CMT Participant Guid.. - Center for LifeLong Learning
Financial Acumen:
Cost Management Tools
Participant Guide
(C) 2013, BJC HEALTHCARE (ST LOUIS, MISSOURI). ALL RIGHTS RESERVED.
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Table of Contents
Objectives
Describe how healthcare business is different from other types of business
Understand your department’s financial performance
Identify the metrics used at the HSO level
Create a plan for better financial management, focusing on finding and resolving variances
Practice accessing your monthly reports to perform similar activities to those in class
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Introduction to Cost Management: Understanding the Business and
Financial Structure of BJC
Purpose
The purpose of this section is to review the pre-work which included an online video and an online survey.
We will discuss your understanding of how BJC does business, as well as your familiarity with key financial terms that are related to decisions you make. This section will reinforce that what you as managers on a daily basis impacts the sustainability of BJC.
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Video Review
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Learning Activity: Not-for-Profit or For-Profit?
Characteristic Not-for-Profit For-Profit
Must provide community benefit
Profits can be distributed to individuals
Company has to pay taxes
Profits must be reinvested into the company
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Introduction to Cost Management: Understanding a HSO’s Financial
Performance
Purpose
In this section, you will learn about the impact of the payor mix, and the difference between operating and capital budgetes.
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Learning Activity: Difference between Gross and Net Revenues
Current year actual Current year budget Prior year actual
Total Gross revenue 88,773 85,058 78,226
Charity Care (392)
Revenue Deductions (38,656)
(488)
(36,391)
(337)
(32,974)
Net Patient Revenue 49,725 48,178 44,915
1.
What is gross revenue?
2.
Why is there a difference between gross revenue and net revenue?
3.
What are revenue deductions?
4.
So Net Revenue is ____________________ minus Charity Care payments and minus
___________________ because our payors do not pay our __________________ fees.
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Operating Margin
Learning Activity: Operating Margin Percentage
Current Year
Last Year
2 Years Ago
How much of our revenue was profit?
Operating Income
Operating Revenue = _____ %
Total Operating Revenue
Total Operating Expense
Operating Income/ Margin
Current Year Last Year 2 Years Ago
368,900
347,900
21,000
372,800
348,800
24,000
350,700
320,700
30,000
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Budgets
Capital Budget
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Learning Activity: Numbers Game 1
Round 1 Score: _______________
Learning Activity: Numbers Game 2
Round 2 Score: _______________
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Learning Activity: Numbers Game 3
Round 3 Score: _______________
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Learning Activity: Numbers Game Final Results
Introduction to Cost Management: Understanding your Department’s
Financial Performance
Purpose
In this section, you will use department-specific reports to identify and analyze variances. You will work through calculations to control labor and supply costs.
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Learning Activity: Income Statement Income/Revenue Questions
Look at the Monthly Departmental Budget Variance Summary Report and answer these questions.
Operating Income/Loss
1.
What’s the bottom line? Did this department make money in December? How much?
2.
How did actual earnings compare to budgeted earnings for December, favorable or unfavorable?
By how much?
3.
How did actual earnings this month compare to this month last year, favorable or unfavorable?
By how much?
4.
What report line (Account Description) provides this information?
Revenue
5.
What types of charges are Inpatient?
6.
What types of charges are Outpatient?
7.
How did this month’s actuals of Inpatient and Outpatient Revenue compare to last year, favorable or unfavorable?
8.
What are some of the “charge capture systems” you use to enter these charges?
9.
What are your responsibilities for capturing charges?
Learning Activity: Income Statement Expenses Questions
1.
What is the largest expense item?
2.
What is the second largest expense item that impacts this budget?
3.
Which expenses vary depending on the volume of patients or work?
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Tools to Manage Your Department’s Financial Performance
Budget Variance Reports:
Budget
Variance
Summary
Budget
Variance Detail
Salary Class
Detail
Vouchers
Journals
Accurals
Monthly Departmental
Budget Variance Summary
Report
Monthly Departmental
Budget Variance Detail
Report
Monthly Departmental
Budget Salary Class Detail
Report - By Account
Accounts Payable Voucher
Detail
General Ledger Transaction by Department
Receipt Accural Distribution by Department
Summary Income Statement provides category rollups of revenues, expenses, labor and statistics. Use for an overall review of department activity.
Detailed Income Statement provides account level detail for revenues, expenses, labor and statistics. Use to analyze and breakdown the summary report into account level detail.
Labor report provides multiple views; labor $ by account, hours by account, fte's by account, labor $ by salary class, hours by salary class, fte's by salary class.
Use to further analyze salary and hours data at the account or salary class level.
Provides a list of invoices received by
Accounts Payable. Expenses to departments are recognized at time of invoice receipt by A/P not necessarily at time of actual payment of invoice.
