Meridian Group_Final Business Plan

The Future of Inpatient Dialysis Service at

Alamance Regional Medical Center

CAPSTONE BUSINESS PLAN

Deidre Boozer Robin Larson Jason LoVerdi

Chris MacFadyen Tamar Odle

Department of Health Policy and Management

UNC Gillings School of Global Public Health Spring 2012

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TABLE OF CONTENTS EXECUTIVE SUMMARY 5

1. INDUSTRY ANALYSIS 8

1.1 OVERVIEW OF DIALYSIS TREATMENT 8

1.2 INDUSTRY GROWTH 8

1.3 DISTRIBUTION & SUPPLY CHAIN 9

1.4 KEY TRENDS 9

New technology 9

Hospital outsourcing 10

Aging population 10

Medicare reimbursement 10

Legal / Political Trends 10

2. MARKET ANALYSIS 11

2.1 STATE-WIDE TRENDS 11

2.2 TARGET MARKET & PATIENT BASE 11

Primary service area 11

Target patient population 11

2.3 MARKET GROWTH 11

2.4 HEALTH PROFILE & MARKET DEMOGRAPHICS 12

Public health profile 12

Patient profile 12

2.5 FUTURE GROWTH POTENTIAL 13

Growth in Prevalence of ESRD 13

Ambulatory “Awareness Effect” 13

3. COMPETITIVE ENVIRONMENT 14

3.1 CURRENT MARKET SHARE 14

3.2 MAJOR COMPETITORS 14

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UNC Health Care 14

Duke University Health System 15

Moses Cone Health System 15

3.3 BARRIERS TO ENTRY 15

Competitive position 16

3.4 LEVEL OF COMPETITION 17

3.5 FUTURE COMPETITORS 17

4. LEGAL / REGULATORY ANALYSIS 18

4.1 CERTIFICATE-OF-NEED 18

4.2 HEALTH REFORM / VALUE-BASED PURCHASING 18

Bundled Payment system 18

Value-based purchasing 18

5. INTERNAL ANALYSIS 19

5.1 STRENGTHS, WEAKNESSES, OPPORTUNITIES & THREATS 19

5.2 STAKEHOLDER ANALYSIS 19

5.4 CAPACITY & PATIENT VOLUME 21

Current capacity 21

Patient volume 21

5.5 PATIENT MIX & REIMBURSEMENT 22

5.6 PAYER MIX 22

5.7 CAPACITY PROJECTIONS GIVEN CURRENT STATE 23

6. RECOMMENDED STRATEGY 23

6.1 RECOMMENDATIONS 24

Expand 24

Contract 24

6.2 IMPLEMENTATION 24

7. IMPLEMENTATION PLAN 25

7.1 CURRENT LOCATION AND FUTURE LAYOUT 25

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7.2 IMPLEMENTING EXPANSION 26

7.3 IMPLEMENTING IN-HOUSING 26

8. OPERATIONS PLAN 28

8.1 STAFFING MODEL 28

8.2 WORK SCHEDULE 28

8.3 NURSE FLOATING & ON-CALL 29

8.4 MAINTENANCE SERVICES 29

8.5 RECRUITMENT & RETENTION 29

9. AWARENESS CAMPAIGN 31

9.1 REINFORCE DEDICATION TO DIALYSIS PATIENTS & COMMUNITY 31

9.2 INCREASE INTERNAL REFERRALS 32

9.3 EXTERNAL OUTREACH 32

9.4 IMPLEMENTING THE AWARENESS CAMPAIGN 33

10. FINANCIAL PERFORMANCE 35

10.1 PAST AND PRESENT PERFORMANCE 35

10.2 EXPANSION AND EQUIPMENT COSTS 35

10.4 STAFFING & FLOTATION COSTS 35

10.3 PROJECTED NET INCOME & COST PER TREATMENT 36

10.4 NET PRESENT VALUE & SENSITIVITY ANALYSIS 37

Net present value 37

Sensitivity & Scenario analyses 37

10.5 OTHER APPLICABLE FINANCIAL STATEMENTS 37

11. MEASURING PERFORMANCE & EXIT STRATEGY 39

11.1 Key Barriers to implementation 39

11.2 Performance measures 40

11.3 Exit strategy 40

12. PUBLIC HEALTH & MEETING COMMUNITY NEED 42

APPENDIX 1: EXAMPLE OF HEMODIALYSIS EQUIPMENT 43

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APPENDIX 2: OUTPATIENT REVENUE GROWTH, 2009 TO 2012 44

APPENDIX 3: INDUSTRY DISTRIBUTION OF DIALYSIS PATIENTS 45

APPENDIX 4: ECONOMIC SENSITIVITY ANALYSIS OF OUTPATIENT DIALYSIS INDUSTRY 46

APPENDIX 5: DIALYSIS PATIENTS ADMISSIONS PER PATIENT-YEAR 47

APPENDIX 6: NEPHROLOGY MARKET SHARE MAP 48

APPENDIX 7: VALUE BASED PURCHASING INITIATIVE 49

APPENDIX 8: PORTER’S FIVE FORCES 50-51

APPENDIX 9: STAKEHOLDER ANALYSIS 52

APPENDIX 10: CON LAW IN NORTH CAROLINA 53

APPENDIX 11: EVALUATION OF ALTERNATIVES 54

APPENDIX 12: DISTRIBUTION MECHANISMS OF AWARENESS CAMPAIGN 55

APPENDIX 13: STAFFING MODEL CALCULATIONS & ASSUMPTIONS 56

APPENDIX 14: EXAMPLE OF STAFF WORK SCHEDULE 57

APPENDIX 15: EXAMPLE OF NURSE JOB DESCRIPTION 58

APPENDIX 16: DETAILED NPV COMPARISON 59

APPENDIX 17: NET INCOME WITHOUT CONTRACT 60

APPENDIX 18: NET INCOME WITH CONTRACT 61

APPENDIX 19: GROSS MARGIN COMPARISON 62

APPENDIX 20: SENSITIVITY ANALYSIS 63

APPENDIX 21: SCENARIO ANALYSIS 64

APPENDIX 22: PERFORMANCE GOALS 65

WORKS CITED 66

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EXECUTIVE SUMMARY

BACKGROUND

Alamance Regional Medical Center (ARMC) is a non-profit community hospital located in Burlington North Carolina. ARMC currently operates a three-bay dialysis unit which provides inpatient dialysis services to hospitalized patients. Since the unit opened in 2009, management of operations has been outsourced to DaVita, a large outpatient dialysis provider, who provides ARMC with the necessary staff and equipment to run the unit. Prior to 2009, residents in Alamance County who required inpatient dialysis treatment had to travel long distances to receive acute dialysis care. When the unit first opened, ARMC expected to receive between 6 and 8 patients per month. In its first month of operation, it received nearly 23 patients. Since then, the need for inpatient dialysis services has continued to grow. To help ARMC expand its operations to better meet the growing need for inpatient dialysis services, the Meridian Group was asked to develop an expansion strategy. After a thorough analysis, the following recommendations were developed:

RECOMMENDATIONS

1. ARMC should increase the size of its inpatient dialysis unit by 416 square feet and add one additional dialysis bay

2. ARMC should terminate its contract with DaVita and bring the operations of its inpatient dialysis service in-house

3. ARMC should follow the implementation plan outlined by the Meridian Group to ensure successful expansion and in-housing of its inpatient dialysis services

CURRENT CAPACITY & PATIENT VOLUME

ARMC’s three-bay inpatient dialysis unit receives an average of three to five patients per day. The unit operates at capacity when it treats six patients per day. Higher than expected patient volumes have resulted in the unit operating at overcapacity approximately 15% of the time, or approximately one day in every seven.

MARKET GROWTH & PATIENT DEMAND

The target market is Alamance County, home to 85% of ARMC’s inpatient dialysis patients. Need for inpatient dialysis has grown considerably in this target market over the past several years. Patients with end-stage renal disease (ESRD) average approximately two hospitalizations per-year. The number of Alamance residents with ESRD grew from 177 patients in 2001 to 288 patients in 2011. This represents a 61% increase in ESRD prevalence over the past 10 years. Looking forward, the number of ESRD patients requiring inpatient services is expected to grow by 6% annually.

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COMPETITION

ARMC currently holds 58% of the inpatient all-discharge dialysis market. Major competitors include UNC Health Care, Duke University Health System, and Cone Health. While UNC and Duke hold competitive advantages in size and brand-recognition, ARMC has the advantage of location and convenience.

EXPANSION & OPERATIONS

ARMC’s dialysis unit will be expanded into the four office spaces adjacent and to the west of the unit. An additional dialysis bay will be added to increase treatment capacity. ARMC will also terminate its current outsourcing contract and staff the newly expanded inpatient dialysis unit with its own employees and equipment. To meet projected demand, ARMC will need to hire three full-time registered dialysis nurses, three part-time nurses, and one nurse manager to oversee operations. A minimum of two nurses will be staffed 7am to 7pm with one nurse on 24 hour on-call every day except for Sunday when only one nurse will be staffed on 24 hour on-call. ARMC will also need to contract with a specialized biomedical technician to provide maintenance and support to its dialysis equipment.

AWARENESS CAMPAIGN

Marketing of the newly expanded, in-housed unit will consist of an awareness campaign. It will be important for former hospitalized dialysis patients and community residents with impaired kidney functions to know that ARMC is a viable option if they need to be hospitalized. The campaign will also target ARMC’s clinicians and physicians i.e. Primary Care Physicians, Nephrologists, Cardiologist, and Vascular Surgeons, ambulance services/emergency medical technicians, and local outpatient dialysis centers. The three main objectives of the awareness campaign will be to: 1) reinforce ARMC’s dedication to dialysis patients & community, 2) increase internal referrals, and 3) external outreach. The campaign will employ brochures, informational letters, direct mailings, phone outreach, internal emails/newsletters, and physician to physician mobilization to build awareness about the expansion.

FINANCIAL PERFORMANCE

Historically, inpatient dialysis services provided at ARMC have produced a net loss to the hospital. As a result, the net present value (NPV) of expanding and bringing services in house is projected to

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be negative. However, when compared to the NPV of expanding and continuing to outsource, ARMC is projected to save approximately $1 million by in-housing its dialysis services. This NPV savings will be recognized over five years with a $200,000 to $400,000 savings in net income annually. ARMC will also be able to cover the start-up costs of expansion (~$202,000) within its first year given projected savings from lower cost per treatment.

MISSION & COMMUNITY NEED

According to ARMC’s mission statement, the hospital’s vision is to be “desired and chosen by the community for healthcare services based on a reputation of excellent services, modern facilities and equipment, skilled and compassionate staff, friendly environment, and their relationships with other healthcare organizations.” In order to affirm this mission statement, ARMC must ensure that it has the capacity to continue to meet the rising community need for dialysis services. Accordingly, ARMC must also have the staff and expertise to guarantee high quality care to all patients receiving dialysis treatments. Establishing an in-house, expanded inpatient dialysis unit is a strong step in that direction.

