Finance 1 Exam 1 Reading
Investor-owner (for profit) corporation
A corporation that is owned by shareholders who furnish capital and expect to earn a return on their investment
Partnership
A nonincorporated business entity that is created by two or more individuals
Briefly explain the difference between cash and accrual accounting, and give an example of each.
Cash accounting is when you record the event in the period when the payment takes place where as accrual accounting is when you record events in the periods when the events occur Cash accounting: Bill patient in 2015 but they paid in 2016 so it would only appear on the 2016 financial statement Accrual accounting: Bill patient in 2015 and they pay in 2016 so it would only appear in the 2015 statement as "receivable"
Give some examples of current asset accounts.
Cash and cash equivalents short term investments
What is the difference between net income and operating income?
Note that both operating income and net income measure profitability as defined by GAAP. Net income is operating income + total nonoperating income
Financial management
The field of finance that provides the theory, concepts, and tools used by healthcare managers to make financial decisions
What is the difference between net income and cash flow?
Total profitability is net income Cash flow: the actual cash that flows into and out of the business than it does on reported net income
Accrued expenses
a business liability that stems from the fact that some obligations, such as wages, and taxes, are not paid immediately after the obligations are created
Liability
a fixed financial obligation of the business
Assets
an item that either possesses or creates economic benefit for the organization
What are the major differences between investor-owned and not-for-profit corporations?
no single body of individuals has has ownership rights to the firm's residual earnings or exercises control of the firm, not-for-profits are exempt from taxation, individual contributions to not-for-profits can be deducted from taxable income by the donor
Net patient accounts receivable (receivables)
the amount of money billed for services provided but not yet collected
Financial accounting
the field of accounting that focuses on the measurement and communication of the economic events and status of an entire organization
Medical coding
the process of transforming medical diagnoses and procedures into universally recognized numerical codes
Credit terms
the statement of terms that extends credit to a buyer
Briefly explain the following payment methods: 1. Cost based 2. Charge based and discounted charges 3. Per procedure 4. Per diagnosis 5. Per diem 6. Bundled 7. Capitation
1. Cost based: payer agrees to reimburse the provider for the costs incurred in providing services to insured population 2. Charge based: payers are billed and pay the provider according to a rate established by the provider (charge master) 3. Per procedure: a separate payment is made for each procedure performed on a patient 4. Per diagnosis: provider is paid a rate that depends on the patient's diagnosis 5. Per diem: provider is paid a fixed amount for each day that service is provided, regardless of the nature of the service 6. Bundled: payers make a single prospective payment that covers all services delivered in a single episode, whether the services are rendered by a single provider or multiple 7. Capitation: provider is paid a fixed amount per covered life per period (usually a month) regardless of the amount of services provided
Briefly explain the following characteristics of insurance: 1. Pooling of losses 2. Payment only for random losses 3. Risk transfer 4. Indemnification
1. Pooling of losses: sharing of losses is the heart of insurance, each individual realizes the average loss of the pool rather than the actual loss incurred; the sharing of losses by the entire group and the prediction of future losses with some accuracy 2. Payment only for random losses: payments are made only for losses that are unforeseen and unexpected and occurs as the result of chance 3. Risk transfer: the assumption of a risk by a business (or an individual) itself rather than by an insurance company; transfer of a risk from an insured to an insurer which is typically in a better financial position to bear the risk than the insured because of the law of large numbers 4. Indemnification: reimbursement to the insured if a loss occurs
What is the difference between a business and a pure charity? Between a business and a governmental agency?
A business sustains itself by selling goods or services and is thus in competition with other businesses for the consumer dollar; a pure charity obtains funds by soliciting contributions and then uses those funds to supply charitable (free) services; governmental agencies don't receive revenues by selling services or by soliciting contributions but instead derive them from taxing the populations that benefit from the service
What is the effect of the collection of a receivable on a business's equity account?
A collection for services previously billed and recorded does not affect equity. Revenue would have already been recorded when they were billed and cannot be recorded again—it just changes from accounts receivable to cash
Form 990
A form filed by not-for-profit organizations with the Internal Revenue Service that reports on governance and charitable activities
What is modified cash basis accounting?
A hybrid method of cash accounting used by most businesses; they combine some features of cash accounting with some features of accrual accounting
Four Cs
A mnemonic for the basic finance activities: costs, cash capital and control
Briefly, what are some of the commonly reported expense categories?
