Internal Audit Department Maricopa Integrated Health System Financial Condition Report July 2004 Maricopa Long Term Care Market Share at End of Each Period 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% $60 0% FY00 $50 MLTCP $40 $30 $20 $10 Feb 04 June 03 June 02 June 01 June 00 ($20) June 99 $0 ($10) FY01 Evercare FY02 FY03 Mercy Care May 1, 2004 County Auditor Ross L. Tate, CMA, CIA, CGFM Project Team Members Joe Seratte CPA, MIM, Audit Manager Richard Chard CPA, Senior Auditor Project Consultant Eve Murillo CPA, MBA, Audit Manager Maricopa County Internal Audit FY03 Financial Condition Report — July 2004 Maricopa County Internal Audit Department 301 West Jefferson St Suite 1090 Phx, AZ 85003-2143 Phone: 602-506-1585 Fax: 602-506-8957 www.maricopa.gov July 30, 2004 Andrew Kunasek, Chairman, Board of Supervisors Fulton Brock, Supervisor, District I Don Stapley, Supervisor, District II Max W. Wilson, Supervisor, District IV Mary Rose Wilcox, Supervisor, District V We have completed the FY 2003 edition of the Maricopa County Financial Condition Report. This year features Maricopa Integrated Health System (MIHS) key financial trends at the beginning of the report and concludes with General Fund financial trends. In certain instances, MIHS charts have been updated through April 2004. This work, which is part of our Board-approved audit plan, provides important information on County financial conditions and trends over the past five to ten years. The challenges facing MIHS are apparent in this report. Overall, MIHS cash levels have dropped to critically low levels, and the Long Term Care health plan is steadily losing membership and profitability. Although Maricopa County’s General Fund continues to increase its strong financial position, the General Fund will be vulnerable to MIHS financial stresses until the health system is stabilized and transitioned to the new healthcare district. Evaluating a jurisdiction’s financial condition is a complex process, especially during uncertain economic times. Many variables are difficult to isolate and quantify. We believe, however, that a routine assessment of the past provides insight for the future, allowing us to make informed decisions in critical times. Additionally, a comparison to benchmarks broadens our perspective. This type of financial analysis alerts County officials to potential concerns and facilitates the Board’s governance of Maricopa County. Sincerely, Ross L. Tate County Auditor Overview Health System Profits Decline Page 5 Health System Cash is depleted Page 3 $20 $120 $100 $16 $80 $12 $60 $8 $40 $20 $4 $0 FY99 FY00 FY01 FY02 FY03 Feb 04 Apr-04 FY99 MLTCP Is Not Profitable Page 7 Health Plans’ Profits Decline Page 5 $60 $300 $40 $200 $20 $100 $0 FY00 FY01 FY02 FY03 Maricopa Long Term Care MLTCP Is Losing Members Page 8 Market Share at End of Each Period 100% 90% 80% 60% $350 $300 4 04 03 Ap r0 Fe b 01 00 99 02 Ju ne Ju ne Ju ne 0% FY00 ($500) Strong General Fund Liquidity Page 14 10 8 $250 $200 $150 6 4 $100 2 $50 0 FY99 FY00 FY01 FY02 FY03 FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 $- Maricopa County Internal Audit Maricopa FY01 MLTCP Benchmarks Evercare FY02 FY03 May 1, 2004 Mercy Care General Fund Revenue Trend Page 15 $390 $370 $350 $330 $310 $290 $270 $250 $230 $210 $190 Property Tax Revenue Sales Tax Revenue FY02 Strong General Fund Equity Page 12 10% ($400) FY00 ($100) 20% ($300) FY98 ($80) 40% 30% ($200) FY96 ($60) 50% FY94 ($40) Ju ne Ju ne 04 04 03 ($100) A pr Fe b 02 Ju ne 01 Ju ne 00 Ju ne 99 Ju ne Ju ne ($20) 70% $0 $0 “Do the right things right!” Table of Contents Maricopa Integrated Health System Overview 1 MIHS Has Depleted Its Cash 3 MIHS Net Income Has Declined 5 Maricopa Long Term Care Program 6 Maricopa Health Plan / Senior Select 9 Maricopa County General Fund 12 General Fund Revenues Exceed Expenditures 13 General Fund Strong Liquidity and Long Term Debt Ratios 14 General Obligation Bond Ratings Are Strong 16 Population Growth from 2000 to 2003 17 Report Methodology 18 Maricopa Integrated Health System Overview Maricopa Integrated Health System includes the following entities: • Maricopa Medical Center (hospital / delivery system) • Maricopa Health Plan (ambulatory managed