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Inflows and Revenue Management Please respond to the following: Determine a key difference between a fee-for-service plan and an episode of care payment plan, and indicate the plan that you believe to be most advantageous for the majority of patients.
These are for the first part of this discussion. I dont have the scenario yet, I will have it later on today.
HSA525 Week 2, Lecture 1 Script: Assets, Liabilities, and Net Worth
Slide #
Scene/Interaction
Narration
Slide 1
Scene 1
Professor Quan enters classroom and introduces the topics for todays lesson and begins the lecture.
Prof Quan: Hello everyone
.welcome back to class. Today, we are going to discuss assets, liabilities, and net worth with the context of health services organizations.
A principle goal of healthcare financial management is to generate a reasonable net income by investing in assets and putting the assets to work for the organization. Assets, liabilities, and net worth are part of the language of financial management; therefore, it is imperative that we consider their composition as well as how the concepts relate.
Assets are the economic resources that are owned by the organization in both the short and long term. Financial managers have the expectation that assets will provide positive future cash flows for the organization.
Liabilities, on the other hand, are economic obligations, or debt owed by the organization in both the short and long term.
Net worth represents the owners claim to the assets of the organization. Assets, liabilities, and net worth are reflected on the organizations balance sheet.
Lets first discuss the economic resources that a company may hold. What are some examples?
Sophia: Supplies, buildings, equipment, money to name a few
Lauren: I would agree, but would also add claims to receive money. In terms of healthcare finance, a claim to receive money is perhaps the most basic asset that the healthcare organization owns, because it involves reimbursement from third party payers. This is evidence of a short-term asset.
Tyler: In addition to what has already been noted, I would say that inventory would be considered assets as well.
Prof. Quan: Absolutely
what are some of the liabilities of the healthcare organization?
Lauren: As you mentioned, professor, liabilities are the obligations of the organization. I would say that accounts payable and expense payables are two examples.
Prof. Quan: What are some examples of Owners Equity?
Sophia: Common stock and retained earnings which indicates the cumulative profit/losses of an organization.
Prof. Quan: Great job Sophia! Now lets take a closer look at how each affects the basic accounting equation.
Slide 2
Check Your Understanding
Which of the following is an asset account?
A. Accounts Payable
B. Accounts Receivable
C. Unearned Revenue
Correct Feedback:
B. Accounts receivable is correct. Accounts receivable equates to claims to receive money, usually from third party payers.
Incorrect Feedback:
A. Accounts payable is a liability account.
C. Unearned revenue is a liability account.
Slide 3
Scene 2
Discussion between Prof Quan and students.
Prof. Quan: Financial managers classify assets in order to evaluate the health of the organization by examining the specific performance of each type of the organizations assets.
Assets typically noted on the healthcare organizations balance sheets are current assets, receivables, inventory, prepaid expenses which are short-term assets, investments, and plant and equipment which are long-term assets. Common liabilities include accounts payable, accrued expenses payablewhich are short-term liabilities, deferred revenue, and long-term liabilities.
In terms of net equity, stocks we previously mentioned are also included on the balance sheet. Cash and cash equivalents include coin, currency, savings accounts, CDs, and temporary marketable securities.
Accounts receivables for the healthcare organizations are a little different for the healthcare organization when compared to other types of organizations. Generally speaking, healthcare organizations actually receive substantially lower amounts than what is charged to its customers than other types of organizations.
The healthcare organization uses allowances to restate its receivables as a result of its low collected amounts versus its billed amounts. The allowances are categorized as charity allowances, courtesy allowances, doubtful account allowances, and contractual allowances. Health services managers are tasked to make sure that allowances are not so large that they do not cover the actual cost of the service provided.
Sophia: So, Professor Quan
can you explain the allowances?
Prof. Quan: Absolutely!The charity allowance applies the difference between established rates and the amount that is actually charged to a financially indigent patient. There are some healthcare facilities that adjust their fees for those who are considered to have incomes below a standard, such as the poverty level.
To determine the allowance, the discounted rate is deducted from the initial price. In terms of the courtesy allowance, providers may grant a special discount to other providers. The difference between the list price and the discounted amount is considered the courtesy allowance.
Tyler (interrupts): Just to be clear, a courtesy discount is given for other professionals?
