FINANCE TEST 4
Bottom-line of the Statement of Cash Flow:
Bottom-line of the Statement of Cash Flow: a. Represents the net increase or net decrease in cash. b. Useful in verifying the accuracy of the cash flow statement
Key difference between patient service revenue & premium revenue:
Key difference between patient service revenue & premium revenue: i. Patient service revenue is reported when the service is provided so the payer must pay for services already provided; Premium revenue is reported at the start of each contract payment period before services rendered.
Key feature of capitation
Key feature of capitation is the reversal of profit and loss portions of graph-- Profits occur at lower volumes under capitation is contrary to fee-for-service environment.
Keys to success in capitated environment:
Keys to success in capitated environment: a. Manage (reduce) utilization b. Increase the number of members covered.
3 Major components of Income Statement:
Major components of Income Statement: i. Revenues= represents both the cash received to date and the obligation of payers for services provided during a time period ii. Operating Costs= the cost of providing services (salaries, supplies, purchased medical services, and other costs) iii. Capital Costs= costs associated with the building and equipment used by the HCO, such are lease, interest expenses, and depreciation.
How can managers influence operating leverage?
Managers can influence operating leverage by reducing fixed costs
Purpose of auditor opinion:
a. Purpose of auditor opinion: i. Means of verifying and validating the organization's financial statment
"Advanced Medical Homes"
"Advanced Medical Homes": a. Authorized by the Tax Relief and Health Care Act b. CMS model to demonstrate how a medical home could provide Medicaid beneficiary with low-cost, high quality care. c. Chronically ill patients get coordinated care via "personal physicians". d. RVU-based payment along with performance-based bonuses; Selected physicians get care management fee plus Medicare-covered service fees. g. Primary care provider will pay for service out of the chronic care payment (CCP) if the assigned patient needs specific services from other providers (eg. Eye doctor) . CCP does not cover hospital or specialty care for major acute episodes
2 types of Closed Panel HMOs
2 types of Closed Panel HMOs: a. Group Model HMO= contracts with multi-speciality groups of physicians to provide all physician care to enrollees, typically on capacitation. Physicians are employed by the group, not the HMO. b. Staff Model HMO= HMO's employ individual physicans to provide all physicians care to enrollees; primary care physicians are always employed, and some specialty and sub-specialty physicans may be on contract.
3 Types of revenue and the way they are reported on the income statement:
3 Types of revenue and the way they are reported on the income statement: i. Discounts from charges--- >are incorporated before the revenue is recorded on the net patient service revenue line, so the patient service revenue amounts shown on the income statement are the net of discounts. Discounts are not reflected in the net patient service revenue line. ii. Charity care-- is reported in the footnotes of the income statement. Charges for charity care are not reflected in the net patient service revenue because there is no expectation of collecting this revenue. iii. Bad debt loses- are reported as an expense under provision of bad debts.
3 main sections of the Cash Flow Statement:
3 main sections of the Cash Flow Statement: a. Cash flow from operating activities= cash flow from operations (net income is most important source). i. Both for-profit & nonprofit must generate positive cash flow from operations to be sustainable. ii. Consistent negative cash flow from operations should warn investors/managers the business not sustainable. iii. Marketable securities and notes payable are not tied directly to operations. b. Cash flow from investing activities (aka Capital investments) i. Depreciation is accounted for in the cash flow from operating systems ii. Focus on Fixed assets including property and equipment c. Cash flow from financing activities. i. Focuses on securities investment and financing ii. New debt should be used to purchase real assets than financial assets.
4 Initiatives to Address Nation's Health Goals:
4 Initiatives to Address Nation's Health Goals: a. Institute of Healthcare Improvement= aims to protect patients from medical harm incidents by improving quality of care b. Institute of Medicine and Nation Academies= improve quality of care via provision of scientific information to health-related questions c. Access Project= aims to eliminate healthcare disparities by supporting local initiatives to improve healthcare access d. Commonwealth Fund= improve effectiveness and efficiency of health systems and improve access to care.
Impact of Accepting a proposal for discounted fee-for service contract:
4. Impact of Accepting a proposal for discounted fee-for service contract: a. Lower average revenue per visit will cause a decline in the contribution margin. b. Cost structure remains same since there is no change in patient volume. Discount will only impact the revenues. c. Profits will be below the breakeven point. To compensate for the revenue loss, more services must be provided so increased financial pressure is present under captitated environment.
Definition of Accounting Identity:
Accounting Identity: 1. Definition: a. Total assets must equal liabilities plus equity (total assets must equal total claims). b. Reminds us that equity is really a residual amount that represents the difference between assets & liabilities.
Define Accounting Period
Accounting Period: a. Definition= period of time (X<1 year) covered by financial statements when evaluating operational results 6. Monetary Unit a. Definition= provides common basis by which economic events are measured b. Financial statements ignore inflations because monetary unit is assumed to have constant purchasing power over time
Define Accumulated Depreciation:
Accumulated Depreciation: i. Definition: Total dollars of depreciation that have been expensed on the income statement against the historical of the organizations' fixed assets. Depreciation expense connects the balance sheet's net fixed assets account to the income statement.
