Economic Behavior of the PR Medical Services Administration

The Economic Behavior of the Puerto Rico Medical Services Administration: A Function of its Dynamic Technical and Social Changes in the existing Organizational Architecture, embedded within the Healthcare, Financial, Academic, and Political Macro Ecosystems

"The intellect has little to do on the road to discovery. There comes a leap in consciousness, call it intuition or what you will, and the solution comes to you and you don't know how or why." Albert Einstein

 Nilza I. Cruz Ruiz

Former General Administrator

PR Medical Services Administration

(ASEM)

May, 2016 - Short Summary

Executive Summary

Puerto Rico is facing a healthcare affordability defining moment within the Commonwealth’s Economic Crisis. Healthcare industry stakeholders are striving to pay climbing healthcare costs. Hospitals are being forced to make difficult financial choices. The island’s age growing population is going without the needed care.  As a direct result, many health professionals, and a significant patient segment, which depends on government health care services are migrating to the mainland.

Young Puerto Ricans are frustrated by limited job prospects on an island that has staggering unemployment at over 12 percent. It is more than double the mainland’s rate even before the governor’s announcement in June 2015 of an unpayable $72 billion public debt. “Experts say the situation is not as simple as a brain drain”. “It’s not just an outmigration of the most-educated people. It’s an outmigration of workers,” said Mark Hugo Lopez, the director of Hispanic Research at the Pew Research Center, “and that’s true of people who might be doctors or lawyers but also true of people who might be technicians, engineers or truck drivers.”

The Puerto Rico Medical Complex, which is composed of tertiary and above tertiary hospitals, outpatient clinics, Comprehensive Cancer Research Center, the University of Puerto Rico Medical Science Campus, and other medical facilities, is spearheaded by the Administration of Medical Services of Puerto Rico (hereinafter: ASEM). It is the appointed landlord of the donated real estate under which the Complex is instituted.  Classified as a “Business Type Activity” within the Commonwealth’s executive and financial structure. This fund accounts for the operations associated with providing support through centralized health infrastructure services to the hospitals within the complex (hereinafter: Participating Institutions). Examples are: diet, laundry, instrument sterilization, security, emergency room, operating rooms, blood bank, ancillary services, and outpatient services. Infrastructure is defined by the economic and additional resources associated with physical facilities, human capital, materials, equipment, information technology, utilities, and standard operating procedures, among others. Governance and internal politics are in-built within the structure.

 ASEM operates under the legal base of Law No. 66, June 1978, repealing previous Law 54 of 1957.  The legislative history shows that Law 54 was amended due to the escalating  debts of the participating institutions and the inability (governance) of the Corporation’s Board of Directors (which was mainly composed by the  directors of the participating institutions) to resolve the situation of billing and paying between themselves. ASEM’s fiscal situation was intended to be solved by the implementation of this measure. This, by transferring ample decision making "powers" to the Secretary of Health (except for regulation) and establishing payment safeguards amongst other controls of financial nature. Nevertheless, this objective’s achievement was unsuccessful.

One of the elements with "claws" incorporated into this new law, motivated by the severity of the debt in the effect was positioned in Article 13.  Among other things, it set out for the Secretary of Treasury to send ASEM at the beginning of each fiscal year total funds commensurate to the amount the participating institutions certify they would consume during said year. Further, it authorized the Director of the Office of Management and Budget (OMB) to carry out transfers to ASEM in case of defaults due to insufficient funds by the institutions.

  Unfortunately, this objective’s achievement had failed for years. As a matter of fact, the Office of the Comptroller of Puerto Rico, recently concluded that despite the millions in debts and their effect on the daily operations of the ASEM, CEOs over time did not proceed as provided in the Article 13. However, during the current fiscal year (2015-2016) we proceeded as provided by law. Since the approval of Law 66, (28 years) the fiscal behavior continued and the need for capital improvements and upgraded technology forced a loan from the Government Development Bank as domestic capital or reserves were inexistent. Despite this, the underlying organizational architecture remained unchanged. Again, another piece of legislation to deal with the problem was submitted and Law 112 of 2005 was approved. It mandated the Secretary of Health and Executive Director of ASEM to prepare a reorganization plan within a period of one year. Works began and in January 31, 2007, and both officials submitted to the Governor a document entitled "Puerto Rico Medical Center Proposed Actions for Institutional Improvement (2007-2008)." However, the study concluded: "... there should be more information to determine the need for change and establish the feasibility of reformulating the organizational structure." Subsequent to the report, no affirmative action occurred.