care) • Maricopa Long - Term Care Program (MLTCP / ALTCS) • Health Select (managed employee care) • Senior Select (Medicare plan) In November 2003, Maricopa County voters authorized the formation of a separate healthcare district. The formation will mean that employees of Maricopa Integrated Health System (MIHS) may become employees of the new district. The district will have a board of directors, consisting of 5 elected members that will have the power to levy secondary property taxes and issue bonds for up to 20 years. The secondary property tax would have an initial cap of $40 million dollars. State law allows the cap to increase 2% a year and factors in growth. Maricopa County intends to turn the health system over to the new district in January 2005. Currently, health system employees and County administrators are working to resolve problems with health plan billing systems, cash flow deficits, and falling profitability in order to ensure a clean transition from the County to the special district. Transition Timeline Citizens Approve Formation of Healthcare District District Shell Created Target Transition Date Transition Tasks November 2003 Maricopa County Internal Audit District Board of Directors Elected January 2005 1 FY03 Financial Condition Report — July 2004 Maricopa County is experiencing a difficult period in transitioning its healthcare system to the new special district. Although the County’s General Fund continues to have a strong financial position, the County’s health system is facing severe problems on several fronts. These problems have the potential to cost the General Fund many millions of dollars before the health system is stabilized and transitioned to the new voter-approved special health district. The most prominent issues facing the transition are: • On-going challenges of operating a healthcare delivery system with large numbers of non-paying patients • Obsolete infrastructure and capital investment needs at the medical center and clinics • Declining market share / profitability in Long Term Care and Senior Select health plans • Critically low cash levels • Failure to successfully implement a new health plans claims payment system The following pages portray troubling financial trends in the healthcare system, followed by more positive trends in the County’s General Fund. . Maricopa County Internal Audit 2 FY03 Financial Condition Report — July 2004 MIHS Has Depleted Its Cash The decline is attributed to: MIHS Combined Cash (Millions) $120 $100 Declining health plans profitability • Hospital capital expenditures The Board of Supervisors approved a General Fund line of credit in November 2003. In April 2004, the outstanding General Fund loan to the health system reached $20 million. Includes $20 million loan from General Fund $80 • $60 (MIHS repaid the loan in June 2004 when the General Fund permanently transferred $41 million to MIHS.) $40 $20 $0 FY99 FY00 FY01 FY02 FY03 Feb 04 Apr-04 Averaging daily cash balances over each month is useful for closer viewing of cash trends over shorter time periods. MIHS Average Daily Cash (Millions) The December 2002 peak represents a period when health plan claims were not paid while the new claims payment system was being implemented. Although the system has failed to accurately process claims, cash dropped when estimated payments were made. $60 $50 $40 $30 $20 $10 Average Daily Cash Maricopa County Internal Audit The lowest cash balances in several months approached zero, and would have dipped below zero without General Fund loans to the system. Apr-04 Feb-04 Dec-03 Sep-03 Jun-03 Mar-03 Dec-02 Sep-02 $0 Lowest Daily Cash 3 FY03 Financial Condition Report — July 2004 MIHS Cash Declined $25 Million in 21 Months Uses of Cash (Millions) $ 52 Operations (Net) 12 Cap Assets 8 Debt Service $40 Million Balance at 7/1/02 3 Other $ 75 Total Outflow Sources of Cash (Millions) Transfers In $ 19 County Loans 20 Grants 8 Interest 3 $ 15 Million Balance at 4/30/04 Total Inflow $ July 1, 2002 Maricopa County Internal Audit 50 April 30, 2004 4 FY03 Financial Condition Report — July 2004 MIHS Net Income has Declined Declining health plans’ profitability hurt the health system. MIHS Net Income (Millions) Not Adjusted