2 Advantages of Direct Contracting:
Advantages of Direct Contracting: i. Stimulates competition between integrated delivery systems and encourages local control and innovation. ii. Reduces administrative costs which in turn reduces cost of employer health plans
Average cost per unit of activity
Average cost per unit of activity= Total costs/ volume: a. Because fixed costs are spread over more visits as activity increases, the average cost per unit of activity declines as volume increases. b. Higher volume reduces average fixed cost and the average cost per unit of activity has important implications regarding the effect of volume changes in profitability.
Define Bad debt & Charity Care:
Bad debt & Charity Care: a. Bad debt is reported as an operating expense based on charges. b. AIPCA requires HCO to not report charity care as a revenue, a deduction from revenue, or an operating expense. It can be noted as a footnote.
Balance Sheet's interrelationship with Income Statement:
Balance Sheet's interrelationship with Income Statement: a. Income statement reports operational results over a period of time b. Balance sheet reports financial position at a given point in time (Snapsot). c. Two primary interrelationships: i. Annual depreciation expense shown on the income statement accumulates on the balances sheet in the accumulated depreciation account. ii. All earnings from income statement that are reinvested in the business accumulate on balance sheet in the equity account
Barriers to Access and other Societal Benefits
Barriers to Access and other Societal Benefits i. Patients delay getting medical care due to rising healthcare costs. (skipping pills & tests, not filling medications, or postponing seeking care) ii. Hospitals with graduate medical education programs are built into service costs- complicates overall payment systems & distorts pricing system. iii. Technology & innovation to sustain healthcare delivery requires generation of revenue but difficult when payers don't pay full cost of care.
Barriers to Quality:
Barriers to Quality: i. Gap between known effective care processes and processes actually used due the fact the fact that providers are not compensated in ways that encourage evidence-based care ii. Health plans do not encourage patients to seek out evidence-based care. iii. Volume-based payment systems encourage competition for high-margin services. iv. Poor outcomes lead to more treatments, which leads to more payments.
Barriers to Stability:
Barriers to Stability: i. High administrative costs due to variety of payment methods used (diagnosis-related groups, per diem, pay-for-performance, ect) ii. Payment system challenges financial stability by encouraging providers to create cross-subsidies. Cross-subsidies are way that providers offset the losses stemming from other payers who are unable or unwilling to pay.
Basic structure of Income statement
Basic structure of Income statement consists of revenues, profits, and expenses, which includes revenues minus expenses: i. Revenues= monies collected or expected to be collected ii. Revenues are broken down into net patient service revenues, premium revenues, and other revenues.
Relationship of P& L statement & break-even analysis
Both the Pro forma P&L statement and breakeven analysis are used to estimate relationships between cost, volume, price, & profit: a. When the focus is breakeven volume, the same 4 variables (cost, volume, & price) used while the profit is assumed to be known while volume is unknown. b. When the focus is profit (P&L statement), three assumed variables are cost, volume, & price, while the profit is calculated.
2 ways Breakeven Analysis used?
Breakeven Analysis: 1. Used to estimate the volume needed (or the value of some other variable) for the organization to break even in profitability. Breakeven point= volume that generates zero accounting profit. 2. At breakeven point, the total contribution margin just covers fixed costs, resulting in zero profitability.
Business with high DOL has more risk than business with low DO---Why?
Business with high DOL has more risk than business with low DOL because DOL measures the impact of Utilization changes on profits. Thus, in a fee-for-service environment, high DOL businesses benefit most from increases in utilization
CVP Analysis in Capitated Environment:
CVP Analysis in Capitated Environment: 1. A Capitated environment changes the situation for providers with vis-avis a fee-for -service environment, Capitated provides takes on the insurance function. 2. Under capitation, the revenue per unit of volume, when measured, is zero. Thus, provider risk is minimized with high DOL (high fixed costs), which results in a low variable cost rate and a small, but negative, contribution margin. 3. To do CVP analysis in capitated environment, need cost information and utilization information (actuarial)
2 ways CVP Analysis used?
CVP analysis= analysis of the effects of volume changes on cost. a. Allows managers to examine the effects of alternative assumptions regarding cost, volume, and prices. b. Helps managers to evaluate future courses of action regarding pricing and introduction of new services.
Define Charges Minus Discount:
Charges Minus Discount: a. Discounted charges are offered by HCO in exchange for large patient volumes or for completion b. No financial risk to the HCO and no incentive for HCO to provide what is medically appropriate.
Define Charges
Charges: a. HCO sets charges for a service that are agreed upon to be paid by third party or patient but HCO is saved from any financial risk b. When patients do not pay, they become a financial risk s bad debt. c. Using set charges provides no financial incentive for the HCO to provide what is medically appropriate.
Closed Panel HMOs
Closed Panel HMOs i. Definition= HMOs that exert maximum control over physicians providers because HMO contracts with or employees physicians to provide care for enrollees on a exclusive basis.
Define Consistency
Consistency a. Definition= application of "like" guidelines to a single accounting entity over time. The concepts that states users must be able to compare financial statements over time and see a steady pattern.