Prof. Quan: Yes, we see it quite often where a doctor who is treating another doctor offers a professional courtesy discount. This is very common
sometimes employees are granted courtesy discounts as well.
The doubtful account allowance is interesting because the allowance is based on the providers belief that the billed amount, although discounted may never be recouped because a patient is medically indigent. Then there is the contractual allowance. This particular allowance is actually the most common. It is the difference between the list charge and the contract charge between the provider and the third party payer.
Lauren: I am still not quite clear on the doubtful account allowance. Can you provide an example?
Prof. Quan: Sure
.Lets assume that a medically indigent patient receives care that totals one-hundred dollars. The provider may recognize that the patient is medically indigent and may offer to charge the patient half of the total bill.
The provider will bill the patient, but may feel as though the patient may not pay the fifty-dollars because of his or her financial challenges, under this circumstance, the fifty-dollars will be entered as a doubtful account allowance. This basically means that there is no reasonable expectation of payment.
The allowance must be carefully reviewed as significant increases in the allowance may affect the reliability of the organizations cash flow.
Slide 4
Check Your Understanding
When the allowance for the doubtful account appears on a companys financial statements, its balance is considered a _____ balance.
A. Credit
B. Debit
Correct Feedback:
A. Credit is correct. The doubtful account allowance is considered a contra account
which is basically the equivalent of an offsetting account. In this instance, the doubtful allowance account offsets the asset account, thereby creating a credit balance.
Incorrect Feedback:
B. The allowance account must be zero or credit balance when reported on the balance sheet.
Slide 5
Check Your Understanding
Horizon Medical Equipment company has current assets of $50,000 and total assets of $150,000. Horizon Medical Equipment has current liabilities of $30,000 and total liabilities of $80,000. The amount of Horizons owners equity is:
A. $20,000
B. $30,000
C. $70,000
D. 120,000
Correct Feedback:
C. $70,000 is the correct amount
.reflect back to the general accounting equation
assets equals liabilities plus owners equity. The equivalent equation is assets minus liabilities equal owners equity. Horizons total assets equal $150,000. Its total liabilities equal $80,000. You would simply subtract Horizons total liabilities of $80,000 from its total assets of $150,000 to determine the owners equity.
Incorrect Feedback:
A. Incorrect. Please try again. Remember, owners equity equals total assets minus total liabilities.
B. Incorrect. Please try again. Remember, owners equals total assets minus total liabilities.
D. Incorrect. Please try again. Remember, owners equity equals total assets minus total liabilities.
Slide 6
Scene 3
Discussion of Current and non-current liabilities.
Prof. Quan: Now lets discuss liabilities, which can be classified as current and noncurrent.
Can anyone give examples of current and non-current liabilities?
Sophia: I think I can name a few. Examples of current liabilities are accounts payable, accrued liabilities, and current portion of long-term debt. Noncurrent liabilities include debt that is not expected to be paid in a year. Examples of noncurrent liabilities include mortgages, bonds, pensions, long term leases and business loans.
Prof. Quan: Very good Sophia! Those are all great examples.
Tyler: Prof. Quan
.what is the difference between notes payable and accounts payable?
Prof. Quan: Tyler that is a great question
accounts payable is classified as a current liability, and notes payable is classified as a current or long-term liability. A current liability is due in less than one year, where a long term liability is due in over a year. Accounts payables are based on good faith and no formal written agreement other than an invoice is issued. Notes payables, on the other hand, require a written promise to pay within a specific period of timeframe.
Lauren: So is it safe to say that one of the biggest differences involves the informal nature of the accounts payable and the formal nature of the notes payable?
Prof. Quan: Yes, Lauren
.I think that is a pretty good distinction.
Sophia: I think that the discussion on assets and liabilities has really clarified some questions for me. Now, a little more clarification on net worth would really help.
Prof. Quan: Well, that is a great lead-in to the next topic, which is net worth.
Slide 7
Scene 4
Discussion on increase in assets and decrease in liabilities.
Prof. Quan: The concept of net worth, which is owners equity, is the difference between the organizations assets and its liabilities. It represents the ownership interest of stockholders in the organization.
Net Worth also comprises common stock and retained earnings (the cumulative earnings of the organization). The common stock refers to the monies invested into the organization and retained earnings refer to the income earned by the organization less dividends paid.
