Health Care Finance 2-3 pages, health and medicine homework help

  

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 How does the finance work in the Healthcare Business?
What did you learn
about Elements of Financial Management?
How you can apply your new knowledges to the annual
management cycle?
What does the Health Care Administrator need to know about
financial management in health Care?
Did these Chapter and
articles change your thoughts about Health Care Management and Finance, and
Health Care Business? 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 Finance and Healthcare management
system?
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.
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C OV E R STO R Y
Mixing Finance
and Medicine
THE EVOLUTION OF
FINANCIAL PRACTICES
IN HEALTHCARE
This article is based on a study supported by the IMA® Foundation for Applied Research (FAR).
By James R. Langabeer II, CMA; Jami L. DelliFraine;
and Jeffrey R. Helton, CFE
The healthcare industry has been considered a laggard when
it comes to emerging best practices, at least relative to
most other industries. Historically, healthcare organizations
have largely been controlled by nonprofits and local
governments that were less concerned about efficiency and
performance because of a lack of industry transparency
and reimbursement practices that preserved margins despite
excessive cost structures.
Not anymore.
December 2010
I
S T R AT E G I C F I N A N C E
27
C OVE R S TO R Y
New waves of chief financial
officers (CFOs) are being tapped
from other industries. Plus,
greater environmental pressures
for financial performance are
helping to radically transform
the state of practice for hospitals
and healthcare organizations.
The Patient Protection and
Affordable Care Act, passed in
early 2010, may further change
health organizations as payment
mechanisms and organizational
configurations are refined. The
need for sophisticated accounting systems that link to
clinical systems, and the establishment of best practices
for financial management professionals, will be keys to
achieving positive margins for healthcare organizations.
As a result, there’s an evolution under way toward much
greater sophistication in financial management in the
U.S. healthcare industry. This evolution is creating opportunities for finance and accounting professionals.
In this article, we’ll share our research involving surveys of more than 100 hospital CFOs about their views
on the current state of financial practice and evolving
strategies for continuous improvement in American hospitals. Specifically, we were interested in understanding
how the industry differs from other industries in financial and accounting management, how CFOs are positioned within their organization, what financial
techniques they utilize, and what best practices the industry employs. We focused primarily on a few key areas,
namely performance management and internal
controls/risk management.
A Primer on the Healthcare Industry
The healthcare industry is a large, rapidly growing
segment of the U.S. economy, amounting to just over
$2.1 trillion annually. This industry focuses on prevention, diagnosis, treatment, and rehabilitation of injury
and illness and makes up one sixth of the U.S. Gross
Domestic Product (GDP). Healthcare spending is the
largest source of the nation’s public expenditures.
The healthcare industry is composed of a number of
business segments that develop, manufacture, and deliver
products and services. These segments include:
◆ Biotechnology, which uses biological principles and
agents to develop pharmaceutical substances;
◆ Drug manufacturing, which involves commercial
28
S T R AT E G I C F I N A N C E
I
December 2010
production of pharmaceuticals, typically by publicly traded, for-profit companies;
◆ Healthcare plans and
insurers, which are intermediary companies that manage
risk and administrative
processes in the providerpatient relationship;
◆ Diagnostic and medical
equipment companies, which
provide technology solutions
to help diagnose and treat
patients with advanced
devices, such as magnetic resonance imaging (MRI) or
computed tomography (CT), or more basic equipment,
such as beds or wheelchairs;
◆ Hospitals and other health facilities that provide
care to patients. (We will focus primarily on this category
of the industry.)
Demand for most healthcare services is based on a
“need” (illness or injury) rather than a “want,” although
marketing of discretionary services such as cosmetic
surgery is growing. While the demand for healthcare services is episodic, the need is often immediate. This
requires most hospitals to maintain continuous access to
emergency care around the clock every day. That constant
availability of services can make it difficult to maintain
productivity during times of slack demand.
Physicians can practice medicine in a variety of organizational forms ranging from a solo practitioner operating
as a stand-alone small business to employment in a large
clinic such as the Mayo Clinic, Cleveland Clinic, or the
Permanente Medical Group. But regardless of the practice
type, the actual decision to use medical services isn’t
entirely the patient’s since the physician must provide or
prescribe the treatment. He or she is therefore in the
position to decide what the patient needs and to be paid
for providing that service, which is similar to what your
average consumer faces when dealing with auto repairs.