Contents/ Structure of Balance Sheet:
Contents/ Structure of Balance Sheet: a. Assets side (left)= list the resources/assets owned by organization in dollar terms. b. Liabilities/ Equity Side= lists the claims against the resources. Source of capital/ financing used to acquire the assets. i. Liability= claims fixed by contract ii. Equity= residual claim that depends on asset values and the amount of liabilities.
Contribution margin in capitated environment:
Contribution margin in capitated environment: a. Contribution margin is negative in capitated environment b. Fee-for Service= higher portion of fixed costs drives Positive contribution margin even higher c. Capitated reimbursement= high portion of fixed cost drives the negative contribution margin toward zero
Define Cost Shifting
Cost Shifting 1. Definition= practice of shifting cost to some payers to offset losses from other payers, usually offsets losses from bad debt and charity care 2. Most of the losses in hospitals were due to Medicaid and Medicare
Define Cost
Cost: a. Third-party reimburses the HCO for the projected cost. b. Later, third-party audits HCO to determine the actual cost and adjusts the reimbursements after care has been delivered. (retrospective and inflationary). c. No financial risk to HCO if third party approves the cost. HCO assumes financial risk if full reimbursement not received and the losses are passed onto other third parties and patients who pay more than the cost.
Degree of operating leverage (DOL) :
Degree of operating leverage (DOL) : a. Indicates how much profit will change for each 1% change in volume. b. DOL is greatest in HCO with large proportion of fixed costs and consequently low proportion of variable costs. End result is high contribution margin that contributes to high DOL. c. "Economics of Scale"= high DOL businesses with high volumes tat lead to lower per unit total costs. Small increase in revenue produces a large profit increase. d. As DOL of businesses approaches closer break-even points, there is greater risk of losses. e. High operating leverage. A large proportion of the company's costs are fixed costs. In this case, the firm earns a large profit on each incremental sale, but must attain sufficient sales volume to cover its substantial fixed costs. Low operating leverage. A large proportion of the company's sales are variable costs, so it only incurs these costs if there is a sale. In this case, the firm earns a smaller profit on each incremental sale, but does not have to generate much sales volume in order to cover its lower fixed costs.
Difference between Income Statement & Balance Sheet:
Difference between Income Statement & Balance Sheet: i. Balance sheet reports the business financial position over a specified time period; Income statement contains operational results over a specified time period.
Difference between Income Statement & Statement of Cash Flow:
Difference between Income Statement & Statement of Cash Flow: a. Income Statement focuses on accounting profitability. b. Statement of Cash flow focuses on the movement of cash (Cash Viability); Will the organization make enough cash for short & long-term needs.
Difference between long-term debt and current maturities:
Difference between long-term debt and current maturities: a. Current maturities are long-term debt that must be paid in one accounting period; Long-term debt- debt does not have to paid in the coming year.
Difference between long-term investments & fixed assets:
Difference between long-term investments & fixed assets: Fixed assets (property / equipment) not liquid and are used over long periods of time. They are fixed and maintained at a level to handle peak patient demand.
Difference in equity of non-profits and investor-owned HCO:
Difference in equity of non-profits and investor-owned HCO: a. Equity is called "net assets" if non-profit; "net" represents the dollar value of assets remaining when business liabilities are stripped out. b. Non-profits cannot pay dividends so all the earnings must be retained in the business; Some portion or all of the earnings of for-profits maybe given to owners through dividend
Define Direct Contracting:
Direct Contracting: a. Definition= large employers contract directly with integrated delivery systems or systems of healthcare providers capable of accepting the financial risk and delivering a range of healthcare services
Direct Service Plans:
Direct Service Plans: a. Definition= employers prepaid specific hospitals & physicians to provide care to their employees b. Commercial indemnity plan= employers and/or employees to prepay to an insurance company that would reimburse a hospital or physician of the employee's choosing. - led to the concept of third-party payers c. Federal tax policies allowed employers to deduct the cost of health benefits to employees leading to an increase in number of insured Americans in 50's
Episode of Care- individual providers
Episode of Care- individual providers a. Global payment is given to single provider for delivering a related group of services b. Provider assumes financial risk for efficiency and coordination of treatment processes c. Consumers risk getting few services than appropriate
Episode of Care- multiple providers
Episode of Care- multiple providers a. Global payment is given to multiple providers for delivering a related group of services b. Provider assumes financial risk for efficiency and coordination of treatment processes c. Consumers risk getting few services than appropriate
Four reasons that Financial Accounting statements evolved historically:
Four reasons that Financial Accounting statements evolved historically: a. Lenders could no longer inspect the assets that back their loans b. Loans made on the basis of a share of the business profits created a need for a widely accepted method of expressing income c. Owners required reports to see how effectively their own enterprises were being operated d. Government needed information for tax assessments
Define Fund Accounting
Fund Accounting Definition= form of accounting used by nonprofits when they receive restricted funds (donor has specified that the funds can only be used for a specific purpose; restricted by law or contractual agreement)
Fund Accounting & its importance to Healthcare:
Fund Accounting & its importance to Healthcare: a. Restricted assets impose legal and fiduciary responsibilities on HCO to carry out the written wishes of donors. b. Fund accounting does not alter the format of balance sheet or its economic interpretation. c. Complicates internal auditing procedures and adds details to balance sheet
Define Funded Depreciation
Funded Depreciation: 1. Long-term investments funded from depreciation cash flow; applicable to only non-profits 2. Does not occur with For-profits; any cash flow above the needed amount is returned to capital suppliers or used to pay off stock dividends;
Going Concern
Going Concern a. An assumption that the accounting entity will have an indefinite life and that most assets should be valued on the basis of their value to the ongoing business as opposed to the current market value b. Short-term events should not be allowed to influence the data presented in financial statements. c. Going concern assumption & the fact that financial statements must be prepared for short time period means that financial statements are not exact but represent an approach for complex measurement problems.
