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FI N 513 – Health Care Finance

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FI N 5 1 3 – Health Care Finance

Course Syllabus

FI N 5 1 3 – Health Care Finance

Course Syllabus

Introduction

This syllabus contains the lesson assignments for FIN513 – Health Care Finance. This course is designed to introduce health care accounting and finance issues that have become part of the everyday life of most health care executives. The course covers types of financial decisions that health care executives are most likely to be involved with and provides materials that will help you understand the conceptual basis and mechanics of financial analysis and decision making as they pertain to the health care industry sector.

The general basis of financial decision-making in any business is almost always built upon understanding three critical elements. First, most financial decisions are based upon the use of accounting information. Second, all business units operate within an industry. The health area industry is a huge, complex industry that is unlike other industries in many areas. Third, both accounting and finance are, in many ways, subsets of economics. Expected Student Learning Outcomes Upon the successful completion of this course you should be able to:

• Appraise the importance and uses of financial information in health care organizations.

• Explain the common ownership forms of health care organizations, along with their advantages and disadvantages.

• Describe factors that influence the financial viability of a health care organization.

• Respond to a compliance audit or investigation, particularly when the subject of that inquiry includes financial records.

• Explain the primary financial objective of a health care firm, and the critical drivers of financial performance.

• List and describe the requirements for effective financial planning and policy-making.

Required Text:

Cleverly, W., & Cleverly, J. (2018) Essentials of health care finance (8th Edition). Boston, MA: Jones & Bartlett Learning. ISBN: 9781284094633

FI N 5 1 3 – Health Care Finance

Course Syllabus

Suggestions for getting the most out of this course:

• Read professional journals and periodicals.

• Participate in the course discussion forums, and learn from the experience and knowledge of your faculty mentor and fellow students.

• If possible, form a relationship with someone who works in an area related to your course. Explain that you would like to obtain their insights and perspectives from time to time.

Academic Engagement Each academic course at William Howard Taft University is assigned a semester unit value equivalent to the commonly accepted and traditionally defined units of academic measurement in accredited institutions. Credit bearing courses are measured by the learning outcomes normally achieved through 45 hours of student work for one semester unit. For example, a course with a value of 3 semester units would require a typical student to commit 135 hours of academic engagement and preparation to complete the course requirements.

Lesson Assignments This course contains a number of lesson assignments. Work through the lessons one at a time. Unless otherwise instructed, you should complete all assignments for a particular lesson in one WORD document.

When you complete all of the assignments in a lesson, submit it to the faculty for grading and feedback. Submit only one lesson at a time, completing them in sequence. Continue on to the next lesson, but be sure to incorporate any feedback received on previous lessons into your subsequent assignments – if necessary.

Format Unless otherwise instructed, Lesson Assignments should be prepared in Microsoft Word® using the Times New Roman font, 12 point, single space, double space between paragraphs. Each page must be numbered and your last name and student number included on the upper left hand corner of each page.

Your lesson assignment responses should be evidenced from the course textbook and/or from peer-reviewed sources not more than 5 years old. In general, Wikipedia is not a professionally- reviewed resource and should not be used as an assignment reference. Y ou m ust cite your references so that readers can verify your conclusions, and easily determine what is your work, and what is paraphrased or taken directly from other sources. Failure to give credit for the work of others in your assignments and writing projects constitutes plagiarism.

FI N 5 1 3 – Health Care Finance

Course Syllabus

Citation Machine: http://citationmachine.net/index2.php?start=&reqstyleid=2&newstyle=2&stylebox=2 Citation Machine is an online tool to assist in proper citation of researched information. We recommend APA format, although you may use other approved formats as long as you remain consistent.

Final Examination Final examination requirements and procedures are set forth in the Student Handbook. Notwithstanding any other provision in this syllabus, if you are required to take a Final Examination for this course you must pass the exam to pass the course.

Academic Integrity It is the policy of the University that any student found guilty of cheating and/or plagiarism will be subject to immediate dismissal from the University. All students are required to sign a Coursework Certification Form for each course. This form is provided as a link in the last lesson of each course. Evaluation Your grade will be influenced by the accuracy of your research and the quality of your writing. The extent of research necessary will vary from assignment to assignment. In most cases, your work product should not simply consist of quoting from the assigned text. When grading your assignments, the faculty will consider three general components:

1. A demonstrated understanding of the material and the learning objectives.

2. Your ability to articulate, synthesize and analyze the concepts and issues presented in the material.

3. Clear and logical composition supported by examples and appropriate references. If at any time you desire additional feedback, you should contact your faculty advisor directly via email. Feel free to ask questions about course progress, grades, etc., at any time, and remember that the faculty and administration are interested in helping you learn and succeed. The final grade for the course is determined by the sum of each of the grades in the Lesson Assignments. Each of the lesson assignments is weighted equally in determining your grade for the course. Total Possible Points = 800 (100 Points per lesson).

http://citationmachine.net/index2.php?start=&reqstyleid=2&newstyle=2&stylebox=2

FI N 5 1 3 – Health Care Finance

Course Syllabus

Grade GPA Percentage Comments

A 4 90-100 (Outstanding)

A- 3.67 88-89 B+ 3.33 84-87 B 3 80-83 (Satisfactory)

B- 2.67 78-79 C+ 2.33 74-77 C 2 70-73 (Passing but below the standard accepted in graduate study)

C- 1.67 68-69 D+ 1.33 64-67 D 1 60-63

(Does not meet standard for graduate study, coursework must be repeated for credit)

D- 0.67 59 F <0.67 58 or below (Failure)

Faculty Advisors will refer to the following grading rubric when evaluating your assignments:

Excellent Above Average

Satisfactory Needs Improvement

Unsatisfactory

Understanding of Material and Lesson Objectives

Demonstrates a thorough understanding of the material.

Demonstrates an adequate understanding of material

Responses are generally accurate, but at times lacking coherence.

Demonstrates a marginal understanding of the material and lesson objectives.

Provides marginally complete and/or inaccurate responses showing little understanding of the material

Articulation, Synthesis and Analysis of Concepts

Work is articulated consistent with the degree level integrating or synthesizing concepts in an original and innovative way.

Work demonstrates a solid knowledge of concepts and theories with some individual analysis of issues.

Work demonstrates an elementary knowledge of concepts but lacks original thought and analysis.

Work is primarily paraphrased or quoted directly from the text or other sources. Responses demonstrate little or no individual analysis.

No individual analysis of concepts. Work is poorly articulated and/or derived entirely from the textbook.

Composition, Presentation, and References

Work presented in a logical and coherent way supported by sound resources. Citations are composed in proper format with few or no errors.

Work presented is grammatically sound. Resources are appropriate and cited in proper format with few errors.

Work is grammatically sound with a few minor errors. Resources may be of questionable authority, but are cited in proper format with few errors.

Work contains frequent grammatical errors. Resources are few, non- existent, or may be of questionable authority.

Frequent errors in composition, grammar and presentation. Quoted material is incorporated without the use of quotation marks or citation (plagiarism).

FI N 5 1 3 – Health Care Finance

Course Syllabus

Course Completion Requirements

The course will be deemed completed only when all the following has been accomplished:

• You have completed all the lesson Assignments and they have been received by the University

• You have passed the course Final Examination (if required)

• You have completed the Course Certification Form and it has been received by the

University

• You have completed the Course Evaluation Survey

FI N 5 1 3 – Health Care Finance

Course Syllabus

Lesson 1 – Financial I nform ation, and B illing and Coding

Introduction This lesson begins with an introduction to the concepts of financial information, financial decision-making, and forms of ownership in health care organizations. As the health care industry continues to grow, it is important to understand cash flow management, how investment decisions are made, and how financial information is used and who uses it. The effectiveness of financial management in health care, as in any business, in part depends on information quality. A good information system enables decision makers to choose a course of action with the highest probability of favorable results. Financial information is particularly important to analyze the financial condition or viability of an organization. The financial condition helps determine whether an organization is capable of achieving its goals and can function at a consistent level. The organization’s financial information may help determine short- and long-run effects and help evaluate investment decisions. In addition, financial information sheds light on efficiency and effectiveness of health care operations and provides data to perform cost-benefit analysis. Overall, most common uses of financial information are:

1. evaluating the financial condition of an entity

2. evaluating stewardship within an entity

3. assessing the efficiency of operations

4. assessing the effectiveness of operations

5. determining the compliance of operation with internal and external directives

Not all decision-makers are equally interested in every aspect of financial information that an organization may have. Decision-making groups, such as governing boards or rate-setting organizations, use financial information to assess financial condition and efficiency. A relatively recent but important development in health care organizations is the separation of financial management functions into controllership and treasurership. While the former is mainly responsible for such activities as establishing budgets, preparing financial statements and conducting cost analysis, the latter is focused on investor relations, issuing lines of credit, and collection policies. This lesson provides a brief overview of the main forms of business ownership. Four main types of organizations in health care are discussed:

• Not-for-Profit, Business-Oriented Organizations

FI N 5 1 3 – Health Care Finance

Course Syllabus

• Investor-Owned Health Care Entities

• Governmental Health Care

• Non-Governmental, Nonprofit Health Care Organizations The second half of the lesson explains how a healthcare provider is paid for services. In other words, how do healthcare providers generate revenue? First, we cover the healthcare revenue cycle. This revenue cycle is broken down further into the components that ultimately lead to timely and accurate payment for products and services provided to patients. Coding and billing are the two core aspects of proper reimbursement in health care.