A natural classification: classifies expenses by the nature of the expense Functional classification: classifies expenses by purpose (like inpatient services, outpatient services, and administrative)
Cost
A resource use associated with providing or supporting a specific service
Proprietorship/sole proprietorship
A simple form of business owned by a single individual
What is meant but the term healthcare finance?
Accounting and financial management as it applies within the health services subsector
What is the accounting identity, and what information does it provide?
Accounting identity of basic accounting equation is the relationship that the right side of the balance sheet must equal the left side Total assets= liabilities + equity
What is the difference between accounting and financial management?
Accounting involves measuring and recording events that show an organization's operational and financial status while financial management are the theory, concepts, and tools that healthcare managers use to make these financial decisions.
How does accumulated depreciation tie in to the income statement?
Accumulated depreciation represents the total dollars of depreciation that have been expensed on the income statement against the historical costs of the organization's fixed assets. The amounts of depreciation expense reported on the income statement each year are totaled over time to create the accumulated depreciation account. Contra-asset account
From a financial perspective, briefly describe a business.
An entity that (1) obtains financial (capital) from the market place, (2) uses those funds to buy land, buildings, and equipment (3) operates those assets to create goods or services and then (4) sells those goods or services to create revenue
How can income statement data be used to estimate cash flow?
As a rough estimate, cash flow can be thought of as net income plus noncash expenses. Depreciation expense must be added back to net income to get cash flow because it initially was subtracted from revenues to obtain net income even though there was no associated cash outlay.
What are the three major sections of the balance sheet?
Assets, liability, and equity
Why is operating income such an important measure of profitability?
Because net operating revenues are all related to patient services, operating income measures the profitability of core operations Operating income is an important measure of a healthcare business's profitability because it focuses on the core activities of the business.
Why is the net income called "the bottom line"?
Because of its location on the income statement and its importance, net income is referred to as the bottom line.
Who are the primary users of financial accounting information?
Because of their direct financial interest in healthcare businesses, investors are the primary outside users of financial accounting information.
Why are the notes and supplementary information sections important parts of the financial statements?
Because the actual financial statements cannot possibly contain all relevant information, additional information is provided in the notes section. It typically begins with a descriptive section that discusses the organization's operating results over the past year as well as developments that are expected to affect future operations. Because the notes and supplementary information sections contain a great deal of information essential to a good understanding of the financial statements, a thorough examination always considers the information contained in these two sections.
What are some different types of private insurers?
Blue cross/blue shield: hospitals agree to provide a certain amount of services to program members who made period fixed payments, blue shield has physicians as providers instead of hospitals Commercial insurers: issued by life insurance companies, by casualty insurance and companies formed exclusively to offer health insurance (Aetna, Humana, UnitedHealth Group Self-insurers: individuals set aside funds to pay future costs as they occur (wealthy)
Briefly explain the three major categories shown on the statement.
Cash flows from operating expenses: focuses on the sources and uses of cash tied directly to operations; operating income + depreciation+ accts receivable + accts payable + inventories + accrued expenses (not short-term investments or notes payable) Cash flows from investing activities: investing activities are defined as both property and equipment (fixed assets) investments and securities investments; focus on gross investment in fixed assets Cash flows from financing activities: focuses on the organization's use of securities to finance its operations and all other business activities (like notes payable) o Net increase (decrease) in cash and equivalents and reconciliation: the sum of the totals from the three major sections listed above; can be easily manipulated to show a business is doing well so not super important
Describe how the following types of revenue are reported on the income statement:
Contractual discounts and allowances: the patient service revenue shown on the income statement is reported after contractual allowances have been considered and hence reimbursement amount expected; Charity care: given to patients are those who presumably are willing to pay for services provided but do not have the ability to do so; not reflected in the patient revenue reported Bad debt losses: they enter the amount they aren't planning on collecting and list it as the provision for bad debts
What are the three major categories of asset accounts?
Current Assets, Long-term Investments, Net Property and Equipment
What is the primary different between current assets and the remainder of the asset side of the balance sheet?
Current assets include cash and other assets that are expected to be converted into cash within one accounting period.
What are some of the accounts that would be classified as current liabilities?
Current liabilities include liabilities that must be paid within one accounting period. Seasonal employees
What is depreciation cash flow, and what is its expected use?
Eventually, the accumulated total of depreciation cash flow would be used by the company to replace its fixed assets as they wear out or become obsolete. Businesses must plan to generate net income, in addition to the accumulated depreciation funds, sufficient to replace existing fixed assets in the future at inflated costs or even to expand the asset base.