So, given the accelerated growth resulting from the gathering of economic commitments between ASEM, its vendors, government agencies, ASEM Institutions accounts receivable, and particularly, since 1997, the effect of the Government Health Reform, insurance contractual adjustments and uncollected payments from non insureds, economic conditions worsened again. By this time, in order to temporarily alleviate the financial situation, Act No. 174 of 2010 was approved. This allowed ASEM to incur in obligations up to 285 million dollars to pay their debts, improve physical facilities and provide liquidity for operations. The Act identified the Government General Fund as payment for the line of credit.   It was also guaranteed by collateral and ASEM would report GDB financials on a monthly basis through Fiscal Oversight Agreement statements in addition to operational measures as aggressive collecting efforts and obtaining operating efficiencies. To date, since the organizational structure remains the same, the adverse economic behavior has continued to grow exponentially.

 As a consequence of ASEM’s evolution, the only trauma hospital in Puerto Rico and the Caribbean is encompassed under its governance through Law 101 of 1965. Therefore, the two main sources of revenue for ASEM are centralized health infrastructure services vended to participating institutions which constitute 71% or $96 million of its net service revenue, and reimbursements collected from contracted insurers and/or self- insured patients for health related services provided through the emergency room, trauma hospital, and outpatient facilities. These represent 29% or $40 million of annual net revenues (audited results, Fiscal Year 14-15).

ASEM also provides its medical facility infrastructure as teaching and research resources for the Medical Science Campus attending doctors and residents.

From the business standpoint, 6 (six) out of (8) eight or 75% of ASEM participating institution consumers represent 99% or $97 million of this segments cash revenue influx for projected FY 15-16. Historically this has been the trend. Four (4) of these institutions, which represent $88 million are under the authority of the Department of Health (the Department itself, a substantial Consumer). Since services provided under the Department are classified as government activities, they are mainly subsidized by the commonwealth’s general fund which is under significant financial constraint. Therefore, disbursements of dollar amounts are restrained. As a result, their inability to pay ASEM for acquired support centralized services is increasing.  While the remaining participating institutions are government corporations and a non-profit organization, their capacity to meet with a balanced budget is adverse. Monthly cash generated by the participating institutions line of business is projected at an average of $8.2 million for FY 15-16. With regards to patient service revenue, fifty three percent (53%) of ASEMs patients are insured by the government (Health Reform and ACAA). Forty percent (40%) represents health reform. Existing ARRA (American Recovery and Reinvestment Act of 2009) funding and financial disorder, amongst other factors are a threat, and may impact this portion of the aggregate. Monthly cash generated by the patient service revenue line of business is projected at an average of $2.7 million for FY 15-16, for which $1.8 million or 67% are collected from the government (ASES (Health Reform) and ACAA). Said factors contribute to the weakness of ASEM’s liquidity, net position, and debt accumulation. Core infrastructure deterioration is also manifested. This directly jeopardizes revenue generation for both lines of business. Examples are worsened operating rooms, instrument sterilization system, laundry and diet. Indirect costs associated with increased risk exposures are linked with infection control and joint commission standard compliance.

 ASEM’s cash position may continue to fail exponentially for the following reasons:

 1) Lack of customer diversification - 99% of participating institutions are financed by the government.

2) Revenue Influx Mix - 79% or $96mm of ASEMs net service revenue relies on participating institutions.

3) Inability of Payment - due to 1) and 2) and the Commonwealth economic crisis impact.

4) Public policy related to the caregiving of uninsureds, John Doe and alien patients.

5) Universal Third Party Payer System model for insured patients.

6) Lack of tertiary an above tertiary health structure amongst private hospitals in PR. 41% of patients received through the ASEM emergency Room are transfers from private hospitals.

7) Uncompensated health care costs triggered by health services provided to uninsured patients    (average of 10 million/year), contractual adjustment (average 57%) and bad debts (Average 4 million/year).

8) Insured Patient Mix – 53% of patients are insured by the government.

Furthermore, the 8 (eight) consumers (including the Department of Health) within the Medical Center Complex are independently governed. Three (3) governed by the Department of Health: University District Hospital, Pediatric Hospital, and the Administration for Services of Mental Health and Against Addiction (ASSMCA). One (1) is the Department of Health. One (1) governed by the municipality of San Juan: Municipal Hospital. Two (2) corporations: Cardiovascular Center, and Industrial Hospital (under the State Insurance Fund Corporation). One (1) governed under a non-profit organization: Oncological Hospital.

