HMGT 322 PART 4

GROUP 3: BEST FINANCIAL PRACTICES

HMGT 322

Professor Moody, V.

INTRODUCTION Best practices are essential to the financial success and efficient allocation of finances and resources in healthcare organizations. It is especially important in a large hospital setting such as Holy Cross Hospital. Failure to implement these best practices can have a negative impact on Holy Cross resulting in adverse financial consequences. Best practices covered will include: Waste Reduction and QI, Cost Control, Reduce and/or Adjust Expense of Staffing, Financial Planning & Budgeting, Ratios and Trends, and Providing Income Statements.

QUALITY IMPROVEMENT (QI) ● According to hrsa.gov Quality improvement is defined as, “Quality improvement

(QI) consists of systematic and continuous actions that lead to measurable improvement in health care services and the health status of targeted patient groups.” Benchmarks for QI are:

○ Ensuring quality care for the patient’s experience. ○ Reduction of provider fatigue. ○ Decreasing the cost of care for patients and providers/Hospitals. ○ Improving the health of the population being served. ○ Holy Cross Hospital, according to its website Holycross.org “Is the region's

only three-time winner of The Joint Commission’s highest quality award … and is the only healthcare provider in Maryland to receive the Workplace Excellence Seal of Approval Award each year since 1999 from the greater Washington, D.C., Alliance for Workplace Excellence.” (p4)

● Quality improvement as it applies to Financial Management are ○ Used to reduce overhead costs of unnecessary testing and procedures by

evaluating cost/profit analysis. ○ Used to increase provider production with financial incentives, bonuses for

higher patient ratings and patent survey satisfaction reports. ○ QI standards are set by National organizations such as The Joint

Commission, Nation Association for Healthcare Quality and CMS. (Tinker 2018)

WASTE REDUCTION ● Waste reduction is essential for ensuring a high profit margin, this applies to

both small health care facilities and large hospitals. In order to achieve waste reduction the contribution margin must be examined as well as variance analysis. Waste reduction is achieved by utilizing each product, service or provider in the hospital total maximum efficiency.

● Reduction of product waste during surgeries, such as bio-medical materials, disposable items and over use of Operating Room time by identifying Key Performance Indicators. These include but are not limited to, “KPIs that will help them monitor work hours, overtime, number of patients, and full- time employees per occupied bed.” (Sampson, 2016)

● Employment at hospitals is also a major overhead cost, “Labor is the largest single component of hospital costs. Deloitte estimates that labor expenses make up roughly 50 percent of total operating costs for most hospitals.” (Deloitte, 2017) According to Holycrosshealth.org “Our team of more than 4,100 employees, 1,575 community-based physicians.” (p2)

● However many of these positions could be eliminated as they are considered to be duplicate or unnecessary. According to 5 Ways to Cut Costs through Hospital Revenue Cycle Management, “Costs are a utilization or a variation. Variation is caused by management and causes cost… consolidating management layers can reduce overhead cost and help with the new payment methodologies.” (Sampson, 2016)

COST CONTROL WHY IS COST CONTROL IN HEALTHCARE IMPORTANT?

● Over 60% of healthcare Administrators agree that healthcare cost has become a number one priority in the majority of healthcare organizations (RevCycleIntelligence, n.d.).

● The cost of health care in 1990 was approximately $714 million and in 2010 it had increased tremendously to roughly $2.6 trillion, with a projected $750 billion dollars going towards unnecessary and preventable care services (Hospitalists and cost control in the u.s. Health care system, n.d.).

● In 2000, the cost for healthcare labor workers were approximately $1.37 trillion (Hospitalists and cost control in the u.s. Health care system, n.d.). In 2015, the number had increased to more than $3.2 trillion which leads to the conclusion that labor is a big factor in cost control and budget (Hospitalists and cost control in the u.s. Health care system, n.d.).

● The uninsured and lack of insurance repayments or their stalled payment arrangements in healthcare adds to the cost control issue.

● Practicing cost control is vital for the overall long-term success of healthcare organizations especially in the time of healthcare reform.

COST CONTROL THE EFFECTS OF NON-COMPLIANCE OF COST CONTROL IN

HEALTHCARE?

● If healthcare wages increase between two and five percent each year, yet compensation increases are less, it would cause a financial dilemma in the cost and profits outlines (The healthcare cost problem and how to control it, n.d.).

● The inability to connect cost to practice enhancements or results, which could hinder administrators from making viable cost reductions (The healthcare cost problem and how to control it, n.d.).