Yet, like a mechanic who works at a dealership and uses
the company’s lifts and expensive diagnostic tools, physicians usually don’t have the facilities to provide sophisticated testing or surgical procedures in their offices, so
they rely on hospitals and clinics to deliver more technically advanced services. Most hospitals offer state-of-theart emergency rooms, surgical suites, lab testing, and
imaging services. The hospital essentially represents the
physician’s workshop.
the other hand, pays for care for the
poor. It’s a collection of state-based
insurance programs jointly funded
by individual states with a contribuHOSPITAL TYPE
NUMBER OF FACILITIES
PERCENTAGE OF ALL FACILITIES
tion from the federal government.
Government-owned
1,472
23.3%
But insurers don’t cover everyone.
3,160
50.1%
Nonprofit
There are currently about 47 million
Investor-owned
1,500
23.8%
Americans who either don’t have the
180
2.8%
Military and veterans
resources to pay for health insurance
Total
6,312
100.0%
or who choose not to purchase it.
Under a federal law called the EmerSource: American Hospital Association Annual Survey, 2008.
gency Medical Treatment and Labor
Act (EMTALA), hospitals are
Who’s Picking Up the Tab?
required to provide services sufficient to resolve a lifeRegardless of the cost of the care they receive, patients
threatening condition or care for a woman in childbirth,
rarely pay the provider directly except for small copayregardless of the patient’s ability to pay. An unintended
ments, instead relying on a third-party insurer (referred
consequence of this law has increased pressures on hospito in the industry as the “payer”) to settle up for them.
tals to fund the costs of care to the uninsured from other
Health insurance can come from different sources. Prisources, including increasing collections from insured
vate or “commercial” insurance is purchased by an indipatients to offset losses. Therefore, it’s a big challenge for
vidual or by an employer (for an employee benefit).
hospitals to document the extent of these losses and justiExamples of some of the larger
fy their price-setting methods.
private insurers are Blue
Healthcare services are paid
Cross/Blue Shield, Aetna,
based on rates that are set by
Humana, MetLife, and Travelindividual providers. Those
ers. Insurance can also come
prices aren’t regulated, and the
from a public source, with the
fee that one provider charges for
largest two being Medicare
a given service (such as an X-ray)
and Medicaid. Medicare is a
will likely differ from that of a
federal government program
competitor. Nevertheless, most
that provides health insurance
large insurance programs,
for people age 65 or older and
including Medicare and Medicfor the disabled. Medicaid, on
aid, dictate the price they’ll pay
Table 1:
Distribution of U.S. Hospitals
Table 2:
Five Major Evolving Themes
PRACTICE OR THEME
IMPLICATIONS FOR MANAGEMENT ACCOUNTANTS
1
Need for heightened operational efficiency
Greater recruiting of accountants, plus a larger role and scope in jobs.
2
Finance professionals are becoming more “strategic”
CFOs are becoming increasingly more involved in the strategy process;
71% of finance executives report their roles have expanded in the past
year.
3
Greater focus on internal controls
Greater use of SOX, GAAP, and information and management systems
will help create significant opportunities for management accountants.
4
Increased reliance on business analysis
Roles of finance and accounting professionals will help to develop and
measure business performance.
5
Industry growth will continue
The healthcare industry will continue to grow, as will the demand for
accountants.
December 2010
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S T R AT E G I C F I N A N C E
29
C OVE R S TO R Y
Figure 1:
Costs Rising Faster in Healthcare than in Other Industries
150
140
Inflation Index
Medical Care
130
General CPI – All Items
120
110
100
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Data tables from U.S. Department of Labor, Bureau of Labor Statistics, 2009.
and offer a “take it or leave it” proposition to hospitals
and individual physicians alike. Other insurers don’t
wield quite as much market power but are still able to
negotiate discounts from providers. This results in
providers billing their “usual and customary rates” but
having to account for a “discount” given to those insurers
by virtue of regulation or prior contractual arrangements. You can imagine the challenges that a management accountant working for a healthcare provider faces
in monitoring the numerous steps in the billing and collection process to minimize these revenue losses.
As you can see from Table 1, these accounting challenges extend to more than 6,300 hospitals in the United
States, most of which are general community hospitals
but many of which are more specialized. The largest
groups of U.S. hospitals have operating budgets in excess
of $3 billion, while the smallest is just over $20 million.
