Finance. Michael Nowicki, EdD, FACHE, FHFMA Professor of Health Administration Texas State University

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1 Finance Michael Nowicki, EdD, FACHE, FHFMA Professor of Health Administration Texas State University American College of Healthcare Executives Finance Knowledge Area Percentage and Number of Exam Questions in Each Knowledge Area Knowledge Area Percentage Number of Questions Healthcare 17% 34 Management and Leadership 15% 30 Human Resources 11% 22 Finance 11% 22 Quality and Performance Management 10% 20 Business 9% 18 Professionalism and Ethics 8% 16 Laws and Regulations 7% 14 Governance and Organizational Structure 6% 12 Healthcare Technology & Information 6% 12 Management Knowledge 100% 200 American College of Healthcare Executives 1

2 Finance Knowledge Area This knowledge area covers the planning, development, establishment, analysis and assessment of financial management processes for an organization s capital, budget, accounting and related reporting systems. 1. Knowledge of financial accounting principles 2. Knowledge of operating budget principles 3. Knowledge of capital budget principles 4. Knowledge of reimbursement methodologies 5. Knowledge of fundamental productivity measures 6. Knowledge of financial controls 7. Knowledge of revenue generation 8. Knowledge of how to justify a business model 9. Knowledge of potential impacts and consequences of financial decision making 1. Knowledge of financial accounting principles needed to analyze and interpret financial reports. Financial accounting identifies, measures, records, and communicates, in dollar terms, the economic events and status of an organization. Financial statements summarize and communicate an organization s financial status to interested stakeholders, both outside and inside the organization. Outside stakeholders include investors (both owners and creditors) and inside stakeholders include boards and managers. What are some of the uses of this information? 2

3 GAAP and GAAP-setting process Securities & Exchange Commission (SEC) Financial Accounting Standards Board (FASB) American Institute of Certified Public Accountants (AICPA) Industry Committees Healthcare Financial Management Association Principles & Practices Board Statements Issue Analyses What are some problems with the GAAP-setting process? GAAP and GAAP-setting process External audit--the final step in assuring the quality of the financial statements. Auditor s opinions Unqualified opinion Qualified opinion Adverse opinion What is the purpose of the auditor s opinion? 3

4 Accounting concepts Accounting entity Going concern Accounting period Objectivity and reliability Monetary unit Relevance Full disclosure Materiality Conservatism Consistency and comparability Accounting methods Cash accounting--economic events are recognized when the financial transaction takes place. Revenue is recognized when it is received Expenses are recognized when they are paid Accrual accounting--economic events are recognized when they occur. Revenue is recognized when it is earned Expenses are recognized when they are incurred What are the advantages of both methods of accounting? 4

5 Statement of Operations getting to net patient service revenue 2015 Revenues Gross patient services revenues $ 9,490 Less deductions from revenues Contractual Allowances 510 Charity Care 190 Net Patient Service Revenues $ 8,790 Contractual allowances dropped to a note to the financial statements and must include an identification of principle agreements. Charity care dropped to a note to the financial statements and must include the charity care policy and amount of charity care at charges, costs, or units. Beginning in 2018, contractual allowances will be recognized as explicit price concessions. Statement of Operations since Revenues Net patient services revenues $ 8,790 Deduction for bad debt 356 Premium revenues xxx Other operating revenues 633 Total Operating Revenue $ 9,067 Note: Beginning in 2018, classic bad debt will be moved to an operating expense and the bad debt related to high deductible policies will be identified as an implicit price concession (FASB ASU , Topic 606). 5

6 Statement of Operations 2015 Revenues Net patient services revenues $ 8,790 Deduction for bad debt 356 Premium revenues xxx Other operating revenues 633 Total Operating Revenue $ 9,067 Statement of Operations 2015 Operating Expenses Salaries and wages 5,678 Supplies 850 Utilities 576 Insurance 46 Depreciation 173 Interest 146 Other operating expenses 1,299 Total operating expenses 8,768 6

7 Statement of Operations 2015 Operating income 299 Nonoperating income 195 Excess of revenues over expenses $ 494 Change in net assets Unrestricted $ 388 Temporarily restricted Permanently restricted Total changes in net assets $ 388 Statement of Operations What is the purpose of the statement of operations? What is the difference between gross patient service revenue and net patient service revenue? Describe how the following types of revenue are reported on the statement of operations: Discounts from charges Charity care Bad debt 7