There are six stages to the revenue cycle in health care:

• Provide services • Document services • Establish charges • Prepare claim/bill • Submit claim/bill to payer • Receive payment

The key to accurate and timely payments is documentation. The first step in revenue generation typically is the occurrence of an encounter with the patient. When a patient goes to a provider, the first part of the documentation gathered is basic information about the patient, such as name, address, and insurance status. This process is known as registration. There are three key activities of registration:

• Insurance verification • Computation of patient’s co-payment or deductible • Financial counseling for the patient’s portion of bill

Documentation of the services provided is the next key element of revenue generation. In nearly all cases, if a product or service is not supported by documentation, it cannot receive compensation. Coding is the bridge between medical records and the administrative billing systems. Coding is what allows the medical record to be utilized for billing purposes. Coding enables payment of charges submitted for reimbursement and provides statistical data for the firm’s financial planning.

FI N 5 1 3 – Health Care Finance

Course Syllabus

Coding The Health Insurance Portability and Accountability Act (HIPAA) of 1996 provides the basis for the present state of medical coding. There are two systems: The International Classification of Diseases, Tenth Revision, Clinical Modification (ICD-10-CM) and the Healthcare Common Procedure Coding System (HCPCS). Table 2-1 in the text explains under which circumstances each type of system is used.

The ICD-10-CM system, which is a classification-based system that groups data into broad categories, is the major coding system utilized for coding hospital inpatient diagnoses and procedures. ICD-10-CM is a modification of the ICD-10 code set created by the World Health Organization (WHO); the ICD-10 has been in use in place of the ICD-9 system since 2015. The ICD-10-CM system is an expanded code set that includes health-related conditions and offers a higher level of specificity by including separate codes for laterality and additional characters for greater detail. ICD-10-CM codes summarize clinical services that lead to reimbursement for the hospital from third-party payers. The ICD-10 system contains both diagnosis and procedure codes. The WHO has primary responsibility for the diagnostic codes and CMS has the primary responsibility for the procedural codes. Diagnostic codes are used to report the patient’s exact condition during the inpatient stay. Diagnostic codes have three to seven numeric or alphanumeric characters. The main divisions or chapters of codes are further broken down into code sections, code categories, code subcategories, and code sub-classifications. Each code in the ICD-10-CM provides greater specificity at the sixth and seventh character levels. The hierarchical structure is similar to the prior ICD-9 system where the first three characters are the category of the codes and all codes with the same category have similar traits. Unlike diagnostic codes, procedural codes are assigned one code per procedure. The ICD-10-PCS code set has expanded to always include seven characters compared to ICD-9 procedure codes, which could be three to four digits long with a decimal point placed after the second digit. To report services, supplies, and materials for Medicare and Medicaid beneficiaries in the ambulatory care setting, the HCPCS is utilized. The services, supplies, and materials coded should correspond to an appropriate ICD-10-CM code for diagnosis. Unlike the ICD-9-CM classification- based system that grouped data into broad categories, the HCPCS is a nomenclature-based system in which data have a one-to-one relationship with the code. There are two levels of national HCPCS codes:

1. Level I: Current Procedural Terminology (CPT) codes were developed and are updated

annually by the American Medical Association (AMA). These codes describe medical services and procedures performed by health care providers. Each code is a five-digit numeric or alphanumeric code. Some examples of outpatient services coded using CPT codes include surgery, pathology, clinic visits, and radiology.

2. Level II: Codes developed by CMS to classify services or supplies not found in the CPT

system. These are also called national codes. The five-digit codes are structured alphanumerically and range from A0000 to V9999.

FI N 5 1 3 – Health Care Finance

Course Syllabus

Chargemaster The chargemaster has long been a critical element in the coding, billing, and payment process of hospitals and health systems. The chargemaster’s primary function is to be the computerized repository of the charges and coding information that are used to develop claims. In addition, the chargemaster is increasingly being used to track utilization of supplies and services, which can then be analyzed by management for efficiency of resource use.

Chargemasters generally have the following six common elements:

• Charge code

• Item description

• Department Number

• Charge/Price

• Revenue Code

• CPT/HCPCS code Billing/Claims Preparation Generation and submission of a hospital bill are the mechanisms by which hospitals request reimbursement for services provided. Billing forms are necessary for consistency in the information required to provide reimbursement for services provided. There are two major billing forms currently used to obtain reimbursement: The Uniform Billing Form 2004 (UB–04) and the Centers for Medicare and Medicaid Services Form Number 1500 (CMS–1500). Reimbursement of inpatient and outpatient hospital care is obtained through submission of the UB–04. Non-hospital services, such as in-hospital physician services and private office visits require the CMS–1500.

Most claims in today's environment are submitted in an electronic format. Usually, claims are submitted directly to the payer, or indirectly to a clearinghouse where the claims are grouped and then sent to the appropriate payer. The Health Insurance Portability and Accountability Act (HIPAA) administrative simplification provisions direct the Secretary of Health and Human Services to adopt standards for administrative transactions, code sets, and identifiers, as well as standards for protecting the security and privacy of health data.

Claims Editing Most providers use some form of claim-editing software to ensure that a claim is accurate and complete. Claim-editing software uses rules-based logic to assess provider claims information including Current Procedural Terminology (CPT) and Health Care Procedure Coding System (HCPCS) procedure codes against a series of edits using a clinically-based software system that evaluates claim information to detect coding irregularities, conflicts or errors.

FI N 5 1 3 – Health Care Finance

Course Syllabus

CMS developed the National Correct Coding Initiative (NCCI) to promote national correct coding methodologies and to control improper coding that leads to inappropriate payment of Part B health insurance claims. The coding policies developed are based on coding conventions defined in the American Medical Association's CPT codes, national and local policies and edits, coding guidelines developed by national societies, analysis of standard medical and surgical practice and review of correct coding practice.

CMS has designated a series of specific edit checks that are used in determining hospital outpatient claim status. These edit checks are referred to as Outpatient Code Edits (OCE). The OCE utilizes claim-level and line-item level information in the editing process. The claim level information includes such data elements as "from" and "through" dates, ICD-10-CM diagnosis codes, type of bill, age, sex, etc. The line level information includes such data elements as HCPCS code with up to two modifiers, revenue code, service units, etc. Each OCE edit results in one of six different dispositions. The dispositions help to ensure that all fiscal intermediaries are following similar procedures. There are four claim level dispositions:

• Rejection—Claim must be corrected and resubmitted

• Denial—Claim cannot be resubmitted but can be appealed

• Return to provider (RTP)—Problems must be corrected and claim resubmitted

• Suspension—Claim requires further information before it can be processed There are two line-item level dispositions:

• Rejection—Claim is processed but line item is rejected and can be resubmitted later

• Denial—Claim is processed but line item is rejected and cannot be resubmitted

Lesson Learning Objectives By the conclusion of this lesson you should be able to:

• Appraise the importance, uses (and users) of financial information in health care organizations.

• Explain the financial functions within an organization.

• Discuss the common ownership forms of health care organizations, along with their advantages and disadvantages.

• Describe the revenue cycle for health care firms.

• Explain the role of coding information in health care organizations in claim generation.

FI N 5 1 3 – Health Care Finance

Course Syllabus

• Define the two major bill types used in health care firms.

• Appraise the role of claims editing in the bill submission process.

Reading Study Chapters 1 and 2 of the text View the PowerPoints for Chapters 1 & 2

Assignments

The follow ing Assignm ents should be com pleted and subm itted to the course faculty via the learning platform for evaluation and grading. Subm it your responses to these questions in one W OR D docum ent. List the question first, and then your response. Y our response m ust adequately cover the question w ithout being w ordy or relying on “yes” or “no” responses. Short Answer Questions

1. What are the primary responsibilities of the financial manager?

2. What are primary uses of financial information?

3. Is profit maximization the same thing as shareholder wealth maximization?

4. What are the three primary forms of legal business organization? What are some of the advantages and disadvantages of each form?

