Chapter 5 Discussion Questions

What does "1.5/15 net 25" mean?

"1.5/15 net 25" means that a 1.5% discount will be given if payment is made within 15 days. "Net 25" means that if the discount is not taken, then the full amount is due within 25 days. The time between day 15 and day 25 is called the "net period."

What is an unsecured loan?

An unsecured loan is one which is not backed by collateral.

What is the formula to determine the approximate annual interest cost for not taking a discount? When should discounts be taken?

Approximate Interest Rate = (Discount Percent x 365) / ((1 - Discount Percent) x Net Period). The general rule is to pay on the last day of the discount period, or, if the discount is not taken, to pay on the last day of the "net" period. Although it is true that interest costs seem to decrease as the number of days the bill is not paid increases, at a certain point after the "net" period, new costs are encountered due to unfavorable relations.

As more health care costs are shifted to the patient through high deductible health plans, what policy can a health care provider implement to ensure timely payment for elective surgery procedures?

Cash payment should occur at the first encounter with the patient, especially for elective procedures and in cases where insurance coverage cannot be validated.

How do compensating balances affect the "true" interest rate the borrower pays?

Compensating balances increase the true or effective interest rate that the borrower must pay, because in effect it requires the borrower to maintain a reserve which cannot be used for other purposes.

What is the critical step in capturing charges and identifying billing items?

Correctly identifying the diagnostic and procedural codes

State the three reasons why a health care facility holds cash.

Daily operations, precautionary purposes, and speculative purposes. Daily operations refers to holding cash so that day-to-day bills may be paid. Precautionary purposes refers to holding cash to meet unexpected demands. Speculative reasons refers to holding cash to take advantage of unexpected opportunities.

Identify and define two methods to finance accounts receivable.

Factoring and pledging are two methods to finance accounts receivable. Factoring refers to selling accounts receivable, usually to a bank, at a discount. Factoring is usually undertaken in cases: 1) where monies are needed before cash will normally become available; and 2) when the benefits of selling the receivables at a discount outweigh the returns expected upon collection of the accounts. Pledging refers to using receivables as collateral.

Compare aggressive and conservative asset mix strategies. The comparison should address goals, liquidity, and risk.

In the aggressive approach the health care organization attempts to maximize its returns by investing its funds in non-liquid assets such as buildings and equipment. By minimizing its working capital in this way, the organization faces increased risk of inventory stock-outs, lost customers from stringent credit policies, and lack of cash to pay employees and suppliers. Conversely, in the conservative approach, a health care organization accepts lower returns with higher liquidity (typically earned on shorter-term investments) so as to minimize its risk of not having sufficient funds to pay current obligations. (See Exhibit 5-3.)

What is the function of working capital?

It allows a health care organization to collect its funds, pay its employees, buy its supplies and pays its creditors.

Identify two problems that can delay the billing process.

Name changes Address changes

Why is preregistration important in the revenue cycle management process?

Pre-registration and admission screenings are important because they help the health care organization determine a patient's ability to pay, including the verification of name, address, employment status, and insurance coverage.

Two methods to monitor accounts receivable are as a percentage of net patient revenues and as days in accounts receivable. What factor can cause the former to be a better measure than the latter with regard to collections activities?

Receivables as a percent of net patient revenues controls for the effect of the timing of revenue during a period.

What is the difference between temporary and permanent working capital needs? What is the general rule about when to borrow long term or short term?

Temporary working capital needs result from seasonal changes, while permanent working capital needs arise from more ongoing factors, such as a permanent increase in patient volume. The general rule is to borrow shortterm for short-term needs and long-term for long-term needs. This often results in a mixed strategy for health care providers.

Describe the lockbox technique for managing collection float.

The lockbox approach attempts to decrease mail and processing time by having the health care organization's customers send their checks to a PO box near an affiliated bank. The bank clears the payments from the box at different times during the day.

Identify the alternatives for investing cash on a short term basis, and discuss the general characteristics of each alternative.

The major alternatives for investing cash on a short-term basis are: Tbills, CDs, Commercial Paper, and Money Market Mutual Funds. In general, the trade-offs are between risk, return, and liquidity. (See Exhibit 510.)

What is the major obstacle that health care providers face in receiving their payments electronically?

The major obstacle health care providers face in receiving payments electronically is reconciling payments with the Electronic Remittance Advice (ERA), which provides details on how the claims were paid by the thirdparty payer, and/or why they were denied

What are the objectives of billing, credit, and collections policies?

The objectives of billing, credit, and collection policies are to accelerate cash receipts and to maximize the ultimate collectable amount of the accounts receivable.

In the hospital's billing process, why is medical records a critical department?

The payors, especially Medicare, require proper coding of clinical information in order to receive accurate and prompt payment.

What are the main sources of temporary cash?

The three primary sources of temporary funds include: bank loans, extension of credit from suppliers (i.e., trade payables), and billings, collections, and disbursement policies which increase the speed with which money is collected.

What are the two types of unsecured bank loans? Describe each one.

The two major types of unsecured bank loans are normal lines of credit and revolving lines of credit. A normal line of credit is an informal agreement established by the bank and the borrower with respect to the maximum amount of funds which can be borrowed. Thus, the bank is not legally obligated to fulfill the borrower's credit request. On the other hand, a revolving line of credit legally requires the bank to fulfill the borrower's credit request up to the prenegotiated limit.

In terms of cash flow, what are the stages of the working capital cycle?

The working capital cycle looks at the four major phases of the inflows and outflows of cash: 1) Obtaining cash; 2) Turning cash into resources and paying bills; 3) Using the resources to provide services; 4) Billing and collecting revenues earned so that the cycle can be continued.

In terms of risk and return (profit), compare the advantages and disadvantages of both short- and-long-term borrowing to meet working capital needs.

Under normal conditions, health care facilities can usually achieve higher earnings (lower interest costs) through short-term debt, but will do so at an increased risk of being unable to meet higher debt payments. On the other hand, facilities borrowing long-term to support working capital needs lower their earnings (increased interest costs), but reduce the risk through lower debt payments. (See Exhibit 5-4.)

Describe the two components of a working capital management strategy?

Working capital management strategy has two components: asset mix and financing mix. Asset mix refers to the amount of working capital the organization keeps on hand relative to its potential working capital obligations. Financing mix refers to how the organization chooses to finance its working capital needs.

List three ways to measure accounts receivable performance.

an aging of receivables measuring days in accounts receivable computation of receivables as a percent of net patient revenues.