Other Assets: Goodwill & tangible vs. intangible assets
Goodwill = intangible assets; fixed assets not used in the provision of healthcare services. Funds used to support long-term debt sales that will be expensed over time. Goodwill is reported on the balance. a. Tangible assets= physical form and substance (cash, inventories, fixed assets) b. Intangible assets= no physical form (good credit standing, skilled employees, unique products/ services) c. Any difference between the fair market value of an item (eg. Property/ equipment) and the book value/ balance sheet value of the owner's equity, it is presumed to be due to goodwill and then recorded as an asset on the balance sheet. The creation of goodwill tells the readers that the price paid for the acquisition was higher than the book value of the assets acquired.
History of Third-Party Payment:
History of Third-Party Payment: a. Third-party payments started in 1920's. b. AMA opposed labor union efforts to support compulsory health insurance c. Kaiser-Permanente Plan began with Dr. Garfield providing prepaid medical care to employees d. Blue Cross plan began with arrangement for teachers being offered prepaid hospital care. i. Later, AMA accepted voluntary health insurance if hospital and medical benefits remained separate-- Blue Cross provided hospital benefits, Blue Shield provided medical benefits. ii. Roosevelt's Social Security Act in 1933's proposals for compulsory health insurance were opposed by AMA. iii. Hospital Survey & Construction Act= provided funding for hospital construction
Define Incurred but not reported expense (IBNR):
Incurred but not reported expense (IBNR): 1. Under capitation, providers get payment before the service is rendered 2. Capital providers will record IBNR expenses both as a current liability on balance sheet and as an operating expense on the income statement
Define Marginal Analysis
Marginal Analysis: 1. Focus is on incremental (marginal) profitability associated with decreasing or increasing volume.
Marketable securities are preferred to cash holdings---Why?
Marketable securities are preferred to cash holdings because they pay low interest, any return is better than none. a. Current assets (zero-return assets) should be converted into marketable securities (some return assets) quickly b. Providers who work with capitation have liquidity advantage (smaller accounts recievables & larger cash and marketable securities) over fee-for-service revenue providers
Define Matching Principle
Matching Principle a. Definition: Accrual Accounting Concept that states: " when you record revenue, you should also record at the same time any expenses directly related to that revenue revenue. Thus, if there is a cause-and-effect relationship between revenue and the expenses, record them in the same accounting period.
Define Materiality
Materiality a. Definition= Accounting Principle that states that financial statements need only contain information that is significant to the user. It that affects the presentation of the financial statement.
Materiality principle
Materiality principle= allows accountants or providers to list inventories as other current assets rather than as separate item on balance sheet.
Measurement of Operating leverage
Measurement of Operating leverage= total contribution margin/ earnings before interest & taxes (Non-profits is profit minus interest)
Define Monetary Unit
Monetary Unit a. Definition= provides common basis for measuring economic events. b. Financial statements ignore inflations because monetary unit is assumed to have constant purchasing power over time
Define Net income
Net Income: i. Definition= measure of profitablities. ii. Expenses decrease the profitability of a business, so expenses are subtracted from revenues to determine the organization's profitablities: Net income= (revenues- expenses)
Define Net Working Capital
Net Working Capital= difference between total current assets and total current liabilities. i. A business is "liquid" if it has cash available to pay its bills on time ii. Current Assets are one fact that makes up the "liquidity" of organization
What is called the bottom-line?
Net income is also called bottom line because of its location on the income statement a. Non profits are required to use a performance indicator on their income statements that reports the financial results of the organization (which is the net income)
Net income verse Cash flow:
Net income verse Cash flow: a. Cash flow is the actual amount of cash generated in the year . b. Income statement can be used to estimate the cash flow by adding the net income plus the major categories of noncash expenses. c. Depreciation expense must be added back to the net income to get the cash flow d. Business can go bankrupt even if it has a positive net income on the income statement. Income statement does not show the actual amount of cash that was actually collected. Reported revenue is not the same as cash revenue
Net patients account receivables:
Net patients account receivables: (Example of Current Assets) 1. Money owed to an HCO for services that have bee provided to patients 2. Third party payers (insurance) make payments weeks/ months after the services rendered.
Network HMOs:
Network HMOs: i. Can be either Closed panel or open panel. ii. Relies on groups of primary care physicans and reimburses physicians groups on capacitation. iii. Primary care groups are responsible for referring and reimbursing referrals t specialty physicians.