5. What are social responsibility and ethics as they relate to business-oriented organizations? How should social responsibility and ethics affect the decisions of even for-profit companies?

6. What is meant by the term, “the revenue cycle”? What factors contribute to the complexity of the revenue cycle in health care?

7. What are the two types of forms used for health services billing?

8. What are the six elements that should be present, at a minimum, in all chargemasters?

9. What are HCPCS codes? How do they affect provider payment?

10. Explain the registration process, including the activities that comprise it.

FI N 5 1 3 – Health Care Finance

Course Syllabus

Lesson Quiz Take the quiz for this lesson. Your results on the quiz do not affect your grade for the course. Quizzes are designed to help you to learn important concepts in the lesson and prepare you for the Final Examination, if required. You may take the quiz as many times as you wish.

FI N 5 1 3 – Health Care Finance

Course Syllabus

Lesson 2 – Financial, Legal and R egulatory Environm ent

Introduction This lesson begins with an examination of the roles of hospitals, doctors, private and government insurance, and different systems for organizing and financing care. We cover Medicare reimbursement in particular for the following health care sectors: hospital inpatient and outpatient, physicians, skilled-nursing facilities, and home-health agencies. Numerous data are provided to show the sources of revenue for the various sectors. P aym ent Units The primary difference between fee-for-service and capitation reimbursement is that under fee- for-service, each encounter creates additional revenue for the provider. The encounter may be defined as a visit, a diagnosis, a hospital day, or in some other manner, but the key feature is that the more services that are performed, the greater the reimbursement amount. Under capitation, the provider is paid a fixed amount per covered life per period (usually a month) regardless of the amount of services provided. Under historical cost reimbursement, payers reimburse providers for all costs, a system that provides little incentive to control costs. Facilities will be lavish and amenities plush. Services that may not truly be required might be provided because more services lead to higher costs, which means higher revenues. Cost-based reimbursement is the least risky for providers because payers more or less ensure that costs will be covered, and hence profits will be earned. With charges for specific services, providers have the incentive to set high charge rates, which leads to high revenues. However, in highly competitive markets, there will be a constraint on how high providers can go. Because billed charges is a fee-for-service type of reimbursement, in which more services result in higher revenue, a strong incentive exists to provide the highest possible amount of services. Providers can increase utilization, and hence revenues, by creating more visits, ordering more tests, and extending inpatient stay. Although charge-based reimbursement does encourage providers to contain costs, the incentive is weak because charges can be more easily increased than costs can be reduced. Providers bear the cost-of-service risk in that costs can exceed revenues. However, if providers set charge rates for each type of service provided, they can most easily ensure that revenues exceed costs. Under prospective payment reimbursement, provider incentives are altered. Providers have the incentive to reduce costs because the amount of reimbursement is fixed and independent of the costs actually incurred. When per diem reimbursement is used, particularly with hospitals, providers have an incentive to increase length of stay (LOS). Because the early days of a hospitalization are typically costlier to the provider than the later days, the later days are more profitable. Hospitals have the incentive to reduce costs during each day of a patient stay.

FI N 5 1 3 – Health Care Finance

Course Syllabus

When prospective payment is made on a per diem basis, even when stratified, one daily rate usually covers a large number of diagnoses. Because the nature of the services provided could vary widely, both because of varying diagnoses as well as intensity differences within a single diagnosis, the provider bears the risk that costs associated with the services provided on any day exceed the per diem rate. However, patients with complex diagnoses and greater intensity tend to remain hospitalized longer, and per diem reimbursement does differentiate according LOS. The additional days of stay may be insufficient to make up for the increased resources consumed. In addition, providers bear the risk that the payer, through the utilization review process, will constrain LOS, and hence increase intensity during the days that a patient is hospitalized. Thus, under per diem, compression of services and shortened LOS can put significant pressure on providers’ profitability. Capitation reimbursement reverses the actions that providers must take to ensure financial success. Under all prospective payment methods, the key to provider success is to work harder, increase utilization, and thus, increase profits. Under capitation, the key to profitability is to work smarter and decrease utilization. As with prospective payment, capitated providers have the incentive to reduce costs, but now they also have the incentive to reduce utilization. Thus, only those procedures that are truly medically necessary should be performed, and treatment should take place in the lowest-cost setting that can provide the appropriate quality of care. Furthermore, providers have the incentive to promote health rather than just treat illness and injury because a healthier population consumes fewer healthcare services. Under capitation, providers assume all utilization and actuarial risks along with the risks assumed under the other reimbursement methods. Capitation arrangements were more common in the mid-1990s, and have since experienced a significant decline, but have seen new life in the form of Accountable Care Organizations (ACOs). ACOs represent groups of providers that come together to deliver coordinated care to patients. The ACO can be paid on a fully capitated basis or in some modified method, but the end result for the payer is to have more control over the global costs of care for an enrolled population.

M edicare Overview The two major government third-party payers are Medicare and Medicaid. Medicare was established by the federal government in 1966 to provide medical benefits to individuals age 65 and older. Medicare consists of three separate coverages: Part A provides hospital and some skilled nursing home coverage; Part B covers physician services, ambulatory surgical services, outpatient services, and other miscellaneous services; and Part D provides prescription-drug coverage. The Medicare program falls under the Department of Health and Human Services (DHHS), which creates the specific rules of the program on the basis of enabling legislation. Medicare is administered by an agency under DHHS called CMS, which was formerly called Health Care Financing Administration (HCFA). CMS has 10 regional offices that oversee the Medicare program and ensure that regulations are followed. Medicare payments to providers are not made directly by CMS but by contractors at state or local level called intermediaries for Part A payments and carriers for Part B payments. Medicaid began in 1966 as a modest program to be jointly funded and operated by the states and the federal government to provide a medical safety net for low-income mothers and children and for elderly, blind, and disabled individuals receiving benefits from the Supplemental Security Income (SSI) program. Congress mandated that Medicaid cover hospital and physician care, but states were encouraged to expand on the basic package of benefits either by increasing the range of benefits or extending the program to cover more people. States with large tax bases

FI N 5 1 3 – Health Care Finance

Course Syllabus

were quick to expand coverage to many groups, while states with limited abilities to raise funds for Medicaid were forced to establish more limited programs. A mandatory nursing home benefit was added in 1972. Over the years, Medicaid has provided access to healthcare services for many low-income individuals who otherwise would have no insurance coverage. Furthermore, Medicaid has become an important source of revenue for healthcare providers, especially those that treat large numbers of indigent patients. However, Medicaid expenditures have been growing at an alarming rate, and both federal and state policymakers are struggling to find effective ways to improve the program’s access, quality, and cost. The second part of lesson two concerns how all the financial management of a healthcare organization previously described, is shaped by the legal and regulatory environment in which it exists. Healthcare providers are responsible for complying with myriad laws and regulations addressing patient billing, cost reporting, physician transactions, occupational health and safety, and fair labor standards, and more. Allegations of violations of laws and regulations are widespread. Consequently, federal and state government interest in combating fraudulent and abusive practices is now widespread. High-profile settlements involving many types of providers and settlements into the hundreds of millions of dollars have provided additional incentives for the government to continue its scrutiny of the healthcare industry. It is incumbent on today’s financial manager to understand the risks that noncompliance can pose. Chapter Four covers the major areas of federal rules and regulations that affect the delivery of healthcare services. Some of the major topics covered are fraud and abuse, antitrust, Stark laws, qui tam actions, the FCA, the Emergency Medical Transfer and Active Labor Act (EMTALA), HIPAA, and corporate compliance programs. Lesson Learning Objectives By the conclusion of this lesson you should be able to:

• Describe factors that influence the financial viability of a healthcare organization.

• Discuss the major reimbursement methods used in health care.

• Describe how Medicare reimburses the major types of providers, and discuss the implications of these methods for an organization’s resource management.

• Understand how legal and regulatory issues shape and define good financial management of a healthcare organization.

• Identify the most common federal regulatory issues such as fraud and abuse, Stark, HIPAA privacy and security, Emergency Medical Treatment and Active Labor Act (EMTALA), and Internal Revenue Service (IRS requirements for tax-exempt organizations, as well as less common concerns that arise under the antitrust laws, Red Flag Rules, and state insurance regulations.

• Identify the major components of a corporate compliance plan, including the establishment of internal controls relating to the finances of an organization.

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• Be prepared to respond to a compliance audit or investigation, particularly when the subject of that inquiry includes financial records.