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1. INDUSTRY ANALYSIS

1.1 OVERVIEW OF DIALYSIS TREATMENT Dialysis is used to treat patients who have lost kidney function. The dialysis process involves removing waste and excess water from the blood stream. Blood is pumped out of the blood stream and through a hemodialyzer, or artificial membrane. This membrane acts as a filter for waste and excess fluid that accumulates in the blood stream. Once waste is removed, the purified blood is pumped back into the body.1 Patients can receive either hemodialysis or peritoneal dialysis. Hemodialysis involves stationary treatment in four hour increments while peritoneal dialysis is mobile and can be done during the day or at night while the patient is sleeping. Treatment can be performed in an inpatient setting, in an outpatient facility, or at home. Outpatient facilities treat patients with chronic kidney problems while inpatient dialysis treatment involves more severe cases. Patients requiring inpatient dialysis care are very sick individuals. Inpatients requiring acute dialysis treatment are typically admitted through the emergency department (ED), often for non-kidney related ailments such as shortness of breadth or abdominal pain, and later on in the course of treatment, a determination is made that dialysis treatment is needed. Patients receiving inpatient dialysis treatment often receive dialyiss on a regular basis in outpatient settings and have a history of chronic kidney problems that require maintenance dialysis care three to four times a week. Many suffer from end-stage-renal disease (ESRD), among other co-morbidities. The most prevalent primary diagnosis for patients admitted for inpatient treatment includes altered mental status, anemia, shortness of breath, nausea and vomiting, and abdominal pain.2

1.2 INDUSTRY GROWTH

Rising prevalence of chronic kidney and end-stage renal disease has spurred large growth in the need for dialysis treatment. More than 20 million Americans currently suffer from chronic kidney disease. As of 2009, the number of patients with end-stage renal disease (ESRD) reached a record high with 571,414 under dialysis treatment3. This represents a 40% increase from 2000 levels.4 This also represents the largest increase in point prevalence of ESRD in over a decade.5 Growth in patient demand for dialysis services has been coupled with large increases in revenue from outpatient services and Medicare spending. Since 2009, outpatient revenue from dialysis services has grown by nearly $1.2 billion dollars. Future estimates project the dialysis industry to grow by another billion dollars in 2012, representing an 8% increase in annual revenue above projected growth in GDP.6 (For a more outpatient projections, See Appendix 2)

Figure - Picture of Hemodialysis Treatment

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There has been equally large growth on the inpatient side. Since 1991, Medicare spending on inpatient care for ESRD patients has grown by 9% annually (see Figure 2).7 Over the same period, spending per treatment remained flat relative to inflation, suggesting that growth in inpatient Medicare spending is primarily due to growth in the volume of treatments as opposed to growth in treatment costs. Industry growth has also been consistent year-to-year and relatively insensitive to market pressures and trends in inflation and employment. 8,9,10,11,12 (See Appendix 4 for Industry Sensitivity Analysis)

1.3 DISTRIBUTION & SUPPLY CHAIN

Distribution is highly concentrated and led by two large for-profit outpatient providers, DaVita and Fresenius. Both providers are vertically integrated, resulting in a robust but consolidated supply chain for dialysis equipment, supplies, and clinical expertise. Other major suppliers of dialysis equipment include Gambro, Baxter, B. Braun, Althin and Cobe.13 Heavy consolidation of distribution and supply suggests that the dialysis industry as a whole is reaching the maturity stage of market development. As it reaches peak maturity, the industry can expect to see more entrenched competition among fixed market leaders (DaVita and Fresenius) and hardening customer loyalty as market share is consolidated.

1.4 KEY TRENDS

Key environmental trends will likely impact the dialysis industry include hospital outsourcing of inpatient services, Medicare bundling and reimbursement, an aging population, and further consolidation of both outpatient and supplier markets.

NEW TECHNOLOGY Greater utilization of state-of-the-art hemodialysis machines that offer automated monitoring and real-time processing capability is expected to continue as costs associated with automation declines and competition on service quality among hospitals increases. Advances in hemodialysis membrane technology will also ensure continued preference for hemodialysis over peritoneal in hospital settings in the near term.14

Figure - Total Medicare Expenditures on ESRD Population by Type of Service Provider, 1991 - 2009

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HOSPITAL OUTSOURCING Inpatient dialysis services are outsourced more than any other service-line. Decisions to outsource are largely driven by whether or not outsourcing providers can provide services on greater economies of scale while still maintaining quality of care. As of 2006, 31% of hospitals reported outsourcing dialysis services due to both cost pressures and perceived expertise of outpatient market leaders.15 While outsourcing is expected to remain relatively flat among larger hospitals, mounting cost pressures will likely to result in greater outsourcing of dialysis services among smaller community hospitals.

AGING POPULATION The U.S. population is aging rapidly. According to the U.S. Census Bureau, the number of Americans over 65 is expected to double by 2030.16 With incidence rates of kidney disease highest among people 55 and older17, the aging of the American population will likely result in large increases in demand for dialysis services.

MEDICARE REIMBURSEMENT While there was no net change in the 2012 Medicare fee schedule for nephrology-related service, 18

reductions in bundled payments through productivity offsets and value-based purchasing can be expected in the near term as the federal government attempts to reign in Medicare spending.19

LEGAL / POLITICAL TRENDS Further consolidation within the outpatient dialysis market can be expected as Fresenius and DaVita compete for market share. This will result in greater cost pressures on small and medium size providers in both inpatient and outpatient settings. Consolidation may also result in limited access to peritoneal and home dialysis as large providers limit the range of therapies to strictly hemodialysis in an effort to boost profits.

5%

12%

65%

18%

N/A

DecreaseOutsourcing

Maintain CurrentLevels

IncreaseOutsourcing

FUTURE OUTSOURCING TRENDS

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2. MARKET ANALYSIS

2.1 STATE-WIDE TRENDS

Over the past twenty years, North Carolina’s prevalence rates for both end-stage renal disease (“ESRD”) and chronic kidney disease (“CKD”) have exceeded national rates.20

ESRD Network 6 1 currently estimates nearly 40,000 ESRD and CKD patients, the largest of any region in the country. Furthermore, the region’s ESRD patient population has been steadily growing at a rate of 4% per year21 which is faster than that the most recent national growth rate of 3.5%.22

2.2 TARGET MARKET & PATIENT BASE

ARMC’s target market is defined as patients who are expected to require inpatient dialysis services and live within the primary service area from which ARMC receives acute dialysis patients.

PRIMARY SERVICE AREA Based on 2010 admission data provided by ARMC, approximately 85% of ARMC’s dialysis patients reside in Alamance County, followed by Guilford County with 10%. Based on this admission data, Alamance County was identified as ARMC’s primary service area within its target market.

TARGET PATIENT POPULATION The target patient population is comprised of ESRD patients currently residing in Alamance County and whose kidney-disease will eventually result in the need for inpatient dialysis treatment. ESRD patients average nearly two hospitalizations a year.23 Additionally, patients being treated for ESRD are also prone to hospital re-admission. Re-hospitalization rates among ESRD patients are more than double that of the general Medicare population.24

2.3 MARKET GROWTH

Since 2002, the number of ESRD patients under treatment has grown from 177 patients to a projected 288 patients as of 2011. This represents a 63% increase in population size from 2002 levels. 25 Looking at year-to-year growth, the ESRD patient population in Alamance County has grown by approximately 6.1% annually over the past five years, exceeding ESRD growth in neighboring counties, state-wide, across ESRD Network Six, and even the nation as a whole (See Figure 3).

1 In 1978, Congress amended Title XVIII of the Social Security Act to establish ESRD Network Organizations in efforts to add oversight and

improve quality of services provided patients suffering from ESRD. Currently, the U.S. is divided into 18 ESRD Network Organizations. North Carolina belongs to Network 6 (along with Georgia, and South Carolina).

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2.4 HEALTH PROFILE & MARKET DEMOGRAPHICS

PUBLIC HEALTH PROFILE The two main risk factors associated with kidney-disease are diabetes and heart-disease. Nearly 10% of Alamance county residents report having either Type I or Type II diabetes. Nearly one-in-three Alamance residents also report hyper-tension. At the state level, diabetes prevalence has more from than doubled from 4.5% in 1995 to 9.6% as of 2009.26 These population health trends suggest that vascular health problems will continue to drive up prevalence rates of kidney-related illness and demand for both outpatient and inpatient dialysis services.

PATIENT PROFILE Hospitalization Rates: Patients receiving inpatient dialysis treatment are very sick individuals. The most common admitting DRGs among dialysis patients at ARMC over the past two years include heart failure and shock, septicemia, renal failure, and other circulatory system diagnoses. Hospital admissions are highest among women, African Americans, older patients, and patients whose ESRD is caused by diabetes.27 Race/Ethnicity: The racial and ethnic makeup of inpatient dialysis patients at ARMC closely mirrors that of Alamance County and North Carolina as a whole (See Figure 4). African American dialysis patients represent nearly 61% of patients receiving dialysis, a higher percentage than the state rate, but less than the rate among African American ESRD patients nationwide. Compared to the nation as a whole, North Carolina’s population aged 65 and older maintains a larger proportion of African Americans (15.6 % in NC vs. 8.3 % nationally) and a smaller proportion of Latinos (1.3 % in NC vs. 6.6 % nationally).

African American

61%

White

37%

Asian 0%

Other 2%

179 177 180 186 197 214 232 238 256 271 288

0

50

100

150

200

250

300

350

ESRD Dialysis Patients Alamance County

Figure – Racial & Ethnic Profile of Inpatient Dialysis Patients at ARMC

1.7%

3.3%

5.9%

8.6% 8.4%

2.6%

7.6%

6% 6.1%

5.5%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Rate of ESRD Growth Alamance Co. State Average National Average

Figure - ESRD Patient Population Growth in Alamance County, 2001 to 2011

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0

1000

2000

Nu

mb

er o

f p

ati

ents

N.C. Age Distribution

American Indians, Asian Americans, and other ethnic groups account for only 2.0% of the population 65 and older. Although in Alamance County, Native Americans represent the smallest portion of dialysis patients, state-wide, they represent 1.5% of the dialysis population. Hispanics represent a young and growing population in North Carolina and ARMC should therefore expect to see more Latino dialysis patients in the future. Based on these demographic trends, ARMC can expect to see an increasing proportion of minority patients requiring inpatient dialysis treatment.

Age / Gender: Alamance County dialysis patients are older than the statewide average (62 versus 53, respectively), and are most frequently represented in the 40 to 44, 50 to 54, and 65 to 69 age cohorts. In terms of gender, ARMC sees a higher number of men hospitalized with ESRD than the national average.28

2.5 FUTURE GROWTH POTENTIAL

There are two principal drivers of growth in the need for inpatient dialysis services within Alamance County: 1) rising prevalence of chronic and end-stage renal disease among Alamance county residents, and 2) what we have coined the “awareness effect” on ambulance providers.

Growth in Prevalence of ESRD

Growth in inpatient dialysis patient volume is driven primarily by growth in the prevalence of end-stage renal disease (ESRD) among Alamance County residents. ESRD patients receiving outpatient treatment are frequently hospitalized for kidney-related health problems such as altered mental status, anemia, infection, abdominal pain, and shortness of breath. They also eventually require acute dialysis treatment as their acuity worsens overtime.

Ambulatory “Awareness Effect”

Awareness of the availability of inpatient dialysis treatment among ambulatory providers is a second key driver of increased inpatient volume. Unlike in outpatient settings, within acute care, the emergency department (ED) is the primary entrance into the hospital for dialysis patients. The ED acts like a feeder-system for inpatient treatment and the process begins with ambulance awareness of inpatient dialysis capability. At ARMC, the inpatient dialysis service is entering into its third year, growth associated with this “awareness effect” is expected to taper-off as the availability of inpatient treatment becomes common knowledge.

0

20

40

Nu

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f p

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Alamance County Age Distribution

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3. COMPETITIVE ENVIRONMENT

A number of competitors currently compete for inpatient dialysis patients within Alamance County. Key competitors include UNC Health Care, Duke University Health System, and Moses Cone Health System.

Figure - Map Showing Location of Key Competitors

3.1 CURRENT MARKET SHARE

As of 2010, ARMC holds approximately 58% of the all-discharge2 inpatient dialysis market within Alamance County (see Figure 6). In that same year, UNC captured 19% of the market followed by Cone Health and Duke who each captured approximately 10% of the market.

3.2 MAJOR COMPETITORS

UNC HEALTH CARE UNC Health Care (UNC) is a large, academic medical center located 31.5 miles east of ARMC in Chapel Hill North Carolina. UNC currently owns and operates a 10 bay inpatient dialysis unit at its main hospital in Chapel Hill. UNC also has a two-thirds ownership stake in Carolina Dialysis, LLC, a multi-facility outpatient dialysis provider comprised of Carolina Dialysis-Carrboro, Pittsboro, Sanford, Siler City, FMC Burling Kidney Center, and Burlington Dialysis Center.29 Renal Research Institute owns the remaining one-third interest. Both UNC’s inpatient and outpatient dialysis units are staffed and operated by the large outpatient dialysis organization Fresenius. Despite its size, UNC continues to face difficulties in recruiting and onboarding dialysis nurses for its inpatient unit. According to UNC’s inpatient dialysis nurse

2 The “all discharge” market refers to the market comprised of patients across all service-lines regardless of admitting DRG.

