Accounting/ Microsoft Excel

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Revenues (Inflow) 4 C H A P T E R

OVERVIEW

Revenue represents amounts earned by an organization: that is, actual or expected cash inflows due to the organi- zation’s major business. In the case of health care, rev- enue is mostly earned by rendering services to patients. Revenue flows into the organization and is sometimes re- ferred to as the revenue stream.

Revenue is generally defined as the value of services rendered, expressed at the facility’s full established rates. For example, hospital A’s full established rate for a cer- tain procedure is $100, but Giant Health Plan has nego- tiated a managed care contract whereby the plan pays only $90 for that procedure. The revenue figure—the full established rate—is $100. Revenues can be received in the form of cash or credit. Most, but not all, healthcare revenues are received in the form of credit.

RECEIVING REVENUE FOR SERVICES

One way that revenue is classified is by whether payment is received before or after the service is delivered. The amount of revenue received for services is often influ- enced by this classification.

Payment after Service Is Delivered

The traditional payment method in health care is that of payment after service is delivered. Two basic types of pay- ment after service is delivered are discussed in this sec- tion: fee for service and discounted fee for service. One evolved from the other.

After completing this chapter, you should be able to

1. Understand how receiving revenue for services is a revenue stream.

2. Recognize contractual allowances and discounts and their impact on revenue.

3. Understand the differences in sources of healthcare revenue.

4. See how to group revenue for planning and control.

P r o g r e s s N o t e s

1. Fee for service. The truly traditional U.S. method of receiving revenue for services is fee for service. The provider of services is paid according to the service performed. Before the 1970s, with a very few exceptions, fee for service was the dominant method of payment for health services in the United States.1

2. Discounted fee for service. In this variation on the original fee for service, a con- tracted discount is agreed upon. The organization providing the services then re- ceives a payment that is discounted in accordance with the contract. Sometimes the contract contains fee schedules. A large provider of services can have many different contracts, all with different discounted contractual arrangements. Many variations are therefore possible.

Payment before Service Is Delivered

Traditional payment methods in the United States have begun to give way to payment be- fore service is delivered. There are multiple names and definitions for such payment. We have chosen to use a general descriptive term for payment received before service is deliv- ered: predetermined per-person payment. The payment method itself and its rate-setting variations are discussed in this section.

1. Predetermined per-person payment. Payment received before service is delivered is generally at an agreed-upon predetermined rate. Payment, therefore, consists of the predetermined rate for each person covered under the agreement. Thus, the amount received is a per-head or per-person count at a particular point in time.

2. Rate-setting differences. Different agreements can use varying assumptions about the group to be served, and these variations will affect the rate-setting process. Numerous variations are therefore possible.

Contractual Allowances and Other Deductions from Revenue

Revenues are recorded at the organization’s full established rates, as previously discussed. Those amounts estimated to be uncollectible are considered to be deductions from rev- enues and are recorded as such on the books of the organization. (For purposes of the ex- ternal financial statements released for third-party use, reported revenue must represent the amounts that payers [or patients] are obligated to pay. Therefore, the terms gross rev- enue and deductions from revenue will not be seen on external statements. The discussion that follows, however, pertains to the books and records that are used for internal manage- ment, where these classifications will be used.)

Contractual allowances are the difference between the full established rate and the agreed-upon contractual rate that will be paid. Contractual allowances are often for com- posite services. Take the case of hospital A as an example. As discussed in the overview to this chapter, hospital A’s full established rate for a certain procedure is $100, but Giant Health Plan has negotiated a managed care contract whereby the plan pays only $90 for that procedure. The $10 difference between the revenue figure ($100) and the contracted amount that the plan pays ($90) represents the contractual allowance.

32 CHAPTER 4 Revenues (Inflow)

Sources of Healthcare Revenue 33

It is not uncommon for different plans to pay different contractual rates for the same service. This practice is illustrated in Table 4-1, which shows contractual rates to be paid for visit codes 99213 and 99214 for 10 dif- ferent health plans. Note the variations in rates.

The second major deduction from rev- enue classification is an allowance for bad debts, also known as a provision for doubt- ful accounts. (Again, for purposes of the ex- ternal financial statements released for third-party use, the provision for doubtful reports must be reported separately as an expense item. The discussion that follows, however, still pertains to the books and records that are used for internal manage- ment, where the classification of deductions from revenue will be used.) The allowance for bad debts is charged with the amount of services received on credit (recorded as accounts receivable) that are estimated to result in credit losses.

