FMW5HW

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1. Describe key methodologies for the practical application of financial management in healthcare organizations.

Reading Assignment

Chapter 7: Managing Short-Term Resources and Obligations

Chapter 8: Accountability and Control

Unit Lesson

Unit V considers techniques and approaches designed to maximize the benefit of short-term resources and minimize the cost of short-term obligations. Both of these aspects are important for a successful healthcare organization. Healthcare has definitely been “squeezed” financially by government and other payers over recent years, making these topics more important today than ever before in the history of American medicine.

The process of controlling short-term resources and obligations is referred to as working capital management. In performing working capital management, the manager must ensure that adequate cash is on hand to meet the organization’s needs and also to minimize the cost of having that cash available. To do this, the manager must carefully monitor and control cash inflows and outflows. Cash not immediately needed should be invested, earning a return for the organization. The organization should use a cash budget and should employ lock boxes and concentration banking when appropriate. You will learn more about lock boxes and concentration banking as you read this unit.

The issue of working capital management has become more crucial today because of delays in payments from managed care organizations and other payers. Twenty years ago it was common for insurance companies to pay their bills to hospitals and doctors in about two weeks’ time. Under indemnity insurance at that time, the payer had no right of approval or denial for services; they were simply paying a percentage of the total bill (often 80%) and leaving the remainder for payment by the patient (typically 20%). Payment came rather quickly under that scenario, but those days are gone. Today managed care organizations have contractual rights to approve or deny services, and also to request additional information from patient, hospital, or doctor. The process of reviewing, challenging, denying claims, and considering appeals seems to drag on forever, and throughout the process, the provider is waiting for the money. Managed care organizations often take 60-90 days to remit payment to healthcare organizations, posing new challenges in managing cash flow for the medical facility.

When there is excess cash at the hospital or clinic, it should be invested. A variety of marketable securities may be appropriate for an organization. Such securities can provide a higher yield for the organization while still offering reasonable liquidity and safety of principal. Healthcare organizations today will invest in certificates of deposit, mutual funds, bonds, and even individual stocks as a way of earning some return on investment. Not all of these options are available to all healthcare facilities; for example a government-owned hospital (city, county, or state) is typically prohibited by law from investing in stocks.

Strong efforts must be made to collect accounts receivable as soon as possible, an increasing challenge for healthcare facilities today. This reduces the rate of bad debts and also allows the collect receivables to start earning interest sooner. Experience in healthcare management tells us that if we do not collect for services

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UNIT x STUDY GUIDE

Title early, we may never collect at all. Collections past 90 days from the date of service typically go down substantially and are much more difficult to collect.

Often problems with receivables management stem from inadequate data systems. Sound and current data are required to allow invoices to be issued promptly, and then more data are required to track outstanding receivable balances. As you read this unit, you will learn about the process of accounts receivable aging, and that is crucial learning. We must be able to identify payer types and specific payers where we have delays or difficulty in collecting, and then focus on those areas in order to reduce receivables. Typically, the measure of receivables employed by hospitals and clinics is days in accounts receivable. Keeping that number low, and constantly trying to reduce it, is a key aspect of healthcare financial management today!

We also need to consider inventory expense. Excess supplies should be not be kept by the organization. The money spent now to pay for inventory that is not needed until later could be used by the organization for some other purpose. At a minimum, the money could be invested in the organization’s savings account, earning interest. The economic order quantity and just-in-time techniques can provide managers with assistance in minimizing the cost of inventory. Meanwhile, the ongoing concern in healthcare organizations, different from some other businesses, is that we dare not run out of certain supplies and medications because a patient may need them urgently! Managing the inventory of patient care supplies is a challenging job, and the profession of materials management has emerged in U.S. healthcare to address that.

Short-term obligations must also be managed carefully. The organization desires to have sufficient cash to pay its obligations when they are due. However, if the organization pays it bills before they are due, it will lose the interest it could have earned if it had left the cash in the savings account for a little longer rather than paying the obligation. Managers should take advantage of opportunities to delay payments, if the delay does not have any negative implications for the organization. A time-honored expression applies here, and it is simply true: never part with money until you have to. The managed care organizations are in no hurry to pay the hospital or clinic today, so we should pay our bills to vendors when they are due—not even one day before they are due.

If an organization is to succeed, it must achieve their plans to the greatest extent possible. Management control systems are used by organizations to motivate their employees to try to achieve those plans. Under management control systems, departments and individual employees are held accountable for their actions and results. These results show up on the variance reports that are prepared each month and reported at the CEO, CFO, and board of director’s level of the organization.

We must also know how we intend to measure results. We can focus on just the revenues and expenses budgeted and the actual revenues and expenses. Or, the organization can be more sophisticated and try to assess things such as its efficiency and effectiveness in measuring its overall performance. Variances arise if actual performance differs, or varies, from expectations. Developing an understanding of why variances have occurred can help the organization avoid undesirable variances in the future.

Conclusion

To keep the organization functioning optimally, it must also focus on issues related to ethics and the safeguarding of its resources. To achieve planned status, it is vital for personnel to be as ethical and error- free as possible. The elements of a control system are designed to minimize the resource losses that the organization suffers either by intent or by accident.

This is a crucial unit of learning in this course; how an organization manages its short-term resources and short-term obligations can literally make or break the organization, so you must be very strong in this area.