The Patient Protection and Affordable Care Act may
result in substantial changes to the way hospital care is
delivered in the future. As millions of people are added
to insurance plans through federal coverage mandates,
services to patients who currently can’t pay for care
should result in additional revenue for hospitals. Access
to health insurance may also foster more demand for
nonemergency care, which could be a boon to individual
physicians—especially primary care doctors, whom
30
S T R AT E G I C F I N A N C E
I
December 2010
patients usually see first. The extent and magnitude of the
changes are yet to be determined because the law will be
implemented gradually through 2014.
The Evolution of Financial Practices
Our primary method of research involved developing and
sending a survey to 508 senior-level finance and accounting professionals with titles of chief financial officer or
vice president of finance, as listed in the directories of
hospital-finance trade associations. Surveys were distributed in January 2009 via an e-mail with a link to the survey, and three follow-up e-mails were sent at two-week
intervals. Overall, 103 financial executives responded
(20.3% response rate). On reviewing their responses, we
discovered five major findings, or evolving themes, for
the future of finance and accounting in the healthcare
industry. These are summarized in Table 2 and will be
discussed in separate sections of this article.
Finding 1:
Need for Heightened Operational
Efficiency
Finance and accounting professionals are relatively scarce
in healthcare organizations, making up barely 1.5 of
every 100 employees per facility. Yet our research shows
that more finance and accounting professionals are being
Figure 2:
Operating Efficiency, $ per FTE
2007
2006
2005
2004
2003
$95
$100
$105
$110
$115
Thousands
$120
$125
$130
Source: American Hospital Association Annual Survey Database, 2002-2007.
recruited to help improve the control
and management of these organizations. The current lack of finance and
accounting professionals could be
one reason why the industry’s annual
cost increases are nearly double those
of traditional goods and services. Figure 1 presents the medical Producer
Price Index, normalized at 1999 as the baseline year, relative to the general Consumer Price Index.
With this rapid rise in costs, it’s important for healthcare finance and accounting professionals to take the lead
in using systems and processes to gain tighter control
over costs. From 2002 to 2007, we saw a 33% increase in
costs per hospital bed and a 20% decrease in operating
efficiency, as measured by operational costs per full-time
equivalent (FTE). Figure 2 presents the industry’s average
operational cost structure per employee during that time
period.
Finding 2:
Finance Executives Are Becoming
More Strategic
Finance executives face a considerable challenge in the
healthcare industry because of growing pressures to
improve quality and efficiency simultaneously. Government regulations will encourage the greater visibility of
these professionals to translate into better performance,
prices, and outcomes. Finance and accounting executives
will be tapped to implement information and management systems to ensure that these positive changes occur.
Similarly, we found that the role of the
CFO is changing. Nearly 71% of all executives we surveyed have experienced significant job expansion in the past 12
months. Historically, finance professionals in this industry have remained fairly
focused on traditional functions, such as
managing accounts receivable, negotiating reimbursement rates, budgeting, and overseeing debt
policies. Now, senior-level accounting and finance officers
are starting to get involved in a variety of functions that
typically are outside the scope of finance, including
strategic planning and project management tasks. As
capacity and productivity grow in importance with new
health reform legislation, this expansion of involvement
in nontraditional finance roles likely will continue.
Stronger Ties
Between CFOs and CEOs
Table 3:
NUMBER OF
MEETINGS
PER WEEK
NUMBER OF
RESPONSES
PERCENTAGE
OF RESPONSES
0
2
2%
1
28
27%
2
26
25%
More than 2
47
46%
Total
103
100%
December 2010
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S T R AT E G I C F I N A N C E
31
C OVE R S TO R Y
Most Commonly Benchmarked Financial Indicators
Figure 3:
Debt Service Coverage
(Net Income/Total Debt Service)
Operating Margin %
(Operating Income/Net Revenue)
Days’ Sales Outstanding
(AR/Net Revenue) X 365 Days
Days of Total Cash on Hand
(Total Cash/Net Operating Expenses)
56
57
58
Finance professionals also are reporting more involvement in governance functions. Nearly 80% of CFOs
report more frequent interaction with other executives
and the board of directors (or trustees) during recent
years. In our analysis, we found that the average number
of meetings between the CFO and the CEO is just over
three times per week, although 27% of our sample
reported only one meeting per week (see Table 3).
