finance chris truax system director, business development ohiohealth

Finance

Chris TruaxSystem Director, Business Development

OhioHealth

Finance

• 20 Questions and reflects 10% of the Exam– Financial Mgmt and Financial Analysis Principles– Operating Budget Principles– Capital Budgeting Principles– Reimbursement Methodologies and Ramifications– Fundamental Productivity Measures– Financial Controls and Auditing Principles– Capitol Funding Sources– Revenue Generation– Asset Mgmt, including Facilities equipment, etc.

Financial Accounting

• The three basic financial statements:– Balance Sheet– Income statement (statement of revenue and

expenses– Statement of cash flows

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• Balance Sheet• Presents the financial position of the

organization at a point in time – usually at the end of the fiscal year

• Values assigned to the assets are accounting values and do not necessarily reflect market values.

• Prepared in accordance with GAAP• Major components:

– Historical cost convention– Accrual– “going concern”


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• Historical cost convention– Asset values are typically based on the value

assigned at the time of purchase (price paid)

• Accrual– Focuses on a matching of the revenues earned and

the expenses incurred to provide those services, not when the cash flow actually occurs

• “Going concern”– Reflects the fact that the values assigned to the

assets are based on the premise that the organization will continue to perform the same type of mission (i.e.,. Health services in the case of a hospital)


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• Basic structure of the balance sheet– Present assets in order of liquidity and

liabilities in order of payment– Values of the assets must be equal to the

claims of the capital supplier


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TOTAL ASSETS

including:

Current Assets

Assets Limited as to Use

Tangible Assets

Intangible Assets

TOTAL DEBT AND EQUITY

including:

Current Liabilities

Long-Term Liabilities

Equity/Net Worth/Funds Balance

=

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Balance Sheet: Assets (in thousands)

2010 2009

Current Assets:

Cash $12,102 $6,486

Marketable securities 10,000 5,000

Net patient accounts receivable 28,509 25,927

Inventories 3,695 2,302

Total current assets $54,306 $39,715

Long-term investments $48,059 $25,837

Property and Equipment:

Land $2,954 $2,035

Buildings and equipment 85,595 77,208

Gross fixed assets $88,549 $79,243

Less: Accumulated depreciation 36,099 29,694

Net fixed assets $52,450 $49,549

Total assets $154,815 $115,101

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Balance Sheet: Liabilities

and Equity (in thousands)

2010 2009

Current Liabilities:

Notes payable $4,334 $3,345

Accounts payable 5,022 6,933

Accrued expenses 6,069 5,037

Total current liabilities 15,425 15,315

Long-term debt 85,322 53,578

Total liabilities 100,747 68,893

Net assets (Equity) $54,068 $46,208

Total liabilities and equity $154,815 $115,101

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• The Income Statement (statement of revenues and expenses) reports the revenues and expenses of the organization over a period of time.

• The bottom line of the income statement is captured in the equity section of the balance sheet.


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• Income statements are usually prepared in accordance with GAAP, which requires the use of the accrual basis of accounting for recognition of revenues and expenses.

• Revenues and expenses reported include the value of services provided regardless of whether cash has been received– Cash expenses such as salaries– Noncash expenses such as:

• Depreciation• Amortization• Bad debt expense


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• Noncash expenses reflect accounting allocations of 1)previous capital investment decisions and 2) the amount of revenues that have been billed but will probably not be collected in full.


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• Charity Care

• Not shown as an expense or deduction under the revised accounting rules.

• Charity Care, Other Deductions from Revenue (allowance accounts and discounts) are now shown in the footnotes of the financial statements.


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Income Statement: Revenues (in thousands)

2010 2009

Revenues

Net patient service revenue $169,013 $140,896

Other revenue 7,079 5,704

Total revenues $176,092 $146,600

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Income Statement:

Expenses (in thousands)

2010 2009

Expenses:

Salaries and benefits $126,223 $102,334

Supplies 20,568 18,673

Insurance 4,518 3,710

Lease 3,189 2,603

Depreciation 6,405 5,798

Provision for bad debts 2,000 1,800

Interest 5,329 3,476

Total expenses $168,232 $138,394

Net Income $7,860 $8,206

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• Statement of Cash Flows uses information from balance sheet and income statements to develop a cash flow statement that explains changes in cash flows resulting from three activities:– Operating– Investing– Financing

• This statement is usually prepared in accordance with GAAP.