• Be aware of the most important aspects of the Patient Protection and Affordable Care Act of 2010 (Health Reform Act) as it relates to financial management in the post-Reform environment.

Reading Study Chapters 3 and 4 of the text View the PowerPoints for Chapters 3 and 4

Assignments The follow ing Assignm ents should be com pleted and subm itted to the course faculty via the learning platform for evaluation and grading. Subm it your responses to these questions in one W OR D docum ent. List the question first, and then your response. Y our response m ust adequately cover the question w ithout being w ordy or relying on “yes” or “no” responses. Short Answer Questions

1. What is the main difference between the fee-for-service and capitation reimbursement methods?

2. What is the primary distinction between prospective payment and retrospective payment?

3. What is the primary provision of the EMTALA? How could a hospital legally avoid being covered by the Emergency Medical Treatment and Labor Act (EMTALA)?

4. How are Medicaid payments to providers limited by the federal government?

5. How does the Stark Law impact physicians?

6. What federal law would be most implicated by CIO Tiffany Technophile’s proposal? Are there safeguards available to ensure that one or both of the proposals remain compliant with this federal law?

7. Compare and contrast Medicare and Medicaid.

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Professional Development Questions For the following problems (as applicable), assume that the Medicare/patient split of payments is as covered in the book. Assume that the participating/non-participating and maximum allowable charge are as covered in the book. Ignore the patient’s annual deductible. Use the following information to solve problems 1, 2 and 3.

Dr. Melissa Rose is trying to decide whether to be a Medicare-participating physician for the upcoming year. (Assume that her entire practice consists of Medicare patients or at least that her practice has slack capacity. Her Medicare patients do not displace non-Medicare patients.) Assume that her average charge is $120 (before Medicare’s limiting charge is applied), for which the average Medicare-approved amount is $100. If she decides to be a non-participating physician, she expects to accept assignment 80% of the time. For the unassigned patients assume that she would set her charges at 110 percent of the Medicare- approved fee for a nonparticipating physician. Assume that her Medicare patient volume is not reduced if she chooses not to participate nor if she does not accept assignment. (Ignore bad debt and any other factors not presented here.) 1. What will be Dr. Rose’s average reimbursement per visit if she chooses to be a Medicare-

participating physician? (This is the total from both Medicare and the patients.)

2. What will be Dr. Rose’s average reimbursement per visit if she chooses not to be a Medicare-participating physician? (This is the total from both Medicare and the patients.)

3. Based strictly on the information presented here (ignore bad debt, patient mix differences, and other considerations not presented here), should she choose to be participating or non-participating if she wishes to maximize her total reimbursement for services?

Lesson Quiz

Take the quiz for this lesson. Your results on the quiz do not affect your grade for the course. Quizzes are designed to help you to learn important concepts in the lesson and prepare you for the Final Examination, if required. You may take the quiz as many times as you wish.

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Lesson 3 – Com m unity B enefit, R evenue Determ ination, Health I nsurance and M anaged Care

Introduction This lesson focuses on the increasing attention being given to the community benefits provided and received by not-for-profit healthcare firms, especially hospitals. Almost 60% of all nonfederal hospitals in the US are not-for-profit hospitals, which means that they are exempt from federal income taxation. This tax exemption is the lightning rod that has attracted public attention. Chapter 5 considers five major sections, as described below.

1 . Tax -ex em pt status Not-for-profit hospitals qualify for tax exemption under a provision of the Internal Revenue Code that relates to charitable purpose, 501(c) (3). The Internal Revenue Service (IRS) requires five factors to be present to support the tax-exempt status of a hospital. None of these five factors however reference specific levels required for charity care.

Starting in 2010, all not-for-profit hospitals will be required to file Schedule H of IRS Form 990. This schedule contains a variety of specific information regarding the charitable activities of not-for-profit hospitals. States have also established some reporting standards for tax exemption that are not uniform across the country.

2. Areas of Community Benefit

There is a lack of consensus among parties regarding what specific areas should or should not be included in the assessment of community benefit. Schedule H of IRS Form 990 provides for measurements of the following categories.

• Charity Care and Certain Other Community Benefits at Cost • Community Building Activities • Bad Debt, Medicare, & Collection Practices • Management companies and joint ventures • Facility information • Supplemental information

The first two are generally regarded as legitimate areas of community benefit. It is important to recognize that it is the cost of benefits provided –not the loss of revenue that defines the magnitude of the benefit. For example, charges written off for charity care do not represent the benefit cost but rather the actual cost of services provided. Costs are always netted against any revenue received.

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3. Measuring Community Value – Community Value Index ® The CVI is composed of ten measures that assess a hospital’s performance in four areas:

• Financial viability and plant reinvestment • Hospital cost structure • Hospital charge structure • Hospital quality performance

Fundamentally, the CVI suggests that a hospital provides value to the community when it is financially viable, is appropriately reinvesting back into the facility, maintains a low-cost structure, has reasonable charges, and provides high quality care to patients.

Of special importance are the comparisons between not-for-profit hospitals with for-profit hospitals. If there is little difference between for-profit hospitals and not-for-profit hospitals, the tax exemption becomes very difficult to justify.

4. Estimating Financial Benefits Received

The final section of Chapter 5 outlines the specific benefits that not-for-profit healthcare firms receive that have been cited by policy analysts over the years. Actual methods for estimating the dollar benefits are described via a case example.

5. Estimating Financial Benefits Provided

The specific benefits described include:

• Traditional Charity Care

• Unpaid Cost of Medicaid

• Medical Education

• Other Benefits

• Subsidized Health Services

• Community Health Services

• Cash / In-Kind Donations to the Community

• Research

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Chapter Six covers revenue determination. There are three payment-determination bases: cost, fee schedule, and price related. These three payment bases may have two different units of payment, either specific services or bundled services. Health care providers can control their revenue function in three ways: Right pricing, contract negotiation and, appropriate billing and coding measures. The three factors that influence pricing are desired net income, competitive position, and market structure. Other factors that influence pricing are market share, capital intensity and payer mix. A sub-factor affecting pricing under the market-structure umbrella is price elasticity. Products or services whose ultimate demand is strongly influenced by price are said to be price elastic. Health care services, while not immune from the pressures of price elasticity, are usually less affected than other products. The presence of health insurance has further insulated many from the effects of price in health care markets. Most businesses would like to operate in an environment in which significant barriers to entry exist to protect them from new competitors. Large capital investment and Certificate-of-need regulations can prevent new health care providers from entering a market, as well as restrict growth for existing providers. Health care firms must set rates at levels sufficient to maintain their financial viability. Price setting must also recognize that some payers may pay values less than full or average cost. Prices must also reflect discounts from billed charges that may be granted to health plans or uninsured patients. The last requirement that needs to be included in price setting is some factor for profit. Health care providers with either tax-exempt or taxable status need some return to insure their financial survival. Large write-offs or discounts to the charge-related payer base can and often do escalate prices to levels that are well above costs. The relationship between hospital cost and hospital price has changed markedly during the period 1996 to 2008. Payers and hospitals often assess the reasonableness of their prices based upon comparisons with similar hospitals and/or other hospitals in the same geographic region. In any managed-care contract, there are two critical elements. First, there is the payment schedule, which describes the basis of payment and actual payment/fee schedules. Second, there is the actual contract language, which describes the administration of the contractual arrangement that determines how services are provided and paid. From most providers’ perspectives, the key element in a managed-care contract is the payment or compensation schedule. For hospitals, the predominant unit of payment for inpatient care is usually a per-day basis. Many hospital contracts have outlier or stop-loss provisions. This provision specifies that the hospital may pay on a basis other than per diem or case if charges exceed a specific limit. Many managed-care contracts that provide for payment of claims on a discount from billed charges include rate-increase-limit clauses. The price-increase-limit provision is intended to prevent a hospital from raising its prices beyond reasonable levels. Medical groups are often paid on a fee-schedule basis, with limited capitation arrangements sometimes being used. The fee schedules are usually by CPT and, in come cases, are directly related to Medicare’s Resource- Based Relative Value Scale (RBRVS) payment system. Lesson Three concludes with coverage of health insurance and managed care. Managed-care (MCOs), health maintenance organizations (HMOs), preferred provider organizations (PPOs), physician organizations (POs), physician hospital organizations (PHOs), capitation, medical service organizations (MSOs), consumer-directed health plans (CDHP), and integrated delivery systems (IDSs) are all terms and acronyms that are used freely in today’s health care arena.

