HS 345 - Final Exam

Effective cost drivers, and hence the resulting allocation system, must have what two important attributes?

1) Fair costs 2) Control costs

What are three techniques for solving time value problems?

1. Effective annual rate 2. Periodic Rate 3. Nominal Rate

What are the three forms of business organization? Describe their advantages.

1. Proprietorship - Inexpensive to form. Pays no corporate taxes. Pays lower taxes. 2. Partnership - Low cost to form. Tax treatment is similar to a proprietorship. 3. Corporation - Unlimited life. It can continue long after original owners are gone. It's to transfer ownership. Owners have limited liability.

Assume that two investments are combined in a portfolio. A. In words, what is the expected rate of return on the portfolio? B. What condition must be present for the portfolio to have lower risk than the weighted average of the two investments? C. Is it possible for the portfolio to have lower risk than that of either investment? D. Is it possible for the portfolio to be riskless? If so, what condition is necessary to create such a portfolio?

A. The weighted average of the returns of the component investments. B. The correlation coefficient must be less the r = +1.0 C. Yes D. Yes. It take for each of the investments moving in the opposite direction of the other. They would have to have a perfect negative correlation r = -1.0

What is the difference between a lump sum, an annuity, and an unequal cash flow stream?

A lump sum is a single dollar amount, an annuity is a series of set payments of fixed amounts over a period of time and an unequal cash flow steam is a series of uneven lump sum amounts

Explain the difference between the stated rate, periodic rate, and effective annual rate.

A stated rate is a normal rate that is used in the debt contract. It (stated rate/nominal) shows no effects of compounding that happens annually. The periodic rate, just as the name suggests is the standard rate/compounding periods per year. Last the effective annual rate is annually compound and it produces the FV.

When considering stand-alone risk, the return distribution of a less risky investment is more peaked ("tighter") than that of a riskier investment. What shape would the return distribution have for an investment with (a) completely certain returns and (b) completely uncertain returns?

A) Completely certain returns would be a vertical line B) Along the X Axis -∞ to +∞

A. What is risk aversion? B. Why is risk aversion so important to financial decision making?

A. This is a tendency that people/businesses don't like risk. If a riskier investment comes up, it will need a higher rate of return to be considered an acceptable risk. B. The answer is two-fold. One is that you can look at two different investments and go with the one with the lower risk. This is what investors will favor. Second, if there is a higher risk investment there is expected a higher rate of return.

A. What are the two types of portfolio risk? B. How is each type defined? C. How is each type measured?

A. Two types of portfolio risk are corporate and market. B. Corporate is a portion of risk from a business project that cannot be diversified away from holding the business's portfolio of projects. This type of risk is in the business context. Market Risk cannot be diversified away by holding the stock of the company. (as part of the diversified portfolio) C. The measure of corporate risk is corporate beta or corporate b. Market's measure is market beta or market b.

Describe provider incentives and risks under each of the following reimbursement methods: A: Cost-based B: Charge-based (Including discounted charges) C: Per procedure D: Per diagnosis E: Per Diem F: Bundled payment G: Capitation

A: Cost-based - An incentive is that costs will be covered with payments from the payer. PIP are made by the payer. B: Charge-based - Payers are at the mercy of the Providers. This rings especially true in small, limited markets. Disadvantages that low-income patients are billed less than the actual charge. They also have negotiated/discounts charges where they can get 20-50% discount on the bill that they receive. C: Per procedure: Payment is occurs when a single procedure is performed. This deals mostly with outpatient procedures. D: Per diagnosis: Reimbursement rates depend on the diagnosis that the patients receive. The higher the difficulty to treat, the more expensive the treatment and vice versa. E. Per Diem: Provider receives a fixed amount of payment from the payer every day. This only occurs with a inpatient care and is considered stratified. This means that they can be charged one day for a surgery and the next for general patient care. F. Bundled payment: One single payment for the complete set of services for an episode. This is regardless of how many providers are being used. G. Capitation: Provider is paid a fixed amount (normally/month). The amount is regardless of what services are being rendered. Used by managed care plans.