If Net Worth is positive, then total assets exceed total liabilities. Conversely, if Net Worth is negative, then debt is greater than the assets. It is important to note that the non-profit organization must retain all earnings.
Retained earnings are an equity account and like all equity accounts, represent a claim against assets.
What are the two primary ways an organization can increase its net worth?
Sophia: I would say that the organization must decrease its liabilities or increase its assets.
Prof. Quan: Exactly
It is so important to remember that stockholder equity is the residual of assets minus liabilities. Often you may hear the phrase book value of the company. The book value simply reflects the amount of shareholders equity per share.
If the organization generates high returns relative to shareholder equity, obviously the organization creates substantial assets for each dollar invested.
Tyler: Professor, in our discussion, you have provided us with a significant amount of information about shareholder equity. It seems as though the statement of shareholder equity receives less scrutiny than the balance sheet, income statement, and statement of cash flows.
Since we are discussing shareholder equity, I would like to learn more about the statement of shareholder equity. How does it differ from the balance sheet?
Prof. Quan: The statement of shareholder equity shows the amount of equity that the owners or shareholders have at the beginning and the end of the accounting period. In looking at the balance sheet, the final section of the balance sheet contains the equity portion.
The statement of shareholder equity reports the transactions that cause changes in its shareholders equity account balances. Common reasons for changes include the sale of additional stock, the acquisition of treasury stock, net income and the declaration of dividends.
Lauren: So, since non-profit businesses, which are the majority of healthcare organizations, do not have equity, what is the appropriate terminology for net worth for non-profits?
Prof. Quan: Afor-profit organization which has the designation of a sole proprietorship or partnership would use the term owners equity, whereas the corporation would use the terms capital stock or retained earnings. As you noted, the non-profit technically does not have equity; therefore, the appropriate terminology is fund balance.
Slide 8
Scene 5
Summary
Picture of Tyler, Lauren, and Sophia as they speak.
Prof Quan: We are just about out of time. Lets go over what we learned in this lesson.
Today, our discussion focused on the financial aspects of the organizations including assets, liabilities, and net worth. We discussed the process of recognizing typical assets and liabilities. We also discussed the appropriate terminology for net worth as it relates to types of organizations, whether it is for-profit or non-profit.
Before we adjourn, are there any questions?
Tyler: I have no questions, I think that the information was clearly presented, Professor.
Sophia: No questions for me
Lauren: None at this time for me either, professor.
Professor Quan: Well, if there are no further questions, I will say good evening and I will see you next time.
HSA525 Week 2, Lecture 2 Script: Revenues and Expenses
Slide #
Scene/Interaction
Narration
Slide 1
Scene 1
Professor Quan enters classroom and introduces the topics for todays lesson and begins the lecture.
Prof. Quan: Hello everyone, welcome back! During our last lecture, we discussed assets, liabilities, and net worth, the components of the balance sheet. Now, we will expand our discussion to include revenues and expenses which are found on the income statement.
Generally speaking, revenue in a healthcare facility comes from three sources
.patient services revenue, other revenue, and non-operating gains. Operating expenses are categorized in two ways, by cost or responsibility center or by object of type of expenditure. We will go over these in detail. Today we will start with a discussion on sources of revenue for the healthcare organization.
Until the early 1970s, most insurance plans were considered fee for service plans. As you may recall, the traditional fee for service plan, also known as indemnity plans, offered considerable flexibility allowing policy holders the freedom to select any healthcare provider of their choice.
Under fee for service plans, provider reimbursement is paid retrospectively according to the number and type of services performed. This is in contrast to managed care, which is a method of combining the financing and delivery of healthcare. Managed care contains a specified set of health benefits provided in exchange for an annual fee or fixed periodic payment.
Lauren: It is my understanding that managed care plans reimburse providers under capitation.
Prof. Quan: That is correct, Lauren. Capitation affects inflows or revenues as the provider receives a fixed amount of money each month for every person enrolled in a given plan, irrespective of whether or not a given person receives care.
Other inflows include revenue generated from activities not directly related to patient care. For instance, a facility or healthcare organization may offer educational programs or may rent space within the facility. The monies received from these sources are also considered revenue.
Can you think of other sources of revenues that are not directly related to patient care?
Sophia: Hospitals often have gift shops and cafeterias, both services can generate revenue for the facility.
Tyler: Hospitals often charge visitors for parking, which can also be a source of revenue.