What does the total profit margin measure?
Example: each dollar of revenues and income produced 4.5 cents of profit and required 95.5 cents of expenses The higher the net income, and hence total margin, the lower the expenses. If the total margin for other similar clinics were known, judgments about how well the organization is doing in the area of expense control, relative to its peers, could be made.
What entities are involved in regulating the development and presentation of financial statements?
Financial Accounting Standards Board (FASB), American Institute of Certified Public Accountants (AICPA)
Why are widely accepted principles important for the measurement and recording of economic events?
Financial information constructed and presented according to standardized rules allows investors to make the best-informed decisions. All businesses, except for the smallest, create SEC-conforming financial statements.
Explain how ratio analysis can be used to help interpret income statement data.
Financial ratio analysis: one of the techniques used in financial condition analysis In financial ratio analysis, values found on the financial statements are combined to form ratios that have economic meaning and help managers and investors interpret the numbers.
What happens to net income?
For the most part it is reinvested in the business. An investor-owned corporation, on the other hand, may return a portion or all of its net income to owners in the form of dividend payments.
How does the statement differ between not-for-profit and for-profit entities?
For-profit: some portion of the earnings of the business is paid out as dividends to the owners, etc. Not-for-profit: the entire amount of net income is retained in the business so the equity of the clinic increases
Briefly, what is the difference between gross patient service revenue and net patient service revenue?
Gross patient service revenue: for each item and service provided Net patient service revenue: the amount recorded after the provision for bad debts has been accounted for
What are some different types of managed care plans?
Health maintenance organization (HMO): have as strong an incentive to prevent illnesses as to treat them; must use a certain provider Preferred provider organization (PPO): do not mandate beneficiaries use specific providers but encourage them to use physicians that are a part of the provider panel
What is the relationship between the retained earnings account on the balance sheet and earnings (net income) reported on the income statement?
In the case of not-for-profit businesses, there is simply nowhere else for those earnings to go. Most organizations have adjustments to net income that either increase or decrease the amount that flows to the balance sheet equity account.
Are investors passive users of this information?
Investors are not merely passive users of financial accounting information; they do more than just read and interpret the statements. They often create financial targets based on the numbers reported in financial statements that managers must attain or suffer some undesirable consequence.
What is the purpose of the statement of changes in equity (net assets)?
It reports how much of a business's income statement earnings flows to the balance sheet equity account
What are liabilities?
Liabilities represent claims against the assets of an organization that are fixed by contract. Wages, unpaid taxes, vendors
What is the relationship between assets and capital?
Liability and equity (capital) represent claims against the assets of the business by various classes of creditors.
What is Medicaid, and how is it administered?
Medicaid is a federal and state government health insurance program that provides benefits to low-income individuals and disabled who receive benefits from the Supplemental Security Income (SSI); administered by the federal government but modified at the state level
In regard to time, how do the income statement and balance sheet differ?
Most financial statements contain two or three years of data, with the most recent year presented first. Whereas the balance sheet reports a business's financial position over a single point in time, the income statement contains operational results over a specified period of time.
What is the purpose of the statement of changes in equity?
Most organizations have organizations have adjustments to net income that either increase or decrease the amount that flows to the balance sheet equity account.
What categories of revenue are reported on the income statement?
Nonoperating income (contributions and security investments) and operating revenues (revenues that stem from the provision of patient services
Why is nonoperating income reported separately from revenue? Is this always the case?
Nonoperating income is not central to the core business, which is providing healthcare services. Overreliance on nonoperating income could mask operational inefficiencies that, if not corrected, could lefinancial ad to future problems. Some providers don't have a separate section titled nonoperating income. Rather, nonoperating income is included in the revenue section that heads the income statement. Total revenues would then include both operating and nonoperating revenues.
What is the difference between notes payable and long-term debt?
Notes payable is the same thing as short-term debt, meaning it must be paid back within this accounting period (usually 1 year) The long-term debt section of the balance sheet represents debt financing to the organization with maturities of more than one accounting period.
What is the link between coding and reimbursement?
Proper coding can mean reimbursement from third-party payers
What is the purpose of SOX, and what are some of its provisions?