Describe the primary features of accountable care organizations (ACOs) and medical homes. What benefits are attributed to them?

ACOs are basically an incentive for physicians to control their costs and improve their quality. They integrate physicians with the healthcare community. When goals are met bonus can be given. A medical home is a "team-based model of care." They are led by a physician. While this program is not complete, their are pilot programs going around to get the ball rolling.

Briefly describe the following concepts as they apply to the preparation of financial statements. Accounting entity, Going concern, Accounting period, Monetary unit, Historical costs, Revenue recognition, Cost matching, Full disclosure, Objectivity, Materiality, Consistency, Conservatism

Accounting Entity:This is where the accountant looks at the statements of the business that they are going to be working on. Going Concern: This is an assumption that will be made the assets will be valued by the contribution that they make to the company. They will also have an indefinite life which means the assets value will not devalue due to age or other circumstances. Accounting Period: This is a certain amount of time that is covered in the financial statements. Monetary Unit: This is the base that economic events are measured. If it were in Mexico and the unit was a Peso, then all of the transactions/events would need to be described in that manner. Historical Costs: The purchase price cost Revenue Recognition: Revenue that is earned to be recognized in that accounting period. Cost Matching: This is where all of the expenses are matched with the revenues. Full Disclosure: Just like when girls talk to their friends and want full disclosure on their dating situation. The same goes for financial statements, this is a complete picture of all of their economic events that have taken place in their business. Objectivity: Have to have an objective eye on converting economic events to financial statements. Materiality: This means only the pertinent information that is needed is given in the report. This is because reports are so complex that inferences about what's in them would not only be extremely difficult, but also time consuming. Consistency: Once you have an accounting method you stick wit it over time, so that you can compare that same method for years to come. The book gave a great example of it being like apples to apples, but if you changed it, it would be more like apples to oranges. Conservatism: This fits the bill of being conservative. When looking at a report it is important to not overstate what the business is doing and use an approach that is the least likely.

How are the statistics, revenue, expense, and operating budgets related?

All of these are included in a business's master budget.

Compare and contrast the following three methods for developing capitation rates: Fee-for-service approach, cost approach, and demographic approach.

All three are comparable, because they are used to set premium rates. Where they differ is the how they go about setting the rates. The Fee-for-service approach is used to set premium rates. These rates should cover all costs (especially profit. Cost approach uses different forecasts and utilization methods to help set their premium rates. Demographic approach basis their premium rates on the population demographic.

Briefly describe the format of the income statement.

An income statements use accrual based accounting. Basically what it does is it paints a picture of the health of the business entity by summarizing the entities revenues, expenses and their profitability.

What is the difference between bad debt and charity care?

Bad debt are the people who can pay their bills, but choose not to. Charity care are the people who can't pay their bills, but would if they could.

Explain the concept of return on investment (ROI) and the two different approaches to the measuring ROI.

Basically the ROI is the analyzing of how much one gets back for a product compared to how much money they put in. Two different approaches that measure this are dollar and percentage terms.

Explain why holding investments in portfolios has such a profound impact on the concept of financial risk.

Because one stand-alone investment doesn't matter compared to the collective group of investments in a portfolio.

Which is the better cost driver for the cost of a hospital's financial services department: patient services, department revenues, or numbers of bill generated? Explain your rationale.

Bills generated is more closely related to the activities that cause the cost.

What is the difference between fee-for-service reimbursement and capitation?

Both are reimbursement methods, but fee-for-service provides payment when a service is provided and capitation is based on the number of covered lives.

What are the critical differences in a profit analysis when conducted in a capitated environment verses a fee-for-service environment?

Capitated provider takes on the insurance element. So they have to deal with a third party.

Explain the difference between cash and accrual accounting. Be sure to include a discussion of the revenue recognition and matching principles.

Cash accounting is when a transaction occurs it is immediately recognized, but with accrual accounting they are not recognized until payment has been made. Small businesses that are not regulated often use the cash method, but for the most part, most entities use accrual based accounting. Revenue recognition is important to understand, because that is when monies are collected which would make it the accrual based accounting. Cost matching is important, because this is where you match up the expenses for the period of time with the revenues.

