Health Care Finance, 5th Edition — 2018 — facebook.com/LinguaLIB


Чтобы посмотреть этот PDF файл с форматированием и разметкой, скачайте его и откройте на своем компьютере.
FINANCE
FIFTH EDITION
JUDITH J. BAKER, P
D, CPA
R.W. BAKER, JD
Basic Tools For Nonfinancial Managers
HEALTH CARE
World Headquarters
www.jblearning.com
professional associations, and other qualified organizations. For details and specific discount information,
All rights reserved. No part of the material protected by this copyright may be reproduced or utilized in any form,
The content, statements, views, and opinions herein are the sole expression of the respective authors and not that
name, trademark, manufacturer, or otherwise does not constitute or imply its endorsement or recommendation by
Health Care Finance: Basic Tools For Nonfinancial
Managers, Fifth Edition
is an independent publication and has not been authorized, sponsored, or otherwise approved
There may be images in this book that feature models; these models do not necessarily endorse, represent, or participate
only. Any individuals and scenarios featured in the case studies throughout this product may be real or fictitious, but
Subjects: | MESH: Financial Management | Health Facilities--economics | Health Facility Administration |

Preface
PART I
HEALTHCARE FINANCE OVERVIEW
Introduction to Healthcare Finance
The History
..........................................................................................................
........................................................................................................
How Does Finance Work in the Healthcare Business?
.......................................................................................................
The Organizations Structure
Two Types of Accounting
Key Terms
.............................................................................................................
Four Things the Healthcare Manager Needs to Know About
How the System Works in Health Care
Key Terms
...........................................................................................................
T  C
The Digital Age: Changing the Landscape of Healthcare
High-Tech and High-Touch Approaches
.......................................................................................................
Changes in Health Information Technology
Additional Trends and Complexities: Other Delivery Systems
Summary
...........................................................................................................
Key Terms
...........................................................................................................
PART II
RECORD FINANCIAL OPERATIONS
Overview
Key Terms
...........................................................................................................
Overview
Receiving Revenue for Services
Key Terms
...........................................................................................................
Overview
Disbursements for Services
Key Terms
...........................................................................................................
Table of Contents

v
Chapter 7

Cost Classifications

.....................................................................................
55

................................................
55
Examples of Direct Cost andIndirect Cost

......................................................
56
Responsibility Centers

.......................................................................................
57

...............................................
60
Information Checkpoint

...................................................................................
61
Key Terms

...........................................................................................................
61
Discussion Questions

.........................................................................................
61
Notes

..................................................................................................................
61
PART III
TOOLS TO ANALYZE AND UNDERSTAND FINANCIAL OPERATIONS

.........
63
Chapter 8

Cost Behavior andBreak-Even Analysis

.......................................................
65
Distinctions Among Fixed, Variable, andSemivariable Costs

.........................
65
Examples of Variable and Fixed Costs

..............................................................
69
Analyzing Mixed Costs

......................................................................................
71
Contribution Margin, Cost-Volume-Profit, and Profit-Volume Ratios

............
73
Information Checkpoint

...................................................................................
78
Key Terms

...........................................................................................................
78
Discussion Questions

.........................................................................................
78
Notes

..................................................................................................................
79
Chapter 9

Understanding Inventory and Depreciation Concepts

.................................
81
Overview: The Inventory Concept

....................................................................
81
Inventory and Cost of Goods Sold (Goods Such as Drugs)
.........................
82

............................................................................................
83
Inventory Tracking

............................................................................................
84
Inventory Distribution Systems

.........................................................................
86
Calculating Inventory Turnover

.......................................................................
87
Overview: The Depreciation Concept

..............................................................
88

......................
88
Computing Tax Depreciation

...........................................................................
92
Information Checkpoint

...................................................................................
93
Key Terms

...........................................................................................................
93
Discussion Questions

.........................................................................................
93
Notes

..................................................................................................................
93
Appendix 9-A

A Further Discussion of Accelerated and

Units of Service Depreciation Computations

..............................................
95

........................................................
95
Chapter 10


........................................
103
Staffing Requirements

....................................................................................
103
FTEs for Annualizing Positions

......................................................................
103
Number of Employees Required to Fill a Position: Another Way to

Calculate F
TE
s

............................................................................................
106
Regulatory Requirements Regarding Staffing

...............................................
111
T  C
Summary
Key Terms
.........................................................................................................
PART IV
REPORT AND MEASURE FINANCIAL RESULTS
Reporting as a Tool
Subsidiary Reports
Summary
Key Terms
.........................................................................................................
Financial and Operating Ratios as Performance
Measures
Key Terms
.........................................................................................................
The Time Value of Money
Present-Value Analysis
Key Terms
.........................................................................................................
Present-Value Table
(The Present Value of $1.00)
vii
Compound Interest Table: Compound Interest
Present Value of an Annuityof $1.00
PART V
TOOLS TO REVIEW AND MANAGE COMPARATIVE DATA
Trend Analysis, Common Sizing, and Forecasted Data
Trend Analysis
Summary
Key Terms
.........................................................................................................
Overview
A Managers View of Comparative Data
Key Terms
.........................................................................................................
PART VI
Overview
Key Terms
.........................................................................................................
T  C
Overview
Key Terms
.........................................................................................................
PART VII
TOOLS TO PLAN, MONITOR, AND CONTROL FINANCIAL STATUS
Variance Analysis andSensitivity Analysis
Variance Analysis Overview
Two-Variance Analysis and Three-Variance Analysis Compared
Three Examples of Variance Analysis
Summary
Sensitivity Analysis Overview
Sensitivity Analysis Tools
Summary
Key Terms
.........................................................................................................
ix
Estimates, Benchmarking, and Other Measurement Tools
Estimates Overview
Example: Estimating the Ending Pharmacy Inventory
Example: Estimated Economic Impact of a New Specialty ina
Adjusted Performance Measures Over Time
Measurement Tools
Key Terms
.........................................................................................................
Two Basic Approaches to Data Analytics
Data Analytics and Healthcare Analytics Serve Many Purposes
.....................................................................................................
Key Terms
.........................................................................................................
PART VIII
Understanding Investment and Statistical Terms Used in Finance
Overview
Long-Term Investments in Bonds
Privately Held Companies Versus Public Companies
Statistics Overview
Commonly Used Statistical and Other Mathematical Terms
Key Terms
.........................................................................................................
T  C
Overview of Capital Structure
Key Terms
.........................................................................................................
Sample Amortization Schedule
Choices: Owning Versus Leasing Equipment
Buy-or-Lease Management Decisions
Key Terms
.........................................................................................................
PART IX
STRATEGIC PLANNING: A POWERFUL TOOL
Strategic Planning and the Healthcare Financial Manager
Strategic Plan: Overview
Varied Approaches to Strategic Planning
Examples of Mission, Vision, and Value Statements
Performance Measures
The Planning Cycle Over Time
Introduction: Requirements, Plans, and Performance
An Example: The VA Office of Information Technology IT Strategic
xi
The VA Office of Information Technology IT Strategic Planning Cycle:
The VA Planning Cycles Process Flow
Tools for Strategic Planning: Situational Analysis
Case Study: Strategic Financial Planning in Long-Term Care
Key Terms
.........................................................................................................
Technology (IT) Staff
Overview
The Service or Equipment Description
The Knowledgeable Reader Approach to Your Business Plan
The Executive Summary
Strategic Aspects of Your Business Plan
Key Terms
.........................................................................................................
Understanding Strategic Relationships: Health Delivery Systems,
Defining Health Delivery Systems
T  C
Delivery
Key Terms
.........................................................................................................
PART X
INFORMATION TECHNOLOGY AS A FINANCIAL AND STRATEGIC TOOL
Understanding Value-Based Health Care and Its Financial and Digital
The Value-Based Concept: Introduction
Value-Based Progress in the Private Sector
Value-Based Progress in the Public Sector
Value-Based Education Efforts
Value-Based Legislative Reform
Value-Based Public Reporting in the Private Sector
Value-Based Public Reporting in the Public Sector
Value-Based Strategic Planning by the Private Sector
Value-Based Strategic Planning by the Public Sector
Key Terms
.........................................................................................................
s for Eligible Professionals
Legislative Reform and MACRA: An Overview
Versus A
xiii
Composite Performance Score
Performance Categories
Scoring Works
How Significant Participation Works
Timelines for Developing Quality Measures
A Framework for MACRA Quality Measurement
: AReference
Key Terms
.........................................................................................................
Standardizing Measures and Payment in Post-Acute Care: New
Requirements
PAC
Electronic Reporting Timelines for
PAC
Impact Act Benefits and Costs: A Summary
T  C
Key Terms
.........................................................................................................
-10 E-Records Overview and Impact
Overview of the
-10 Transition
-10 Implementation: Systems Affected and Technology Issues
Understand Technology Issues and Problems
-10 Implementation: Training and Lost Productivity Costs
Costs of Training
-10 Key Performance Indicators
Key Performance Indicators to Assess
s to Track
Commencing an Information Technology
SWOT
Summary
Key Terms
.........................................................................................................
....................................................................................................
PART XI
The Offer: Sell Your Practice to Us
xv
Researching Acquisition Viewpoints and Industry Trends
What Will Dr. Matthews Decide?
Case Study: Strategic Financial Planning in Long-Term Care
Framework of the Boards Mandate
Industry Profile
Appendix 33-B
Comparative Analysis Using Financial Ratios and
PART XII
Mini-Case Study 1: The Economic Significance of Resource
Misallocation: Client Flow Through the Women, Infants,
and Children Public Health Program
Mini-Case Study 2: Technology in Health Care: Automating
Admission Processes
Referral Tracking and Approval
.....................................................................................................
T  C
Glossary
Examples and Exercises, Supplemental Materials, and Solutions
......................................................................................................
Supplementary Materials: The Mechanics of Percentage Computations
NEW MATERIAL IN THE 5TH EDITION:
r$IBQUFS
r$IBQUFS

