answered: · Question 1 The majority of hospitals in the United States are classified as pri

· Question 1

The majority of hospitals in the United States are classified as private for-profit hospitals.

· True

· False

 

· Question 2

Charity Care is defined as care for services when it is expected that the patients will not pay.

· True

· False

· Question 3

The capitation method of payment is one of the many strategies used by managed care companies to control costs.

· True

· False

 

· Question 4

In 2004, there was nationwide litigation against several large not-for-profit health systems. Please explain the following: the reason for the legal action; the reason why the law targeted not-for-profit hospitals; the government response (federal, state and local level) to this occurrence.

·
Question 5

Please explain the organization purpose and also identify why each point is important to the management of health care organizations.

· Question 6

The prepaid group practice was the forerunner of the BlueCross/ Blue Shield plans that are in existence today.

· True

· False.

· Question 7

Please list and discuss the characteristics of the three methods of payment. Please also list at least one strength and weakness of each of the chosen methods.

· Question 8

In the Statement of Cash Flows, cash flows from investing activates contain information regarding the purchases and sale of PPE (Property, Plant, and Equipment).

· True

· False

· Question 9

In cost allocations, the direct method recognizes the interdependencies between the various support departments (e.g., relationship human resources, housekeeping, and administration).

· True

· False

· Question 10

As you move down the asset section of the balance sheet, assets become more liquid.

· True

· False

· Question 11

Please list and define the three measures of charity care. Which level is most likely to be performed by hospitals?

· Question 12

Cost that occur with relative certainty, and occur regardless of the level of volume over a relevant range are known as adjusted costs.

· True

· False

Healthcare Financial Management
Lecture Packet 3

1

1

Outline

Types of Costs

Cost Analysis

Cost Allocation

2

2

3

Types of Costs

Types of Costs

Costs:

Costs are a ‘resource use’ associated with providing or supporting a specific service.

There are several different types of costs: fixed costs, variable costs, direct costs, and indirect costs.

Costs do not necessarily reflect the actual cash outflows.

This occurs because of the use of accrual accounting. We will revisit later.

_______________________________________________________________

Costs can be classified two ways:

Their relationship to the volume (amount of services provided).

E.g. Fixed/ variable costs

Their relationship to the unit (department) being analyzed

E.g. Direct/ indirect costs

We will revisit this topic later.

 

4

4

Types of Costs

Costs Behavior:

Health services managers are extremely interested in how costs are affected by changes in the organization activity (volume).  

The relationship between costs and volume is known as cost behavior, or underlying cost structure.  

_______________________________________________________________

The primary reason analyzing an organizations underlying cost structure is to provide healthcare managers with a tool for forecasting costs (and ultimately profits) at different volume levels.

5

Types of Costs

Fixed Costs:

Costs that are known with relative certainty.

These costs occur regardless of the level of volume within the relevant range.

e.g. The clinic has a labor force of well trained permanent employees that would be increased or decreased only under certain circumstances.

As long as volume falls within a relevant range, labor costs at the clinic are fixed for the coming year regardless of the number of patient visits.

6

.

6

Types of Costs

Variable Costs:

Costs that are directly related to the volume of services supplied.

e.g. the costs of the clinical supplies (e.g. rubber gloves , tongue depressors , hypodermics) would be classified as variable costs.

While some costs are fixed regardless of volume (within a relevant range), variable costs are driven by volume.  

7

7

8

Variable Cost per Test Fixed Costs per Year
Clinic Supplies $28.18 Labor $1,000,000
Other fixed costs $3,967463

Cost Analysis

‘Volume Fixed Costs Total Variable Costs ‘Total Costs ‘Average (Total) Cost Per Tests
0 $4,967,463 $0 $4,967,463 $ 0
1 $4,967,463 $28 $4,967,491 $4,967,491.18
50 $4,967,463 $1,409 $4,968,872 $99,377.44
100 $4,967,463 $2,818 $4,970,281 $49,702.81
500 $4,967,463 $14,090 $4,981,553 $9,963.11
1,000 $4,967,463 $28,180 $4,995,643 $4,995.64
5,000 $4,967,463 $140,900 $5,108,363 $1,021.67
10,000 $4,967,463 $281,800 $5,249,263 $524.93
15,000 $4,967,463 $422,700 $5,390,163 $359.34
20,000 $4,967,463 $563,600 $5,531,063 $276.55
70,000 $4,967,463 $1,972,600 $6,940,063 $99.14
75,000 $4,967,463 $2,113,500 $7,080,963 $94.41
80,000 $4,967,463 $2,254,400 $7,221,863 $90.27

8

Cost Analysis

Variable Cost per Test:

The per unit (per test) variable costs of $28.18 for laboratory supplies

The variable cost rate remains the same at $28.18 per test

_________________________________________________________________

Total Variable Costs:

Increases or decreases proportionately as volume changes

If volume doubles from 500 to 1,000 test the total variable costs double from $14,090 to $28,180.

_________________________________________________________________

Fixed Costs:

Remain unchanged as the volume varies

When volume doubles from 500 to 1000 test fixed costs remain at $4,967,463.  

9

9

Cost Analysis

Total Costs:

Total costs are the sum of the fixed and total variable costs. 

________________________________________________________________

Average (Total) Cost Per Test:: Total costs/ Volume. 

e.g. At 5,000 tests, the total costs is $ 5,108,363 the average cost per test is $ 5,108,363 /5,000= $1,021.61.

As volume increases, the average cost per test declines.

Occurs because the fixed costs are spread over more tests.

Economies of Scale.

The fact that higher volume reduces the average cost per unit of activity has important implications regarding the effect of volume changes on profitability.

We will revisit this concept later.

10

11

$4,967,463

100,000

Total Variables Costs

Cost Behavior Graph

$7,221,863

Fixed Costs

Total Costs

15,000

80,0000

Volume (Number of Tests)

Costs $

0

10,000

Cost Analysis

11

12

Cost Analysis

Semi-Fixed Costs

Cost Analysis

Semi-Fixed Costs:

Fixed and variable costs represent two ends of the volume classification spectrum.

Within the relevant range, costs are either independent of volume (fixed costs) or directly related to volume (variable costs).

Semi-fixed costs falls in between the two extremes.  

13

14

Variable Cost per Test Fixed Costs per Year
Clinic Supplies $28.18 Labor $1,000,000
Other fixed costs $3,967463

Cost Analysis

‘Volume Fixed Costs Total Variable Costs ‘Total Costs ‘Average (Total) Cost Per Tests
0 $4,967,463 $0 $4,967,463 0
1 $4,967,463 $28 $4,967,491 $4,967,491.18
50 $4,967,463 $1,409 $4,968,872 $99,377.44
100 $4,967,463 $2,818 $4,970,281 $49,702.81
500 $4,967,463 $14,090 $4,981,553 $9,963.11
1,000 $4,967,463 $28,180 $4,995,643 $4,995.64
5,000 $4,967,463 $140,900 $5,108,363 $1,021.67
10,000 $4,967,463 $281,800 $5,249,263 $524.93
15,000 $4,967,463 $422,700 $5,390,163 $359.34
20,000 $5,467,463 $563,600 $6,031,063 $301.55
70,000 $5,467,463 $1,972,600 $7,440,063 $106.29
75,000 $5,467,463 $2,113,500 $7,580,963 $101.08
80,000 $5,467,463 $2,254,400 $7,721,863 $96.52

14

Cost Analysis

How to handle semi-fixed costs:

Assume that the actual relevant range of volume for the clinic is between 10,000 to 20,000 tests per year.  