If you were the CEO of bayside Memorial Hospital, would you advocate a top-down of bottom-up approach to budgeting? Explain your rationale.

I would advocate for a top-down approach, because Jr and Sr managers work together. There is little negotiation that takes place and the process is quicker and it reflects top management's theory.

Stock A has an expected rate of return of 8%, a standard deviation of 20%, and a market beta of 0.5. Stock B has an expected rate of return 12%, a standard deviation of 15%, and a market beta of 1.5. Which investment is riskier? Why? (Hint: Remember that the risk of an investment depends on its context.

I would say that Stock B is the riskier investment. What leads me to believe this is that the market beta is 1.5 which is above the 1 average. So it has a higher risk on the investment.

How does activity-based costing (ABC) differ from traditional costing approaches?

In ABC you allocate the costs based on the activities that will be performed and from that comes aggregates costs that create costs. In traditional you accumulate all of the products cost prior and create the overhead rate.

Chapter 6

Cost Allocation

Chapter 5

Cost Behavior and Profit Analysis

What is the goal of cost allocation?

Cost allocation is making sure that patients are paying costs that they have received.

Would you rather have a savings account that pays 5 percent compounded semiannual or one that pays 5 percent compounded daily? Explain your answer.

Definitely the daily one. The reason being the more your money compounds the greater return you'll see. I would love to have a 5% savings account. The other one gets compounded twice a year. Compared to 365 days a year. BIG difference.

What medical coding systems are used to support fee-for-service payment methodologies?

Diagnosis codes (ICDs) and procedure codes (CPTs) are what support fee-for-service payment methodologies.

What are the Primary differences between direct and indirect costs?

Direct costs are directly related to a department or subunit and a indirect cost is overhead from a support department.

Chapter 10

Financial Risk and Required Return

Explain the differences between fixed cost, semi-fixed costs, and variable cost.

Fixed cost: These costs are known with certainty regardless of the amount of volume a relevant range. Semi-fixed costs: Semi-fixed costs are two costs that are fixed with two or more values within a relevant range. Variable cost: This is the cost of one unit/output

Total cost are made up of what components?

Fixed costs + Total variable costs.

The present value of a perpetuity is equal to the payment divided by the opportunity cost (interest) rate: PV = PMT / I. What is the future value of a perpetuity?

For this you'd have to know what day the perpetuity converts to a annuity. Once it is an annuity than it is possible to find the FV.

Explain the essential difference between full cost and marginal cost pricing strategies.

Full cost is prices that recover the full cost of operating. Marginal Cost Pricing Strategies these are prices that are set by price setters that are only able to cover the cost of the marginal costs.

What is fund accounting, and why is it important to some healthcare providers?

Fund accounting receives contributions (restricted) that are both unrestricted and restricted funds. Some healthcare providers find these funds important, because they are not contractually required to use the funds a certain way.

What is the role of information systems in pricing decisions?

Information systems are used to help give management more options on choosing the best methods for different pricing decisions that they will make.

What are the primary differences between investors-owned and not for profit corporations?

One of the primary differences is that investors-owned have stockholders who own the corporation, whereas a not-for-profit has a large, undefined number of stakeholders have an interest in the organization. Investor-owned are taxable and not-for-profit is not!

Part A: Briefly discuss the role of finance in the healthcare services industry. Part B: Has this role increased or decreased in importance in recent years?

Part A: To plan for, acquire and use resources to maximize the efficiency and value of the enterprise Part B: It has increased.

Part A. What is an opportunity cost rate? Part B. How is this rate used in time value analysis? Part C. Is this rate a single number that is used in all situations?

Part A. It's the rate of return that is expected to happen if a different (alternative) course of action is taken place. It's not a consistent number that is used. Part B. They are used because they look at how the OCR will negate any other investment decisions that are looking to be made and it will be at a discounted rate. (Do you have a better way to understand this concept?) Part C. No. The number that is used varies from situation to situation.