ARMC 58%

Duke

10%

Cone

10%

UNC

19%

Other 3%

Figure - All-Discharge Market Share, 2010

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manager, it takes up to 9 months to fill a dialysis position. Still, UNC intends to provide greater support to the program as it expects the program to continue to grow given rising patient need.30

DUKE UNIVERSITY HEALTH SYSTEM Duke University Health System (DUHS) is a three-hospital academic medical center located 34 miles east of ARMC in Durham, North Carolina. DUHS currently owns and operates a 12 bay inpatient dialysis unit at its University Hospital in Durham. DUHS’s nephrology department is highly esteemed and currently ranks as one of the best nephrology training programs in the country. Inpatient services provided by Duke include nephrology consultation, on-going dialysis treatments, and kidney / pancreas transplants. Duke also has an active home dialysis program and is available for emergency dialysis as well as pediatric nephrology services provided through its Children’s Hospital. Similar to UNC, DUHS has a strong outpatient component and provides maintenance dialysis care to its chronically-ill patients at a number of DaVita-operated outpatient dialysis facilities in Henderson, Roxboro, Louisburg and Durham. DUHS also owns several Fresenius-led outpatient units in Warrenton and Durham.31

MOSES CONE HEALTH SYSTEM Moses Cone Health System (Cone Health) is a multi-hospital system located 19 miles west of ARMC in neighboring Guilford County in Greensboro. While Cone Health has historically been a key competitor within the inpatient dialysis market in Alamance County, as of 2011, Cone Health has begun the process of merging with ARMC.

3.3 BARRIERS TO ENTRY

Barriers to entering and successfully competing in the inpatient dialysis market include proximity to third-party organizations, an increasing target market, specialized knowledge, high degrees of liquidity, and strong brand-recognition.

1. Hospital must be in close proximity to third-party organizations to generate referrals (i.e. dialysis organizations). As stated earlier, the primary population for inpatient dialysis is those that receive dialysis in outpatient dialysis facilities. To promote continuity of care, inpatient dialysis services must stay in frequent communication with the outpatient facilities to maintain access to outpatient resources and expertise in areas such as improving quality, lowering cost, and increasing employee satisfaction.

2. Target patient population is characterized by rising prevalence of ESRD. It is

imperative that a provider have robust patient demand within its primary service area to support growth and stay competitive.

3. Specialized knowledge (i.e. nephrologists, certified dialysis nurses, water treatment specialists). Unlike most programs, there is specific expertise required to provide dialysis services, many of which can be difficult to recruit due to healthcare shortages. Access to

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staff properly trained in providing and supporting dialysis care is therefore crucial to successfully competing in the inpatient dialysis market.

4. High degree of liquidity and economies of scale. Not only are startup costs high but most inpatient units operate at a net loss and thus organizations need a high degree of liquidity to maintain operations. Also, without economies of scale to lower costs through higher volumes and allocate losses across other service-lines, a provider will not be able to sustain its competitive position within the market.

5. Strong reputation for high quality care within target patient population. Since potential dialysis patients come to the hospital for emergent conditions, they will mostly be directed (or request to be directed) to the nearest hospital. Without a strong reputation for quality within the local community, the ability to maintain market position is jeopardized.

Table – Breakdown of ARMC’s Competitive Position

Competitive Factors ARMC’s Position

RATIONALE

Close proximity to third-party organizations for referrals

MODERATE

Less opportunity for relationships with outpatient facilities and referrals relative to other organizations but four large dialysis organizations in Alamance County

Target Population has rising prevalence of ESRD

STRONG

Rate of growth is slowing down but exceeds state average

Geographic scope of patients is limited to Alamance County

Specialized clinical knowledge & experience

POOR

Less access to multiple nephrologists and nephrology residents given rural location

Must recruit for certified dialysis nurses from outside ARMC

ARMC may not be able to respond to major changes in the environment and reimbursement scheme as quickly as its competitors

Highly degree of liquidity / economies of scale

STRONG

Cone Health has committed large sums to ARMC once merger is final.

Under Cone Health, ARMC will enjoy large economies of scale

Reputation for High Quality Care

POOR

Relative to UNC and Duke, ARMC is behind in developing its brand-recognition

Recent negative press regarding safety issues at ARMC may tarnish ARMC’s reputation among its dialysis patient population

Quality measures are in lower percentiles when compared with competing organizations

Lacks competitive edge in providing in home care education and transplant services

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COMPETITIVE POSITION While ARMC’s primary competitors Duke and UNC have a competitive advantage in size and brand-recognition, ARMC has the advantage of location and convenience. Should ARMC decide to expand its dialysis service, it should assume a “defender” competitive strategy, protecting its current dialysis service-line and seek to gain more traction within its primary service area. It will also be imperative that ARMC focus on quality in order to leverage its dominant position and affirm patient loyalty throughout Alamance County.

3.4 LEVEL OF COMPETITION

After conducting a Porter’s Five Forces Analysis (see Appendix 8), the overall level of competition in the inpatient dialysis market within Alamance County appears to be low-to-medium. With no major competitors in close proximity of ARMC (within 15-20 miles), the intensity of rivalry remains relatively low. Threats of substitutes are also low as there are few low-cost acute alternatives to hemodialysis treatment. While patient bargaining power remains low given the emergent nature of inpatient dialysis care, the power held by payers and suppliers appears to be high as Medicare remains the dominant Payer for ESRD treatment. This also results in significant regulatory clout. In terms of suppliers, market dominance of DaVita and Fresenius results in high supplier bargaining power.

3.5 FUTURE COMPETITORS

There will be few new competitors in near-term given only a small percentage of ARMC’s dialysis patients reside outside of Alamance County. Rather, ARMC is more likely to face increasing competition from its current competitors Duke and UNC. UNC, in particular, is expanding and applied for a Certificate of Need for a new hospital in Hillsborough near ARMC. ARMC has appealed UNC’s CON, however, market penetration from large academic medical centers like UNC and Duke should be expected.

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IV. LEGAL / REGULATORY ANALYSIS

4.1 CERTIFICATE-OF-NEED

Pursuant to North Carolina state law regarding certificate-of need (CON), the expansion of ARMC’s dialysis unit will not require ARMC to file a CON application because CON requirements do not apply to expansion of dialysis services in inpatient settings. (For more detail on CON requirements in North Carolina, see Appendix 10)

4.2 HEALTH REFORM / VALUE-BASED PURCHASING

Two major considerations regarding health reform and its potential impact of ARMC’s inpatient dialysis unit include the impact of the new bundled payment system and value-based purchasing.

BUNDLED PAYMENT SYSTEM Under this new bundled payment system, providers will receive a lump sum payment for services linked to a single episode of care. For example, a provider would receive a bundled payment for a stroke patient that received multiple services while hospitalized, rather than separate payment for each individual service. The goals of bundled payments are to improve quality of patient care, care coordination, and reduce healthcare costs for Medicare by incentivizing providers against providing unnecessary, costly patient services. Although the “bundled” payment system may have a positive impact on improving quality of care and efficiency, it may result in financial losses to secondary services such as inpatient dialysis. Specifically, CMS has not determined the services that will be included in bundled payments nor how payments will be allocated to non-physician components of care.32

VALUE-BASED PURCHASING

Under value-based purchasing, provider payments are based on quality metrics within the acute care inpatient setting. Specifically, under this new program, “hospital performance on quality measures will be compared to the relative performance of other hospitals and improvement will be measured over time.” Beginning in 2013, Medicare payments will be reduced for excess 30-day hospital readmissions for patients suffering from heart attacks, heart failure, and pneumonia.33 Looking ahead, it will be important that ARMC maintains high quality outcomes among its acute-care patients, especially those with high co-morbidities and receiving inpatient dialysis treatment. (See Appendix 7 for more on Value-Based Purchasing)

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5. INTERNAL ANALYSIS

5.1 STRENGTHS, WEAKNESSES, OPPORTUNITIES & THREATS

To identify internal strengths, weaknesses, external opportunities and threats associated with inpatient dialysis service, a “SWOT” analysis was conducted (See Table 2).

Major strengths include a dominant market position and strong location free of proximate competitors servicing ARMC’s target market. Other strengths identified include previous experience in-housing dialysis services3, and strong administrative / clinical support for expansion and bringing dialysis services in-house. Major weaknesses include its small size and fewer developed relationships with outpatient giants DaVita and Fresenius relative to competitors. ARMC also has a relatively limited target market. Fortunately, the market for dialysis service is relatively difficult to enter without the support of a third-party (i.e., Fresenius or DaVita). Opportunities identified included lower costs if services are in-housed, meeting unmet need in the community, and gaining greater control over staffing and quality of care. Threats facing ARMC included potential damage to ARMC’s ability to provided dialysis services if it loses its nephrologists to another organization and future cuts in Medicare reimbursement due to productivity off-sets and value-based purchasing. Table - SWOT Analysis

5.2 STAKEHOLDER ANALYSIS

A number of key stakeholders were identified whose influence and importance will impact expansion and in-housing of inpatient services (See Table 3). Primary stakeholders of high importance and high to moderate influence include ARMC administration, nephrologists, Davita, payers, state regulators, and ARMC’s nursing staff. (See Appendix 9 for full Stakeholder Analysis)

3 ARMC’s Continual Renal Replacement Therapy (CRRT) was previously provided by DaVita but is now serviced by ARMC nurses.

STRENGTHS WEAKNESSES

-Market Dominance -Location & Convenience -Dedicated Nephrology Staff -Prior experience in-housing services -Strong Administrative & Clinical support for expansion & in-housing

-Few developed relationships with outpatient providers -Small Size -Limited target market -No current registered dialysis nurses on staff

OPPORTUNITIES THREATS -Lower costs through in-housing -Meet community need for inpatient services -Gain greater control over quality of care -Develop economies of scale under Cone Health

-Potential damage to operational capability if nephrologists go elsewhere -Cuts to Medicare reimbursement -Competitive backlash from Cone Health merger

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Table - Key Stakeholders

Importance Influence Description

ARMC Administration

High High Administration is both highly important and highly influential in determining the direction of renal care at ARMC and providing the required funds to expand and in-house services. However, as ARMC plans for expansion, Dialysis has been identified as an area that has reserved space.

Nephrologists High High Both nephrologists at ARMC provide the clinical expertise and medical knowledge that is required to successful operate an inpatient dialysis unit. They also have a vested interest in improving quality of care and preventing patient transfers. Looking forward, both nephrologists are likely to be interested in the establishment of a dedicated Renal Floor as currently they are rounding on patients in disparate locations. A Renal Unit also signifies importance and dedicated resources. If the dialysis program does not meet their expectations and the Renal Unit is not realized, although not likely, the nephrologists could possibly discontinue their service to ARMC.

Payers (CMS) High High Health reform legislation and greater emphasis on Medicare bundling, pay for performance, and cost cutting will heavily influence the financial performance of expansion and in-housing services. ARMC will also face increased scrutiny from CMS since Medicare is the major payer for dialysis.

State Regulators

High High Currently Davita holds responsibility for all regulatory and reporting requirements. If services are in-housed, ARMC will assume this responsibility and compliance will be crucial to the success of the newly expanded unit.

Davita High Moderate DaVita’s size and long-standing market dominance results in their monopoly of considerable intellectual capital and clinical expertise that ARMC will not have access to if services are in-housed. If ARMC decides to discontinue its contract, DaVita may be willing to extend a reduction in price per treatment in order to retain ARMC as a client. DaVita may also try to retain some of ARMC’s business by serving as a vendor for the program’s equipment and supplies.

Nursing Staff High Moderate Should ARMC discontinue its contract, the success of this program is highly dependent on the number of nurses that are willing and able to be complete dialysis care training. This will likely require several months and possibly result in confusion on patient assignments and frustration with the on-call schedule in the short-term.

A stakeholder map was also developed to identify the relationship between important stakeholders and their level of support for in-housing ARMC’s dialysis service. This relationship appears positive with the most important stakeholders showing the highest levels of support for discontinuing ARMC’s Davita contract and bringing services in-house (See Figure 6).