The clinic’s current work force can only handle up to 15,000 tests per year, so an additional tech at an annual cost of $500,000 would be required if volume were to exceeds 15,000 tests per year.

_________________________________________________________________

Labor costs are fixed from 10,000 to 15,000 tests.

Labor costs are then fixed at a higher level from 15,000 to 20,000 tests.

As a result of semi-fixed costs, costs are not at the same level throughout the entire relevant range of 10,000 to 20,000 tests per year.

15

Cost Analysis

How to handle semi-fixed costs (continued):

Semi fixed costs are fixed within ranges of volume, but there are multiple ranges of semi-fixed costs within the relevant range.

 

Also known as step-variable costs (looks like a step when depicted graphically).

_______________________________________________________________

The inclusion of semi fixed costs prevents average fixed costs and average cost per test from continuously declining throughout the relevant range.

16

Cost Analysis

How to handle semi-fixed costs (continued):

At a volume above 15,000 tests, the clinic must add an additional staff at a cost of $ 500,000.

This causes an increase in total costs and average cost per test.

If volume continues to show a stable increase, the average fixed costs and average cost per test will again begin to decrease.

___________________________________________________________

As a result of the negative impact of the sudden increase in total costs, the clinic’s director would probably try to avoid hiring an additional technician when volume exceeds 15,000 tests.

Instead, the director will try to increase worker productivity.

17

17

Cost Analysis

How to handle semi-fixed costs (continued):

This is especially the case if volume is expected to be only slightly above the decision point.

Also a determination has to be made if the increase in business is short term or long term.

_________________________________________________________________

New incentives (?) could be put in place to encourage the current technicians to be more productive. 

Such an action could lower costs in general and create a situation in which the average cost per test would decline throughout the relevant range.  

 

18

18

19

$4,967,463

100,000

Total Variables Costs

Semi-Fixed Costs

Cost Behavior Graph: Semi Fixed Costs

$7,221,863

Fixed Costs

Total Costs

15,000

80,0000

Volume (Number of Tests)

Costs $

0

10,000

Cost Analysis

19

20

Cost-Volume Analysis (CVA)

Please see assigned reading titled Economies of Scale : The Obama Administration looks to Private Sector to Discover New Cost Savings

20

Cost-Volume Analysis

Cost-Volume Analysis or CVA

Total costs does not provide the clinic’s managers with much information regarding potential alternative financial outcomes for a given year.

A detailed breakdown of costs (itemization) gives the clinics managers more insight into prospective financial outcomes.

Please see the next two slides for various cost-volume scenarios.

21

21

Cost-Volume Analysis

Total costs= Fixed costs + Total variable costs

= $4,967, 462 + ($28.18 *number of visits)

_______________________________________________________________

Volume 70,000

= $4,967, 462 + ($28.18 *70,000)

= $4,967, 462 + 1,972,600

Total costs = $6,940,062

_______________________________________________________________

Volume 75,000

= $4,967,462 + ($28.18 * 75,000)

= $4,967, 462 + $2,113,500

Total costs = $7,080,962

22

22

Cost Analysis

Volume 80,000

Total costs= Fixed costs + Total variable costs

= $4,967, 462 + (28.18 * 80,000)

= $4,967, 462 + $2,254, 4000

Total Costs = $7,221, 862

23

23

24

Total revenues ($100 * 75,000) $7,500,000
Total variable costs ($28.18 * 75,000) 2,113,500
Total contribution margin ($ 71.82 * 75,000) 5,386,500
Fixed costs 4,967,462
Profit 419,038

Cost-Volume Analysis

24

Cost Allocation *
definitions

Cost Allocation:

Intra-organizational process where managers allocate the cost of one department to other departments.

_______________________________________________________________

The allocation of costs from the non-revenue (support) departments to revenue departments are considered to be a rational strategy.

This occurs because without the support departments the revenue departments could not function.

25

25

Cost Allocation
definitions

Direct Costs:

Costs that are tied directly to the sub-unit.

These costs are unique to the reporting sub-unit

e.g. salaries (costs) of laboratory employees (sub-unit)

When the subunit is eliminated, the direct costs disappear.

Direct costs constitute only a portion of a sub units cost structure

______________________________________________________________

Indirect Costs:

Indirect costs are costs that are tied to shared resources rather than an individual subunit.

E.g. Hospitals requires a basic infrastructure to operate, if the lab was closed, indirect costs (e.g. utilities costs) would be reduced but not disappear.

____________________________________________________________________

Indirect costs are more difficult to measure than direct costs.

26

Cost Allocation

Cost Allocation Perspective:

The classification of direct/indirect costs depends on perspective.

The direct/indirect classification has relevance only at the sub-unit level; at the organizational level all costs are considered to be direct costs.

_______________________________________________________________

The costs classifications (fixed/variable and direct/indirect) are interrelated to one another.

Fixed costs typically include both direct and indirect costs

Variable costs can include both direct and indirect costs

Direct costs usually include fixed and variable cost

27

27

Cost Allocation *

The goal of cost allocations is to assign all the costs of organization to the activities that cause them to be incurred.

Ideally, health services managers would like to track and assign costs by the true level of costs incurred by the individual patient, physician, diagnosis, etc.

With the true representation of costs are captured and analyzed in a managerial accounting system, managers can make better decisions regarding: cost control, the offering of services, and the pricing of services.

_______________________________________________________________

“To measure is to control”

28

Cost Allocation *

The Cost Allocation Trade Off:

The more complex (accurate) the managerial accounting system, the higher the cost of developing, implementing, operating, and explaining the system.

The benefits associated with more accurate cost data must be weighed against the costs required to develop such data (cost-benefit assessment).

_________________________________________________________________

The motivation for more accurate allocation of overhead costs usually come from the recipients of the cost allocation.

e.g. the managers of the revenue centers such as physical therapy, patient care services.

Managers at all levels within health services organizations are under increased pressure to optimize economic performance.

This translates into the desire to reduce cost.

29

30

Cost Allocation

Cost Allocation Basics

30

Cost Allocation Basics
definitions

To assign cost from one activity to another there needs to be a cost pool and a cost driver.

_________________________________________________________________

Cost Pool:

A cost pool is a group of costs that must be allocated.

e.g. housekeeping costs

_________________________________________________________________

Cost Driver: *

(area of debate)

A cost driver is the standard upon which the allocation is made.

e.g. size of department space

_______________________________________________________________

Total housekeeping costs would be the cost pool, and the number of square feet of occupied space would be a cost driver.

Housekeeping costs/ square foot of department space = dollar cost per square foot of space utilized.

31

31

Cost Allocation Basics *

Cost Pool:

Typically, a cost pool consists of all of the direct costs of one support department.

e.g. housekeeping does one job. There costs are allocated to each department.

______________________________________________________________

However, depending on the complexity of the department you may have multiple pools.

e.g. hospital’s financial services department provides two significantly different services: patient billing and budgeting.

32

Cost Allocation Basics

Cost Pools (continued):

Multiple Cost Pools **

Assume that the ambulatory care department uses more patient billing services than the laboratory department, but the laboratory uses more budgeting services than the ambulatory care department.

In this situation, it would be best for the finance department to create two cost pools: one cost pool for billing and the other cost pool for budgeting.

Then, cost drivers must be chosen from each pool and the costs allocated to the various patient services department which uses the service.

The identification of cost drivers is viewed as the most important step in the cost allocation process.

33

34

Cost Allocation

The Cost Allocation Process

The Cost Allocation Process *

Step 1 Establish the cost pool:

In this scenario, the clinic is allocating housekeeping cost, the cost pool is a projected total cost of the housekeeping department ($100,000).

