PHMS 509 Final

What does the concept Key Performance Indicator mean? How are Key Performance Indicators used to make managerial decisions?

A key performance indicator is a metric chosen by a business to monitor one aspect of operational or financial performance routinely. For example, the number of visits for a clinic (or net admissions for a hospital) might be the KPI that monitors volume. A dashboard is a way to present KPIs in an easily readable format. The dashboard presents metrics as dials or with color codes to signify whether benchmarks are being met. Some KPIs for example volume, are reviewed daily, while others are reviewed less often.

What is an Integrated Delivery System? What are the distinctions between Vertical and Horizontal systems? Cite examples of each.

An integrated delivery system has the capability of providing all healthcare services needed by a defined population. It consists of a number of different types of healthcare organizations, such as hospitals, clinics, and nursing homes, owned and operated as a single entity. The complexity of this system makes the overall management process much more difficult than in smaller organizations that focus on one type of service. Vertical system is a single business entity that owns a group of related, but not identical providers, such as hospitals, medical practices, and nursing homes. Horizontal system is a single business entity that owns a group of similar providers, such as hospitals.

With respect to the Balance Sheet what is the Basic Accounting Equation? Discuss each component. Describe how they are interrelated.

Assets = Liabilities + Equity Assets: either possess (cash) or create (buildings and equipment) economic benefit to the business. Liabilities: represent claims against the business that are fixed by contract. Failure to meet these claims can result in bankruptcy and potential closure. (In effect, liabilities represent payment obligations of the business.) Most common current liabilities: notes payable, accounts payable, and accrued expenses. Equity: represents the non-liability claims against a business's assets. Equity (net assets) = total assets - total liabilities

With respect to capital structure, define restrictive covenants, call provisions, and cost of debt. Discuss the process of capital structure analysis.

Capital structure: the financing mix used to acquire a business's assets or the proportion of debt used by a business. Restrictive covenant: Call Provisions: a stipulation in a contract that give the issuing company the right to redeem the bonds prior to maturity. Cost of Debt: the return that a company provides to its debt holders and creditors. Ex: bonds, loans, interest rate, etc. Capital Structure Analysis:

Define the concept of Capitation. If you are a manager of a department and your reimbursement shifts from predominantly Fee-For-Service to predominantly Capitation, what might you try to do with your direct costs? Why?

Capitation: puts physician at financial risk for patients, fixed amount of money per patient per unity of time which the services are provided. If reimbursement is tied to fee for service/volume, then the provider's financial risk is minimized if all costs are variable. If reimbursement is exclusively Capitation, then the provider's financial risk is minimized if all costs are fixed.

What are the three major categories that comprise the Balance Sheet? Discuss how the information on the Balance Sheet is used by an organization. Provide examples of items in each of the major categories found on the Balance Sheet.

Categories that comprise the balance sheet: assets, liabilities, and equity. The organization uses a balance sheet because it shows the assets of said organization. It also shows the liabilities and equity of the business, or how the assets are financed. The balance sheet presents a business's position at a given point in time. The balance sheet shows a right and left side. On the left, assets are shown. Assets include current assets, long-term assets and then the total. On the right, liabilities and equity is shown. It includes current liabilities, long-term liabilities, equity and then the total for both.

What are some of the differences between Licensure and Certificate of Need? Elaborate on the financial/business effect of each.

Certificate of Need (CON) is the approval required by many states before a new healthcare facility can be constructed. CON proponents claim the system helps control costs by preventing excess capacity. Critics, contend that CON regulation impedes competition and the spread of new technologies while protecting established providers, even those that do not operate efficiently. Licensure is the process of granting "permission" for healthcare professionals to practice. Most professional licenses are granted by states with the goal of protecting the public from incomplete practitioners. States require licensure of certain healthcare providers in an effort to protect health, safety, and welfare of the public. Licensure regulations establish minimum standards that must be met to provide a service. Many types of providers are licensed, including entire facilities (such as hospitals and nursing homes) and individuals (such as physicians, dentists, nurses, and even some managers). Licensed facilities must submit to periodic inspections and review activities. Such reviews focus more on physical features and safety than on patient care and outcomes, although progress it being made to change this practice. Thus, licensure has not necessarily ensure that the public will receive high-quality services.

Compare and contrast the concepts of Compounding and Discounting.

Compounding: the process of finding the future value of a current amount or series of cash flow. Ask the question if we invest xyz today, what will be the amount in the future. FV=PV(1+r)^n Discounting: the process of finding the present value of an amount or series of cash flow expected to be received in the future. Ask the question how much do we have to invest right now to get to xyz in the future. PV=FV/(1+r)^n

What is a Contribution Margin? What is a Profit Margin? How do they differ? Why is each an important measure?