Sarbanes-Oxley Act—a measure to improve transparency in financial accounting and prevent fraud (transparency: timely, meaningful, and reliable disclosure of a business's financial information) Auditors can no longer provide consulting or non-auditing services to the companies that they audit The lead partners of the audit team for any company must rotate off the team every 5 years Senior managers involved in the audits of their companies cannot have been employed by the auditing firm during the one-year period preceding the audit
Use an example to explain the logic behind accruals.
Sunnyvale's staff earns it wages and benefits on a daily basis as the work is performed. However, the clinic pays its workers every two weeks. Therefore, other than on paydays, the clinic owes its staff some amount of salaries for work performed. Whenever the obligation to pay wages extends into the next accounting period, an accrual is created on the balance sheet.
What is the depreciation shield?
The amount of taxes saved is called the depreciation shield—the dollar amount of taxes that will not have to be paid because of the business's depreciation expense.
What is the purpose of the balance sheet?
The balance sheet contains information concerning an organization's assets and the financing used to acquire those assets. The balance sheet presents a snapshot of the financial position of an organization at a given point in time.
How does the statement of cash flows differ from the income statement?
The balance sheet reports the cash balance on hand at the end of the period, but it does not provide details on why the cash account is greater or smaller than the previous year's statement. There also may be cash raised by means other than operations that does not even appear on the income statement. The cash coming into a business does not sit in the cash account forever. Most of it goes to pay operating expenses or to purchase other assets—thus the cash account does not increase by the gross amount of cash generated, and it would be useful to know how the difference was spent. The statement of cash flows details where a business gets its cash and what happens to it. The income statement focuses on accounting profitability, while the statement of cash flows focuses on the movement of cash.
Why does GAAP favor accrual over cash accounting?
The cash method presents an incomplete picture of the financial status of a business so they prefer accrual accounting
Are there applicable differences in the income statements of not-for-profit businesses and investor-owned businesses?
The financial statements of investor-owned and not-for-profit businesses are generally similar except for entries, such as tax payments, that are applicable only to one form of ownership.
How has this role changed over time?
The focus is now on cost containment where it used to just be on accounting for costs
What is the goal of financial accounting?
The goal of financial accounting is to provide information about organizations that is useful to present and future investors and other users in making rational financial and investment decisions.
What are the impacts of taxes and depreciation on net income and cash flow?
The impact of taxes on net income is clear: the addition of taxes reduces net income and the greater the tax rate, the greater the reduction. Depreciation expense lowers taxable income by a like amount and hence lowers taxes by T x depreciation expense, where T is the tax rate.
In your view, what is the most important piece of information reported on the statement?
The net cash flow from operations because it is a more important indicator of financial well-being than is the net increase (or decrease) in cash line.
What is the difference between gross property and equipment and net property and equipment?
The net property and equipment is first listed as historical costs. The total of such historical costs is labeled gross property and equipment. Net property and equipment (fixed assets) are highly illiquid and typically are used over long periods of time by the organization.
What is the effect on a business's equity account of a payment on a bill that has already been booked (recorded as an accounts payable)?
The payment on an account for an expense already recognized decreases both assets (cash) and liabilities (payable)
What is the difference between long-term debt and current portions of long-term debt?
The portion of long-term debt that must be paid in the coming year is recorded on the balance sheet as a current liability titled current portion of long-term debt.
What conditions must be met when entering transactions on the balance sheet?
The primary concept behind all balance sheet transactions is that the basic accounting equation must be preserved—that is, the balance sheet must balance. Thus, each transaction must have a duel effect, either one on the left side and one on the right side or offsetting effects on the same side.
What is the primary purpose of the income statement?
The primary purpose is to summarize the ability of an organization to generate profits
What is the purpose of the auditor's opinion?
The results of the external audit are reported in the auditor's opinion, which is a letter attached to the financial statements stating whether or not the statements are a fair presentation of the business's operations, cash flows, and financial position as specified by GAAP.
Why do not-for-profit businesses need to make a profit?
They need a profit to be able to pay for expenses that arise and maintain their facility and faculty.
Why is it important to understand the basic accounting concepts that underlie the preparation of financial accounting?
To better understand the content of financial statements, it is useful to discuss some aspects of the conceptual framework that accountants apply when they develop financial statements. By understanding this framework, readers will be better prepared to understand and interpret the financial statements of healthcare organizations.
What are the difference in the equity sections of not-for-profit and investor-owned providers?
