managing cost and revenue

8/7/2019 Managing Cost and Revenue

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It is the process of:Providing oversight of the

healthcare organizations day-to-day financial operationsPlanning the organizations long-

range financial directionIncreasing the organizations

revenues and decreasing its costs

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Generate a reasonable net income.

Set prices for services.

Facilitate relationships and managecontracts with third party payers.

Record and analyze cost information.

Prepare, audit, and disseminate the

organizations financial reports. Invest in long-term capital assets.

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Ensure that payroll is covered and that

suppliers are paid.

Protect the organizations tax status.Respond to government regulators,

external auditors, accrediting agencies,

and quality consultants.

Control financial risk to theorganization.

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For-Profit, Investor-owned

Serve private interests and pay taxes.Goal is to maximize profits for the

owner. Not-for-Profit

Serve public interests and are tax-exempt.

Goal is to provide community benefitand optimal patient care (including theindigent).

2 types: 1. Business-oriented (private)2. Government-owned

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Methods Used by Private Health PlansRetrospective determinedafterservice delivery

Charges

Charges Minus a DiscountCost Plus

Prospective determinedbefore service deliveryPer DiemPer Diagnosis

Capitation

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Those without insurance are billed for full chargesHas resulted in the rise of personal

bankruptcies, due to inability to pay such large

sums of money.

Uncompensated Care 2 Major Types:*Bad Debt no payment received for billedservices; written off by the organization.

*Charity Care organization provides care,knowing the patient will be unable to pay.

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Importance of Cost Accounting inProvidingManagers with Information:

To estimate and manage their costs.

To set charges and analyze profits.To make decisions regarding

adding, enhancing, or eliminatingservices.

To provide methods for classifying,allocating, and determining productcosts.

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ByBehaviorFixed costsVariable costs

ByTraceabilityDirect costsIndirect costsFull costs

By Decision Making CapabilityControllable costsUncontrollable costs

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Cost allocation involves the determination of the total

cost of producing a healthcare service through

assigning costs from non-revenue-producing

departments into revenue-producing departments.Purpose is to:

Ensure patients are paying only for services and

products received.

Separate costs at the unit-of-service level to allow

managers to measure changes in intensity & case

mix, and to identify inefficient functions.

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More recent methods for determiningproduct costs tend to cross departmentlines of responsibility.

Activity-based costing,for example,ismore accurate than prior methods of

cost allocation, because costsare determined on the basis ofcostdrivers, the activities involved ingenerating a unit of service.

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Charges are published prices (Pam Pohly).

However, there is a wide disparity between

published prices and contract prices, since

most third party payers negotiate lower rateswith healthcare providers.

Prices, on the other hand, involve the money

actually spent, involving perceived value of

the services and the other opportunitiesforegone by consumers to acquire the

services.

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Consider legal and regulatory issues.Establish pricing goals and objectives.Estimate the economic market conditions

involving supply and demand.Estimate costs and the break-even point.Consider policies of third party payers.Consider other competitors in the market.Consider the effects of over- and under-pricing. Take into consideration allowable costs.Utilize pricing tactics.

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Definition: Total current assets, or short-term assets that can be converted to cash inone year (Nowicki), versus current assets

plus current liabilities (McLean).Primary Sources of Working Capital:

*Permanent working capital*Net income, orprofits*Temporary working capital, including

equity, or net assets; short-termdebt, or loans; and trade credit fromdelayed payments to vendors.

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To increase revenues & reduce expenses by:Making capital assets (buildings, etc.) productive bymanaging current assets (labor, etc.).Conserving cash by cutting financing costs to take

advantage of short-term investments.Managingcash flow or amount of inflows & outflows.Managing the liquidity of the organization.

To enhance good will toward the organization:By paying vendors and employees on time.By demonstrating to lenders that the organization iscredit worthy.

To undertake changes that add value to the organization.

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Definition: Current assets, created in the course ofdoing business, consisting of revenues recognized,but not yet collected as cash (McLean).

AR generally provide no interest, and their collection

become less likely as time passes.AR comprise about 75 % of a healthcare providers

current assets (Zelman et al.). Having large dollar amounts in AR means lost

opportunities for other investments.

There are othercosts associated with AR, includingcarrying costs, delinquency costs, & collectioncosts.

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The primary goal of managing AR is to reduce thecollection period, or days in AR.

There is interdependence among almost all

departments of a healthcare organization inreduction in the AR collection period. Healthcare providers often need to receive cash

advances on outstanding AR to continue operations.2 methods used to finance AR:

1. Factoring receivables selling at a discount.2. Pledging receivables as collateral to negotiate aline of credit to cover temporary cash shortfalls.

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Importance ofMaterials Management:1. Delivery of appropriate patient care.2. Provision of cost control. A non-productive asset,

inventory loses value over time.

3. Improvement of the organizations bottom line,through best pricing and reducing over-utilization. Methods for Stocking Inventory:

Just-in-time (JIT) Products are literally delivered to theprovider just in time for use; decreases holding costs andobsolescence.

ABC Inventory Method Each supply item is assigned to

one of 3 groups & is thus monitored according to cost.

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Develop close relationships with distributors, whocontrol availability, pricing, and receiving schedule.

Understand the costs of inventory, including

purchasing costs, ordering costs, carrying costs,stock-out costs, and overstock costs.

Calculate the economic order quantity (EOQ)andreorder point (RP)to know the right quantity of itemsto be ordered at the right time.

Create an in-service training program for themanagement team regarding procedures forrequesting purchase orders, negotiations withvendors, etc.

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Definition: The plan for turning the objectives of theorganization into a program for earning revenues andcontrolling expenditures. Involves all managers.

MajorTypes ofBudgets:

Operating budget, orcash budget Annualbudget that is a forecast of cash inflows,outflows, and net lending or borrowing needs.

Expense budgetRevenue budget

Capital b

udget - Plan for expenditures for long-term assets whose useful life is more than a

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Basic questions that need to be answered:Does this asset at least pay for itself?Does the asset add value to the organization?

Types of items included in CapitalBudgets:Land acquisitionFacility construction, acquisition, renovationRoutine capital equipment used in clinical areasInformation technology infrastructure &

upgradesAcquisition of staff physicians

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Wish Listsubmitted to managers andproposals submitted by managers to FinanceDepartment.

Methods ( Decision Rules) Utilized to MakeCapitalBudgeting DecisionsAccept/RejectCapital rationing Those selected have

highest profitability index.

Non-criteria-based Safety valve allowingpurchase no matter what.Approval by Administration and GoverningBody

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Managing costs and revenues in healthcare

organizations is a complex process involving

understanding of:

The interrelatedness of multipleprocesses

The interplay of many departments

The importance of external influences

Managers at all levels of the organization areinvolved in addressing these functions.

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The end

managing cost and revenue

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