_____________________________________________________________

Step 2: Determine the cost driver:

Cost Driver: Housekeeping labor hours required by the clinics departments (10,000 hours).

This is believed to be the variable that is most closely related to the actual costs of providing these services.

We will revisit later.

_____________________________________________________________

Step 3: Calculate the allocation rate:

$100,000/10,000 hours = $10 per hour of housekeeping services provided.

35

35

The Cost Allocation Process *

Step 4: Determine the allocation amount:

Patient care department or the department receiving the services.

Physical Therapy utilizes 3,000 hours of housekeeping services, so it’s allocation of housekeeping department overhead is $10 x 3,000 = $30,000.

Allocation methods would be similar to other revenue generating departments.

_______________________________________________________________

When all departments are considered, the entire clinic is projected to use 10,000 hours of housekeeping services.

The total amount allocated across the entire clinic must = $100,000.

_______________________________________________________________

In addition to determining the allocation amount. The goal is to also analyze the effectiveness of the cost driver.

See example on next slide.

36

36

Cost Allocation Basics *

Cost Allocation Example:

Traditionally, overhead costs were aggregated across all support departments and then divided by a rough measure for organizational output.

e.g. Assume a hospital had 72,000 patient days with total inpatient costs equal to $36 million.

Cost Pool= Total Inpatient Costs ($36 million); Cost Driver: Inpatient Days (72,000)

The overhead allocation rates would be $36 million/72,000 = $500 per patient day (per diem overhead rate).

Regardless of the type of patients treated within it inpatient services department, the $500 per diem allocation rate would be applied the department.

Are inpatient days an appropriate cost driver?

What are the potential problems associated with this cost allocation strategy?

37

37

38

Cost Allocation

Cost Allocation Methods

38

39

Human Resources

Housekeeping

Administration

Physical Therapy

Internal Medicine

Direct Method

Support Departments

Patient Services Department

Three different types of allocation methods: direct method, reciprocal method, and step-down method.

 _______________________________

Direct method:

Each of the support departments are allocated to the patient services departments.

None of the costs of providing support services is allocated to other support departments.

Only the direct costs of the support departments are allocated to the patient service departments because no indirect costs have been created by intra-support department allocations.

Key feature of this method is that it is easy to apply.

Cost Allocation Methods *

40

Support Departments

Patient Services Department

Human Resources

Housekeeping

Administration

Physical Therapy

Internal Medicine

Reciprocal Method

Reciprocal method:

Recognizes the interdependencies between the support departments (e.g. relationship human resources, housekeeping, and administration).

With this method no information is ignored and no biases are introduced into the cost allocation process.

As a result, the reciprocal method is relatively complex, which makes explaining difficult and implementation costly.

Cost Allocation Methods *

40

41

Human Resources

Housekeeping

Administration

Physical Therapy

Internal Medicine

Step Down Method

Step-down method:

A compromise between the simplicity of the direct method and the accuracy/ complexity of the reciprocal method.

It recognizes some of the intra-support departmental effects that the direct method ignores, but it does not recognize the full range of interdependencies.

Support departments are closed out after they are allocated to patient service departments. This does not happen with the reciprocal method.

Support Departments

Patient Services Department

Cost Allocation Methods *

Please see assigned reading titled: Step Up to the Step Down Method

41

Healthcare Financial Management
Lecture Packet 1
2022

1

Please review with notes page visible.

Respectfully,

GEG

1

Outline

The Objective of Healthcare Management.

The Objective of Healthcare Financial Management.

What is Healthcare Financial Management?

Traditional Responsibilities of Financial Managers.

Major Responsibilities of Healthcare Financial Management.

The Four C’s of Financial Management.

2

The purpose of this lecture is to provide an overview of the Healthcare Financial Management discipline. This will be accomplished by focusing on the objectives of healthcare management and healthcare financial management. We will also discuss the responsibilities of healthcare financial managers. We will then conclude this presentation by focusing on the Four C’s (cost, cash, capital and control) of financial management.

2

The Objective of Healthcare Management.

3

3

The Objective of Healthcare Management

The overall objective of healthcare management is to accomplish the organizational purpose.

Organizational Purpose: (formal definition) “To provide the community with the services it needs at clinically acceptable levels of quality at a publicly responsive level of amenity, and at the least possible cost (Berman, Kukla, and Weeks 1994).

__________________________________________________________________

Provide services at a high level of quality, serve as many people as you can, and keep costs as low as possible). (broad view)

Organization Purpose also depends on the line of business. (specific view)

Who are we, what do we do?

Why is the organizational purpose important?

4

4

The Objective of Healthcare Financial Management?

5

5

The Objective of Healthcare Management

The objective of healthcare financial management is provide both accounting and finance information that assists healthcare managers in accomplishing the organization’s purpose.

_______________________________________________________________

Two Broad Areas of Accounting:

Financial Accounting: Provide information for external users.

This type of information is heavily regulated by the Financial Accounting Standards Board (FASB)

e.g. preparation of income statement.

Managerial Accounting: Provide information for internal use.

These types of statements are not regulated

e.g. budgets, cost allocations.

6

6

The Objective of Healthcare Management

Accounting Versus Financial Management:

Accounting: focuses on the financial measurement of events that reflect the resources, operations, and financing of an organization.

–vs.–

Financial Management: focuses on the theories, concepts, and tools necessary to help managers make better financial decisions.

What are you going to do with the information at hand.

7

7

What is Healthcare Financial Management?

8

What is Healthcare Financial Management

Finance: (initial role):

The traditional role of finance has been to borrow and invest funds that will assist managers in accomplishing its organizational purpose.

Reactive approach

____________________________________________________

Finance: (larger present day role):

Use managerial, financial accounting, and finance theory to evaluate past decisions and shape new organizational decisions.

Proactive approach

e.g. ratio analysis, cost allocations, capital budgeting.

There are many more techniques we will discuss during the semester.

9

9

What is Healthcare Financial Management
Nowicki (2008): The Financial Management of Hospitals and Healthcare Organizations

10

Economics

Financial Accounting

Finance

Managerial Accounting

Operations Research

Statistics

Financial Management

Clinical Objectives

The purpose of this slide is to identify all of the various disciplines which encompasses financial management (highlighted in red). Financial management mainly include the areas of finance, financial accounting and managerial accounting. In addition, financial management includes the disciplines of economics, operations research, statistics, and a relatively new focus on clinical objectives. All of these tools must be used effectively and efficiently to guide the financial strategy of an organization.

10

11

Traditional Responsibilities of Finance Managers

Traditional Responsibilities of Finance Managers

Budgeting:

The formation of budgets are an important process for any organization.

Budgeting involves the process of constructing and using budgets.

Budgets are detailed plans for obtaining and using resources during a specified time period.

We will revisit later  

____________________________________________________

Managing Financial Operations:

Healthcare organization spent a lot of time managing cash and supplies as well as collecting money for services rendered.

Proper management of these functions is necessary to ensure operational effectiveness and to reduce costs.

Today, managers at all levels should be involved in this process.

We will revisit later

12

Traditional Responsibilities of Finance Managers

Financing Decisions:

All organizations must raise funds to buy the assets necessary to support operations.

Such decisions may involve issues such as: deciding between long-term and short-term debt, the use of lease versus conventional financing.

Senior managers and the financial staff typically make the financial decisions, but these decisions have ramifications for managers at all levels.

13

Traditional Responsibilities of Finance Managers

Capital Investment Decisions:

Involve decisions which surround the purchase/sale of property, plant and equipment (PPE).

These types of decisions are the primary means by which businesses implement strategic plans.