8 Balance Sheet 2015 Current assets Cash $ 124 Temporary investments 45 Receivables, net 1,536 Inventory 75 Prepaid expenses 32 Total current assets 1,912 Long-term investments 1,010 Plant and equipment 6,980 Less accumulated depreciation 1,730 Plant and equipment, net 5,250 Total assets $ 8,172 Accounting Standard Update (Topic 842) In the spirit of transparency and comparability, Update 842 requires the lessee to present the lease liability (lease payments) and lease asset (right-of-use) for operating leases over 12 months and is effective December 15, Balance Sheet 2015 Current Liabilities Accounts payable $ 302 Accrued expenses payable 208 Deferred revenues 77 Total current liabilities 587 Long-term liabilities 3,000 Total liabilities 3,587 Net assets Unrestricted 3,285 Temporarily restricted 700 Permanently restricted 600 Total net assets 4,585 Total liabilities and net assets $8,172 Accounting Standard Update (Topic 958) Topic 958 requires not-for-profit entities to report net assets in two categories net assets with donor restrictions, and net assets without donor restrictions, effective December 15,

9 Balance Sheet What is the purpose of the balance sheet? What are the three major sections of the balance sheet? What is accumulated depreciation and how does it relate to the statement of operations? How does the balance sheet relate to the statement of operations? Statement of Cash Flows 2015 Cash flows from operating activities Cash received from patient sources $ 8,404 Cash received from other operating 650 sources Cash received from nonoperating 180 sources Cash payments to employees (4,500) Cash payments to suppliers (4,203) Net cash flow from operating activities $ 531 9

10 Statement of Cash Flows 2015 Cash flows from investing activities Cash payments for purchase of plant (940) Cash payments for long-term investments (450) Proceeds from sales of plant assets 54 Proceeds from sale of long-term invest. 49 Net cash flow from investing activities (1,287) Cash flows from financing activities Proceeds from issuance of 6% bonds 3,000 Principal payments on long-term debt (400) Cash payments to retire 7% bonds (2,000) Net cash flow from financing activities 600 Net increase/(decrease) in cash $ (156) Statement of Cash Flows How does the statement of cash flows differ from the statement of operations? What is the most important piece of information on the the statement of cash flows? 10

11 Financial Analysis 1. Establish the facts in the organization. 2. Compare the facts over time (horizontal or trend) and to facts in other similar organizations (comparative). 3. Use perspective and judgment to make decisions. Financial Analysis Liquidity ratios measure an organization s ability to pay short-term debt: Current ratio Average collection period Days cash-on-hand, short-term sources Days cash-on-hand, all sources Average payment period 11

12 Financial Analysis Profitability ratios measure an organization s ability to exist and grow: Operating margin Excess margin Financial Analysis Capital structure ratios measure the organization s long-term liquidity: Long-term debt-to-capitalization Debt service coverage ratio 12

13 Financial Analysis Asset efficiency ratios measure an organization s ability to be efficient: Age of plant ratio Inventory turnover ratio HFMA Key Hospital Financial Ratio Medians, December Truven Health ActionIO, 2015 FY medians. Ratios prepared using 2015 hospital data. 2.Standard & Poor s fiscal 2015 ratios of stand-alone hospitals and systems based on audited financial statements. 3.Optum Data from the 2017 Almanac of Hospital Financial and Operating Indicators. Reprinted with Permission All Rights Reserved. Healthcare Financial Management Association (HFMA),

14 Financial Accounting Principles 1. Financial statements are important in order to A. Identify, measure, record, and communicate, in dollar terms, the economic events of an organization. B. Serve as a control mechanism for budgeting. C. Provide detailed financial information for control at the department level. D. Provide staffing guidelines to human resource managers. Financial Accounting Principles 1. Financial statements are important in order to A. Identify, measure, record, and communicate, in dollar terms, the economic events of an organization. B. Serve as a control mechanism for budgeting. C. Provide detailed financial information for control at the department level. D. Provide staffing guidelines to human resource managers. 14