To determine what belongs to the owners, whether explicitly recognized in for-profit businesses or implied in not-for-profit organizations, fixed claims (liabilities) are subtracted from the book value of the business's assets. The remainder, the net assets (equity), represents the residual value of the assets of the organization.
What is the logic behind depreciation expense?
To match the cost of fixed assets to the revenues produced by such long-lived assets, accountants use the concept of depreciation expense, which spreads the cost of a fixed asset over many years. The longer you have something the more value it loses.
Do any problems arise when translating physical assets and economic events into monetary units? Give one or two illustrations to support your answer.
Yes—numbers shown on the balance sheet to reflect a business's assets and liabilities generally reflect historical costs and prices. However, inventories may be spoiled, obsolete, or even missing Land, buildings and equipment may have current values that are much higher or lower than their historical costs Money owed to the business may be uncollectable Costs reported on an income statement may be understated or overstated, and some costs, such as depreciation, don't even represent current cash expenses.
Fixed assets
a business's long-term assets, such as land, buildings, and equipment. Usually labeled net property and equipment on the balance sheet
Managed care plan
a combined effort by an insurer and a group of providers with the purpose of both increasing quality of care and decreasing costs
What is meant by the term managed care?
a continuum of plans, which can vary significantly in their approaches to providing combined insurance and healthcare services; common feature in managed care plans is that the insurer has a mechanism by which it controls, or at least influences, patients' utilization of healthcare services
Tax-exempt (not-for-profit) corporation
a corporation that has a charitable purpose, is tax exempt, and has no owners
Debt ratio
a debt utilization ratio that measures the proportion of debt (versus equity) financing. Typically defined as total debt (liabilities) divided by total assets
Budget
a detailed plan, in dollar terms, of how a business and its subunits will acquire and utilize resources during a specified period of time
Chart of accountings
a document that assigns a unique numerical identifier to every account of an organization
Medicaid
a federal and state government health insurance program that provides benefits to low-income individuals
Medicare
a federal government health insurance program that primarily provides benefits to individuals aged 65 or older
Charge-based reimbursement
a fee-for-service reimbursement method based on charges (chargemaster prices)
Cost-based reimbursement
a fee-for-service reimbursement method based on the costs incurred in providing services
Prospective payment
a fee-for-service reimbursement method that is established beforehand by the third-party payers and, in theory, not related to costs or charges
Per diem payment
a fee-for-service reimbursement method that pays a set amount for each inpatient day
Statement of cash flows
a financial statement that focuses on the cash flow that come into and go out of a business
Balance Sheet
a financial statement that lists a business's assets, liabilities, and equity (fund capital)
Statements of changes in equity
a financial statement that reports how much of a business's income statement earnings flows to the balance sheet equity account
Income statement
a financial statement, prepared in accordance with generally accepted accounting principles (GAAP), the summarizes a business's revenues, expenses, and profitability (statement of operations, statement of activities, or statement of revenues and expenses)
Third-party payer
a generic term for any outside party, typically an insurance company or a government program, that pays for part or all of a patient's healthcare services
Corporation
a legal business entity that is separate and distinct from its owners (or community) and managers
Net working capital
a liquidity measure equal to current assets minus current liabilities
Chargemaster
a list of all items and services provided by a health services organization containing their gross (list) prices
Relative value unit (RVU)
a measure of the amount of resources consumed to provide a particular service. When applied to physicians, a measure of the amount of work, practice expenses, and liability costs associated with a particular service
Healthcare Common Procedure Coding System (HCPCS)
a medical coding system that expands the CPT codes to include nonphysician services and durable medical equipment
Accountable care organization (ACO)
a network of healthcare providers joined together for the purpose of increasing patient service quality and reducing costs
What is an accountable care organization (ACO), and what is it designed to accomplish?
a network of physicians, other clinicians, and hospitals and clinics that shares responsibility for providing coordinated care to patients; they are jointly accountable for the health of their patients, but also receive financial incentives to cooperate and reduce costs by avoiding unnecessary tests and procedures, eliminating duplication of services and coordinating patient care
Depreciation
a noncash charge against earnings on the income statement that reflects the "wear and tear" on a business's fixed assets (property and equipment)
Limited liability partnership (LLP)
a partnership form of organization that limits the professional (malpractice) liability of its payers
Stakeholder
a party that has an interest, often financial, in a business. Stakeholders can be affected by the business's actions, objectives, or policies
Real asset
a physical asset, such as a medical practice or a piece of diagnostic equipment, that has the potential to generate future cash inflows
Financial Accounting Standards Board (FASB)
a private organization whose mission is to establish and improve the standards of financial accounting and reporting for private businesses
Capitation
a reimbursement methodology that is based on the number of covered lives as opposed to the amount of services provided
Fee-for-service
a reimbursement methodology that provides payment each time a service is provided
Annual report
a report issued annually by an organization to its stakeholders that contains descriptive information and historical financial statements
Financial asset
a security, such as a stock or bond, that represents a claim on a business's cash flows. Financial assets are purchased with the expectation of receiving future payments
Medical home
a team-based model of care led by a personal physician who provides continuous and coordinated care throughout a patient's lifetime with a goal of maximizing health outcomes
What is the medical home model, and what is its purpose?