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Figure – Stakeholder Map regarding decision to in-house ARMC’s dialysis services

5.4 CAPACITY & PATIENT VOLUME

CURRENT CAPACITY ARMC’s current dialysis unit has three bays and provides both hemodialysis and peritoneal dialysis services. The unit averages between three and five patients per day but volumes are unpredictable and vary considerably. With only three bays, the unit is at capacity when it treats six patients per day.

Based on ARMC’s patient census data, ARMC has been operating at or under capacity approximately 84.6% of the time. Due to greater than expected patient volumes, over the past three years, approximately 15% of the time (or slightly over one day in every seven), they operated at max capacity. In order to meet this excess demand, nurses have to adjust the lengths of treatment and dialyze patients at later times, lowering the quality of care.

PATIENT VOLUME Since the unit’s inception in 2009, the number of patients requiring dialysis treatment has grown dramatically. In its first year, the unit saw approximately 274 patients. Over the next two years, patient volume jumped to 390 in 2010 and then to 484 in 2011, a 43% and 24% increase in volume year-to-year. Over the next five years, the number of Alamance County’s ESRD patients is projected to grow 6% annually. Based on the projections, ARMC will treat approximately 514 patients in 2012 (see Figure 9).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

10

20

30

40

50

60

70

0 1 2 3 4 5 6 7 8 9 10 11

Cu

mu

lativ

e Percen

tag

e

Fre

qu

ency

of

Da

ily

Tre

atm

ents

# of Treatments

Daily Patient Census (2011)

~84.6%

0

5

10

0 5 10

Le

ve

l o

f Im

po

rta

nc

e

Current Level of Support

Administration

Nephrologists

DaVita

Payers

Nursing Staff

StateRegulators

22

5.5 PATIENT MIX & REIMBURSEMENT

Dialysis is a unique inpatient service because insurers do not specifically reimburse for the provision of inpatient dialysis treatments. Instead, payment for dialysis treatments are lumped within a single sum based on the primary admission DRG. Over the past two years, the most prevalent admitting DRGs for ARMC’s dialysis patients have been heart failure and shock, septicemia, renal failure, and other circulatory system diagnoses. However, no single DRG makes up a substantial portion of the patient population. The distribution of DRGs also varies significantly year-to-year. As of 2011, heart failure and shock had the highest average contribution margin, while septicemia had the lowest. In 2011, five of the top eight most prevalent admitting DRGs had a negative average net contribution margins. Along with annual fluctuations in DRG prevalence, average reimbursement also changes yearly based on the acuity of the patients being admitted.

5.6 PAYER MIX

Payer mix for inpatient dialysis services is heavily skewed towards public payers with Medicare (82%) and Medicaid (10%) comprising over 90% of reimbursement in 2011 (See Figure 10). This is due to the fact that the majority of dialysis patients seen at ARMC fall into the special category of end stage renal disease (ESRD) patients who are automatically Medicare-eligible regardless of their age.

TOP DRGS (2011)

Avg. Margin

% of Total

Heart Failure & Shock

$1,520.91 13.2%

Renal Failure ($1,401.81) 9.7%

Septicemia ($2,502.87) 6.2%

Other circulatory diagnoses

($109.88) 5.4%

Acute Myocardial Infarction

($626.06)

3.7%

Other Vascular Procedure

$922.44

3.3%

Esophagitis, gastroent. & misc. digest disorders

($1,228.31) 3.3%

Nutritional & Misc. Metabolic Disorder

$557.64 2.3%

TOTAL 47.1%

274 390

484 514 545 578 613 651

0

100

200

300

400

500

600

700

# o

f p

ati

ents

Figure – Dialysis Patient Volume Projections at ARMC, 2009 through 2016

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$0

$10,000

$20,000

$30,000

$40,000

$50,000

AVG REIMBURSEMENT BY PAYER

2011

2010

In 2011, 82% of the patient population was Medicare patients, a decrease from 90.5% in 2010. Outside of government payers, the other major payer was Managed Care plans which represent 9.6% of total reimbursement in 2010 and 6% reimbursement in 2011. In 2011, there was a rare increase in Medicare reimbursement. This was likely due to fluctuations in DRG mix and acuity adjustments given the patient population seen over that year.

5.7 CAPACITY PROJECTIONS GIVEN CURRENT STATE

Using random sampling and of daily census distributions, we estimate that if the dialysis area is not expanded, the percentage of time that the dialysis area operates at maximum capacity will increase from 17.9% in year 1 to nearly 29.9% in year 5. (See Table 4).4 Table – Projected % of Time Operating at Max Capacity over next 5 years

4 Using the previous year’s daily census for treatments provided as a base for the following year’s, Excel was used to create a random sample

from the previous year’s distribution. A sample size of 1,500 was used to maximize validity and reduce error, and the proportions were applied to

a one-year period. For each day of the year, it was randomly determined if there was to be additional demand, and the probability of the increased

demand occurring was 0.06. The amount of actual additional procedures per day came from a separate additional random sample from the previous year’s distribution. Adding in this additional demand models a 6% increase in the number of procedures done.

YEAR 1

YEAR 2

YEAR 3

YEAR 4

YEAR 5

(%) of Time at Max Capacity

17.9% 23.1% 26.5% 28.4% 29.9%

Comm BCBS 1%

Fed/State Agencies 0.33% Hospice

1%

Medicaid 10%

Medicare 82%

Mgd Care 6%

PAYER MIX

Figure - Payer Mix and Avg. Reimbursement by Payer for Inpatient Dialysis Services, 2011

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6. RECOMMENDED STRATEGY

ARMC’s vision is to be “desired and chosen by the community for healthcare services based on a reputation of excellent services, modern facilities and equipment, [and] skilled and compassionate staff...”34 The Meridian Group has developed the following recommendations to help ARMC achieve its vision for meeting the community’s inpatient dialysis need. (See Appendix 11 for Evaluation of Alternatives)

6.1 RECOMMENDATIONS

EXPAND Based on market trends, current capacity, and projected demand, it is recommended that ARMC expand its unit’s capacity by one additional dialysis bay, and increase the size of the unit by approximately 416 square-feet.

CONTRACT Based on financial projections, anticipated cost-savings, and internal administrative and clinical interest, ARMC should dissolve its contract with DaVita and bring inpatient dialysis services in-house.

6.2 IMPLEMENTATION

To ensure that the recommendations are successful, the Meridian has developed an implementation strategy for expanding and in-housing ARMC’s inpatient dialysis unit. The remaining sections of this business plan cover the strategy in detail.

•Increase capacity by adding one additional dialysis bay •Increase unit size by 416 sq. ft EXPAND

•Dissolve contract with outpatient provider •Bring services in-house CONTRACT

•Follow recommended plan for implementing expansion and bring services in-house IMPLEMENT

Figure – Recommendations for ARMC

25

7. IMPLEMENTATION PLAN

Implementation of the Meridian Group’s recommendations will involve two separate implementation processes (one for expansion and one for in-housing). These can be run concurrently, or, with one preceding the other in either order. Since ARMC’s contract with DaVita will not end until July 2014, it is recommended that expansion occur first followed by implementation of in-housing dialysis services.

7.1 CURRENT LOCATION AND FUTURE LAYOUT

The present layout of the unit does not support effective provision of high quality care to the patient population. Dialysis services are currently provided on the lower level of the hospital. The designated area is approximately 295 square feet and contains three dialysis bays. The minimal space currently allotted for dialysis treatments hinders operational efficiency, and only two of the bays can be conveniently used due to an obstruction in the middle of the dialysis area. There is also limited space for storage which has forced staff to store both dirty and clean supplies in the same room and in close proximity to one another. This practice is not standard in the industry as it leads to an increased chance of contamination. Limited storage space also requires necessary supplies to be kept elsewhere which further hinders operational efficiency.

There are four offices next to the current location containing 416 square feet that could be renovated to provide additional space for dialysis services, including space for adding additional dialysis bays beyond the recommended expansion. Due to the water system that is currently located next to the dialysis area, moving the area to another location is impractical and would be very expensive.

FUTURE CURRENT

Figure - Current Layout & Future Expansion

26

While the four offices next door are currently in use, ARMC is adding space elsewhere in the hospital which should help facilitate the relocation of those employees currently residing in these four offices.

7.2 IMPLEMENTING EXPANSION

Implementation of expansion should occur in three phases (See Figure 14). Phase 1 will consist of organizational planning efforts including organizing a steering committee to oversee the project and developing a transition plan to guide expansion efforts. In Phase 2, construction will commence. Renovation of the adjacent office rooms and hallway should be completed first before tearing down the remaining wall that divides the dialysis area from the office area. This will ensure patients can still receive treatments during Phase 2. In Phase 3, this final wall will be torn down marking the completion of renovations. After clean-up, unit reorganization and design efforts can begin including the repositioning of the current bays and the addition and placement of the additional bay. During this final phase of expansion, dialysis patients will need to be treated outside the unit, preferably in the patient’s room. While this will take additional labor and the use of portable dialysis machines, the financial impact is expected to be minimal as Davita charges per encounter rather than per hour for staffing and equipment.

Figure - Timeline for Expansion

PHASE 1

0-6 Months

• Organize committee to oversee project

• Develop transition plan

• Submit requests for bids and identify contractor

PHASE 2

6-12 Months

• Begin construction on offices and hallway while treating patients in current location

• Committee to work with supply chain management to ensure proper supplies are readily available for the transition

PHASE 3

12-18 Months

• Tear down final wall while administering dialysis to patients at their bedside utilizing DaVita staff

• Add additional dialysis bay and move into the expanded space

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7.3 IMPLEMENTING IN-HOUSING

Implementation of in-housing dialysis services will involve a similar three-step plan (See Figure 15). The first step will involve assessing the labor market and starting the search for viable candidates. This first step is not time-sensitive and can begin at any point. In contrast, Step 2 will be predicated on the expiration of ARMC’s Davita contract. After discontinuing ARMC’s contract with Davita, Step 2 will involve finalizing the recruitment process and hiring new employees. Finally, in Step 3, the new hires will complete the on-boarding / orientation process after which the in-housed unit can officially open and begin providing treatments.

Assess Labor Market & Begin Recruitment STEP 1 • Asses size of RDN labor market

• Follow recruitment and retention strategy (See Section 8.5)

Discontinue Contract & Finish Recruitment STEP 2 • Begin termination discussions with DaVita

• Hire 3 full-time + 3 part-time RDNs and 1 Nursing Supervisor

• Negotiate biotechnician contract and order equipment/supplies

On-Board New Hires & Open Unit STEP 3 • New hire orientation period

• Begin dialysis treatments with ARMC staff

Figure - Three-Step Implementation Process for In-Housing Services

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8. OPERATIONS PLAN

In addition to implementation, the Meridian Group has developed the following operations plan to guide ARMC’s operation of the expanded, in-housed dialysis unit.

8.1 STAFFING MODEL

Dialysis patients are a unique patient population whom require specialized clinical personnel to care for them. The nurses administering dialysis must be registered dialysis nurses (RDNs), which requires a defined amount of supervised experience and ongoing training. As ARMC currently treats this unique patient population, they must be able to provide dialysis service at all times. For ARMC to move forward with bringing services in-house, it will be necessary to recruit a full staff of registered dialysis nurses. An RDN in an acute setting can monitor up to two dialyzing patients of average acuity level at the same time. The average length of a dialysis treatment is four hours with an hour needed before and after the treatment for setup and cleaning. The optimum staffing level for the unit was determined using the professional judgment method5. Based on treatment length and unit capacity, approximately 4.4 full-time equivalents (FTEs) are needed to adequately staff the unit. This calculation includes time-out adjustments of approximately 10% which accounts for both PTO and unplanned absences. To meet this optimum level, ARMC should hire three full-time RDNs and three part-time RDNs. ARMC will also need to hire a nursing supervisor who will take responsibility for overseeing all dialysis related activities, including continuing education, regulatory and compliance issues, conference attendance and scheduling issues. (See Appendix 13 for Staffing Calculations)

8.2 WORK SCHEDULE

To meet the projected demand and be able to provide care at all hours, it is necessary to keep a minimum of two RDNs staffed every day of the week, excluding Sundays,6 and one RDN on-call 24 hours a day every day of the week. Each full-time RDNs will work three twelve hour shifts per week with an average of one twenty-four hour on-call shift, while the part-time RDNs will work two twelve hour shifts with an average of one twenty-four hour on-call shift per week. The Nursing Supervisor will work eight hour shifts Monday through Friday. Employing a rotating weekly schedule, this work schedule would allow for both full-time and part-time nurses to only have to work one Saturday shift every third week. (See Appendix 14 for Example Work Schedule)

5 Professional judgment method calculates total hours needed to staff a particular unit and takes into account a time-out percentage to adjust for PTO and unplanned absences and then converts them into FTEs needed. 6 Sundays historically have the lowest volume of dialysis treatments, thus one nurse on staff will suffice.

