Develop a 2-3-page paper reflecting your understanding APA

  

1. Introduction
(25%) Provide a brief synopsis of the meaning (not a description) of
each Chapter and articles you read, in your own words.
2. Your Critique
(50%)
What is your reaction
to the content of the articles?
What did you learn
about Assets, liability and net Worth?
What did you absorb
about Healthcare Revenue, Planning and control?
How you can apply your new knowledges to the Disbursement
for services?
What does the Health Care Administrator need to know about
Grouping Expenses for Planning and Control?
Did these Chapter and
articles change your thoughts about Revenue and Expenses? If so, how? If not,
what remained the same?
3. Conclusion
(15%)
Briefly summarize
your thoughts & conclusion to your critique of the articles and Chapter you
read.  How did these articles and
Chapters impact your thoughts on Healthcare Assets, Liability and Net Worth?
Evaluation will be based on how clearly you respond to the
above, in particular:
a) The clarity with which you critique the articles;
b) The depth, scope, and organization of your paper; and,
c) Your conclusions, including a description of the impact
of these articles and Chapters on any Health Care Setting.
finance_101_presentation.pdf

paymentmechanisms.pdf

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4/10/2013
Healthcare Finance 101
Healthcare Finance 101
Jim Heffernan, Sr. VP Finance & Treasurer
MGPO
April , 2013
Framework for discussion
• Financial Statements
• Accrual statements
Accrual statements
• Modified cash as an alternative
• Revenue and payment systems
• Expenses