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These terms often represent different things to different people and often change in meaning over time. One common thread runs through these terms: the issue of change and market reform that is sweeping the health care industry. Our focus in this chapter will be primarily on the development of managed-care plans and the development of required premium payments for health care coverage. The major types of health plans are described and their growth over the last 20 years has been tracked. Differences between plan types are described relative to their impact upon subscribers, physicians, hospitals, and employers. Lesson Learning Objectives By the conclusion of this lesson you should be able to:

• Describe the current basis for tax exemption of not-for-profit healthcare firms. • Describe the elements of community benefit listed by key policy groups. • Assess the relative community benefits provided by proprietary and not-for-profit hospitals. • Define basic methods of payment for healthcare firms. • Understand the general factors that influence pricing. • List some of the important considerations when negotiating a health plan contract. • Define a health maintenance organization (HMO). • Describe the four main activities of health plans. • List the five types of health plans and their characteristics. • Describe the forces that influenced the development of integrated delivery systems (IDSs). • Describe some of the methods by which providers are paid by health plans. • Discuss legal and regulatory issues that affect MCOs.

Reading Study Chapters 5, 6, and 7 of the text View the PowerPoints for Chapters 5, 6, and 7

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Short Answer Questions

1. What firms must file an IRS Form 990 on an annual basis?

2. Why is the unreimbursed cost of Medicare most often not included as an element of community benefit?

3. List and discuss the three payment-determination bases.

4. What are the three major ways that health care providers can control their revenue

function?

5. Why does market share matter to a health care provider?

6. Explain the four major activities of a health plan?

Professional Development Questions

1. An HMO has a Point of Service (POS) option for its members, but will pay only 80 percent of approved charges. If a member goes out of network for a medical procedure with a charge of $2,000, of which $1,200 is approved, how much must the member pay?

2. A nursing home contracts with an HMO for skilled nursing care at $2.00 PMPM. If costs are expected to average $120 per day, what is the maximum utilization of days per 1,000 members that the nursing home can experience before it begins to lose money?

Lesson Quiz

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Lesson 4 – Accounting, Financial Statem ents, and Accounting for I nflation

Introduction The financial viability of a healthcare organization is the result of numerous decisions made by a variety of people, including care givers, administrators, boards, lenders, community members, and politicians. These decisions eventually result in the organization acquiring and using resources to provide services, incur obligations, and generate revenue. One of the major roles of accounting is to record these transactions and report the results to interested parties. This lesson begins by showing how a series of typical transactions of a health center are recorded on the books, and how these records are used to produce the four major financial statements of a not-for-profit, business-oriented healthcare organization. In the accrual basis of accounting, revenues are recognized when earned and expenses are recognized when resources are used. The accrual basis of accounting must be used in healthcare organizations. Major rules for recording transactions using the accrual basis of accounting include:

• At least two accounts must be used to record a transaction.

• Increase (decrease) an asset account whenever assets are acquired (or used).

• Increase (decrease) a liability account whenever obligations are incurred (or paid for).

• Increase a revenue, gain, or other support account when revenues are earned, a gain occurs, or other support is received.

• Increase an expense account when an asset is used. The balance sheet presents the assets, liabilities, and net assets of a healthcare firm. The balance sheet presents the accounting value of assets and the source of money used to purchase those assets at a given time. Assets are usually listed in descending order of liquidity, or the ability to convert to cash. The statement of operations (or income statement in an investor-owned firm) is a financial statement listing the revenues, expenses, and excess or revenues over expenses (net income) of the firm in a period of time. The third financial statement is the statement of changes in net assets, called the statement of changes in owners’ equity or stockholders’ equity in a for-profit business. Its purpose is to explain the changes in net assets from one period to the next. This statement reflects increases and decreases in net assets for permanently restricted, temporarily restricted, and unrestricted net asset accounts.

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Since accrual accounting is used, the statement of operations provides information about how much revenue was generated and the amount of resources used to generate those revenues. It does not reflect cash flows. The statement of cash flow is a financial statement that shows the firm’s cash receipts and cash payments over a period of time. The lesson concludes with coverage of how organizations account for inflation. The financial performance of healthcare organizations is of interest to individuals and groups, including administrators, board members, creditors, bondholders, community members, and government agencies. Chapter Ten presents a variety of ways to analyze the financial statements of healthcare organizations. The Balanced Scorecard, Dashboard Reporting, and ratio analysis are the three main foci. Some of the accounts in financial statements are valued based on historical cost accounting principles. In times of high inflation, however, the results of historical cost accounting can be misleading as profit can be overstated, assets understated in terms of current values, and capital maintenance is only concerned with the nominal amount of the capital invested rather than its purchasing power. To properly understand business results over time, it is helpful to understand variations that result only from changes in the value of money. For example, if the price level has doubled over five years (the value of money has halved over that period), then a profit of $1 million this year is not worth the same amount as that sum five years ago. Over such a period a business would need to have doubled its profits just to remain level. To adjust for the effects of changing price levels, the Financial Accounting Standards Board (FASB) has issued numerous pronouncements over the last 35 years. In September 1979, the FASB issued Statement 33, which required large public enterprises to provide supplemental information on the effects of changing price levels in their annual financial reports. Statement 33 required firms to disclose primarily current-cost and constant dollar earnings; certain other income statement items; and current cost of inventory, property, plant, and equipment, in notes to the financial statements. This was a major step for the FASB and represented for the first time that firms were required to report price-level effects in their financial reports. In 1986, when the inflation rate had subsided to less than 5%, the FASB substantially modified its initial position set forth in Statement 33 with the publication of Statement 89. This pronouncement left much of Statement 33 intact, except that it designated the reporting as voluntary. Consequently, most publicly traded companies stopped disclosing inflation-adjusted earnings. Lesson Learning Objectives By the conclusion of this lesson you should be able to:

• Describe the differences between financial and managerial accounting.

• Understand core principles of accounting that guide the preparation and dissemination of financial information.

• Discuss the differences between the accrual- and cash-basis methods of accounting.

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• List the three categories of net assets.

• Discuss the accounting conventions that affect the application of accounting principles.

• Explain why it is important to know the scope of business being reviewed when using financial statements.

• Understand the format and content of the balance sheet.

• Describe the format and content of the statement of operations, the statement of changes in net assets, and the statement of cash flows.

• Discuss the major types of asset valuation.

• Describe the alternative units of measurement in financial reporting.

• Define the major financial reporting alternatives.

• Describe the uses of financial report information.

• Describe the difference between monetary and nonmonetary accounts. Reading Study Chapters 8, 9, and 10 of the text View the PowerPoints for Chapters 8, 9, and 10

Assignments

1. Explain the difference between the accrual basis of accounting and the cash basis of accounting.

2. What are the major reasons for accrual accounting?

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3. What are the double-entry accounting system and the duality concept? How are they related?

4. Define and describe the purpose of fund accounting (now called net assets). List and describe the three categories of net assets.

5. What are the four basic financial statements?

6. For restating financial statements to convert to constant dollars, what index is required

by the Financial Accounting Standards Board?

Professional Development Questions

1. Given below is a list of account balances for Currie Hospital as of December 31, 2013. Prepare a balance sheet as of December 31, 2013, in proper form. (Hint: You will need to compute the net assets account. Assume that all net assets at the beginning of the year are unrestricted.)

Account Balance

Gross plant & equipment $6,000,000

Accounts payable 130,000

Inventories 100,000

Other current liabilities 70,000

Net accounts receivable 650,000

Accrued expenses 100,000

Accumulated depreciation 200,000

Long-term debt 5,000,000

Cash 210,000

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Refer to Megatropolis Hospital’s financial statements for calculating the ratios requested in problems 2 to 7.

