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

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

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)

Hospital Lab Budget

Revenues

ExpensesSalaries

Technical LaborNon Technical Labor

Lab ReceptionistsAdministrative

NightsPhlebotomistsPathology Secretaries

Professional FeesSuppliesEquipment

DepreciationService ContractsRepairs

Other

Direct CostsIndirect Costs

Total Costs

Net Income

$9,172,526

$1,668,365

$197,680$114,525$119,873$314,490$128,804$1,286,906$1,498,399

$147,506$105,643$40,842$115,475

$5,738,508$2,215,221

$7,953,729

$1,218,797

Hospital Lab Budget by Section

Microbiology Blood Bank Chemistry Hematology Anatomic SerologyRevenues 1,006,444$ 1,002,114$ 4,106,062$ 1,457,584$ 1,262,867$ 337,455$

ExpensesSalaries

Technical labor 245,674$ 237,429$ 557,584$ 352,500$ 193,455$ 81,723$ Non Technical Labor

Lab Receptionists 19,217$ 13,440$ 84,595$ 61,845$ 8,961$ 9,622$ Administrative 11,133$ 7,787$ 49,011$ 35,829$ 5,190$ 5,575$

Nights -$ 41,955$ 35,962$ 41,956$ -$ -$ Phlebotomists 46,002$ 14,748$ 131,439$ 98,531$ 4,453$ 19,317$

Path secretaries 12,932$ 1,006$ 6,333$ 4,630$ 103,183$ 720$ Professional Fees 98,215$ 98,214$ 210,636$ 98,214$ 683,413$ 98,214$ Supplies 144,979$ 332,708$ 760,486$ 140,793$ 47,035$ 72,398$ Equipment

Depreciation 13,084$ 9,678$ 50,804$ 45,802$ 23,658$ 4,390$ Service Contracts 9,516$ 2,088$ 52,313$ 32,459$ 7,732$ 1,535$

Repairs 2,375$ 1,661$ 10,452$ 24,058$ 1,107$ 1,189$ Other 11,947$ 7,796$ 49,069$ 35,883$ 5,198$ 5,582$

Direct Costs 615,074$ 768,510$ 1,998,684$ 972,500$ 1,083,385$ 300,265$ Indirect Costs 298,183$ 312,921$ 740,798$ 400,102$ 340,721$ 122,496$

Total Costs 913,257$ 1,081,431$ 2,739,482$ 1,372,602$ 1,424,106$ 422,761$

Net Income 93,187$ (79,317)$ 1,366,580$ 84,982$ (161,239)$ (85,306)$

Profit/Loss = Revenue - Expenses

Revenue

Billed Revenue =

Lab Procedures X Current Fee

Collected Revenue =

Billed Revenue - Contractual Allowances

Insurance Mix

Medicare 35%

Medicaid 10%

Trigon (Blue Cross) 25%

Managed Care 25%

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

02040

6080

1 2 3 4 5 6 7 8 9

product volume

do

llars

Direct Costs

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

0

100

200

300

400

1 2 3 4 5 6 7 8 9 10 11

product volume

do

llars

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

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

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 FeeA. 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

$30.00 - $10.00 = $20.00

Break Even Volume = Fixed CostsContribution Margin

500 Tests = $10,000.00 $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

• Revenue 1,000 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

PRICE $20 $15 $20 $20

VOLUME 1000 1000 5000 300

REVENUE $20000 $15000 $100000 $6,000

TOTAL COST $13700 $13700 $18300 $12895

PROFIT $6300 $1300 $81700 ($6895)

Let’s take a break

Department of Pathology Profit and Loss StatementFor the twelve months ending June 30, 2001

Gross Net Direct Indirect Total NetRevenue Revenue Cost Cost Expenses Income

Anatomic Path $4,411,600 $2,131,277 $1,865,304 $1,287,010 $3,152,314 ($1,021,037)Blood Bank $9,620,938 $4,939,270 $2,015,608 $1,209,373 $3,224,981 $1,714,289Blood Products $4,554,241 $2,419,450 $4,833,592 $1,005,173 $5,838,765 ($3,419,315)Chemistry $46,742,064 $24,362,139 $3,480,162 $1,975,722 $5,455,884 $18,906,255Hematology $15,602,023 $8,144,456 $2,749,265 $1,690,990 $4,440,255 $3,704,201Microbiology/Immunology $13,158,977 $6,733,938 $2,994,244 $1,744,997 $4,739,241 $1,994,697Molecular Diagnostics $2,097,371 $1,029,036 $1,372,563 $559,202 $1,931,765 ($902,729)Reference Testing $1,077,603 $530,942 $2,143,322 $329,341 $2,472,663 ($1,941,721)TOTAL $97,264,817 $50,290,508 $21,454,060 $9,801,808 $31,255,868 $19,034,640

Gross Revenue

Blood Bank10%

Chemistry47%

Hematology16%

Microbiology/Immunology

14%

Blood Products5%

Reference Testing1%

Anatomic Path 5%Molecular Diagnostics

2%

Direct Cost

Anatomic Path 9%

Blood Bank9%

Blood Products23%

Chemistry16%

Hematology13%

Molecular Diagnostics

6%

Reference Testing10%

Microbiology/Immunology

14%

Profit

Chemistry56%

Blood Bank5%

Blood Products10%

Anatomic Path 3%

Molecular Diagnostics

3%

Reference Testing6%

Hematology11%

Microbiology/Immunology

6%

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