Hospital Finance 101

1. The Finance Quality Connection • Introduction to Hospital Finance & Reporting • Getting Comfortable with the numbers Hospital Finance 101 Carla Neiman Chief Financial Officer Clark Fork Valley Hospital

2. What is your F Quotient?

3. Discussion Topics • Why Finance? • How the goals of financial performance and quality care are related & integrated • Basic Hospital Finance & Reporting • How to understand and use your hospital’s financial information • Current Trends in Healthcare Finance & Reimbursement • Affordable Care Act and coming payment reforms

4. Why Finance? • Margin vs. Mission • One of the most important characteristics of ANY business is its financial performance & condition

5. Financial Analysis evaluates a business’s financial performance & condition • Does it have the financial capacity to fulfill its mission? • By assessing the financial health of our hospital we can identify strengths & weaknesses • The principal of Stewardship

6. The Quality Connection • The financial impact of quality on your hospital • Cost of new technology and the evolving “standard of care” • Adverse events • Lawsuits, insurance claims and insurance cost • Community image – consumer assessment • Payer impact – Never Events, credentialing & payment reform • Survey agencies • Publicly reported quality data

7. The evolving relationship between quality and cost in health care • The “Cost of Quality” - 1990 • “…costs and quality of care cannot be separated from each other. Higher quality often requires increased expenditures. When this occurs, decision makers must reconcile the desire for higher quality with the desire for cost control.” –Kovener & Neuhauser, 1990

8. The evolving relationship between quality and cost in health care • The “Cost of Poor Quality” - 2005 • Process improvement & resulting reduction in cost, LEAN, Six Sigma • “Although health care differs in many ways from manufacturing, there are also surprising similarities: Whether building a car or providing health care for a patient, workers must rely on multiple, complex processes to accomplish their tasks and provide value to the customer or patient. Waste – of money, time, supplies or good will – decreases value…” --Institute for Healthcare Improvement (2005)

9. The Quality Connection • High Cost does not mean High Quality • “Despite having the most costly health system in the world, the United States consistently underperforms on most dimensions of performance compared with other industrialized countries…” –Karen Davis, President, Commonwealth Fund

10. Introduction to Hospital Finance & Reporting • How the hospital gets and spends its money

11. Financial Statements • Audited vs. Interim • Statement of Operations (Income Statement) • Statement of Financial Position (Balance Sheet) • Statement of Cash Flows

12. Other Financial Reports • Statistical Reports • Accounts Receivable Status • Labor Productivity Report

13. Statistical Reporting • Hospital revenues tend to be volume driven and revenues are well demonstrated with statistics • Statistical reports should compare actual statistics to budget for current period and year-to-date • One should see a reasonable correlation between variances in statistics and corresponding categories of revenue

14. Typical Statistics to Review • Average Daily Census (by unit, by category) • Patient days • Outpatient Visits • Surgery minutes • Case mix index • Emergency Room visits • Clinic visits • Revenue per day and per visit

15. Statistical Report example

16. Dashboard Report

17. The Statement of Operations Also called the “Income Statement” – this report outlines actual revenues and expenses, as compared to budget, and is the most important gauge of the positive or negative results of the hospital’s operations for the period.

18. Hospital Revenues • Operating Revenue • Directly related to operations • Volume driven • Other Operating Revenue • Indirectly related to operations • Non-Operating Revenue • Not related to operations

20. Operating Revenues • Routine – Inpatient Room & Bed Charges • Ancillary – Inpatient & Outpatient • Lab, Imaging, Pharmacy, Therapy, Supplies, ER, Surgery, Home Health • Clinic

21. Deductions from Revenue“No one pays full price…” • Contractual Discounts/Allowances • Charity Care • Policy Discounts – Employee discounts, Administrative Discounts • Monthly Allowance Estimates

22. Net Patient Service Revenue • This is the difference between Gross Charges and Contractual Allowances • This is the NET amount of revenue we expect to collect after discounts to patients and public/private payers

23. Hospital Service Revenue & Margin Lab Test A • Charge/Price = $25.00 • Payment (varies w/payer) Medicare = $18.00 • Cost = $13.00 • Charge – Payment = Contractual Adjustment • Payment – Cost = Contribution Margin

24. Payer Types & Payment Methodology – Hospital • Medicare and Medicaid Hospital • CAH  Cost Based • Non-CAH  Prospective Payment (DRG & APC) • Commercial Insurance – Fee for service and discounts from charges, DRG or case payments, capitation • Private Pay – Prompt pay discounts, charity care, bad debt expense • Medicare Swingbed – Per Diem based on Cost per Day