Discussions with specific board members or the chair
of the board’s finance committee were somewhat less
common. Although nearly half the respondents (44%)
reported at least one meeting per month, another 46%
reported two or more. Even though meetings with the
board were less frequent than meetings with the CEO, the
CFO and the finance department appear to be getting
routine access to internal governance.
While the healthcare management accountant’s job
description appears to be expanding, so, too, is the
importance of traditional financial management practices
such as internal controls and business analysis. As the
healthcare economy continues to constrain payments,
financial and accounting professionals need to identify
potential internal control risks that could further reduce
and threaten financial viability.
Finding 3:
Greater Focus on Internal Controls
The sheer size of the U.S. healthcare system creates
potential opportunities for financial fraud and abuse.
Opinions vary on the extent of such risk. In 2008, the
32
S T R AT E G I C F I N A N C E
I
December 2010
59
60
61
62
63
64
65
66
National Health Care Anti-Fraud Association (NHCAA)
published a “conservative estimate” that 3% of all healthcare spending ($68 billion) was diverted to fraudulent
ends. Details of another estimate compiled by the Association of Certified Fraud Examiners (ACFE) included
these breakdowns:
◆ The Centers for Medicare & Medicaid Services
(CMS) estimated that $133 billion, or 7% of all payments
governed by that agency, was disbursed improperly
because of the filing of illegitimate claims;
◆ The Blue Cross/Blue Shield Association estimates
that $50 billion (10%) of payments made from their
healthcare plans were for fraudulent services; and
◆ $100 billion in other private insurer or patient payments (representing 20% of those payments) was for
some form of improper billing.
Because of this, the industry has seen a trend toward
increasing its internal controls and risk management
frameworks. Specifically, our survey of healthcare CFOs
indicated a move toward greater standardization of
accounting procedures, greater use of the Sarbanes-Oxley
Act (SOX), more elaborate documentation of business
and administrative processes, and more diligent financial
reporting.
Given the large proportion of nonprofit organizations
and the fact that many others aren’t subject to direct
oversight by the Public Company Accounting Oversight
Board (PCAOB), the implementation of internal controls
under a framework such as SOX Section 404 has been
limited. In our survey, 51% of the respondents’ organiza-
Figure 4:
Growth in the U.S. Healthcare Industry
Gross Square Feet (GSF)
# of Employees
5.3
1,850
5.2
1,800
5.1
1,750
4.9
4.8
1,700
4.7
# of Employees (Millions)
# of GSF (Millions)
5.0
4.6
1,650
4.5
4.4
1,600
2002
2003
2004
2005
2006
2007
Source: American Hospital Association Annual Survey Database, 2002-2007.
tions reported having a SOX compliance program, with
an average investment of $647,630 per facility. Another
12% of survey respondents indicated their organizations
were considering such an implementation. Only 9% of
the facilities reported having staff with the Certified
Internal Auditor (CIA) credential, so it would appear that
much of the progress on SOX compliance has been
accomplished through outsourced contract work or noninternal-audit-trained staff. The management accountant’s training about internal controls may be of great use
in the hospital industry as the SOX compliance effort
continues.
Finding 4:
Increased Reliance on
Business Analysis
As financial performance remains a challenge for
healthcare organizations and the establishment of internal control frameworks is still a work in progress, ongoing monitoring of organizational operations has a
higher degree of importance. Our survey results indicate
that 91% of respondents used some form of perfor-
mance scorecard. The role of the management accountant can be significant in this effort because much of the
performance tracking is financial or operations oriented. In addition, the measures previously used on performance scorecards may likely evolve as the industry
evolves, creating additional opportunity for the profession to have an impact on healthcare financial
management.
Data mining can also improve financial practices. This
technique involves the use of computerized data analysis
to canvass paid claims for potential fraudulent activity,
including unusual billing or referral patterns exhibited by
certain providers or unusual treatment patterns seen in a
particular plan beneficiary.
Many of the hospitals responding to our survey stated
that they routinely benchmark themselves against competitors (44%), while approximately 6% said that they
never benchmark performance externally. Although
benchmarks are useful, each organization is unique, and
performance among facilities we surveyed suggests that
there’s no pattern of metrics or comparison of metrics
that will accurately predict financial success. The most
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