Contribution Margin: difference between per visit (per unit) revenue and variable cost rate. Profit/Gross Margin: measures amount of revenue that remains after subtracting costs directly associated with production (revenue minus cost of goods sold). Contribution Margin is per item profit metric and Profit Margin encompasses the entire company's profitability. Fixed overhead costs not included in contribution margin, so Contribution Margin is always higher than Profit Margin.

What is Conventional Budgeting? What is Zero-Based Budgeting? How are they different? Which is typically done in the real world? Why?

Conventional (incremental) budgeting: assumes that the previous year's budget accurately reflects the true costs and revenues of the organization; minor changes are made tot the current year's budget to reflect any changes in circumstances. Zero-based budgeting: starts with a clean slate; departments begin with a budget of zero; department managers must justify every line item on the basis of expected volume; all costs and revenues must be justified and created from scratch. Differences: conventional budgeting is less costly to perform, but any inaccuracies existing in such a budget tend to recur year after year; zero-based budgeting is more time consuming, but usually this approach produces a more realistic and effective budget.

Compare and contrast Cost Accounting and Accrual Accounting. Which is typically used and why?

Cost Accounting recognizes an event when a cash transaction takes place. Revenues are reported when the payments for services are actually received and costs are reported when the payments are made. No complex rules are required for the preparation of financial statements. It is closely aligned to accounting for income tax purposes, and hence cash accounting statements are easy to translate into tax filing data. Accrual accounting is a method of accounting that uses economic events, not cash transactions, as the basis for reporting. Accrual accounting recognizes an even when an obligation is created. Its provides a better picture of the true economic status of a business, but more complicated. Revenues are reported when the service is rendered (payment obligation is created), and costs are reported when the obligation to pay is created. The GAAP requires accrual accounting, so most businesses, including for-profit and not-for-profitt, use this method. However, many small businesses, which do not have to provide financial statements to the public, use cash accounting.

What is a cost allocation pool? What is a cost driver? How do they relate to each other? Give an example of how they work together.

Cost allocation is to assign all overhead costs to the departments that create the need for such costs, for example the patient service departments which are revenue producing. Within cost allocation, there is a cost pool and a cost driver. A cost pool is the overhead amount to be allocated which consists of the direct costs in one support department, yet if the costs of a single support department differ substantially in nature and are used in different proportions then multiple cost pools should be used. An example is seen in Financial Services overhead might be divided as billing and collections cost pool and budgeting cost pool. A cost driver is the basis on which the cost pool is allocated. For example, the cost driver for facilities overhead (building space depreciation, maintenance, utilities, etc.) might be the amount of space used by each patient service department. The selection of cost drivers is critical to the cost allocation process. Cost drivers should create an allocation that is highly correlated with the actual amount of overhead services consumed. Good cost drivers will be perceived as being fair and they should promote organizational cost reduction. Example of how they work together: Housekeeping Department cost pool (direct costs): $100,000 cost driver (amount of space occupied): 200,000 sq. ft. allocation rate: $100,000 / 200,000 = $0.50 per sq. foot of space occupied *each user department is allocated some portion of Housekeeping overhead costs. If the Critical Care Department occupies 10,000 sq. ft., then its allocation would be $0.50 x 10,000 = $5,000.

Compare and contrast fixed and variable costs. Give examples of each.

Different costs are used for different purposes, and are classified by their relationship to volume and their relationship too the subunit being analyzed. Fixed costs do not change as they are independent of volume and are generally part of long term agreements. Example of fixed costs are rent and malpractice premiums. Variable costs depend on volume. Usually, companies save money by reducing variable costs. Examples of variable costs in healthcare include hourly laborers or the cost of supplies that vary based on the number of patients seen or procedures performed. In healthcare, the variable costs are tied directly to the patients.

Compare and contrast direct and indirect costs. How are they defined? What are the implications for the spread of indirect costs for an enterprise?

Direct and indirect costs are classifications for the cost relationship to the unit of activity. Direct costs: the costs unique and exclusive to a sub-unit. Direct cost is something that is traceable to the cost object. A direct cost is an expense whose benefit can be specifically identified with a particular funding source and/or department. Indirect costs (overhead): the costs associated with shared resources used by the entire organization. Indirect cost is not traceable. An indirect cost benefit is not readily identifiable with a specific department or departments butt is necessary to the general operation of the organization.

It has been said that financial activities at healthcare organizations can be summarized by the 4 C's. What are the 4 C's? How and why are each important?