Beyond contractual allowances and a provision for bad debts, the third major deduction from revenue classification is charity service. Charity service is generally defined as services provided to financially indigent patients.

SOURCES OF HEALTHCARE REVENUE

Healthcare revenue in the United States comes from a variety of public programs (govern- mental sources) and private payers. The sources of healthcare revenue are generally termed payers. Payer mix—the proportion of revenues realized from the different types of payers—is a measure that is often included in the profile of a healthcare organization. For example, “Hospital A has a payer mix that includes 40 percent Medicare and 33 percent Medicaid” might be part of the profile.

Governmental Sources

The Medicare Program

Title XVIII of the Social Security Act is commonly known as Medicare. Actually entitled “Health Insurance for the Aged and Disabled,” Medicare legislation established a health in- surance program for the aged in 1965. The program was intended to complement other benefits (such as retirement, survivors’, and disability insurance benefits) under other titles within the Social Security Act.

Table 4–1 Variations in Physician Office Revenue for Two Visit Codes

Visit Codes

Payer 99213 99214

FHP $25.35 $35.70 HPHP 42.45 58.85 MC 39.05 54.90 UND 39.90 60.40 CCN 44.00 70.20 MAYO 45.75 70.75 CGN 10.00 10.00 PRU 39.05 54.90 PHCS 45.00 50.00 ANA 38.25 45.00

Rates for illustration only.

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The Medicare program currently has four parts. The first part, known as Part A, is hos- pital insurance (HI) and is funded primarily by a mandatory payroll tax. The second part, known as Part B, is called supplementary medical insurance (SMI). SMI is voluntary and is funded primarily by insurance premiums (usually deducted from monthly Social Security benefit checks of those enrolled) supplemented by federal general revenue funds. Guide- lines determine both the services to be covered and the eligibility of the individual to re- ceive the services under the Medicare program. Medicare claims (billings) are processed by fiscal agents who act on behalf of the federal government. These fiscal agents include in- termediaries who process the claims for Part A (HI) institutional services and outpatient claims for Part B (SMI), carriers who process the claims for Part B (SMI) physician and med- ical supplier services and Medicare Administrative Contractors (MACs) who process both A and B claims.

Medicare’s third part, Part C, is known as “Medicare Advantage.” Medicare Advantage consists of managed care plans, private fee-for-service plans, preferred provider organiza- tion plans, and specialty plans. Although Medicare Advantage is offered as an alternative to traditional Medicare, coverage must never be less than what Part A and Part B (traditional Medicare) would offer the beneficiary.

Medicare’s fourth part, Part D, is the prescription drug benefit, effective as of January 1, 2006. The prescription drug benefit represents expanded coverage. It is a voluntary pro- gram that requires payment of a separate premium and contains cost-sharing provisions.

The Medicare program covers approximately 95 percent of the U.S. aged population along with certain eligible individuals receiving Social Security disability benefits.2

Medicare is an important source of healthcare revenue to most healthcare organizations.

The Medicaid Program

Title XIX of the Social Security Act is commonly known as Medicaid. Medicaid legislation established a federal and state matching entitlement program in 1965. The program was in- tended to provide medical assistance to eligible needy individuals and families.

The Medicaid program is state specific. The federal government has established broad national guidelines. Each state has the power to set eligibility, service restrictions, and pay- ment rates for services within that state. In doing so, each state is bound only by the broad national guidelines. Medicaid policies are complex, and considerable variation exists among states. The federal government is responsible for a certain percentage of each state’s Medicaid expenditures; the specific amount due is calculated by an annual formula. The state pays the providers of Medicaid services directly. Thus, the source of Medicaid rev- enue to a healthcare organization is considered to be the state government’s Medicaid pro- gram representative.

The Medicaid program is the largest U.S. government program providing funds for med- ical and health-related services for the poor.3 Therefore, although the proportion of Med- icaid services within the payer mix may vary, Medicaid is a source of healthcare revenue in almost every healthcare organization.

Other Pro g r a m s

There are numerous other sources of federal, state, and local revenues for healthcare or- ganizations. Generally speaking, for most organizations, none of the other revenue sources

will exceed the Title XVIII and Title XIX programs just discussed. Other programs include the Department of Veterans’ Affairs health programs, workers’ compensation programs, and state-only general assistance programs (versus the federal-and-state jointly funded Med- icaid program). Still other public programs are school health programs, public health clin- ics, maternal and child health services, migrant healthcare services, certain mental health and drug and alcohol services, and special programs such as Indian healthcare services.

