The City and County of San Francisco Board of Supervisors directed the Office of the Budget Analyst in Motion MO1-1, adopted January 2, 2001, to conduct a management audit of the Department of Public Health. Pursuant to consultation with the sponsor of Motion MO1-1 concerning the intent of the motion, the audit focused primarily on financial management controls and practices at San Francisco General Hospital.

Purpose and Scope

The purpose of the management audit was to examine the operations, practices and finances of San Francisco General Hospital and determine if opportunities exist for improving its efficiency, effectiveness, and economy. The scope of the management audit was limited to financial management, but included all aspects of the Hospital, including operations, finances, organizational structure, staffing, planning and management decision making.

The fieldwork for the management audit was conducted between February and October of 2002 with a draft report issued on December 16, 2002. Following the Hospital’s review of the draft report, this final report incorporating the comments of Hospital management was issued on February 11, 2003.

Audit Methodology

This audit was conducted in accordance with Government Auditing Standards, developed by the United States General Accounting Office and promulgated by the Comptroller General of the United States. In accordance with these standards, the management audit was conducted in five phases as follows:

• An entrance conference was held with the Chief Financial Officer of the Department of Public Health and key members of the organization’s financial management staff to present the preliminary audit work plan, discuss audit procedures and protocol, request certain background information, and respond to questions.

• A pre-audit survey was conducted to familiarize the management audit staff with the operations and records maintained by the Hospital’s various departments and divisions and to identify areas requiring additional review. As part of this survey phase, interviews were held with executive and management staff throughout the organization.

• Fieldwork was conducted to develop a more detailed understanding of selected departmental operations. Fieldwork activities included additional interviews with selected managers, supervisors and line staff, review of documents, financial analysis and observations of Hospital functions.

• A draft report was prepared based on analysis of the information and data collected during previous audit phases. This draft contained our initial findings, conclusions and recommendations, and was presented for review by the Chief Financial Officer and his management staff.

• An exit conference was held on January 8, 2003, following delivery of the draft report. During the period between delivery of the draft report and the exit conference, management audit staff was available to provide additional explanation of the findings and recommendations. At the exit conference, the Hospital provided additional information related to the findings, and was able to request clarification of findings and recommendations. Based on the additional information provided, a final report was prepared. The Hospital then provided a written response to the final report, and the final report and response was delivered to the Board of Supervisors.

Overview of San Francisco General Hospital Administration

San Francisco General Hospital (SFGH) provides acute inpatient care, outpatient services, and emergency services to the residents of San Francisco. Designated as the City’s only Level I Trauma Center, San Francisco General Hospital also serves a disproportionate share of the City’s poor and indigent populations. The Hospital, licensed for 550 beds, employs approximately 2,642 full time equivalent employees. Physician services are provided through an affiliation agreement with the University of California at San Francisco.

The Board of Supervisors exercises budgetary and other oversight control over the Hospital, which relies upon the City for a subsidy to supplement its own operating revenues. In fiscal year 2001-02, actual revenues and expenditures totaled $364.7 million and $351.4 million respectively, resulting in a surplus of $13.3 million, which was carried forward into FY 2002-2003. Because of the FY 2001-2002 operating surplus, the General Fund subsidy to the hospital was reduced by $23.9 million, from the original budgeted amount of $96.3 million to the actual amount of $72.4 million, with a fund balance of $3.7 million carried forward to FY 2002-2003. The adopted budget for fiscal year 2002-03 is $379.0 million in appropriations, partially funded by a $94.8 million operating subsidy from the General Fund. San Francisco General Hospital’s budget has increased in FY 2002-2003, due largely to salary increases mandated in the City’s collective bargaining agreements with employee organizations, higher pharmaceutical costs, and increased patient census.

Administration of the Hospital is the responsibility of the Department of Public Health with many of the administrative support functions reporting directly to Department of Public Health management, such as Finance, Human Resources, and Legal Services. Additionally, there are several support functions that report directly to Hospital management, such as Support Services and Quality Management, which includes Utilization Review.