● Noncompliance of cost control can lead to a falsification of provided services; meaning that providers will not be paid properly for services rendered (The big idea: How to solve the cost crisis in health care, n.d.).

● Hospitals will begin to see an negative adjustment on their balance sheet and income statements being that their expenses will begin to outpace their revenue (The big idea: How to solve the cost crisis in health care, n.d.).

● Reducing variation and regulating clinical care delivery can have a positive effect on cost control for any healthcare setting if it’s done effectively and in a timely manner (The big idea: How to solve the cost crisis in health care, n.d.).

REDUCE AND/OR ADJUST EXPENSE OF STAFFING

● Hospital staffing needs are a factor that arise to the forefront of managerial concern for healthcare organizations. Being adequately staffed is important to hospital facilities because it affects patient’s access to care and operational efficiency. As a financial manager, it is imperative that you adjust the expense of staffing. These adjustments can be made based on analytical data statistics such as service line profitability or activity.

● When budgeting for the expense of staffing you must consider departmental needs based on activity as well as service line profitability. These factors can fluctuate; therefore, staffing requires a flexible budget. A flexible budget is created in anticipation of different levels of production and capacity utilization, "it changes in accordance with the activity level." (Surbhi, 2015).

REDUCE AND/OR ADJUST EXPENSE OF STAFFING

● There are two ways to view and adjust the staffing needs of Holy Cross hospital. There is the amount of staffing and the type of staffing. The amount of staffing will be determined based on the volume of service being provided and patient activity. For example, a high patient activity department such as the emergency room may require 40 staff members. In contrast, a lower patient activity department such as the pathology laboratory may require only 12 staff members. As a manager, the primary concern is to be adequately staffed. However, from the financial management aspect, you want to be adequately staffed in a cost-effective manner.

● An example of staffing the Holy Cross emergency department adequately and in a cost-effective manner would be to have a stratified staffing structure. Instead of staffing 12 emergency trauma physicians and 28 registered nurses, you can create a structure that alleviates this expense. Staffing 4 emergency trauma physicians (MD), 8 physician assistants (PA), 10 registered nurses (RN), and 18 certified nursing assistants (CNA) can drastically reduce the expense of staffing while still ensuring the department is adequately staffed.

FINANCIAL PLANNING & BUDGETING

Financial planning (Strategic Plan)

● Long term horizon

● Sets financial goals and objects for the hospital

● Includes key performance indicators (KPI) or benchmarks by which to evaluate the performance and financial health of the hospital

● Benchmarks help identify and prioritize financial goals and objectives of Holy Cross Hospital (Cihak et al, 2012)

Budgeting (Operational Plan)

● Short term horizon

● Type of financial plan that focuses on the operation of the hospital

● Accounts for costs and forecasts expenditure and earnings

● Important part to being good stewards of Holy Cross Hospital’s money

FINANCIAL PLANNING & BUDGETING

● Patient care is important, but so is financial planning and budgeting

● Financial planning and budgeting are vital to maintaining good financial health and continued operation of Holy Cross Hospital (Aiena, C., 2011).

● Financial planning is a process that establishes strategic financial goals for Holy Cross Hospital, looking to where/who it wants to be (Aiena, C., 2011).

● Monitoring of progress is typically done quarterly or semiannually (Aiena, C., 2011).

● Budgeting is a process that establishes the tactical or short-term financial goals for Holy Cross Hospital that focused on the day to day management of cashflow.

● Monitoring of progress is typically done on a more frequent interval, like weekly or monthly.

RATIOS AND TRENDS ● There are several key ratios that an organization can use to include the liquidity

ratio, profitability ratio, leverage and capital structure ratio, and nonfinancial ratios ("Week 6: Assessing Performance Through Ratio Analysis", n.d.).

● Each ratio has a specific purpose that can help an organization improve efficiency and grow; however, ratios alone are only one part to improvement. The use of ratios over a period of time can help trend an organization’s performance over time and better identify areas of improvement ("Week 6: Assessing Performance Through Ratio Analysis", n.d.).

● Within the Holy Cross Hospital, one can apply the current ratio which is a form of the liquidity ratio. The current ratio compares an organization’s assets to their liabilities ("Week 6: Assessing Performance Through Ratio Analysis", n.d.).

● After calculating the Holy Cross Hospital’s current ratio in 2016, the value is 1.7, meaning that the hospital can cover 1.7 times their total liabilities with their current assets. This number means that they can sustain themselves and grow or incur more liabilities if necessary (Auerbach, 2019).