Great Lakes Health Network's net income increased from $3.2 million in 2001 to $6.4 million while in 2011. The total growth rate over the ten years is 100 percent, while the annual growth rate over the ten years is only about 7.2 percent, which is much less than 100 percent divided by ten years. Part A- Why is the annual growth less than the total growth rate divided by ten? Part B- Which growth rate has more meaning—the total rate over ten years or the annualized rate?

Part A. The annual rate is less, because you have to factor in the amount of money that is being added including interest. So when you do the math it comes out to being a smaller number. Part B. I think that the annualized rate has more meaning to it, because it gives a better picture as to how things are going from a yearly basis.

Part A: What are the three primary methods of cost allocation? Part B: What are the differences between them?

Part A: 1) Reciprocal 2) Direct 3) Step-down Part B: a. The direct (allocation) method ignores any services rendered by one support department to another; it allocates each support department's costs directly to the operating departments. b. The step-down (allocation) method allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments. c. The reciprocal (allocation) method allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments.

Part A: What is cost-volume-profit (CVP) analysis? Part B: What is it so useful to health services managers?

Part A: (CVP) analysis is an analytical technique that is used to analyze the effects of volume changes on costs. Part B: This is useful because it can allow managers to look at alternative methods to examine costs, volume, and prices.

Part A: What is a stakeholder? Part B: What stakeholders are the most interested in the financial conditions of a healthcare provider? Part C: What is the goal of financial accounting?

Part A: A stakeholder is someone who has a vested interest in a business. For a not-for-profit, stakeholders would be the managing staff, physicians, employees and even the community that the business is in. For-profit is virtually the exact same, except they also have owners. Part B: Investors have the most interest in the financial condition. Part C: Financial accounting is there to help managers meet the mission (this can be either maximizing the wealth of the owners or for not-for-profit providing healthcare to the community) that they have set forth. It's also a major tool for outside parties to know of the health of the business.

Part A: What are the advantages and disadvantages of conventional budgeting versus zero-based budgeting? Part B: What organizational characteristics create likely candidates for zero-based budgeting?

Part A: Advantages (zero-based): Start out with a clean slate. Conceptually superior to conventional budgeting. Disadvantages: More resources are required for zero-based. Have to justify every line in the budget, which also shows the time that is spent on this kind of budget. Advantages (conventional): Have a starting point and the ability to compare budgets. Disadvantages: Have to determine if the previous budget reflects (accurately) what resources the organization needs. Part B: Organizations that may not update their budget frequently or even had a zero-based budgeting meeting in years.

Part A: Explain the relationships among the static budget, flexible budget, and actual results. Part B: Assume that a group practice has both capitated and fee-for-service (FFS) patients. Furthermore, the number of capitated enrollees has changed over the budget period. In order to calculate the volume variance and break it down into enrollment and utilization components, how many flexible budgets must be constructed?

Part A: All three play a role in the budgeting process. Static budget is the starting point. It is the budget that is prepared before the planning period begins. Flexible budget is adjusted to reflect realized volume, but assumptions are made using the static budget. Actual results are just that. They are after the fact results. Part B: 2 budgets

Part A: What makes an asset a current assets? Part B: Provide some examples of current assets. Part C: What is net working capital, and what does it measure?

Part A: Anything that can be converted to cash in a single accounting period or cash/other assets. Part B: Cash, short-term securities, A/R, and inventories. Part C: Net working capital is Assets - Liability = Liquidity measure

Part A: What are assets? Part B: What are the three major categories of assets?

Part A: Assets are what creates or possesses an economic benefit to the organization. Part B: Current Assets, Long-Term Investments, and Net Property and Equipment

Part A: Why are tax laws important to healthcare finance? Part B: What three major advantages do tax laws give to not-for-profit corporations? Part C: What is Form 990?

Part A: Because the tax laws that are set are important in making managerial decisions. Part B: 1) Not subject to income/ property taxes. 2) Take on debt without having interest payments that are exempt from lenders personal taxes. 3) Contributions are tax deductible to the tax donor. Part C: Form 990 is a form the is filled by a not-for-profit with the IRS that reports all of their governance and charitable activities.

Part A: Define contribution margin. Part B: What is its economic meaning?