Thus, capital investment decisions play a significant role in the financial future of all businesses.

14

Traditional Responsibilities of Finance Managers

Financial/Operational Analysis:

In order to achieve and maintain a high level of organization performance, all business must constantly monitor their financial/operational conditions.

Can be accomplished with the use of dashboards.

In addition to monitor conditions businesses must take corrective action to make sure that the organizational purpose (goals) are met.

15

Traditional Responsibilities of Finance Managers

Financial Reporting:

Financial Reporting involves the reporting of the current financial/operating conditions of the company. This is primarily done for people who are not part of the organization.

This task is usually accomplished by referencing material on the financial statements.

Please see the next slides for examples on current events and their effect on the financial statements.

16

Traditional Responsibilities of Finance Managers

Financial Reporting (continued):

Hospitals’ uncompensated care costs jumped to $38.3B in 2016: 3 findings

https://www.beckershospitalreview.com/finance/hospital-uncompensated-care-costs-jumped-to-38-3b-in-2016-3-findings.html

Written by Morgan Haefner | January 05, 2018

Hospitals nationwide saw uncompensated care costs increase 7.3 percent in 2016, according an American Hospital Association analysis.

Here are three findings from the report, which compiled data from the AHA’s annual hospital survey.

The AHA found hospitals’ uncompensated care costs were $35.7 billion in 2015, and grew to $38.3 billion in 2016.

While uncompensated care costs were roughly 7 percent higher in 2016, the figure was down 10.5 percent from 2014, when costs totaled $42.8 billion.

U.S. hospitals’ uncompensated care costs totaled $46.4 billion in 2013, the highest cost reported during the past 26 years.

17

Traditional Responsibilities of Finance Managers

Financial Reporting (continued):

Becker’s Hospital CFO Report

Moody’s Severe flu season will pressure nonprofit hospital margins

Written by Alia Paavola | January 30, 2018 |

https://www.beckershospitalreview.com/finance/moody-s-severe-flu-season-will-pressure-nonprofit-hospital-margins.html

Despite an increase in patient admissions, the severe flu outbreak this season will pressure nonprofit hospital margins, according to a recent report by Moody’s Investors Service.

A surge in patient volume is often credit-positive for hospitals since reimbursements are often tied to the number of patients served. However, the surge in flu-related patient volume will pressure hospital margins because reimbursements for flu-related services often fail to cover the cost of treatment.

“Minimizing the length of stay for flu patients is essential to maintaining margins, but the severity of this year’s flu will complicate those efforts,” the Moody’s report reads.

18

Traditional Responsibilities of Finance Managers

Financial Reporting (continued):

Becker’s Hospital CFO Report

Moody’s Severe flu season will pressure nonprofit hospital margins

Written by Alia Paavola 

https://www.beckershospitalreview.com/finance/moody-s-severe-flu-season-will-pressure-nonprofit-hospital-margins.html

In addition, the heightened patient volume increases other costs, such as overtime payments and other unbudgeted staffing costs, and may also limit facility capacity for more profitable services such as elective surgeries. Many hospitals across the nation are considering canceling elective surgeries, which are a valuable source of revenue, as their facilities grapple with an influx of flu-related cases.

Since flu-related admissions are often unplanned, and in many markets there are shortages of primary care physicians, many flu patients are heading to the emergency department to receive care, which is costly.

“Treating large numbers of patients in the ED creates a bottleneck to efficient flow of patients through the hospital and is often an expensive place to receive care,” the report reads.

Moody’s also notes flu patients are at a higher risk for complications, which may increase hospital costs. 

19

.

Financial Reporting (continued):

Nonprofit hospital margins unlikely to recover until COVID 19 vaccine

Ayla Ellison Friday, July 17th, 2020

https://www.beckershospitalreview.com/finance/fitch-nonprofit-hospital-margins-unlikely-to-recover-until-covid-19-vaccine.html

Median financial ratios for nonprofit hospitals and health systems improved before the COVID-19 pandemic, which will provide some financial cushion to withstand financial pressures, according to a report from Fitch Ratings. 

The medians for 2019, based on 2018 data, showed the nonprofit hospital and health system sector stabilized after a period of operational softness. The medians for 2020, based on 2019 audited data, are expected to show improvement in operating margins driven by higher revenues, cost reductions and increased cash flow, Fitch said. 

“We expect the 2020 medians will represent peak performance levels until the sector is able to recover from the effects of the pandemic on operations,” Fitch said. 

20

Traditional Responsibilities of Finance Managers

Traditional Responsibilities of Finance Managers

Financial Reporting (continued):

Becker’s Hospital CFO Report

Nonprofit hospital margins unlikely to recover until COVID 19 vaccine

Ayla Ellison Friday, July 17th, 2020

https://www.beckershospitalreview.com/finance/fitch-nonprofit-hospital-margins-unlikely-to-recover-until-covid-19-vaccine.html

The credit rating agency said the nonprofit healthcare sector is unlikely to stabilize until a COVID-19 vaccine is widely available.

“The sector has shown considerable resiliency over the years, weathering significant events such as the Great Recession and legislative changes to funding,” Fitch said. “However, the coronavirus presents entirely new and fundamental challenges for the sector in the short term in the form of volume and revenue disruption, and over the medium to longer term with expected deterioration of individual provider payor mixes and possible changes in the behavior of healthcare consumers.”

21

Traditional Responsibilities of Finance Managers

Financial Reporting (continued):

Delta variant creates setbacks in hospital financial recovery

Alia Paavola – Tuesday, August 24th, 2021 Print | Email

https://www.beckershospitalreview.com/finance/delta-variant-creates-setbacks-in-hospital-financial-recovery.html

Hospitals and health systems in the U.S. experienced both patient volume declines and financial setbacks in July as COVID-19 cases spiked due to the rapid spread of the delta variant, according to an Aug. 24 report from consulting firm Kaufman Hall.

Compared to pre-pandemic levels seen in 2019, hospitals saw lower margins and patient volumes. In addition, while revenues rose above 2019 levels, the gains were often offset by expense increases.

The median hospital operating margin was 3.2 percent in July, not including relief funding. With the relief aid, the median hospital margin was 4.1 percent in July. Additionally, hospitals’ median operating earnings before interest, taxes, depreciation, and amortization margin for July was 7.7 percent without the federal relief aid and 8.9 percent with the relief aid.

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Traditional Responsibilities of Finance Managers

Financial Reporting (continued):

About 1 in 5 healthcare workers have left medicine since the pandemic began — Here’s why

With about 1 in 5 healthcare workers leaving medicine since the pandemic began, The Atlantic explored numerous reasons why providers are leaving healthcare, coming up with at least seven key reasons. 

The U.S. healthcare sector has lost nearly half a million workers since February 2020, according to estimates from the Bureau of Labor Statistics. Eighteen percent of healthcare staff have quit since the pandemic began, while 12 percent have been laid off, according to survey research company Morning Consult. Of the remaining workers, 31 percent have thought about leaving their employer, according to Morning Consult.  

“Physicians are some of the most resilient people out there,” Sheetal Rao, MD, a primary care physician who left her job last October, told The Atlantic. “When this group of people starts leaving en masse, something is very wrong.”

Excluding those who have left the field because of layoffs or conditions linked to long COVID, below are seven reasons healthcare workers are exiting the field, per The Atlantic: 

Please see the Assigned Readings folder for the full text article.

