financial management

investor-owned hospital

a hospital that is owned by investors who benefit financially from its operation (for-profit hospital)

general acute care hospital

a hospital that treats all conditions that require a relatively short hospitalization (less than 30 days)

price taker

a provider that has no power to influence the prices set by the marketplace; because many markets either are somewhat competitive or are dominated by large payer groups, and because government payers cover a significant proportion of the population, most providers probably qualify as price takers for a large percentage of their revenue

vertical system

a single business entity that owns a group of related, but not identical providers, such as hospitals, medical practices, nursing homes

horizontal system

a single business entity that owns a group of similar proiders, such as hospitals

medical home model

a team-based model of care led by a personal physician who provides or arranges with other qualified professionals to provide, continuous and coordinated care throughout a patient's lifetime to maximize health outcomes

business

an entity that raises capital in the marketplace; invests those funds in assets; and uses those assets to create gods or services, which it sells.

Accountable care organizations

an organization that integrates physicians and other healthcare providers with the gal of controlling costs and improving quality.

partnership

an unincorporated business that is created and owned by two or more people

provider incentives

charge based- set high prices and offer more services prospective payment reimbursement- more procedures per diagnosis reimbursement- reduce costs bundled- ? capitation- decrease utilization (riskiest)

managed care organizations

combine insurer and provider functions into a single administrative organization; most common type is health maintenance organization (HMO); another type is preferred provider organization (PPO)

codes

diagnostic codes- ICD, established by WHO procedure codes- CPT, established by AMA

moral hazard

excess health services being consumed because individuals do not bear the full cost of the services provided; requiring a deductible helps offset this

profit and loss statement

forecast profit given the base case assumptions n costs, volumes, and prices; assumed variables are expected volume, expected price, and expected costs; profit is calculated based on the assumed variables

risk averse

individuals are willing to pay for insurance now to avoid paying higher costs later

adverse selection

individuals or businesses likely to incur losses are more likely to purchase insurance than those less likely; drives the cost of healthcare for a defined population to higher than anticipated levels

pay for performance

insurers explicitly reward providers for achieving certain benchmarks

third party payers

insurers that reimburse health services organizations and hence are the major source of revenues for most providers

fee-for-service

methods of reimbursement are cost based- costs directly related to service, charge based- rate schedule established by provider, and prospective payment- the rates paid by payers are determined by the payer before the services are performed

the joint cmmission

the accreditation body for hospitals and other health services organizations

price shifting

the act of charging more than full costs to one set of patients to compensate for charging less to another set. Also called cross-subsidization

capitation

the provider is paid a fixed amount per covered life per period, regardless of the amount of services provided

professional liability

the responsibility of organizations and individuals who provide professional services, such as hospitals and physicians, for losses that result from malpractice

utilization risk

the risk that patients, often members of a managed care plan, will use more healthcare service that initially assumed

chief financial officer

the senior manager in a large organization's finance department (vice president- finance)

financial management

the use of theory, principles, and concepts developed to help managers make better financial decisions

basic characteristics of insurance

1. pooling of losses- the spread of losses over a large group of individuals (or organizations) 2. payment only for unforseen losses 3. risk transfer- risk shifted from insured to insurer 4. indemnification- reimbursement of the insured if a loss occurs

indirect costs (overhead costs)

-costs not borne solely by a department but shared by all of the hospital's departments -more difficult to measure at the department level because they arise from shared resources

semi-fixed costs

-costs that are fixed, but not at a single amount throughout the entire relevant rant

variable costs

-costs that are related to volume -only include direct costs

the four c's

-costs- the measurement and minimization of costs are vital activities to the financial success of all healthcare organizations -cash- businesses must have sufficient cash on hand (or the ability to make it quickly) to meet cash obligations as they occur -capital- funds used to acquire land, buildings, and equipment -control- business must control its financial and physical resources to ensure that they are being wisely employed and protected for future use -fifth c- collections- collecting money from insurers for patient services provided

actuarial information

-data (including utilization data on the covered population) regarding the financial risks associated with insurance programs

the allocation process

-determine the cost pool -determine the cost driver -calculate the allocation rate= cost pool/expected volume of cost driver -determine the allocation amount (depends on the allocation rate and the amount of overhead services utilized)

simple variance analysis

-does not take volume into account

budget types (expense budget)