Newly Purchased Fixed Assets
Newly purchased fixed assets (long-term assets such as buildings & equipment) are not reported as an expense on the income statement but are listed on the balance sheet as property owned by the clinic . 1. Reason-= Fixed assets acquisitions costs cannot be allocated to a single accounting period because these assets are used to produce revenue over a much larger period time. 2. Cost of fixed assets are also not reported when they are acquired is that it would affect the profitability when large amounts of assets are purchased and reported earning would fluctuate from year to year on the basis of the amount of the fixed assets acquired.
Nonprofits need to make profits:--Why?
Nonprofits need to make profits: a. They need to plan to generate net income in addition to accumulated depreciation funds , to be able to replace fixed assets in the future at inflated costs or even to expand the asset base. b. Incorporation of the depreciation expense into the pricing structure of its series is designed to enure the abilitity of the organization to replace fixed assets as needed.
Open Panel HMOs:
Open Panel HMOs: i. Defintiion= HMOs that exert moderate control over physician providers; they contract with physicians to provide care for enrollees in physician offices. ii. Physicians are reimbursed by capitation or by fee-for-service basis with discount.
PROMETHETHUS payment model:
PROMETHETHUS payment model: a. Single, risk-adjusted payments given to providers across healthcare settings. b. Providers could negotiate payment amounts with evidence based case rates. c. Payment and reporting systems were public and transparent. 4 Key Features: i. Providers can defend scorecard findings (data, findings) before they are public ii. Effective referral choices by providers are promoted via provision of efficiency data on other providers iii. Promotes lower administrative burden/costs iv. Providers have freedom to configure themselves into whatever aggregation they choose.
Pay for Performance & Pilot program
Pay for Performance 1. Deficit Reduction Act of 2005 required CMS to implement a value-based purchasing (pay for performance initiative) 2. Premier Hospital Quality Incentive Demonstration: a. Medicare pilot project to test whether performance incentives and quality data improved inpatient care. b. Non-profits hospitals get composite scores for clinical conditions and top 2% scoring hospitals got bonus
Define Per Diem:
Per Diem: a. Definition= HCO get a per-day reimbursement for care provided to patients of third-party payments and rates are set before the provision of care. b. Financial risks and financial incentives for HCO: i. Loss incurred if the care provided for a cost greater than per diem rate and profit if the services are less than the per diem rate. ii. HCO may extend hospital stay length to recover costs.
Primary purpose of current assets
Primary purpose of current assets is to support operations and provide liquidity. i. Business keep only enough current assets to support operations and maintain liquidity because of the low/zero return earned on current assets
Principles of GAAP set by 3 regulatory organizations:
Principles of GAAP set by 3 regulatory organizations: i. Securities & Exchange Commission (SEC)= regulates the form and content of financial statements ii. Financial Accounting Standards Board (FASB)= improves the standards of financial accounting and reporting for private businesses iii. American Institute of Certified Public Accountants (AICPA) iv. The above three entities are involved in regulating the development and presentation of financial statements
Define Profit Margin
Profit Margin: a. (Net Income)/ (Total Revenues) b. Measure of the expense control; For a given amount of revenues, the higher the net income, and hence the profit margin, the lower the expenses c. If the profit margin for many HCO in the same area were given, judgements about how a certain HCO is doing in the area of expense control could be made.
Provision of bad debt losses:
Provision of bad debt losses: i. Revenue= (charges of services)- (discounts & charity care) ii. Because non-profits can issue tax-exempt debt on which lender are willing to accept a low return, there can be positive spread between borrowing costs and investment returns. iii. Non-profits do not have pay taxes on interest earning so they keep the entire amount but they are prohibited from getting tax-exemption for debt when the sole purpose is for investment in securities
2 uses of ratio analysis?
Ratio Analysis: a. Helps managers and investors interpret the data with the goal of making judgments about the financial condition of the business b. Helps to use the income statement data in financial statement analysis
Relationship between net income on the income statement & equity section on the balance sheet for Non-profits:
Relationship between net income on the income statement & equity section on the balance sheet for Non-profits: a. Depreciation b. All earnings (net income) must be reinvested in the business c. Equity section of the balance sheet reflects the ownership status of the organization. In non-profits, the majority of the equity capital is obtained from reinvesting earnings within the business (minor portion comes from grants & private donations). This highlights the connection between the balance sheet ad the income statement. Equity (net asset) is not a store of cash.
Explain the Relationship that exists between depreciation expense on the income statement and the accumulated depreciation on balance sheet.
Relationship exists between depreciation expense on the income statement and the accumulated depreciation on balance sheet. 1. Fixed costs are listed at their purchase price (aka historical cost) minus the accumulated depreciation on balance sheet. 2. Amounts of depreciation expense reported each year on the income statement are accumulated over time to create accumulated depreciation amount on balance sheet.
Explain the relationship of cash flow, accrual accounting, net income, and income statement
Relationship of cash flow, accrual accounting, net income, and income statement: Because the income statement is constructed under the accrual accounting, net income does not represent the actual amount of cash earned or lost during the reporting period. To estimate the cash flow, noncash expenses must be added back to the net income. The major noncash expense is depreciation.
Define Relevance
Relevance: a. Definition= financial statements must have information that aids the users in making decisions
Define Reliablity:
Reliablity: a. Definition= information reported on the financial statement is free of error and bias and users can assume that the information fairly represent the financial status b. Reliablity is ensured when audiors follow the guidelines reach the same conclusion about the financial statement values.