● Additionally, in the year 2015, HCH also had a current ratio of 1.7 (Auerbach, 2019). Their assets increased but so did the liabilities meaning that the ratio remained the same(Auerbach, 2019).

IMPORTANCE OF RATIOS AND TRENDS

● According to the Financial Accounting Standards Board - Summary of Statement No. 109 - by acquiring assets or settling liabilities, organizations can be taxed ("Summary of Statement No. 109", 1992).

● Healthcare organizations must understand these taxes as the accrue more assets and pay off liabilities, as their ratio increases for either reason, their taxes will increase ("Summary of Statement No. 109", 1992).

● This means that having a high ratio isn’t necessarily optimal for an organization. Rather finding a good medium is far more effective.

● If the use of ratios such as these are not use and trended, organizations can lose track of why their expenses are increasing.

● Additionally, if an organization fails to monitor these ratios, it can lead to increases in liabilities to a point where an organization can no longer cover these liabilities through their current assets. Trending a decline in these ratios could mean the success of a company or possibly an early change that could prevent such a failure.

WHAT IS AN INCOME STATEMENT AND WHY IS IT IMPORTANT?

ONE OF 3 KEY FINANCIAL STATEMENTS (BUSINESSES & HEALTHCARE) (HMGT 322 ppt, 2019)

AKA STATEMENT OF OPERATIONS OR PROFIT & LOSS STATEMENT (Investopedia, 2019)

SUMMARIZES HOLY CROSS HOSPITAL’S REVENUES, EXPENSES, PROFITS/LOSSES OVER A SPECIFIC PERIOD OF TIME

REVENUES REPORTED (OPERATING AND NON-OPERATING ACTIVITIES) (Investopedia, 2019)

MOST COMMON REPORTING: MONTHLY FOR INTERNAL REVIEW FINANCIAL OVERVIEW FOR INVESTORS AND LENDERS TO EVALUATE

RISKS ASSOCIATED WITH HOLY CROSS HOSPITAL NECESSARY FOR HOLY CROSS TO ANALYZE EXPENSES VS. PROFITS; MAKE PREDICTIONS ABOUT THEIR FUTURE PROFITABILITY; INCREASE

EFFICIENCY IN ALLOCATING RESOURCES HIGH EXPENSES PLUS LOW REVENUES = NET LOSS

HIGH REVENUES PLUS LOW EXPENSES = NET INCOME OR PROFITS (HMGT 322 ppt, 2019)

IMPORTANT FOR HOLY CROSS TO ACCURATELY MONITOR & EVALUATE FINANCIAL HEALTH

PROVIDING AN INCOME STATEMENT

PROVIDING AN INCOME STATEMENT

POLICY/REGULATIONS:

● INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)- INTERNATIONAL ACCOUNTING STANDARDS DICTATING REPORTING METHOD FOR TRANSACTIONS/EVENTS (Epstein, 2019)

● IFRS SET BY INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) (Epstein, 2019)

● GAAP ACCOUNTING STANDARDS SET BY THE AMERICAN INSTITUTE OF CPAS (Epsteing, 2019)

● STANDARDS DIFFER BETWEEN GAAP AND IFRS. (DIFFER IN CALCULATIONS, INFORMATION REQUIRED, AND REPORT FORMAT) (Epstein,2019)

● GAAP REQUIRES INCOME STATEMENTS TO INCLUDE 3 YEARS OF DATA; IFRS REQUIRES ONLY 2 YEARS OF DATA (Epstein, 2019)

● LENDERS & STAKEHOLDERS REQUIRE GAAP- FORMATTED INCOME STATEMENTS

● STATEMENTS MUST BE ACCURATE, TRANSPARENT, & DETAILED

NON-COMPLIANCE – WHAT CAN GO WRONG:

● HOLY CROSS INCOME STATEMENTS ARE SUBJECT TO AUDIT FROM INVESTORS/LENDERS (& GOVERNMENT IF RECEIVING ANY GVT. FUNDING) (415 Group, 2014)

● AUDITS CONDUCTED UNDER GVT. AUDITING STANDARDS & REQUIREMENTS OF OFFICE OF MANAGEMENT AND BUDGET (UNDER OMB CIRCULAR A-133) (415 Group, 2014)

● INACCURATE/INCOMPLETE/MISSING INCOME STATEMENTS MAY RESULT IN REDUCED FUNDING FOR HOLY CROSS OR TERMINATION OF CONTRACTS (Thacker, 2019)