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Statement of Cash Flows

• Converts net income based on the accrual basis of accounting to a cash basis by adding noncash expenses back to the reported net income

• Identifies cash flows from providing services, investing activities and financial activities


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Ratio Analysis• Primary financial tool used to assess the

financial condition of an organization• Categories of ratios are:

– Liquidity: ability to meet short-term obligations– Operating: use of assets and management

performance– Debt: long-term survivability– Profit: management performance and ability to meet

long-term obligations

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Ratio Analysis

• Liquidity ratios indicate an organization’s ability to meet short-term financial obligations.– Current ratio– Collection period (days in AR)– Days cash-on-hand, all sources– Days cash-on-hand, short-term sources– Average payment period

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Ratio Analysis

• Profitability ratios indicate an organization’s ability to survive and grow by measuring the relationship of revenues to expenses.– Operating margin– Total margin– Return on net assets

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Ratio Analysis

• Asset efficiency ratios indicate an organization’s ability to be efficient by measuring the relationship between revenue and assets [note: total revenue includes net non-operating gains].– Total asset turnover– Age of plant– Fixed asset turnover– Current asset turnover– Inventory turnover

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Ratio Analysis

• Capital structure ratios indicate that organization’s long-term liquidity by measuring a variety of relationships to capital.– Net asset financing– Long-term debt to net assets– Debt service coverage– Cash flow-to-debt

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Operating Indicators

• Measure financial performance related to operations.– Average length-of-stay (LOS)– Occupancy rate– Outpatient revenue as a percentage of total

patient revenue– FTE’s per occupied bed– Salary per FTE– Compensation costs per discharge

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• Ratio Analysis for Managed Care Organizations – focus on two major categories of expense and how they relate to the premium dollar

Medical Claims Expense Ratio =Total Medical Claims ExpensePremium Revenue

Administrative Expense Ratio = Non-health Service ExpensesTotal Operating Revenue

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Management Accounting

• Management Accounting’s primary focus is the determination of the cost of a particular decision.

• “Cost” is ambiguous and its meaning depends on the type of decision being made.

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Cost Classifications

• In the long-run, all costs are variable, and hence these cost classifications hold only in the short-run, say, for one year.

• Also, no costs are fixed throughout an indefinite range of volumes. Thus, the concept of cost classifications according to volume must be applied within some relevant range of patient volume.

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Key Calculations for Total Cost Decisions

Total Cost = Total Fixed Cost + Total Variable Costs

Per-unit costs are averagesPer unit costs = TFC/Q + TVC/Q

(Q = Services provided)

It is important to stress that whenever you have fixed costs, you can not determine per-unit costs without specifying a volume of output.

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Contribution Margin Approach

• The relationship between fixed and variable costs and profit can also be expressed in terms of the contribution margin approach:

• Contribution Margin = Price after Discounts – Variable Cost Per Unit

CM = P – VCU

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• Relationship between CM and the Income Statement

$20 Average revenue per patient visit after discount -8 Average variable cost per patient visit$12 Contribution margin (CM) per patient visit

Total Fixed Costs (TFC) = $240,000

BEQ (Break Even Quantity) = TFC/CM = $240,000/12

Total revenue (20,000 x $20) = $400,000Total variable costs (20,000 x $8) = $160,000Total contribution margin (20,000 x $12) = $240,000Total fixed costs = $240,000Excess of revenue over expenses = $ 0

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Contribution Margin approach is used determine:

• Break-even points/profit

• Quantity

• Prices

• Cost categories

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Financial Management

Sources of Capital

• Equity (or fund balance)

Contributed capital

Retained earnings

• Debt

Short-term (trade credit)

Long-term (notes, bonds, leasing)

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Risk of Debt• As the amount of debt increases, the risk

to the lender increases and higher interest rates follow

• To maintain a stable risk profile in the capital structure, then, increased use of debt requires that additional equity also be obtained to keep the relative amounts of each source within board-established units

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Weighted Average Cost of Capital Model (WACC)

• Method to measure the costs of various services of capital and the impact of the capital structure

• The relative amount of debt and equity in the capital structure and the cost of each source in the marketplace are used to determine the weighted cost

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Evaluation Techniques• Economic evaluation techniques (adjusted

for the time value of money)– Net Present Value– Internal Rate of Return

• Accounting evaluation techniques (not adjusted for the time value of money)– Accounting Rate of Return– Pay Back

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Net Present Value (NPV)The different between the discounted cash inflows and discounted cash outflows over the life of the investment

Internal Rate of Return (IRR)The discount rate, r, which, when used to discount a series of cash inflows and outflows, makes the NPV of those cash flows equal to zero.

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Accounting Rate of Return

The average increase in income reported on the financial statement divided by the total or average investment

Pay Back

The amount of time it takes to recover the cash outflows of the investment from the cash inflows

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Finance

Ready for some test questions?

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Finance Test Questions

Which of the following is a unit measure commonly used to determine physicians’ clinical productivity?

– RVU– CMS– IPO– CPU


Which of the following third-party reimbursement methods provides the largest financial incentive for the provider to reduce cost?