Lauren: Investments and the income generated from investments can be sources of revenue as well.
Prof. Quan: Excellent!Now lets consider expenses
.Todays healthcare organizations are increasingly concerned with healthcare costs. Consequently, decision makers are more focused on the organizations operating expenses to make sure that costs are as low as possible without sacrificing quality.
What are some of the operational expenses that you believe a healthcare organization may incur?
Tyler: Salaries haveto be one of the biggest expenses for a healthcare organization.
Sophia: I agree with Tyler and would add
.supplies, depreciation and amortization, and interest.
Lauren: Professor, bad debt is also an -expense.
Prof. Quan: Very good
It is important to point out that depreciation and interest are two special accounts that have significance to the financial manager. Depreciation is a non-cash expense that reflects the financial value an asset loses over its useful life. Interest is the expense paid as part of debt financing.
Slide 2
Scene 2
Discussion on Charges and Charges less discounts.
Prof. Quan: Patients use a variety of methods to pay providers for healthcare services. The healthcare financial manager must be aware of the financial risk assumed by the healthcare organization. Lets first take a look at fees for services provided (revenue).
Every healthcare organization has a list of -feesfor patient care. If the healthcare organization sets itsfeescorrectly, and if the third party pays the -fees, the healthcare organization assumes no financial risk
as it provides care and is reimbursed for the care provided by either the patient or insurance company.
Then, we look at the method of -feesless discounts. Under this methodology, the healthcare organization offers discounted charges to third party payers.
Tyler: Professor, so what incentive is there for the organization to offer a discount when there is the potential to receive reimbursement at cost?
Prof. Quan: Many insurance payers reward providers who agree to discounted charges with large volumes of patients. The increased volume of patients should offset any financial risk to the organization. Think of it this way
if the healthcare organization does not discount its charges below its costs, it assumes little financial risk.
Sophia: OK, I get it
the advantage is more patients, which increases revenues.
Prof. Quan: That is correct. The charge minus discount involves contracting. Most providers are contracted with payers, who in turn, include the provider as part of its network of providers. The patients are more likely to use the network provider because they incur less out of pocket expenses by using the network or contracted providers.
In some instances, there may not be any benefits payable for a patient who does not use the network provider. So, you can easily see that there is an incentive for the patient to use the network provider
but, there is also an incentive for the healthcare organization to become contracted by using the charges less discounts method.
Tyler: Professor, when you indicated that there are some instances where the payer may not reimburse for services that patients receive, if they use providers other than the contracted provider, is that specific to a particular insurance plan type?
Prof. Quan: Yes, there are some plans that have a requirement for all enrollees to use contracted providers. These guidelines are often associated with the traditional Health Maintenance Organizations or what we commonly refer to as HMOs.
The HMO has changed significantly and there are some HMO plans that are less restrictive and will allow members to seek care outside of the contracted providers.
Slide 3
Scene 3
Discussion on captitation, per diem, and per case.
Prof. Quan: HMOs use the capitation method. Capitation is a very common and the financial manager must pay particular attention to utilization patterns with respect to capitation. Under capitation, healthcare organizations receive a fixed amount, or a per member, per month fee for all services, whether or not the patient receives care.
The financial manager must be aware that the capitation method provides significant financial risk and opportunity. The fixed amount is based on cost of care projections.
Lauren: So, in other words, capitation is all about forecasting?
Prof. Quan: Absolutely
.If the cost to provide care exceeds the capitated amount, the health care provider does not earn a profit. Capitation provides financial incentives to healthcare organizations to contain costs before the patient seeks care, primarily by encouraging prevention and efficiency in the delivery system.
In the Per Diem method, healthcare organizations receive a per day reimbursement for patient care. The rates are set prospectively by the payer. If the organization provides care for a cost greater than the per diem rate, the organization loses money. If the organization provides care that costs less than the per diem rate, the organization makes a profit on that care.
With the Per Case method, reimbursement is made based on the diagnosis of the patient. Per case provides financial risks and incentives to the organization.
Sophia: Is the DRG method similar to the per case method?
Prof. Quan: Yes, the Diagnosis Related Group is a perfect example of Per Case methodology?