Finance activities can be summarized by the four C's: costs, cash, capital, control. Costs: costs must be continuously monitored to ensure that they are not excessive for the amount of services provided. Cash: businesses must have sufficient cash on hand to meet payment obligations as they occur. Capital: Businesses must raise the capital (money) necessary to provide services. Control: Businesses must control their resources to ensure that they are used wisely.

What is Float? How does it relate too financial management?

Float is the difference between the balance on the bank records and the balance on the business's checkbook. It often is thought of to be an interest free loan from the bank and the larger the float the better. Float relates to financial management because when a clinic writes a check it could take several days too clear the bank which causes lag from the time it takes too mail, deliver, and deposit the checks. The clinic statement may be off from the bank statement because of this. The clinic float is a combination of the oncoming and outgoing checks written.

Distinguish between full cost pricing and marginal cost pricing. Give an example of when using each would be beneficial. What is the unique utility of using Marginal Cost Pricing in the short term?

Full cost pricing: prices for a services are set to cover all costs including direct costs (fixed and variable), overhead costs (indirect), and economic costs (profit) - designed to maximize yield profit - ideal when competition is limited. Marginal cost pricing: prices for a service are set to cover incremental, or marginal, costs. Usually means recovering only direct variable costs; good to move inventory quickly - like getting rid of old inventory off of the shelves, not sustainable for the long-term; year-end sales or sales when an updated product is being released; short-term - move product quickly.

Compare and contrast traditional large inventory supply systems with Just-In-Time and Consigned/Contracted Inventory management systems. What are tithe advantages and disadvantages of each of the three systems? As a manager, which recent trend might you adopt as an approach for your organization that would increase available cash? Why?

Just-In-Time systems are what many organizations are using now. Before organizations would have warehouses where they would store inventory but that was not cost effective. With just-in-time there are deliveries daily where supplies would be taken to smaller stock items within a hospital. Consigned inventory system is when a supplier delivers supplies just as in a stockless system. The difference is the supplier owns the products until they are used by the hospital and then the hospital would pay for them. As a manager I would use the consigned/contracted inventory management system because you have the supplies that are needed and you are charged upon using the items. Therefore items that you do not use often you would not be charged for and would be the most cost friendly option.

Compare and contrast Operating and Non-Operating Income and give possible examples of each.

Operating income is patient services and those activities that are directly related. It measures the profitability of a healthcare organization's core activities. Example: inpatient services, outpatient services, emergency room costs. Non-Operating Income is income (actually revenue) from sources that are unrelated to patient services. Example: charitable contributions and income from security investments.

What is a Profit and Loss Statement? Why is it important? How is it used in Financial Management? How does it relate to Time Trend Analysis?

Profit and Loss Statement: uses cost structure information along with the revenue forecast and projects volume two forecast profitability. Summarizes revenues, costs, and expenditures over a period of time. Provides information about whether a company can generate profit by increasing revenue, decreasing costs, or both. Can be influenced by managerial actions.

What is Ratio Analysis? Cite examples. How is it used tot assess the status of a business enterprise?

Ratio Analysis is used in financial condition analysis. In ratio analysis, values found on the financial statements are combined to form ratios that have economic meaning and sense help managers and investors interpret the numbers. In other words, ratio analysis is the process of creating and analyzing ratios from data contained in a business's financial statement and elsewhere to help assess financial condition. The idea is to create single values (ratios) from the raw data that have economic meaning and can be easily interpreted. For example a business with $100,000 in debt and $250,000 in assets has a deb ratio of $100,000 / $250,000 = 0.040 = 40%, which tells us that it is financed with 40% debt and, by definition, 60% equity. Thus, this single value summarizes the business's financing situation (capital structure). Furthermore, it is easy to compare this value to industry averages or to other comparative values. Profitability Ratio provides a measure of the aggregate financial condition of a business. This tool can be used to assess ability to general profit or compare business performance against another business by evaluating Total Margins, Return on Assets, and Return on Equity. Liquidity Ratio: can the business meet its cash obligation? Current Ratio: Debt Management Ratio: is the business using the right mix of debt and equity? Capitalization Ratios: Coverage Ratios Asset Management Ratio: does the business have the right amount of assets for its patient volume?

Compare and constrast the three forms of allocation, Direct, Reciprocal, and Step-Down

Regardless of the method, all overhead costs must ultimately be allocated to the patient services department. Direct method: the costs of each support department tare allocated directly to, and only to, the patient services department. Reciprocal method: recognizes all of the support department interrelationships, but it requires a system of simultaneous equations or a complex set of iterative calculations. Step-Down method: some (but not all) of the intra-support department relationships are recognized. This method is more complex that the direct method, but still manageable.

What is a Revenue Budget? Wha tis an Expense Budget? What is an Operating Budget? How do they relate to one another? Why is each important?