15 Financial Accounting Principles 2. Final enforcement authority in the GAAP-setting process rests with A. Financial Accounting Standards Board (FASB) B. Securities & Exchange Commission (SEC) C. American Institute of Certified Public Accountants (AICPA) D. Healthcare Financial Management Association (HFMA) Financial Accounting Principles 2. Final enforcement authority in the GAAP-setting process rests with A. Financial Accounting Standards Board (FASB) B. Securities & Exchange Commission (SEC) C. American Institute of Certified Public Accountants (AICPA) D. Healthcare Financial Management Association (HFMA) 15

16 Financial Accounting Principles 3. The most important part of the audit letter is the A. Introductory paragraph. B. Scope paragraph. C. Opinion paragraph. D. Salutation. Financial Accounting Principles 3. The most important part of the audit letter is the A. Introductory paragraph. B. Scope paragraph. C. Opinion paragraph. D. Salutation. 16

17 Financial Accounting Principles 4. In most cases, the most favorable audit opinion that an organization can is a(n) A. Qualified opinion. B. Adverse opinion. C. Disclaimer of opinion. D. Unqualified opinion. Financial Accounting Principles 4. In most cases, the most favorable audit opinion that an organization can is a(n) A. Qualified opinion. B. Adverse opinion. C. Disclaimer of opinion. D. Unqualified opinion. 17

18 Financial Accounting Principles 5. The accounting concept that relates to uncertainty dictating understating volumes and revenues and overstating expenses is A. Conservatism. B. Materiality. C. Full disclosure. D. Going concern. Financial Accounting Principles 5. The accounting concept that relates to uncertainty dictating understating volumes and revenues and overstating expenses is A. Conservatism. B. Materiality. C. Full disclosure. D. Going concern. 18

19 Financial Accounting Principles 6. An accounting method that recognizes revenues when they are earned and recognizes expenses when they are incurred is called A. Cash accounting. B. Accrual accounting. C. Cost accounting. D. Differential accounting. Financial Accounting Principles 6. An accounting method that recognizes revenues when they are earned and recognizes expenses when they are incurred is called A. Cash accounting. B. Accrual accounting. C. Cost accounting. D. Differential accounting. 19

20 Financial Accounting Principles 7. The purpose of the statement of operations, or income statement, is to A. Present the financial position of the organization at a specific point in time. B. Present the reasons net assets changed from one period to another. C. Present cash receipts and where they came from and cash disbursement and where they went during an accounting period. D. Present the operating results of the organization over a period of time. Financial Accounting Principles 7. The purpose of the statement of operations, or income statement, is to A. Present the financial position of the organization at a specific point in time. B. Present the reasons net assets changed from one period to another. C. Present cash receipts and where they came from and cash disbursement and where they went during an accounting period. D. Present the operating results of the organization over a period of time. 20

21 Financial Accounting Principles 8. According to the 2010 AICPA Audit Guide for Health Care Organizations, the statement of operations presents charity care in the following manner: A. As a note to the financial statements based on cost. B. As an operating expense based on rates. C. As an operating expense based on cost. D. As a deduction from revenue. Financial Accounting Principles 8. According to the 2010 AICPA Audit Guide for Health Care Organizations, the statement of operations presents charity care in the following manner: A. As a note to the financial statements based on cost. B. As an operating expense based on rates. C. As an operating expense based on cost. D. As a deduction from revenue. 21

22 Financial Accounting Principles 9. Accumulated depreciation is reported on the A. Statement of operations. B. Balance sheet. C. Statement of changes in net assets. D. Statement of cash flows. Financial Accounting Principles 9. Accumulated depreciation is reported on the A. Statement of operations. B. Balance sheet. C. Statement of changes in net assets. D. Statement of cash flows. 22

23 Financial Accounting Principles 10. Ratios that measure an organization s long-term liquidity are called A. Liquidity ratios. B. Profitability ratios. C. Capital structure ratios. D. Efficiency ratios. Financial Accounting Principles 10. Ratios that measure an organization s long-term liquidity are called A. Liquidity ratios. B. Profitability ratios. C. Capital structure ratios. D. Efficiency ratios. 23

24 Financial Accounting Principles 11. Managerial accounting is A. Relevant to internal decision makers. B. Dependent on historical data only. C. Useful in preparing financial statements. D. The same thing as financial accounting. Financial Accounting Principles 11. Managerial accounting is A. Relevant to internal decision makers. B. Dependent on historical data only. C. Useful in preparing financial statements. D. The same thing as financial accounting. 24