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Traditional Responsibilities of Finance Managers

Financial Reporting (continued):

94% of nursing homes face staff shortages: AHCA, NCAL

https://www.beckershospitalreview.com/post-acute/94-of-nursing-homes-face-staff-shortages-ahca-ncal.html?utm_campaign=bhr&utm_source=website&utm_content=related

Almost all, or 94 percent, of U.S. nursing homes face staff shortages, according to a recent survey conducted by The American Health Care Association and National Center for Assisted Living. 

The findings, posted June 23, were from a survey of 616 nursing homes and 122 assisted living communities across the U.S.  

Four other key findings:

1. Nearly three-fourths of nursing homes and more than half of assisted living communities said their facility’s overall workforce situation has gotten worse compared to 2020.  

2. More than half of facilities are actively trying to fill vacant positions for certified nursing assistants, licensed practical nurses, registered nurses, dietary staff and housekeeping roles.

3. The majority of providers believe higher reimbursement to offer better pay and benefits would help recruit and retain staff. 

4. More than half of facilities in 2020 said staff in essential positions — such as CNAs or direct caregivers and dietary staff — had quit.

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The Major Responsibilities of Healthcare Financial Management?

25

25

Major Responsibilities of Healthcare Financial Management

Generate Income:

The philosophy of all organizations is to survive and grow.

The organization will cease to exist if it cannot afford to operate.

With non-healthcare organizations: The goal is to maximize owner’s wealth.

E.g. Google, Apple

_________________________________________________________________With healthcare organizations: The goal is to maintain community services****.

Further distinctions exist with for-profit and not-for profit hospitals.

We will revisit later.

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Major Responsibilities of Healthcare Financial Management

Respond to Regulations:

There is a tremendous amount of regulation in health care.

Federal, state/local governments all play a role in regulating the healthcare industry.

Federal state and local governments pay over 45 percent of all healthcare bills Thus, these entities have a vested interest in how the care is provided.

__________________________________________________________________

Healthcare organizations are in the position to take care of the sick, the elderly, and the poor.

E.g. This is one of the reasons for the Emergency Medical Treatment & Labor Act of 1986 (EMTALA).

_________________________________________________________________

Quasi-regulations: Healthcare organizations must also meet quasi-regulations (e.g. accreditation, certification) to qualify for reimbursement from many third party payers.

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Major Responsibilities of Healthcare Financial Management

Facilitate Relationships with Third Party Payers (continued):

Complex relationship

Third Party Payers account for over 80 percent of the operating revenue for healthcare organizations.

Financial managers must be responsive to the needs of third-party payers and must treat these payers as ‘valued customers.’

In addition, financial managers must be responsive to the patient as a customer. The patient has influence over the third-party payer.

This increased focus on responsiveness usually occurs in areas where you have high hospital (health provider) competition markets.

Hospital competition and consolidation is measured by the Herfindahl–Hirschman Index.

We will revisit this concept later

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Major Responsibilities of Healthcare Financial Management

Influence Reimbursement Levels:

Underneath the facade, there is usually an acrimonious relationship between hospitals and third-party payers.

_____________________________________________________________

This acrimonious relationship can be traced to the advent of two types of reimbursement mechanisms.

Prospective Payment: agreeing in advance to a price for providing care. (i.e. Per diem Payments, Diagnostic Related Groups DRGs).

Capitation: Price per subscriber before the subscriber actually needs care (Private health insurer’s form of prospective payment).

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The dispute is over: Continuum Health Partners and UnitedHealthcare signed a new contract Wednesday night after months of sometimes tense negotiations. The contract is for all product lines, including commercial, Medicare and Medicaid, and is effective retroactively to March 1.

“We’re pleased with the outcome,” said Ruth Levin, Continuum’s chief negotiator on the contracts.

The contract dispute dates back to December, and Continuum dropped from UnitedHealthcare’s network on Jan. 1. United and the health system—which includes Beth Israel Medical Center, St. Luke’s-Roosevelt Hospital Center, Long Island College Hospital and the New York Eye and Ear Infirmary—failed to agree on new contract terms over reimbursement and other issues.

On one hand, United was trying to hold down the cost of premiums….A spokeswoman for the insurer (stated that United) “a responsibility to our employers and health plan participants to balance affordability and access.”

UNITED HEALTHCARE CONTRACTS DROPPED HOSPITALS

http://www.crainsnewyork.com/article/20100312/FREE/100319959#ixzz1kKu5hNoe

Major Responsibilities of Healthcare Financial Management

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Ms. Levin, who is Continuum’s corporate senior vice president

“United took the position that if we didn’t agree to their language terms, they were not interested in further discussions,”

Continuum would try to obtain “the necessary protections against potential abuse of underpayments, denials, unreasonably burdensome and costly administrative requirements, etc..”

The dispute escalated in January, when Continuum filed a request for an injunction in Manhattan Supreme Court to stop United from “improperly removing” some 1,500 Continuum doctors from United’s networks.

All the bickering over a contract is now history, with the hospital chain and United agreeing on undisclosed terms.

Continuum, meanwhile, is continuing to negotiate a contract with another large insurer, Aetna.

UNITED HEALTHCARE CONTRACTS DROPPED HOSPITALS (continued)

Major Responsibilities of Healthcare Financial Management

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Doctors, Anthem agree to contract

Graves-Gilbert Clinic, insurance provider end a two-year dispute

http://www.bgdailynews.com/news/doctors-anthem-agree-to-contract/article_56c2ec31-1cac-50a3-9d8d-7e2aa2e3adbb.html

By JENNA MINK, The Daily News, [email protected]/783-3246 Dec 15, 2009

Graves-Gilbert Clinic patients covered by Anthem insurance can continue to receive care at the clinic after the two reached a contract agreement Monday.

Graves-Gilbert Clinic announced today that it signed a two-year contract with the insurance company, which will go into effect Jan. 1.

The agreement ends a nearly two-year dispute between the clinic and the insurance provider centered around physician reimbursement fees. Graves-Gilbert had requested an increase in the amount of money physicians receive for their services, and Anthem was not willing to grant that increase.

The two companies reached an agreement 18 days before the current contract expired. Graves-Gilbert would have terminated its contract with Anthem on Jan. 1 if the dispute was not settled.

Major Responsibilities of Healthcare Financial Management

32

Major Responsibilities of Healthcare Financial Management

Doctors, Anthem agree to contract (continued)

If the contract had been terminated, thousands of local Anthem members probably would have been looking for new physicians.

Graves-Gilbert told its patients that the clinic would stop seeing Anthem members after March 31 if an agreement was not reached.

Several people expressed support of an agreement between Anthem and Graves-Gilbert, Thorn said.We’ve had a lot of people call in support,” he said. “Employers as well as patients.”

The dispute would have impacted one of the city’s biggest employers – Western Kentucky University. About 1,900 university employees are covered by Anthem insurance.

But during the dispute, both parties acknowledged that an agreement still could be reached.

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Major Responsibilities of Healthcare Financial Management

Respond to Changes in Federal Reimbursement Policy

In the 1980s federal government instituted prospective payment for in-patient hospital services. (Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982).

What was the potential impact?

In the 1990s federal government instituted prospective payment for out-patient services (Balanced Budget Amendment (BBA) of 1997).

What was the potential impact?

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Major Responsibilities of Healthcare Financial Management

Respond to Changes in Federal Reimbursement Policy (continued)

Obamacare Insurance Mandate Is Struck Down by Federal Appeals Court

A federal appeals court on Wednesday struck down a central provision of the Affordable Care Act, ruling that the requirement that people have health insurance was unconstitutional.

Some 17 million Americans could lose the coverage gained through the Affordable Care Act if the law were thrown out, more than 50 million people with pre-existing medical conditions could again be denied health insurance and insurers would no longer have to cover people up to age 26 under their parents’ plans.