● LOSS OF THEIR REPUTATION/CREDIBILITY ● LOSS OF HOLY CROSS’S INVESTORS ● HOLY CROSS WILL BE UNABLE TO ACCURATELY

ASSESS ITS PROFITABILITY & FINANCIAL HEALTH ● INABILITY TO PROPERLY MANAGE ITS FINANCES

AND RESOURCES RESULTING ● INCREASED FINANCIAL RISK AND/OR FINANCIAL

LOSSES FOR HOLY CROSS AND ITS STAKEHOLDERS

REFERENCES 415Group. (2014). Financial statement and compliance audits: What’s the difference? Retrieved from

https://www.415group.com/financial-statement-and-compliance-audits-what-s-the-difference Aiena, C. (2011). Budgeting Basics 101: The Nuts and Bolts of Budget Planning [PowerPoint presentation]. Retrieved from

Massachusetts general Hospital http://facultydevelopment.massgeneral.org/cfd/pdf/20111006BudgetingBasics.pdf Auerbach, A. (2019). How to Analyze Your Business Using Financial Ratios. Retrieved from

https://www.academia.edu/9029690/Trend_Analysis_and_Financial_Ratios_of_What_Use Cihak, M., Demirguç-Kunt, A., Feyen, E., & Levine, R. (2012). Benchmarking financial systems around the world. World Bank

Policy Research Working Paper, (6175). Daly, Rich July 2018, What's Driving Increased Hospital Cost Concerns? (n.d.). Retrieved May 1, 2019, from

https://www.hfma.org/Content.aspx?id=61217 D. (2017). Deloitte 2017 Survey of US health system CEOs: Moving forward in an uncertain environment. Retrieved May 1,

2019, from https://www2.deloitte.com/content/dam/Deloitte/us/Documents/life-sciences-health-care/us-lshc-deloitte- 2017-survey-of-us-health-system-ceos.pdf

Epstein, L. (2019). Key financial statement differences between GAAP and the IFRS. Retrieved from https://www.dummies.com/business/accounting/key-financial-statement-differences-between-GAAP-and-the-IFRS

Financial Plans vs. Budgets - Wells Fargo. Retrieved from https://www.wellsfargo.com/financial-education/basic-finances/build- the-future/short-long-term-planning/budget-vs-financial-plan/

Holy Cross Health. (2019). About Us. Retrieved May 3, 2019, from http://www.holycrosshealth.org/about-us HealthLeaders. (n.d.). How hospitals can shape sustainable cost control | healthleaders media. Retrieved from

https://www.healthleadersmedia.com/strategy/how-hospitals-can-shape-sustainable-cost-control

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hospitalist.org/hospitalist/article/140161/leadership-training/hospitalists-and-cost -control-us-health-care-system Income statement sample image retrieved from https://www.bing.com/images/search?view Investopedia. (2019). What kind of financial reporting requirement does GAAP set out? Retrieved from

https://www.investopedia.com/ask/answers/011915/what-kind-financial-reporting-requirements-does-gaap-set-out.asp LaPointe, J. (2016). What Is Value-Based Care, What It Means for Providers?. Retrieved from

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https://www.hrsa.gov/https://www.hrsa.gov/quality/toolbox/508pdfs/qualityimprovement.pdf. RevCycleIntelligence. (2019, March 14). 5 Ways to Cut Costs through Hospital Revenue Cycle Management. Retrieved May

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https://revcycleintelligence.com/news/healthcare-cost-control-rises-to-top-hospital-exec-Priority Summary of Statement No. 109. (1992). Retrieved from https://www.fasb.org/summary/stsum109.shtml Surbhi, S. (2015, June 25). Difference Between Fixed Budget and Flexible Budget. Retrieved from

https://keydifferences.com/difference-between-fixed-budget-and-flexible-budget.html Thacker, S. (2019). Complying with GAAP procedures. Retrieved from

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cris is-in-health-care

REFERENCES The healthcare cost problem and how to control it. (n.d.). Retrieved from https://www.healthcatalyst.com/healthcare-

cost-problem-how-to-control-it. The Importance of Understanding Capital Budgeting for Managers in Healthcare. (2013). Retrieved from

https://ncustudent.wordpress.com/2013/07/30/the-importance-of-understanding-capital-budgeting-for-managers-in- healthcare/.

The Top 7 Healthcare Outcomes Measures. (2019, March 26). Retrieved April 30, 2019, from https://www.healthcatalyst.com/insights/top-7-healthcare-outcome-measures.

Week 6: Assessing Performance Through Ratio Analysis. Presentation, UMUC HMGT 322.