-driven by the volume of ser ices provide; listing of expected expenses of an organization -broken down into labor and nonlabor and then fixed and variable

variance analysis

-examination and interpretation of what has actually happened versus what was expected to happen; two approaches are simple and flexible variance analysis

cost allocation methods (reciprocal method)

-fully recognizes all services from one support department to other support departments

profit (revenue) centers

-generate revenues as well as costs, so their managers can be held accountable for profitability

organizational objectives

-helps to achieve organizational goals; quantitative in nature

steps required to implement ABC

-identify the relevant activities -determine the cost of each activity, including equipment and supplies and both direct and overhead costs. -determine the cost drivers for the activity -collect activity data for each service -calculate the total cost of the service by aggregating activity costs

standard

-in variance analysis is the budgeted value established at he beginning of the budget period; protif goal 0postitive amounts signify good or desirable results, negative amounts are bad results

fixed costs

-known with certainty, regardless of the level of volume within the relevant range -include both direct and indirect costs

private not for profit hospitals

-operated for the exclusive benefit of the community

cost centers

-organziational subunits, typically departments, that incur costs but do not directly generate revenues; managers responsible for the costs of running their departments

government hospital

-owned by the government; federal owned by federal government; public hospitals are owned by state or local governments

cost allocation methods (step-down method)

-partially recognizes services provided from one support department to other support departments -compromise between the simplicity of the direct method and the complexity of the reciprocal method -critical difference between the step-down method and reciprocal methods is that after each allocation is made in the step-down method, a support department is removed from the process

finance activities

-planning and budgeting -managing financial operations -financing decisions -capital investment decisions -financial reporting -financial and operational analysis

marginal-cost pricing

-prices are set only to cover the marginal cost of providing the service -marginal cost- the cost of one additional unit of output

integrated delivery system

-providing hospital care, ambulatory care, lng-term care, and business support services through single system

profit analysis

-technique used to analyze the effects of volume changes on profit; used to examine the effects of alternative assumptions regarding costs and prices; "what if" analysis -most likely estimate often called the base case

variable cost rate

-the added cost for each additional unit of service

cost allocation

-the assignment (allocation) of overhead costs, such as financial services costs, from a support department to the patient services department -typically costs associated with facilities and support personnel -goal is to assign all of the costs of an organization to the activities that cause them to be incurred

top-down approach to budgetting

-the budget is developed by the finance staff and then, after approval by senior management, sent to department managers for implementation

patient capture

-the concept that once a patient enters the system at one point all services needed by that patient will be provided within the system

values statement

-the core beliefs that define the organization

managerial accounting

-the development of information used internally for managerial decision making

contribution margin

-the difference between per unit revenue and per unit variable cost (variable cost rate); a type of profit -only after fixed costs are fully recovered does the contribution margin begin to contribute to profit

comptroller

-the finance department manager who handles accounting, budgeting, and reporting activities

treasurer

-the finance department manager who handles capital acquisition, investment management, and risk management activities

business manager

-the manager responsible for the finance function in a small healthcare rganization, such as a medical practice with one or a few clinicians

accounting

-the measurement and recording of events that reflect the operations, assets, and financing of an organization

allocation rate

-the numerical value used to allocate a cost pool to patient services departments

conventional approach

-the previous budget is used as the starting point for creating the new budget; each line on the old budget is examined and then adjustments are made to reflect changes in circumstances

breakeven analysis assumptions

-the price or set of prices for different types of patients and different payers is independent of volume -costs can be reasonably subdivided into fixed and variable components -the breakeven volume falls within the relevant range