Megatropolis Hospital

Statement of Operations For the Year Ended December 31, 2010

Revenues, Gains, Other Support

Net patient service revenue $ 1,500,000 Other revenue 200,000 Total Revenue 1,700,000

Ex penses Nursing Services 1,200,000 Administrative Services 200,000 Depreciation 100,000 Other Expenses 50,000 Total Expenses 1,550,000 Operating Income 150,000 Investment Income 50,000 Excess of revenues over expenses200,000 Increase in Unrestricted Net Assets$200,000

Balance Sheet As of December 31, 2010 (2009 omitted)

Assets Current Assets Cash and cash equivalents $ 50,000 Net patient receivables 350,000 Total Current Assets 400,000

Properties and Equipment Gross properties and equipment $ 900,000 Less accumulated depreciation 475,000 Net Properties and Equipment 425,000 Total Assets $ 825,000

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Liabilities and N et Assets Current Liabilities Accounts Payable 200,000 Salaries Payable 50,000 Total Current Liabilities 250,000 Notes Payable 200,000 Unrestricted Net Assets 375,000

Total Liabilities and Net Assets $825,000

2. What is Megatropolis Hospital’s operating margin?

3. What is Megatropolis Hospital’s days in accounts receivable?

4. What is Megatropolis Hospital’s long-term debt to net assets ratio?

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Lesson 5 – Analyzing Financial P osition, Financial Analysis of Alternative H ealth Care and Strategic Financial P lanning Introduction The financial performance of healthcare organizations is of interest to a number of individuals and groups, including administrators, board members, creditors, bondholders, community members, and government agencies. This lesson presents a variety of ways to analyze the financial statements of healthcare organizations. The Balanced Scorecard, Dashboard Reporting, and ratio analysis were the three main foci. Next, the lesson examines issues that are unique to other sectors of the health care industry including nursing homes, medical groups, and health plans. Included is detailed coverage of how their revenue sources differ from that of hospitals. Also covered are some of the tools and concepts that are helpful for analyzing their financial condition and for understanding their operating environment. This lesson concludes by giving the reader an appreciation for the relationship between strategic planning and financial planning. They are highly interrelated and should be conducted jointly. The planning/control cycle has four major components: strategic planning, planning, implementing, and controlling. The purpose of strategic planning is to identify the organization’s mission and strategy to position the organization for the future. A major activity of the strategic planning process is an assessment of the organization’s external and internal environments. Whereas the organization’s strategic planning process has a long-term focus, it also develops shorter-term tactical and operational plans that are more specific and identify short-term goals and objectives in more detail regarding marketing/production, control, and financing the organization.

Lesson Learning Objectives By the conclusion of this lesson you should be able to:

• Describe the balanced scorecard and dashboard reporting.

• Describe the four key elements of dashboard reporting.

• Explain what is most important in long-term financial success.

• Explain the primary financial objective of a healthcare firm.

• Describe the critical drivers of financial performance.

• Discuss the importance and types of performance measures.

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• Introduce the hospital cost-index measure.

• List the major non-hospital and non-physician sectors of the health care industry.

• Discuss the sources of revenue for the nursing-home industry.

• Discuss the major sources of revenue and expenses of medical groups.

• List and describe the major organizational types of physician groups.

• Describe alternative HMO organizational arrangements.

• Describe the relationship between financial planning and strategic planning.

• List and describe the key financial policy targets for which the board is responsible.

• List and describe the 10 requirements for effective financial planning and policy-making.

• Explain the four steps involved in the development of a financial plan.

• Explain how management control is used in conjunction with the financial plan.

Reading

Study Chapters 11, 12, and 13 of the text Review the PowerPoints for Chapters 11, 12, and 13

Assignments

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Professional Development Questions Listed below are the balance sheet and statement of operations for Wynn Memorial Nursing Home for 2008 and 2009.

Balance Sheet for Wynn Memorial Nursing Home

2009 2008 Current Assets: Cash and Cash Equivalents $30 $50 Net Patient Receivables 295 235 Prepaid Expenses 80 80 Total Current Assets 405 365

Plant, Property, & Equipment Gross Plant, Property, & Equipment 350 300 (less Accumulated Depreciation) (70) (50) Net Plant, Property, & Equipment 280 250

Construction in Progress 203 0

Total Assets $888 $615

Current Liabilities: Accounts Payable $220 $190 Salaries Payable 75 50 Total Current Liabilities 295 240

Long-Term Liabilities: Bonds Payable 100 20 Total Long-Term Liabilities 100 20

Net Assets 493 355

Wynn Memorial Nursing Home Balance Sheet (in 000)

For the Years Ending December 31, 2009 and 2008

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hibit 4-19a Statement of Operations for Wynn Memorial Nu

2009 2008 Revenues: Net Patient Service Revenue $1,400 $1,200 Other Revenue 200 200 Total Revenues 1,600 1,400

Expenses: Nursing Services 1,320 1,150 Administrative Services 110 100 Depreciation 20 15 General Services 50 35 Total Expenses 1,500 1,300

Operating Income 100 100 Excess of Revenues over Expenses 100 100

Wynn Memorial Nursing Home Statement of Operations (in 000)

For the Years Ended December 31, 2009 and 2008

1. Compute Wynn Memorial Nursing Home’s current ratio.

2. Compute Wynn Memorial Nursing Home’s acid (or acid-test) ratio.

3. Compute Wynn Memorial Nursing Home’s long-term debt to net assets ratio.

4. Compute Wynn Memorial Nursing Home’s return on total assets.

5. Compute Wynn Memorial Nursing Home’s operating margin.

6. Assume that a certain nursing home has two categories of payers. Medicaid pays $60.00 per day and private pay patients pay the established per diem, but approximately 10 percent of private-pay charges are not collected. If 50 percent of the patients are Medicaid and 50 percent are private pay, what rate must be set to generate $150,000 in profit? Variable costs are $45.00 per day and fixed costs are expected to be $1,000,000. Expected volume is 50,000 patient days.

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7. Using the data of problem 6 and assuming that the nursing home charges $100 per day, what would be the nursing home’s required volume (in patient days) to make $150,000 profit?

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Lesson 6 – Cost Concepts, P roduct Costing, M anagem ent Control and Cost Variance Analysis

Introduction The purpose of this lesson is to give the reader the ability to identify and use relevant cost information in financial decision making (e.g., addition or elimination of programs, increases or decreases in program size.) Costs are classified by their traceability (direct vs. indirect), management control (controllable vs. non-controllable), relation to budget (budgeted vs. actual), relation to time (avoidable, sunk, incremental, and opportunity), and relation to activity (fixed, variable, and mixed). These classifications are used to improve the decision-making process by precisely defining cost to make it more relevant to decisions. Regardless of the classification system, however, in most situations, the total value of the costs is the same. Because, in most cases, different concepts of cost simply slice total cost in different ways, there may be underlying relationships among the various concepts of costs. For example, direct costs and controllable costs may be related. In many situations, there are standard rules of thumb that may be used to relate cost measures. An understanding of fixed and variable costs is a crucial element in making such decisions. Fixed costs are costs that do not vary in total but vary per unit over the relevant range. Variable costs are costs that vary in total but do not vary per unit over the relevant range. The relevant range is the range of activity within which the assumptions about the cost behavior are valid. The break-even equation can be used to determine price, volume, fixed costs, and variable costs per unit, if each of these other factors is known. The break-even point is the volume at which total revenues equal total costs. The break-even equation for volume in units is: Volume = Fixed Costs / (Price – Variable Costs). The results of a break-even analysis are often presented on a break-even chart, which displays total costs, total revenues, and volume. The distance between the total cost and total revenue lines on this chart represents the amount of profit or loss the service is experiencing at any particular volume of service. An alternative form of this chart portrays just the difference between the total cost and total revenue line—net income. Refer to Figure 14-9 Break-Even Chart The break-even equation can be applied to capitated situations to determine capitation rates, utilization rates, and fixed or variable costs. The break-even equation can also be extended to multipayer and multiproduct situations. In conducting multipayer analysis, which includes capitated and fixed-fee patients, it is important not to adjust revenues for changes in volume, though variable costs may change. The quantity (Price – Variable Costs) is called contribution margin. It is the amount of profit made on each additional unit produced if all other costs (i.e., fixed costs and overhead) remain the same. It is also the amount of incremental income made on each unit that is available to cover all other costs.

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In instances where there are multiple services being offered, it is likely that there will be both organizational fixed costs and service-specific fixed costs. Fixed costs that are there just because the service is being provided and would not be there if the service were not offered are called avoidable fixed costs. If a service is covering its own variable and avoidable fixed costs, even though it does not fully cover its full share of other costs (non-avoidable fixed costs and common costs), the organization is better off delivering the service than not, all other things being equal (e.g., there are no better alternatives). Practically every healthcare provider expresses a strong and urgent interest in developing better cost accounting systems. The basis for this interest is easy to understand and relates to the nature of payment systems for healthcare providers. Before 1983, hospitals and many other healthcare providers were paid based on actual cost. Hospitals, for example, were paid on a cost basis by Medicare, many Blue Cross plans, and most Medicaid programs. In this type of payment environment, costing was important, but allocation of costs to heavily cost-reimbursed areas was emphasized, rather than accurate costing. Reimbursement maximization, not accurate costing, was the primary objective. With the advent of prospective payment systems in the early 1980s and the growing importance of managed care in the late 1980s, hospitals and other healthcare providers became concerned with the actual cost of service delivery. Providers wanted to know what the actual costs of producing a medical or surgical procedure were so they could compare these costs with the revenue received and make more intelligent decisions about products and product lines. This lesson provides the reader with an understanding of product (or service) costing in the healthcare setting. It is imperative that today’s healthcare manager understand the costs of providing services. Because they are assuming more risk, providers must be able to measure their costs accurately. In a healthcare setting, the primary object to be costed is a patient encounter of some type—either inpatient Diagnosis Related Group DRG, an outpatient visit, or some other specific treatment category. Cost information has value in management decision making, which is often segregated into planning, budgeting, and control decisions. The needs for information may vary depending upon the type of decision that is being made. The development of cost information will depend to some extent upon existing financial reporting systems. Most financial reporting systems will share the following dimensions:

• Cost data is usually based upon historical cost

• Cost of acquired resources are charged to departments or responsibility centers

• Products that can be directly traced to a patient treatment should be costed and charged directly to the patient, regardless of whether they are in a direct or indirect department

• Costs in indirect cost centers are allocated to direct cost centers and eventually assigned to products consumed in a patient treatment

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In most healthcare firms, there are two phases in the production (or treatment) process. In Stage 1 of the production process, resources are acquired and consumed within departments or activity centers to produce a product or service. We define the services produced by a department as its service units (SUs). Two points need to be emphasized. First, all departments have SUs, but not all departments have the same number of SUs. For example, the nursing department may provide the following four levels of care: acuity levels 1, 2, 3, and 4. A laboratory, in contrast, may have 100 or more separate SUs that relate to the provision of specific tests. Second, not all SUs can be directly associated with the delivery of patient care; some of the SUs may be only indirectly associated with patient treatment. For example, housekeeping cleans laboratory areas, but there is no direct association between this function and patient treatment. However, the cleaning of a patient’s room could be regarded as a service that is directly associated with a patient. Stage 2 of the production process relates to the actual consumption of specific SUs during the treatment of a patient. Much of the production process is managed by the physician. This is true regardless of the setting (hospital, nursing home, home healthcare firm, or clinic). The physician prescribes the specific SUs that will be required to treat a given patient effectively. For example, the physician determines what imaging procedures are needed, what laboratory procedures are required, and many other critical resource decisions. Understanding the nature of the production process defines leads to the definition of two sets of costing standards. First, the specific cost of SUs from both direct and indirect departments must be established. We refer to this standard as a Standard Cost Profile, or SCP. The second standard defines the amount of specific services that will be required in any given patient treatment. Please note that these two systems can be established before the fact and used as budgets or they can be determined after the fact and used to establish future budgets or in-control decisions. Accurate costing in any healthcare setting requires the cost analyst to determine the costs of products produced, such as lab tests and patient meals, and to also define either the actual quantities of products that were consumed in a patient encounter or that will be required in a patient encounter. The budget is one of the most important documents of a healthcare organization and is the central document of the planning/control cycle. It identifies the revenues and resources that will be needed for the organization to achieve its goals and objectives and allows the organization to monitor the actual revenues generated and its use of resources against that which were planned.

• A responsibility center is an organizational unit that has been formally designated with the responsibility to carry out one or more tasks and/or achieve one or more outcomes. Responsibility centers or departments are the organizational units through which management control is exercised.

• The budgeting process can be bottom-up or top-down. The choice involves tradeoffs between planning and control.

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• The statistics budget forms the basis for projecting revenue and expenses. Projected service levels by responsibility center are required to determine expected revenues and expenses. Projected volumes are often based upon historical values but modified by some subjective estimates regarding future service volume.

• The increments of the budget often are years, quarters, or months. The tradeoffs are between planning (longer-range budgets) and control (shorter-range budgets).

• Another choice in budget preparation is how often revisions are made. o Zero-base: Starts over every year or every other year

o Rolling (continuous): Always cover the year ahead (three- to five-year plans)

Cost variance analysis is of great potential importance to the healthcare industry. Successful use of cost variance analysis requires a sound system of standard setting, or budgeting, and a related system of cost accounting. Perhaps the major factor impeding the widespread adoption of more effective cost variance analysis in the healthcare industry has been the lack of interaction between it and existing systems of cost accounting. Cost accounting systems usually serve two basic informational needs. First, they supply data essential for product or service costing. Second, they provide information for managerial cost control activity. This second role is the major topic of this chapter. Efficiency cost is a term that is used to describe the cost incurred when an operating system, a department, or responsibility center is out of control when compared to budgeted standards. The objective of management should be to minimize the efficiency cost in any given situation. While accomplishing this objective, two major alternatives are available to management: (1) the preventive approach, and (2) the detection-correction (DC) approach. The second approach focuses upon variance analysis, which is the primary topic of this chapter. There are three primary areas of variance analysis application that are discussed in the chapter:

• Facility-wide analysis: Seeks to explain why costs have changed from prior period values or budgeted values; variances are broken down into cost and intensity of service

• Departmental analysis: Seeks to explain why costs have deviated from a budget; variances are broken down into three areas: price, efficiency, and volume

• Variances for managed care plans: Seeks to provide a method for assessing deviations from budgeted and actual costs; variances are broken down into four areas: enrollment, utilization, efficiency, and case mix

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Lesson Learning Objectives By the conclusion of this lesson you should be able to:

• Discuss the four major categories of costs.

• Explain what is meant by cost behavior, and differentiate between the five general types of cost behavior.

• Explain the difference between controllable and noncontrollable costs.

• Explain the role of direct and indirect costs in the costing process.

• Describe the three methods of cost allocation.

• Describe how cost information relates to the 3 key activities of management: planning, budgeting, and control

• Explain the two systems necessary to accurately cost healthcare encounters of care.

• Explain the concept of management control and how budgeting is used as part of it.

• List the major types of budgets and describe how they are used.

• Describe the concept of zero-base budgeting

• Describe the two major theories used for the detection of out of control costs.

• Define variance analysis and how it is used by management.

Reading Study Chapters 14, 15, 16 and 17 of the text View the PowerPoints for Chapters 14, 15, 16, and 17

Assignments

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Short Answer Questions

1. Discuss the differences between efficiency and effectiveness.

2. What are the four phases of management control? 3. When would it make sense to use a flexible budget as compared to a forecast budget? 4. Your hospital has just been told that all your cardiovascular surgeons are transferring

their practice to a competitive hospital beginning next year. How would this affect a forecast of volume?

Professional Development Questions Use the follow ing inform ation for questions 1 , 2 and 3. Your hospital has been approached by a major HMO to perform all their MS-DRG 470 cases (major joint procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for MS-DRG 470 during the last year and found the following profile:

Average Charge $15,000 Average LOS 5 Days

Cost/Charge Variable Cost % Routine Charge $3,600 0.80 60

Operating Room 2,657 0.80 80 Anesthesiology 293 0.80 80 Lab 1,035 0.70 30 Radiology 345 0.75 50 Medical Supplies 4,524 0.50 90 Pharmacy 1,230 0.50 90 Other Ancillary 1,316 0.80 60 Total Ancillary $11,400 0.75 50

1. In the above data set, assume that the hospital’s cost to charge ratio is 0.80 for routine services and 0.75 for all other ancillary services. Using this information, what would the average cost of MS-DRG 470 be?

2. Estimate the variable cost per MS-DRG 470 using the departmental cost/charge ratios and variable cost percentages.

3. The HMO in the above example has indicated that their doctors use less expensive joint implants. If this less expensive implant is used, your medical supply charges would be reduced by $2,000. What is the estimated reduction in variable cost?

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4. Management has studied work patterns in the housekeeping department and estimates the number of hours to be worked as follows. Hours worked = (1,500 hours per month) + (0.50 × RVUs). For the coming month, management expects RVUs to be 5,800. What should budgeted labor for the month be?

FI N 5 1 3 – Health Care Finance

Course Syllabus

Lesson 7 – Financial M athem atics, Capital P roject Analysis, Consolidations and M ergers, and Capital Form ation Introduction Financial managers must make both investment and financing decisions. Investment decisions involve spending money today for expected cash flows in the future. Financing decisions involve receiving funds today in return for a promise to make future payments. The key to understanding and analyzing the different investment and financing alternatives or opportunities is that the value of money changes over time. Financial analyses must take into consideration the time value of money to make appropriate investment and financing decisions. This lesson describes the mechanics of calculating present and future values of unequal cash flows and annuities. Understanding this basic financial math is critical to more involved investment decision analysis discussed in Chapter 19. Capital project analysis occurs during the programming phase of the management control process and is the phase primarily concerned with new programs; here, it is broadly defined to include the selection of investment projects. Capital expenditures are large-dollar investments that are expected to achieve long-term benefits for an organization (at least over two years, but typically many years into the future). A capital investment decision has two components: 1) determining if the investment is worthwhile and 2) determining how to finance the investment. Although these two decisions are interrelated, finance theory demonstrates that these decisions should be separated. This chapter focuses on the first component—determining whether a capital investment should be undertaken. Finally, we will explore the accounting, benefits, costs, and valuation of consolidations and mergers. The motives for mergers could include capturing economies of scale or of vertical integration, combining complementary resources, making better use of tax shields or tax loss carry-forwards, shifting surplus funds from one firm to another firm that will use the funds more profitably or distribute them to shareholders, and eliminating inefficiencies. Mergers should be undertaken only when the organizations are worth more together than apart. The gain to a merger is the present value of the merged firms minus the sum of their separate present values. The cost of the merger to your firm is that part of the gain which the other firm captures. The cost of a merger is the premium the buyer pays for the selling firm over its value as a separate entity. This cost is sometimes tricky to calculate; for example, when the selling firm’s stockholders acquire a share of the two merging firms, thus acquiring a share of the economic gain to the merger.