Revenue Budget: listing of the expected revenues (operating and non operating) of an organizational, usually on a monthly, quarterly, and annual basis and broken out by department, service, and payer. Expense Budget: listing of the expected expenses of an organization, usually by department and service, and further broken down into components such as facilities, labor, and supplies; driven by the volume of services provided. Operating Budget: combination of the revenue and expense budgets; uses underlying data such as volume, reimbursements, and labor requirements, to forecast revenues, expenses, and profits. Operating budgets are prepared at multiple levels within organizations and for specific services and contracts. Operating budgets are the primary focus of the budgeting process because they focus on profitability.

What is a Simple Budget? What tis a Flexible Budget? How do they differ? How do they relate tot Variance Analysis?

Simple Budget: the original budget, unadjusted for actual volume. Flexible Budget: the initial budget adjusted to reflect the actual volume achieved in the budget period. Permits a more detailed analysis than is possible in a simple budget variance analysis To be of maximum use, variance analysis must be approached systematically. The starting point is the simple budget. A better examination of what is driving the variances is obtained using a flexible budget. Variance Analysis is an examination and interpretation of what has actually happened vs. what is expected to happen. Variance, in accounting, is the difference between actual value and the budgeted value Simple Variance Analysis and Flexible Variance Analysis.

What is an Accounts Receivable Aging Schedule? How might an excess in days in Accounts Receivable be managed (example, Industry average is 35 days in A/R, your organization's average is 60 days in A/R)?

The aging schedule breaks down a business's receivable by the age of the account. The longer it takes to collect receivables the greater the cost of carrying those receivables. Aging schedules that show a large percentage of old accounts would have a high carrying cost. When accounts are past due it becomes problematic and oftentimes end up not being collected and are used as a write off as bad debts. It is important to ensure charges are not sitting in AR for extended periods of time. The organization should be at the benchmark and should try not to write debts off.

What are the two major categories that comprise the Income Statement? Discuss how the information of the Income Statement is used by an organization. Provide examples of items in each of the major categories found in the Income Statement.

The income statement is a statement that provides the financial status and the results of operations of the organization and is useful to stakeholders, primarily the investors, and the managers. It provides information about a business's operations and economic profitability over a specified time period, usually a year. It is also known as Statement of Operations, Statement of Activities, or Statement of Revenue and Expenses. Categories of income statement: revenues and expenses Revenues, which under accrual accounting represent both cash received and payer obligations. Examples: patient service revenue, less: provisions for bad debts. Combine both to get net patient service revenue, premium revenue. Other operating revenue (represents revenues from sources related to operations (patient care), including such items as, parking garage receipts or cafeteria sale). Add both to get the net patient revenue and other operating revenue to get net/total operating revenue. This does not represent the amount of cash collected. Some portion has not yet been collected. The uncollected portion will appear on the balance sheet in an account titled receivables. In reporting revenues, note how the following categories are handled: discounts - not reported as revenue, charity care - not reported as revenue, and bad debt losses - reported, but stripped out. Expenses, which are the resource expenditures required to produce the revenues. Under accrual accounting, both cash and non cash expenses are recognized. Examples: salaries and benefits, supplies, insurance, etc. Add all to get the total expenses. Other examples: inpatient services, outpatient services, and administration. profit measure(s)/net income = revenues - expenses Usually, businesses only report the net income but in healthcare two different types of profitability are reported: profits from patient service activities (operating income) and profits from all activities or the net income.

Consider a healthcare market located on a state line (such as Louisville). What might be an economic impact of differing Certificate of Need requirements between the two states?

The question is trying to get at what is the impact in a market like Louisville, where you have CON regulation in Kentucky, but in Indiana you do not. You would want to think about things such as...in a CON state can a provider set up (for example) an ambulatory surgery center easily or are there barriers to enter the market? Think about is it easier to do this in a non-CON state and if the answer is yes, why is this important financially? Could the provider offer services easily in an ambulatory surgery center that they own, potentially taking higher margin cases out of a hospital and if so, what impact does that have on the hospital and what cases (lower margin) are they left with?

Describe Top-Down Budgeting. Describe Bottom-Up Budgeting. Which is typically done in the real world? Why?

Top-down budgeting; budgeting system where the finance staff prepares the budget for senior management approval, after which it is sent to department and program heads for implementation. The budget is developed by the finance staff and then sent to department managers for implementation. Department managers may have some input in the process, but not nearly as much as in the bottom-up approach. Bottom-up budgeting: budgeting system where budgets originate at the department or program level and then are aggregated and approved by senior managers. Program managers develop budget, then the budgets are sent to finance department for review, then the budget is approved by senior management.