Compensation
g
p
• Monitoring financial performance
2
1
4/10/2013
Why am I here?
“Damn it, Jim!  I’m a 
Doctor, not an
Doctor, not an 
Accountant!”
Good Financial 
Management
Dr. Leonard H. McCoy, MD
Efficient Practice 
Operations
p
Chief Medical Officer, USS Enterprise, 2266 ‐ 2364
This is why we ALL are 
here
Enhanced Patient Care 
& Satisfaction
3
Financial Statements
• Balance Sheet
• A quantitative summary of a companyʹs financial condition at a 
specific point in time. The first part (assets) shows what a 
company owns and the second part (liabilities) what it owes The
company owns, and the second part (liabilities) what it owes. The 
remainder (Net Assets) is the difference between the two and 
represents the organization’s “retained earnings”.
• Assets = Liabilities + Net Assets
• Statement of Operations (Profit & Loss ‐ P&L)
• An accounting of revenues, expenses, and net profit for a given 
period. 
• Statement of Cash Flows
St t
t f C h Fl
• Summarizes the entity’s cash receipts and payments for a given 
period – shows Operating, Investing, and Financing activities
• Statement of Changes in Net Assets identifies the reasons for the 
changes in the entity’s value
2
4/10/2013
Where do I look on an income statement?
Key subtotals and totals
• Revenue
• Net Patient Service Revenue (NPSR) – Expected collections from patient 
care activity
• Other Operating Revenue 
Other Operating Revenue –non‐patient
non‐patient activity such as  research 
activity such as research
revenue, academic revenue, operating investment income, other 
• Expenses
• Salaries and Benefits
• Supplies and Outside Services
• All Other Expenses
• Operating Gain (Loss) ‐ The amount of income we made, after expenses, 
from continuing hospital operations, “The bottom line”
g
p
p
• Excess (Deficit) of Revenues over Expenses (Net Gain (Loss))‐ The amount 
of money earned from all our lines of business, including non‐operating 
gains, gifts, non‐operating investment income, etc.. “The bottom, bottom 
line”
Statements of Operations by Category
for the period ending
(In $ Thousands)
2012
Patient service revenue
Inpatient
Outpatient
Capitation revenue
Total patient service revenue
Deductions from revenue
Third party allowances
Charity care
Provision for bad debts
Prior year adjustments
539,000
901,000
41,000
1,481,000
2011
555,000
816,000
4,000
1,375,000
Net patient service revenue
807,000
22,000
20,000
(9,000)
840,000
641,000
765,000
22,000
14,000
(2,000)
799,000
576,000
Other operating income
Total operating revenue
175,000
816,000
168,000
744,000
Operating expenses
Salaries & wages
Employee benefits
Supplies
Space Related Cost
Purchased Prof Services
Malpractice and General Liability
Other
Depreciation and amortization
Interest
Total operating expenses
368,000
110,000
199,000
35,000
15,000
18 000
18,000
36,000
10,000
5,000
796,000
334,000
100,000
181,000
34,000
14,000
17 000
17,000
30,000
9,000
5,000
724,000
20,000
20,000
Nonoperating gains (expenses)
Income from investments
Gifts and other
Total nonoperating gains
Income (Loss) From Operations
26,000
2,000
28,000
4,000
1,000
5,000
Excess (deficit) of revenues over expens
48,000
25,000
6
3
4/10/2013
Where do I look on a balance sheet?
Named because Total Assets will equal the sum of Total Liabilities and Net Assets
• Current Assets (C/A) represent resources that are available to the 
organization within a year
• Cash, Investments, Receivables – generally for patient care services, 
other assets
o
e a e
• Current Liabilities (C/L) represent what the entity has to pay within a year
• Debt payments, accounts payable, compensation & benefits, settlements 
with 3rd party payers
• The ratio of C/A to C/L is an important indicator to the organization’s ability 
to meet near term responsibilities ‐ Less than 2:1 can be a sign of financial 
stress. The ratio is generally referred to as the Current Ratio
• Other assets to look for plant & equipment and the depreciation of these 
assets –
t the Net PP&E relative to PP&E may indicate an aging plant
th N t PP&E l ti t PP&E
i di t
i
l t
• Long term debt is the borrowing generally to build the facility and buy 
equipment
• Net assets is the difference between total assets and total liabilities it is one 
measure of the financial value of the organization
Balance Sheet
for the period ending September 30, 2012
(In $ Thousands)
FY12
FY11
ASSETS
LIABILITIES AND NET ASSETS
Current assets:
Current liabilities:
Cash and equivalents
33,000
51,000
Investments
320,000
289,000
Current portion of investments limited as to use:
51,000
29,000
Patient accounts receivable
Current portion of long-term obligations:
87,000
76,000
Accounts payable and accrued expenses
less allowance for bad debts
(29,000)
(23,000)
Accrued compensation and benefits
net patient accounts receivable
Current portion of settlements w/ 3rd-party payers
58,000
53,000
Other current assets:
22,000
21,000
Total current assets
484,000
443,000
Due from Affiliates
FY12
FY11
2,000
1,000
5,000
6,000
49,000
43,000
7,000
15,000
61,000
64,000
Due to affiliates
Investments limited as to use:
Total current liabilities
Other liabilities:
Board designated funds:
Accrual for settlements with third-party payers
Sundry funds
Board designated endowments
5,000
3,000
Accrued professional liability
83,000
15,000
Accrued employee benefits
12,000
9,000
Deferred compensation
41,000
39,000
Deferred compensation
41,000
39,000
Bond Funds
15,000
16,000
Accrued other
56,000
55,000
Total other liabilities
Total investments limited as to use:
Pledges receivable and contributions receivable
1,000
1,000
142,000
67,000
107,000
109,000
Total long term obligations, less current portion
107,000
109,000
Total liabilities
310,000
240,000
374,000
343,000
1,000
1,000
134,000
130,000
Revenue bonds
(57,000)
(47,000)
Capital leases and other
Net property plant and equipment