The Finance Division is comprised of Medical Records, the Controller function, which includes budget and accounting, Patient Financial Services, which is comprised of admissions and billing and collection responsibilities, and the Laguna Honda Hospital finance unit. Support Services is comprised of numerous functions supporting the SFGH facility, such as maintenance, security, environmental health and safety, and materials management.

Accomplishments of the San Francisco General Hospital

Management audits tend to concentrate on the deficiencies within an organization. Nonetheless, we recognize the challenges that are faced by the San Francisco General Hospital and have identified many management accomplishments. San Francisco General Hospital management has provided the following items as some of the top five accomplishments during the past few years.

Accounts Receivable

San Francisco General Hospital had made tremendous progress in the management of its accounts receivable during FY 2001-2002. Days in accounts receivable decreased from 123 days at June 30, 2000 to 74 days at June 30, 2002, finishing the year at an all-time low for the institution. This had been accomplished by the timeliness of medical records coding, the increased effectiveness of the eligibility system, improved front end processes to produce cleaner claims and improvements in cash collection efforts. Further improvements are expected as a result of the upcoming conversion of billing systems and centralization of registration personnel.

Traumatic Brain Injury Program (TBI)

SFGH established this program to optimize care for traumatic brain-injured patients by creating a continuum of care that begins with life saving efforts in the Emergency Department and Surgical Services, and progresses through maximizing day-to-day ability to function through rehabilitative care. Through a coordinated approach, TBI decreases length of stay in critical care and advances recovery of patients in acute units. Elements of the program include around-the-clock attending neurosurgeon coverage to respond to all major resuscitations, continuity of care from acute care through rehabilitation and discharge, and neuro-psychologist consults. The program has completed hiring of two nurse practitioners and a neuro-science clinical nurse specialist to provide continuity of care, and plans to add an additional neurosurgeon.

Integrated Soft Tissue Infection Service (ISIS) Clinic

Prior to July 2000, the majority of patients with significant soft tissue infections (abscesses and cellulitis) were treated in the Emergency Department or admitted to the hospital. The ISIS clinic was created with the goal of providing appropriate, compassionate, efficient and cost effective care to patients with soft tissue infections. In addition to wound care, it provided integrated substance abuse referral and treatment services, on site counseling, and social services. After one year of operation, more than twice the original estimated numbers of clients were served (1,785). Annual hospital admissions with abscess or cellulitis as a primary diagnosis decreased 22%, and Emergency Department visits were reduced by 36%.

In FY 2001-2002, the clinic saw 2,383 patients and 4,112 visits. Hospital admissions with abscess or cellulitis as a primary diagnosis decreased 36% from FY 2000-2001, and Emergency Department visits for this patient population remained the same. Abscess or cellulitis went from being the number one most frequent inpatient diagnosis in FY 1999-2000 to the eighth most frequent diagnosis in FY 2000-2001 and the tenth in FY 2001-2002.

Medical-Behavioral Unit (MBU)

In January 2001, this unit was created to better facilitate integrated physical and behavioral health services for patients with complex needs. Common patient conditions seen in the MBU include alcohol withdrawal, behavior leading to 5150/5250 status, and neurologically impaired patients with traumatic brain injuries and dementia. An interdisciplinary team of practitioners includes substance abuse counselors, psychosocial consultation, a clinical nurse specialist, and medical and psychiatric social workers. The goals of the MBU include improving patient safety by decreasing restraint usage and decreasing the rate of falls and numbers of patients leaving without being discharged, as well as increasing staff competency around Safety Management and Response Techniques (SMART), psychotropic medications, and behavioral contracting.

Medical High Utilizer Case Management Program

SFGH established this program to focus on decreasing preventable admissions for patients who are frequently admitted or are at risk of frequent admissions to SFGH’s inpatient units. The case management team consists of physicians, psychiatrists, social work managers, and a public health nurse.