Part A: Contribution margin is the difference between per-unit cost (variable cost rate) and per-unit revenue. Part B:This tells how units of output contributes to covering fixed costs and then flows over to profit.

Part A: What is cross-subsidization (price shifting)? Part B: Is it as prevalent today as it has been in the past?

Part A: Cross subsidization is the shift in price when insurers are overcharged for their services, unlike full costs who cover costs that are undercharged. This allows providers to offer a full range of the services that they otherwise wouldn't have been able to. Part B: No

Part A: What is meant by the term expense? Part B) what is depreciation expense, and what is it purpose? Part C) What are some other categories of expenses?

Part A: Expenses are the costs for businesses to be able to run. Part B: Depreciation expense is a noncash charge that occurs on equipment that is owned. As equipment gets older it loses it's value and therefore it must be recorded as a depreciation expense. This can only occur in accrual based accounting. This is where the cost matching principle comes into play, because it says the costs must be matched to their accounting period. Part C: Salaries/benefits, supplies, insurance, interest, lease.

Part A: What are the generally accepted accounting principles? (GAAP) Part B: What is the purpose of the GAAP? Part C: What organizations are involved in establishing GAAP?

Part A: GAAP are as set of guidelines and principles that are ever evolving and are there to be rules for how financial statements are prepared. Part B: The purpose of GAAP is to make sure the businesses are being honest on their accounting records. Makes sure businesses are reporting their honest income and expenses. Part C: The organizations that are involved are FASB, SEC and AIC-PA

Part A: What is the difference between gross revenues and net revenues? (Hint: Think about discounts and charity care) Part B: What is the difference between patient service revenue and other revenue? Part C: What is the difference between charity care and bad debt losses? How is each handled?

Part A: Gross revenue is everything billed. Net Revenue=Gross Revenue-Deductions. Part B: Patient revenues refers to an obligation that payers have to pay the organization that the patient is at when services have already been provided. Other revenues consist of parking, cafeteria food (not for patients), office rentals and any pharmaceuticals that may be sold to employees, staff, and visitors. Part C: Charity care refers to patients who want to pay, but can't. So charges for this care are not reflected in the income statement. Bad debt losses are patients who don't pay up and the business are unable to collect. This is handled by putting the losses into the expenses part of the income statement.

Part A: Briefly describe the following health service settings: Hospitals, Ambulance care, home health care, long-range care, integrated delivery systems. Part B: What are the benefits attributed to integrated delivery systems.

Part A: Hospitals - Differ in function (general acute care vs specialty), patient length of stay, size, and ownership (governmental vs private and, within the private sector, for-profit vs not-for-profit). Ambulatory Care - Also known as outpatient care, encompasses services provided to noninstitutionalized patients. They include medical practices, hospital outpatient departments, ambulatory surgery centers, urgent care centers, diagnostic imaging centers, rehab/ sports medicine centers and clinical laboratories. Home Health Care - Brings many of the same services provided to ambulatory care settings into the patient's home. Long-Range Care - Entails healthcare services that cover an extended period of time, including inpatient, outpatient, home health, and hospice care, often with a focus on mental health, rehabilitation, or nursing home care. Integrated Delivery Systems - The organization assumes full clinical, and in certain cases financial, responsibility for the healthcare needs of the covered population Part B: Some of the benefits of the Integrated Delivery Systems are that patients are kept in a corporate network of services, linked organizations have better access to capital, they can offer payers a complete package of services and they can better plan and deliver a full range of health care services.

Part A: What cost structure is best when a provider is primarily capitated? Explain. Part B: What cost structure is best when a provider is reimbursed primarily by fee-for-service? Explain.

Part A: I would say a fixed structure. Primarily because you could have a fixed volume regardless of what the volume. Also, you avoid some of the financial risk when you have a cost structure that is in line with the revenue structure. Part B: Variable. The reason is because you wouldn't be able to count on how many patients that you are going to see so you would want the cost structure to focus on pay for the service that is rendered. Having a fixed structure wouldn't be beneficial.