25 Finance Knowledge Areas 2. Knowledge of operating budget principles 3. Knowledge of capital budget principles 4. Knowledge of reimbursement methodologies 5. Knowledge of fundamental productivity measures 6. Knowledge of financial controls 7. Knowledge of revenue generation 8. Knowledge of how to justify a business model 9. Knowledge of potential impacts and consequences of financial decision making 2. Knowledge of operating budget principles. Strategic Plan--a ten year look at the future by the board and executive management (i.e., do you want to be in the healthcare business and if so, what will the business look like?). 1. Validate mission 2. Assess the external environment 3. Assess the internal environment 4. Formulate the vision 5. Establish strategic thrusts 6. Identify critical success factors 7. Develop core objectives 8. Develop strategic financial plan 25

26 Operating Budget Principles Strategic Financial Plan--a five year look at the future that forces executive management to identify the resources that will be necessary to accomplish the strategic plan (see Kaufman, Best Practice Financial Management) How much cash should the organization have? How much debt can the organization afford? What are the margin targets necessary to meet the cash and debt levels desired above? What is the required level of operating change to meet margin targets? What are the organization s strategic capital requirements? What will be the source(s) of capital funding? Operating Budget Principles Budget--the process of converting the operating plan into monetary terms. Types of budgets Management approach--top down versus bottom up Design characteristics Incremental versus zero-based Comprehensive versus limited-in-scope Fixed versus flexible Discreet versus continuous 26

27 Operating Budget Principles Budget--the process of converting the operating plan into monetary terms. 11. Project volumes 12. Convert volumes to revenues 13. Convert volumes to expense requirements 14. Adjust revenues and expenses as necessary 3. Knowledge of capital budgeting principles. Capital Budgeting--the process of identifying and prioritizing capital expenditures as defined by the organization. Types of capital budgets Replacement as scheduled, for increased efficiency, for improved quality/safety. New ventures for expanded services, reduced operating expenses, improved quality/safety. 27

28 Capital Budgeting Principles Capital Budgeting--the process of identifying and prioritizing capital expenditures as defined by the organization. 15. Identify and prioritize requests 16. Project cash flows 17. Perform financial analysis 18. Identify nonfinancial benefits 19. Evaluate benefits and make decisions Capital Budgeting Principles Financing Capital Expenditures There are several ways to finance the acquisition of capital equipment. In almost all cases the financing may be for new or replacement Building, or Moveable equipment Capital may be financed through Funded depreciation Philanthropy Debt Taxable leases Non-taxable leases (not available to for-profit entities) Operating surpluses Equity (for-profit entities only) Taxes (governmental entities only) 28

29 4. Knowledge of reimbursement methodologies and their ramifications. Third-party payers are agents of the patient (the first party) who pay all or a portion of the bill to the providers (the second party). Commercial indemnity plans Medicare and Medicaid Part A, Part B, Part C, and Part D Managed care plans Managed indemnity Service plans PPOs Point-of-Service Open-panel HMOs Closed-panel HMOs High Deductible Health Plans Reimbursement Methodologies Third-party payers use several methods of payment to providers that are often classified as to the amount of financial risk assumed by the provider. Charges Charges minus a discount Cost plus a percentage for growth Cost Per diem Per diagnosis Capitation 29

30 Reimbursement Methodologies Third-party payers use several methods of payment to providers that are often classified as to the amount of financial risk assumed by the provider. Bad debt Charity care Pay-for-performance (of lack thereof) The future? Self-insurance with administrator or direct contracting Consumer-driven healthcare (aka high deductible policies) Affordable Care Act of 2010 MACRA of 2015 National health insurance Affordable Care Act of 2010 Expands coverage to 32 million people (2010)(2014) Reduces the rate of increase in Medicare and Medicaid spending reduced payment updates (2010) decreased DSH payments (2014) financial penalties for unnecessary hospital readmissions (2012) and hospital-acquired infections (Medicare 2008)(Medicaid 2011) Adopts delivery system reforms to better align reimbursement with improved coordination of patient care and quality (2011 for Medicaid Health Homes)(2012 for ACOs and bundled payments) Provides grants and loans to improve workforce (2010) Includes provisions to reduce waste, fraud and abuse in Medicare and Medicaid (2012) Imposes new reporting requirements for tax-exempt hospitals (2010) Places significant restrictions on the expansion of physician-owned hospitals and prohibits new facilities (2010) 30