Information includes amount, description, p.o.#, invoice date and vendor name. Use to validate invoice payments for services/products.
This is an all-inclusive transaction report of activity postings from hospital systems for revenue and expenses. Use to verify correct and complete postings for month end financial close process.
Expense for products and services ordered via Purchase Orders are recognized upon receipt even before an invoice is received and submitted for payment. When an invoice is received and processed by A/P a reversal will show up on the Accurals report and the payment will be posted on the Voucher and Journal report. Use to verify or research specific charges for products/services.
** Barnes - Jewish Hospital Financial Reports Departmental Definitions
Preliminary look on the 3rd working of month, final by
9th working day
Preliminary look on the 3rd working of month, final by
9th working day
Preliminary look on the 3rd working of month, final by
9th working day
Preliminary look on the 3rd working of month, final by
9th working day
Preliminary look on the 3rd working of month, final by
9th working day
Preliminary look on the 3rd working of month, final by
9th working day
Unit Cost
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Learning Activity: Calculating Unit Cost and % of Variance
Lab Actual Budgeted Variance
Total Expenses
Volume (Lab Tests)
Unit Cost
234,365
71,000
241,000
78,527
6,635
(7,527)
Unit Cost % Variance
Total Expenses Volume = Unit Cost
Unit Cost Variance Budgeted Unit Cost = Cost % Variance
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Labor per Stat
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Learning Activity:
Calculating Unit Cost and % of Variance and Labor per Stat and % of Variance
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Full Time Equivalent
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Learning Activity: FTE
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Learning Activity: Productive RN Hours per Patient Day
Actual Budget Variance
Volume 200 225
Prod RN Hours 1380 1385
Prod RN Hours/Pt Day 6.9 6.15
How many productive RN Hours could have been used with a volume of 200 patient days and still deliver 6.15 Productive RN hours per pt. day?
Formula:
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Learning Activity: Adjusting to Volume with Productive RN Hours
Nursing Division 2500 has a budgeted census of 400 patient days and
7.00 budget productive RN hours per patient day.
If the actual total census was 450 patient days, how many productive RN hours could be paid and still deliver 7.00 budgeted productive RN hours per patient day?
If the actual total census was 350 patient days, how many productive RN hours could be paid and still deliver 7.00 budgeted productive RN hours per patient day?
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Accruals
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Accounts Payable
Purchase orders are needed for most items.
Invoices should be sent directly to AP for coding.
Exception: Direct pay invoices (primarily for services). You code these and send to AP for payment.
Sending:
Send an email to "MYBJCINVOICES".
Each invoice should have a separate pdf file.
You may attach up to 5 separate invoice files in one email.
Send a fax to 314-747-1860.
Please use a separate fax for each invoice.
If you have questions or encounter problems regarding Cardinal invoices, please contact Carol
Payne in AP.
If you would like to set up a Recurring Payment, please email Angelina Williams in AP directly after
completing the Recurring payment form found in PeopleSoft.
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No longer use ___________________________________.
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Variances
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What are some things you could try to mitigate issues you’ve found?
Examples to try?
Variances not addressed proactively will accumulate.
Financial Acumen: Cost Management Action Plan
Name:____________________________________________________________________
Identify an area of cost management for your department that you could improve upon (i.e., supply costs, labor costs, etc.)
List actions that will help you achieve your goal. Include a date by which you plan to achieve new results.
Identify resources you will need to implement your action plan.
Identify measures of success; how will you know you are successful?
Share your plan with your manager to get feedback and additional suggestions.
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My Resources
Here are people for me to contact for support
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Possible people in my organization for support may be:
Finance Operations (from BJH)
Financial/Capital Analysis
Patient Access
Patient Financial Services
Health Information Management
Compliance Officer
Utilization Review Dept. - works w/managers to figure out issues
Going Forward
One thing I’ll do differently is …
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Glossary of Key Financial Terms and Definitions
Accounts Payable (AP)
The money owed to suppliers, service providers, and creditors. This department pays the bills.
Accounts Receivable (AR)
The money due to the organization from patients, third parties, and others for services or products provided.
Accrual
The recording of revenues when they are earned or expenses when they occurred regardless of when cash was received or disbursed. Example: Rent may be payable only quarterly or annually, but is expensed every month.
Accrued Expenses
Expenses that have been incurred and recorded on the financial statements, but not yet paid. This includes services or goods for which invoices have not been received, as well as services or goods for which invoices have not been paid.
Actual Cost
The cost incurred not the budgeted or forecast cost. This can also be the amount paid for an asset; not its retail value, insurance value or market value.