Managed Care Sources

In the 1970s, managed care began to appear in healthcare models in the United States. An all-purpose definition of managed care is: managed care is a means of providing healthcare services within a network of healthcare providers. The responsibility to manage and pro- vide high-quality and cost-effective health care is delegated to this defined network of providers.4 A central concept of managed care is the coordination of all healthcare services for an individual. In general, managed care plans receive a predetermined amount per member in premiums.

Types of Plans

The most prevalent type of managed care plan today is the health maintenance organiza- tion (HMO). Members enroll in the HMO. They prepay a fixed monthly amount; in return, they receive comprehensive health services. The members must use the providers who are designated by the HMO; if they go outside the designated providers, they must pay all or a large part of the cost themselves. The designated providers of services in turn contract with the HMO to provide services at agreed-upon rates. Several different forms of HMOs have evolved over time.

The preferred provider organization (PPO) is a type of plan found across the United States. It consists of a group of providers called a panel. The panel members are an ap- proved group of various types of providers, including hospitals and physicians. The panel is limited in size and generally has utilization review powers. If the patients in a PPO use health providers who are not within the PPO itself, they must pay a higher amount in de- ductibles and coinsurance.

Types of Contracts

In the case of an HMO, the designated providers of health services contract with the HMO to provide services at agreed-upon rates. The different types of HMOs—including the staff model, the group model, the network model, the point-of-service model, and the individual practice association (IPA) model—have various methods of arriving at these rates. A PPO contracts with its selected group, who are all participating payers, to buy services for its eli- gible beneficiaries on the basis of discounted fee for service. A large healthcare facility will have one or more individuals responsible for managed care contracting.5

Other Revenue Sources

A considerable amount of healthcare revenue is still realized from sources other than Title XVIII, Title XIX, and managed care:

Sources of Healthcare Revenue 35

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• Commercial insurers. Generally speak- ing, conventional indemnity insurers, or commercial insurers, simply pay for the eligible health services used by those individuals who pay premiums for healthcare insurance. They do not tend to have a say in how those health services are administered.

• Private pay. This is payment by patients themselves or by the families of pa- tients. Private pay is more prevalent in nursing facilities and in assisted-living facilities than in hospital settings. Phy- sicians’ offices also receive a certain amount of private pay revenue.

• Other. Additional sources of revenue for healthcare facilities include donations re- ceived by voluntary nonprofit organizations and tax revenues levied by governmental nonprofit organizations.

Healthcare revenue is often reported to managers by source of the revenue. Table 4-2 presents such a revenue summary. This example covers all types of sources discussed in this section. Both dollar totals and proportionate percentages by source are reported.

GROUPING REVENUE FOR PLANNING AND CONTROL

Grouping revenue by different classifications is an effective method for managers to use the information to plan and to control. In the preceding paragraph, we have just seen revenue reported by source. Other classification examples are now discussed.

Revenue Centers

A revenue center classification is one form of a responsibility center. In a responsibility cen- ter, the manager is responsible, as the name implies, for a particular set of activities. In the case of a revenue center, a particular unit of the organization is given responsibility for gen- erating revenues to meet a certain target. Actually, the responsibility in the healthcare set- ting is more for generating volume than for generating a specific revenue dollar amount. (The implication is that the volume will, in turn, generate the dollars.) Revenue centers tend to occur most often in special programs where volume is critical to survival of the program.

Care Settings

Grouping revenue by care setting recognizes the different sites at which services are deliv- ered. The most basic grouping by care settings is inpatient versus ambulatory services. Exhibit 4-1, however, illustrates a six-way classification of care setting revenues within a health system. In this case, hospital inpatient, hospital outpatient, off-site clinic, skilled

Table 4–2 Sample Monthly Statement of Revenue by Source

Summary Year to Date %

Private revenue $100,000 2.9 HMO revenue 560,000 16.7 Medicare revenue 1,420,000 42.4 Medicaid revenue 820,000 24.5 Commercial revenue 400,000 12.0 Other revenue 50,000 1.5

Total $3,350,000 100.0%

Grouping Revenue for Planning and Control 37

nursing facility, home health agency, and hospice are all accounted for. A percentage is shown for each. This type of classification is useful for a brochure or a report that profiles the different types of healthcare services offered by the organization.