Slide 4
Check Your Understanding:
The payment method that provides financial incentives to healthcare organizations prior to the provision of care by encouraging prevention is called:
A. Per Diem
B. Per Case
C. Capitation
Correct Feedback:
C. Capitation offers an incentive to providers to keep costs low by encouraging prevention.
Incorrect Feedback:
A. Try again.. Remember, the Per Diem method refers to the daily rates and generally involves inpatient care.
B. Not quite
The Per Case method involves payments based on condition or disease.
Slide 5
Discussion on bad debt and charity care.
Prof. Quan: Two very important concepts that affect the organizations finances are bad debt and charity care. Bad debt is an unpaid healthcare bill.
Under the accrual accounting method, bad debt expenses are incurred when a patient fails to pay for services rendered resulting in a write off of the account. Healthcare organizations are required to report bad debt expense as an operating expense based on charges, not costs but provide for this through the allowance for doubtful accounting so that a fixed amount is expensed every month.
The concept of charity care refers to the provision of care to patients who the organization knows cannot pay for the care. Healthcare organizations are prohibited from reporting charity care as revenue, a deduction from revenue, or an operating expense.
Rather, organizations are required to report the level of charity care in a note to the statement of operations in the annual report, along with the organizations policy for providing charity care and the method used to determine cost.
Tyler: How is charity care different from uncompensated care?
Prof. Quan: Uncompensated care is the total of bad debt and charity care
Uncompensated care is reported on the income statement as an operating expense.
Lauren: How does a healthcare organization balance its uncompensated care? Obviously, healthcare organizations cannot remain viable if they are overburdened with uncompensated care.
Sophia: I would actually think that costs are somehow passed on to us all (most likely through higher insurance premiums)
.we continue to see increases in charges which in my view accounts for how the healthcare organizations try to balance uncompensated care.
Tyler: I agree
it is very apparent in the rate in which costs are increasing.
Prof. Quan: You all make valid points
.the process that you have described is cost shifting. Cost shifting is the practice of shifting costs to some payers to offset losses from other payers. This practice is not unique to healthcare; it is pretty common in all industries.
Slide 6
Discussion on expenses and cost.
Professor Quan summarizes todays lesson and gives a preview of the next lesson.
(Prof. Quan goes to the whiteboard and writes the information).
Prof. Quan: Lets look at expenses relative to costs. Remember, costs are expenses or outflows, whereas, fees are revenues or inflows. There is a very important distinction that must be made between the two concepts.
Cost is the price of an asset; whereas, an expense is an ongoing payment and is not directly associated with an asset.
When we look at costs, we need to understand the process involved with allocating costs. Cost allocation refers to taking costs from one area and allocating them to others. The allocation process involves several important steps.
Lets look at an example. Assume that Horizon Healthcare is allocating its housekeeping costs for the 2013 budget. First, the cost pool must be established. In this instance, Horizon isallocating housekeeping costs, so the cost pool is the projected total costs of the Housekeeping Department, $100,000.
The second step involves the determination of the cost driver. After investigation, Horizons managers conclude that the best cost driver for housekeeping costs is labor hours the number of hours of housekeeping services provided. An expected total of 10,000 hours of such services will be provided to those departments that will receive the allocation.
The third step requires that the allocation rate is calculated. $100,000 divided by ten thousand hours equals ten dollars per hour of housekeeping services provided.
The next step is to determine the allocation amount. Looking at our example, the manager determines that the physical therapy department uses three thousand hours of housekeeping services, so its allocation of housekeeping department overhead is ten dollars times three thousand equals thirty thousand dollars.
Sophia: So with this information, the manager can determine where the highest level of utilization occurs for the housekeeping services? This would be helpful to the manager so that resources can be directed in the appropriate areas.
Tyler: Yes, this is good information because if one department does not use as much as another department, the information can help in terms of budgeting those resources.
Prof. Quan: Precisely
Understanding cost allocation is important in assigning costs within an organization, so that it is possible to know exactly what types of costs were incurred in the operation of a given area in the organization. Also, managers need to understand cost allocation for simply keeping track of expenses for internal planning purposes.
It appears that we are out of time. I really appreciate your active engagement
.
During our next lecture, we will cover costs classifications. Our discussion will include the topics of direct and indirect costs, cost behavior and break-even analysis.
Are there any other questions regarding what we have covered today?
Prof. Quan: Since there are no questions, we will adjourn for today. I look forward to our next meeting.
Answer
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