77,000
83,000
Other assets:
66,000
1,000
Property and equipment
less accumulated depreciation
Long-term obligations, less current portion:
Net assets:
Unrestricted Net Assets
Total assets
684,000
583,000
Total liabilities and net assets
684,000
583,000
4
4/10/2013
Accrual Accounting
Not cruel accounting!!!
• Accrual Accounting (GAAP)
• Required approach for most corporate entities for financial and 
tax reporting
• Recognition (recorded in books) of revenue occurs when 
Recognition (recorded in books) of revenue occurs when
the revenue is earned, not necessarily when it is collected.
• Expenses are recognized when assets are used up or 
liabilities are incurred in the delivery of services, not 
necessarily when cash is paid.
• Matching Principle of accrual accounting
• Expenses should be matched to the revenue that they 
hel ed eate (e
helped create (e.g. wage, salary and supply costs usually 
a e ala y a d u ly o t u ually
can be easily associated with revenues of a given period).  
• If the association between revenue and expenses is 
impossible to discover, the use of a systematic, rational 
method of allocating costs to a period (e.g. depreciation, 
amortization) is allowable
Why use accrual accounting?
• Advantages
• Rigorous standards on the application of principles
• Corporate entities subject to audit, independent 
Corporate entities subject to audit, independent
review
• Meets requirements of lenders, tax filing and 
investors
• Disadvantages
• Complicated accounting rules require resources to 
manage
g
• Don’t always seem to match the business
• Difficult conversations with operating managers and 
physician leaders
5
4/10/2013
Modified Cash Accounting
• Cash Accounting differs from accrual accounting in that 
the matching principle is replaced by recognizing 
transactions when cash is exchanged
• It
It is used in physician practices in limited cases when allowed and 
is used in physician practices in limited cases when allowed and
often to show the performance of practices that are subunits of 
larger groups
• Advantages
• Simple to understand since it looks like a checkbook
• Focuses attention of short term performance
• Recognition of expenses and revenue is direct and doesn’t involve 
calculations of reserves and allocation of expenses based on 
complicated assumptions
• Disadvantages
• Does not recognize liabilities the hospital owes to creditors (payables)
• Does not recognize revenues that are earned but not yet received 
(receivables)
• Does not recognize expenses as resources are used, but only when 
the money is paid out (expenditures)
Uses of accounting methods
• Health systems, hospitals, physician organizations use 
accrual accounting for corporate reporting purposes
• Many physician organizations use modified cash for 
internal reporting
l
• These organizations use accrual accounting at the corporate level
• Physician groups that are part of hospitals may use accrual 
accounting
• Hospitals generally use non‐standard statements for 
departmental reporting
• Charges are used in place of net revenue and often only direct 
g
p
y
expenses are reported
• Hospitals most often use sophisticated cost accounting systems 
to allocate expenses and revenues to service lines and potentially 
individual services
6
4/10/2013
Revenue Discussion
Categories of Revenue
•Patient Service Revenue 
•Gross Patient Service Revenue (GPSR) vs. Net 
Patient Service Revenue (NPSR)
Patient Service Revenue (NPSR)
•Calculation of NPSR
•Payment Methodologies
•Membership revenue, capitation 
•Other Revenue
•Research Revenue 
h
•Direct and Indirect
•Academic Revenue
7
4/10/2013
Patient Service Revenue
• Gross Patient Service Revenue (GPSR)
• The total amount of charges that result from 
the provision of health care services to patients
h
i i
fh lh
i
i
• “Sticker Price”
• Net Patient Service Revenue (NPSR)
• The amount of patient revenue that remains 
after reducing charges to contractual rates and 
g
g
estimating the charges for services rendered 
for charity care, bad debts and insurer denials
Basics: Price and Quantity are Your Friend
Physicists 
love E=mc2
love E=mc
Accountants 
love P * Q
One of the best ways to analyze a variance between 2 numbers:
 Isolates the drivers of the variance
 May pinpoint areas you can Control
16
8
4/10/2013
Basics: P * Q Example
You manage the flu shot clinic.  While 
reviewing financial results, you notice 
that actual patient revenue is $337,500, 
versus a budget of $350,000.  That’s 
$12 500 l
$12,500 less than you planned.  That’s 
th
l
d Th t’
not too good….
You investigate a bit further, and you 
discover that your volume was 7,500 
shots, versus a budgeted 7,000 shots. 
Hmmmm.  If I did 500 more shots, how 
did I make less money?
Let’s find out….
Budget
Revenue
Volume (Shots)
Price per shot
Actual
Variance
$350,000
$337,500
7,000
7,500
($12,500)
500
$50
$45
($5)
How much of the 
(Actual P – Budget P ) * Actual Q
($12,500) is related 
($45 ‐ $50) * 7,500 shots = ($37,500)
to Price and how 
Volume Variance:
much is related to 
(A t l Q – Budget Q
(Actual Q
B d t Q ) * Budget P 
)*B d tP
Quantity?
(7,500 – 7,000) * $50 = $25,000
Price Variance:
P * Q
Not really controllable
Price
Somewhat controllable
Quantity
Total
($37,500)
$25,000
($12,500)
17
Basic: Patient Revenue
 Separate and more detailed patient revenue module 
 Essentially: P * Q
 Need to understand volume at the macro and micro‐levels
 What will happen to overall volume?  Increase? 
Decrease? Why?
 CPT mix, including potential shifts in services or 
coding patterns
 Provider capacity, including effect of ramp ups and 
shifts in provider schedules
hift i
id
h d l
 Provider productivity expectations
 Payment rates
 Who is paying you, and what will they pay you going 
forward?
18
9
4/10/2013
Changes to Gross Patient Service Revenue