– Charge-based– Cost-based– Prospective payment– Per diem


Statements and earnings, financial positions, changes in financial position and retained earnings are required to be submitted yearly by all:

– Publically owned healthcare organizations– Privately owned healthcare organizations– Government owned healthcare organizations– Faith-based owned healthcare organizations


Which of the following is an Example of a capital expenditure?

– Land that is purchased for resale– Surgical equipment with a useful life of six

months– A building with a useful life of 20 years– Medical supplies used for patient care


If the amount of charity care increased from one reporting period to the next, which of the following would occur?

– Provision for bad debts would increase– Unrestricted net assets would increase– Unrestricted net assets would neither,

increase or decrease– Unrestricted net assets would decrease


Which would be a reasonable basis on which to allocate administrative overhead costs?

– Salaries– Amount of supplies used– Hours worked– Square footage


The effective cost of debt is roughly the same for both not-for-profit and investor-owned organizations because:

– Both types of organizations can issue tax-exempt debt

– The interest rate is the same on both tax-exempt and regular debt

– Neither type of organization can issue tax-exempt debt

– The tax deductibility of interest for investor-owned firms offsets the lower coupon rate on tax-exempt debt.


Which of the following statements best describes the statistics budget?

– It combines volume and expense rates to forecast costs

– It is a profit forecast for the coming year– It combines volume and reimbursement data

to forecast revenues– It provides input date for other budgets


Which of the following is an Example of an asset?

– Accounts payable– Accrued employee benefits– Property, plant, and equipment– Unrealized gain


• Which statement about short-term debt reduces liquidity?

– Increased use of short-term debt reduces liquidity

– Short-term debt provides certainty about interest costs over time

– The interest rates for short-term debt are typically higher than interest rates for long-term debt

– An organization that relies on short-term debt replaces the need for working capital


• Cost accounting is an important tool which enables the CFO to:

a.Meet Joint Commission fiscal requirements

b.Ensure supplies are competitively purchased

c.Determine the actual cost of providing patient care

d.Improve revenue cycle returns


• What does a liquidity ratio measure?

a.A firm’s ability to meet its current obligations in a timely manner

b.Size of dividends to be paid to shareholders

c.The percent of total funds provided by creditors

d.Days in accounts receivable


• The real value of financial statements lies in the fact they can be used to help:

a.Predict the firm’s future financial conditionb.Compute total margin versus periodic gainc.Relate the industry average to net profit/loss

over timed.Understand that a large portion of a hospitals

net income may come from non-operating gains


• Facing struggles such as declining profit margins, nonprofit healthcare organizations have become more dependent on what source for financing capital needs?

a.Philanthropy

b.Bond financing

c.Capital leases

d.Operational leases


• You work for a county organization that has decided to issue bonds to fund a new building. What type of bond would be sold on behalf of your organization?

a.Mortgage bond

b.Corporate bond

c.Capital bond

d.Municipal bond


• On a balance sheet, what does the difference between total current assets and total current liabilities indicate?

a.Cash on hand

b.Net working capital

c.Liquid assets

d.Equity


• Budgets for new capital expenditures include requests for:

a.Infrastructure

b.Wage adjustments

c.New employee insurance plans

d.New gain share agreement with staff physician


• The Capital Asset Pricing Model (CAPM), an equilibrium model, describes the relationship between which of the following?

a.Market risk and required rate of returnb.Expected rate of return and actual rate of

returnc.Price and market riskd.Expected rate of return and required rate of

return


• Which of the following is not considered part of the labor budget?

a.Staff Salaries

b.Hourly wages

c.Employee benefits

d.Contract staff expenses


• What in the revenue cycle process is a major impediment to prompt payment?

a.Payment receipt and posting

b.Claims submission

c.Poor financial counseling

d.Claim denial


• When evaluating capital budget performance, what is the best indicator of operating leverage?

a.Debt to capitalization ratio

b.Expense ratio

c.Average age of plant

d.Depreciation ratio


• An analysis of proposed capital investment typically includes all of the following except:

a.Cost of capital

b.Cash flow projections

c.Liquidity ratio

d.Risk assessment


• Revenue cycle billing management typically includes what broad activities?

a. Billing and collections for inpatient, outpatient and surgical services

b. Claims processing, denial management and claims payment

c. Processing accounts payable, denial management and billing for outpatient services

d. Activities before services are rendered, activities that occur simultaneously with the services and activities after services are rendered


• Under the regulations of the IRS, a tax exempt entity:

a.Must provide a private benefit to those institutions operating or affiliated with the entity

b.Must limit the benefit to any private individualc.Must provide a public benefit to the

communityd.Can minimize penalties if it limits private

benefits to less than 50%


• Bundled pricing (paying a single fee for all services) for such services as total hip replacement or coronary artery bypass surgery affects physician-hospital relationships by:

a. Reducing the need to devote administrative effort to measuring outcomes and performance indicators

b. Putting the physician and hospital at each other’s throat fighting over distribution of the fee

c. Promoting efforts to collaborate and integrate efforts to provide more efficient care

d. Guaranteeing that only top quality physicians will be allowed to participate in such programs