i6OEFSTUBOEJOH
4USBUFHJD
3FMBUJPOTIJQT
)FBMUI
%FMJWFSZ
4ZTUFNT\r
'JOBODF
BOE
among health delivery systems, finance, and reimbursement. This chapter assists a manager in recogniz
ing both differences and interrelationships and in applying this recognition to their own organizations
r$IBQUFS
improving patient care and reforming payment systems. Healthcare organizations should define what
r$IBQUFS
chapter highlights significant legislation and regulations that change payment methods and performance
upon proper reporting of new performance measures. The new system is a true reform, as it replaces a
r"QQFOEJY
scribes the evolution of meaningful use before and after its transition into the new physician performance
r$IBQUFS
chapter is about important legislation and regulations that standardize measures and require studies about
payment reform for post-acute care. This means performance measures for skilled nursing facilities, home
health agencies, inpatient rehabilitation facilities, and long-term care hospitals are being standardized.
r$IBQUFS
updated chapter focuses upon challenges for the manager within ICD-10 implementation. An all-new
section introduces useful Key Performance Indicators that are used to assess an organizations ICD-10
r$IBQUFS
r$IBQUFS
r"QQFOEJY
r"QQFOEJY
r$IBQUFS
r$IBQUFS
r5XP
outdated. This includes the following: Chapter 24 Information Technology and EHR: Adoption Require
r"QQFOEJY
r$IBQUFS
r3FMFWBOU
age. This is manifested by its coverage of electronic health records (EHRs), data analytics, value-based health
care, and social media, among other topics. In this era of population health and the resulting need for clinical
integration, data-driven collaboration has the potential to improve outcomes and lower costs, as well as more
Our world of work is divided into three parts: the healthcare consultant, the instructor, and the writer. Over
the managers were mid-career adults, working in all types of healthcare disciplines. We taught them and they
of finance often feels a dislocation and a change of perspective, and that experience can be both difficult and
ri1SPHSFTT
r"O
r"
r5IF
Part I: Healthcare Finance Overview
Part II: Record Financial Operations
Part III: Tools To Analyze and Understand Financial Operations
Part IV: Report and Measure Financial Results
Part V: Tools to Review and Manage Comparative Data
[Two chapters]
[Two chapters plus two new appendices]
Part VII: Tools to Plan, Monitor, and Control Financial Status
Part VIII: Financial Terms, Costs, and Choices
P
Part IX: Strategic Planning: A Powerful Tool
Part X: Information Technology As A Financial and Strategic Tool
[Four chapters plus two appendices; three chapters and
one appendix are all new and the fourth chapter has been substantially revised. In addition, two previous chapters
Part XI: Case Studies
[One new case study about the doctors dilemma,one case study about strategic financial
Part XII: Mini-Case Studies
[Two mini-case studies; one concerns resource misallocation in a public health clinic
information. This section includes the major case study about the system, followed by an appendix containing an
was turned around using comparative analysis of benchmarks and statistical data. A third case study appendix
At the back of the book you will find additional resources as follows, all of which have been updated for the
r"O
r"
r&YBNQMFT
r0UIFS
With this edition we welcome Dr. Neil R. Dworkin as our coauthor. Neil brings a formidable combination of both
educational and practical on-the-ground experience in health care. He also brings fresh viewpoints that are as
has evolved with the help of numerous instructors and students who give us feedback; we
listen. We owe a great debt of thanks to Mike Brown, our long-suffering and understanding publisher. And
first readers, including Teresa Schroder, AuD, CCC-A, along with others who prefer
to be anonymous; you know who you are. The continuing support and suggestions of Janet Feldman, PhD,
RN, Vice President, Qualitas Associates, along with certain continuing technical support provided by Colleene
The input from finance sessions we taught as Adjunct Faculty at Texas Womans University in Dallas also
Vice President/CFO, McDonough District Hospital, Macomb, Illinois; and Nancy M. Borkowski, PhD, Profes
sor, Department of Professional Management/Health Management, St. Thomas University, Miami, Florida, for
their encouragement, information, suggestions, and assistance with the original concept of the book. We also
Many others also contributed suggestions, recommendations, and information to help shape and refine the
Leonard H. Friedman, PhD, Assistant Professor, Coordinator, Health Care Administration Program, Oregon
Donna M. Tortoretti, RNC, Chief Operating Officer, Community Nursing Center, University of Rochester
Billie Ann Brotman, PhD, Professor of Finance, Department of Economics and Finance, Kennesaw State Univer
Judith J. Baker, PhD, CPA
, has worked with healthcare systems, costing, finance, and reimbursement through
out her career. With over 40 years experience in health care, she is a co-founder of Resource Group, Ltd., a
Judith has written numerous peer-reviewed articles and has served as Consulting Editor for Aspen Publishers,
(with Robert Hankins) and
Essentials of Cost Accounting for Health Care Organizations
(with Steven Finkler and
, is also a co-founder of Resource Group, Ltd., a healthcare consulting firm. He has more than
studies for healthcare providers. His early studies centered around facility-specific MDS data collection and
for over nine years. More recently he has designed, implemented, and managed a series of national time studies
R. W. is the editor of continuing professional education seminar manuals and training manuals for facility
member at Charter Oak State College, which is part of the Connecticut State University System and where he
Neil has hospital administration experience, and has been a nursing home administrator in New York and
Problems
Healthcare
Overview
Introduction to
Healthcare Finance
THE HISTORY
Financial management has a long and distinguished
history. Consider, for example, that Socrates wrote about
the universal function of management in human
ization for efficiency in 350
. Evidence of
sophisticated
financial management exists from much earlier times: the
Chinese produced a planning and control system in 1100
., a minimum-wage system was
developed by Hammurabi
in 1800
., and the Egyptians and Sumerians developed
Many managers in early history discovered and rediscov
accomplished.
As management thought became
codified over time, how
ever, the building of techniques for management became
year, Joseph Wharton
Universities of Chicago and California established
their business schools. Thirteen years later, in 1911, 30 such
Over the long span of history, managers have all sought
how to make organizations work more effectively. Financial
effectiveness.
Discuss the three viewpoints
Identify the four elements of
Understand the differences
Understand the composition
manager, through planning, organizing, controlling, and decision making, is able to adjust the
HOW DOES FINANCE WORK IN THE HEALTHCARE BUSINESS?
understanding the various pieces and their relationship to each other. If you, the manager, truly
The healthcare industry is a service industry. It is not in the business of manufacturing, say,
tories of medical supplies and drugs, but those inventories are necessary to service delivery, not
to manufacturing functions. Because the business of health care is service, the explanations
and illustrations within this book focus on the practice of financial management in the service
The managers within a healthcare organization will generally have one of three views: (1)fi
The financial view. These managers generally work with finance on a daily basis. The re
porting function is part of their responsibility. They usually perform much of the strategic
2.
The process view. These managers generally work with the system of the organization.
3.
The clinical view. These managers generally are responsible for service delivery. They
have direct interaction with the patients and are responsible for clinical outcomes of the
Managers must, of necessity, interact with one another. Thus, managers holding different views
Figure 11
In summary, financial management is a
discipline with a long and respected history.
Healthcare service delivery is a business, and
in balancing the inflows and outflows that
Business does not run itself. It requires a
operate properly.
controlling, (3)
organizing and directing, and (4) decision making. The four divisions are based on the purpose
recognizes organizing and directing as a separate element of financial management, primarily
because such a large proportion of a managers time is taken up with performing these duties.
1.
Planning. The financial manager identifies the steps that must be taken to accomplish
the organizations objectives. Thus, the purpose is to identify objectives and then to iden
Controlling. The financial manager makes sure that each area of the organization is fol
and compare them with reports from earlier periods. This comparison often shows where
the organization may need attention because that area is not effective. The reports that
the manager uses for this purpose are often called feedback. The purpose of controlling
3.
Organizing and directing. When organizing, the financial manager decides how to use
the resources of the organization to most effectively carry out the plans that have been
of the organizing running efficiently. The purpose is to ensure effective resource use and
provide daily supervision.
4.
of decision making rely on information, and the primary tasks are analysis and evalua
THE ORGANIZATIONS STRUCTURE
Three Views of Management Within an
inancial
Clinical
Pr
ocess
5
Organization Types
Organizations fall into one of two basic types: profit oriented or nonprofit oriented. In the
There are two subgroups of nonprofit entities: voluntary and government. Voluntary
nonprofits have sought tax-exempt status. In general, voluntary nonprofits are associated
with churches, private schools, or foundations. Government nonprofits, on the other hand,
do not pay taxes because they are government entities. Government nonprofits can be
federal, (2) state, (3) county, (4) city, (5) a combination of city and county, (6) a
pital
taxing district (with the power to raise
revenues through taxes), or (7) a state
versity
(perhaps with a
affiliated with the university). The organizations type may
Organization Charts
sures and indicators are not necessary because management can view overall operations. But in
ment control system is acceptable only if the
pects of the operation. Otherwise, a
formal
system is required. In the context of health
care, therefore, a one-physician practice
Figure12
Figure
) must use a
fect its financial management. Organization
nization chart represents a particular area of
management responsibility. The lines
the boxes are lines of authority.
lustrated in Figure 13, the president/chief
executive officer oversees seven senior vice
presidents reporting to him or her in each
NonprofitVoluntary
Church Associated

Foundation Associated
Hospital District
State University
Types of Organizations
particular area of responsibility designated on the chart. These vice presidents, in turn, have an
array of other managers reporting to them at varying levels of managerial responsibility.
The organization chart also shows the degree of decentralization within the organization.
Decentralization indicates the delegating of authority for decision making. The chart thus il
The purpose of an organization chart, then, is to indicate how responsibility is assigned to
Financial accounting is generally for outside, or third party, use. Thus, financial accounting em
phasizes external reporting. External reporting to third parties in health care includes, for ex
ample, government entities (Medicare, Medicaid, and other government programs) and health
Financial reporting for external purposes must be in accordance with generally accepted
accounting principles. Financial reporting is usually concerned with transactions that have al
Managerial accounting is generally for inside, or internal, use. Managerial accounting, as its
porting of profitability of services and the pricing of services are other common
ongoing uses
of managerial accounting. Strategic planning and other intermediate and long-term decision
7
Physicians Office Organization Chart.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Scheduling
Billing
Accounting
Front
Office
Physicians
Assistan
Registere
Nurse
Clinical
Services
Physicia
Courtesy of Resource Group, Ltd., Dallas, Texas.
INFORMATION CHECKPOINT
With your supervisor.
With your supervisor or in the administrative offices.
How is it used?

KEY TERMS
Nonprofit Organization (also see Voluntary Organization)
What element of financial management do you perform most often in your job?
Do you perform all four elements? If not, why not?
Of the organization types described in this chapter, what type is the one you workfor?
Have you ever seen your companys organization chart? If so, how decentralized isit?
5.
If you receive reports in the course of your work, do you believe that they are
prepared
for outside (third party) use or for internal (management) use? What leads you to
C. S. George, Jr.,
The History of Management Thought
3.
Fundamentals of Strategic Planning for Healthcare Organizations
(NewYork: The Haworth Press, 1997).
9
a manager, need to perceive the structure and reasoning
that underlies management actions. To do so, you need to
1.
What are the four segments that make a financial
4.
What is the annual management cycle for reporting
tions. It also discusses how to communicate financial
information to others. This ability is a valuable skill for a
The information that you, as a manager, work with is only one
part of an overall system. To understand financial manage
ment, it is essential to recognize the overall system in which
your organization operates. An order exists within the system,
and it is generally up to you to find that order. Watch for how
healthcare financial system work are (1)the original records,
(2) the information system, (3)the accounting system, (4) and
the reporting system. Generally speaking, the original records
reports
Understand that four
segments make a financial
Recognize the basic system
Follow the annual
of the effect. The healthcare manager needs to know that these separate elements exist and that
automated. Occasionallyeven todaythey can still be generated by hand and not by com
puter. (This last instance is becoming rare and can happen today only in certain small and
manager
should be able to recognize.
shows information system components for an
cal record is also linked to the system. These are basic facts that a manager should recognize
In addition, the financial information, both outpatient and any relevant inpatient, is fed
relevant inpatient care plan and nursing information. Again, all of these are basic facts that a
electronic data
e
st
ems
ollment/eligibilit
y
Utilization management
Demand management
Algor
ithmic scheduling
suppor
t
Insurance
ri
fi
cation
Link
er
pr
ise-W
ide
Mast
er P
atient Inde
x
Int
erf
ace Engine
Clinical and
nancia
Da
ta Repositor
y
actice Management
Sy
st
em Schedulin
Schedulin
atient
A
ccounting
st
em
nancial (OP and IP)
Inpatient
st
em
der entr
y
IP car
e plans
IP nu
rs
in
t
Tr
ac
king
(IP and OP)
u
t
o
m
a
t
e
d
M
e
d
i
c
a
l
R
e
c
o
r
d
managed care strategic
tistical support. The manager does not have to understand the specifics of all the inputs and
are useful because they portray who is responsible for what piece of information as it enters
the system. The manager needs to realize the significance of such information. We give, as an
dress will, for example, cause the billing to be rejected. Understanding this connection
between
Figure22
involved, in addition to the patient. This physician has computed the cost of a bad address
as $12.30 to track down each address correction. He pays close attention to the handling of
this information because he knows there is a direct financial management consequence in his
es
C
all
k
Superbill
if Change
k
Superbill
if Change
P
atient
er
C
orr
ect
ed
A
ddr
ess in
C
omput
er
py
Insurance
Ca
rd
uct
P
atient
to
C
orr
ect
F
inancial
Da
ta
k
A
ddr
ess
Insurance
vie
w
P
atient
R
ecor
ds
ecor
d
Message
eceiv
e
C
all
Phone Intak
e
y/Exit
eceptionist
A
ddr
ess
Change
A
ddr
ess
Change
A
ddr
ess
Change
Doct
or
ype
Char
t
Label
C
oder
Insurance
Change
13
The second example, shown in
Figure 23
the flow begins not with a receptionist, as in the physician office example, but with a central
database. This central database downloads the information and generates a
summary report
department. The object
billing department must have a correct
address to receive payment. But the flow is different within two different systems. Amanager
must understand how the system works to understand the
To understand financial management, it is essential to decipher the reports provided to the
entral intak
e ent
er
s
demographics at time
re
f
erral r
eceiv
ed
Pa
tient
A
ccount
Cler
k genera
te
s
Pa
tient In
rm
atio
Summa
ne
xt da
y
ta downloads to
CDB
er
nigh
or
mation on
tient
Inf
or
mation Summa
ve
ri
fi
ed
car
e manager at ne
xt
visit
orr
ect inf
or
matio
wr
it
t
en in
staf
f
or
mation
C
orr
ect?
rm
is placed in
appr
op
at
e
ca
manage
s
mailbo
x
rm
tu
ed in
Pa
tient
A
ccount
Re
pr
esentati
ve
ta in CDB
s centra
l
inta
ke
upda
d
by

tient
A
ccounts
Re
pr
esentativ
e
rm
placed in
billing
lder
w labels generat
ed
if necessa
s
ganization. In other words, the classification on the organization chart (as discussed in the
previous chapter) should be compatible with the groupings on the chart of accounts. Thus, if
there is a human resources department on your facilitys organization chart, and if expenses are
grouped by department in your facility, then we would expect to find a human resources group
generic. Every
organization exhibits differences in its own chart of accounts that express the unique aspects
organization. The
element. Thus,
The exhibit is again in two horizontal segments, Structure and Example, and there are now
Primary
Secondary


(Primary
(Secondary
15
stands for Hospital A. The second part is two digits and indicates the fund designator number.
Thus, we conclude that there is more than one fund within this system. Our example shows
The third part of Exhibit 22 is one digit and indicates the financial statement element.
Thus, the first line of our example shows 4, which is for Revenue, and the second line of
our example shows 6, which is for Expense. (The third part of this example is the first part
Microbiology. The number
pler example shown in Exhibit 21. The simpler example used only two digits for this part, but
subclassification. Our example shows 03 on the first line, the revenue line, which stands for
Payer: XYZ HMO and indicates the source of the revenue. On the second line, the expense
line, our example shows 10, which stands for Clerical Salaries. Therefore, we understand
that these are the clerical salaries belonging to LabMicrobiology in Hospital A. (The fifth part
of this example is the third and final part of the simpler example shown in Exhibit 21.) On a
report, these account numbers might appear as 10-10-4-3125-03 and 10-10-6-3125-10. Another
Primary
Secondary