a team-based model of care led by a physician who provides continuous and coordinated care throughout a patient's lifetime; the goal is to maximize health outcomes by assigning a team to work collaboratively ti ensure coordinated and integrated care, access and communication, quality and safety
Briefly explain the materiality as it applies to the preparation of financial statements:
affects the presentation of the financial statements rather than their aggregate financial content (i.e. the final numbers); conceptual framework, when the number is big and important in relation to the whole, it deserves its own line
Value-based purchasing (VBP)
an approach to provider reimbursement that rewards quality of care rather than quantity of care
Current assets
an asset that is expected to be converted into cash within one accounting period (often a year)
Schedule H
an attachment to Form 990 filed by not-for-profit hospitals that gives additional information on charitable activities
Health insurance exchange
an online marketplace created primarily by the states of the federal government that insurers use to post plan details and consumers use to purchase healthcare insurance
What is a health insurance exchange?
an online marketplace created primarily by the states or the federal government that insurers use to post plan details and consumers use to purchase healthcare insurance
Briefly explain "T-account" used in the recording and compiling of accounting data:
because accounts have both debit and credit entries, they traditionally have been set up in a "T" format and hence are called T accounts, with debits entered on the left side of the ventricle line and credits entered on the ride side
Briefly explain the full disclosure as it applies to the preparation of financial statements:
because financial statements must be relevant to a diversity of users, the full-disclosure principle pushes preparers to include even more information in financial statements
Current Procedural Terminology (CPT) codes
codes applied to medical, surgical, and diagnostic procedures
What are the four Cs?
costs, cash, capital and control
What is the purpose of hybrid forms?
designed to limit owners' liability without having to fully incorporate
Briefly, what are the origins and purpose of Medicare?
established by Congress in 1965 to provide medical benefits to individuals aged 65 or older; pays 17% of all US healthcare services
What are the provider incentives created under fee-for-service reimbursement? Under capitation?
fee-for-service-- incentive to provide the highest possible amount of services (more visits, inpatient stays) and reduce costs; capitation: reduce costs and utilization
What is the major difference between fee-for-service reimbursement and capitation?
fee-for-service-- providers are reimbursed on the basis of the amount of services provided and capitation is paid a fixed amount per covered life per period regardless of the amount of services provided
What is the difference in goals between investor-owned and not-for-profit businesses?
for investor-owned corporations is generally assumed to be shareholder wealth maximization (stock price maximization); not-for-profit organizations have to please all of the organization's stakeholders
What pressures recently have been placed on not-for-profit hospitals to ensure that they meet their charitable mission?
guidelines for charity care that include (1) giving discounts to uninsured patients of limited means (2) establishing a common definition of community benefit (3) improving transparency or the ability of outsiders to understand a business's governance structure and policies
Name a few settings in which health services are provided.
hospitals, ambulatory care facilities, long-term care facilities, and at home
Historical Cost
in accounting, the purchase price of an asset; requires organizations to report the values of most assets based on acquisition costs rather than fair market value (aka might be worth a million more dollars today but still reported at original value)
What is adverse selection, and how do insurers deal with the problem?
individuals and businesses that are more likely to have claims are more inclined to purchase insurance than those that are less likely to have claims; they deal with it by creating a large, well-diversified pool of subscribers
Will reform have a greater impact on insurers or providers?
insurers
Briefly describe the impact of ACA on health insurance.
it expands insurance coverage and improve insurance affordability and access
Briefly explain the going concern as it applies to the preparation of financial statements:
it is assumed that the accounting entity will operate as a going concern and hence will have an indefinite life. This means that assets, in general, should be valued on the basis of their contribution to an ongoing business as opposed to their current fair market value.