• Which of the following is an Example of direct costs?

a.Utility bills

b.Parking operations

c.Debt service

d.Drug prescriptions


• What are the three basic categories of quantitative performance measures used in conventional accounting systems?

a.Market share, customer satisfaction, and quality

b.Demand, sales, and cost

c.Demand, cost, and output/productivity

d.Services rendered, market share, and access


• Under capitated payment system, the risk sharing arrangements involve which parties?

a.Insurers and patients

b.Physicians and purchasers

c.Hospitals and patients

d.Hospitals and insurers


• Which concept of profitability analysis listed below is correct?

a.Internal Rate of Return (IRR) measures a project’s percentage of cash flow

b.Net Present Value (NPV) is a profitability measure that uses discounted cash flow

c.Modified Internal Rate of Return (MIRR) is a less accurate measure than a project’s actual rate of return

d.Profitability Return Rate (PRR) provides the most accurate measure


• Which of the following must be included when determining a capital project’s incremental cash flow?

a.Opportunity costs

b.Cash inflows

c.Inflation

d.Internal rate of return


• The primary purpose of generally accepted account principles (GAAP) in healthcare settings is to:

a. Provide regulators with increased access to high quality financial statements of organizations within their jurisdiction

b. Ensure that financial information that is reported to outsiders is consistent across businesses and presented in a manner that facilitates interpretation and judgments

c. Allow interested individuals a rapid means of collecting financial data about hospitals and managed care organizations

d. Facilitate the training of accountants and other finance professionals in the fundamentals of hospital and health services accounting


• The Statement of Cash Flows is typically organized into three sections: Cash Flow From Operations; Cash Flow From Investing Activities; and Cash Flow From:

a.Bad Debt Recovery

b.Regulatory Recapture

c.Financing Activities

d.Donations & Foundation Support


• Which of the following combines data from a balance sheet and an income statement to create a single number that facilitates easy interpretation?

a.Financial ratio analysis

b.Acid test ratio

c.Operating margin ratio

d.Cash flow analysis


• If a CEO wanted to look at a “snapshot” of the financial condition of the healthcare organization, he/she would review which of the following?

a.Income Statement

b.Balance Sheet

c.Retained Earnings Statement

d.Investment Portfolio


• Where should charity care be shown in a healthcare organization’s financial statement?

a.In the balance sheet

b.In the statement of operations

c.In the statement of changes in net assets

d.In the notes to the financial statements

• Which financial statement is updated daily to reflect changes in assets or composition of financing?

a.The flash report

b.The balance sheet

c.The statement of operations

d.The statement of cash flows



• Controlling the costs of accounts receivable is heavily affected by:

a.The time or length of the payment cycle

b.The dollar amount of credit granted to individuals

c.The total dollar amount of receivables carried on the books

d.Working capital management


• One of the techniques most frequently used in industry to aid management in interpreting a firm’s balance sheet is computation of the acid-test ratio, which is the ratio of:

a.Current assets to current liabilitiesb.Total assets to total liabilitiesc.Cash to short-term departmentd.Cash, marketable securities, and accounts

receivable to current liabilities


• Memorial Hospital offers a screening test as a public service for a $0.50 per test. Variable costs per unit are $0.32. Fixed costs are $43,200 per month for the department performing the test. It is the only test done by this special department. The break-even point in tests is:

a.240,000 testsb.172,000 testsc.135,000 testsd.86,400 tests


• The asset turnover ratio is useful in measuring managerial performance because it indicates the:

a.Amount of resources required to generate a dollar of revenue

b.Profitability per dollar of revenue

c.Effectiveness of capital structure decisions

d.Effective use of current assets


Which of the following is the depreciation method that best recognizes changes in the general purchasing power of the dollar and/or changes in the replacement cost of specific assets?

A. Declining-balance depreciation.

B. Straight-line depreciation

C. Price-level depreciation.

D. Sum of the years’ digits depreciation.


When third-party policies and programs impede the healthcare facility’s fiscal capacity to renovate and model its plant as routinely scheduled, the healthcare facility, to protect itself, should first:

A. Delay capital improvements until funds are available.

B. Reduce the level of operating services.

C. Limit the number of admissions from the selected third-party payments sources.

D. Resort to the regulatory agency to obtain a waiver.


Under generally accepted accounting standards, bad debts are reported as a/an:

A. Operating expense

B. Deduction from net revenue

C. Contractual allowance

D. Deduction from gross revenue

Study up!

Get additional resources if needed.

Understand your financial ratios, and how they relate to each other.

Finance

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