(Primary
(Secondary
of accounts number. The first part is an entity designator and designates a company within the
hospital system. The fund designator two-digit part, as traditionally used (see Exhibit 22), is
missing here. The financial statement element one-digit part, as traditionally used (see Exhibit
22), is also missing here. Instead, the second part of Exhibit23 represents the primary classifi
cation, which is shown as an expense category (Payroll) in the example line. The third part of
tion that indicates the department within the company (Home Health). On a report for this
21-7000-2200-7151 would indicate the home care
partment. Finally, remember that time spent understanding your own facilitys chart of accounts
The books and records of the financial information system for the organization serve to capture
single transaction occurs, the process begins. The individual transaction is
recorded in the ap
propriate subsidiary journal. Similar such transactions are then grouped and balanced within
rized, and entered in the general ledger. Within the general ledger, the transaction groups
Category
(Primary
(Secondary

per-Visit RN
Services
Category)
17
are reviewed and adjusted. After such review and adjustment, the transactions for the period
All transactions for the period reside in the general ledger. The subsidiary journals are so
named because they are subsidiary to the general ledger: in other words, they serve to support
illustrates this concept. Another way to think of the subsidiary
journals is to picture them as feeding the general ledger. The important point here is to under
The annual management cycle affects the type and status of information that the manager is
expected to use. Some operating information is rawthat is, unadjusted. When the same
information has passed further through the system and has been verified, adjusted, and
The Progress of a Transaction.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Is Recorded
Subsidiary Journals
Subsidiary Journals
General Ledger
reporting
day of a month that is one year, or 12 months, in the future (e.g., December 31). If we see a
heading that reads, For the year ended June 30, we know that the fiscal year began on July
1 of the previous year. Anything less than a full 12-month year is called a stub period and is
fully spelled out in the heading. If, therefore, a company is reporting for a three-month stub
Annual year-end reports cover the full 12-month reporting period or the fiscal year. Such
Courtesy of Resource Group, Ltd., Dallas, Texas.
yr
ol
Jour
na
ccounts
Re
ceiv
ab
le
Jour
na
ash
R
eceipts
Jour
nal
ash
Disb
ur
sements
Jour
nal
ccounts
Pa
ya
bl
e
Jour
na
Y JOURNAL
S
19
Annual year-end reports represent the closing out of the information system for a specific
The ability to communicate financial information effectively to others is a valuable skill. Itis
r$SFBUF
r6TF
r6TF
r#FHJO
r0SHBOJ[F
r1MBDF
The rest of this book will help you learn how to create such a report. Our book will
finance works.
What is needed?
An explanation of how the information flow works in
Where is it found?
Probably with the information system staff; perhaps in the
How is it used?
Study the flow and relate it to the paperwork that you

KEY TERMS
4.
If so, is it similar to one of the three formats illustrated in this chapter? If not, how is it
6.
If so, do these reports give you useful information? How do you think they could be
1.
J. J. Baker,
Activity-Based Costing and Activity-Based Management for Health Care
(Gaithersburg,
21
Healthcare systems are using high-tech and high-touch
We characterize the current state of online technology
by greater user interactivity and collaboration, more per
Social media, such as Facebook and Twitter, are the out
growth of Web 2.0. The challenge to a healthcare organiza
media to reach customers and turn social media content
Central to understanding the changes that are now occurring
ment. Technology and patient engagement go hand-in-hand.
An overarching objective of the healthcare digital age is to
make patient engagement more meaningful and effective.
A truly engaged patient is one who is an active partner in his
or her own health care. It stands to reason that primary care
Understand what drives
changes to health
Identify types of high-tech
and high-touch digital
Identify the digital impact
areas for patient
Understand the difference
Recognize how to effectively
This chapter explores major
digital age influences that are
would be the specialty wherein this concept can most effectively be operationalized. Patients
Jacqueline Fellows assembled a comprehensive list of digital impact areas under the rubric
Among the areas that attracted the most interest
and chronically ill population and the shortage of physicians in some areas of the country.
However, there are reimbursement issues that must be overcome, which also encompass
Mobile technology has the potential to help healthcare providers manage risk, encourage
healthy behaviors, and engage with consumers. Garmin (producers of GPS programs), along
Leaders in performance technology such as Garmin also produce remote monitoring
mobile technology have the true potential to improve wellness and to lower healthcare costs.
It is
Recognizing the importance of social media is a first step in bringing a hospital, for example,
with community members and potential patients before they arrive, and manage their care
patient interactions more comfortable and less clinical. The intersection of health care and
social media is unavoidable. Social networks, blogs, discussion forums, and other social and
A common misconception related to social media is that it
requires the creation of additional content. Any content that is being used for print media
and just over 50% had a Twitter account.
For all the good that may come from patients and
healthcare consumers use of social media, there are also risks and challenges. For example, it
cal and human resources-related. In addition, with the locus of responsibility for social media
That said, in todays
matics, or the application of information technology to healthcare delivery. These changes
r.PSF
r.PCJMF
r"EPQUJPO
Still another major technology change involves data mining. Electronic records are increasingly
(For additional information on
At the center of the health information technology evolution is the electronic health record
EHR. The EMR is essentially the digital version of the traditional paper chart, the electronic
record of a particular physicians office. The EHR ideally represents the total health status of
Incorporating EMRs and EHRs into clinical practice will require large investments in new
technology, in addition to changes in existing systems and processes. These barriers tend to slow
EHR adoption rates. Moreover, in some instances, this technology may serve as a distraction
25
during care delivery. On the other hand, the hope is that EHRs will realize their potential to
Interoperability, or the ability of two or more information systems to talk to each other
(exchange data), is the key to the future success of EHRs as is the effectiveness of health
information exchanges (HIEs). These exchanges are a key component of health informat
ics through which information from various electronic record systems is shared according to
Population health is now center stage in healthcare delivery, and it is transforming the industry.
This represents an industry-wide shift in focus; while health care used to be transactional and
focused on the individual, population health emphasizes outcomesnot just of a single patient,
tions (ACOs) and their rapid growth and maturation. ACOs are groups of hospitals, doctors,
quality care to their (primarily) Medicare patients. At the time of this writing, there are approxi
is. First, the provider has to define the population. Then, the care that the population is
population is receiving with the care that the population requires. Finally, the delivery system
Improving the health of populations is one element
Taken
In order to effectively engage in population health management, healthcare organizations
maintains that efficient data sharing among multiple providers will be key; hospitals
These imperatives go beyond the functionality of EHRs and envision real-time population
health management solutions that are intended to work in tandem with that certified technology.
The trends and complexities related to population health and the digital age involve other
The growth and development of urgent care medicine has not been unexpected. For many
patients, there are long waits in the emergency room for nonemergent care, and there has been
Further evidence of the continuing maturation of this type of care is that many centers are
now seeking accreditation. Urgent care centers offer imaging and other services not found in
Walmart on in-store centers or going it alone. Many consumers of retail medicine are uninsured
individuals looking for a fixed cost-of-care. There are also regulatory concerns and questions
Behavioral health presents a myriad of unique challenges in the digital age. The nature of
behavioral health care (mental health care) makes the application of current health IT chal
lenging. The use of EHRs in behavioral health is limited because of strict privacy concerns,
tions have formal linkages or agreements to securely share their information. A recent survey
of the Digital Age. To be successful today, managers must work toward fully recognizing and
27
Where Is It Found?
Websites, blogs, discussion forums, Facebook, Twitter, and/or
How Is It Used?
The particular online visibility sources will vary depending

KEY TERMS
1.
2.
, 18, no 6
, accessed September 2, 2015, and
5.
A Hospital Leadership Guide to
J. Glaser, Five Reasons to Like Patients Use of Social Media,
, April 11, 2016,
8.
(Chicago:
9.
M. L. Braunstein,
Contemporary Health Informatics
(Chicago: American Health Informa
11.
J. Glaser, All Roads Lead to Population Health Management,
H&HN
, June 13, 2016,
13.
15.
16.
Managed Healthcare Executive
, June 17, 2015,
managedhealthcareexecutive.modernmedicine.com/managed-healthcare-executive
17.
29
finance. As such, it is important to understand both their
ligations, or debts, payable to outsiders. Thus, liabilities are
has invested in the business. No matter what term is used,
the sum of these claims reflects what the business is worth,
An accounting equation reflects a relationship among
Home Health Agency (HHA) has cash in its bank account, that is an economic resourcean
12-month period, it is considered long term. In our Great Lakes HHA example, accounts
the inventory should be converted to business use within 1 year; thus, it too is considered
short term.
sider, however, what would happen if the note is to be paid over 3 years. A portion of the
notethat amount to be paid in the coming 12 monthswill be classified as short-term,
or current, and the rest of the notethat amount to be paid further in the futurewill be
The land, building, and equipment will
generally be classified as long-term because
the coming 12 months. Buildings and equip
called book value, which reduces their his
torical cost by any accumulated depreciation.
(The concept of depreciation is discussed in
Inventory
Accounts payable, payroll taxes due, notes payable, and mortgages payable are all liabilities.
to the vendors is recognized as accounts payable. When the HHA paid its employees, it withheld
payroll taxes, as required by the government. The payroll taxes withheld are due to be paid
to the government and thus are also a liability. The HHA has borrowed money and signed a
formal agreement and thus the amount due is a liability. The HHA also has a mortgage on its
Exhibit 42
term. If, however, the liability cannot reasonably be expected to be paid within a 12-month
period, it is considered long-term. In our Great Lakes HHA example, accounts payable and
consider what would happen if the note is to be paid over 3 years. A portion of the notethat
amount to be paid in the coming 12 monthswill be classified as short-term, or current, and
the rest of the notethat amount to be paid further in the
futurewill be classified as long-
on the type of organization. For-profit organizations will have equity accounts with which
labeled as Owners Equity. A corporation,
on the other hand, will generally report two
types of equity accounts: Capital Stock and
distributed company income that has been
left in the business.
35
Not-for-profit organizations will generally
use a different term such as Fund Balance
liabilities in their report. This is presumably
because nonprofits should not, by definition,
have equity. Governmental entities in the
United States may also use the term Fund
Balance in their reports.
Exhibit 43
summa
How is it used?

