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Financial Management

Financial Management. Thomas J. Dilts MT(ASCP),MBPA Vice Chair of Administration and Operations Department of Pathology Virginia Commonwealth University Healthsystem Medical College of Virginia Hospitals and Physicians. Financial Management. Why is this important?

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Financial Management

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  1. Financial Management Thomas J. Dilts MT(ASCP),MBPA Vice Chair of Administration and Operations Department of Pathology Virginia Commonwealth University Healthsystem Medical College of Virginia Hospitals and Physicians

  2. Financial Management Why is this important? • Economics - A major driver of health care. • Needed to understand your opportunities and fate of your profession • Requirement • Personal and Professional use

  3. History • Medicare • Medicaid • Managed Care • Insurance

  4. Profit/Loss = Revenue - Expenses

  5. BUDGET (Cut the Budget!!!!!)

  6. Planning is the process of deciding in advance what is to be done and how. Most organizations operate in an environment of change. With a more dynamic environment the planning function becomes critical.

  7. Planning Strategic Long Range Budget

  8. Budget Revenue (pay check)$4,000.00 Expenses • Rent/mortgage $950.00 • Gas for car $200.00 • Food $350.00 • Savings/vacation(escrow) $200.00 • Electric bill $185.00 Total expenses $1,885.00 Net income/profit$2,115.00

  9. Budget Net income/profit $2,115.00 • What’s left after bills are paid Revenues - Expenses = Profit ( or Loss ) ($4,000.00-$1,885.00=$2,115.00)

  10. Hospital Lab Budget

  11. Hospital Lab Budget by Section

  12. Profit/Loss = Revenue - Expenses

  13. Revenue Billed Revenue = Lab Procedures X Current Fee Collected Revenue = Billed Revenue - Contractual Allowances

  14. Insurance Mix Medicare 35% Medicaid 10% Trigon (Blue Cross) 25% Managed Care 25% Other 5%

  15. Revenue Billed Revenue = Lab Procedures X Current Fee Collected Revenue = Billed Revenue - Contractual Allowances $40,500 = $54,000 - $13,500

  16. REVENUE PROBLEM • 200 CBCs performed • Current fee per CBC is $25 • All patients have Blue Cross at 50% contractual adjustment for each test • What is the billed revenue and the collected revenue?

  17. SOLUTION • 200 X $25 = $5000( billed revenue ) • $5000 X .5(50%) = $2500( col. Revenue )

  18. Costs (Expenses) Direct Costs are costs that can be directly identified with a given product or activity. • Reagents • Controls • Tubes Indirect Costs cannot be identified with a given product or activity. • Electricity • Environmental services • Management • Computer support

  19. Direct Costs Variable Costs-- changes with a change in product volume

  20. Direct Costs Fixed Costs-- Do not change with change in product volume

  21. WHICH DIRECT EXPENSE IS THIS? • Service contract for equipment • Reagent for each test • Quality control material • Labor costs • Pipet tips • Purchase cost of equipment • Rent of lab space

  22. Costs (Expenses) Direct Costs are costs that can be directly identified with a given product or activity. • Reagents • Controls • Tubes Indirect Costs cannot be identified with a given product or activity. • Electricity • Environmental services • Management • Computer support

  23. Indirect costs Departmental • management • travel • telephone Global (Hospital) • administration • dietary • computer systems • plant facilities

  24. EXAMPLES OF INDIRECT COSTS

  25. Profit/Loss = Revenue Minus Expenses Profit/Loss = Collected Revenue (Net) - Total Expenses

  26. Month Budgeted Actual Variance Revenue $332,000 $325,000 ($7,000) Personnel Expenses $160,000 $185,000 -$25,000 Supplies/Reagents $35,000 $43,000 -$8,000 Total Expenses$195,000 $228,000 -$33,000

  27. Profit/Loss = Revenue minus Expenses $97,000 = $325,000 - $228,000 (gross revenue) ($58,000) = $170,000 - $228,000 (net revenue) ($160,000) = $170,000 - $330,000 (plus indirect expense) ____________________________________________ Insurance cont.= $155,000 indirect exp = $102,000

  28. PROBLEM • Gross revenue is $100,000 • Contractual adjustments are $40,000 • Direct variable expenses are $15,000 • Direct fixed expenses are $5,000 • All indirect expenses are $10,000 • What is the net revenue(profit)

  29. SOLUTION • Gross revenue $100,000 • Contractual adjust. - $40,000 • _________ • Collected revenue $60,000 • Direct expenses - $20,000 • Indirect expenses - $10,000 • __________ • Net revenue(profit) $30,000

  30. Monitoring the Budget • Usually monthly • Action plan –(how to get back on budget) • Your involvement as lab staff

  31. Setting the Test Fee A. Must identify all direct costs to do procedure: • labor • supplies • reagents • equipment(depreciation) • service and maintenance • collecting and processing specimen • ordering supplies - request slip B. Must add indirect costs. C. Must consider collection rate for billing. D. Mark up (% profit)

  32. Depreciation • Cost of item divided by useful life • Useful life is usually five years for lab equipment • $100,000/5years = $20,000

  33. SETTING THE TEST FEE EXAMPLE • Labor 10min x $0.50/min = $5.00 • Supplies $0.80 • Reagents $1.20 • Equipment($200,000/40,000) $0.50 • Service/maintenance $0.12 • Specimen collection/process. $1.00 • _____ • Total $8.62

  34. SETTING TEST FEE EXAMPLE • Direct costs $8.62 • Indirect costs(20% of dir) $1.72 • _______ • $10.34 • Collection rate(40%) $10.34/.4 = $25.85 • Mark up (profit) 10%= $25.85+$2.59 = • $28.44

  35. COST ACCOUNTING

  36. COST ACCOUNTING EXAMPLE • Labor 10min x $0.50/min = $5.00 • Supplies $0.80 • Reagents $1.20 • Equipment $0.50 • Service/maintenance $0.12 • Specimen collection/process. $1.00 • Indirect costs $1.72 • Total $10.43

  37. Contribution Margin • Price(fee) – Variable cost/test = Contribution Margin • Contribution Margin contributes to fixed costs and to profits

  38. Break Even Analysis • Break even volume = Fixed costs divided by the Contribution Margin • Break even volume(analysis) = What is the number of tests I must perform to recover my costs

  39. Price - Variable cost per test= Contribution Margin $30.00 - $10.00 = $20.00 Break Even Volume = Fixed Costs Contribution Margin 500 Tests = $10,000.00 $20.00

  40. Volume = 1,000 tests • Price = $20 each • Costs • equipment $50 • reagents $1000 ($1.00 each test) • controls $100 ($0.10 each test) • supplies $50 ($0.05 each test) • salary $12,500 (0.50 FTE) Total $13,700 • Revenue 1,000 X $20 = $20,000 • Costs = $13,700 • Profit = $20,000 - $13,700 = $6,300

  41. Change the fee to $15.00 • What is the profit?

  42. $15.00 per test $15,000 - $13,700 = $1,300 profit

  43. PROBLEM • Test volume is now 5,000 • Assume that no additional labor is needed for the increased test volume • What is the final profit for this volume?

  44. 5,000 tests is volume • Revenue = 5,000 X $20 = $100,000 • Costs • equipment $50 • reagents $5000($1.00 x 5000) • controls $500($0.10 x 5000) • supplies $250($0.05 x 5000) • salary $12,500 • Total Costs $18,300 • Profit = $100,000 - $18,300 = $81,700

  45. Let’s take a break

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