Define Semi-Fixed Costs
Semi-Fixed Costs Definition= Costs that are constant within a defined level of activity but can increase or decrease when activity reaches the upper or lower levels. Costs that are fixed within ranges that are less than the relevant range.
Define Spontaneous Liabilities:
Spontaneous Liabilities: a. Balances rise and fall with the business level of operations. b. Trade credits & Accruals are examples c. Value of spontaneous financing is the it provides funds when businesses need them the most.
T/F? Assets and Liability sections of balance sheet look alike on the balance sheet for both non-profits & for-profits.
True Assets and Liability sections of balance sheet look alike on the balance sheet for both non-profits & for-profits.
T/F? The income statement of investor-owned and non-profits look very much alike and have same economic content.
True The income statement of investor-owned and non-profits look very much alike and have same economic content.
T/F: Equity section does differ in presentation for different types of ownership (NFP Vs. FP)
True: Equity section does differ in presentation for different types of ownership (NFP Vs. FP)
Two GAAP- approved formats for Statement of Cash Flow:
Two GAAP- approved formats for Statement of Cash Flow: a. Direct method= computation of operating cash flow directly using patient data, third party payers, and interests. b. Indirect method=computation of movement of cash into and out of the cash account using financial data from income statement & balance sheet
Pros & Cons of Cash Accounting
Two advantages of cash accounting: i. Simple and easy to use (no accounting rules) ii. Closely aligned with accounting for tax purposes so easy to translate into tax data. c. Disadvantage= lacks information on revenues owned to businesses and is incomplete presentation of financial status
Two components of Matching Principle
Two components of Matching Principle 1. Requires that revenues of a business to be "matched" with with accounting period during which they erned. 2. Requires that organization's expenses be matched with the revenue to which they are related.
Two key differences between Accrual Accounting & Cash Accounting:
Two key differences between Accrual Accounting & Cash Accounting: i. Cash accounting assumes that revenue earned corresponds with receipt of cash.; Accrual accounting implies that revenue earned does not correspond with earned cash but rather corresponds with a payment obligation. 1. Under accrual accounting and cash accounting, if the payment obligation is satisfied immediately by the patient making full payment, the revenue form is cash and the revenue is recorded on the financial statement. a. Under cash accounting, economic events are recognized when the financial transaction occurs. Under accrual accounting, economic events are recognized when the obligation to make a payment occurs. 2. In accrual accounting, the amount of revenues not collected is noted in balance sheet. Under cash accounting, revenue that has not been paid would not be recognized until it has been paid.
Two parts of Stockholder's Equity section of Balance sheet (For Profits)
Two parts of Stockholder's Equity section of Balance sheet (For Profits) a. Contribution Capital i. Dollars of capital contributed when stock is purchased directly by stockholders of corporations. It is reported as stockholder's equity on the balance sheet. b. Retained Earnings: i. Definition= accumulation of earning over time that are reinvested in business. ii. Represent a claim against assets, and they are not available to buy equipment, pay dividends, or any other purpose
Two primary difference between P&L statement verses income statement:
Two primary difference between P&L statement verses income statement: a. P&L statement can be developed to best serve decision making purposes, as opposed to GAAP. b. Can be created for any sub-unit within the organization, whereas income statements are created for the overall accounting entity and major subsidiaries. c. P&L statement distinguishes between variable & fixed costs unlike a income statement which does not make this distinction.
Two types of Open Panel HMOs
Two types of Open Panel HMOs a. Direct contract HMO= contract with individual physicians to provide care b. Independent practice association model= contract with association of physicians. HMO may organize the association to provide physician services. c. Both of these models allow physicians to see their own patients and HMO patients.
What is the best indicator of an organization's financial well-being? Difference between cash line & bottom line?
Unlike the bottom-line of the income statement, the change in cash line has limited value in assessing an organization's financial condition because it can be manipulated by financing activities. Net cash from operations is more important indicator of the financial well-being than the net increase (decrease) in cash line.
Define Unrestricted Funds/ General Funds:
Unrestricted Funds/ General Funds: a. All assets not restricted for a specific purpose; majority of non-profits funds are unrestricted funds. b. Board of directors (trustees) can designate assets as limited use assets (eg. Funds to pay a loan) but are still unrestricted funds.
Define Vertical Integration.
Vertical Integration= expansion of product or service that leads to linking of different levels of care to expand the variety of services. (eg. Pharmacy integrating with hospital.)
What happens to net income?
What happens to net income? a. Most of the net income is reinvested b. Non-profits must reinvest all the earning in business c. For profits may pay a portion of its net income to owners as dividends. i. Payout Ratio= portion of the net income paid out to owner in for-profits HCO. ii. Retention Ratio= portion of the net income retained in the business.
Define Net patient service revenue
a. Net patient service revenue= revenues solely from patient services (eg. Parking garages & visitor food services). "Net" signifies that the amount is less than the gross charges for the services provided.