Briefly describe the impact of the ACA on payments to providers.
move from fee-for-service model to a prospective payment model (bundled payments or capitation) these aim to move reimbursement from based on the amount of services provided to based on value and better outcomes
Total (profit) margin
net income divided by total revenues. It measures the amount of total profit per dollar of total revenues.
International Classification of Diseases (ICD) codes
numerical codes for designating diseases plus a variety of signs, symptoms, and external causes of injury
Is income from securities investments included in the revenue section? If not, why not?
o No—the primary contributions and securities investments will be reported at the bottom of the income statement o When all the revenue associated with patient services is totaled, the amount reported as net operating revenues represents that net amount of revenue that stems from a provider's core operations—the provision of patient services.
What are the major components of the income statement?
o Revenues: represent both the cash received and the unpaid obligations of payers for services provided during each year presented (also contributions and investment income—stem from donations and securities investments) o Expenses: classified as operating or capital (financial) Operating expenses: consist of salaries, supplies, insurance, and other costs directly related to providing services Capital costs: costs associated with the buildings and equipment used by the organization, such as depreciation, lease, and interest expenses o Profitability: expenses are subtracted from revenues to determine an organization's profitability
What are the historical foundations of financial accounting statements?
o Specialization began and did away with self-contained families; trade came with specialization and trade eventually expanded beyond the local area o Money developed and so did banking with wealthy merchants lending money to enterprising shops—loans eventually began being made to distant locations o Lenders could no longer easily inspect the assets that backed their loans so they needed a practical way of summarizing the value of those assets. o Certain loans were made on the basis of a share of the profits of the business, so a uniform, widely accepted method for expressing income was required. o Owners required reports to see how effectively their own enterprises were being operated, and governments needed information to assess taxes.
Default
occurs when a borrower fails to make a promised debt payment. Note that technical default occurs when the borrower fails to meet one of the restrictions in the loan agreement but is still making the required payments.
Briefly explain "posting" used in the recording and compiling of accounting data:
once a transaction is identified, it must be recorded, or posted, to an account
Operating margin
operating income divided by net operating revenues. It measures the amount of operating profit per dollar of operating revenues and focuses on the core activities of a business. (does not include contributions and investment income)
Premium revenue
patient service revenue that stems from capitated patients as opposed to fee-for-service patients.
Explain the method used by Medicare to reimburse for physician services.
payments for services are determined by the resource costs needed to provide them as measured by relative value units (skill level and training required with intensity and time required, equipment and supplies costs and office support costs, relative risk and cost of potential malpractice claim)
What are the three primary forms of business organization, and how do they differ?
proprietorship (1 owner), partnership (2 or more owners but non incorporated), corporations (separate and distinct from its owners)
What are the purpose and content of IRS Form 990?
provide IRS and public with financial information about not-for-profit organizations and used to prevent organizations from abusing their tax-exempt status; it contains an annual income tax return
Briefly explain the monetary unit as it applies to the preparation of financial statements:
provides the common basis by which economic events are measured. This unit is the dollar in the US, unadjusted for inflation or deflation.
Briefly explain "account" used in the recording and compiling of accounting data:
record of transactions for one uniquely identified activity
What are some important issues facing healthcare managers today?
reimbursement, Medicare, Medicare, bad debt losses
Briefly explain the expense matching as it applies to the preparation of financial statements:
requires that an organization's expenses be matched, to the extent possible, with the revenues to which they are related
Patient service revenue
revenue that stems solely from the provision of patient services. In some situations, may only reflect revenue from fee-for-service patients.
Financial statements
statements prepared by accountants that convey the financial status of an organization. The four primary statements are the income statement, balance sheet, statement of changes in equity, and statements of cash flows
Equity
the book value of the ownership position in a business, where book value is the value that appears on a business's financial statements. In other words, the value according to GAAP
What is the primary purpose of healthcare reform?
the central goal is to expand healthcare coverage through shared responsibility between government , individuals and employers
Revenue recognition principle
the concept that revenues must be recognized in the accounting period in which they are realizable and earned o Generally, this is the period in which the service is rendered, because at that point the price is known (realizable) and the service has been provided (earned)
Expenses
the costs of doing business. Or, the dollar amount of resources used in providing services.