Administrative Cost Center/Cost Center
Non-revenue producing organizational units responsible for their own costs that provide administrative support to other organizational units or the organization as a whole. Example: Alton Memorial Hospital’s Skilled Nursing Unit’s Cost Center number is 104_140001012.
Asset
Anything owned by the organization that has commercial or exchange value. This includes but is not limited to cash, investments, property, and accounts receivable.
Everyone receives an Asset list yearly to review.
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Average Wage Rate
The average Wage or salary rates paid for nominal time of work, comprising basic wages and salaries, cost-of-living allowances and other guaranteed and regularly paid allowances.
Average Wage Rate Formula:
Total Salaries (in dollars) / Total Hours
Example: $266,665 / 12,359 hours = $21.58 (Average Wage Rate per hour)
Balance Sheet
An itemized statement that lists the total assets and total liabilities of the organization.
Budget (also known as Operating Budget)
An itemized list of all estimated revenue the organization expects to receive in a given period, along with a listing of the estimated costs and expenses that will be incurred in the same period.
Capital Asset
A long term asset (something owned by the organization) that has a useful life of at least two years. This would include items such as buildings, property, and equipment.
Capital Budget
The estimated amount planned to be used for capital assets such as facilities and equipment, the cost of which is normally written off over a number of years
Case Mix Index
The measure of the severity of illness for inpatients during a given period.
Charge Master
The master file containing all patient charge items and related costs, along with
Current Procedural Terminology (CPT) codes, revenue codes, and General Ledger key information mapped to a particular cost center.
Charity Care
Medical services given free of charge to those without insurance or adequate insurance who have evidenced they are unable to pay for their care.
Charity-Eligible Care
Unreimbursed medical services provided to those presumed to have been eligible for charity care under BJC policy had they applied for financial assistance.
Community Benefit
Programs and services designed, implemented, and funded by heath care organizations to meet an identified community need.
Cost Driver
Any activity or series of activities that causes costs to be incurred.
CPT Codes (Current Procedural Terminology Codes)
Code set maintained by the American Medical Association which describes medical, surgical, and diagnostic services and is designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes.
Depreciation (also known as Depreciation Expense)
A non-cash expense recorded on the income statement that to write off the cost of fixed assets, such as buildings and equipment, to compensate for wear and tear or obsolescence over the expected useful life of the asset.
EBITDA
Earnings before Interest, Taxes, Depreciation, and Amortization.
Fixed Expense
An expense that remains the same regardless of consumption levels of a good or service. These expenses do not fluctuate with volume changes. This is the opposite of a variable expense.
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Full Time Equivalent (FTE)
A unit that represents one full-time employee.
FTE per Adjusted Occupied Bed (Hospital Only) Formula:
Example:
Adjusted Patient Days =
Total Gross Patient Revenue + Other Operating Revenue x Inpatient Days
Gross Inpatient Revenue
$41,887,879 + $846,437 x 5,200 days = 8,149 (Adjusted Patient Days)
$27,270,934
Adjusted Patient Days
Calendar Days
8,149 = 271.62 (Adjusted Occupied Bed)
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FTE 2,188 = 8.06 (FTEs per Adjusted Occupied Bed)
Adjusted Occupied Bed 271.62
ICD-9-CM (International Classification of Diseases)
Universal coding method (6-digit numbers) used to document the incidence of disease, injury, mortality, and illness. Groups patients into Diagnosis Related Groups
(DRGs) designed to facilitate the collection of uniform and comparable health information. NOTE: ICD-10-CM (10 th revision – effective 10/1/2013)
Internal Rate of Return (IRR)
The annualized effective compounded return rate that can be earned on a potential investment of capital. IRR is used in conjunction with Net Present Value (NPV) analysis for project evaluation. IRR is the break-even discount rate at which the values of cash outflows, equals the values of cash inflows. Also described as the discount rate at which the NPV of a project equals zero.
Job Code (aka Position Code)
The number assigned to identify specific positions.
Journal Entry
The logging of business transactions. At BJC, journal entries are manual adjustments made by Finance to reflect revenue and/or expenses for the period in the general ledger.
Labor per Stat (also known as Man Hour per Stat)
The labor cost per service. This is a measure used specifically by BJC to determine how effectively the organization is managing labor hours based on the level of patient volume. The calculation is the year-to-year percent change in total hours expensed divided by a primary weighted statistic. Example: How much of the cost of an average lab test exam is due to labor costs?
Labor per Stat Formula:
Total Hours / Primary Weighted Statistic.
Example:
Total Hours 12,359 = 13.70 (Actual Labor per Stat)
Primary Weighted Statistic 902
Total Hours 11,343 = 13.04 (Budgeted Labor per
Stat)
Primary Weighted Statistic 870
% Labor per Stat Formula:
Actual Labor per Stat – Budgeted Labor per Stat / Budgeted Labor per Stat.