Part A: Explain the difference between the equity section of a not-for-profit business and an investor-owned business? Part B: What is the relationship between net income on the income statement and the equity section on a balance sheet?

Part A: If listed as a net assets then it is a not-for-profit. Also, all their earnings have to be reinvested into the business. An investor-owned business would have a title such as, "stockholder's equity." This section has two part to it: accumulated earnings and contributed capital. Part B: The relationship is that the net income of the income statement and equity section on the balance sheet should be equal

Part A: What is scenario analysis as applied to pricing and decisions? Part B: Why is it such an important part of the process?

Part A: It focuses on the alternative outcome instead of the most likely outcome. Also focuses on best and worst case scenario. Part B: This is vital because looking into all of the different outcomes will help make an educated decision that will be most beneficial. Weighing all the outcomes and having a better picture of what might happen will help make informed decisions and avoid taking major risks.

Part A: What is the difference between liabilities and equity? Part B: What makes a liability a current liability? Part C: Give some examples of current liabilities. Part D: What is the difference between long-term debt and notes payable?

Part A: Liabilities are claims that go against the assets of an organization, they are fixed by contract. Equity represents the residual value of an organization's assets. Part B: Current liability are liabilities that must be paid within one accounting period. Part C: A/P, Accruals, and notes payable. Part D: Long-term debt is a (debt) financing that goes beyond one accounting period and the repayment isn't due that same period while a notes payable is accounted for within one accounting period.

Part A)What is the difference between operating income and net income? Part B) Why is net income called "The bottom line" Part C) What is the difference between net income and cash flow? Part D) Are financial conditions more closely related to net income or to cash flow?

Part A: Operating income is Total Revenue minus Total Expenses. This is to help make sure that this form of income stays close to the operation. Net income is a business's total earnings. Part B: Because it is located at the bottom of the income statement and also it shows it's importance being last. Part C: Net income is a business's Total Operating income + Total Nonoperating Income, while cash flow is the net income, but it's adjusted due to non cash expenses (depreciation for example). Part D: Cash flow, because they show the actual cash that the business is generating

Part: A What is a Cost Pool? Part B: What is a Cost Driver? Part C: How is the cost allocation rate determined?

Part A: Overhead costs that need to be allocated. An example of this, facility cost. Part B: The factors that are used to determine how the cost pool is allocated. Part C: Cost Pool Amount/ Cost Driver Volume

Part A: Define relative value unit (RVU). Part B: Explain how RVU's can be used to set prices on individual services.

Part A: RVU is the measure of the amount of resources that is consumed in order to provide a particular experience. Part B: Because they can be matched up with different services and they can be used to estimate the cost of the particular service.

Part A: What is the primary goal of investor-owned corporations? Part B: What is the primary goal of most not-for-profit healthcare corporations? Part C: Are there substantial differences between the financial and the finance goals of investor

Part A: Shareholder wealth maximization Part B: Can be found in their individual mission statement. Also, maintaining financial viability. Part C: No? (Couldn't find this answer for the life of me!)

Part A: What is the statement of cash flows and how does it differ form the income statement? Part B: What are the three major sections of the statement of cash flows? Part C: What is the bottom line of the statement of cash flows, and how important is it?

Part A: Statement of cash flows are statements that show the cash flows that are going in and out of a business. This provides detailed information about the cash flows of the company. Unlike, an income statement which is more broad. Part B: Cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Part C: The bottom line is the net increase (decrease line) this is important, because it shows if you have made or lost money.

Part A: What is target costing? Part B: Suppose a hospital was offered a capitation rate for a covered population of $40 per month (PMPM). Briefly explain how target costing would be applied in this situation.

Part A: Target costing is a (management) strategy where they shift the cost to ensure that there is a profit made. Service given - Desired profit on that service = Target Costing Part B: Target costing would be applied by reducing this monthly cost and making sure that there is a profit made.

Part A: What is the accounting identity? Part B: What is the implication of the accounting identity for the numbers on a balance sheet? Part C: What does the accounting identity tell us about a business's equity?

Part A: The accounting identity is Assets = Liabilities + Equity. They have to be equal to one another. Part B: They must balance each other out. Part C: It reminds that the business's equity is a residual claim going against the total assets.