Trade credit
the credit offered to businesses by suppliers (vendors) when credit terms are offered
Net assets
the dollar value, according to GAAP, of a business's assets after subtracting the business's liabilities. In not-for-profit businesses, the term often is used on the balance sheet in place of equity
Operating income
the earnings of a business directly related to core activities. For a healthcare provider, earnings related to patient services
Nonoperating income
the earnings of a business that are unrelated to core activities. For a healthcare provider, the most common sources are contributions and investment income
Accounting entity
the entity (business) for which a set of accounting statements applies o Important for two reasons: first, the investor-owned businesses, financial accounting data must be pertinent to the business activity as opposed to the personal affairs of the owners. Second, within any business, the accounting entity defines the specific areas of the business to be included in the statements
Securities and Exchange Commission (SEC)
the federal government agency that regulates the sale of securities and the operations of securities and the operations of securities exchanges. Also has overall responsibility for the format and content of financial statements
Bundled (global) payment
the fee-for-service payment of a single amount for the complete set of services required to treat a single episode
Accounting
the field of finance that involves the measuring and recording of events, in dollar terms, that reflect an organization's operational and financial status
Briefly describe the coding system used in hospitals (ICD codes) and medical practices (CPT codes).
the first three digits denote the disease category, and the fourth and fifth digits provide additional information; ICD: standard for designating diseases plus a wide variety of signs, symptoms, and external causes for injury; CPT: used to specify medical procedures (treatment)
Capital
the funds raised by a business that will be invested in assets, such as land, buildings, and equipment, and support the organizational mission
Briefly describe the typical structure of the finance department within a health services organization.
the head is the chief financial officer (or VP-finance); the CFO reports to the chief executive office (CEO); the comptroller and treasurer work underneath the CFO
General ledger
the master listing of an organization's primary accounts, which record the transactions that ultimately are used to create a business's financial statements
Inpatient prospective payment system (IPPS)
the method, based on diagnosis, that Medicare uses to reimburse providers for inpatient services
What is the moral hazard problem, and how do insurers mitigate the problem?
the owner who deliberately sets a failing business on fire to collect the insurance or when insurance covers the whole cost people aren't affected by the price as much; primary weapon that insurers have against the moral hazard problem is coinsurance, which requires insured individuals to pay a certain percentage go eligible medical expenses
Accounting Period
the period (amount of time) covered by a set of financial statements—often a year, but sometimes a quarter or another time period
Moral hazard
the problem faced by insurance companies because individuals are more likely to use unneeded health services when they are not paying the full cost of those services
Adverse selection
the problem faced by insurance companies because individuals who are more likely to have claims are also more likely to purchase insurance
Capital budgeting
the process of analyzing and choosing new long-term assets such as land, buildings, and equipment
American Institute of Certified Public Accountants (AICPA)
the professional association of public (financial) accountants
Accrual accounting
the recording of economic events in the periods in which the events occur, even if the associated cash receipts or payments happen in a different period; earned revenue is recognized financial statements when a service has been provided that creates a payment obligation on the part of the payer
Cash accounting
the recording of economic events when a cash exchange takes place
Generally Accepted Accounting Principles (GAAP)
the set of guidelines that has evolved to foster the consistent preparation and presentation of financial statements—ONLY APPLIES TO FINANCIAL ACCOUNTING
Briefly explain "transaction" used in the recording and compiling of accounting data:
the starting point for the identification and recording of financial accounting information is a transaction—an exchange of goods or services from one individual or enterprise to another; must be supported by documentation
Double entry system
the system used to make accounting journal entries. Called double entry because each transaction has to be entered in at least two different accounts
Net income
the total earnings of a business, including both operating and nonoperating income
Book value
the value of a business's assets, liabilities, and equity as reported on the balance sheet. In other words, the value in accordance with generally accepted accounting principles (GAAP)
Fiscal Year
the year covered by an organization's financial statements. It usually, but not necessarily, coincides with a calendar year. (governments= October 1 to September 30)
What is the role of finance in today's health services organizations?
to plan for, acquire, and use resources to maximize the efficiency and value of the enterprise
Briefly describe the method used by Medicare to reimburse for inpatient services.
two national base payment rates (operating and capital expenses), which are then adjusted to account for two factors the affect the costs of providing care: (1) the patient's condition and treatment and (2) market conditions in the facility's geographic location; MS-DRGs compare to other patients with similar clinical problems so pay same
Briefly explain the cost-benefit as it applies to the preparation of financial statements:
when deciding what information should be reported, and how that information should be reported, standards setters and accountants must determine whether the benefits of the information outweigh the associated costs