for Inflation $20 Maricopa Long Term Care Program’s decline had the largest impact on the system (see following sections). $16 $12 $8 $4 $0 FY99 FY00 FY01 FY02 FY03 Consolidated health plans’ profitability is often measured as a per member per month ratio. FY04 losses of $86 per member per month were reported through April 2004. The loss includes a cumulative adjustment for medical expense accruals as estimated by an independent consultant. MIHS Consolidated Health Plans Per Member Per Month Net Income Through April 2004 $60 $40 $20 The recent revaluation of medical expense estimates suggests that prior financial reporting may have overstated profitability. 04 A pr 04 Fe b 03 Ju ne 01 00 02 Ju ne Ju ne Ju ne Ju ne ($20) 99 $0 The most troubling trend involves the Maricopa Long Term Care Plan (MLTCP), also known as ALTCS (see following page). ($40) ($60) ($80) Source: MIHS Finance Dept. ($100) Maricopa County Internal Audit 5 FY03 Financial Condition Report — July 2004 Maricopa Long Term Care Program (MLTCP) Program Description The Maricopa Long Term Care Program (MLTCP) is a managed care, long term care plan operated by Maricopa Managed Care Systems. Chronically ill and physically disabled patients receive medical services as a result of an annual contract with the Arizona Health Care Cost Containment System (AHCCCS). Membership and Profitability In past years, MLTCP earned large profits and accumulated large cash balances that management viewed as offsetting Medical Center cash deficits. Since FY00, MLTCP has steadily lost membership and profitability. In May 2002, Internal Audit (IA) reported projected MLTCP losses as early as FY03 (see chart below), primarily from the following factors: • Competition from two other ALTCS health plans operating in Maricopa County • Increasing Home and Community Based Services (HCBS) per member per month costs • General and administrative cost increases (relative to revenues) Actual losses were first reported by MIHS in FY04. Current analysis of medical expense accruals may lead to larger losses than those reported. MLTCP Net Operating Income Projected v. Reported Actual (Millions) $30 $20 $10 Reported Actual Maricopa County Internal Audit 20 04 pr il 20 04 03 A Fe b FY 02 01 IA May 2002 Projection YT D $(40) YT D $(30) FY $(20) FY FY $(10) 00 $0 6 FY03 Financial Condition Report — July 2004 MLTCP Cost Increases Outstrip Revenue Increases Per Member Per Month Net Income (Loss) MLTCP Per Member Per Month Net Income Through April 2004 Troubling Trends: $300 $200 $100 4 04 pr 0 A Fe b Ju ne 03 02 01 Ju ne Ju ne 99 Ju ne Ju ne ($100) 00 $0 • $456 per member per month net loss for first 10 months of FY04. • Recent evaluation of medical expense estimates suggests that prior financial reporting overstated profitability. ($200) ($300) ($400) Source: MIHS Finance Dept. ($500) Per Member Per Month Costs Outstrip Revenues Increases in Per Member Per Month Revenue and Key Expenses - First 10 Months FY04 • Per member per month revenues increased $45. • Per member per month expenses increased much more than revenues: $160 $140 $120 $100 • $80 $60 Home and Community Based Services up $139 $40 $20 Maricopa County Internal Audit Administrative Hospitalization HCBS Revenues $- 7 • Hospitalization up $62 • Administrative expenses up $82 FY03 Financial Condition Report — July 2004 MLTCP Market Share Decreases MLTCP Continues to Lose Market Share • • Maricopa Long Term Care Market Share at End of Each Period State of Arizona opened Long Term Care Program to competition in FY00. 100% 90% 80% 70% Since FY00, market share has declined 1% per month. 60% 50% • • As of May 1, 2004, MLTCP has only 52% of AHCCCS long term care health plan members. 40% 30% 20% 10% Market share losses contribute to lower profitability. 0% FY00 FY01 MLTCP MLTCP Continues to Lose Members • FY02 Evercare FY03 May 1, 2004 Mercy Care Maricopa Long Term Care Members at End of Each Period In less than four years, MLTCP has lost 3,200 members. This represents nearly a third of the FY00 membership level. 12,000 10,000 • Member loss trends have not slowed. 