Primary Purpose of GAAP
a. Primary Purpose of GAAP i. Establishes the standards for financial accounting measurement & reporting (does not include tax accounting & managerial accounting) ii. Ensures that the best possible development & presentation of financial data
Growth of Physician Hospital Organizations is due to HCO's 5 strategic goals.
c. Growth of Physician Hospital Organizations (PHO) is due to HCO's pursuit of access and control of money and use the following strategic goals: i. Focus on performance of the system as a whole, esp by primary care physicians ii. System emphasis on primary care and prevention. iii. Establishment of physician integration or commitment of physicians to the system, esp. by primary care physicians iv. Clinical care coordination among providers to provide full continuum of care. v. Achievement of geographic and service breadth (satellite clinics)
Depreciation Expense
iDepreciation Expense= The cost of fixed assets is spread over many years by accountants to match the cost of fixed assets to the revenues produced (matching principles of accounting applied)
3 assumptions of breakeven analysis:
3 assumptions of breakeven analysis: a. Volume increases are not attained by lowering prices, and price increases are not met by volume declines. b. Cost can be reasonably subdivided into fixed and variable components c. Both fixed costs and variable cost rate are independent of volume over the relevant range, so both the total cost and total revenues are linear.
5 Key differences between managerial accounting & Financial accounting:
5 Key differences between managerial accounting & Financial accounting: a. Unlike financial accounting, managerial accounting is forward-looking. b. Managerial accounting is less reliable than financial accounting because it focuses on the uncertainty of the future as opposed to the past, as in financial accounting. c. Managerial accounting is more open to improvisation than financial accounting because it does not have generally-agreed upon rules and also relies on assumptions about the future. d. Managerial accounting is decision work while financial accounting is reporting work. e. Managerial accounting focuses individual activities and financial accounting focuses on aggregate amounts.
Define Accrual Expense
Accrual Expense a. Wages & benefits due to employees, interest due on debt financing, accrued utilities expenses, and similar items on balance sheet extends into the next accounting period.
Asset's Annual Depreciation Expense
Asset's Annual Depreciation Expense= (Historical cost of the asset- Estimated salvage value)/ Number of years of its estimated useful life.
Condition-specific Capitation:
Condition-specific Capitation: a. Provider gets single payment for delivering a group of services that address aspecific health condition. b. Provider assumes financial risk to control efficiency and the number of episodes of care c. Consumers risk getting fewer services than appropriate.
Define Conservatism
Conservatism a. Accounting concept that that states the one should choose the approach that is least likely to overstate the business's financial condition.
Define Cost Plus Percentage for Growth:
Cost Plus Percentage for Growth: a. HCO are paid both the cost for care provided to patients in addition to small percentage of money to develop new services b. Third-party payer audits the HCO and adjusts the reimbursements. Final reimbursements are given after the services is provided (retrospective and inflationary reimbursement) c. No incentive for HCO to contain costs and very little financial risk.
Deficit Reduction Act of 1984
Deficit Reduction Act of 1984= federal government limited the amount of the employers could deduct for health benefits. -- increase in patient out-of-pocket costs and decline in insured patients.
Define Gross Patient Revenue
Gross Patient Revenue= deductions for contractual allowances and charity care
Define Objectivity
Objectivity a. Definition= information reported on the financial statement must be supported by verifiable supporting data.
Define Operating Leverage
Operating Leverage: 1. Definition= extent to which an organization's costs are fixed. It is measured by the degree of operating leverage (DOL).
Define Pro forma profit and loss (P&L) statement
Pro forma profit and loss (P&L) statement= a. profit projection that uses assumed values for volume, price, and cost.
Purpose of Balance Sheet: (3 facts)
Purpose of Balance Sheet: a. Snapshot of the financial position of a business at a given point in time b. Contains information about the organizational operations c. Provides information about the resources/ assets needed to produce the revenues and how the resources were financed.
Purpose of Statement of Cash Flow:
Purpose of Statement of Cash Flow: a. Shows where the organization gets its cash and how it is used. b. Combines information found on both the income statement and balance sheet
Two problems that can occur when the matching principle is applied:
Two problems that can occur when the matching principle is applied: i. Long-lived assets (eg. Property, equipment) which provide revenues for many years have their costs spread out over many years. ii. HCO that is paid under capitation will receive revenues upfront before the provision of services. Costs associated with revenues will need to be forecasted and recorded in the same accounting period as when the revenues are reported.
Two reasons accounting entity is important:
Two reasons accounting entity is important: i. Financial accounting data must be relevant to business activity for investor-owned business ii. Defines the specific areas of the business to be included in statements
List the 4 types of Current Assets by most liquid to the least liquid
Current Assets: i. Cash (most liquid) ii. Marketable Securities iii. Net Accounts Receivables iv. Inventories (least liquid)
Effects of adding Semi-fixed cost to behavior graph, average fixed costs, and total fixed costs
Effects of adding Semi-fixed cost to behavior graph, average fixed costs, and total fixed costs 1.. Addition of the semi-fixed cost cause the cost behavior graph (Plot of semi-fixed cost verses volume) to look like step function - aka "step-function costs" 2. Inclusion of semi-fixed cost prevents average fixed cost and average cost per unit from continuously declining throughout the relevant range. 3. At volumes above the relevant range, the addition of a semi-fixed cost will cause a jump in total fixed costs (consisting of fixed and semi-fixed), average fixed cost, total costs, and average cost per test. Once this jump (or step) occurs, average fixed cost and average cost per unit again begin to decrease as volume increases.