relevant range

-the range of output (volume) for which the organization's cost structure holds

underlying cost structure

-the relationship between costs and volume -used by managers in planning, control, and decision making -primary reason for defining an organization's cost structure is to provide managers with a tool for forecasting costs at different volume levels

underlying cost structure

-the relationship between volume and an organization's total costs (cost structure)

total (full) costs

-the sum of direct and indirect costs

total costs

-the sum of fixed costs and total variable costs

healthcare financing

-the system that a society uses to pay for healthcare services

total variable costs

-the variable cost rate multiplied by the volume -increases or decreases proportionately as volume changes, but the variable cost rate remains constant

direct costs

-unique to the reporting subunit and hence usually can be identified with relative certainty

traditional costing methods

-use the top down approach to costing, wherein overhead costs are allocated down to patient services departments -still dominates as primary method

marginal analysis

-used to analyze the impact of adding volume to an existing base

price setting strategies (full-cost pricing)

-recognizes that to remain viable in the long run, healthcare organizations must set prices that recover all costs associated with operating the business -must include the direct variable costs of providing the service, the direct fixed costs, and the appropriate share of the overhead expenses of the organization

certificate of need

-required providers to obtain state approval on the basis of community need for construction and renovation projects that either relate to specific services or exceed a defined threshold (est by Congress in 1974)

operational planning

-road map for executing strategic plan -document that contains detailed guidelines for meeting organizational objectives -"five year plan"

vision statement

-single-sentence description of the organization's desired position at a future point in time; provides a single goal that motivates

organizational goals

-specified goals that an organization strives to attain; qualitative in nature

zero-based budgeting

-start with a clean slate; departments begin with a budget of zero -department managers must fully justify every line on the basis of expected volume -superior to conventional budgeting, but the managerial resources required exceed those for conventional budgeting

cost-containment programs

-state programs that require providers (primary hospitals) to submit budgets each year for approval.

breakeven analysis

-accounting breakeven occurs when all accounting costs are covered (zero profitability) -economic breakeven the volume needed to produce some target profit level; the volume that creates revenues equal to total accounting costs plus the desired profit amount

activity based costing (ABC)

-all costs within an organization stem from activities -more complex and costly than traditional

cost pools

-all the direct costs of one support department -may need to be separated into multiple pools

cost allocation methods (direct method)

-allocates overhead costs directly to patient services departments -this method does not recognize services provided by one support department to another

liquid investment

-an investment that can be sold quickly at a fair price

bottom-up approach to budgeting

-budgets are developed first by department or program managers and are submitted to the finance department for review and incorporation into the organizational budget; more compliance than top-down

budget types (operating budget)

-combination of the revenue and expense budgets; uses underlying data such as volume to forecast revenues, expenses, and profits; prepared at multiple levels and for specific services; prepared monthly and annually; forecasted profit and loss statement

roles of finance staff

-contract management -financial risk management

flexible variance analysis

--flexible budget is the initial budget adjusted for actual volume; after the fact device

average cost per unit of volume

-= total costs/volume -higher volume reduces average fixed cost and average cost per unit of volume (economics of sale)

cost drivers

-a good cost driver provides the most accurate cause and effect relationship between the sue of services and the costs of the department using those services -two characteristics- fairness and cost reduction

budget types (revenue budget)

-a listing of the expected revenues of an organization, usually on a monthly, quarterly, and annual basis and broke down by department, service, and payer

target costing

-a management strategy that helps providers offset the limitations imposed when they are price takers. Target costing assumes that the amount received for a service is fixed and subtracts the desired profit on that service to obtain the target cost level.

price setter

-a provider that has the power (within reason) to set market prices for its services

cost

-a resource use associated with providing, or supporting a specific service -classified in two ways- by their relationship to the volume of services provided and by their relationship to the unit being analyzed

propietorship

-a simple form of business owned by one person

strategic plan

-a statement of where the business is now, where it wants to be in the future, and how it intends to get there

mission statement

-a statement that defines the overall purpose of the organization