Craig E. Samitt, MD, MBA

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The Metamorphosis of Fallon ClinicTransforming
the Financial Performance of a Multi-specialty
Group Practice

• Craig E. Samitt, MD, MBA
• Chief Operating Officer, Fallon Clinic, Inc.
• Healthcare Financial Management Association
  Meeting
• May 17, 2005

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Our Focus for Today

• An introduction to Fallon Clinic.
• What is the vision that is driving our
  metamorphosis?
• What role has our financial transformation played
  in catalyzing our operational transformation?
• What tactics have weve used to enhance our
  bottom line?

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An Introduction to Fallon Clinic

• Established in 1929 by Dr. John Fallon and other
  Mayo Clinic MDs.
• Largest private multi-specialty group practice in
  Massachusetts, in 26 locations.
• 250 physicians and 1700 staff. 150,000 patient
  base.
• A national leader in clinical quality
• A vision to transform our industry

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Fallon Clinics Belief (Obsession 1)
Health Care Delivery is the only service
industry that doesnt act like one.
Fallon Clinics Vision
To become the gold standard in healthcare, with
service excellence as our differentiating factor.
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Fallon Clinics Belief (Obsession) 2 Health
care does not apply the tools and techniques
other industries use to excel.

• Market Research
• Business Process Re-Engineering
• Business Process Outsourcing
• Automation and Heavy IT investments
• Behavioral Interviewing
• Performance Management
• Balanced Scorecards and Metrics
• Marketing

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Vision without execution is called
hallucinationSteven Case, AOL Time Warner, Inc.
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Fallon Clinics Transformational Plan
Success Pride
Customer Service Loyalty
Physician Staff Recruitment, Motivation
Satisfaction
Operational Efficiency, Revenue Maximization, and
Enhancing the Bottom Line
Clinical Effectiveness, Quality Safety
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Our Focus Today Relates to
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Our Focus Today Relates to
Specifically, how has Fallon Clinic achieved its
financial transformation?
Operational Efficiency, Revenue Maximization, and
Enhancing the Bottom Line
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"I think, ladies and gentlemen, that this calls
for a wave. Harris, would you start us off?"
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Liquidity Days Cash on Hand
FY05 Target
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Liquidity Debt to Equity
FY05 Target
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Collections Fee-For-Service
93.0
FY05 Target
90.3
86.1
79.9
78.8
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Collections Days in A/R
FY05 Target
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FY04 Consolidated Operating Profit (pre-tax)
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The Drivers of Financial Transformation
Payor Mix Contract Negotiation
Process Re-Engineering Technology
Business Process Outsourcing
Divestiture Of Assets
Revenue Cycle Coding Enhancements
External Benchmarking
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Step 1. Changing the payer mix and renegotiating
contracts

• Moving beyond exclusivity with a single health
  plan
• Strategic contracting with the new health plans
• Evaluating the winner and loser contracts, and
  developing an aggressive negotiating stance
• Termination of some
• Conversion of some to group contracts
• Renegotiation of all others.

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New Payers and Revised Contracts

• New payor contracts

• New group contracts

• Renegotiated existing contracts

(Formerly One Health Plan)
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Revenue Mix (Gross FFS) by Payer
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Step 2. Divestiture of non-core assets

• Evaluating which assets are core to our strategic
  mission and vision, and which will remain
  profitable into the future.
• In order to enhance cash flow, divesting non-care
  assets
• Pharmacy Chain
• Partial ownership in rehab hospital
• Real-estate divestitures

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Step 3. Enhancing the Top Line

• Process mapping and re-engineering of the revenue
  cycle
• Encounter forms
• Denials
• Courtesy Discounts
• Bad Debt
• Coding versus productivity benchmarking and
  training
• Physician compensation adjustments
• Development of high-margin, new clinical programs.

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Revenue Collection Rate
FY05 Target
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Step 4. Benchmarking our performance

• Evaluating which of our core internal disciplines
  are more costly than the performance of peer
  organizations.
• Fallon Clinic completed its own home-grown
  benchmarking study.
• Detailed results may be found in the appendix.

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Overhead Cost Analysis Process

• External consulting expertise sought through a
  formal RFP
• 5 firms sent Request for Proposal
• None responded
• Alternatively, a study was conducted through GPIN
  (Group Practice Improvement Network) using a
  survey/questionnaire phone interviews.
• The study was designed directed by Fallon
  Clinic

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GPIN Respondents

• Criteria established for organizational
  comparisons
• Multi-specialty groups with the ability to
  analyze hospital and ambulatory overhead costs
  separately.
• 15 organizations expressed interest
• 7 organizations participated
• Data incomplete in some areas
• Consistent comparisons could generally be made
  against 3 or 4 of the 7 other organizations
• Comparison groups cohorts were not necessarily
  consistent from metric to metric.