NURSING STAFF BREAK DOWN

12 Hr Shift

24 Hrs On Call

8 Hr Shift

3 Full-Time

Nurses

3 shifts 1 shift X

3 Part-Time

Nurses

2 shifts

1 shift

X

1 Nurse

Supervisor

X X 5

shifts

29

8.3 NURSE FLOATING & ON-CALL

Day-to-day demand for inpatient dialysis treatment varies significantly making it difficult, if not impossible, to accurately predict volume in advance. To combat this unpredictability, we recommend that ARMC float its registered dialysis nurses to the Medical and Surgery unit (Med/Surg) during low-volume periods. Under this float model, the salary cost of each nurse would be split between the dialysis unit and Med/Surg based on the amount of time RDNs spend in each. This would significantly improve the financial viability of the dialysis unit, because ARMC already employs floating schedules in other units, and there would be minimal cultural resistance. Using data from the past two years on the time Davita RDNs staffed at ARMC spend not providing treatment; we determined that 85% of the time RDNs can treat approximately four patients over a 12 hour shift. However, 15% of the time RDNs can only treat two high acuity patients over a 12 hour shift. Based on these numbers, RDNs should be expected to float to Med/Surg approximately 52% of the time in year one. After year one, nurse float time in Med/Surg is projected to decrease to approximately 40% by year 5 due to increases in dialysis volume (See Figure 11). Figure - Percentage of Time RDN’s spend floating to other units

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

Float time

52%

50%

46%

43%

40%

8.4 MAINTENANCE SERVICES

Ending ARMC’s contract with DaVita and bringing services in-house will also require that the unit’s equipment and water purification system be serviced. ARMC should contract with the water purification company Mar Cor, to ensure that they have maintenance support and expertise to minimize treatment side-effects and sustain high quality care,. Full maintenance service would cost an estimated $35,000 per year and would include technical support, medical device maintenance and quick responses in case of device malfunction. Mar Cor also provides web-based training courses for hospital employees as well as a comprehensive training program on maintaining medical water treatment systems.

8.5 RECRUITMENT & RETENTION

Given ARMC’s relative inexperience operating an inpatient dialysis area, it is recommended that ARMC should not initially self-train and certify its own RDNS. Instead, ARMC should focus its efforts on recruiting already trained registered dialysis nurses with previous experience in inpatient settings. Recruitment should focus first on the professional networks of ARMC’s current staff to track down any available internal referrals prior to branching out to external sources. Moving to external recruitment, in order to stay competitive with local outpatient dialysis centers, full-time nurses should receive ARMC’s benefits package worth 24% of their total salary to include a

30

complete medical insurance package, disability and life insurance, wellness program benefits and competitive retirement benefits. Part-time nurses will receive the same benefits package given their 24 hour work week. This generous benefits plan, particularly for part-time nurses, should position ARMC to be competitive in the full-time RDN market and highly preferred in part-time market. The Meridian Group recommends that ARMC include a sign-on and retention bonus worth 10% of the total salary. ARMC should pay new RDN hires $3,350 up front, and $3,350 after two-and-a-half years of service. Should the nurse choose to end employment before year one, he or she would have to repay the bonus amount on a pro-rata basis. (See Appendix 15 for Example Job Description)

31

9. AWARENESS CAMPAIGN Given the emergent nature of inpatient dialysis treatment, patient demand is predicated less on brand-recognition and external referrals and more on local availability, internal referrals, and patient awareness. As a result, we recommend that ARMC’s marketing efforts consist of an awareness campaign targeting ARMC’s five major stakeholders: community residents, former dialysis patients, ARMC clinicians and physicians, ambulance services/emergency medical technicians, and local outpatient dialysis centers. The design of the campaign should focus on achieving the following three objectives:

9.1 REINFORCE DEDICATION TO DIALYSIS PATIENTS & COMMUNITY

“ARMC’s commitment to high quality emergency medicine and inpatient dialysis services as illustrated by the hospital’s recent decision to invest in the expansion of inpatient dialysis services”, will be the message that is communicated to the Alamance County community. This message will also be coupled with patient outreach post-patient discharge to reinforce ARMC’s dedication to its patients, ensure patient satisfaction, and strengthen patient loyalty.

DEDICATION TO PATIENTS AND QUALITY To reinforce ARMC’s dedication to its patients receiving dialysis treatments, short pamphlets highlighting ARMC’s commitment to high-quality dialysis care and the breadth of its staff’s clinical expertise will be distributed to patients and families admitted through the ED. These pamphlets will also be sent via direct mail to Alamance County residents.

Reinforce dedication to dialysis patients

Increase Internal Referrals

Expand External Outreach

Figure - Awareness Campaign Objectives

32

PATIENT OUTREACH To ensure patient satisfaction, dialysis patients recently discharged from ARMC’s will be asked to fill out a satisfaction survey. To necessitate maximum compliance, the survey will also be accompanied by a phone call that addresses the patient experience and reinforces ARMC’s commitment to quality patient-centered care.

9.2 INCREASE INTERNAL REFERRALS

Clinical staff and physicians assess patient needs during the triage process, and play a large role in determining whether patients need and can receive dialysis treatment during their stay. The majority of patients requiring inpatient dialysis treatment are hospitalized for cardiology or vascular-related illnesses. As a result, it will important for the expansion of the inpatient dialysis unit to be thoroughly communicated to clinical staff and physicians, notably cardiologists and vascular surgeons.

INTERNAL OUTREACH & COMMUNICATIONS To effectively communicate the expansion to clinicians and physicians within ARMC, the following actions will be taken:

1. The expansion of the inpatient dialysis unit will be announced in the employee Newsletter, Wavelengths; the medical staff newsletter, Physicians’ Quarterly; the community health magazine, and Well Now;

2. ARMC’s Chief Medical Officer and other unit administrators will be asked to inform their clinical/medical staff and primary care physicians about the expansion of the dialysis unit and to encourage patient referrals to the unit; and,

3. Eight weeks before and one month after the expansion of the dialysis unit, a biweekly mass internal email to all clinical and medical staff will be disseminated with information about expansion and the importance of patient referrals to the unit.

4. Expansion will be included as a topic of discussion at ARMC’s Annual Renal Symposium which has a high attendance of Vascular surgeons/physicians, Nephrologists, and Cardiologists

9.3 EXTERNAL OUTREACH

As mentioned earlier, the vast majority of dialysis patients treated at ARMC are admitted through the ED. Therefore, emergency medical technicians (EMTs) and ambulance services awareness of the expansion will be necessary. Furthermore, ARMC will need to promote awareness of expansion among local outpatient dialysis service centers and physicians.

33

EXTERNAL OUTREACH & COMMUNICATIONS To ensure awareness of expanded inpatient capacity at ARMC, the following actions will take place:

Information on expansion efforts will be disseminated to EMTs and ambulance services via direct mailings

Ambulatory management will be contacted via phone about expansion at ARMC

Brochures will be disseminated to outpatient dialysis centers in Alamance County (BMA of Burlington, and Burlington Dialysis Center) outlining the services and expertise offered by ARMC’s newly expanded inpatient dialysis unit

Informational letters and phone calls will be directed to outpatient dialysis centers in Alamance County (BMA of Burlington, and Burlington Dialysis Center) about expansion of ARMC’s inpatient dialysis unit

Physician to physician mobilization and communication will be encouraged between ARMC’s physicians and community physicians. The goal here will be to build awareness about the expansion amongst local physicians (i.e. Nephrologists, Cardiologists, Primary care physicians, Vascular Surgeons) and encourage them to refer patients with impaired kidney function who need to be hospitalized to ARMC.

9.4 IMPLEMENTING THE AWARENESS CAMPAIGN

Implementation of the campaign should be coordinated with expansion efforts and should begin 8 weeks prior to commencement of construction and end approximately 18 months after completion of the expanded, in-housed unit. (See Figure 18) For more detail on distribution mechanisms, see Appendix 12.

34

Figure - Timeline for Implementing Awareness Campaign

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10. FINANCIAL PERFORMANCE While the provision of inpatient dialysis services at ARMC is based on meeting community need, the financial performance of the expanded unit will be crucial to successful implementation and future sustainability.

10.1 PAST AND PRESENT PERFORMANCE

ARMC began serving the dialysis patient population of Alamance County region in 2009 due to growing community need. In 2010, ARMC’s inpatient dialysis patient population had a negative net operating margin of $522,716. Although the net operating margin was negative, the gross margin for the patient population needing dialysis services available was $1,488,117, suggesting that the revenue generated from dialysis patients covers the direct costs of treating them.

10.2 EXPANSION AND EQUIPMENT COSTS

Start-up costs for expanding and in-housing dialysis services total approximately $202,150. The recommended expansion of 416 square feet will cost approximately $83,200 assuming a $200 per-square-foot expansion cost based on historical data on past renovations at ARMC. When DaVita’s contract is dissolved, ARMC will also need to purchase its own equipment and supplies. Under the expanded unit with four dialysis bays, ARMC will need to purchase six dialysis machines and two portable water units. This new equipment will cost approximately $95,400. Additional costs including marketing (~$13,500) and staff retention bonuses (~$10,050) must also be included. ARMC will also need maintenance support for its dialysis equipment which will not contribute to the start-up costs of expansion and in-housing but will need to be added to annual operating expenses. Cost for maintenance support is estimated to be approximately $35,000 per year.

10.4 STAFFING & FLOTATION COSTS

The cost savings from allocating nurse’s salaries to the Medical and Surgery floor for their accumulated nurse float time is expected to lower the unit’s labor costs by upwards of $100,000 per year over the first two years of the unit’s operations. Savings will then drop to between $80,000 and $90,000 in years 3 through 5 as volume increases and float times decline (see Table 5).

START UP COSTS

Renovation $83,200

Equipment $95,400

Awareness Campaign $13,500

Sign-on Bonus $10,050

Total $202,150

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Table - Cost Savings from Projected Nurse Float Times

Year 1 Year 2 Year 3 Year 4 Year 5

Costs Allocated to Other Depts.

$103,798 $100,326 $93,383 $86,440 $79,497

To meet the fluctuating patient census for dialysis services, ARMC will also need to use on-call shifts. On-call nurses will be paid time-and-a-half when called in. Given only four percent of the dialysis patients in 2011 required nurses to be call-in at time-and-a-half hourly pay, additional labor costs from on-call nurses are expected to be minimal (~$3,100 per year). Costs are also expected to increase with overtime as volume increases.

10.3 PROJECTED NET INCOME & COST PER TREATMENT

ARMC currently pays a contracted fee to DaVita per treatment administered to a patient at ARMC. This fee starts as a flat rate with additional fees added for items such as wait times, number of patients monitored at one time, and a premium for administering dialysis at certain hours of the day. By ending its contract with DaVita and providing services with its own staff and equipment, ARMC can reduce its cost per treatment by 33% in the unit’s first year operating in-house, increasing to nearly 44% in projected savings in cost per treatment by year 5. These cost savings from in-housing would also increase over time as volumes increase and more patients are seen by the newly expanded unit. By dissolving ARMC’s contract with DaVita and bringing services in-house, ARMC can also reduce its negative net income by $200,000 to $400,000. This would result in considerable savings. Furthermore, because reductions in negative net income stem from lower cost per treatment, savings to the hospital will continue to grow as the unit treats more and more patients (See Table 6). (For more detailed financial statements on Net Income, see Appendices 17 and 18) Table – Projected Savings in Net Income & Cost per Treatment

Expanding the Unit… YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

With Contract ($719,425) ($762,318) ($808,346) ($856,749)

($908,287)

With In-Housing ($473,653) ($476,456) ($493,107) ($489,220)

($495,710)

Savings in Net Income

% Savings Per Treatment

$245,772

33%

$285,861

37%

$315,240

38%

$367,528

41%

$412,577

45%

37

10.4 NET PRESENT VALUE & SENSITIVITY ANALYSIS

NET PRESENT VALUE

By bringing inpatient dialysis services in-house, ARMC is projected to save approximately $1,120,941 in net present value (NPV) of 5 year projected cash flows. For a more detailed breakdown of NPV, see Appendix 16.