KEY TERMS
3.
If you receive a copy of the balance sheet, is one distributed to you once a month, once
For-profit corporations:
Not-for-profit (nonprofit) companies:
OVERVIEW
Revenue represents amounts earned by an organization:
tions major business. In the case of health care,
mostly earned by rendering services to
patients. Revenue
Revenue is generally defined as the value of services
rendered, expressed at the facilitys full established rates.
For example, hospital As full established rate for a certain
negotiated
a managed care contract whereby the plan pays only $90
for that procedure. The revenue
RECEIVING REVENUE FOR SERVICES
One way that revenue is classified is by whether payment
is received before or after the service is delivered. The
amount of revenue received for services is often influenced
Payment After Service Is Delivered
payment after service is delivered. Two basic types of pay
ment after service is delivered are discussed in this section:
fee for service and discounted fee for service. One evolved
from the other.
receiving
revenue for services is a
revenue stream.
Recognize contractual
allowances and discounts
Understand the differences in
sources of healthcare
See how to group revenue
for service. The provider of services is paid according to the service performed. Before
for health services in the United States.
2.
Discounted fee for service. In this variation on the original fee for service, a contracted
discount is agreed upon. The organization providing the services then
receives a payment
schedules. A large provider of services can have many different contracts, all with differ
Payment Before Service Is Delivered
service is delivered. There are multiple names and definitions for such payment. We have cho
sen to use a general descriptive term for payment received before service is delivered: prede
is a per-head or per-person count at a particular point in time.
2.
Rate-setting differences. Different agreements can use varying assumptions about the
Contractual Allowances and Other Deductions from Revenue
Revenues are recorded at the organizations full established rates, as previously
discussed. Those
revenues and are
represent the amounts that payers [or
patients] are obligated to pay. Therefore, the terms gross
revenue and deductions from revenue
discussion that follows, however, pertains to the books
upon contractual rate that will be paid. Contractual allowances are often for composite services.
Take the case of hospital A as an example. As discussed in the overview to this chapter, hospital
As full established rate for a certain procedure is $100, but Giant Health Plan has negotiated a
It is not uncommon for different plans to pay different contractual rates for the same service.
Table51
classification is an allowance for bad debts,
counts. (Again, for purposes of the external
financial statements released for third-party
use, the provision for doubtful reports must
be reported separately as an expense item.
The discussion that follows, however, still per
tains to the books and records that are used
for internal management, where the classifica
The allowance for bad debts is charged with
the amount of services received on credit (re
sion for bad debts, the third major deduction
from revenue classification is charity service.
Charity service is generally defined as services
SOURCES OF HEALTHCARE REVENUE
sure that is often included in the profile of a healthcare organization. For example, Hospital
Governmental Sources
The Medicare Program
Title XVIII of the Social Security Act is commonly known as Medicare. Actually entitled Health
The Medicare program currently has four parts. The first part, known as Part A, is hospital
insurance (HI) and is funded primarily by a mandatory payroll tax. The second part, known as
Part B, is called supplementary medical insurance (SMI). SMI is voluntary and is funded pri
Security benefit checks
the services to be covered and the eligibility of the individual to
receive the services under the
39
Variations in Physician Office Revenue
for Two Visit Codes
Payer
99213
99214
MAYO
10.00
10.00
PRU
Rates for illustration only.
(MACs), process both Part A (HI) and Part B (SMI) Medicare claims.
Medicares third part, Part C, is known as Medicare Advantage. Medicare Advantage con
sists of managed care plans, private fee-for-service plans, preferred provider organization plans,
and specialty plans. Although Medicare Advantage is offered as an alternative to traditional
Medicare, coverage must never be less than what Part A and Part B (traditional Medicare)
would offer the beneficiary.
Medicares fourth part, Part D, is the prescription drug benefit, effective as of January 1,
2006. The prescription drug benefit represents expanded coverage. It is a voluntary program
The Medicare program covers approximately 95% of the U.S. aged population along with
certain eligible individuals receiving Social Security disability benefits.
Medicare is an impor
The Medicaid Program
Title XIX of the Social Security Act is commonly known as Medicaid. Medicaid legislation estab
lished a federal and state matching entitlement program in 1965. The program was intended to
rates for services within that state. In doing so, each state is bound only by the broad national
federal government is responsible for a certain percentage of each states Medicaid expendi
of Medicaid services directly. Thus, the source of Medicaid revenue to a healthcare organization
is considered to be the state governments Medicaid program representative.
and health-related services for the poor.
vices within the payer mix may vary, Medicaid is a source of healthcare
revenue in almost every
Other Programs
There are numerous other sources of federal, state, and local revenues for healthcare
organizations. Generally speaking, for most organizations, none of the other revenue sources
will exceed the Title XVIII and Title XIX programs just discussed. Other
programs include
state-only general assistance programs (versus the federal-and-state jointly funded Medicaid
program). Still other public programs are school health programs,
public health clinics, mater
nal and child health services, migrant healthcare services,
alcohol services, and special programs such as Native
American healthcare services.
Managed Care Sources
In the 1970s, managed care began to appear in healthcare models in the United States. An
all-purpose definition of managed care is: managed care is a means of providing healthcare
A central concept of managed care is the coordination of all healthcare services for an in
Types of Plans
The most prevalent type of managed care plan today is the health maintenance organization
receive comprehensive health services. The members must use the providers who are desig
nated by the HMO; if they go outside the designated providers, they must pay all or a large
part of the cost themselves. The designated providers of services in turn contract with the
HMO to provide services at agreed-upon rates. Several different forms of HMOs have evolved
various types of providers, including hospitals and physicians. The panel is limited in size and
generally has utilization review powers. If the patients in a PPO use health providers who are not
Types of Contracts
In the case of an HMO, the designated providers of health services contract with the HMO to
provide services at agreed-upon rates. The different types of HMOsincluding the staff model,
selected group, who are all participating payers, to buy services for its eligible beneficiaries on
the basis of discounted fee for service. A large healthcare facility will have one or more individu
Other Revenue Sources
A considerable amount of healthcare revenue is still realized from sources other than Title
XVIII, Title XIX, and managed care:
r$PNNFSDJBM
cial insurers, simply pay for the eligible health services used by those individuals who pay
premiums for healthcare insurance. They do not tend to have a say in how those health
services are administered.
r1SJWBUF
QBZ
pay is more prevalent in nursing facilities and in assisted-living facilities than in hospital
r0UIFS

by voluntary nonprofit organization, tax revenues levied by governmental nonprofit orga
Healthcare revenue is often reported to managers by source of the revenue.
Table 52
ents such a revenue summary. This example covers all types of sources discussed in this section.
41
Grouping revenue by different classifications
revenue
A revenue center classification is one form of a
responsibility center. In a responsibility
center,
revenue center, a particular unit of the organization is given responsibility for generating revenues
volume than for generating a specific revenue dollar amount. (The implication is that the volume
will, in turn, generate the dollars.) Revenue centers tend to occur most often in special programs
where volume is critical to survival of the
Exhibit 51
, however,
inpatient, hospital outpatient, off-site clinic, skilled nursing facility, home health agency, and hospice
are all accounted for. A percentage is shown for each. This type of classification is useful for a bro
chure or a report that profiles the different types of healthcare services offered by the organization.
Service Lines
In the
healthcare field, many organizations opt instead for service line terminology. A ser
vice line is
Sample Monthly Statement of Revenue
by Source
Summary
Year to Date
Private revenue
$100,000
HMO revenue
16.7
Medicare revenue
Medicaid revenue
Commercial revenue
12.0
Other revenue
1.5
Total
100.0%
A number of hospitals have adopted the major
One advantage of MDCs is that they are a
universal designation in the United States.
MDCs also have the advantage of
possessing
service line classification, a
recently
five service lines: (1)
medical, (2)surgical,
(3)women and children, (4) men
tal health,
and (5) rehabilitation (neuro-ortho rehab)
Figure 51
Long-Term Care
(CCRC) can use its various levels of care as
a starting point. Thus, the CCRC usually has
four service lines, listed in the descending order of resident acuity: (1) skilled
nursing facility,
(2) nursing facility, (3) assisted
living, and (4) independent living. The skilled nursing facility
provides services for the highest level of resident acuity, and the independent living provides
services for the lowest level of resident acuity. One adjustment to this approach includes isolat
ing subacute services from the remainder of skilled nursing facility services. Another adjustment
independent
Figure 52
illustrates CCRC service lines by acuity level.
Long-Term Care Service Lines.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Facility
Facility
Livin
Livin
d
ed
Home Care
Numerous categories of service delivery can be considered home care. A practical
was taken by one home care entitypart of a health systemthat defined its key functions.
Key functions can in turn be converted to service lines (
Figure 53
43
Hospital Service Lines.
Courtesy of Resource Group, Ltd., Dallas, Texas.
&
Children
Home Care Service Lines.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Mental Health
Pulmonary
Maternity Service
Wound Care
Physician Groups
Service delivery for physician groups will vary,
of course, with the nature of the group itself.
Figure 54
Other Service Designations
particular organizations. Columbia/HCA is
now reported to classify its services in a disease
sists of eight disease
management areas: (1)
ioral health, (5) workers compensation, (6)
womens services, (7) se
nior care, and (8) emergency services.
Other Types of Revenue Groupings
Other healthcare organizations may have revenue groupings that are not service lines. An
entity
that provides services is able to choose service lines as a method of grouping its
revenue. But if
the entity sells or makes a product (rather than providing services), its revenue will have to be
pharmaceutical manufacturer.
Physicians Group Service Lines.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Procedures
Medicine
revenues into three major categories of sales: Prescription Drugs, Nonprescription (Over-the-
Counter, or OTC) Drugs, and Other Merchandise. (The major category of Other Merchandise
Pharmaceutical Manufacturer
A pharmaceutical manufacturers revenue groupings would likewise be specific to its type of
healthcare business. These organizations are producing a product rather than providing a service.
egory might then either be national versus international revenues, or perhaps a classification of
In summary, the entitys revenue classification system, whatever it may be, must be consistent
INFORMATION CHECKPOINT
With your supervisor.
How is it used?
With your supervisor, or in the information services division.
How is it used?
grouping. You will probably find that these groupings are
used for performance measures. They can also be used for

KEY TERMS
Discounted Fee for Service
Fee for Service
1.
Does your organization receive revenue mainly in the form of payment after service is
delivered or payment before service is delivered?
45
What do you believe the proportion of revenues from different sources is for your organi
6.
1.
Texas Medical Association, American Medical Association, Texas Medical Foundation,
and Texas Osteopathic Medical Association,
A Guide to Forming Physician-Directed Managed
(Austin, TX: Texas Medical Association, 1994), 3.
2.
Health Care Financing Review: Medicare and Med
4.
D. I. Samuels,
Capitation: New Opportunities in Healthcare Delivery
(Chicago: Irwin
5.
D. E. Goldstein,
Alliances: Strategies for Building Integrated Delivery Systems
(Gaithersburg,
MD: Aspen Publishers, Inc., 1995), 283; and Texas Medical Association,
cal Association, Texas Medical Foundation, and Texas Osteopathic Medical Association,
(Austin, TX: Texas Medical As
Cost Accounting: A Managerial Emphasis
, 9th ed. (Englewood Cliffs, NJ:
these hospitals will change the names of their service line designations to match the new
titles is unknown at this point. We do know it will take time to decide upon such a change
8.
A. Sharpe and G. Jaffe, Columbia/HCA Plans for More Big Changes in Health-Care
World,
, 28 May, 1997, A8.
OVERVIEW
Another way to think of expenses is as the costs of doing
business. Just as revenues represent the inflow into the orga
outflowa stream of
expenditures flowing out of the organization. Examples of
expenses include salary expense for labor performed, pay
roll tax expense for taxes paid on the salary, utility expense
for electricity, and interest expense for the use of money.
In fact, expenses are expired costscosts that have been
used up, or consumed, while carrying on
enues and expenses affect the equity of the business. The
inflow of revenues increases equity, whereas the outflow of
expenses decreases equity. In nonprofit organizations, the
term is fund balance rather than equity. This is because a
nonprofit organization, by its nature, is not in business to
make a profit. Thus, it should not have equity. However, the
principle of inflow and outflow remains the same. In the
Many managers use the terms expense and cost
interchangeably. Expense in its broadest sense includes
every expired (used up) cost that is deductible from rev
erty transferred, services performed, or liability incurred)
in consideration of goods or services received or to be
either
Understand the distinction
Understand how
disbursements for services
represent an expense stream
(an outflow).
Follow how expenses are
grouped in different ways for
Recognize why cost reports
have influenced expense
For example, an electric bill for $500 is recorded in the books of the clinic as an expense.
The administrator sees the $500 as the cost of electricity for that month in the clinic. And
the administrator is actually correct in seeing the $500 as a cost because it has been used up
Confusion also exists in healthcare reporting over the term cost versus the term charges.
Charges are revenue, or inflow. Costs are expenses, or outflow. Charges add; costs take away.
DISBURSEMENTS FOR SERVICES
There are two types of disbursements for services:
1.
at a later time and not at the point when the expense is incurred. If this is the case, the
when payment is made. One measurement of operations is days in accounts payable,
whereby the operating expenses for the organization are reduced to a rate per day and
A cost center is one form of a responsibility center. In a responsibility center, the manager is
over which it holds authority. The medical records division is an example of a cost center. The
billing and collection office might be another example. A cost center might be a division, an
In healthcare organizations, it is common to find departments as cost centers. This is often a
logical way to designate a cost center because the lines of authority are generally organized by
director or officer that is in charge of
report that contains multiple cost centers.
because he or she is ultimately responsible for
vices and other
professional services. There are five cost centers in the nursing services group, ranging from
operating room to
vices group. In the hospital that uses the grouping shown in Exhibit 61, however, not all of
the 20 cost centers are departments. Some
ple, EKG and EEG operate out of the same
centers
producing. (The
central to the
organization, which is
to provide
healthcare ser
vices.) The 11 cost
general
services and support
services. The 6 cost cen
ters in the general services group
happen to
hospital. (Other
hospitals might not have
security as a sepa
dietary, maintenance, laundry, housekeeping,
recordswould be separate
port services group include a general cost
center that contains administrative costs; the
remaining 4 are related to
employee salaries
rity taxes, employee
welfare, and pension cost
centers, all of which will probably be in the
organizations own needs and preferences. It is
the responsibility of management to make the
cost centers match the proper lines of authority.
Exhibit 62 illustrates two categories of
healthcare expense: general services and sup
port. Athird related category is operations
vice directly related to patient care. Examples are radiology expense and drug expense. A gen
eral services expense provides services necessary to maintain the patient, but the service is not
directly related to patient care. Examples are laundry and dietary. Support services expenses, on
the other hand, provide support to both general services expenses and operations expenses. A
support service expense is necessary for support, but it is neither directly related to patient care
nor is it a service necessary to maintain the patient. Examples of support services are insurance
Diagnoses and Procedures
noses and procedures for purposes of planning and
ficial because it matches costs against common classifications
Nursing Services and Other
Professional Services Cost Centers
Nursing Services Cost Center
OBNursery
Total
Other Professional Services
Laboratory
Emergency Service
Respiratory Therapy
Ambulance Service
Total
49
of revenues. Much of the revenue in many
organizations is designated by
either
diagnoses or procedures. One preva
by major diagnostic categories (MDCs). The
23 MDCs serve as the basic classification sys
tem for diagnosis-related groups (DRGs).
represents a category of pa
tients. This category contains patients whose
resource consumption, on statistical average,
number of MDCs may increase when
Exhibit 64
shows a departmental and
pital uses 27 cost center codes: the 23 MDCs
plus 4 other codes (Special Drugs, HIV,
separately. Unassigned is a default category and should have little assigned to it. Outpatient is a
pitals departmental code is 18, per Exhibit 64. The DRG classification, ranging from
third column, and the related cost appears in the fourth and final column. These costs can now
Outpatient services in particular are generally designated by procedure codes. Procedure
codes, known as Current Procedural Terminology (CPT) codes, are commonly used to group
cost centers for outpatient services. (CPT codes represent a listing of descriptive terms and
identifying codes for identifying medical services and procedures performed.) However,
procedures can beand arealso used for purposes of grouping inpatient costs, generally
within a certain cost center. A hospital example of reporting radiology department costs by
Table 61
procedure is in the middle column, and the departmental cost
cedure appears in the right column. These costs can now be readily
General Services and Support
Services Cost Centers
General Services Cost Center
Laundry
Total
Support Services Cost Center
Social Security Taxes
Employee Welfare
Total
service line, as discussed in the pre
ter, then expenses should also be grouped by
these categories. In that way, matching of rev
readily occur. A more
chapter.
Programs
A program can be defined as a project that
has its own objectives and its own program
Nervous System
Ear, Nose, Mouth, and Throat
Respiratory System
Circulatory System
Hepatobiliary System and
Connective Tissue
Skin, Subcutaneous Tissue,
Kidney and Urinary Tract
Pregnancy, Childbirth, and
Organs and
Unspecified Sites)
MDC 19
Injuries, Poisoning, and Toxic
with Health Services
Hospital Departmental Code List
Nervous System
Ear, Nose, Mouth, and Throat
Respiratory System
Circulatory System
Hepatobiliary System
Connective Tissue
Skin, Subcutaneous Tissue, and Breast
Kidney and Urinary Tract
Injury, Poison, and Toxin
Other Health Services
51
indicators. Within managements
functions of
making,
the program must stand on its own. Aprogram
is often funded separately and for finite periods
of time. For example, funds from a grant might
programsespecially those
funded separately from the revenue stream of
organizationhave to arrange their
expenses in a special format that is specified by
Program expenses should be grouped in
such a way that they are distinguishable. Also,
if such programs have been specially funded,
commingled. An example of a program cost
example has received special funds and must
be reported separately, as shown.
COST REPORTS AS INFLUENCERS
OF EXPENSE FORMATS
care program (Title XVIII) and the Medicaid
program (Title XIX). Every provider par
ticipating in the program is required to file
ers who must file cost reports is illustrated in
Table 62
. The arrangement of expense head
primarily
consistent since the advent of such reports
Example of Hospital Departmental Costs Classified by Diagnoses, MDC, and DRG
Hospital Departmental Code
O/RINFECT/PARASITIC DIS
POSTOP/POSTTRAUMA INFECT
OT/INFECT/PARASITIC DX
Southside
Intake Center
Feeding Ministry
January 2XXX
Telephone
Program Total
Example of Radiology Department
Costs Classied by Procedure Code
Procedure
Procedure
Description
Department
557210
Ribs, Unilateral
Spine Cervical Routine
125,000
Pelvis
LimbWrist
557400
LimbHip, Unilateral
557410
LimbHip, Bilateral
14,000
557430
LimbKnee Only
Total
in 1966. Therefore, this standard and traditional
arrangement has strongly influenced the ar
cussed earlier in this chapter. Instead, the cost-finding cost center is, broadly speaking, a
type of cost pool used in the cost-finding process. The primary purpose of the cost pool/cost
overhead.
discussed in a
preceding chapter.) The beginning trial balance is
reflected in the first three
\t\t&#x/Act;&#xualT;xt;�&#x/Act;&#xualT;xt;�
\t\t&#x/Act;&#xualT;xt;�&#x/Act;&#xualT;xt;�

Total

respective line items on the page stay constant throughout the flow of
General service
Inpatient routine service
Ancillary service
Outpatient service
INFORMATION CHECKPOINT
With your supervisor.
How is it used?
Selected Cost Report Forms
Type
Form
Hospital and Hospital Healthcare Complex
CMS 2552-10
Skilled Nursing Facility and Skilled Nursing Facility Complex
CMS 2540-10
Home Health Agencies
CMS 1728-94
53
Where is it found?
With your supervisor or in the information services
How is it used?
grouping. You will probably find that these groupings are
used for performance measures. They can also be used for

KEY TERMS
General Services Expenses
Support Services Expenses
1.
Have you worked with cost centers in your duties? If so, how have you been exposed to
3.
Do you believe that grouping expenses by diagnoses and procedures (based on type of
5.
6.
S. A. Finkler,
Essentials of Cost Accounting for Health Care Organizations
At the time of this writing, 23 major diagnostic categories (MDCs) serve as the basic classifi
G. F. Longshore, Service-line Management/Bottom-line Management for Health Care,
nal of Health Care Finance
Direct costs can be specifically associated with a particular
unit or department or patient. The critical distinction for
ever the manager is responsible forthat is, the unit, the
The somewhat vague definition of a cost object is any
unit for which a separate cost measurement is desired. It
cost
The important thing is that direct costs
can be traced. Indirect costs, on the other hand, cannot
be specifically associated with a
particular cost object. The
controllers office is an example of indirect cost. The con
trollers office is essential to the overall
organization itself,
viding healthcare services. The critical distinction for the
indirect costs usually cannot be traced, but
instead must be
allocated or
apportioned in some manner.
Figure 71
To summarize, it is helpful to recognize that direct costs
are incurred for the sole benefit of a particular
operating
answer to the following question is yes, then the cost is a
direct cost: If the operating unit (such as a department)
Indirect costs, in contrast, are incurred for the over
all operation and not for any one unit. Because they are
lowing question is yes, then the cost is an indirect cost:
Must this cost be allocated in order to be assigned to the
Understand why the
difference is important to
Understand the composition
and purpose of responsibility
It is important for managers to recognize
direct and indirect costs and how they are
indirect
center; the second concerns an ambulance
service center.
Table 71
direct
cost and indirect cost for a rehab cost center.
The report concerns three types of therapy
physical, occupational, and speech therapy
and a total. In this report, the manager
can observe the proportionate differences
see the differences among the three types of
Table 72
cating indirect costs and the result of such allocation. Managers should notice that the Total
Indirect Costs in Table 72 carry forward and become the Indirect Costs in Table71. Thus,
this report showing allocation of indirect costs is considered a subsidiary
because it is
supporting, or subsidiary to, the preceding main report. This use of one or more support
The allocation of indirect costs subsidiary report contains quite a lot of information. It shows
what particular expenses (clerical salaries, administrative salaries, computer services) are con
expenses are allocated across the
three separate types of therapy. And the report also shows how each item was allocated; see the
Allocation Key containing codes A, B, and C. The basis for allocation is presented in the Key
of further study by the manager.
Allocate
to
Traced
to
Costs
Cost
Examples of Rehab Cost Center Direct and Indirect Cost Totals
Rehab Cost Centers
Direct Cost
Indirect Cost
Total
Physical Therapy (PT)
$410,000
$107,500
$517,500
Occupational Therapy (OT)
190,000
Speech Therapy (ST)
120,000
153,500
Total
$185,000
Note: Direct Cost proportions, rounded, are as follows:
PT = 57%/OT = 26%/ST = 17%/Total = 100%
Courtesy of J. J. Baker and R. W. Baker, Dallas, Texas.
costs, are what the organizations managers believe can be traced to the specific
operation of the
freestanding center.
center. These costs are what the
organizations
to the specific operation of the
freestanding
center. The decisions about what will and what
will not be considered direct or indirect costs
will almost always have been made for the
manager.
What is
important is that the man
ager understand two things: first, why this is
so, and second, how the
Remember the rule of thumb
earlier in this chapter. Ifthe
to the following question is yes, then the cost
a department) did not exist, would this cost
We previously discussed revenue centers,
whereby managers are responsible for gener
ating revenue (or volume). We also previously
managers are
Example of Ambulance Direct
Vehicle expense
Purchased services
Vehicle depreciation
Total direct costs
Example of Ambulance Indirect
Total indirect costs
57
Example of Indirect Costs Allocated to Rehab Cost Center
Clerical
Administrative
Computer
Services
Total Indirect
Allocation Basis:
Indirect Cost to Be Allocated
$185,000
Allocated to:
Physical Therapy (PT)
107,500
Occupational Therapy (OT)
16,000
13,000
15,000
Speech Therapy (ST)
10,000
15,000
Proof Total
$185,000
Allocation Key:
A = # Visits (Volume): PT = 8500/OT = 4000/ST = 2500/Total = 15,000 (15,000 x $4.00 = $60,000)
B = Proportion of Direct Costs: PT = 57%/OT = 26%/ST = 17%/Total = 100% (% x $50,000)
C = # Computers in Service: PT = 9/OT = 3/ST = 3/Total = 15 (15 x $5,000 each = $75,000)
Courtesy of J. J. Baker and R. W. Baker, Dallas, Texas.
responsible for managing and controlling cost. The responsibility center (R/C) makes a man
(outflow) side of a
department, division, unit, or program. In other words, the manager is responsible for generating
profit center
We will examine the type of information a manager receives about his or her own
responsibility center by reviewing the Westside Center operations. Westside Center offers two
basic types of services: an ambulatory surgery center (ASC) and a rehabilitation center. The
management of Westside is overseen by Bill, the director. Joe manages the ambulatory surgery
center. Bonnie manages the rehabilitation center. Denise, a part-time radiologist, provides radi
ology services on an as-needed basis. Joe, Bonnie, and Denise, the managers, all report to Bill,
the director.
Figure 72
To restate the relationships shown in Figure 72, Joe manages a responsibility center for
ambulatory surgery services. Bonnie manages a responsibility center for
services.
These services represent the business of Westside Center. Denise manages the
vices, but this is not a responsibility center in the Westside
center. Bill, the
director, manages a bigger responsibility
described, plus the general and administrative support center.
Bill, the director, receives a managerial
. Bills Directors
Summary contains the data for the entire
Westside operation.
Figure 73
illustrates the reports received
by each manager at Westside. Joes report
for the ambulatory surgery center is at the
top right of Figure 73. His report shows the
controllable revenues he is responsible for
($225,000), less the controllable expenses he
is responsible for ($155,000). The difference
is labeled ASC Responsibility Center Surplus
on his report. The surplus amounts to $70,000
Directors Summary of Westside
Texas.
Lines of Managerial Responsibility at Westside Center.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Center
Director
Ambulator
Surgery Center
Responsibility
Center
Manager
Administrative
Support Center
Support Center
Manager
Rehab Center
Responsibility
Center
Manager
Bonnies report for the rehabilitation center is the second report on the right of
Figure73.
Westside Costs by Responsibility Center.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Westside ASC & Rehab Center
ASC R/C Surplus
$70,000.00
Rehab R/C Surplus
85,000.00
Less G&A Support Ctr
(80,000.00)
Less Radiology Support Ctr
(20,000.00)
Responsibility Center
Therapy Manager
Controllable revenues
Patient fees
$300,000.00
Controllable expenses
Wages
120,000.00
Payroll taxes, other fringes
30,000.0
Billable supplies
50,000.0
Medical supplies
10,000.0
Continuing education
3,000.00
Licenses and permits
2,000.00
Total expenses
215,000.00
Rehab R/C surplus
$85,000.00
Responsibility Center
Medical/Surgical Manager
Controllable revenues
Patient fees
$225,000.00
Controllable expenses
Wages
100,000.00
Payroll taxes, other fringes
25,000.0
Billable supplies
20,000.0
Medical supplies
10,000.0
Total expenses
155,000.00
ASC R/C surplus
$70,000.00
Support Cente
Salaries
$40,000.00
Payroll taxes, other fringes
10,000.0
Office supplies
1,200.00
Telephone
2,400.00
Rent
10,800.0
Utilities
4,800.00
Insurance
1,200.00
Depreciation
9,600.00
Total expenses
$80,000.00
Radiology Manager
Salaries
$12,000.00
Payroll taxes, other fringes
3,000.00
Radiology supplies
5,000.00
Total expenses
$20,000.00
59
Denises report for radiology services is at the bottom right of Figure 73. Her report shows
the controllable expenses she is responsible for, which amount to $20,000. Her
report shows
only expenses because it is a support center, not a responsibility center. Therefore, Denise is
Bill, the director, receives a report for the general and administrative (G&A) expenses, as
shown second from the bottom on the right of Figure 73. This report shows the G&A control
lable expenses that Bill himself is responsible for at Westside, which amount to $80,000. The
G&A report shows only expenses because it also is a support center, not a responsibility center.
However, Bill is also responsible for the entire Westside operation. That is, the overall West
side operation is his responsibility center. Therefore, Bills directors summary, reproduced on
the left side of Figure 73, contains the results of both responsibility centers and both sup
port centers. The surplus figures from Joe and Bonnies reports are positive figures of $70,000
and $85,000, respectively. The expense-only figures from Bills G&A
from Denises radiology support center report are negative figures of $80,000 and $20,000,
respectively. Therefore, to find the result of operations for Bills
entire Westside operation, the
subtracted from the surplus figures to arrive at a
Although the lines of managerial responsibility will vary in other organizations, the relation
Product costs
is a term that was originally associated with manufacturing rather than with services.
The concept of product costs assumes that a product has been manufactured and placed into
inventory while waiting to be sold. Then, whenever that product is sold, the product is matched with
is the common usage for manufacturing firms.
(The concept of matching revenues and expenses has been discussed in a preceding chapter.)
). The term comes from the span of time in which matching
Service organizations have no manufacturing process as such. The business of healthcare ser
vice organizations is service delivery, not the manufacturing of products. Although the overall
concept of product versus period cost is not as vital to service delivery, the
important for managers in health care to know.
department, division, or unit. A period cost is not traceable in this manner. Another way to view
this distinction is to think of product costs as those costs necessary to actually deliver the service,
whereas period costs are costs necessary to support the existence of the orga
Finally, medical supply and pharmacy departments do have inventories on hand. In their case,
a product is purchased (rather than manufactured) and placed into inventory while waiting to
be dispensed. Then, whenever that product is dispensed, the product is matched with revenue
and recognized as a cost of providing the service to the patient. Therefore, the product cost
concept is important to managers of departments that hold a significant amount of inventory.
INFORMATION CHECKPOINT
Where is it found?
With your supervisor, in administration, or in information services.
To track operations directly associated with the unit.
Where is it found?
With your supervisor, in administration, or in information services.
How is it used?
To reflect operations that a manager is specifically responsible for