(13.70-13.04) / 13.04 = .0506 or 5.1%
Liability
A loan, expense, or any other legal obligations that must be paid by the organization.
Examples include accounts payable, debt payments, payroll, and pension.
Non-Productive Time
Non-worked time, which includes time spent in class, orientation, bereavement, jury duty, holiday leave, on call and Extended Time Off (ETO) used for vacation and sick leave.
Operating Income
The amount that net revenue exceeds operating expenses this does not include returns on investment.
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Operating Margin (also known as Operating Income Percent)
The amount that net revenue exceeds expenses (does not include returns on investment). The ratio of operating income to net revenue and is expressed in terms of a percent.
Operating Margin Formula:
Operating Income / Net Revenue.
Payor Mix
Example: Operating Income
Net Revenue
$30 = .05 or 5% Operating Margin
$600
The breakdown of revenue or volume by payor source such as Medicaid, Medicare, indemnity insurance and managed care; all who are responsible to pay us.
As a manager, you have no control over the payor mix. However, if you hear about it in an update, it means something has changed that you need to understand.
Managed Care
Any arrangement for health care in which an organization, such as an HMO, another type of doctor-hospital network, or an insurance company, acts as intermediate between the person seeking care and the physician. For example: Blue Cross,
Healthlink, and Group Health Plan. Managed Care makes up about 55% of the hospital’s total charges. They reimburse us approximately 69% of charges.
Medicaid
State health care program for qualifying low-income residents.
Medicare
Federal health care program for senior citizens and citizens with qualifying disabilities.
Primary Statistic
The main metric used to reflect a department’s volume or workload. The Primary
Statistic changes by cost center and department.
Pro Forma
Estimated financial statements. The data reflect the results on a “what if” basis.
Example: “What if” patient volumes increase 5% over the next year?
Productive Time
Actual time worked. Includes regular and overtime; also includes differential pay for weekend, evening, and worked holiday pay.
Profit
The amount that net revenue exceeds expenses. In a non-profit organization, profit is the same as income or earnings.
Revenue
Inflows of assets (usually cash or accounts receivable) earned for products or services provided to customers or patients.
Gross Revenue
The standard rate we charge for services before any payor deductions.
Net Revenue
Revenue after payor adjustments. Gross revenue minus the difference between standard rates and negotiating payor rates. This is what the Hospital gets paid for the services that it provides.
Revenue Deductions/Adjustments
The difference between our standard rate and the amount we are reimbursed by payors, such as insurance companies.
Return on Investment (ROI)
A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. It determines the value that is received from a particular project or investment in return for money spent.
Salary Class
Individual categories used to group individual job codes. The salary class determines which accounts each employee’s salary expense is charged to in the general ledger.
Secondary Statistic
Metrics that are tracked at the department level and provide additional useful information as to activity or volume.
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Skill Mix
The various skill levels of health-service staff required to provide effective care.
Subsidized Services
Services that are vital to a community, which a hospital provides at a financial loss.
Supply per Stat
Supply Cost per service.
Uncompensated or Unreimbursed Care
The cost of medical services for which a hospital does not receive payment from government payors.
Unit Cost
The cost of providing a service. A measure used to determine how effectively the organization is managing costs after based on the level of volume. The metric calculation is the year-over-year percent change in total expenses divided by a primary weighted statistic. Example: How much does a lab test cost, on average?
Unit Cost Formula:
Total Expenses / Primary Weighted Statistic. Example:
Total Expenses $335,800 = $372.28 (Actual Unit Cost)
Primary Wgt Stat 902
Total Expenses $318,459 = $366.04 (Budgeted Unit Cost)
Primary Wgt Stat 870
% Unit Cost Formula:
Budgeted Unit Cost - Actual Unit Cost / Budgeted Unit Cost
($366.04-$372.28)/$366.04 = -1.7%
Variable Expense
Expenses that change in relation to some measure of activity or volume (dependent on consumption of a good or service). Variable expenses may change significantly from period to period, such as week to week, month to month, quarter to quarter or year to year.
Variance to Budget
The difference between what was planned (budgeted) and what was achieved
(actual).
Volume Performance Index (VPI)
The Volume Performance Index Key Metric is the weighted average increase (or decrease) in volume from last year to this year across all revenue producing departments. Growth (a key financial indicator) is reflected in the VPI.
Weighted Statistic
Statistics that have a weight applied so that differentiation can be made between different services and the resources that are required to perform them. An MRI has a higher weight than a single X-ray of the arm because it takes more time (people) and the equipment is more expensive (higher cost per use). This statistic provides a more accurate representation of a department’s workload. It is determined by the type of trauma/sickness of the patient.
Write-off
The difference between the total charge and the allowable amount by the insurance.
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