8,000 6,000 4,000 2,000 FY00 Maricopa County Internal Audit 8 FY01 FY02 FY03 May 1, 2004 FY03 Financial Condition Report — July 2004 Maricopa Health Plan (MHP) Health Plan (Acute Care) Per Member Per Month Net Income Through April 2004 • $29 per member per month loss for the first 10 months of FY04. The loss includes a cumulative adjustment for medical expense accruals as estimated by an independent consultant. • The recent revaluation of medical expense estimates suggests that prior financial reporting may have overstated profitability. $20 $10 pr 04 A Fe b Ju n 04 03 e 02 Ju n ($10) e e Ju n Ju n Ju n e e 99 00 01 $0 ($20) Program Description ($30) Source: MIHS Finance Dept. The Maricopa Health Plan is an ambulatory health care plan operated by Maricopa Managed Care Systems (MMCS). MMCS contracts with the Arizona Health Care Cost Containment System (AHCCCS) which provides monthly capitation revenues based on MHP enrollment. AHCCCS is Arizona’s version of Medicaid and is based on a managed care model. ($40) Maricopa Health Plan Membership 60,000 50,000 40,000 • Membership peaked at 51,598 in October 2003. • April 2004 membership dropped to 44,539. Apr 2004 Feb 2004 Dec 2003 Oct 2003 Aug 2003 Jun 2003 Apr 2003 Feb 2003 Dec 2002 Oct 2002 Aug 2002 Jun 2002 20,000 Apr 2002 30,000 10,000 - Maricopa County Internal Audit 9 FY03 Financial Condition Report — July 2004 Senior Select • • $174 per member per month loss for the first 10 months of FY04. The loss includes a cumulative adjustment for medical expense accruals as estimated by an independent consultant. Senior Select Per Member Per Month Net Income Through April 2004 $50 $0 The recent revaluation of medical expense estimates suggests that prior financial reporting may have overstated profitability. ne ($50) Ju 99 J e un 00 J e un 01 J e un 02 ne Ju 03 b Fe 4 -0 r Ap 04 ($100) ($150) Program Description ($200) Source: MIHS Finance Dept. The Maricopa County Senior Select Health Plan (MSSP) is a “Medicare+Choice HMO” Plan offered to individuals who are eligible to receive Medicare benefits. The plan, which began in November 1993, provides additional care for qualifying Maricopa Long-Term Care Plan (MLTCP) members not traditionally covered under Medicaid. Senior Select Membership 10,000 9,000 8,000 6,000 5,000 The Centers for Medicare and Medicaid Services (CMS) capped membership at 7,754 effective May 1, 2003. • The April 2004 membership dropped to 6,248. Maricopa County Internal Audit Apr 2004 Feb 2004 Dec 2003 Oct 2003 Jun 2003 Aug 2003 Apr 2003 Feb 2003 Dec 2002 2,000 Oct 2002 3,000 Aug 2002 4,000 Jun 2002 • 7,000 Membership peaked at 9,060 in June 2002. Apr 2002 • 1,000 - 10 FY03 Financial Condition Report — July 2004 (Blank Page) Maricopa County Internal Audit 11 FY03 Financial Condition Report — July 2004 Maricopa County General Fund The General Fund is the County’s primary operating fund. Conservative fiscal policies have lead to strong financial positions in equity, liquidity, and general long term debt. The following pages demonstrate strong General Fund positions. However, health system financial problems pose a potential drain on General Fund resources. Approximately two years ago, symptoms of MIHS financial problems began to surface. The first symptom noted was a steep decline in health system cash balances. Until a complete analysis of health system finances and operations could be achieved, County administrators scaled back on large capital projects, including a new administration building, in order to reserve General Fund resources for potential health system shortfalls. Conservative budget strategies have resulted in healthy General Fund balance increases. General Fund Balance (Millions) $350 The fund balance did not grow in FY01 because the County set money aside to fully fund several construction projects. $300 $250 The fund balance rose sharply in FY02 because additional money budgeted to fund construction projects was kept in the General Fund. County management determined that such funds may be needed for worsening economic conditions, potential cost shifting by the state, and deteriorating financial trends in the County’s healthcare system. $200 $150 $100 $50 Maricopa County Internal Audit FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95 FY94 $- 12 FY03 Financial Condition Report — July 2004 General Fund Revenues Exceed Expenditures Since FY96, Maricopa’s General Fund has achieved a healthy fund balance in relation to its revenues. Since FY97, Maricopa has significantly surpassed the average of ten benchmark counties for this financial measure. Benchmark Counties: General Fund Balance as a Percent of Revenues 40% 35% 30% Strong General Fund equity will serve the County’s citizens during current and future financial challenges. 