A central question in the case was whether the Affordable Care Act’s “individual mandate” requiring most Americans to buy health insurance or pay a penalty became unconstitutional after Congress reduced the penalty to zero dollars as part of the tax overhaul bill enacted in 2017. When the Supreme Court upheld the mandate in its landmark 2012 ruling that saved the law, it was based on Congress’s power to impose taxes.

Please see the assigned readings folder for full text of article.

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Major Responsibilities of Healthcare Financial Management

Respond to Changes in Federal Reimbursement Policy (continued)

Estimating the Impact of Repealing the Affordable Care Act on Hospitals

Findings, Assumptions and Methodology

Submitted to: The Federation of American Hospitals (FAH) The American Hospital Association (AHA)

http://www.aha.org/content/16/impact-repeal-aca-report.pdf

In modeling the repeal of the ACA as laid out in H.R. 3762, we found that between 2018 and 2026,

The loss of coverage would have a net impact on hospitals of $165.8 billion with the restoration of Medicaid DSH reductions.

The ACA Medicare reductions are maintained and hospitals will suffer additional losses of $289.5 billion from reductions in their inflation updates.

Full restoration of Medicare and Medicaid Disproportionate Share Hospital (DSH) payment reductions embedded in ACA would amount to $102.9 billion.

36

Major Responsibilities of Healthcare Financial Management

Monitor Physicians:

Health care managers must monitor physicians and their potential financial liability to the organization in terms of their ordering patterns and their possible negligence.

Usually accomplished with Utilization Review

This is a relatively new role and a very hard thing to do. However, taking increased emphasis with population health management (capitation) and RAC (Recovery Audit Program) audits.

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Major Responsibilities of Healthcare Financial Management

Monitor Physicians (continued):

In 2013, physicians accounted for over 30 percent of all health care spending.

As a result, there is a lot of potential for waste, fraud and abuse.

Physicians are the key that starts the financial engine of the hospital and they know it!

______________________________________________________________________

Healthcare financial managers must ensure (through the utilization review process) that physician ordering patterns are consistent with what the patient needs.

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Major Responsibilities of Healthcare Financial Management

Protect Tax Status:

For-Profit healthcare organizations must seek ways of reducing tax liability.

Why?

_______________________________________________________________

Not-for-Profit healthcare organizations seek ways of protecting their tax-exempt status from the attempts of state and local governments to find new resources.

The recent recession has spurred on more efforts by state/local governments in this area.

Relatively recently tax-exempt status of hospitals have come under judicial scrutiny.

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Major Responsibilities of Healthcare Financial Management

Class Action Suits Against Non-Profit Hospitals http://www.crowell.com/NewsEvents/Newsletter.aspx?id=535

Protect Tax Status (continued):

Nationwide litigation against not-for-profit hospitals has exploded in recent days. On June 16, 2004, thirteen class action lawsuits were filed against not-for-profit hospital systems in eight states.

In general, the litigation includes claims for breach of contract, EMTALA violations, fraud, unjust enrichment, and civil conspiracy. The filing of these lawsuits coincides with Congressional hearings on hospital pricing practices and tax-exempt status.

The purpose of this slide is to discuss the legal scrutiny that numerous not for profit hospitals had to deal with in the recent past.

For the full article, please see reading on blackboard titled Class Action Suits Against Non-Profit Hospitals

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Major Responsibilities of Healthcare Financial Management

Class Action Suits Against Non-Profit Hospitals (continued) http://www.crowell.com/NewsEvents/Newsletter.aspx?id=535

The AHA has aided and abetted Catholic Healthcare Partners (CHP’s) breaches of contract by providing assistance and advice on how to bill for and collect “grossly inflated” medical charges from Plaintiffs.

The AHA has also lobbied the Department of Health and Human Services, and such efforts have contributed to CHP’s breaches of contract.

_______________________________________________________________________

Plaintiffs seek a preliminary and/or permanent injunction against CHP’s billing and collections practices.

For the full article, please see reading on blackboard titled Class Action Suits Against Non-Profit Hospitals

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Major Responsibilities of Healthcare Financial Management

Protect Tax Status (continued):

40% of hospitals not publishing community health needs assessments, putting tax-exempt status at risk

Alia Paavola – Thursday, August 26th, 2021 Print | Email

https://www.beckershospitalreview.com/finance/40-of-hospitals-not-publishing-community-health-needs-assessments-putting-nonprofit-status-at-risk.html

Forty percent of nonprofit hospitals are failing to complete and publicly report documentation required for a community health needs assessment, according to a study published Aug. 24 in JAMA Network Open.

As mandated by the ACA, nonprofit hospitals are required to complete community health needs assessments every three years to ensure they are producing community benefits with the costs saved from tax exemptions.

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Major Responsibilities of Healthcare Financial Management

40% of hospitals not publishing community health needs assessments, putting tax-exempt status at risk (continued)

In particular, nonprofit hospitals are required to do three things: conduct the assessment and adopt an implementation strategy, abide by documentation requirements and make those documents publicly available. Not doing these three things could jeopardize a nonprofit hospital’s ability to receive tax exemptions.

Researchers found that only 60 percent of hospitals had both a community health needs assessment and an implementation strategy publicly available, and many documents were missing.

For the study, researchers analyzed a random sample of 500 U.S. hospitals to determine adherence to these requirements. The researchers assessed the hospitals’ IRS form 990 Schedule H from a ProPublica database.

Researchers noted that the 60 percent statistic applies to whether hospitals completed all three requirements.

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Major Responsibilities of Healthcare Financial Management

North Carolina nonprofit hospitals’ charity care rarely exceeds tax breaks, report shows

A majority of North Carolina nonprofit hospitals’ charity care spending did not exceed 60 percent of their tax breaks in 2019 and 2020, an Oct. 27 analysis by Johns Hopkins Bloomberg School of Public Health and the North Carolina State Health Plan showed.

North Carolina State Treasurer Dale Folwell invited researchers from both organizations to create the report, according to a press release from his office.

The report found that fewer than 25 hospitals surpassed the amount of their tax exemption through their charity care spending, while the largest hospitals in the state collected tax breaks of more than $1.8 billion in 2019 and 2020.

Please see the Assigned Readings folder for the full text article.

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The Four C’s of Financial Management

45

The Four C’s of Financial Management

All of the financial activities listed previously can be summarized by focusing on cost, cash, capital and control.

___________________________________________________________________

Costs:

Costs must be continuously monitored to ensure that they are not excessive for the number of services provided.

Rampant costs as compared to revenues usually spell doom for any business.

The measurement and minimization of costs is vital to the financial success of all healthcare organizations.

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46

The Four C’s of Financial Management

Cash:

Businesses must have sufficient cash on hand to meet payment obligations as they occur.

Cash is the lubricant that makes the wheel of a business run smoothly; without it, the business grinds to a halt.

Businesses must have sufficient cash on hand (or the ability to quickly raise it) to meet cash obligations as they occur.

***In healthcare, a critical part of managing cash is collecting money from third party payers for patient services provided.

We will revisit all of these concepts later.

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The Four C’s of Financial Management

Capital:

Capital represents the funds (money) that is used to acquire land, buildings, and equipment.

Without capital, healthcare businesses would not have the physical resources needed to provide patient services (and also generate revenue).

Thus, capital allows healthcare organizations to meet the healthcare needs of their communities.

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The Four C’s of Financial Management

Control:

A business must control is financial and physical resources to ensure that they are being wisely employed and protected for future use.

In addition to meeting current mission requirements, healthcare organizations must plan to meet the changing environment and society’s future healthcare needs.