Employee Retirement Income Security Act (ERISA)
Employee Retirement Income Security Act (ERISA)= law allowed large employers to self-insure and gain the full benefit of any reductions in cost. i. Regulates direct contracting arrangement by large, self-insured employers, the employers are exempt from state insurance regulation and therefore avoid the associated costs that HMOs incur.
Financial statements are important to managers because: (2 reasons)
Financial statements are important to managers because: a. They must understand the basics of financial accounting b. Financial statements summarize the financial status and organizational performance.
Define Full disclosure
Full Disclosure a. Definition= Financial statements must contain a complete picture of the organization's financial activities.
Interrelationship amongst utilization, variable cost, total variable cost, and breakeven point?
If utilization increases in number of visits, the variable cost increases. Higher variable cost rate increases total variable cost for any number of members, which pushes the breakeven point above the reference range.
Impact of rejected a proposal for Discounted Fee-for- Services Contract:
Impact of rejected a proposal for Discounted Fee-for- Services Contract: a. Loss in patient volume would cause the total variable cost, total revenues, and total contribution margin would decrease proportionately. b. Decline in patient volume would mean that volume would be below the breakeven point. c. Major factor behind the projected loss is the fixed costs. Reducing the fixed costs (eg. Sell equipment, fire staff) would correct for the anticipated volume reduction. d. Loss of the market share caused by rejecting this proposal can have negative impact on profit, which indicates that the fixed cost structure should be examined.
3 Implication of Accounting Identity on Balance Sheet:
Implication of Accounting Identity on Balance Sheet: a. If a healthcare organization is liquidated and the creditor claims are paid before the equity claims, then liabilities are shown before equity on the balance sheet. b. If the business writes decreases in the value of its assets, its liabilities are unaffected because these amounts are still owned to creditors. c. If a total assets value drops below the liabilities, the total equity reported on the balance sheet is negative amount.
Importance of utilization management in a capitated environment:
Importance of utilization management in a capitated environment: a. With lower utilization, total variable costs are reduced and profit increases. b. Ability of provider to control utilization is the primary key to profitability in capitated environment. c. Less utilization means lower total costs, and lower total costs mean greater profit. d. Utilization changes affect variable cost rate & breakeven point.
In fee-for service environment:
In fee-for service environment: a. High operating leverage means low variable cost rate and high per visit contribution margin, and hence high risk in that small volume decreases lead to large reductions in profitability. b. On the other hand, small volume increase have significant positive impact on the bottom line.
Primary Purpose of Income Statement
Income Statement a. Primary Purpose= Income statement reports the organization's operation over a time period and summarizes the ability to generate profits. It lists the organization's income (revenues), the costs that must be incurred to generate revenue (expenses), the cost that must be incurred to produce revenues (expenses) and the difference between the two (net income)
Define Marginal Cost
Marginal Analysis: 1. Focus is on incremental (marginal) profitability associated with decreasing or increasing volume. 2. Marginal cost= cost associated with each visit and is variable cost rate
Define Accounting entity
Accounting entity a. Definition= Establishes boundaries tht tell accountants what data must be included as well as inform readers what businesses is being reported
Cost Behavior: (Relationship between Cost & Activity)
Cost Behavior: 1. Cost structures are used to help provide managers with a tool for forecasting costs at different levels of activity. 2. Underlying cost structures consist of both fixed & variable costs. 3. Total variable costs increase or decrease proportionately as activity changes, but variable cost rate (price per unit) remains the same. 4. Fixed costs, in contrast to total variable costs, remain unchanged as the activity level varies. 5. Total costs= sum of the fixed costs plus sum of variable costs. 6. Because variable costs are tied to volume, total costs increase as activity increases even though fixed cost remain constant
Define Horizontal Integration.
Horizontal Integration= expansion of product or service line at same point in the production process (nursing home integrating with nursing homes)---consolidation of competitors producing the same service
Define Per Diagnosis:
Per Diagnosis: a. Prospective reimbursement where HCO get paid per diagnosis b. Financial risks and financial incentives to HCO to control costs. HCo cannot recover excessive costs by extending length of stay.
2 Private Sectors are exploring pay for performance models?
Private Sectors are exploring pay for performance models: a. Leap Frog Group i. First national standardized pay for performance program ii. Uses measures collected by JACHO to tie financial incentives to hospital performance. b. Bridges to Excellence i. Top performance providers earn a set amount for each patient covered by participating employer ii. Participating employers provide these incentives from the savings achieved through lower healthcare costs and increased employee productivity. iii. This programs was integrated into medical home program and doctors got bonus for top performance.
Define Profit (CVP) Analysis:
Profit (CVP) Analysis: 1. Definition= analytical technique that typically is used to analyze the effects of volume changes on revenues, costs, and profit.
Two key problems with Second-Party Payments:
Two key problems with Second-Party Payments: i. Ethical Concerns= Patients who needed care could not afford it. ii. Bad debt concerns= patients sought ER care but couldn't pay.