Within the Medical Center Complex hospitals including Trauma, there are approximately 1,056 beds with an average occupancy of 68%. Because of independent governance as a result of the existing organizational architecture, beds are not shared. This represents an example of the fact that there is great opportunity to improve efficiency and effectiveness. Without a dramatic transformation of the actual Macro Healthcare Ecosystem and the Medical Center Complex, PR will continue to spend superior dollar amounts on increasing health related costs, rather than readdressing capital in preventive, and individual planning healthcare, targeting social, and rehabilitation factors. This, combined with an effective financial structure reconceptualization (from fee for service to value based healthcare).

Even though ASEM’s FY 14-15 audited financial statement show a net operating revenue increase of 11% or $13 million, expense decrease of 5% or $9 million, and operating loss decrease of 34% or $22 million compared to FY 13-14, its current organizational architecture and financial structure will promote increasingly untenable financial results in the next six (6) months if a transformation of impact does not occur. Accounts receivable accumulated projection to June, 2016 is $65 million. This includes the department of health ($7million), other participating institutions ($37 million), health plan uncompensated costs (20.3 million) and other ($700 thousand).  The accumulated accounts payable projection to June, 2016 escalates to a staggering $487.6 million. This amount includes the Government Development Bank (GDB) debt which has increased from $283 million in November, 2010 to $312.5 million including interests. ASEM’s dependence on the General Fund will only increase.

 This paper suggests, that in order to change the adverse economic behavior, which proves to be a trend for at least the past 20 (twenty) years, the existing organization should be transformed.

It also explains and proves comprehensively, how, through the introduction and deployment of the Business Oversight Model: “Hacia la Re conceptualización Del Centro Medico de Puerto Rico…” improved financial results, operational efficiencies, and social / behavioral changes have been achieved. But they will not be sustained, if the existing structure and healthcare public policies persist.

The model prompts that the interrelations/or non-interrelations fostered within its core dominant factors, living variables, and external healthcare, fiscal, academic and political ecosystems would produce commensurate economic results. It interrelates clinical, operational, financial, and social data in order to gather meaningful figures proportionate with the risk scenario, driven by patient requirements. Analysis of information and social behavior would then be introduced into the organization’s architecture and used to perform simulations to ensure continuous operational and financial improvement. This, while upholding patient wellbeing and satisfaction.

 The proficiency of the model would require the existing structure to be transmuted, within a parallel revolution of the mentioned macro ecosystems. It is not meant to “survive” working independently, as neither is ASEM.

The following charts show historical financial results (based on audited financial statements FY 1993 – 2015):

ASEMs operations within its existing community hospitals and academic health structure are on shaky ground.  

Achieving sustainability should include, but not be limited to a transformed macro integrated healthcare prevention system. Factors to be evaluated should include the development and retention of healthcare professionals, transformed economic structure incorporating alternate models within the insurance company third party payer system (especially for the existing Health Reform model), and strategies to promote economic development through medical tourism, research, development, and academic exchanges, for example.

 The financial crisis Puerto Rico is facing is positively correlated to a continuously growing negative economy for at least the past twelve years, a population in which more than 50% is under the level of poverty, facing threatening diseases and aging.  Data intelligence is critical. Intelligence structures need to enhance information interaction and promote sustained technological innovation.

I do have to strive on the fact that being part of the Puerto Rico Administration Medical Center executive team as General Administrator for the past 3.5 years has been a true professional challenge,   but at the same time, it’s been a fulfilling experience providing the utmost opportunity of being part of the Medical Center Community. But what does this really mean? Well, it’s hard to express in words, but I’ll try:

 Facilitating coworkers at all levels, mourning with expired and grave patient relatives, praying with them, and sharing their faith; have made all the difference!  I was part of the Ecosystem.

Having the opportunity to talk with the indigent and discovering they’re really special!  The passion we see on a day to day basis, from our surgeons, those so well educated professionals, that are by far focused on saving lives, on making a difference, on making us and the population understand how important prevention is… for the sake of our lives, is simply contagious.

  All of the above, really make every hour, every difficult managerial decision, any daily work frustration just transform into a smile… And the feeling of satisfaction… of giving, of understanding tomorrow one can be the one involved or hurt in a serious accident, (that’s called empathy), well… no words to describe.