25% 20% 15% 10% 5% Maricopa FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95 FY94 0% Avg of 10 Other Counties Since FY95, the General Fund has consistently spent less than it takes in, causing fund balance growth and increased cash availability for paying obligations. General Fund (Millions) Excess of Revenues and Other Financing Sources Over Expenditures and Other Financing Uses $100 $90 $80 The FY01 dip reflects the transfer of money to fund construction projects. $70 $60 Surpluses $50 The FY02 upward spike reflects deferred construction projects and a decision to keep additional money in the General Fund for future needs. $40 $30 $20 $10 Maricopa County Internal Audit FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95 FY94 $0 13 FY03 Financial Condition Report — July 2004 Strong Liquidity and LongLong-Term Debt Ratios Although the General Fund shows a strong liquidity ratio in FY03, the General Fund may face fiscal challenges from the ongoing budget shortfalls at the State and from troubled financial conditions at MIHS. General Fund Liquidity Ratio (Excluding Due From/To Other Funds) 10 9 Maricopa County’s conservative fiscal policy places it in a better position to meet these challenges. Maricopa County’s strong liquidity far exceeds the benchmark counties. 8 7 6 5 4 3 2 1 0 FY99 FY00 FY01 Maricopa Maricopa County has very low debt levels compared with the average of benchmark counties. $700 Maricopa’s low debt level has resulted from a conservative, “pay as you go” approach to financing new capital assets/projects. FY02 FY03 Benchmarks Long Term Debt Per Person Maricopa County vs. Benchmarks Adjusted for Inflation $600 $500 $400 FY04 is the last year of the County’s 1986 voter approved general obligation debt financing for capital projects. As of July 2005, Maricopa County will be considered free of general obligation debt. $300 $200 $100 Maricopa Maricopa County Internal Audit 14 FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95 FY94 FY93 FY92 $0 Avg. 10 Benchmarks FY03 Financial Condition Report — July 2004 Inflation and Declining Sales Hurt Revenue Trends Although sales tax revenues have become relatively more important in recent years, the upward trend of inflation-adjusted sales tax reversed in FY02. Property vs. Sales Tax Revenues Adjusted for Inflation (Millions) $390 Property Tax Revenue $370 As Maricopa County has increased its reliance on sales taxes to support services, it has been more directly affected by economic trends. $350 $330 $310 $290 $270 Sales Tax Revenue $250 $230 $210 FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95 FY94 $190 In recent years, General Government revenues have not kept up with population growth and inflation. Even though governmental revenues may increase in dollars, revenues (adjusted for inflation and population) actually declined. General Governmentral Revenues Per Person Adjusted for Inflation $480 $460 However, the County fund balance is healthy, which indicates that although revenues are down, spending is under control. $440 $420 $400 $380 Maricopa County Internal Audit FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95 FY94 $360 15 FY03 Financial Condition Report — July 2004 General Obligation Bond Ratings are Strong Speculative Grade AAA AA+ AA AAA+ A ABBB FITCH Investment Grade Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa MOODY’S Highest Grade C Financial Strength is Reflected in the County’s General Obligation Bond Ratings: The County’s financial position declined in the early 1990’s. The County responded by restructuring its finances. Recent ratings by Moody’s and Fitch are considered investment grade. Moody’s — Aa3 The chart presented above shows that Maricopa County’s long-term bonds, rated Aa3 by Moody’s, are considered high-grade bonds. The following graph