Part A: What is operating leverage? Part B: How is it measured?

Part A: The amount of fixed costs for a business's structure Part B: Total Contribution Margin/ Profit

Part A: What is the difference between the income statement and balance sheet in regards to timing? Part B: What is wrong with this statement: "THe clinic's cash balance for 2011 was $150,000, while its net income on December 31, 2011 was $50,000."

Part A: The difference is the income statement is what the operations have produced over an amount of time and the balance sheet is at any given point in time. Part B: Net income should be a period of time not a moment in time. Whereas cash balance should be a moment in time not a period of time.

Part A: What are the primary characteristics of managed care plans? Part B: Describe the different types of managed care plans.

Part A: The primary characteristic of managed care is to combine insurance with health care. Part B: Health Maintenance Organization - here there is the thought that providers are incentivized for treating illnesses. While they provide little to no incentive. The cost and quality varies due to the large vastness of HMO's. Preferred Provider Organization - are a hybrid of HMOs. They use a lot of the cost saving strategies that HMOs do. They don't force that certain beneficiaries go to specific providers. Beneficiaries do not have to use gate keeper physicians. Managed fee-for-Service Plans - This is what many insurance companies use now. They use "pre-admission certification, utilization review, and second surgical opinions to control inappropriate utilization" (page 47). The insurer has more control/influence over where patients get their health care.

What would happen financially to a health service organization over time if its prices were set at: Part A: Full Cost Part B: Marginal cost

Part A: They would be a healthy organization as long as their revenues cover the full cost of operating the business. Part B: Over time they would fail, because there wouldn't be enough revenues to cover the costs.

Part A) What is the purpose of the statement of changes in equality? Part B) What is it's basic format?

Part A: This is really important because it shows how much of the business's net income the company can retain, which in turn will increase the equity. Part B: Net Income + Equity (net assets), beginning of year = Equity (net assets), end of the year

Part A: Write out and explain the equation for volume break even. Part B: What role does contribution margin play in this equation?

Part A: Total Revenues - Total Variable Costs - Fixed Costs = Profit This is when all of the accounting costs are reached so profit there is zero profitability Part B: Contribution margin is the per-unit dollar amount available to first cover an organization's fixed costs and then to contribute to profits

Part A: Using a hospital to illustrated your answer, explain the differences between a price setter and a price taker. Part B: Can most providers be classified strictly as either a price setter or a price taker?

Part A: With Price Setter the healthcare providers can set the prices on some or all of their services. They have the market power. Price Taker have to go by prices that are set by the market. These are services are prices that are set by governmental insurers. Part B: I don't believe they can. I think that there is a certain amount of negotiable power so that would allow for them to be either one.

Part A: On the balance sheet, what is the difference between long-term investments and property and equipment? Part B: What is the difference between gross fixed assets and net fixed assets? Part C: How does depreciation expense on the income statement relate to accumulated depreciation on a balance sheet?

Part A: a long-term investment is an investment in a financial assets and property/equipment are an investment in a real asset. Also, long-term is reported at the fair market value. Part B: Gross fixed assets are a fixed asset being recorded by it's historical cost on the balance sheet. Net fixed assets are the value after the depreciation expense. Part C: Because they are the amount of depreciation that has accumulated that's been expensed on the income statement against the purchase price of the organization.

Chapter 8

Planning and Budgeting

Chapter 7

Pricing and Service Decisions

What is the primary legal issue facing providers today?

Professional liability or malpractice.

What role does regulation play in the health services industry?

Regulation is what make sure health care systems are staying within the rules of the industry. They make sure that systems are licensed and are obeying the laws.

What are the major current concerns of healthcare managers?

Reimbursement from government agencies, bad debt losses and medicare/medicaid. Also, balancing the clincal and financial issues without having one negatively affect the other.

Describe the components of a financial plan.

Review of the business's financial condition. By doing this it provides a way to look at where the business is at and where to get started. Capital budget is next. Here shows a picture of the future capital investments that will occur over the next 5 years. Lastly, are the organization's future financing requirements are listed. This also will include how they will be funded.