25. Payer MethodologyOther Services • Medicare DME, Lab, Mammo – Fee Schedule • Medicare Home Health – Episode Based • Medicaid Nursing Home – Per Diem based on Facility Rate set by the state • Medicare Nursing Home – Prospective payment based on RUG coding • Medicare Rural Health Clinic – Payment per visit @ cost • Physician – RBRVS based on rate per RVU

26. Evolution of Payment Methodology • Incentives! • DRG’s 1983 • APC’s 2000 • Home Health Episodes 2000 • Future… Value-based Purchasing; Accountable Care Organizations; Payment for outcomes vs. fee for service

27. Hospital Service Mix

28. Outpatient Service Mix

29. Revenue Payer Mix

30. Other Operating Revenue • Cafeteria Revenue • Medical Records Revenue • Rental Revenue • Outreach Revenue

31. Non-Operating Revenue • Interest • Gains and Losses on Fixed Assets and Joint Ventures • Grants & Charitable Donations

32. Operating Expenses • Staffing – Salaries, Benefits, Professional Fees • Supplies & Other – Medical and Non-Medical Supplies, Purchased Services, Insurance, Utilities, Repair & Maintenance, Lease & Rental • Depreciation • Interest • Bad Debt • Other Expense – Postage, Travel, Dues & Subs, Taxes

34. Operating Expenses

35. The Balance Sheet The Statement of Financial Position or Balance Sheet is a snapshot of the financial position of the organization at a specific point in time. It can tell us a lot about the financial health of the business.

36. Assets • Short Term • Cash and Investments • Accounts Receivable – gross vs. net • Other Receivables – Third Party Payers, Non-patient receivables • Inventory • Prepaid Expenses • Long Term • Property Plant & Equipment – at cost less accumulated depreciation • Other Assets – Restricted assets, Joint Ventures, Intangibles, such as good will

37. Liabilities • Short Term • Accounts Payable • Accrued Compensation • Other Accrued Expenses • Line of Credit • Current Portion of Long Term Debt • Long Term • Mortgage & other Long Term Debt Payable • Capital Leases

38. Net Assets or Fund Balance This is the equivalent of “equity” in a non-profit • Unrestricted Fund Balance • Restricted Fund Balance • Current Year’s Operations Balance, if interim

39. CASH – What really keeps the hospital ticking!

40. The importance of monitoring cash flows • While Revenues and Expenses offer an excellent assessment of the financial outcome of operations, the bottom line is not directly indicative of real-time financial performance, since most revenues are not collected at the time of service, most expenses are not paid when incurred and non-cash expenses, while important, do not have a direct impact on our financial resources

41. The Revenue Cycle

42. Sources of Cash • Collection of Accounts Receivable • Cash Services • Investment Income • Sale of Assets • Financings • Unrestricted Donations • Capital Contributions

43. Applications of Cash • Payments to Employees of Accrued Compensation • Payments to Suppliers of Accounts Payable • Payments to Lenders for Principal and Interest • Purchase of Fixed Assets • Investments

44. Statement of Changes in Cash • Net Income (Loss) Results of Operations • Add back Non-Cash Expenses (Depreciation, Amortization) • Identifies sources & uses of cash during the accounting period to explain the change in the cash balance

46. Accounts Receivable Analysis • Increased Accounts Receivable is a drain on cash flow • Optimizing the “Revenue Cycle” means capturing charges, generating bills and collecting from payers as quickly as possible, so that the resulting cash can be used to fund operations • Accounts cannot be collected until they are billed

47. Accounts Receivable Analysis Report • Breakdown by Patient Type (Inpatient, Outpatient, SNF) with prior month comp • Breakdown by Payer Type (Medicare, Medicaid, Commercial, Self Pay) with prior month comparison • Aging of Accounts Receivable • Unbilled Accounts Receivable • Gross Days A/R Outstanding w/ prior month comparison • Revenue and Revenue Day Equivalent

48. Days Revenue in Accounts Receivable Outstanding • Total Accounts Receivable / Average Revenue per day • This is a measure of how many days it takes to collect patient accounts, on average • This will vary by payer and type of service • Medicare will pay a clean bill in 14 days • Private Pay nursing home accounts are generally paid in advance • Self pay bills may take several months to a year (or more) to be paid off

50. Questions to ask about Accounts Receivable Performance • How many days unbilled? • What action have we taken to manage/optimize our revenue cycle? • Monitor physician chart completion • Monitor transcription and coding turnaround • Electronic billing • Ensure clean claims • Collection practices