Margin Improvement Initiative Update

*When fully implemented projected savings are $84 million annually.

($ thousands)

healthcare industry challenges
Healthcare Industry Challenges
  • Healthcare reform
    • Uninsured population
    • Healthcare spending cuts
    • Transparency/Tax Exemption
  • Federal Government budget deficits (Medicare)
  • State budget deficits (Medicaid)
divergent near term plans
Divergent Near-Term Plans?
  • DUHS – adding major facilities and clinical capacity
    • DMP and Cancer Center result in:
        • Approximately 850,000 additional square feet of space
        • Approximately 300 additional physicians
        • Approximately 2,100 additional FTE’s (16% increase)
        • 126 additional beds and 16 additional operating rooms at DUH
        • Major expansion in cancer exam rooms, infusion treatment spaces, radiology equipment
  • University – working to manage revenue challenges (including unavoidable implications on staffing) while maintaining or enhancing mission-critical services to all Duke constituencies
duhs control environment
DUHS Control Environment
  • April 1999 Operating Agreement between DUHS and DU governs organizational relationships
  • DUHS purchases from the University core processing support for many major transaction cycles
  • Disclosed fully in Note 15 – Related Parties in the June 30, 2009 DUHS financial statements
duhs control environment13
DUHS Control Environment
  • DUHS is solely responsible for only two major transaction cycles in the Health System:
      • Revenue Cycle
      • Medical Professional Liability Insurance
  • All other transaction cycles, most of which are high volume and process-oriented in nature, are managed by the University with DUHS as a “customer”:
      • Procurement and A/P Sub-Ledger
      • Payroll and HR
      • Fixed Asset Accounting Sub-Ledger
      • Commercial Banking Relationships
      • Investment Management through DUMAC
      • Capital Acquisition and Repayment
duhs control environment14
DUHS Control Environment
  • Service Level Agreements (SLA’s) have been developed with the University to better define each entity’s operating responsibilities to the other for shared services
  • Each SLA provides for:
    • Review of proposed annual DU budget for each service area by DUHS budgetary officials
    • Duties and responsibilities of each entity, including expectation of adequate internal controls
duhs control environment15
DUHS Control Environment
  • Multiple Information Technology organizations impact the DUHS control environment
    • Administrative Systems Management (ASM) operates SAP from within University Financial Services
    • Duke Health Technology Solutions (DHTS) is managed by the Duke Medicine CIO
    • DU Office of Information Technology (OIT) is managed by the University CIO (Duke-corporate technology strategies)
duhs control environment16
DUHS Control Environment
  • DUHS, as a not-for-profit entity, is not subject to Sarbanes-Oxley (SOX) requirements
  • While many SOX “best practices” have been adopted by DUHS, including risk assessments by multiple parties, Section 404 requirements for assessing, testing, and monitoring internal controls over financial reporting with annual certifications and reporting have not been implemented across the organization
  • For DUHS to be “SOX compliant”, DU would also need to be SOX compliant
duhs control activities
DUHS Control Activities

Expenditure and Investment Transaction Cycles

  • Essentially all are shared with DU
  • DUHS Authorization (from DUHS Board):
    • Annual Corporate Operating Budget
    • Corporate Capital Plan
  • Specific expenditures/investments require specific approvals by Health System Management
  • Once approved, much of the remaining back-office detailed processing takes place in DU systems
  • Ultimately recorded in the DUHS general ledger for financial reporting
slide18

University/DUHS Transaction Relationships

Cash-In

Cash-Out

Operating

DUHS Budget University

Decisions Transactional Processing

DUHS Revenue Cycle

DUHS

Funds

Available

Capital

DUHS Capital University

Decisions Transactional Processing

DUHS External Borrowing

DUHS Investing DUMAC

Decisions

Long Term Pool (LTP)

DCC Pool

duhs control activities19
DUHS Control Activities

Revenue Cycle

  • DUHS has sole responsibility for its revenue cycle
  • Revenue cycle accounting is primarily the responsibility of three functions within DUHS Finance:
    • Patient Revenue Management Organization (PRMO)
    • Reimbursement and Revenue Accounting
    • General Accounting and Financial Reporting
duhs revenue cycle accounting
DUHS – Revenue Cycle Accounting

PRMO

Etc.

Credit Balances

Write-Offs

Collecting

Billing

General Ledger Reporting

General Accounting and Financial Reporting

Net Patient A/R and Net Patient Revenue Valuation Estimates

Reimbursement & Revenue Accounting

DUHS A/R

Sub-Ledger

PDC A/R

Sub-Ledger

duhs prmo
DUHS - PRMO
  • Building a control environment in the PRMO over time
    • 10-member Quality Control group was formed and staffed
    • Deloitte was engaged to conduct a SOX “404-Like” review of all control activities that either were, or should have been, in the PRMO
    • Quality Control eventually moved from documentation to monitoring responsibility
  • Today - - a SOX “404-Like” model exists within the PRMO
    • Detailed control activity documentation is up-to-date for approximately 1,400 controls
    • Operating managers provide quarterly certifications of compliance levels with controls
    • Quality Control group tests both certifications and compliance with control activities and formally reports each quarter
duhs reimbursement and revenue accounting
DUHS – Reimbursement and Revenue Accounting
  • Internal Revenue Accounting
    • Valuation of patient accounts receivable at net realizable value
    • KPMG assisted with the development of a modelling process 10 years ago / DUHS has refined and improved over the years
  • External Revenue Accounting
    • Cost reporting and other third-party payments
    • Engaged outside expertise in 2008 to review policies and procedures over cost reporting, perform a GAP analysis, and help design a policy format to address weaknesses
    • Initial five processes are documented and being communicated
duhs general accounting and financial reporting
DUHS – General Accounting and Financial Reporting
  • KPMG Consulting assisted DUHS with the creation of a “world-class finance function” 10 years ago
  • Core to this was the creation of a strong, centralized general accounting, financial reporting and consolidation group
  • This group is responsible for closing the books each accounting period and preparing all consolidated financial reporting
duhs internal controls summary
DUHS Internal Controls - Summary
  • DUHS is not SOX compliant
  • DUHS has utilized appropriate external resources and expertise to advance its internal controls structure over financial reporting over time
  • DUHS Overall Goal – adequate system of internal controls to minimize the likelihood of a “financial surprise”