Internal Politics, governance issues, a full array of colorful personalities, very complex historical issues, to say the least, well yes, they definitely exist and the culture and behavior are also unique. They represent the evolution of the existing system throughout more than fifty (50) years. 

But none of the working or professional environments which I’ve been part of: VP positions in multinational insurance companies, or Boards of Directors, have provided me with the chance to study and observe closely and personally, the real interrelation and results, of living variables, as I refer to at the beginning of this paper; along with their co-existence and mutations in the Medical Center environment.

Anecdotes related to my first meetings can be shared. I would ask questions, looking for answers based on facts, on empirical data, but no! Answers began with phrases like “I think,” “I understand”, “this should be” or “I was told…”. In addition, departments worked totally independent, and focused on the day to day “problems” of their “small world” or their respective areas, or their perspectives, but they did not see how ASEM should produce results systemically, as a whole, and the fact that everything revolved around a patient centered ecosystem!

 Having many individual pieces called results. Well, this simply was part of the culture, and sincerely, during these initial months it was complex, to the least. What would this imply in terms of measurements, data intelligence, and decision making? It was scary. And in 2016, just the beginning.

 This did not apply to all coworkers, but for many. It was the architecture of the system, the living variables coexistence, mutations produced, and non-evolution and/or counter evolution throughout many years! The problem was not only technical as to “fixing” the economic behavior of ASEM, but has to be addressed integrating the social and behavior factors as well.

And so, the first opportunity was identified: understanding the organization, the underlying structure, and the results, the culture, and people behavior.

The answer:  The Introduction of the new Systemic Oversight Business Model: “Hacia la

Re conceptualización  del Centro Medico de Puerto Rico…”

As to our initial Hypothesis:

The data and information provided throughout this paper, suggests the hypothesis proves to be true. Many efforts impacting operational, technical, social, and behavioral components within the existing Organizational Architecture, and Financial Structure, were addressed based on the introduction and deployment of the new Transformed Management Oversight and Fiscal Control Platform.  This dominant factor promoted a direct impact within the described “living variables”, upholding positive change in ASEM’s immediate Economic Behavior. But because the Organizational Architecture and Financial Structure remain the same within also non-impacted Healthcare, Economic, Academic and Political Ecosystems; no transformation has occurred. Improved economic behavior will not be sustained, and will fall into de category of temporary remedies. But, the ASEM Top Management team alone cannot perform the much needed transformation.

In order to Transform the existing organization and promote sustained Economic Behavior impact, the existing Organizational Architecture, Financial Infrastructure, and Macro Ecosystems need to change and be designed to co-exist. It’s time.

As the following chart shows, ASEM has been operating in deficit since FY 1998 year, in which the health reform system based on the universal third party payer system model was deployed in its medical facilities. The third party reimbursement model is also in force for non-government insured patients.

  

It’s not as complicated as we may perceive…

 Providing health services to patients was part of ASEM’s evolution, though its core business initiative was intended to sell critical infrastructure services, to the specialized above-tertiary hospitals within the Medical Center Complex, or Participating Institutions. But this concept slowly miscarried.

 

The institutions were not only failing to pay ASEM for their consumption on a timely manner, but were acquiring services with private vendors. ASEMs service costs were slowly rising, mainly because of pricing factors associated with employee salaries and/or benefits related with Union Agreements which were truly costly arrangements in paper.  The cash never existed. Indeed, part of the critical economic history of the PR Administration for Medical Service. Plus, the disintegration of the Arbona Healthcare System, in addition to the PR Government Health Reform, the transfer rate to ASEM of patients from private hospitals (41%) and the public policy of providing services to insured, noninsured, john doe’s and alien patients, significantly deteriorated ASEM’s liquidity situation. All factors caused patient mix to be driven by government insured patients. Contracted rates with government reform insurers represent an average of $.40 for each $1.00 invested, making it impossible for ASEM to offset the financial impact of annual increasing health related costs and required infrastructure, triggered by patient mix inelasticity, and the existing economic structure.

A meeting of the minds within the Commonwealth, Department of Health, Legislative and Executive branches, need to be consolidated. Only we are responsible for the transformation of the Puerto Rico Health System, in a Non-Political manner.  We need to invest in healthcare, with a systematic business approach, focused on prevention and wellbeing.