KEY TERMS
5.
If so, do you believe the responsibility centers operate properly? Would you make
1.
, 9th ed. (Englewood Cliffs, NJ:
J. J. Baker,
Activity-Based Costing and Activity-Based Management for Health Care
3.
D. A. West, T. D. West, and P. J. Malone, Managing Capital and Administrative
(indirect)
nal of Health Care Finance
61
Tools to Analyze
and Understand
DISTINCTIONS AMONG FIXED, VARIABLE,
ANDSEMIVARIABLE COSTS
This chapter emphasizes the distinctions among fixed,
variable, and semivariable costs because this knowledge is
able costs to compute contribution margins and break-even
points. The manager also needs to know about semivariable
Fixed costs are costs that do not vary in total when activ
Figure 81
. The horizontal axis of the graph
shows number of residents in the Jones Group Home, and
Variable costs, on the other hand, are costs that vary in
direct proportion to changes in activity levels (or volume)
Figure82
number of residents in
the Jones Group Home, and the vertical axis shows total
variable cost for the group home changes proportionately
residents (the activity level or volume)
example of a variable cost is food
for the group home residents. Food would vary directly,
depending on the number of individuals in residence; thus,
Understand the distinctions
among fixed, variable, and
Be able to analyze mixed
Understand the computation
Be able to compute the
andBreak-Even
Semivariable costs vary when the activity levels (or volume) of operations change, but not in
direct proportion. The most frequent pattern of semivariable costs is the step pattern, where
the semivariable cost rises, flattens out for a bit, and then rises again. The step pattern of semi
Figure 83
. The horizontal axis of the graph shows number of
In this graph, the behavior of the cost line resembles stair steps: thus, the step pattern name
for this configuration. The most common example of a
semivariable expense in health care is
supervisors salaries. A single supervisor, for example, can perform adequately over a range of
rises in activity levels (or volume). When another supervisor has to be added, the rise in the step
It is important to know, however, that there are two ways to think about fixed cost. The usual
cost for the group home. However, another perception is presented in
Figure84
of fixed costs in Figure 84 is the usual flat line just discussed. The bottom view is fixed cost per
$1,000
$2,000
$3,000
$4,000
10
20
30
40
50
Number of Residents
Variable CostJones Group Home.
$1,000
$2,000
$3,000
10
20
30
40
50
Number of R
esidents
tal Month
ly

Va
ri
ab
le C
ost
$3,000
$6,000
$9,000
10
20
30
40
50
Number of Residents
Two Views of Fixed Costs.
$100
$200
$300
$400
0
10
20
30
40
50
Number of Residents
$1,000
$2,000
$3,000
$4,000
0
10
20
30
40
50
67
We can also think about variable cost in two ways. The usual view of variable cost is the diago
diagonal line represents monthly cost varying in direct proportion with number of residents
in the home. However, another perception is presented in
Figure 85
costs in Figure 85 represents total monthly variable cost and is the usual diagonal line just
of variable cost stays the same proportionately for each
resident. A good way to think about
Figures 84 and 85 is to realize that they are close to being mirror images of each other.
staffing. Semifixed costs are the reverse of semivariable costs: that is, they stay fixed for a
time as activity levels (or volume) of operations change, but then they will rise; then they will
plateau; then they will rise. Thus, semifixed costs can exhibit a step pattern similar to that of
Two Views of Variable Costs.
10
20
30
40
50
Number of Residents
$10,000
$20,000
$30,000
$40,000
0
10
20
30
40
50
60
Number of Residents
$200
$400
$600
$800
summary, both semifixed and semivariable costs have mixed elements of fixed and variable
EXAMPLES OF VARIABLE AND FIXED COSTS
can be variable to one organization and fixed to another because they are handled differently
Table 81
69
Operating Room Fixed and Variable Costs
Account
Total
Variable
Fixed
Social Security
60,517
60,517
Pension
Health Insurance
Child Care
Patient Accounting
155,356
155,356
Admitting
110,254
110,254
Medical Records
91,718
91,718
Medical Waste
Sterile Procedures
Laundry
DepreciationEquipment
87,378
87,378
DepreciationBuilding
AmortizationInterest
(5,819)
(5,819)
Insurance
4,216
4,216
Administration
57,966
57,966
Medical Staff
Community Relations
49,813
49,813
Materials Management
Human Resources
Nursing Administration
Data Processing
17,815
17,815
Fiscal
17,700
17,700
Telephone
77,597
77,597
Environmental Services
32,874
32,874
Quality Management
10,016
10,016
Medical Staff
Continuous Quality Improvement

Total Allocated
$1,217,756
$87,378
Reproduced with the permission of Wolters Kluwer Law & Business from J.J. Baker, Activity-Based Costing and Activity-Based Man
agement for Health Care, p. 191, 1998, Aspen Publishers, Inc.
Thirty-two expense accounts are listed in
Table 81: 11 are variable, 20 are
designated
as fixed by this hospital, and 1, equipment
depreciation, is listed separately.
rate listing is because of the way this hospi
tals accounting system handles equipment
Another example of semivariable and
Table 82
. The
costs are expressed as full-time equivalent
tiplied times the appropriate wage or salary
to obtain the semivariable and fixed costs
for the operating room. (The further use of FTEs for staffing purposes is fully discussed
in the chapter on staffing.) The supervisor position is fixed, which indicates that this is the
minimum staffing that can be allowed. The single aide/orderly and the clerical position are
also
indicated as fixed. All the other positionstechnicians, RNs, and LPNsare listed as
pattern
that has been previously discussed in this chapter. This table is a good
example of how to
show clearly which costs will be designated as semivariable and which costs will be designated
Another example illustrates the behavior of a single variable cost in a doctors office. In
Table 83
we see an array of costs for the procedure code 99214 office visit type. Nine costs are listed. The
first cost is variable and is discussed momentarily. The other eight costs are all shown at the
same level for a 99214 office visit: supplies, for example, is the same amount in all four columns.
The single figure that varies is the top line, which is report of lab tests, meaning laboratory
reports. This cost directly varies with the proportion of activity or volume, as variable cost has
Operating Room Semivariable and
Fixed Staffing
Job Positions
Total No.
Semivariable
Fixed
Supervisor

Techs
7.7
7.7
1.2
1.2
Aides, orderlies
1.0
1.0
Clerical
1.2

1.2
Totals
16.3
11.9
Office Visit with Variable Cost of Tests
99214
99214
99214
99214
Service Code
No Test
1 Test
2 Tests
3 Tests
Report of lab tests
$7.64
$11.46
Fixed overhead
$31.00
$31.00
$31.00
$31.00
Physician
11.36
11.36
11.36
11.36
Medical assistant
1.43
1.43
1.43
1.43
Checkout
1.00
1.00
1.00
1.00
Receptionist
1.28
1.28
1.28
1.28
Collection
Total visit cost
$47.74
$51.56
the cost is $11.46. The total cost rises by the same proportionate increase as the increase in the
ANALYZING MIXED COSTS
It is important for planning purposes for the manager to know how to deal with mixed costs
because they occur so often. For
example, telephone, maintenance, repairs, and utilities are
portion representing having the
service (such as telephone) ready to use, and the variable portion of the cost represents a
portion of the charge for actual consumption of the service. We briefly discuss two very simple
more fixed or more variable and acts on that judgment. In the step method, themanager exam
examined at its high level and at its low level. To compute the amount of variable cost involved,
change in the activity (or volume). Two examples are examined.
Table 84
ing steps are performed:
1.
Find the highest volume of 45,000 meals at a cost of $165,000 in September (see Table


Lowest volume


Divide the difference in cost ($70,000) by the difference in number of meals (25,000) to
71
4.

Compute the fixed overhead rate as
Total cost
Total cost
c.

Proof totals: $39,000 fixed portion at
The manager should recognize that large
or small dollar amounts can be adapted to
drug samples and their cost. In this example,
Table 85
contains the basic data
required for the highlow computation. Using the formula previously described, the following
steps are performed:
Find the highest volume of 1,000 samples at a cost of $5,000 (see Table 85) and the low

Lowest volume





difference in number of samples (250) to

4.

Compute the fixed overhead rate as follows:
Total cost
and Cost by Month
No. of
Employee
July
164,000
August
167,000
September
165,000
October
162,000
November
37,000
164,000
146,000
January
123,000
February
March
April
106,800
May
130,200
June
153,000
Number of Drug Samples and Cost for
November
Rep.
No. of Samples
J. Smith
A. Jones
B. Baker
G. Black
T. Potter
D. Conner

Total cost




highest and the lowest levels, and the computation assumes a straight-line relationship. The
CONTRIBUTION MARGIN, COST-VOLUME-PROFIT, AND PROFIT-VOLUME
RATIOS
The manager should know how to analyze the relationship of cost, volume, and profit. This
Contribution Margin



The contribution margin of $150,000 or 30%, in this example, represents variable cost
The importance of dividing costs into fixed and variable becomes apparent now, for a con
tribution margin computation demands either fixed or variable cost classifications; no mixed
Cost-Volume-Profit (CVP) Ratio or Break Even
The break-even point is the point when the contribution margin (i.e., net revenues less vari
able costs) equals the fixed costs. When operations exceed this break-even point, an excess of
revenues over expenses (income) is realized. But if operations does not reach the break-even
either by
73
Figure 86



Less: fixed cost

Operating income
$30,000
Three lines were first drawn to create the chart. They were total fixed costs of $120,000,
CVP charts allow a visual illustration of the relationships that is very effective for the
manager.
Profit-Volume (PV) Ratio
Cost-Volume-Profit (CVP) Chart for a Wellness Clinic.
Courtesy of Resource Group, Ltd., Dallas, Texas.
$1
00
$200
$300
$400
0
1
000
2000
3000
4000
r
iab
le C
ost
Line
x
ed C
ost
Line
eak-E
n
Po
in
nu
e
Line
xed Cost
s
r
iable Costs
Visits
nue (in thousands of dollars)
Figure 87



Profit-Volume (PV) Chart for a Wellness Clinic.
Courtesy of Resource Group, Ltd., Dallas, Texas.
+90
+80
+70
+60
+50
+40
+30
+20
+10
0
10
20
30
40
50
70
80
90
100
110
120
130
140
+80
+70
+60
+50
+40
+30
+10
0
10
20
30
40
50
60
70
80
90
110
120
130
140
150
Revenue
Break-Even
Point
Fixed Cost
Recovered
75
On our chart, the profit pattern is illustrated by a line drawn from the beginning level of
the chart at the break-even point. When the diagonal line begins at $120,000, its intersection
We can prove out the $120,000 versus $400,000 relationship as follows. Each dollar of revenue
enue level of $400,000, proved out as $120,000 divided by .30 = $400,000. This can be written
to show the effect of changes in volume. Both PV and CVP are useful when working with the
Contribution margins are also useful for showing profitability in other ways. An example
Figure 88
gins as the measure of profitability. Case volume (the number of cases of each DRG) is on the
vertical axis of the matrix, and the dollar amount of contribution margin per case is on the
Profitability DRG Volume/Margin Matrix.
Modified from R. Hankins and J. J. Baker,
Management Accounting for Health Care Organizations
(Sudbury, MA: Jones&
$1,000
$2,000
$3,000
$4,000
$5,000
50
100
150
200
250
300
450
400
350
089
DRG
127
DRG
088
DRG
014
DRG
116
DRG
430
DRG
462
ke
y:
DR
G$
014
$900
088
2,000
089
1,500
2,800
4,000
430
5,600
3,100
In performing a mixed-cost analysis, the manager is attempting to find the mixed costs aver
highest and
graph, and volume will be on the horizontal axis. All points are plotted, each point being
placed where cost and volume intersect for that line item. A regression line is then fitted to
the plotted points. The regression line basically represents the averageor a line of averages.
The average total fixed cost is found at the point where the regression line intersects with the
Two examples are examined. They match the highlow examples previously calculated.
Figure 89
presents the cafeteria data. The costs for cafeteria meals have been plotted on
the graph, and the regression line has been fitted to the plotted data points. The regression
line strikes the cost axis at a certain point; that amount represents the fixed cost portion of
the mixed cost. The balance (or the total less the fixed cost portion) represents the variable
Figure810
the cost axis at the point representing the fixed-cost portion of the mixed cost. The balance
(the total less the fixed cost portion) represents the variable portion. Further discussions of this
The examples presented here have regression lines fitted visually. However, computer
programs are available that will place the regression line through statistical analysis as a
means that the sum of the squares of the deviations from plotted points to regression line
is smaller than would occur from any other way the line could be fitted to the data: in other
line visually.
95
$1
85
$1
75
$1
65
$1
55
$1
45
$1
35
$1
25
$1
15
$1
05
$95
$85
20,000
30,000
40,000
lume
ost
s)
77
INFORMATION CHECKPOINT
What is needed?
Revenues, variable cost, and fixed cost for a unit, division,
How is it used?
the CPV or the PV ratio; use to plan and control
operations.