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Healthcare Financial Management
Lecture Packet # 4
2022

1

1

Outline

Basic Concepts of Financial Accounting

Outlined by Generally Accepted Accounting Principles (GAAP)

_______________________________________________________________

Financial Statements

Income Statement: (Revenues -Expenses).

Net Patient Service Revenue

Other Revenue

_______________________

Salaries & Benefits

Supplies

Insurance

Lease

Depreciation

Provision of Bad Debts

Interest

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2

3

Basic Concepts of Financial Accounting

Outlined by Generally Accepted Accounting Principles (GAAP)

3

Basic Concepts of Financial Accounting

Going Concern:

It is assumed that the accounting entity will operate as a going concern.

The company will have an indefinite life. As a result, assets are valued differently.

e.g. For example, the land, building, and equipment of a hospital may have a value of $50 million when used for patient services.

However, if these services are sold to an outside party (for other purposes), the value of these assets may only be $20 million.

As a result of the Going Concern assumption, assets are viewed over a longer time frame and they are valued higher.

Thus, they are not true market measurements. _____________________________________________________________

The going concern assumption, coupled with the fact that financial statements must be prepared for relatively short periods means that financial accounting data is not exact.

Financial Statements are a systematic way to deal with complex measurements. However, the measure is not perfect. NO MEASURE IS PERFECT.

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4

Basic Concepts of Financial Accounting

Accounting Period:

An accounting period is the amount of time over which an organization’s managers or outside parities want to evaluate operational results.

The accounting period could be over months, a year, or a fiscal year.

It does not have to coincide with the calendar year.

_____________________________________________________________

Objectivity:

The information reported in financial statements must be based on objective verifiable supporting data and not subjective data.

Financial statements should be based on supporting documentation, such as invoices and contracts.

_______________________________________

Reliability:

Financial statements should be reasonably free of error/bias.

It is assumed that the information fairly represents the economic events which have affected the company.

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5

Basic Concepts of Financial Accounting

Relevance:

Financial statements must be relevant to their users.

This is always a balancing act.

The information must be able to aid in decision making.

However, there can’t be so much information that the users get bogged down.

_________________________________________________________________

Full Disclosure:

Financial Statements must contain a complete picture of the economic events of a business.

Anything less is viewed as misleading by omission.

_______________________________________________________________

Conservatism:

The conservatism concept calls for choosing the approach that is least likely to overstate the financial condition of the business.

Goal of Conservatism: overstate expenses, understate revenues.

Think of your own personal/family budget.

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6

Basic Concepts of Financial Accounting

Consistency:

When a company’s financial statements are compared over extend periods of time (e.g. 10 years of annual statements). The users must feel confident when they are comparing the results over time.

If there is a change in accounting methods, it is required that an explanation of the change be disclosed in the footnotes.

_____________________________________________________________

Comparability:

When users look at quarterly and financial statements of businesses in the same industry, the users must feel confident that the data are comparable.

_______________________________________________________________

Accounting Methods:

Cash accounting, accrual accounting methods.

Accrual accounting methods is the only method that is audited by GAAP.

As a result, its use dominates financial statements.

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7

Basic Concepts of Financial Accounting

Accounting Methods (continued)

Cash Accounting:

With cash basis accounting, economic events are recognized when the financial transaction occurs.

The cash transaction dictates the action/ reporting.

____________________________________________________________

e.g. The clink provides services to a patient in December 2018. At that time the clinic bills the insurer $700. However, the clinic did not receive a payment from the insurer until February 2019.

Under cash accounting, the $700 dollar obligation on the part of the insurer will not appear on the clinic’s 2018 financial statements.

Instead, it will appear when the cash was received in February 2019.

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8

Basic Concepts of Financial Accounting

Accounting Methods (continued):

Cash Accounting:

The core argument in favor of favor of cash accounting is that the most important event is to record the receipt of cash, not the provision of services.

The recording of expenses (or expenditures) follow the same pattern.

Expenses would not be recorded until they were actually paid out.

_______________________________________________________________

Cash Accounting Advantages:

Easy to use

Closely aligned with the accounting needed for tax purposes.

This is the reason why many sole proprietorships use cash accounting methods.

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9

Basic Concepts of Financial Accounting

Accounting Methods (continued):

Accrual Accounting:

The economic event creates the financial transaction and provides the basis for the accounting entry.

This economic event takes precedence over cash transaction itself.

_______________________________________________________________

Revenue earned does not necessarily correspond to the receipt of cash.

When the revenue is recorded (i.e. services performed) in one accounting period and the payment does not occur until the next period, the revenue reported has not yet been collected and hence no cash has been received.

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10

Basic Concepts of Financial Accounting

Accounting Methods (continued):

e.g. A clinic provided services in 2018 and did not receive payment until 2019. The accounting year ended on 12/31/2018. The clinics books were closed after the revenue was recorded , but before the cash was received.

Thus, the clinic reported $700 of revenue on the 2018 financial statements even though no cash was collected.

With accrual accounting, the amount of money not collected is still listed in the financial statements.

Thus, not all of the revenues represent cash receipts.

This speaks to the importance of Revenue Cycle Management (turning revenue from services provided into cash).

We will revisit this concept later.

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11

Basic Concepts of Financial Accounting

Revenue Recognition Principle:

Requires that all revenues be recognized in period where they are realized and earned.

The period where services have been provided.

_______________________________________________________________

Matching Principle:

Requires that an organization expenses be matched to the revenues to which they are related.

The implementation of matching principle creates many problems.

One such problem occurs with long lived assets such as property, buildings and equipment (PP&E).

E.g. assets such as a hospital ward can provide revenue for many years. The matching principle dictates that that its costs (e.g. deprecation costs) should be spread over those same years.

 

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Financial Statements

13

Income Statement.

A financial statement which identifies which identifies how revenue is transformed into net income (Revenues -Expenses).

____________________________________________________

Balance Sheet.

Identifies the company’s financial position. Also called the statement of financial position.

The balance sheet identifies what resources the company has and what it owns.

____________________________________________________

Statement of Cash Flows.

Provides information on the company’s cash receipts and disbursements.

Cash received from operating, financing, and investing activities.

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14

15

Income Statement

15

Income Statement

Income Statement:

Revenues – Expenses = Net Income.

The income statement summarizes the operations.

i.e. activities of an organization with a focus on its revenues, expenses, and profitability (net income).

__________________________________________________________________

The income statement is also known as the statement of operations and statement of activities.

The income statement answers the most frequent question asked about business.

“Is the business making money.”

Income statement is sometimes viewed as the company’s most important measure.

We will talk about later.

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  2019 2018
Revenues :    
Net Patient Service Revenue $169,013.00 $140,896.00
Other Revenue $7,079.00 $5,704.00
Total Revenues $176,092.00 $146,600.00
     
Expenses:    
Salaries and Benefits $126,223.00 $102,334.00
Supplies $20,568.00 $18,673.00
Insurance $4,518.00 $3,710.00
Lease $3,189.00 $2,603.00
Depreciation $6,405.00 $5,798.00
Provision of Bad debts $2,000.00 $1,800.00
Interest $5,329.00 $3,476.00
Total Expenses $168,232.00 $138,394.00
Net Income $7,860.00 $8,206.00

Income statement ended 12/31/2018 and in 12/31/2019. Income is in thousands of dollars.

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Income Statement

Net Patient Service Revenue

Other Revenue

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2019 2018
Revenues :
Net Patient Service Revenue $169,013.00 $140,896.00
Other Revenue   $7,079.00 $5,704.00
Total Revenues $176,092.00 $146,600.00

Income Statement

19

Income Statement

Revenue:

Revenue is the income an organization receives.

