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? Economics - A major driver of health care. Needed to understand your opportunities and fate of your profession Requirement Personal and Professional use

History Medicare Medicaid Managed Care Insurance

Profit/Loss = Revenue - Expenses

BUDGET (Cut the Budget!!!!!)

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.

Planning Strategic Long Range Budget

Revenue (pay check)$4, Expenses Rent/mortgage$ Gas for car$ Food$ Savings/vacation(escrow) $ Electric bill$ Total expenses$1, Net income/profit$2,115.00

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

Hospital Lab Budget

Hospital Lab Budget by Section

Profit/Loss = Revenue - Expenses

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

Insurance Mix Medicare35% Medicaid10% Trigon (Blue Cross)25% Managed Care25% Other 5%

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

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?

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

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

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

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

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

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

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

EXAMPLES OF INDIRECT COSTS

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

Month BudgetedActualVariance 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

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

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)

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

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

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)

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

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

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

COST ACCOUNTING

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

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

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

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

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 Revenue1,000 X $20 = $20,000 Costs = $13,700 Profit= $20,000 - $13,700 = $6,300

Change the fee to $15.00 What is the profit?

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

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?

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

Let’s take a break

Capital Costs Operational Costs Capital Costs Where do Capital dollars come from?

Profit/Loss = Revenue - Expenses

Capital Equipment Purchase Lease Reagent Rental Cost per Billable Test

Return On Investment ROI (operating margin divided by capital investment) Pay back period ( Capital investment divided by operating margin x 12 months)

ROI $150,000 X 100 = 300% $50,000 $40,000 X 100 = 80% $50,000 $18,000 X 100 = 18.5% $97,000

Return On Investment ROI (operating margin divided by capital investment) Pay back period ( Capital investment divided by operating margin x 12 months)

Pay Back Period $50,000 X 12 = 4 months $150,000 $50,000 X 12 = 15 months $40,000 $97,000 X 12 = 64.6 months (5.4 years) $18,000

ROI PROBLEM The operating margin for this test is $300,000 Equipment purchase will cost $100,000 What is the return on investment(ROI)?

ROI SOLUTION $300,000/$100,000 x 100 = 300%

PAY BACK PERIOD PROBLEM The operating margin for this test is $300,000 Equipment purchase will cost $100,000 What is the payback period?

PAYBACK PERIOD SOLUTION $100,000/$300,000 x 12 = 3.99 or 4 months

QUESTIONS