SENSITIVITY & SCENARIO ANALYSES

The Meridian Group also performed sensitivity and scenario analyses to determine how sensitive savings in NPV are to changes in the unit’s growth rate and number of treatments per inpatient stay. Results from the analysis show that savings in NPV were highly sensitive to the number of dialysis treatments per inpatient stay but less sensitive to growth rate (See Appendix 19 for more details on Sensitivity Analysis). The sensitivity analysis was not expanded to include fluctuation in patient DRG mix or payer mix because there is minimal range in contribution margins and no single DRG comprises a substantial portion of the patient population. Overall, in-housing ARMC’s dialysis services consistently illustrated a more attractive NPV than maintaining its existing contract. This held true for the scenario analysis performed as well, which can be found in Appendix 19.

10.5 OTHER APPLICABLE FINANCIAL STATEMENTS

Applicable financial statements summarizing the expanded unit’s 5 year revenues, expenses and cash flows are presented in Tables 7 and 8 below. For more detailed financial statements including gross margin projections, see Appendices 17-19.

NPV Comparison

Expansion w/ Contract (3,107,936)

Expansion w/ In-House (1,986,995)

SAVINGS $1,120,941

38

Table - Statement of Operations

Table - Statement of Cash flows

Year 1 Year 2 Year 3 Year 4 Year 5

Revenues $6,837,000 $7,246,700 $7,686,800 $8,149,100 $8,641,800

Operating Expenses

Salary and Benefits 435,045 438,703 455,894 452,997 460,163

Supplies 37,419 39,676 42,078 44,626 47,320

Equipment & Maintenance 35,000 35,000 35,000 35,000 35,000

Additional Direct Costs 3,739,864 3,963,836 4,204,631 4,457,344 4,726,881

Total Direct Costs 4,247,328 4,477,214 4,737,603 4,989,968 5,269,363

Gross Margin $2,589,672 $2,769,486 $2,949,197 $3,159,132 $3,372,437

Indirect Costs

Depreciation 13,700 13,700 13,700 13,700 13,700

Additional Indirect Costs 3,049,625 3,232,242 3,428,603 3,634,653 3,854,446

Total Indirect Costs 3,063,325 3,245,942 3,442,303 3,648,353 3,868,146

Total Operating Expenses 7,310,653 7,723,156 8,179,907 8,638,320 9,137,510

Total Net Income ($4,720,981) ($4,953,671) ($5,230,710) ($5,479,188) ($5,765,073)

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Revenues 6,837,000 7,246,700 7,686,800 8,149,100 8,641,800

Operating Expenses 202,150 7,310,653 7,723,156 8,179,907 8,638,320 9,137,510

Net Income (202,150) (473,653) (476,456) (493,107) (489,220) (495,710)

Depreciation 13,700 13,700 13,700 13,700 13,700

Net Cash Flow (202,150) (459,953) (462,756) (479,407) (475,520) (482,010)

39

11. MEASURING PERFORMANCE & EXIT STRATEGY

Based on market trends, the competitive environment, and the overarching mission of ARMC, the following critical success factors were identified:

Recruit and retain dialysis staff / nephrologists

Maintain high patient satisfaction

Provide dialysis services at minimal costs

Ensure volume growth to support expansion

Ensure authority, accountability, and responsibility for all aspects of dialysis care

Maintain or increase market share in renal failure and related disorders

Maintain strong outpatient relationships with DaVita and Fresenius

11.1 KEY BARRIERS TO IMPLEMENTATION

Key barriers to implementation include the following (in order of importance).

1. Number of dialysis treatments per patient is less than expected Historically, dialysis patients at ARMC received an average of 2.8 treatments per visit. According to our sensitivity analysis, the savings associated with the program is threatened by dialysis patients receiving fewer treatments than expected. However, based on the high risk disease profile of our target patient population, we do not anticipate dramatic decreases in patients’ lengths of stay and number of dialysis treatments received.

2. Dialysis program is not compliant with regulatory standards Since all ESRD patients are categorically eligible for Medicare Part A, dialysis treatment is heavily regulated by CMS. ARMC has historically depended on the expertise and experience of DaVita to ensure compliance. In-housing dialysis services will shift this responsibility to ARMC and failure to comply with regulatory standards could jeopardize in-housing efforts. To hedge this risk, it is important that ARMC have a full-time nurse supervisor on staff who is responsible for ensuring the in-housed dialysis unit is fully compliant with regulatory standards and competencies.

3. Unsuccessful recruitment of dialysis nurses Expansion of the program is dependent on recruiting and retaining qualified, committed nursing staff and any inability to do so would hinder plans to in-house services. To hedge against the risk of failing to recruit and retain enough qualified staff, ARMC should offer competitive benefits and stable work hours. ARMC should also consider expanding its outpatient relationships to increase its access to qualified pools of registered dialysis nurses.

40

11.2 PERFORMANCE METRICS

To evaluate the success of this recommended strategy, we aligned the critical success factors associated with expansion and in-housing with the ARMC’s mission and strategic plan. Through this alignment of strategy, mission, and success factors, performance metrics were developed in four main: Finance, Growth, Patient Experience, and Quality of Care. A more detailed breakdown of performance measures which includes strategic goal, success factors, success metrics, and timeframe can be found in Appendix 22.

11.3 EXIT STRATEGY

Should ARMC find that an expanded, in-housed dialysis unit is no longer feasible, the Meridian Group developed an exit strategy for transitioning the unit back to its original size and re-establishing ARMC’s outsource contract. The transition will occur in three phases. Phase 1 will consist of the phasing out current in-housed operations and reassessing expansion and spatial needs given lower than expected treatment volume. While the RDNs will have spent time providing care on other units, given their expertise, the importance of maintaining competency, and the cost premium of specialization, it is unlikely that they would stay at ARMC if the dialysis area was no longer staffed with in-house RDNs. Administration in conjunction with Human Resources would have to deliberate with each RDN on their career options and opportunities. At the same time, ARMC will need to reassess expansion and determine if the added overhead is worth cross-subsidizing if patient volume remains low. Phase 2 of the exit strategy will consist of capital budgeting and other financial due diligence in order to minimize the hospital’s losses. This will include making decisions regarding whether or not ARMC should keep or sell its dialysis equipment. If the machines are still within their usable lives, ARMC could retain its machinery and use a third-party for staffing and supply expertise. Doing so would likely lower the costs associated with outsourcing given that the outsource provider would not need to provide the equipment. ARMC would also have the option of selling its machinery as a capital gain if the machinery is not at its terminal life. While this option would result in immediate

Finance

Cost per treatment relative to market

rate

Positive net savings

Growth

Nephrology market share

Dialysis program growth

Staff retention

Patient Experience

% of patients that would recommend

to others

Dialysis nurse rating

Quality of care

Anemia levels

Mortality rate

Dialysis Adequacy

Figure - Performance Metrics for Expansion & In-Housing of Inpatient Dialysis Services

41

gains, the tax loss from the sale would have to be considered when comparing this option against keeping the equipment and negotiating a lower price from outsource providers. Finally, in Phase 3 of the exit strategy, ARMC would finalize its contract with an outsource provider. Available options would include renewing its contract with Davita or signing a new contract with another dialysis provider, such as Fresenius. Having developed greater expertise in providing dialysis care through its in-housing efforts, ARMC should be well-positioned to negotiate competitive treatment fees when negotiating its final contract. Figure - Summary of Recommended Exit Strategy

[1] Phase out current operation

•Evaluate need for ARMC dialysis nurses

•Determine future spatial needs

[2] Keep or sell equipment

•Estimate terminal value for tax purposes

•Compare gain from sale to savings from lower Outsourcing costs

[3] Begin new DaVita or Fresenius contract

•Evaluate both organizations

•Negotiate more competitive rate

42

12. PUBLIC HEALTH & MEETING COMMUNITY NEED

At the heart of Meridian Group’s recommendations is the firm belief that ARMC will be equipped to better meet the local community’s health needs by increasing its inpatient dialysis capacity and being solely accountable for the operations of the area. When ARMC’s dialysis area operates at max capacity, the nurses must limit treatment length and dialyze patients late into the night to meet the excess demand. This threatens both quality and continuity of care. According to the ARMC’s mission statement, the hospital’s vision is to be “desired and chosen by the community for healthcare services based on a reputation of excellent services, modern facilities and equipment, skilled and compassionate staff, friendly environment, and their relationships with other healthcare organizations.” In order to affirm this mission statement, ARMC must not limit treatment or sacrifice quality of care. Instead, ARMC must have the capacity, staff, and expertise in place to guarantee that it is the hospital of choice for all community residents.

43

APPENDIX 1: EXAMPLE OF HEMODIALYSIS EQUIPMENT

44

APPENDIX 2: OUTPATIENT REVENUE GROWTH, 2009 TO 2012

-2.50%

4.10%

3.02%

7.89%

-4%

-2%

0%

2%

4%

6%

8%

10%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

2009 2010 2011 2012(projected)

GR

OW

TH

RA

TE

(A

BO

VE

GD

P)

TO

TA

L R

EV

EN

UE

(i

n m

illi

on

s)

REVENUE GROWTH AMONG OUTPATIENT PROVIDERS

45

APPENDIX 3: INDUSTRY DISTRIBUTION OF DIALYSIS PATIENTS

10%

12%

15%

31.5%

31.5%

0% 10% 20% 30% 40%

Hospitals

Small Chains

Ind.Providers

Fresenius

Davita

(%) of Market

DISTRIBUTION OF DIALYSIS PATIENTS

46

APPENDIX 4: ECONOMIC SENSITIVITY ANALYSIS OF OUTPATIENT DIALYSIS INDUSTRY

YEAR DIALYSIS GROWTH

GDP GROWTH

UNEMPLOYMENT RATE

FED FUNDS TARGET RATE

(IR)

DOLLAR VALUE*

INFLATION GROWTH

(CPI)

2002 12.60% 1.83% 5.80% 1.67% 80% 1.60%

2003 3.20% 2.50% 6.00% 1.13% 74% 2.30%

2004 5.20% 3.58% 5.50% 1.35% 67% 2.70%

2005 3.70% 3.06% 5.10% 3.22% 65% 3.40%

2006 16.20% 2.67% 4.60% 4.97% 70% 3.20%

2007 8.20% 1.94% 4.60% 5.02% 66% 2.80%

2008 14.20% (-0.02%) 5.80% 1.92% 63% 3.80%

2009 4.30% (-2.67%) 9.30% 0.16% 65% (-0.4%)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2002 2003 2004 2005 2006 2007 2008 2009

GR

OW

TH

(%

)

Macroeconomic Sensitivity of Dialysis Industry

DIALYSIS GROWTH GDP GROWTH INFLATION GROWTH (CPI)

47

APPENDIX 5: DIALYSIS PATIENTS ADMISSIONS PER PATIENT-YEAR

1.75

1.80

1.85

1.90

1.95

2.00

2.05

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Ho

spit

al A

dm

issi

on

s

(per

yea

r)

All dialysis: Admissions per patient-year

48

APPENDIX 6: NEPHROLOGY MARKET SHARE MAP

49

APPENDIX 7: VALUE BASED PURCHASING INITIATIVE Under new Quality Performance program included in the health reform bill, all ESRD payments will be reduced by up to 2% for failure to meet or exceed performance standards.