Declining Federal and State Funding to San Francisco

Because Federal and State support to San Francisco General Hospital is declining as a percentage of the total Hospital budget, the City’s General Fund will face increasing pressure to fund a larger share of San Francisco General Hospital costs in future years. As explained in Section 1 of this report, State and Federal revenues make up 30 percent of the FY 2002-2003 budget compared to 35 percent in FY 2000-2001. Additionally, Medicare and MediCal reimbursements to San Francisco General Hospital for patient services are falling behind the increasing costs of providing services.

Disproportionate Share Hospital and Emergency Services and Supplemental Payments Programs

Disproportionate Share Hospital Program (SB 855)

California adopted SB 855 in 1991 to implement the Federal Disproportionate Share Hospital program. In FY 2002-2003, San Francisco General Hospital anticipates approximately $30 million in Disproportionate Share Hospital funding, which is $5 million less than actual FY 2001-2002 funding. Although the Federal government reduced available Disproportionate Share Hospital funding in the 1997 Balanced Budget Act, Congress subsequently passed legislation mitigating the effects of the reduction through fiscal year 2001-02.

Disproportionate Share Hospital Upper Payment Limit

Over the next eight years, changes in Federal upper payment limit regulations will reduce Federal funding to California, resulting in reduced State funding to San Francisco General Hospital. Under previous Federal Medicaid regulations, the State has been able to pay public hospitals more than 100 percent of the estimated Medicare payments for health services , and California public hospitals currently receive more than 150 percent of the Medicare payment. The new Federal rule gradually reduces the amount that the State can pay public hospitals by establishing an upper payment limit of 100 percent. California has eight years, until 2010, to comply with the new rule. According to the California Legislative Analyst’s Office, the State may compensate public hospitals for the lost Disproportionate Share Hospital revenues by increasing the MediCal per diem rate to the maximum allowable rate under Federal Medicaid rules. However, according to the California Legislative Analyst’s Office, phase-in of the upper payment limit will possibly result in the eventual elimination of the State’s Emergency Services and Supplemental Payments program (SB 1255) and the MediCal Graduate Medical Education Program, which currently provide $21 million annually to SFGH.

California’s Emergency Services and Supplemental Payments Program (SB1255) and MediCal Graduate Medical Education programs

Under the Emergency Services and Supplement Payments program, or SB 1255, the State provides supplemental funds to hospitals providing services to MediCal beneficiaries. Under the Graduate Medical Education (GME) program, San Francisco General Hospital receives supplemental funds to pay for a portion of the teaching costs of medical students and house staff providing services to MediCal beneficiaries. According to the California Legislative Analyst’s Office, phase-in of the Disproportionate Share Hospital upper payment limit and increased MediCal per diem rates will cost the State approximately $500 million annually statewide, resulting in the elimination of the Emergency Services and Supplemental Payments program and the MediCal Graduate Medical Education program.

Medicare Reimbursements for Patient Services

The Federal Balanced Budget Act of 1997 required Medicare to establish a new methodology for reimbursing hospitals for patient services, which would have reduced total Medicare payments to California hospitals by approximately $5.5 billion in 1998 through 2002. Subsequent Federal legislation restored some of the lost funding, but Medicare funding to California hospitals will still be reduced by more than $4 billion over this peroid.

Other Issues

In accordance with Sections 7.45 and 7.46 of the United States General Accounting Office Government Auditing Standards, certain issues identified during the audit are worthy of being brought to the attention of Hospital management and the Board of Supervisors, even though a specific finding was not included in the audit report.

