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

2. What is your F Quotient?

3. Discussion Topics Why Finance? Basic Hospital Finance & Reporting
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”
“…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”
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
Description
Actual
Budget
Variance
Avg YTD
Hospital ADC
4.2
4.7
(.5)
3.9
Surgery Minutes
3709
2778
931
2636
Outpatient Visits
1370
1483
(113)
1388

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 Other 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 Methodology Other 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 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 Long 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 Long 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

51. Labor Productivity Analysis
Helps to analyze and justify variances in labor cost by relating labor cost to service volume or other relevant statistics
Overtime Hours by department
Non-Productive Hours (PTO, Vacation, Sick Leave)
“Target” is actual units of service x budgeted hours per unit
Efficiency measures actual hours per unit of service to budget
Productive % measures worked hours compared to total paid hours

53. How are we doing? How are we tracking against our budget?
Ratio Analysis

54. Ratio Analysis
Ratio analysis is a technique used in both financial statement and operating indicator analyses
It combines values from the financial statements (and elsewhere) to create single numbers that
Have easily interpretable financial significance
Facilitate comparisons

55. Using Ratios A single ratio value has little meaning
One point in time may not be representative
We can’t judge whether it is good or bad
Two techniques are commonly used
Trend – Time series analysis
Comparative – Cross Sectional analysis with comparisons to industry benchmarks and peers

56. Ratios help to identify
Questions to ask
Issues to address
Problems to solve
They do not necessarily provide
Answers
Explanations
Solutions
*That’s the job of management!

57. Profitability Indicators
Measure the ability to generate the financial return required to replace assets, meet financial obligations, meet increases in service demands, and compensate investors (or in the case of a nonprofit, build reserves for stability & growth
Total margin, cash flow margin, return on equity, operating margin, debt service coverage

58. Liquidity Indicators
Measure the ability to meet cash obligations in a timely manner
Current ratio, Days cash on hand, Days Revenue in Accounts Receivable, Days in Accounts Payable

59. Capital Structure Indicators
Measure the extent of debt and equity financing
Equity financing, debt service coverage, long-term debt to capitalization

60. Sources of Comparative Information
Finding a suitable comparison – Peer groups, similar facilities (type, size, service mix, location)
Moody’s and other Debt Rating Agencies
Healthcare Financial Management Association
MHA Databank
National CAH Flex Team Benchmarking

61. Flex Monitoring Team CAH Financial Indicators Report61

62. Beyond the numbers…
Understand your Hospital’s Operating environment and its impact on the financial picture
External environment – economic, regulatory, human resource, payers, competition, investment performance, donor support
Internal environment – management control, staff vacancies, case mix, payer mix, physician practice patterns

63. Environmental Analysis (cont)
Retrospective
How do environmental factors help to explain past financial performance?
Proactive
Anticipating change in the environment and its associated impact on future performance
Taking action to minimize negative influences and maximize opportunities presented by positive change
Planning!

64. The Budget
A budget is an operating plan expressed in dollar amounts that acts as a road map to carry out an organization’s objectives, strategies and assumptions.
Translating operating plans and assumptions into their expected financial results ensures those plans and assumptions are financially realistic

65. Budget Process Based on the Strategic Plan
Allows adequate time for staff and board input, review and approval
Has some basis in current year’s results
Provides for department level involvement
and accountability

66. Current Trends in Healthcare Finance & Reimbursement
The “unsustainable” cost curve
Spending on Healthcare as a Percentage of GDP, 1966 – 2005
Source: Congressional Budget Office (2007)

67. Current Trends in Healthcare Finance & Reimbursement
Projected Spending on Health Care as a Percentage of GDP,
Source: Congressional Budget Office (2007)

68. Current Trends in Healthcare Finance & Reimbursement
Sources of Projected Growth in Spending on Medicare & Medicaid
Source: Congressional Budget Office (2007)

69. Current Trends in Healthcare Finance & Reimbursement
A growing emphasis on “VALUE”
“Value is defined as the relationship of quality to cost. High quality at inappropriately high cost does not produce value. Likewise, low quality at low cost also does not produce value. Relentlessly driving toward both high quality and low cost is what produces value. Given our current environment, it is critical for healthcare organizations to make achieving value a key strategy.”
--Dick Clarke, HFMA President (2009)

70. Current Trends in Healthcare Finance & Reimbursement
Consumer Driven Health Care
Empowered consumers
Widespread availability of information
Third party payer scrutiny – RAC Audits
Never Events

72. From the OIG Adverse Events Report
Studied representative sample data in one month of 2008 to extrapolate annual estimates
1 in 7 Medicare beneficiaries admitted to a hospital is harmed
Adverse events add $4.4 Billion to government health care cost annually and contribute to the deaths of 180,000 patients each year
Most adverse events are preventable

73. Patient Protection & Affordable Care Act (PPACA)
Healthcare Reform using “Healthcare Payment Reform” as incentives
Intended to drive a shift from “fragmented care” to “coordinated care”

76. Trends in Healthcare Finance & Reimbursement
Payment for Outcomes vs. Services
“You may regard as a Utopian dream my hope to see all our hospitals devoting a reasonable portion of their funds to tracing the results of the treatment of their patients and analyzing these results with a view to improving them. You may prefer to ponder over the voluminous discussions now appearing in our journals and in the lay press about the pros and cons for state medicine and who is to pay the cost of medical care. I read these discussions, but they seem to be futile, until our hospitals begin to trace their results.” --E. A. Codman, 1935

77. Trends in Healthcare Finance & Reimbursement
Reduced ability to “cost shift”
With health care reform, more people will have coverage under government programs which traditionally do not cover the full cost of care, due to the expansion of coverage and the aging of the population
Coverage expansion & access to services
Shortage of primary care providers
Adequate supply of facilities & services

78. “Changing Economics in an Era of Healthcare Reform”
“As health systems prepare for healthcare reform, they are focusing significant resources on developing accountable care organizations and medical homes and on preparing for bundled payments and population-based reimbursement. However, current economic trends combined with an analysis of the impact of key healthcare reform initiatives will require health systems to take significant cost out of their systems to maintain positive financial performance. Few organizations have the culture or the expertise to implement a cost-reduction effort of this magnitude.”
--Nathan S. Kaufman, Managing Director, Kaufman Strategic Advisors, LLC (Journal of Healthcare Management, January/February, 2011)

79. Questions?

80. Helpful Resources A Community Leader’s Guide to Hospital Finance
Guidestar: Data on non-profits including IRS F990 info
Montana Attorney General Report on Montana’s Hospitals and Charitable Purpose

81. More Resources
Databank: Financial data repository for all hospitals across the state of Montana; ability to print comparative reports for your hospital to various peer groups, all hospitals in the state, and selected hospitals
Flex Monitoring Team: Comparative financial data on CAH hospitals with trending
*Hospital specific reports for CAH accessible by CEO & CFO
*Educational resources – how to read the reports and interpret ratios & comparative data
Rural Assistance Center: Various resources, publications and funding information related to rural health

82. More Resources Information on healthcare reform & finance
Healthcare Costs & Spending
Adverse Events in Hospitals

83. Contact Me Carla Neiman, CFO Clark Fork Valley Hospital P. O. Box 768
Plains, MT
(406)