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1. Why Are Pro Formas Required?
Each state has its own criteria for evaluating CON applications. One requirement that most have in common is financial feasibility. Most states require an applicant to pass three financial thresholds: the availability of adequate capital funding, the availability of funds for start-up costs, and ongoing financial viability. Applicants show financial feasibility on a set of required forms and tables and an explanation of sources, methods, and assumptions. These are referred to collectively as the financial pro formas of the CON application.
To meet the financial-feasibility requirement, an applicant must show it has sufficient funds for the capital expenditure to construct, renovate, buy, or lease the land, and for equipment and other project costs. The applicant must also show a source of funds for the start-up and operating costs of the project until it generates positive cash flow. Some projects, such as adding a few acute care beds to a large hospital, may have no substantial start-up costs. However, for a new provider, the negative cash flow can be substantial and may continue for months or even years.
An applicant must provide assurance that the intended patient population will have ongoing access to the proposed services by demonstrating long-term financial viability. The financial schedules vary by state, but most require the applicant to project revenues and expenses for the first two or three years of operations and to show positive net income by the second or third full year. Where the proposed project is an expansion of an existing facility, some states require a pro forma for the project and a pro forma for the entire facility to show the project’s impact on the provider’s finances.
2. How Does the Pro Forma Tie into The Rest of the CON Application?
A project’s financial feasibility depends on its projected utilization. Whether the metric is imaging scans, inpatient days, outpatient surgeries, or home health visits, patient revenues and many operating expenses are determined by patient volume. CON applications require utilization projections for proposed projects. Some states require only summary volume projections for the first several years of operations. Others require detailed projections for each project element. In either case, the applicant must ensure that the projected revenues, staffing, and other expenses tie to the projected utilization.
As the number of patient visits or discharges increases, the staff and labor expense increase. The same is true for the medication and supply expense. The projected payor mix must match the services being offered. For example, obstetric services and pediatrics generally have a higher percentage of Medicaid patients than other acute care services. Therefore, an increase in the number of obstetric beds or NICU beds may change a facility’s payor mix, increasing the percent of revenues attributable to Medicaid.
3. What is a Pro Forma Based On?
For existing providers, the best basis for a pro forma is past financial data. While some categories of expenses, such as staffing, may be tightly tied to utilization, growth of others, such as administrative overhead costs, may be based on other assumptions. Line-item billing and claims data allows analysis of past volume, payor mix, patient demographics and service line revenues. Existing providers often have detailed operational expense data, with indicators for various cost centers and service lines that allow consultants to analyze how a specific project is likely to impact future expenses. Projections of future expenses must be based on sound and well-documented assumptions. Some states require providers to report utilization and financial data on license renewal applications and annual surveys. In these states existing providers should be careful the data used in the CON matches data previously reported to the state.
For new health care providers, the evidence of availability of funds for capital costs is the same as for an existing provider. It may be a letter from a bank, a loan term sheet, or showing cash on hand. Showing long-term financial feasibility, however, requires a different method. If the applicant prepared a business plan before preparing an application, the business plan can be the basis for the financial pro forma. For other applicants, MedPAR and state discharge data, which provides data on patient revenues by major payor category (Medicare, Medicaid and other), may be useful. MedPAR data (based on geography, provider volume and other metrics) can give new providers reference points to see if their financial projections are in line with similar existing providers. Some states also require providers to report financial data to the CON or licensure agency. This information along with Medicare Cost Report data, is useful as a reference point when developing a financial pro forma.
About RPC
RPC provides Certificate of Need (CON) services to a variety of providers nationally. RPC has 30 years of experience meeting providers’ needs related to the CON process, including pre-application analysis, writing CON applications, and providing expert testimony. RPC uses state and federal data such as the Centers for Medicare & Medicaid Services’ Standard Analytical Files and Cost Report data for targeted analysis. RPC’s greatest asset is its team’s expertise. RPC’s CON team includes health planning, accounting, clinical, and economic expertise. RPC has experience creating financial pro formas for CON applications, and translating providers’ internal data into CON-required forms. RPC also has consultants with expertise in developing and managing ambulatory surgery centers who can help develop staffing and equipment lists. RPC’s clients include hospitals, hospices, nursing homes, ambulatory surgery centers, free-standing emergency departments, opioid treatment programs, comprehensive inpatient rehabilitation providers and behavioral health providers. For more information on our CON services, please visit the CON page on our website or contact Ron Luke, RPC’s President, at 512-371-8166.