The positive product of an asset.

Revenue is comprised mainly of an organizations operating activities.

This may include sales of products (sales), rendering of services, and earning from interest, dividends, and lease income.

__________________________________________________________________

Net Patient Service Revenue:

Revenue solely from patient services.

“Net” signifies that amount shown is less than the clinics gross charges for the services that it provides.

The discount is incorporated before the revenue is recorded on the net patient service revenue line.

Patient service revenue category is the amount shown when discounts are already in place.

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2019 2018
Revenues :
Net Patient Service Revenue $169,013.00 $140,896.00
Other Revenue   $7,079.00 $5,704.00
Total Revenues $176,092.00 $146,600.00

Income Statement

21

Income Statement

Other Revenue:

The clinic reported “Other Revenue” in the amount of $7,079.

Other revenue can be interest earned from securities, unrestricted charitable contributions, food service, parking fees, gift shops, etc.

Issues with Other Sources Of Revenue:

Over reliance on such streams could lead to operational inefficiencies.

This occurs because of an over focus on items that are not in the main line of business.

Having other sources of revenues could place an organizations not-for profit status in jeopardy.

Recommended that hospitals create a for-profit subsidiary and pay taxes on revenues for items which are not part of its core business.

Please see supplemental reading titled: Can Net Income from Non-Patient-Care Activities Continue to Save Hospitals?

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23

Income Statement

Salaries & Benefits

Supplies

Insurance

Lease

24

Expenses: 2019 2018
Salaries and Benefits $126,223 $102,334
Supplies $20,568 $18,673
Insurance $4,518 $3,710
Lease $3,189 $2,603
Depreciation   $6,405 $5,798
Provision of Bad debts $2,000 $1,800
Interest $5,329 $3,476
Total Expenses $168,232 $138,394
Net Income $7,860 $8,206

Income Statement

24

Income Statement

Expenses:

Expenses are the negative product of an asset.

To produce revenues, organizations must incur costs, or expenses.

  Salaries:

In health care organizations, salaries usually represent the largest expense category.

Please see supplemental readings titled :

Hospital-Owned Medical Practices: Gaining the Benefits without the Losses

Something Old Is New Again: Structuring Physician Practice Acquisitions

The Management of Healthcare Expenses in Hospitals and Health Systems

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Income Statement

Supplies:

Cost of supplies used in providing services (primarily medical supplies).

The clinic does not order and pay for supplies when a particular patient requires them.

Instead, the clinic may order before hand and keep an inventory.

Thus, the report does not reflect the actual cash spent by organization on patient care supplies.

We will revisit this concept later.

Insurance Expense:

The cost of commercial insurance to protect against unexpected emergencies.

Lease:

The clinic leased some of its equipment and the total amount of lease payments $3,189.00 (for that accounting period) is reported as an expense.

Buy-versus-lease decisions and EMR implementation.

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Income Statement

Depreciation

Provision of Bad Debts

Interest

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Expenses: 2019 2018
Salaries and Benefits $126,223 $102,334
Supplies $20,568 $18,673
Insurance $4,518 $3,710
Lease $3,189 $2,603
Depreciation $6,405 $5,798
Provision of Bad debts $2,000 $1,800
Interest $5,329 $3,476
Total Expenses $168,232 $138,394
Net Income x  $7,860 $8,206

Income Statement

28

Income Statement

Depreciation:

Depreciation is a measure of how much tangible asset (i.e. building & equipment) has been used up during an accounting period.

For example, if a hospital buys new examination room equipment for $10,000 and expects the equipment to last ten years, the account might record $1,000 depreciation each year.

This is based on the assumption that one-tenth of the equipment is used up each year.

_______________________________________________________________

The hospital will not report their purchase price as an expense on an income statement.

The one time purchase price is not recorded.

Instead, the purchase price is listed on other parts of the financial statement.

We will revisit this concept later.

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Income Statement

Depreciation:

Some reasons for pursuing a deprecation strategy instead of reporting the full cost of the asset when purchased:

Improper to allocated a fixed asset to a single accounting period: The assets are used to produce revenues over a longer period of time (matching principle).

Severe Impact on Profitability: If the cost of the fixed asset were reported when they were acquired it would have severe impacts on the reported profitability (revenues –expenses) in the year which it was acquired.

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Income Statement

Depreciation (continued):

Salvage Value:

Salvage value is the amount (if any) expected to be received when the final depreciation occurs at the end of the asset’s useful life.

The result is the asset’s annual depreciation expense, which is the charge that is reflected in each year’s income statement.

The term straight line stems from the fact that the depreciation expense is constant every year.

We will revisit depreciation later.

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Income Statement

Uncompensated Care

Bad Debt -v- Charity Care:

Charity Care:

It is known that the patient cannot pay before the service is rendered.

_______________________________________________________________

Bad Debt:

Results from the failure to collect for services provided to patients and third party payers that do have the capacity to pay.

A description of the policies regarding discounts and charity care will often appear in the footnotes of the financial statements.

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Income Statement

Provision of Bad Debts:

Bad debts are revenues that were expected to be collected and then reported.

However, the revenues will never be realized (collected) and the clinic expects it will ultimately will become losses (bad debt).

Bad debt expense category is based on past experiences.

_______________________________________________________________

The clinic expected that $169,013,000 – $2,000,000 = $167,013,000 will be collect for patient services provided in 2019.

Bad debt loss to Net Patient Service Revenue: $2,000,0000/ $169,013,000 = .012 or 1.2 %.

Managers should review the clinics collection policy to ensure that its collection efforts are effective, and accounts must reconcile actual bad debt losses (which will not be known for some time) with past estimates.

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Income Statement

Interest Expense:

Interest expense for debt capital supplied.

Not all of the interest expense reported has been paid because the clinic typically pays the interest semi-annually or monthly.

Hence, some of the interest which has accumulated on some loans will not be paid until the following year(accrual accounting standards).

 

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  2019 2018
Revenues :    
Net Patient Service Revenue $169,013.00 $140,896.00
Other Revenue $7,079.00 $5,704.00
Total Revenues $176,092.00 $146,600.00
     
Expenses:    
Salaries and Benefits $126,223.00 $102,334.00
Supplies $20,568.00 $18,673.00
Insurance $4,518.00 $3,710.00
Lease $3,189.00 $2,603.00
Depreciation $6,405.00 $5,798.00
Provision of Bad debts $2,000.00 $1,800.00
Interest $5,329.00 $3,476.00
Total Expenses $168,232.00 $138,394.00
Net Income $7,860.00 $8,206.00

Income statement ended 12/31/2018 and in 12/31/2019. Income is in thousands of dollars.

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Income Statement

Net Income:

Because of the location on the income statement it is known as the bottom line.

Viewed as the single most important category on the financial statement.

______________________________________________________________

For-Profit organizations: Call net income: profit earned, profit line.

Not-for profit organizations: Call net income: revenues over expenses, excess of revenues over expenses.

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Income Statement

Not-for-profit Organizations and Profit Motive:

Not-for- profit organizations must still make a profit.

“No Margin no Mission”

If the clinic is to offer new services in the future, it must earn a profit today to produce the funds it needs for new assets.

Because of inflation, the clinic could not replace its current fixed assets base as needed without the funds generated by its ability to make a profit.

___________________________________________________________

All of a not-for-profit organization’s net income must be reinvested into the business.

While, an investor owned firm may return a portion of its net income to owners in the form of dividend payments.

We will talk about later.

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National Trends in Uncompensated Care and Profitability

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