QUALITY MEASURES

1. Hemodialysis Adequacy: Achieved urea reduction (URR) of 65 % or more

2. Anemia Management: % of patients whose hemoglobin levels were greater

than 12 grams per deciliter (g/dL)

In future guidance, thresholds will be set for each of these measures. Failure to meet these thresholds will result in a payment reduction of up to 2%. The rules specifying the actual reduction for missing these quality measures will be provided in future guidance. CMS has indicated that in future years, URR will likely be replaced by Kt/V. CMS has also proposed possible future QIP measures: vascular access, vascular access infections, hospitalization, measures of bone and mineral metabolism, patient satisfaction, and patient-reported quality of life. Scoring Methodology

Scores range from 0-30

Sliding scale of payment reductions for year 2012 o Minimum total performance score to avoid reduction is 26

o 21-25 - 0.5%

o 16-20 -1.0%

o 11-15 - 1.5%

50

APPENDIX 8: PORTER’S FIVE FORCES

Five Forces Forces Driving Service Area Competition Conclusion

Intensity of Rivalry

There are approximately 5 hospitals that offer inpatient dialysis services in close proximity of ARMC

The majority of dialysis services offered in the Alamance County region are outpatient services. There have been major consolidations and new market entrants into the outpatient dialysis service market.

Pricing for the provision of inpatient dialysis service is bundled under the patient’s DRG for their hospitalization resulting in minimal pricing rivalry among ARMC and its competitors

Low

Rivalry is low in this market because ARMC holds almost the entire emergent market share for patients requiring dialysis within the area and there are not many providers in a close proximity to ARMC vying for patients with dialysis needs. Additionally, there are no area hospitals similar in size to ARMC that provide this inpatient dialysis service.

Threat of New

Entrants

ARMC holds a significant portion of the economies of scale and a significant amount of the inpatient dialysis service market within Alamance County and its surrounding areas.

ARMC’s recent merger with Cone Health has increased their market share within the community and Cone Health is no longer their competitor.

Staffing inpatient dialysis nurses can be difficult due to the long hours and training required.

There are low to moderate capital requirements for an inpatient dialysis service line if it is staffed by an outside contractor like Fresenius or DaVita- the outside contractors provide the equipment, human capital, and expertise.

Industry growth rate of outpatient dialysis has been steadily growing. There is a correlation between outpatient and inpatient dialysis services; therefore it can be assumed that inpatient dialysis services will continue to grow.

Inpatient dialysis service lines are not revenue generators for facilities; however, they meet the community’s public health needs. The need for dialysis service has increased by about 6% in the past 5 years in Alamance County and surrounding areas.

Barriers to entry- a) licensing of facilities (Joint Commission); b) certificate of need (CON) laws for dialysis services; c) Medicare- limits entrant into the inpatient dialysis service market through its high regulation.

A new facility will only be approved to open if existing facilities’ utilization rates exceed 80% (or more than 3.2 patients per station) and the county has determined that there is a need for at least 10 more additional stations in that county.

Low

The threat of new competitors entering ARMC’s inpatient dialysis service market is relatively low to moderate. This threat is low to moderate to moderate due to the substantial amount of barriers to entering the dialysis market, and ARMC large economies of scale within Alamance County and its surrounding areas. However, if ARMC decides to expand the service and/or become a dedicated renal unit, they may new future competitors, particularly those without renal services.

LO

W

LO

W

51

Threat of Substitutes

There has been an increase in the use of mobile dialysis machines in the provision of care- this may result in a decline in the need of dedicated inpatient renal units.

Dialysis equipment and machines are becoming more advanced and specialized- facilities with greater financial leverage may be able to acquire more advanced dialysis equipment and machinery.

New technology- “Wearable Artificial Kidney” technology (WAK) may eliminate the need for inpatient dialysis units

Low

There are not many low cost, feasible alternatives to dialysis machines and equipment on the market that could substitute inpatient care. Most of the dialysis substitutes on the market would have a greater impact on the provision of outpatient and home dialysis services.

Bargaining Power of

Customers

The majority of inpatient dialysis service volume is the result of emergent care (unplanned by patient).

Dialysis services are primarily funded by Medicare; therefore the government has great bargaining leverage with providers.

Medicare reimbursements for dialysis services are bundled under the patient’s primary encounter DRG.

High

The bargaining power of inpatient dialysis service customers is moderate because the main buyer of inpatient dialysis service is Medicare. The bundling of inpatient dialysis services under the primary encounter DRG results in the facility having low bargaining power and reduced profits (low profits force lower purchasing costs). Additionally, most inpatient dialysis is the result of emergent care which is unplanned- patients have less information prior to encounter to gain bargaining leverage.

Bargaining Power of Suppliers

Market control by few suppliers- The major equipment and service suppliers and distributors of dialysis services are Fresenius, Gambro, and DaVita.

Nephrologist, dialysis RNs and techs are in low supply, require major training, and are required to work long hours

The major inpatient dialysis service contractors, like DaVita and Fresenius, hold major intellectual capital and expertise within the field

High

The bargaining power of suppliers is medium to high because a low number of suppliers (equipment, material, and personnel) hold the majority of inpatient dialysis service market share. Therefore, they have greater bargaining leverage in the service area. Additionally, they have a high number of personnel with expertise in the field which lowers ARMC’s expenditures for training and wages.

HIG

H

HIG

H

LO

W

52

APPENDIX 9: STAKEHOLDER ANALYSIS IMPORTANCE INFLUENCE DESCRIPTION

ARMC Administration

HIGH

HIGH

Will require a sizable initial investment in supplies, equipment, and equipment.

High priority: dialysis has been identified as an area that has reserved space.

Nephrologists HIGH HIGH Highly important and highly influential in the direction of renal care at ARMC

Likely to be interested in the establishment of a dedicated Renal Floor as currently they are having to do rounds on patients in disparate locations.

Dedicated in-house Renal Unit would signify nephrology’s increased importance and status.

DaVita

HIGH

HIGH

May be willing to extend a reduction in price per treatment in order to retain ARMC as a client.

May also try to retain some of ARMC’s business by serving as a vendor for the program’s equipment and supplies.

Holds a considerable amount of intellectual capital that ARMC will not have access to it.

PAYERS (CMS) HIGH HIGH Reimbursement and payer mix will be used as benchmarks for financial analysis and revenue projections.

Health reform legislation and greater emphasis on bundling and cost cutting will highly influence expansion and efforts to bring services in-house.

Nursing Staff HIGH MEDIUM Recruiting experienced dialysis nurses is critical to the operation

Nursing buy-in will be highly important to ensuring the highest quality of care and floating effectively to other units

State Regulators HIGH MEDIUM The discontinuation of the contract implicates ARMC for all regulatory and reporting acquirements for dialysis patients. Currently, many of these reports are DaVita’s responsibility

Patients MEDIUM LOW Ability to choose what Emergency Department they go to is somewhat limited.

Will likely be impacted as ARMC experiences “growing pains”

Patient satisfaction will likely improve since there has been less wait time associated with getting their treatments.

Ambulatory Providers

MEDIUM LOW Ambulance providers’ awareness of the expansion of inpatient services will be moderately important to successful expansion

Suppliers & Maintenance Supply Chain

MEDIUM LOW Most likely will be willing to compete for contracts with ARMC for supplies and equipment.

Negotiated prices as well as the maintenance services they offer will be moderately important to expansion efforts and minimizing cost will maintain quality.

Other ARMC Physicians

MEDIUM LOW Other ARMC physicians’ sickest patients who will be receiving dialysis services at ARMC.

Referring Physicians

MEDIUM LOW Feel more confident that their patients are receiving the necessary care at the hospital closest to home.

Competitors (UNC & Duke)

MEDIUM LOW Already have established inpatient units and will continue to exert competitive pressures on ARMC’s inpatient unit.

53

APPENDIX 10: CON LAW IN NORTH CAROLINA “The North Carolina Certificate of Need (CON) law prohibits health care providers from acquiring, replacing, or adding to their facilities and equipment, except in specified circumstances, without the prior approval of the Department of Health and Human Services. Prior approval is also required for the initiation of certain medical services. The law restricts unnecessary increases in health care costs and limits unnecessary health services and facilities based on geographic, demographic and economic considerations… All new hospitals, psychiatric facilities, chemical dependency treatment facilities, nursing home facilities, adult care homes, kidney disease treatment centers, intermediate care facilities for mentally retarded, rehabilitation facilities, home health agencies, hospices, diagnostic centers, and ambulatory surgical facilities must first obtain a CON before initiating development. In addition, a CON is required before any upgrading or expansion of existing health service facilities or services, which involves a capital expenditure above specified minimums.” Capital expenditure by any person for health service in excess of $2 million dollars requires CON review. According to the CON law, "Kidney disease treatment center" refers to a facility that is certified as

an end‑stage renal disease facility by the Centers for Medicare and Medicaid Services, Department

of Health and Human Services...” The CON law applies to the following activities of outpatient dialysis facilities: 1) Change in bed capacity i) Relocation of health service facility beds or dialysis stations. ii) Change of health service facility beds from one category to another. iii) Increase in dialysis stations or health service facility beds. 2) Establishment of new dialysis services or home health services. 3) Change in project that includes cost overrun of 15% of the capital expenditure amount of an approved CON project or addition of a health service to an approved project. Alamance Regional Medical Center’s dialysis service does not fall under the CON law because it is only offered to inpatients. Furthermore, the expansion of the dialysis bays at ARMC is not projected to exceed the capital expenditure amount of $2 million dollars.

54

APPENDIX 11: EVALUATION OF ALTERNATIVES

Strategic Alternative pros cons I. Maintain dialysis

unit’s current size

-Current operating capacity is well below 80% threshold

-Current operations is hampering patient satisfaction, staffing, operating flow

-Strong push from staff from to expand

II. Expand unit and

serviced by DaVita

-Offers more flexibility to address patient care and demand -Maintains current expertise in dialysis care -Provides relative staffing stability -No training costs incurred -Little to no opportunity for patients to experience initial transition -Less overhead and initial costs for ARMC (i.e. equipment and supplies)

--Estimated premium from DaVita

-Cost per treatment is higher than what ARMC could provide -ARMC is subject to cost per treatment increases -Supply Chain is antagonistic to continuing DaVita contract -Less control over supplies

-Continuing contract does not align with culture of the unit -ARMC is dependent on DaVita for staffing, training, compliance -ARMC staff wants ownership and accountability for providing dialysis

III. Expand unit and

service in-house

-Better control over supplies

-Better quality control -Avoids estimated cost-per-treatment premium from DaVita -ARMC already has pride and ownership invested in the potential unit - No longer dependent on DaVita for staffing, training, compliance - No training costs for ARMC

-Transition will be difficult -Initial significant knowledge transfer -ARMC may face difficulty recruiting and retaining dialysis nurses and expertise -May be difficult to maintain continuing education given current volume -High initial costs of equipment -Potential organizational pushback

55

APPENDIX 12: DISTRIBUTION MECHANISMS OF AWARENESS CAMPAIGN

DISTRIBUTION MECHANISM

OBJECTIVES & IMPLEMENTATION

Phone calls Physician liaison perform outreach to discharged patients to follow-up on patient experience, address concerns, and reinforce ARMC’s commitment to patients

Physician liaison provides outreach to the management of ambulance services about the expansion and ARMC’s ability to treat more patients that may require dialysis treatments

Physician liaison inform outpatient dialysis centers in Alamance County (BMA of Burlington, and Burlington Dialysis Center) about the expansion

Pamphlets/ Brochures

Distribute brochures to patients and families in the emergency to highlight ARMC’s commitment to patients and clinical expertise

Provide outpatient dialysis centers in Alamance County (BMA of Burlington, and Burlington Dialysis Center) with brochures to be disseminated to their patients ---outlines the services and expertise offered by ARMC’s expanded inpatient dialysis unit

Direct Mailings Inform former dialysis inpatients and Alamance County households about ARMC’s commitment to patients and its vision to meet the public health needs of the community by expanding its inpatient dialysis unit

Internal Newsletters

Announce the expansion of the inpatient dialysis unit in the internal newsletters, Wavelengths, Physicians’ Quarterly, and Well Now, the community health magazine