Under what circumstances is each type of risk—stand alone, corporate, and market—most relevant?

Stand alone - It is most relevant for investments that are held in isolation. Corporate - When looking at a business project. Market - This is when you are measuring the volatility of a project.

Briefly describe the cost allocation process.

Step 1: Determine the cost pool Step 2: Determine the cost driver Step 3: Calculate the allocation rate Step 4: Determine the allocation amount

Chapter 4

The Balance Sheet and Statement of Cash Flows

Chapter 2

The Financial Environment

Chapter 3

The Income Statement and Statement of Changes in Equity

Briefly Describe the main provisions of healthcare reform and its implications for the practice of healthcare finance.

The provisions that are starting to take place are expanding medicaid eligibility, lowering insurance premiums, incentivizing business to provide healthcare benefits and prohibiting coverage denial due to a predetermined condition. These are all encompassed in the PPACA. Also, there are provisions to tax high-income earners and Medicare taxes. Last, there are pilot programs going about to see if provider systems can be improved.

What are the implications of portfolio theory for investors?

The holding of a single investment isn't sensible. When one can have a well-diversified portfolio, that can help rid the issues of a stand alone risk. Also, it's important to note that due to the fact that there is less risk when an investment is held in a portfolio the normal standard deviation of risk measure isn't appropriate.

Briefly describe the organization of this book and the learning tools embedded in each chapter.

The organization is separated into seven different parts. It's best to start off by looking at the learning objectives at the beginning of the chapter and really focusing on them. Then after each section there are key concepts to review and a test to go over, to see where ones understanding of the material is.

Briefly describe the planning process. Be sure to include summaries of the strategic, operating, and financial plans.

The strategic part of the planning process has a "guiding light" which is basically a values statement by the organization. In this statement is the priorities of the organization and they also define what the culture of the organization will be. Normally there are 4-6 beliefs in this kind of statement. Also, included is the mission and vision statement and the organizational goals/objectives. The operational planning portion of the planning process is all about using the strategic plan to make a map for the future. Normally planning for the next 5 years. The financial plan which is a portion of the operational plan is focused on the finances.

What is the structure of the finance function within health services organization?

There is the head of the financial depart which is the CFO (Chief Financial Officer). They normally report to the CEO. From there the CFO normally appoints two people to help with their finance activities. A comptroller and a treasurer. The comptroller is responsible for accounting and reporting activities (budgeting, prep of financial statements etc). The treasurer is responsible for the acquisition and management of capital.

How do provider incentives differ when the provider moves form a fee-for-service to a capitated environment?

They differ because a capitated provider wants less patients to be seen the provider to cut their costs. They would have a focus on preventative care.

Briefly describe the major third-party payers.

Third-party payers are basically what we would call private and public insurers.

Chapter 9

Time Value Analysis

Under what circumstances should an overhead department be divided into multiple cost pools?

When multiple departments are using the same service than that rate of service should be multiplied by each department.

What is variance analysis?

Variance analysis is realized values compared to budgeted values and in turn they help to control operations.

What elements of profit analysis change when a provider moves form a fee-for-service to a discounted fee-for-service environment?

When a provider moves from a fee-for-service to a discounted fee-for-service environment the element of capitated environment dramatically differs.

Explain the difference between portfolio risk and diversifiable risk.

With a portfolio risk it is measuring the risk of an individual investment, when it is held as part of a diversified portfolio. As for the diversifiable risk it is a part of the risk that can be eliminated by holding the investment as part of the portfolio.

When a loan is amortized, what happens over time to the size of the total payment, interest payment, and principal payment?

With the size of the total payment it will stay the same. The interest will start to decrease as more payments are made and the principle will grow.

Why are planning and budgeting so important to an organization's success?

Without a plan in hand an organization will have no direction. Say they want to buy some new equipment, they would need to plan how they are going to purchase it, by when, through whom. There are a lot of things that go into running an organization and a plan is vital for success. A budget goes hand and hand with a plan. You make a plan and than you make a budget to carry out the plan. Can't have one without the other!