KEY TERMS
Cost-Profit-Volume
Profit-Volume Ratio
Variable Cost
Do you believe that contribution margins can help you manage in your present work? In
Drug Sample Scatter Graph for November.
$4,750
$4,500
$4,250
$4,000
$3,750
$3,500
$3,250
$3,000
500
600
6.
Do you believe your organization could use these analysis tools more often than is now
1.
, 9th ed. (Englewood Cliffs, NJ:
J. J. Baker,
Activity-Based Costing and Activity-Based Management for Health Care
79
Inventory and
Depreciation
OVERVIEW: THE INVENTORY CONCEPT
This overview concerns both the inventory concept and
Concept of Inventory in Healthcare Organizations
Inventory includes all the items (goods) that an orga
nization has for sale in the normal course of its business.
items that compose the inventory are expected to be used
Types of Inventory in Healthcare Organizations
Various healthcare organizations (or departments within
organizations) deal with inventory and must account for it.
The hospital gift shop and the cafeteria, for example, own
inventory and must account for it. All pharmacies (hospital-
based, retail brick-and-mortar, or mail order pharmacies)
own inventory in the normal course of their business.
In manufacturing companies, inventory typically con
finished goods that are for sale. We might think that most
inventory items for sale in a healthcare organization are not
manufactured, but are finished goods instead. However,
flour, eggs, butter, and so on (raw materials), mixes the
cost of goods sold.
Understand the difference
Be able to calculate inventory
turnover.
expense and the reserve for
depreciation.
Understand how to compute
Be able to identify the five
INVENTORY AND COST OF GOODS SOLD (GOODS SUCH AS DRUGS)
Turning Inventory into Cost of Goods (or Drugs) Sold
tory and is recognized as cost. When the item is recognized as cost, it becomes cost of goods
sold. (Also note that different terminology may be used. In some organizations cost of goods
to its customers is the largest single expense of the business.
Recording Inventory and Cost of Goods (or Drugs) Sold
Recording inventory and cost of goods (or drugs) sold is a sequence of events.
Figure 91
r#FHJOOJOH
JOWFOUPSZ
\tJOWFOUPSZ
r1VSDIBTFT
r#FHJOOJOH
JOWFOUPSZ
r&OEJOH
JOWFOUPSZ
\tJOWFOUPSZ
r$PTU
JOWFOUPSZ
Purchases added to inventory will typically include freight in, or the shipping costs to
deliver the items to you. Any discounts received on the purchases should be subtracted from the
macy Inventory is shown in the chapter about estimates and benchmarking.
or
y
R
ecor
ded
rc
hases
R
ecor
ded
ed
ed
or
y
R
ecor
ded
In
v
ent
or
y
ost of Goods
Av
ailab
le
f
or S
ale
In
v
ent
or
y
ost of Goods
Sol
=

rc
hases
eight In
Recording Inventory in the Accounting Cycle.
Understanding Inventory and Depreciation Concepts
Gross Margin Computation
Gross margin equals revenue from sales less the cost of goods sold. Gross margin is often
expressed as a percentage. Thus, a pharmacys gross margin might appear as follows:


An organizations gross margin percentage can be readily compared to industry standards.
organizations financial statements, as explained in the following sections.
inventory as the first costs moved out into cost of goods sold when a sale occurs. How will this
ure will be higher (because when the oldest inventory moves out first, the ending inventory will
placed into inventory as the first costs moved out into cost of goods sold when a sale occurs.
inventory figure will be lower (because when the latest inventory moves out first, the ending
inventory will be based on costs of the earliest purchases, which we assume will have cost less).
Other Inventory Treatments
Two other inventory treatments deserve mention, as follows.
period. (The weighted average inventory method is also called the average cost method.) The
83
FIFO Inventory Effect

Beginning Inventory
Less: Ending Inventory






Earnings Before Tax
Income Tax
Earnings After Tax
Note: Ending inventory computed as number of units in the beginning inventory plus
FIFO Inventory Effect
example, a physicians office may expense all drug purchases as supplies at the time of purchase
and never count such drugs as inventory. This treatment might be justified when such sup
plies were only a small part of the practice expenses. However, if the physician is purchasing
very expensive drugs and administering them in the office (infusing expensive drugs is a good
example), then not recognizing any such drugs being held as inventory on the financial state
INVENTORY TRACKING
The two most typical inventory-tracking systems are described as follows.
Understanding Inventory and Depreciation Concepts
whereby transactions are entered simultaneously.)
inventory system in the pharmacy department of a hospital.
Periodic Inventory System
With a periodic inventory system, the healthcare organization does not keep a continuous
record that identifies every individual inventory item on hand. Instead, at the end of the
period the organization physically counts the inventory items on hand. Then costs per item
are attached to the inventory counts in order to arrive at the cost of the inventory at the end of
the period (the ending inventory).
Necessary Adjustments
Certain inventory adjustments will commonly become necessary, as discussed here.
LIFO Inventory Effect
LIFO Inventory Effect

Beginning Inventory
Less: Ending Inventory






Earnings Before Tax
Income Tax
Earnings After Tax
Note: Ending inventory computed as number of units purchased plus number of units
in the beginning inventory less number of units soldcount newest units sold first.
85
Shortages
When the periodic inventory results are compared to the inventory balance on the finan
cial statements, it is not uncommon to find that the actual physical inventory amount is
less than the amount recorded on the books. This difference, or shortage, is commonly
termed shrinkage. The inventory amount on the books must be reduced to the actual
amount per the periodic inventory, and the resulting shrinkage cost must be recorded as
macy inventory will contain drugs that have sell by or use by expiration dates. Obsolete
inventory items should be discarded. Their cost must be removed from the cost of inventory on
INVENTORY DISTRIBUTION SYSTEMS
The ability to track inventory is directly impacted by the type of documentation required for
removing items from inventory. Different types of inventory require different types of distribu
tion systems. Thus, removing an item from a particular type of inventory needs documentation
Distribution Using Sign-Off Forms
For example, drawing light bulbs from the Maintenance Department inventory does not require
a requisition for light bulbs must always be attached to a Maintenance Department work order.
Some responsible person has signed off on this work order, and it shows the reason for the
was responsible for generating the order.
The distribution system for medical devices held in inventory typically requires a different
type of requisition. (One reason: Medical devices are more expensive than light bulbs.) The
inventory requisition is usually triggered by the doctors orders, and more than one level of
sign-off is typically required before the device is delivered to the operating room. Thus, tracking
this inventory item may require multiple steps.
Distribution Using Robotic Technology
tion within a facility.
Background
Relative to drugs or pharmaceutical inventory, it should be noted that there are some charac
teristics that differentiate the pharmaceutical inventory from the rest of a hospitals inventory
Understanding Inventory and Depreciation Concepts
Unit-dose dispensing of medication was developed in the 1960s to support nurses in medication
tions, as a manual system it is highly labor intensive. Automation has been developed to support
the bin-filling process. Advantages of the robotic cartfilling method include improved accu
space requirements, and limited robot capacity.
The decision to purchase and implement an automated bin fill system should be based on
demonstrated improvements in service quality and patient care. Although the cost of a robot
CALCULATING INVENTORY TURNOVER
Inventory turnover is a ratio that shows how fast inventory is sold, or turns over. The computa
Figure 92
Step 1. First compute Average Inventory:
Beginning Inventory plus Ending Inventory divided by two equals Average Inventory
Step 2. Next compute Inventory Turnover:
Cost of Goods Sold (or Cost of Sales) divided by Average Inventory equals Inventory Turnover
Step 1. $100,000 (beginning inventory) plus $150,000 (ending inventory) divided by 2 equals
$125,000 (average inventory).
Sold
Inventory
Turnover
divided
by
equals
Beginning
Inventory
plus
2
equals
Ending
Inventory
divided
by
Actual
Inventory
ratio that show
how fast th
inventory is sold
Calculating Inventory Turnover.
87
Step 2. $500,000 (cost of goods sold, or cost of sales) divided by $125,000 (average inventory)
equals 4.0 (inventory turnover).
An organizations inventory turnover ratio can be readily compared to industry standards.
OVERVIEW: THE DEPRECIATION CONCEPT
We recognize the cost of owning buildings and equipment through depreciation expense.
When the cost is spread, or allocated, over a period of years, each years financial statements (for
ple, a piece of laboratory equipment is purchased for $20,000. It has a useful life of five years. So
Salvage Value
have salvage value at the end of the depreciated period. Salvage value, also known as residual
If the laboratory equipment is expected to have a salvage value of $1,000 at the end of its five-
The Reserve for Depreciation
Depreciation expense over the years is accumulated into the reserve for depreciation. In other
words, the reserve for depreciation holds the cumulative amount of depreciation expense
Understanding Inventory and Depreciation Concepts
Another way to think about this is to view the reserve for depreciation as holding all the depre
Interrelationship of Depreciation Expense and the Reserve for Depreciation
Depreciation expense for the year is recorded in the income statement. At the same time, an
equivalent amount is added to the cumulative amount that has been accumulating within the
is, if $25,000 is recognized as depreciation expense in the income statement, then $25,000
Figure 93
r%FUFSNJOF
r4VCUSBDU
SFTFSWF
r5IF
Figure 94
Interrelationship of Depreciation Expense and Reserve for Depreciation in the Accounting
$25,000
depreciation expense is
recognized on the
Income Statement
$25,000
added to the cumulative
Reserve for Depreciation
89
Just as book value means value that is recorded on the organizations books, book deprecia
tion means depreciation that is recorded on the books. Book depreciation is the depreciation
expense recorded in the financial accounting records and reflected on the financial statements.
Tax depreciation, on the other hand, is depreciation that is computed for tax purposes and
discussed in the final section of this chapter.
You as a manager will most likely be using book depreciation in your planning, control, and
Table 91
illustrates the straight-line depreciation
Table 92
ing $10,000 with a 5-year useful life and a $1,000 salvage value. The depreciation expense
would thus equal $1,800 for each year in this example, because we must leave $1,000 at the
per year.)
ciation will be recognized in Year 1. If this is the case, the remaining half-year of depreciation
chapter.
Cost
expense as it is recognized
undepreciate
Understanding Inventory and Depreciation Concepts
The Sum-of-the-Years Digits (SYD) accelerated depreciation
The Double-Declining Balance (DDB) accelerated
beginning of each year by a constant percentage, or factor. In the case of DDB, the constant
at the beginning of each year by a constant percentage, or factor. In the case of 150% DB,
however, the constant factor is half again or 150% of the straight-line rate.
a fixed amount of depreciation to each unit of service or output that is produced by equipment.
Straight-Line Depreciation: Five-Year Life with No Salvage Value
(to Be Depreciated)
Depreciation
per Year*
Accumulated
Depreciation
(Reserve for
Depreciation)
$10,000
Year 1
Year 2

Year 3

Year 4

Year 5
10,000
*$10,000 divided by 5 years = $2,000 per year.
Straight-Line Depreciation: Five-Year Life with Salvage Value
(to Be Depreciated)
Depreciation
per Year*
Accumulated
Depreciation
(Reserve for
Depreciation)
Undepreciated Cost
$10,000

$10,000
Year 1
Year 2

Year 3

Year 4

7,200
Year 5
*$9,000 divided by 5 years = $1,800 per year.
**Remaining salvage value.
91
Units of Production is a manufacturers term for manufacturing, or producing, a product.
Units of Service more properly describes the medical equipment providing services in health
fixed total amount of units of service. This fixed amount is the overall total for the life of the
equipment. Then the number of units of service actually provided each year is depreciated.
COMPUTING TAX DEPRECIATION
Overview
Tax depreciation, as previously defined, means depreciation that is computed for tax pur
poses and is reflected on the applicable tax returns of the organization. The methods of tax
depreciation in effect at the time of this writing fall under the Modified Accelerated Cost Recov
ery System as described here.
Modified Accelerated Cost Recovery System (MACRS)
The Modified Accelerated Cost Recovery System (MACRS) is currently used to depreciate most
business and investment property for tax purposes. MACRS presently consists of two deprecia
General Depreciation System (GDS)
nal Revenue Service rules and regulations, although there are certain exceptions. GDS provides
nine property classifications for useful life, including 3-, 5-, 7-, and 10-year property, and 15-, 20-,
and 25-year property, along with residential rental property and nonresidential real property. For
example, computers, calculators, and copiers fall into the 5-year property classification while office
Alternative Depreciation System (ADS)
The Alternative Depreciation System (ADS) is required for particular properties including,
for example, any tax-exempt use property.
ADS uses fixed ADS recovery periods, along with
straight-line depreciation. ADS can also be used for certain eligible property, even though the
in this section may have been placed into effect at any point in time. More information can be
obtained from the recent Internal Revenue Service Publication 946 How to Depreciate Property.
Understanding Inventory and Depreciation Concepts
INFORMATION CHECKPOINT
What is needed?
Where is it found?
With your supervisor or in the accounting and/or administra
How is it used?