Proposal to Rebuild San Francisco General Hospital by 2013

SB 1953, passed in 1994, requires hospitals throughout the State to comply with specific seismic safety standards by 2008 and with stricter seismic standards by 2030. The intent of the law is to ensure that all general acute-care hospitals can be operational after a major earthquake. A subsequent bill, SB 842, provides an alternative to hospitals by extending the 2008 deadline to 2013, if the stricter 2030 standards are met. The financing for this mandate has been deemed to be the responsibility of the hospitals and not of the State. Accordingly, it is anticipated that financing may be a major issue for many hospitals.

The Health Commission of the City and County of San Francisco has proposed rebuilding San Francisco General Hospital, rather than undertake a seismic retrofit of the existing complex, to meet the requirements set forth by SB 842 and SB 1953. A consultant was engaged to develop a long-range service delivery plan for the rebuild of San Francisco General Hospital and a report was issued in July 2002. In response to the consultant’s report, the Department of Public Health is in the process of completing the following: a) an institutional master plan for the facility, which includes discussions with the University of California at San Francisco; b) operational plans for programmatic areas such as ambulatory care and behavioral health; c) a community education campaign; and, d) a financial plan for implementation of the master plan. With the costs expected to be substantial and with no dedicated funding source, the proposal to perform a Hospital rebuild may have a significant financial impact that the Board of Supervisors will need to address soon in order to comply with SB 1953 and SB 842.

UC Affiliation Agreement

San Francisco General Hospital has had a long-standing affiliation with the University of California, San Francisco, to provide patient services. The Affiliation Agreement between the City and the University of California, which was approved by the Board of Supervisors in 1994, establishes the relationship between the parties, including respective responsibilities, rights, obligations, and expectations. Under the Affiliation Agreement, the University provides physician services and other health services, such as Clinical Laboratories and Respiratory Therapy services, and supervises medical resident and intern training. The University of California, San Francisco, receives reimbursement for patient services from third party payers, and the City pays the University for services for unsponsored patients.

Under the Affiliation Agreement, the University has ten leases with the Department of Public Health, totaling 55,720 square feet, for research space. Currently, the University leases the property for approximately $17.10 per square foot per year, including rental, maintenance and utility costs. Total annual lease revenue to the City is $824,963. The Department of Real Estate is re-negotiating the ten leases into one master lease, which will be subject to Board of Supervisors approval.

Separate from the Affiliation Agreement is the University of California annual contract for services with the City. The University of California contract sets the annual budget, which is re-negotiated each year as part of the budget process, and establishes the amount that the City will reimburse the University for purchased services. In FY 2002-2003, the University of California contract budget is $68 million.

Transition to Internal Billing Process

One of the major initiatives in the Hospital’s Patient Financial Services Division during the last few years has been to bring the billing function in-house. Previously, an external vendor, Health Management Systems (HMS), processed all patient billings except patient self-pay accounts. However, according to SFGH management, HMS performance has been deficient and there have been significant billing delays in the past few years. With the HMS contract expiring in June 2003, the transition to internal processing is expected to be completed in spring of 2003. Given the impact that patient collections has on the Hospital’s revenues, this is an area that will need to be assessed once the transition has been complete in order to determine the success of the new processes.

Acknowledgements

We would like to thank the management and staff of the San Francisco General Hospital for their cooperation and assistance during this study. Without the involvement of many individuals throughout the organization, this study would have been more difficult to complete.

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1. California implements the Federal Medicaid program as MediCal.
2. The Federal Medicaid upper payment limit is based on the upper payment limit calculated by Medicare for the same health services.
3. "Analysis of the 2002-03 Budget Bill: Hospitals Facing Financial Headaches", California State Legislative Analyst's Office, February 2002. Currently, the State negotiates the MediCal per diem rate separately with each hospital. To compensate for the decreased Disproportionate Share Hospital revenues, the State may increase MediCal per diem rates to the maximum allowable rate under Federal Medicaid rules rather than negotiating MediCal per diem rates separately with each hospital.
4. "Analysis of the 2002-03 Budget Bill: Hospitals Facing Financial Headaches", California State Legislative Analyst's Office, February 2002.