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10 Areas Successfully Analyzed

1. Clinical Support Staff
2. Occupancy
3. Information Systems
4. Medical Records Transcription
5. Revenue Operations
6. Human Resources
7. Finance
8. Marketing
9. Compliance, Risk Management Nursing
   Administration

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GPIN Respondents Geographical Base
Fallon Clinic Worcester, MA
Woodland Clinic Woodland, CA
Medical Associates Health Centers Milwaukee WI
Palo Alto Medical Foundation Palo Alto, CA
Vanderbilt Medical Group Nashville TN
CIGNA Medical Group Phoenix, AZ
Esse Health Webster Groves MO
BJC Medical Group St. Louis MO
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GPIN Respondents Background Information
High Low
Total FTE 2,599 272
Patient Visits/Encounters 1,095,024 280,489
Avg. Panel Size 2,933 2,173
Locations 31 1
Physician FTE 303 61
Capitation 74.2 0
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Sample of Overhead Analysis DataClinical
Support Staff
Fallon Clinic High Low Average
Clinical Support Staff per Provider FTE 3.4 5.1 0.4 2.9
Nursing FTE per Provider FTE 0.93 1.29 0.27 0.68
AP FTE per Physician FTE 0.28 1.23 0.14 0.52

• The remainder of the analysis can be found in
  your appendix.

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Overhead Analysis Takeaways

• Clinical support mix was high
• 1.0 million in expense was recognized via
  re-configuration of staffing mix.
• Occupancy costs were high
• Analysis of space utilization with reduction in
  clinical and administrative occupancy.
• IT costs were high
• Detailed staffing review with aim toward
  outsourcing non-core functions to a lower cost
  option.
• Dictated and transcribed lines/MD were high
• Implement EHR

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Step 5. Business Process Outsourcing

• Outsourcing of commodity functions to lower cost
  alternatives (both nationally and
  internationally)
• Human Resources
• IT
• Transcription
• Revenue Operations (Considered but did not)
• Developing alternative means of financing cost
  centers with rapidly rising expenditures
• Captive formation

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Fallon Clinic Malpractice PremiumsOur Captive
(CMIC) vs. Commercial Market
Premium Cost in Millions
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Step 6. At Fallon Clinic, process re-engineering
is king

• Process has been the key ingredient in helping
  other service leaders differentiate.
• Ritz Carlton
• Southwest Airlines
• With this in mind, Fallon Clinic has scrutinized
  and fixed nearly every broken business process.
• Example Telephones

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Telephone Complaints
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Step 6 Continued. Complete technological
transformation through nested ROIs

• Nested ROIs is our expression for strategic
  capital investing, beginning with low cost high
  ROI and proceeding to high cost lower ROI.
• This strategy has enabled us to transform
  technologically
• Voice recognition
• Telephones
• PACS
• EHR

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Thank You. Questions?
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Contact Information

• Craig E. Samitt, MD, MBA
• Fallon Clinic, Inc.
• 100 Front Street
• Worcester, MA 01608
• Tel [phone]
• E-mail craig.samitt_at_fallon-clinic.com

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Fallon Clinic Administrative Clinical Overhead
AssessmentAppendix and Supporting DetailCraig
E. Samitt, MD, MBAAmerican Medical Group
AssociationMarch 11, 2005
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1. Clinical Support Staff Costs
Fallon Clinic High Low Average
Clinical Support Staff per Provider FTE 3.4 5.1 0.4 2.9
Nursing FTE per Provider FTE 0.93 1.29 0.27 0.68
AP FTE per Physician FTE 0.28 1.23 0.14 0.52
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2. Occupancy
FC at Core Hospital FC at other sites Total Fallon Clinic High Low Average
Cost per Square Foot (Rent Taxes only) 24.97 16.61 17.59 18.05 12.45 15.70
Utilities per Square Foot Included in base 6.60 5.39 19.04 3.46 8.77
Cost per Square Foot (all costs) 24.97 23.21 22.98 31.49 18.64 24.47
Current Central Massachusetts Market Rate
15.50 per square foot (base rent and taxes)
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3. Information Systems
Fallon Clinic High Low Average
of Total Expenses 3.05 3.89 0.26 1.95
Is any part of IT outsourced? Yes N/A N/A 6 of 7 yes
FTE to Total FTE 3.62 3.63 0.72 2.23
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4. Medical Records Transcription
Fallon Clinic High Low Average
Total Cost per Transcribed Line 0.12 0.23 0.10 0.16
Lines Transcribed per Provider FTE 99,339 102,420 11,036 53,881
Outsourced Transcription 70 100 14 65
Digital Dictation 87 100 48 91
Use some form of EHR No Yes Yes 5 out of 8 yes
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5. Revenue Operations
Fallon Clinic High Low Average
of Total Expenses 1.51 6.89 1.04 3.28
of Total Revenue 1.55 8.93 1.05 4.62
Automated Charge Entry No N/A N/A 3 of 7 yes
FTE to Total FTE 5.79 15.61 2.39 8.77
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6. Human Resources
Fallon Clinic High Low Average
of Total Expenses 0.51 0.57 0.09 0.35
FTE to Total FTE 1.07 1.56 0.13 0.71
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7. Finance
Fallon Clinic High Low Average
of Total Expenses 0.74 0.93 0.30 0.70
FTE per 10.0 M in net revenue 1.25 1.80 0.47 0.98
Decision Support System No N/A N/A 4 of 7 yes
FTE to Total FTE 1.66 7.36 1.81 2.45
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8. Marketing
Fallon Clinic High Low Average
of Total Expenses 0.12 0.44 0.04 0.23
Marketing Expenses per Encounter or Visit 0.21 1.34 0.06 0.53
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9. Compliance, Risk Management Nursing
Fallon Clinic High Low Average
of Total Expenses 0.41 0.55 0.15 0.34
Expense per Provider FTE 3,315 4,073 383 2,288