shows that Maricopa County’s trend since June 1994 has been one of improving ratings. In announcing its rating upgrade, Moody’s referred to improvement in the County’s financial condition, conservative fiscal strategies, and the County’s low debt position. Moody's Bond Ratings Aa3 Aa3 FY03 FY01 A1 FY99 FY97 FY95 FY93 A3 A2 Fitch — AA+ In November 2003, Fitch upgraded the County’s general obligation bond rating from AA to AA+ . The upgrade was based in part on the imminent transfer of the healthcare delivery system to a separate voter-approved health district with its own property tax levy. Fitch also viewed favorably the County’s successful fiscal reforms, modest debt profile, and continued economic diversification. Maricopa County Internal Audit 16 FY03 Financial Condition Report — July 2004 Population Growth from 2000 to 2003 Maricopa Medical Center Since the 2000 census, Maricopa County’s population increased over 317,000. Maricopa trailed only Los Angeles County nationally in numeric growth. Only Riverside, CA and Clark, NV exceeded Maricopa County’s growth percentage. Population Numerical Growth / Growth Rates April 2000 to July 2003 (Census Bureau) (Report Benchmarks are Blue) 317,111 Lo s An ge le M s ar C A ic op (3 . a R AZ 7% iv er ) (1 si de 0. 3% C A ) C (1 la 5 rk .4 N % V ) Sa H ( 14 ar n .6 Be r is rn TX %) ar (5 di no .7 Sa % C n ) A D (8 ie go .8 % C ) Ta A (5 rra .2 nt TX %) O ra (7 ng .8 e % C Br ) A ow ( 3 ar .9 d FL % ) (6 .7 % ) 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 - Maricopa County Internal Audit 17 FY03 Financial Condition Report — July 2004 Report Methodology Definition Financial Condition is defined as a local government’s ability to finance services on a continuing Explain report methodology Use page A1 from can FY 2000 report basis. A county in good financial condition sustain existing services to the public, withstand economic slumps, and meet the demands of changing service needs. Objectives, Scope, and Methodology The objective of this report is to evaluate Maricopa County’s financial condition using key financial indicators. Indicators were selected from authoritative sources on evaluating governmental entity financial condition and judged to be the most indicative of a county’s overall financial health. This year, our report emphasized Maricopa Integrated Health System, followed by General Fund trends. Our primary information sources were published Comprehensive Annual Financial Reports (CAFR) and MIHS financial statements. Ten benchmark counties’ and Maricopa County’s audited financial statements were used as primary sources for comparing General Fund trends. The benchmark counties are: ! ! ! ! ! ! ! ! ! ! Clark Harris King Los Angeles Multnomah Orange Pima Salt Lake San Diego Santa Clara (Las Vegas, NV) (Houston, TX) (Seattle, WA) (Los Angeles, CA) (Portland, OR) (Santa Ana, CA) (Tucson, AZ) (Salt Lake City, UT) (San Diego, CA) (San Jose, CA) Other sources include the Governmental Accounting Standards Board (GASB), the International City/County Managers Association (ICMA), ASU Center for Business Research, Arizona Department of Economic Security Research Administration, Arizona Department of Revenue Econometrics Unit, Maricopa County’s Strategic Plans (budgetary documents), and Auditor General Reports. Trend analysis is used in this report. Trend analysis involves examining financial indicators’ historical data over several years. A trend is defined as the direction the data is moving over a fiveto-ten year period. Fiscal years are identified as “FY03” (fiscal year ending June 30, 2003). Numbers are referred to as “actual,” otherwise as “adjusted for inflation”, “constant”, or “real” (e.g., “2003 dollars”). An “actual” number is the amount originally published in the CAFR. An “adjusted for inflation” or “constant” number has been adjusted to the purchasing power of a 2003 dollar. The adjustment for inflation was made according to the “U.S. Consumer Price Index—All Items.” Maricopa County Internal Audit 18 FY03 Financial Condition Report — July 2004 Maricopa County Internal Audit 301 W. Jefferson, Suite 1090 Phoenix, AZ 85003 Telephone: (602 ) 506506-1585 Facsimile: (602) 506506-8957 E-Mail: jsimpson@maricopa.gov