Finance Courses Consolidated EXSUM. Financial accounting information is conveyed by a business s financial statements. The three most important are:

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1 Finance Courses Consolidated EXSUM Finance I: Financial accounting involves identifying, recording, and communicating the operational results and status of an organization (as opposed to a subunit). Financial accounting information is conveyed by a business s financial statements. The three most important are: Income statement or Statement of Operations (Revenue and Expenses) An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The income statement provides information about a business s operations and economic profitability. Balance sheet (Assets: Things the business owns or is owed (i.e. cash, receivables, accounts payable, interest payable, etc. = Liabilities + Equity ) A balance sheet reports the dollar amounts of a company's assets, liabilities, and owner's equity (or stockholders' equity) as of a previous date. Assets include cash, accounts receivable, inventory, investments, land, buildings, equipment, some intangible assets, and others. Statement of cash flows The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company. Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are perceived to be good for stockholder value. The Securities and Exchange Commission (SEC) has the legal authority to regulate the form and content of financial statements. Generally Accepted Accounting Principles (GAAP) a set of objectives, conventions, and principles that have evolved through the years to guide the preparation and presentation of financial statements. The GAAP applies only to financial accounting statements.

2 Cash vs. Accrual Accounting In the cash method, you enter the transactions in accounting records as cash is paid In the accrual method, you enter the transactions in accounting records as they are earned or incurred Cash Cash focuses on flows of cash in and cash out of the organization Advantages: Cash flows can be tracked Simplicity Disadvantages Accrual Accounting Does not match revenues with resources used to generate those revenues Susceptible to managerial manipulation Focuses on the flows of resources and the revenues those resources helped to generate Advantages Matches revenues when they are earned with expenses Financial statement provides a broader picture Disadvantages More difficult to implement Also susceptible to manipulation of accounting rules GAAP recommends health care organizations follow accrual basis of accounting Double-entry accounting Every transaction involves two entries into the accounting system. One side is debited and the other is credited All entries into the accounting system affect one or more accounts. Various Ratios and Formulas Debt Ratio (Debt /Assets): The higher this ratio, the more leveraged the company and the greater its financial risk. Total Margin (Net Income / Revenue): A high ratio indicates that an organization has its costs under control and is making a profit.

3 Operating Margin (Operating Income / Net Sales): Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production. Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. EBITDA (earnings before interest, taxes, depreciation and amortization): EBITDA is a measure of profits. Assets = Liabilities + Equity Net Income = Revenue Expenses Finance II Revenue Cycle Management How to Increase Revenue You must ask to get paid...accurately and timely You must manage your revenue cycle Consider other services / procedures and Pay for Performance opportunities Budget and track expenses Proactively measure & report on high-level KPIs Benchmark performance outcomes against industry benchmarks or best practices Current Trends in Healthcare The U.S. spent over $2.4 trillion in healthcare in 2010, yet most of the information exchange is rudimentary $7,681 per resident of the U.S. 16.2% of GDP By 2019, health spending growth is expected to outpace increases in both wages and inflation Premiums for health insurance are up 131% since 1999 U.S. is adopting EMR technology at a much slower rate than other industrialized nations Care remains fragmented and uncoordinated What is Driving Costs Technologic Advances Prescription Drugs Aging of the Population Administrative Costs 7% of total spending Chronic Disease Accounts for over 75% of healthcare spending Preventable diseases consume 80% of spending

4 Market Conditions State budget issues continue Traditional Medicaid/Medicaid Managed Care wanting relief More residents living below the poverty level High penetration of Self-Insured Employers Shifts of health care costs to Consumers Increases in Deductibles Increases in Co-Pays But, still coverage offered from employers Most markets are dominated by few payers Smaller Payers being closed out of the Market Aggressive Managed Care payers Movements to more complicated contracts Reimbursement Variances Commercial Payers Continue to Subsidize Gov t Payers High deductible health plans increase Deductibles increasing too Quality scores tied to contract increases/consumerism Hospitals Physicians Multi-year contracts with payers Calls for transparency growing Long term sustainable cash flow a broad concern A CFO s Focus on Revenue Cycle Vendor Management Denials Management Technology Optimization Point of Service Collections Strategic Pricing Contract Management Compliance Documentation/Coding. Phases of Revenue Cycle Pre-Service Service Delivery and Recording Accounting Suspense Period Billing and Collections Claim o Never Events 3 types of Adverse Events that are NEVER covered by insurance: o 1-Procedure performed on the wrong body part o 2-Procedure performed on the wrong patient, or o 3-The wrong procedure performed on the patient

5 Payment Denial Management o Every 1% of rejected claims can cost an organization $50,000 to $250,000 in annual net revenue Reporting Emergency Medical Treatment and Labor Act (EMTALA) Impact on Revenue EMTALA requires hospital emergency departments (ED) to screen patients presenting at the ED to determine if an emergency medical condition is present. If an emergency medical condition is found, EDs are required to either stabilize the patient prior to transfer, or to obtain a certification that the transfer is appropriate. Although providers are required to screen and stabilize patients, insurer payment for that treatment is not guaranteed. Payment for services covered under the scope of EMTALA may also not be forthcoming because of patients abilities to pay. For these and other reasons, hospitals and physicians report that compliance with ETMALA has had adverse financial effects. Principles and Other Topics Time Value of Money (TVM) The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received. Sensitivity Analysis Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key prediction(s). This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price. Risk Analysis Risk analysis refers to the uncertainty of forecasted future cash flows streams, variance of portfolio/stock returns, statistical analysis to determine the probability of a project's success or failure, and possible future economic states. Beta Common measure of risk. A measure of the volatility of investment returns relative to the return on the portfolio. Shows the tendency of a portfolio s returns to respond to swings in the market. Bonds Bonds are debt. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government). The primary advantage of being a creditor is that you have a higher claim on assets than shareholders do: that is, in the case of bankruptcy,

6 a bondholder will get paid before a shareholder. Pays an interest rate (coupon) to bond holder either quarterly, semi-annually, or annually. Capital Asset Pricing Model (CAPM) A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium. Annuities An annuity is a contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Finance III Be ready to give an EXSUM and field questions on your BCA. Attribution: All information adapted from course notes and from Healthcare Finance: An Introduction to Accounting and Financial Management, 5 th Edition, by Louis C. Gapenski. Publisher: Health Administration Press, Chicago, Illinois.

MAP AUPHA. Health Administration Press, Chicago, Illinois. Association of University Programs in Health Administration, Arlington, Virginia

MAP AUPHA. Health Administration Press, Chicago, Illinois. Association of University Programs in Health Administration, Arlington, Virginia UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT LOUIS C. GAPENSKI GEORGE H. PINK Seventh Edition MAP AUPHA Health Administration Press, Chicago, Illinois Association of University Programs in Health Administration,