Internal Mass Emails

Announce the expansion through a biweekly mass email to all clinical/medical staff, (i.e. primary care physicians, vascular physicians/surgeons, cardiologists) and reinforce the importance of their role in patient referrals

Informational letter Inform ambulance services and EMTs about the expansion of the dialysis unit

Inform outpatient dialysis centers in Alamance County (BMA of Burlington, and Burlington Dialysis Center) about the expansion

56

APPENDIX 13: STAFFING MODEL CALCULATIONS & ASSUMPTIONS

Working Hours Needed Weekly

Shift Hours Hourly Calculation Number of staffed hours needed weekly

Day Shift 7am-7pm 12 hour shifts * 2 nurses a day * 6 days a week

144 hours

Total hours needed weekly: 144

Time-out Adjustment 10%

Adjusted hours 158

FTE required (based on a 36 hr work week)

4.4

FTE staffed 4.5

57

APPENDIX 14: EXAMPLE OF STAFF WORK SCHEDULE

Type of Nurse Sun Mon Tue Wed Thu Fri Sat

RDN 1

FULL 7am-7pm

FULL 7am-7pm

FULL 7am-7pm

24 hr On Call

RDN 2

24 hr On Call

FULL 7am-7pm

FULL 7am-7pm

FULL 7am-7pm

RDN 3

FULL 7am-7pm

24 hr On Call

FULL 7am-7pm

FULL 7am-7pm

RDN 4 (part-time)

FULL 7am-7pm

FULL 7am-7pm

24 hr On Call

RDN 5 (part-time)

FULL 7am-7pm

FULL 7am-7pm

24 hr On Call

RDN 6 (part-time)

24 hr On Call

24 hr On Call

FULL 7am-7pm

FULL 7am-7pm

58

APPENDIX 15: EXAMPLE OF NURSE JOB DESCRIPTION Renal dialysis nurses (RDNs) play a vital role in caring for patients that are undergoing dialysis treatment. Renal dialysis nurses assess patients with impaired kidney functions and develop plans for nursing care. Additionally, renal dialysis nurses are required to implement the course of care for patients, generate thorough care plans, and monitor patient treatments. The areas of practice for RDNs can vary widely, including, but not limited to, hemodialysis, peritoneal dialysis, continuous renal replacement therapies, and apheresis. The position may involve heavy lifting, and moving of patients. The ability to stand for prolong periods of time, bend, move machines and equipment > 200 lbs., and lift chemical and water solutions of up to 30 lbs. up as high as 5 feet is required. RDNs must be comfortable performing multiple tasks at once and are expected to exhibit flexibility, strong attention to detail, the ability to make quick but accurate judgments pertaining to patient needs. The role typically reports to a manager or unit/department head. Education The position requires RDNs to have an associate’s degree and certification as a registered nurse. Certification in Nephrology Nursing, Apheresis Nursing or both is highly encouraged. Experience

Requirement of one year RN experience and minimum of six months nephrology experience

At least six months of dialysis experience required to be on-call

Successful completion of a training course on ESRD patients

Successful completion of Nurses Technical Training

Principal Responsibilities and Duties:

Responsible for assessing patient and family understanding of therapy regimen and conducting ongoing education for patients and their families regarding therapy requirements

Assesses patients’ responses to treatment therapy making appropriate adjustments and modifications to the treatment plan as indicated by the appropriately credentialed physician.

Collaborates and communicates with physicians and other members of the healthcare team to interpret, adjust, and coordinate daily patient care plan to ensure continuity of care.

Cleans and disinfects dialysis machine surface, chair, equipment, and surrounding areas between treatments according to inpatient renal services policies and procedures.

Conducts all tasks necessary for preparation for dialysis treatment and documents where appropriate.

Performs all required pre-treatment dialysis machine alarm testing, including Pressure Holding Test (PHT).

Prepares, organizes, and efficiently utilizes supplies and equipment to prevent waste.

Operates all related equipment appropriately and safely and provides minor trouble-shooting when necessary

59

APPENDIX 16: DETAILED NPV COMPARISON

Expansion w/ Contract

($3,107,936)

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Revenues $6,837,000 $7,246,700 $7,686,800 $8,149,100 $8,641,800

Operating Expenses 83,200 7,556,425 8,009,018 8,495,146 9,005,849 9,550,087

Net Income ($83,200) ($719,425) ($762,318) ($808,346) ($856,749) ($908,287)

Depreciation 4,160 4,160 4,160 4,160 4,160

Net Cash Flow (83,200) (715,265) (758,158) (804,186) (852,589) (904,127)

Expansion w/out Contract

($1,986,995)

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Revenues 6,837,000 7,246,700 7,686,800 8,149,100 8,641,800

Operating Expenses 202,150 7,310,653 7,723,156 8,179,907 8,638,320 9,137,510

Net Income (202,150) (473,653) (476,456) (493,107) (489,220) (495,710)

Depreciation 13,700 13,700 13,700 13,700 13,700

Net Cash Flow (202,150) (459,953) (462,756) (479,407) (475,520) (482,010)

Net Present Value of Cash Flows at 5 Years

Net Present Value of Cash Flows at 5 Years

60

APPENDIX 17: NET INCOME WITHOUT CONTRACT

Net Income of Expansion w/out Contract

Year 1 Year 2 Year 3 Year 4 Year 5

Encounters w/Dialysis 514 545 578 613 650

Encounters not receiving Dialysis 138 146 155 164 174

Treatments per year 1439 1526 1618 1716 1820

Income

Net Rev 5,705,400$ 6,049,500$ 6,415,800$ 6,804,300$ 7,215,000$

Net Rev w/out Dialysis 1,131,600 1,197,200 1,271,000 1,344,800 1,426,800

Total Income 6,837,000 7,246,700 7,686,800 8,149,100 8,641,800

Operating Expenses

Direct Costs

Salary and Benefits

Nurses

Full-time 201,000 201,000 201,000 201,000 201,000

Part-time 134,000 134,000 134,000 134,000 134,000

On call 17,472 17,472 17,472 17,472 17,472

Called-in 3,091 3,277 3,475 3,686 3,908

Float time (103,798) (100,326) (93,383) (86,440) (79,497)

Sign-on Bonus for FT RDNs 0 0 10,050 0 0

Nurse Manager 70,000 70,000 70,000 70,000 70,000

Benefits

Nurses 96,480 96,480 96,480 96,480 96,480

Nurse Manager 16,800 16,800 16,800 16,800 16,800

Supplies 37,419 39,676 42,078 44,626 47,320

Equipment/Maitenance 35,000 35,000 35,000 35,000 35,000

Add'l Trmt Costs w/ dialysis 3,062,938 3,247,668 3,444,315 3,652,881 3,873,365

Add'l Trmt Costs w/out dialysis 676,926 716,168 760,316 804,463 853,516

Total Direct Costs 4,247,328 4,477,214 4,737,603 4,989,968 5,269,363

Gross Margin 2,589,672 2,769,486 2,949,197 3,159,132 3,372,437

Indirect Costs

Add'l Indirect Costs w/ dialysis 2,489,782 2,639,944 2,799,793 2,969,331 3,148,557

Add'l Indirect Costs w/out dialysis 559,844 592,298 628,810 665,322 705,890

Depreciation 13,700 13,700 13,700 13,700 13,700

Total Indirect Costs 3,063,325 3,245,942 3,442,303 3,648,353 3,868,146

Total Operating Expenses 7,310,653 7,723,156 8,179,907 8,638,320 9,137,510

Total Net Income (473,653)$ (476,456)$ (493,107)$ (489,220)$ (495,710)$

61

APPENDIX 18: NET INCOME WITH CONTRACT

Net Income w/ Contract

Year 1 Year 2 Year 3 Year 4 Year 5

Encounters w/Dialysis 514 545 578 613 650

Encounters not receiving Dialysis 138 146 155 164 174

Treatments per year 1439 1526 1618 1716 1820

Income

Net Rev w/ Dialysis 5,705,400$ 6,049,500$ 6,415,800$ 6,804,300$ 7,215,000$

Net Rev w/out Dialysis 1,131,600 1,197,200 1,271,000 1,344,800 1,426,800

Total Income 6,837,000 7,246,700 7,686,800 8,149,100 8,641,800

Operating Expenses

Direct

Salary and Benefits

Nurses

Add'l Trmt Costs w/ dialysis 3,062,938 3,247,668 3,444,315 3,652,881 3,873,365

DaVita dialysis trmt cost 762,776 808,780 857,752 909,692 964,600

Add'l Trmt Costs w/out dialysis 676,926 716,168 760,316 804,463 853,516

Total Direct 4,502,640 4,772,616 5,062,383 5,367,036 5,691,481

Gross Margin 2,334,360 2,474,084 2,624,417 2,782,064 2,950,319

Indirect

Training

Utilities (expansion)

Add'l Indirect Costs w/ dialysis 2,489,782 2,639,944 2,799,793 2,969,331 3,148,557

Add'l Indirect Costs w/out dialysis 559,844 592,298 628,810 665,322 705,890

Depreciation 4,160 4,160 4,160 4,160 4,160

Total Indirect 3,053,785 3,236,402 3,432,763 3,638,813 3,858,606

Total Operating Expenses 7,556,425 8,009,018 8,495,146 9,005,849 9,550,087

Total Net Income (719,425)$ (762,318)$ (808,346)$ (856,749)$ (908,287)$

62

APPENDIX 19: GROSS MARGIN COMPARISON

Gross Margin Comparison

Year 1 Year 2 Year 3 Year 4 Year 5

Expansion w/ Contract $2,334,360 $2,474,084 $2,624,417 $2,782,064 $2,950,319

Expansion w/out Contract 2,589,672 2,769,486 2,949,197 3,159,132 3,372,437

Savings $255,312 $295,401 $324,780 $377,068 $422,117

63

APPENDIX 20: SENSITIVITY ANALYSIS

64

APPENDIX 21: SCENARIO ANALYSIS

NPV w/Contract NPV w/In-house Savings

Best

10% growth

3.0 trmts/visit

Most Likely

6% growth

2.8 trmts/visit

Worst

4% growth

2 trmts/visit

($2,066,853) ($1,810,735) $256,118

($3,704,672) ($2,078,142) $1,626,530

$1,120,941($1,986,995)($3,107,936)

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

Best Most Likely Worst

NP

V S

av

ing

s

Scenario Analysis

APPENDIX 22: PERFORMANCE GOALS

Alamance Regional Medical Center: Dialysis Program Performance Goals

Strategic Goal

Critical Success Factor

Goal Time frame

Qual

ity

of

care

Maintain the highest quality of care

<3% of patients who had an average hemoglobin value less than 10.0 g/dL (N.C. State Average 2010)

1 year

<11% of patients who had an average hemoglobin value greater than 12.0 g/DL (N.C. State Average 2010)

1 year

Corrected calcium: 8.4 -10.2 > 85%, Corrected Ca: 8.4–9.5: > 62% 1 year

>97% of patients who had enough wastes removed from their blood during dialysis (Dialysis Adequacy)

1 year

Pat

ien

t E

xper

ien

ce

Maintain high patient satisfaction

>90% of patients would recommend this unit to others 6 months

> 90% patients stating their privacy needs were met when receiving treatment 6 months

>90% of patients stating the noise level on the unit was acceptable 6 months

>90% of patients rating their dialysis nurse Very Good or Excellent 6 months

Fin

ance

s

Provide dialysis service at minimal cost

Cost-per-treatment increases less than 5% each year 2 years

Cost-per-treatment is less than market third-party rate 2 years

Ensure volume growth to support expansion Volume growth meets or exceeds X% per year

2 years

Maintain or increase Nephrology market share Exceed or maintain at 50% renal care market share

1 year

Inte

grat

ion

Maintain strong outpatient relationships Majority of outpatient dialysis patients choosing ARMC for an emergency

On-going

Recruit and retain dialysis staff and nephrologists

Less than 5% turnover among dialysis nurses 1 year

>10% of clinical time devoted to dialysis care 6 months

100% of dialysis nurses consistently meeting competency requirements 1 year

1

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