31 MACRA of 2015 Repeals Sustainable Growth Rate (SGR) Physicians under Part B receive a.5 percent increase each year for five years Develops two tracks for Part B reimbursement starting in 2019 The first track will provide Part B increases (or decreases) based on a Merit Incentive Payment System (MIPS) which will include criteria for quality, advancing care information, clinical practice improvement, and cost. The second track will provide Part B increases (or decreases) based on the provider s use of CMS-certified Alternative Payment Models (APMs) which are intended to move providers away from low-risk fee-for-service to risk assuming methods of payment. 5. Knowledge of fundamental productivity measures. see Berger s The Power of Clinical and Financial Metrics. Labor compensation as a percent of net revenue Overtime pay as a % of total pay Total paid hours/adjusted patient day (or other unit of service) Total labor compensation/adjusted patient day (or other unit of service) Average hourly rate Hours worked/hours paid Hours worked/hours scheduled 31

32 6. Knowledge of financial controls. Internal Controls The backbone of good internal controls is generally thought of in terms of policies and procedures over the recording, processing, and reporting of financial data Considerations of the internal control structure in a financial statement audit, indicates that an entity s internal control structure consists of the following three elements: Control environment Accounting system, and Control procedures Financial Controls The Control Environment Several factors can greatly impact, both positively and negatively, an organization s internal controls Management or governing board s philosophy and operating style The organizational structure The functioning of the governing board and its committees, particularly the audit committee Methods of assigning authority and responsibility Management or governing board s control methods for monitoring and following up on performance Personnel policies and practices External influences that effect the organizations operations and practices 32

33 Financial Controls The Accounting System Effective accounting systems will: Identify and Record All Valid Transactions. Classify Financial Transactions on a Timely Basis. Value Theses Financial Transactions in an Appropriate Manner. Identify the Time Period in Which These Financial Transactions Occurred. Adequately Disclose These Transactions in the Financial Statements. Financial Controls The Control Procedures Control procedures are policies and procedures, in addition to the control environment and accounting system, that have been established to provide reasonable assurance that specific organizational objectives will be achieved. Proper authorization of transactions. Adequate segregation of duties. Providing a documented audit trail. Safeguarding of assets. Independent review of other procedures performed. 33

34 7. Knowledge of revenue generation. Accounts receivable is a function of both the production cycle and the payment cycle. Revenue Generation Production Cycle--Pre-care Obtain demographics Obtain insurance and verify coverage Obtain authorizations Collect deductibles and co-pays 34

35 Revenue Generation Production Cycle--Care Record charges Maintain medical record Review utilization Revenue Generation Production Cycle--Care Completed Transfer medical record Analyze medical record Abstract medical record Code medical record Transcribe dictation Obtain physician attestation 35

36 Revenue Generation Payment Cycle Print bill Submit bill Follow-up on bill Collect bill Bill resolution Revenue Generation AR performance varies significantly between organizations Costs associated with AR can be significant How do we measure AR performance? Why does it vary between organizations? What can we do to improve AR performance? 36

37 8. Knowledge of how to justify a business model. 1. Create a project team. 2. Choose a project leader. 3. Analyze the organization. 4. Know the audience. 5. Review related publications and literature. 6. Examine potential change to technology, people, and politics. 7. Analyze the data to determine what to include in the business justification. 8. Draft the business justification. Draft the justification to gain shareholder support. 1. Evaluate the feasibility. Is there a market for your business? Does your management team have the necessary skill? Can the business make a reasonable profit? 2. Develop an operating plan. Identify strengths, weaknesses, opportunities, and threats. Develop production, administrative, and marketing plans. Create budgets to demonstrate financial outcomes. 3. Communicate your plan to gain shareholder support. Determine the amount and method of financing. Forecast profitability and shareholder return on investment. Forecast cash flow and ability to repay debt. 37