Service Lines

In traditional cost accounting circles, a product line is a grouping of similar products.6 In the healthcare field, many organizations opt instead for “service line” terminology. A ser- vice line is a grouping of similar services. Strategic planning sometimes sets out service lines.

Hospitals

A number of hospitals have adopted the major diagnostic categories (MDCs) as service lines. One advantage of MDCs is that they are a universal designation in the United States. MDCs also have the advantage of possessing a standard definition. In another approach to service line classification, a hospital re- cently updated its strategic plan and settled on five service lines: (1) medical, (2) surgi- cal, (3) women and children, (4) mental health, and (5) rehabilitation (neuro ortho rehab) (see Figure 4-1).7

L o n g - Term Care

A continuing care retirement community (CCRC) can use its various levels of care as a starting point. Thus, the CCRC usually has four service lines, listed in the descending order of resident acuity: (1) skilled nursing facility, (2) nursing facility, (3) assisted liv- ing, and (4) independent living. The skilled nursing facility provides services for the highest level of resident acuity, and the in- dependent living provides services for the

Exhibit 4–1 Revenues by Care Setting

42% 38% 4% Hospital Hospital Off-Site Inpatient Outpatient Clinic

8% 6% 2% Skilled Home Hospice

Nursing Health Facility Agency

Women &

Children

Mental Health

Medical

Surgical

Rehabilitation

Figure 4–1 Hospital Service Lines. Source: Courtesy of Resource Group, Ltd., Dallas, Texas.

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lowest level of resident acuity. One adjustment to this approach includes isolating subacute services from the remainder of skilled nursing facility services. Another adjustment involves splitting independent living into two categories, one for Housing and Urban Development (HUD)–subsidized independent housing and the other for private-pay independent hous- ing. Figure 4-2 illustrates CCRC service lines by acuity level.

Home Care

Numerous categories of service delivery can be considered as “home care.” A practical ap- proach was taken by one home care entity—part of a health system—that defined its “key functions.” Key functions can in turn be converted to service lines (Figure 4-3).

Skilled Nursing Facility

Nursing Facility

Assisted Living

Independent Living

Nonsubsidized

Subsidized

Balance of SNF

Subacute

Figure 4–2 Long-Term Care Service Lines. Source: Courtesy of Resource Group, Ltd., Dallas, Texas.

Infusion Therapy

Mental Health

Pulmonary

Maternity Services

Wound Care

Diabetes Education

Special Services Home CareStandard Home Care

Figure 4–3 Home Care Service Lines. Source: Courtesy of Resource Group, Ltd., Dallas, Texas.

Physician Gro u p s

Service delivery for physician groups will vary, of course, with the nature of the group itself. A generic set of service lines is pre- sented in Figure 4-4.

Other Designations

Other classifications may meet the needs of particular organizations. Columbia/HCA is now reported to classify its services in a dis- ease management approach. The classifica- tion consists of eight disease management areas: (1) cancer, (2) cardiology, (3) dia- betes, (4) behavioral health, (5) workers’ compensation, (6) women’s services, (7) se- nior care, and (8) emergency services.8 Whatever classification is chosen, it must be consis- tent with the current structure of the organization.

INFORMATION CHECKPOINT

What Is Needed? A report that shows revenue in your organization. Where Is It Found? With your supervisor. How Is It Used? Examine the report to find various revenue sources; look

for how the contractual allowances and discounts are handled on the report.

What Is Needed? A report that groups revenue by some type of classification. Where Is It Found? With your supervisor, or in the information services divi-

sion. How Is It Used? Examine the report to discover the methods that are used

for grouping. You will probably find that these group- ings are used for performance measures. They can also be used for control and planning.

KEY TERMS

Discounted Fee for Service Fee for Service Managed Care Medicaid Program Medicare Program Payer Mix Revenue

Key Terms 39

Office Visits

Surgical Procedures

Emergency Medicine

Laboratory

Radiology

Figure 4–4 Physicians Group Service Lines. Source: Courtesy of Resource Group, Ltd., Dallas, Texas.

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DISCUSSION QUESTIONS

1. Does your organization receive revenue mainly in the form of payment after service is delivered or payment before service is delivered?

2. Why do you think this is so? 3. What do you believe the proportion of revenues from different sources is for your or-

ganization? 4. Do you believe that this proportion (payer mix) will change in the future? Why? 5. What grouping of revenue do you believe your organization uses (revenue centers,

care settings, service lines, other)? 6. From your perspective, would there be a better grouping possible? If so, why do you

think it is not used?