This lesson will explore how organizations raise the money for the purchase of assets (the “left” side of the balance sheet) using the “right” side of the balance sheet. The basic accounting equation suggests that there are three ways in which assets can be financed: debt (liabilities), equity, or a combination of the two.

FI N 5 1 3 – Health Care Finance

Course Syllabus

Investor-Owned: Assets = Debt + Equity Not-for-Profit: Assets = Debt + Net Assets

The equation shows that any increase in assets must be balanced by a similar increase in debt and/or equity. The structuring of debt relative to equity is called the capital structure decision. Another option, but usually used less often, is to sell off some assets to purchase others. For example, sometimes firms will sell off their accounts receivable (typically at some discount to the value listed on their books) to generate cash to invest in other projects or even, in a cash crunch, to cover the costs of day-to-day operations. A firm’s capital structure is increasingly important to both for-profit and not-for-profit providers. Until recently, the cost of capital had not been a major concern for health care providers. Like other operational costs, the costs of debt and equity financing were simply passed on to third- party payers. Hospitals had no trouble accessing capital markets, because they were virtually guaranteed any income they needed to cover all their debts. In today’s health care environment, however, which is characterized by prospective and capitated payments, the increased use of managed care and outpatient services, and increasing cutbacks being forced by competition, obtaining debt and equity is a much more complicated undertaking. Both stock and bond financing have advantages and disadvantages. Lesson Learning Objectives By the conclusion of this lesson you should be able to:

• Explain future value and present value.

• Contrast an ordinary annuity and an annuity due.

• Calculate the future value and present value of an annuity.

• Explain the four stages of the capital decision-making process.

• List some of the kinds of information that is needed to evaluate a capital investment project.

• Calculate a projects’ net present value, profitability index, and equivalent annual cost.

• Explain the concept of a discount rate and the weighted average cost of capital.

• Understand the terminology used in the field of consolidations, mergers and acquisitions.

• Explain some of the possible reasons why consolidations, mergers and acquisitions occur.

• Understand common methods for valuation of a potential target firm.

• Apply analytical methods and tools to value potential acquisitions

• Explain the differences between debt and equity financing and the sources of each.

FI N 5 1 3 – Health Care Finance

Course Syllabus

• Explain the factors that influence the desirability of alternative sources of financing.

• Explain what an investment banker does.

• List the major bond rating agencies and explain their role in the debt market.

• List some of the pros and cons of retiring debt early.

Reading Study Chapters 18, 19, 20 and 21 of the text View the PowerPoints for Chapters 18, 19, 20, and 21

Assignments

1. What is the difference between simple interest and compound interest?

2. What is the formula for determining the future value of an amount?

3. What is the future value of $10,000 for an interest rate of 16% and 1 annual period of compounding? For an annual interest rate of 16% and 2 semiannual periods of compounding? For an annual interest rate of 16% and 4 quarterly periods of compounding?

4. Define an annuity.

5. In the future value annuity table at any interest rate for 1 year, why is the future value interest factor of this annuity equal to 1.00?

6. Explain the difference between a joint venture and a merger.

7. Does adding debt increase or decrease the flexibility of a healthcare provider? Why?

8. A basis point equals how much? How many basis points are there between 6 5/8% and 6 ¾ %?

FI N 5 1 3 – Health Care Finance

Course Syllabus

Professional Development Questions

1. Biogen, Inc. has a cost of capital of 9%, and it has a project with the following cash flows. What is the NPV of this project?

Year Net Cash Flow 0 -100,000 1 -20,000 2 20,000 3 100,000 4 150,000 5 175,000

2. Your organization has been asked to invest in a continuing care retirement center. Your

investment will be $600,000 per year for the next five years. After five years, cash flows will be $400,000 per year for the next 15 years. If your discount rate is 10 percent:

a) What is the present value of the investment? b) What is the present value of the cash flows?

c) What is the profitability index? Lesson Quiz Take the quiz for this lesson. Your results on the quiz do not affect your grade for the course. Quizzes are designed to help you to learn important concepts in the lesson and prepare you for the Final Examination, if required. You may take the quiz as many times as you wish.

FI N 5 1 3 – Health Care Finance

Course Syllabus

Lesson 8 – W ork ing Capital, Cash M anagem ent and Developing the Cash B udget

Introduction In the daily operations of health care organizations, there is an ongoing series of cash inflows and outflows to pay for day-to-day expenses (e.g., supplies and salaries). Management must ensure that the organization has sufficient funds available to pay for these items on a timely basis. This is particularly problematic in health care, where it is not unusual for payments to be received more than two months after the patient or third-party has been billed for services received and where organizations have high labor and supply costs and thin margins. We will examine how firms should manage their short-term working capital and cash. A firm’s value may be negatively impacted by working capital inefficiencies, illiquidity, and policies adversely affecting customer relationships. We provide a discussion of the working capital concept, cash conversion cycles, financing and investment of cash. To minimize costs and plan ahead to finance deficits and invest excess cash, a healthcare organization needs to clearly identify the timing of its cash inflows and outflows. The cash budget is the best way to plan for these cash flows. It helps management determine whether additional financing will be needed, in what amounts and for what duration. This information also will reveal whether it will be possible to invest cash surplus on a short-term basis. This lesson describes the cash budget, and how to prepare and use it.

Lesson Learning Objectives By the conclusion of this lesson you should be able to:

• Explain why cash management is especially crucial in most sectors of the health industry.

• Explain what working capital is and why it is needed.

• Describe the activities covered in the cash budget that affect working capital.

• Describe the tools that an organization manager can use to manage receivables.

• List the external resources available to an organization for its short-term financing needs.

• List and explain the criteria that should be used when investing an organization’s cash in the short term.

• Explain the importance of a cash budget.

• Explain why an organization needs to carry cash balances.

FI N 5 1 3 – Health Care Finance

Course Syllabus

• Explain how to prepare a cash budget

Reading

Study Chapters 22 and 23 of the text View the PowerPoints for Chapters 22 and 23

Assignments

1. Define working capital. What is the difference between working capital and net working capital?

2. What is the purpose of working capital?

3. Compare and contrast an aggressive and conservative asset mix strategies. (Your comparison should address goals, liquidity and risk.)

4. What is the general rule of thumb about when to borrow long-term or short-term? Compare and contrast the advantages and disadvantages of short- and long-term borrowing to meet working capital needs.

5. What is the similarity between the cash budget and long-term financial planning? Professional Development Questions

1. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense?

2. Your hospital has billed charges of $4,000,000 in February. If your collection experience indicates that 20 percent is paid in the month billed, 40 percent in the second month, 20 percent in the third month, and 5 percent in the fourth month, determine the following values:

FI N 5 1 3 – Health Care Finance

Course Syllabus

a) Net patient revenue for February

b) Collections of February charges in February

c) Net accounts receivable at the end of March for February billings

Introduction

Final Examination
Lesson Quiz
Lesson Quiz
Lesson Quiz

Some of the accounts in financial statements are valued based on historical cost accounting principles. In times of high inflation, however, the results of historical cost accounting can be misleading as profit can be overstated, assets understated in...

Statement of Operations
Revenues, Gains, Other Support

Net patient service revenue $ 1,500,000

Expenses

Operating Income 150,000
Investment Income 50,000
Excess of revenues over expenses 200,000
Increase in Unrestricted Net Assets$ 200,000

Balance Sheet
Assets Current Assets Cash and cash equivalents $ 50,000

Properties and Equipment Gross properties and equipment $ 900,000 Less accumulated depreciation 475,000 Net Properties and Equipment 425,000

Liabilities and Net Assets

Total Liabilities and Net Assets $ 825,000

Lesson Quiz
Lesson Quiz
Lesson Quiz
Lesson Quiz
Lesson Quiz