Contractual Allowances & Denials
• Contractual Allowance is the difference between the rates billed to a third‐party 
payer and the amount that actually will be paid.
• Denial Reserve for contested amounts adjusted by payers based on denials, 
bundling of services, and other contract interpretation issues

Charity Care & Bad Debt
• Charity Care is provided to patients who meet State and/or Federal criteria at no 
charge or at reduced rates
• Bad Debt is the reduction in revenue for the estimate of services that are not paid 
by those not qualifying under charity care guidelines  
• The hospital or physician does not pursue collection of amounts qualifying as 
charity care
y
• Providers generally pursue collections of bad debt before writing it off as not 
collectable

Risk Contract Forfeitures & Incentives
• Growth of Value‐based contracts introduces reserves for forfeitures (withhold 
losses) or incentive or management fee payments.
Inpatient Payment Methodologies
• Case Rates (DRGs‐Diagnostic Related 
Groups)
• Per Diems
• Percent of Charges
• Global Rates
10
4/10/2013
Case Rates (DRGs‐Diagnostic Related Groups)
• Under Medicare’s Prospective Payment System (PPS), Medicare 
makes comprehensive, all‐inclusive payments to the hospital.  Other 
payers have now adopted this form of payment system.
• Diagnostic Related Group (DRG) is the basis of payment through 
which each diagnosis is assigned a specific pre‐determined case rate 
hi h ea h dia o i i a i ed a e ifi
e dete i ed a e ate
value. 
• Reimbursement for DRGs is based on a fixed payment amount. 
Each DRG has a payment weight assigned to it, based on the 
average resources used to treat patients in that DRG relative to the 
average resources used to treat cases in all DRGs.  
• Example: a patient is admitted to The Hospital to have a stent 
inserted. Insurance Company A pays $10,000 for a stent procedure 
whether the patient stays 2 days or 4 days, regardless of types of 
medication, or how complicated the recovery was.
di ti
h
li t d th
• Incentives built into payment methodology encourage the hospital to:
• Control costs
• Reduce Length of Stay (LOS)
• Improve efficiency
Per Diems & Percent of Charges
• Per Diems: Hospital receives a fixed payment per patient day 
• Hospitals paid by the per diem method receive payments based on the 
number of days a patient spends in the hospital. Some variation by type of 
care:  med/surgical, ICU
• Example: a patient is admitted to The Hospital to have a stent inserted. 
Insurance Company B pays $2,500/day. If the patient stays 2 days, the company 
pays $5,000. If patient stays 4 days, the company pays $10,000.
• Incentives built into payment methodology encourage hospital to:
• Control cost
• Improve efficiency
• Percent of Charges: The Hospital is paid on the basis of total charges, 
most often some negotiated percentage of total charges, e.g. 80%. 
• Example:
Example: a patient is admitted to The Hospital. Insurance Company C 
a patient is admitted to The Hospital. Insurance Company C
pays 80% of gross charges. All charges for this patient will be totaled, 
including room and board rate for however many nights the patient 
was in the hospital, charge of the stent, any medications, anesthesia, 
etc.., and the company will pay 80% of that total
• Incentive built into payment methodology encourages hospital to:
• Utilize medically necessary services 
• Example:  Many National Payers pay a Percent of Charges (PAF)
11
4/10/2013
Global Fees
• Hospital may negotiate global fees covering hospital and 
professional fees for certain payers
• Individual case rates are developed for certain complex 
p
p
cases such as transplant, international cases or oncology
• Global rate contracts exist for inpatient psychiatric services 
where a case rate or per diem rate includes hospital and 
professional services.
• Episode payments that cover hospital and professional fees 
for an acute treatment such as joint and spine procedures. 
Prometheus system develop by Rand is one approach to 
global payments
global payments.
Outpatient Revenue
• Majority of the revenue the hospital receives from 
outpatient activity is for outpatient ancillary utilization 
( a io ogy, a s, e c )
(radiology, labs, etc..)  
• Outpatient activity represents almost half of total patient 
revenue. 
• The bulk of the revenue from each encounter comes 
from the Outpatient Ancillaries, not the visits.  (Note: 
Outpatient ancillaries relate to both hospital‐based 
visits as well as physician organization (PO)
visits, as well as physician organization (PO) 
physician visits.)
• Over the past decade w/ the increase of ambulatory 
procedures most hospitals derive more than half their 
patient service revenue from outpatient
12
4/10/2013
Outpatient Prospective Payment System (OPPS)
• Outpatient services for Medicare patients are paid on a 
prospective payment system, in which the rates are set 
prior to the service for all components of the service 
i t th
i f
ll
t f th
i
• OPPS consists of groups of services known as 
Ambulatory Payment Classification (APC) groups, which 
are similar to DRGs for inpatients.  Services within an 
APC are similar, both clinically and in resource 
utilization.
tili ti
• Depending on the services provided, hospitals may be 
paid for more than one APC for an encounter
• APCs are the current incentive to control costs.
Outpatient Fee Schedule
• Fee Schedule 
• A fee schedule is a list of services (usually at the CPT‐ 4* 
code level) with corresponding reimbursement amounts 
that a provider will receive from a payer for providing those
that a provide …
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