Chapter 1: Financial Management in Context



Fundamentals of Healthcare Financial Managament

Steven Berger

Chapter 7

July

Joe Attokaren

July 4, 2007

July is the month when the budget becomes the top priority of the accounting and finance department steps in financial analysis

Which is a better technique – Top Down or Bottom up?

Top Down - is defined as revenue and expense levels imposed by the administration and directed down to the manager who is expected to achieve them.

Bottom Up – is defined as revenue and expense levels determined by each department manager that is aggregated to establish the organization-wide budget.

|Top Down |Bottom Up |

|Pros |Cons |Pros |Cons |

|Administration maintains control on |Department managers are not invested|Managers who set their own budget |Managers have no incentives to set |

|the assumptions that determine the |in the budget outcomes because they |will be more invested in process and|aggressive or "stretch" budget |

|targeted operating margin |do not have any input into the |the future outcomes. |target for their own departments. |

| |process | | |

|There will be less chance of the |Administration is perceived as |The budgeted volumes may be closer |Managers have no idea of the overall|

|managers needing to redo their |autocratic, not participative. |to reality, therefore causing less |hospital budget targets and |

|budgets one, two, three time in | |budget variances in the upcoming |therefore no way of knowing the |

|order to "balance the budget" as the| |year. |amount of bottom lines required from|

|assumptions change. | | |their departments for the |

| | | |organization to succeed as a whole. |

Budget calendar is to provide expectations of the duration and timing of the project for all involved participants

Done by meeting times

Requires good communication

Compute Gross Revenues and Contractual Adjustments

Contractual adjustment = Gross revenue – Net revenue

Review Salary and Nonsalary Assumptions

Labor costs make up 45-55% of all expenses in healthcare organizations

Utilization is critical

Labor costs = Pay rate x # of people employed

Fringe Benefits Levels and Increase

Fringe Benefits is a major recruitment and retention tool

Needs to be reevaluated

Controllable Nonsalary Expense Changes (15-25% of total expense)

Noncontrollable nonsalary expenses – defined as interest and depreciation expense

Proposals for new equipment

Regulatory and Legal Environment

Healthcare is heavily regulated industry

state, federal and local laws

Social Security Act of 1965

Criminal penalties, applicable t persons convicted of committing specified fraudulent acts such as the following

Filing of false claims

Misrepresentation of the qualification of an institution

Solicitation, receipt, or offering of kickbacks, bribes, or rebates

Civil money penalties, applicable to persons determined by the Secretary of HHS to have committed the following acts.

Filed fraudulent claims under the programs

Charged beneficiaries for the services in violation of agreements entered into wit the HHS Secretary

Exclusion from the Medicare and Medicaid program participation for those providers and practitioners who are convicted of crimes involving the following

Health programs established under the Social Security Act

Patient abuse or neglect

Health Insurance Portability and Accountability Act of 1996

Corporate Compliance

Accreditation Issues

Participate “Voluntarily” in accreditation programs

JCAHO – Joint Commission on Accreditation of Healthcare Organizations

Determines if the organization is eligible to participate in the Medicare and Medicaid program and able to bill for and receive reimbursement from the government payers.

Marketing advantage

the ability to contract with Managed Care Organizations (MCOs)

National Committee on Quality Assurance (NCQA) accredits third-party payers

Key Terms

FTE – Full Time Equivalent

HCFA – Health Care Financing Administration

HHS – Health and Human Services

OIG – Office of Inspector General

They monitor utilization patterns to determine if providers are “gaming the system” in an illegal way to improve their Medicare or Medicaid reimbursement.

NCQA – National Committee on Quality Assurance

JCAHO – Joint Commission on Accreditation of Healthcare Organizations

MCO – Managed Care Organization

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