38 9. Knowledge of potential impacts and consequences of financial decision making. Cost-benefit analysis an analysis that compares the benefits of two or more alternatives with their costs. Estimate the costs of each alternative and determine the incremental (additional) costs of each alternative. Estimate the benefits of each alternative and determine the incremental (additional) benefits of each alternative. Make a decision. Potential impacts and consequences of financial decision making. Break-even analysis an analysis that determines when fixed costs are covered with volumes (or revenues) at which point the product or service starts making a profit. For example, if physician group practice charges patients $100 per office visit, and the variable costs are $30 per office visit and the fixed costs are $20,000 per month, how many patients would we need to see in order to cover our fixed costs and start making a profit? = =, = 286 patients $ = 286 $100 $28,600 38

39 Potential impacts and consequences of financial decision making. Break-even analysis an analysis that determines when fixed costs are covered with volumes (or revenues) at which point the product or service starts making a profit. A more complicated formula is needed for capitated revenue. For example, if a physician group practice provides outpatient coverage to a 1,000 member plan for $100 per member per month and the variable costs are $30 per visit and the fixed costs are $20,000 per month, what is the break-even point in volume of visits? = $0 = $100,000 $20,000 $30 2,667 = Potential impacts and consequences of financial decision making. Differential cost analysis An analysis assembles costs, both variable and fixed, and sometimes revenues, to alternatives to determine relevancy to the decision. 1. Gather all costs and revenues associated with each alternative. 2. Identify and drop all sunk costs. 3. Identify and drop all costs and revenues that do not differ between the alternatives. 4. Select the best alternative based on remaining cost and revenue information. 39

40 Potential impacts and consequences of financial decision making. Differential cost analysis An analysis assembles costs, both variable and fixed, and sometimes revenues, to alternatives to determine relevancy to the decision. For example, last week the lab bought a piece of equipment for $100,000 that will perform 100,000 lab tests per year with a charge of $5 per test and variable costs of $3 per test. This week a competing manufacturer came out with similar piece of equipment for the same price, but variable costs are only $1 per test. Assuming no salvage value for your existing equipment, do you buy the new equipment? Potential impacts and consequences of financial decision making. Differential cost analysis An analysis assembles costs, both variable and fixed, and sometimes revenues, to alternatives to determine relevancy to the decision. 1. Gather all costs and revenues Keep Existing Buy New Revenue $500,000 $500,000 Fixed Cost Old 100, ,000 New 100,000 Variable Cost 300, ,000 40

41 Potential impacts and consequences of financial decision making. Differential cost analysis An analysis assembles costs, both variable and fixed, and sometimes revenues, to alternatives to determine relevancy to the decision. 2. Identify and drop sunk costs Keep Existing Buy New Revenue $500,000 $500,000 Fixed Cost Old 100, ,000 New 100,000 Variable Cost 300, ,000 Potential impacts and consequences of financial decision making. Differential cost analysis An analysis assembles costs, both variable and fixed, and sometimes revenues, to alternatives to determine relevancy to the decision. 3. Identify and drop all similar costs and revenues. Keep Existing Buy New Revenue $500,000 $500,000 Fixed Cost Old 100, ,000 New 100,000 Variable Cost 300, ,000 41

42 Potential impacts and consequences of financial decision making. Differential cost analysis An analysis assembles costs, both variable and fixed, and sometimes revenues, to alternatives to determine relevancy to the decision. 4. Select the best alternative. Keep Existing Buy New Revenue $500,000 $500,000 Fixed Cost Old 100, ,000 New 100,000 Variable Cost 300, ,000 Potential impacts and consequences of financial decision making. Value proposition A promise of value (benefits - cost) to be delivered, communicated, and acknowledged. 42

43 12. Cost behavior, or underlying cost structure, is the relationship between cost and A. Revenue. B. Activity. C. Expense. D. Time period. 12. Cost behavior, or underlying cost structure, is the relationship between cost and A. Revenue. B. Activity. C. Expense. D. Time period. 43

44 13. Strategic planning is an activity performed best by the A. Employees. B. Board alone. C. Board and executive management. D. Executive management alone. 13. Strategic planning is an activity performed best by the A. Employees. B. Board alone. C. Board and executive management. D. Executive management alone. 44

45 14. A zero-based budget could best be described as A. Starting each budget cycle with a clean slate. B. Adjusting expenses based on realized volumes. C. Allowing unencumbered funds to be transferred to the next year. D. Limiting department managers to only the expenses they control. 14. A zero-based budget could best be described as A. Starting each budget cycle with a clean slate. B. Adjusting expenses based on realized volumes. C. Allowing unencumbered funds to be transferred to the next year. D. Limiting department managers to only the expenses they control. 45

