DRIS Update: Feasibility and Business Planning
A Community Model

by Mike Fadden

Lompoc Valley Healthcare Council-Community Pathway for Substance Abuse Prevention, Committee Meeting, July 1998

Before the Feasibility Consultant can proceed with writing a feasibility analysis, the providers, employers, community members and potential business partners in each DRIS community must negotiate and agree among themselves about a great many issues. This requires that feasibility and business planning be an iterative processes involving the Community Health Councils (CHCs) with “feedback loops” at each step of the way. As the Feasibility Consultant produces feedback in the development of the feasibility analysis, the Councils must make “go/no go” decisions. If the decision is “go,” the process continues through feasibility analysis and business plan development. If the decision is “no go,” the Councils must decide to further modify the scope of the project or terminate the process altogether. The iterative process leading ultimately to project implementation includes the following steps:

• Define the scope of the selected project;
• Determine the potential volume of business;
• Achieve pre-feasibility milestones between providers, employers, community members and potential business partners;
• Determine financial feasibility;
• Develop a business plan;
• Engage in pre-operational planning;
• Obtain final approval from all of the stakeholders; and
• Implement the venture.

Defining the Scope of the Selected Project

Each DRIS site has selected a managed care strategy involving the development of a community/provider owned Administrative Services Organization (ASO). While the overall purpose has similar goals, the scope of functions to be included in these ASOs vary from site to site. For example, one site may want to develop all plan administration and medical management functions, while another may want to limit functions to medical management only. Claims administration and HEDIS administration could be out-sourced or kept in-house. Single signature contracting could be included among the ASO functions. In addition, a site may choose to develop supplementary functions not directly related to managed care, such as physician practice management, shared provider MIS systems or ongoing community health assessment.

Determine the Potential Volume of the Business

Each DRIS community must decide what the volume of business will be for the ASO: self-insured employer covered lives; lives under risk contract with provider-owned risk bearing entities; and/or, lives from additional payor populations such as Medi-Cal. This decision will be driven in each community by the financial requirements to sustain the proposed scope of functions, existing payor contracts and provider alliances, as well as what is politically feasible. If the Feasibility Consultant finds there is not a large enough volume of lives to sustain the scope of work, the scope of work will need to be redefined and/or additional payor sources sought to make the project feasible.

Achieve Pre-feasibility Milestones between Providers, Employers, Community Members and Potential Business Partners

To further define the proposed venture, preliminary business strategy negotiations must take place between the intended network providers, potential purchasers and the CHC. Initial discussions should sort out:

• what purchasers, primarily employers and providers, want from the ASO;
• which providers are willing to participate in the integrated provider network;
• what proposed risk sharing methodology will work;
• what antitrust issues must be addressed;
• what potential exists for community acquisition of up and running businesses which offer components of the selected scope of work;
• what is the need and/or willingness of the community to seek partners;
• what partnering options are available; and
• what partnering requirements are determined to be viable.

Determine Financial Feasibility

Once the questions have been defined for the scope, volume and business strategy of the venture in the steps above, the Feasibility Consultant converts these assumptions into one or more financial models. The financial models will examine financial projections, up-front investments, staffing costs and break even points. The findings will be able to show the feasible level of enrolled lives based on ongoing expense and revenue assumptions for a given financial model. Net development and start-up investment may be raised independently or amortized in the model depending on each community's situation. Expense assumptions will be derived from the experience of current rural ASO-type functions in operation in the State of California. Revenue assumptions will be derived as much as possible from the most current local utilization and reimbursement rates. The feasibility analysis will include:

• description of assumptions;
• community demographics;
• economic factors;
• industry analysis;
• competition and risk analysis;
• product and services description;
• market analysis;
• capital requirements; and
• projected financial statements.

Develop a Business Plan

At the conclusion of the feasibility analysis, the iterative process for the creation of the business plan begins. The Feasibility Consultant again turns to the business strategy committee of the CHC for input and feedback. The business plan may serve as the application for start-up funds and bank loans, without which the venture might not be implemented. The business plan may be the marketing tool to attract and secure intended purchasers. Through business planning the assumptions of the feasibility analysis will be expanded upon and additional assumptions about the venture will be delineated, such as:

• a description of the cooperative vehicle;
• the vision, mission and organizational philosophy;
• the governance and organizational structure;
• the relationship with business partners;
• the board members;
• job descriptions of key staff members;
• marketing strategies;
• non-binding letters of intent;
• proposed sources of start-up capital; and
• exit/payback strategies to investors.

Engage in Pre-operational Planning

Indian Wells Valley Community Health Council-Executive Committee Meeting Ridgecrest, July 1998

Pre-operational planning goes hand in hand with the business plan development and continues after the formal business plan is written. During the preparation of the business plan, non-binding letters of intent signed by the proposed business partners provide the expectation that the business strategy assumptions have some foundation. Yet, however meaningful letters of intent may be to the signers, they are ceremonial in nature and not the final legal documents. Before implementation can really happen, the detailed binding contracts between the multiple parties must be negotiated and executed. Purchasers of the proposed services, such as employers, may be unwilling to commit to binding contracts before systems and staffing are in place. Staffing and systems can only be put in place once there is capital secured from successful funding requests using the business plan as a tool.

Pre-operational planning activities which preceed implementation for ASO development include:

• Negotiation of partnership relationships with external entities such as:
• TPA firms for claims administration,
• other integrated health systems for administrative functions and tertiary relationships,
• capital partners for access to funding, and
• service organizations for provision of case management, health promotion and disease prevention services;
• Negotiation of roles and responsibilities for medical management between various partners, providers and/or purchasers;
• Negotiation of employer contracts;
• Negotiation of employer benefit packages;
• Negotiation of provider contracts;
• Recruitment of administrative staff;
• Development of collateral feasibility analyses such as future implementation of Medi-Cal at risk contracting, as well as MIS sharing; and
• Preparation of grants and loan packages for additional funding.

Obtain Final Approval from All of the Stakeholders

Execution of all of the negotiated contracts between the parties, together with firm arrangements to roll over managed care contracts into the ASO by an agreed upon time line, constitutes final approval. Until this is accomplished, implementation of the ASO venture can not proceed.

Implement the Venture

The day that the DRIS Initiative community-defined ASOs will become operational, is the day that all the systems, start-up staff and capital are in place, required documents executed and the managed care contracts are turned over to the oversight of the ASO.

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