46 15. Most providers would agree that the best method of reimbursement is based on A. Cost. B. Charges. C. Days. D. Capitation. 15. Most providers would agree that the best method of reimbursement is based on A. Cost. B. Charges. C. Days. D. Capitation. 46

47 16. Managed care plans that exert the most control over providers, and therefore save the most money in provider payments, are A. Managed indemnity plans. B. Preferred-Provider Organizations. C. Closed-panel HMOs. D. Point-of-Service Plans. 16. Managed care plans that exert the most control over providers, and therefore save the most money in provider payments, are A. Managed indemnity plans. B. Preferred-Provider Organizations. C. Closed-panel HMOs. D. Point-of-Service Plans. 47

48 17. A productivity measure that takes into account the level of skill required to accomplish the task is A. Hourly rate. B. Paid hours per unit of service. C. Scheduled hours per unit of service. D. Labor compensation per unit of service. 17. A productivity measure that takes into account the level of skill required to accomplish the task is A. Hourly rate. B. Paid hours per unit of service. C. Scheduled hours per unit of service. D. Labor compensation per unit of service. 48

49 18. An analysis that determines when fixed costs are covered with volumes (or revenues) at which point the product or service starts making a profit is called A. Cost-benefit analysis. B. Cost-effective analysis. C. Break-even analysis. D. Differential cost analysis. 18. An analysis that determines when fixed costs are covered with volumes (or revenues) at which point the product or service starts making a profit is called A. Cost-benefit analysis. B. Cost-effective analysis. C. Break-even analysis. D. Differential cost analysis. 49

50 Key Terms Accountable Care Organization Cash accounting Accounts payable Charges Accounts receivable Charges minus a discount Accrual accounting Charity care Accrued expenses payable Comprehensive budget Accumulated depreciation Continuous budget Affordable Care Act Contractual allowance Assets Cost Asset efficiency ratios Current asset Bad debt Current liability Balance sheet Deferred revenue Break-even analysis Depreciation expense Budget Differential cost analysis Capital budget Direct contracting Capital structure ratios Discreet budget Capitation Excess of revenues over expenses Cash Expenses Key Terms Financial accounting Management approach to budgeting Financial analysis Marketable securities Financing capital expenditures Medicaid Fixed budgets Medicaid expansion Fraud & Abuse Medical homes Health Maintenance Organization Medicare High deductible health plan Medicare Part A Incremental budget Medicare Part B Independent auditor Medicare Part C Internal rate of return Medicare Part D Inventory National health insurance Lease-purchase analysis Net assets Liability Net patient service revenue Limited-in-scope budget Net present value Liquidity ratio Noncurrent asset Long-term liability Non-operating income Managed care organization Operating expense 50

51 Key Terms Operating income Statement of changes in net assets Operating revenue Statement of operations Payment cycle Strategic plan Per diem Strategic financial plan Per diagnosis Temporarily restricted net assets Permanently restricted net assets Third party payers Point-of-service plan Unrestricted net assets Preferred Provider Organization Value-based programs Premium revenue Variable budgets Prepaid expense Zero-based budgets Production cycle Productivity measures concept Profitability ratios Revenue Revenue recognition concept Securities & Exchange Commission Statement of cash flows Contact Michael Nowicki, EdD, FACHE, FHFMA Professor of Health Administration Texas State University (512)

52 References and Readings to Healthcare Finance Berger, S. (2005). The Power of Clinical and Financial Metrics: Achieving Success in Your Hospital. Chicago: Health Administration Press. Gapenski, L. (2015). Healthcare Finance: An Introduction to Accounting and Financial Management, 5 th ed. Chicago: Health Administration Press. Peter G. Peterson Foundation. (2010) I.O.U.S.A.: Solutions, Parts I and IV. and Optum, Almanac of Hospital Financial and Operating Indicators. Salt Lake: Optum. Nowicki, M. (2018). Introduction to the Financial Management of Healthcare Organizations, 7 th ed. Chicago: Health Administration Press. Zelman, W., McCue, M., Glick, N., and Thomas, M. (2014). Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications, 4 th ed. San Francisco: Jossey-Bass. 52