KEY TERMS
Book Value
Inventory
Inventory Turnover
Salvage Value
Do you or your supervisor have to deal with inventory? If so, please describe.
Have you ever had to count physical inventory? If so, please describe the process.
Do you or your supervisor have to deal with depreciation expense? If so, please describe.
4.
Have you ever had to compute depreciation expense? If so, please describe the
1.
Agency for Healthcare Research and Quality. National Healthcare Disparities Report,
2.
L. F. Wolper,
Health Care Administration: Managing Organized Delivery Systems
(5th ed.)
Department of the Treasury, Internal Revenue Service.
How to Depreciate Property
tion 946 (Washington, DC: U.S. Government, 2011).
Ibid., Table 4-1.
93
r5IF
BTTFU\bT
years and decreases by one each year thereafter. (Thus, for a five-year useful life, the
numerators are 5, 4, 3, 2, and 1 respectively.)
The denominator of the SYD fraction is the sum of the years digits of the assets life.
(Thus, for a five -year useful life, the sum of 5 + 4 + 3 + 2 + 1 equals 15, which is the
denominator.)
Table 9-A1
illustrates the computation for each year. The depreciable cost of $10,000 is divided
by 15 to arrive at $666.66. Thus, one-fifteenth or $666.66 is multiplied by 5 for the first year ($3,333
centage, or factor. In the case of DDB, the constant factor is twice the straight-line rate (thus
Table 9-A2
r\r
BTTFU\bT
Multiply the 0.20 by 2 (or double) to arrive at the 0.40 double-declining factor.
A Further Discussion
Units of Service
Depreciation
Sum-of-the-Years Digits Depreciation: Five-Year Life with No Salvage Value
Depreciation Computation
Accumulated
the-Years
Depreciation
Undepreciated
Depreciable Cost
Depreciation
(Reserve for
(to Be Depreciated)
(for Computation)
Fraction**
Depreciation)
$10,000
Year 1
$10,000
5/15
Year 2
10,000
4/15
Year 3
10,000
3/15
Year 4
10,000
2/15
Year 5
10,000
1/15
10,000
*Sum-of-the-Years Digits = 15 = (1 + 2 + 3 + 4 + 5).
**One-fteenth of $10,000 = $666.66.
Understanding Inventory and Depreciation Concepts
Double-Declining Balance Depreciation: Five-Year Life with No Salvage Value
Depreciation Computation
Double
Accumulated
Carry-forward
Declining
Depreciation
Undepreciated
Book Value
Balance
Depreciation
(Reserve for
(to Be Depreciated)
(for Computation)
Factor
Depreciation)
$10,000
Year 1
$10,000
Year 2
Year 3
7,840
2,160
Year 4
2,160
Year 5
10,000
*$10,000 divided by 5 years equals 0.20 times 2 (double) equals 0.40 factor.
97
r'PS
:FBS
:FBS
depreciation for Year 1 also equals $4,000. The accumulated depreciation of $4,000 is
book value, of $6,000 at the end of Year 1.
Year 2 depreciation expense. The Year 2 depreciation of $2,400 is added to the accumu
book value, of $3,600 at the end of Year 2.
Year 3 depreciation expense. The Year 3 depreciation of $1,440 is added to the accumu
book value, of $2,160 at the end of Year 3.
than does the declining balance computation. Thus, as we arrive at Year 4 in this example, we
r5P
:FBS
value of $2,160 is divided by the remaining years of useful life, which in this case would be
2 years. Thus $2,160 divided by 2 years equals straight-line depreciation per year for Year
4 and for Year 5 of $1,080 per year.
the switch to straight line is made for the remaining Year 4 and Year 5, as illustrated in
Table 9-A2.
of course, with the method and with the number of years of useful life.
Table9-A3
illustrates
Declining Balance Rates by Property Class
Property Class
3-year
3rd
5-year
7-year
10-year
15-year
150% DB
10.0%
20-year
150% DB
7.5%
Reproduced from Internal Revenue Service, Publication 964, How to Depreciate Property, p. 43.
Understanding Inventory and Depreciation Concepts
tion. (Note that the Five-year Property Class [or Useful Life Class] for 200% declining balance
line would be made. This is consistent with our example in Table 9-A2.)
stant percentage, or factor. In the case of 150% DB, however, the constant factor is half again or
Table 9-A4
r\r
BTTFU\bT
Multiply the 0.20 by 150% (or half again) to arrive at the 0.30 150% DB factor.
The 150% DB computation follows the same pattern as the double-declining example just
r5IF
ZFBS\r
The 150% DB switches to straight line in Year 3 instead of Year 4 as in the previous
ing a fixed amount of depreciation to each unit of service or output that is produced by equip
ment. The Units of Production is a manufacturers term for manufacturing, or producing, a
product. Units of Service more properly describes the medical equipment providing services
fixed total amount of units of service. This fixed amount is the overall total for the life of the
equipment. Then the number of units of service actually provided each year is depreciated.
Table 9-A5
r5IF
TFSWJDF
Units of Service in Year 1 total 1,000. Thus 1,000 units times $2.00 per unit equals $2,000
Year 1 depreciation.
Units of Service in Year 2 total 900. Thus 900 units times $2.00 per unit equals $1,800 Year
The computation continues in this manner until the total 5,000 units of service are exhausted.
99
150% Declining Balance Depreciation: Five-Year Life with No Salvage Value
Depreciation Computation
150%
Accumulated
Carry-Forward
Declining
Depreciation
Undepreciated
Book Value
Balance
Depreciation
(Reserve for
(to Be Depreciated)
(for Computation)
Factor
Depreciation)
$10,000
Year 1
$10,000
$7,000
Year 2
7,000
2,100
5,100
Year 3
Year 4
Year 5
10,000
*$10,000 divided by 5 years equals 0.20 times half again (150%) equals 0.30 factor.
Understanding Inventory and Depreciation Concepts
Units of Service (Units of Production) Depreciation: Five-Years of Service with No Salvage Value
Depreciation Computation
Accumulated
Depreciation
Undepreciated
Units of Service
Depreciation
Depreciation
(Reserve for
(to Be Depreciated)
per Year
Depreciation)
$10,000
Year 1
Year 2
Year 3
Year 4
1,100
7,600
Year 5
10,000
Total Units
*$10,000 divided by total units (5,000) equals depreciation per unit of $2.00.
101
STAFFING REQUIREMENTS
five days a week, generally Monday through Friday. But in
health care, many positions must be filled, or covered, all
seven days of the week. Furthermore, in most businesses,
a position is filled for that day if the employee works an
eight-hour dayfrom 9:00
to 5:00
, for example. But
in health care, many positions must also be filled, or cov
ered, 24 hours a day. The patients need care on Saturday
and Sunday, as well as Monday through Friday, and patients
need care around the clock, 24 hours a day.
Thus, healthcare employees work in shifts. The shifts are
apiece equals 24-hour coverage. Some facilities have gone
to 12-hour shifts. In their case, two 12-hour shifts equal
24-hour coverage. The manager is responsible for seeing
that an employee is present and working for each position
and for every shift required for that position. Therefore,
it is necessary to understand and use the staffing measure
ment known as the full-time equivalent (FTE). Two differ
equivalent is a measure to express the equivalent of an
employee (annualized) or a position (staffed) for the full
Annualizing is necessary because each employee that is eli
for the full number of hours paid for by the organization.
Understand the difference
time equivalents to
time equivalents to
Tie cost to staffing.
Describe regulatory
requirements that affect
Annualizing thus allows the full cost of the position to be computed through a burden approach.
Productive Versus Nonproductive Time
is not on duty: that is, not producing and therefore nonproductive. Paid-for vacation days,
260 days per year (total paid days) but works for only 235 days per year. The 235 days are pro
ductive time, and the remaining 25 days of holidays, sick days, vacation days, and education days
The area assigned to Bob is covered seven days per week for every week of the year.
Total days in business year
Bob doesnt work on weekends
Bobs paid days total per year amount to
Vacation days
Weekends
Bobs holidays
Bobs sick days
Bobs vacation days
Bobs education days

Total days lab area security guard position is covered
full-time employee paid for one year, including both productive and nonproductive (vacation,
Staffing Calculations to Annualize Positions
contains a two-step process to perform the staffing calculation by the annualizing
tor. In the example in Exhibit 102, the factor averages out to about 1.6.
off are not paid for. Thus two days off per week times 52 weeks equals 104
But not all paid days per year are worked. In this example, each employee
(RN, LPN, and Nurse Assistant [NA]) receives 35
(The personal leave days are intended to include holidays, sick leave,
continuing professional education
3 days; NAs

RN


NA

RN


NA
Courtesy of J. J. Baker and R. W. Baker, Dallas, Texas.
105
TO FILL A POSITION: ANOTHER WAY
TO CALCULATE FTES
The calculation of number of FTEs by the
out the schedule and the FTE computation.
tion in Exhibit104 is as follows. One full-time
equals 56 hours on duty. Therefore, to cover 7days per week, or 56 hours, requires 1.4 times a
Staffing Calculations to Fill Scheduled Positions
The term staffing, as used here, means the assigning of staff to fill scheduled positions. The
lent) for a particular position. For example, the cast room has to be staffed 24 hours a day, 7
days a week because it supports the emergency room, and therefore has to provide service at
), the evening shift

Total
To Cover Position
7 Days per Week
per week equals 56 hours on duty. Therefore, to cover 7 days per week or 56 hours
Master Staffing Plan for
Nursing Unit
NAs
24-Hour Total
Courtesy of J.J. Baker and R.W. Baker,
Dallas, Texas.
One 8-hour shift times 5 days per week equals a 40-hour work week. One 40-hour work week
times 52 weeks equals a person-year of 2,080 hours. Therefore, one person-year of 2,080 hours
equals a full-time position filled for one full year. This measure is our baseline.
It takes seven days to fill the day shift cast room position from Monday through Sunday, as
required. Seven days is 140% of five days (seven divided by five equals 140%), or, expressed
another way, is 1.4. The FTE for the day shift cast room position is 1.4. If a seven-day schedule is
be necessary to fill the position for the desired length of time, measuring this figure against the
standard basic work week. For example, if the standard work week is 40 hours and a receptionist
position is to be filled for just 20 hours per week, then the FTE for that position would be 0.5
FTE (20 hours to fill the position divided by a 40-hour standard work week).
Table 101
Tying Cost to Staffing
holiday, sick pay, and other nonproductive days accounted for in the formula (review Exhibit
day, sick pay, and other nonproductive days accounted for in the formula (review Exhibit 104
programs and services.
Actual cost is attached to staffing in the books and records through a subsidiary
journal
illustrates a subsidiary journal in which employee

No. of Annual Hours
No. of Annual Hours
Job Position
No. of FTEs
Paid at 2,080 Hours*
Paid at 1,950 Hours**
Supervisor
4,576
Techs
7.7
16,016
15,015
1.2
Aides, orderlies
1.0
Clerical
1.2
Totals
16.3
*40 hours per week
52 weeks
**37.5 hours per week
52 weeks
Calculations to Staff the Operating Room
107
Week Ended

Hours Worked


Overtime
Gross
Medicare
Overtime
Total
Premiums
Earnings
Tax
Tax
J.F. Green




Courtesy of Resource Group, Ltd., Dallas, Texas.
The hourly rate, base pay, and overtime premiums are noted, and gross earnings are com
illustrates a time card for one employee for a week-long period. This type of
upon which the payroll process is based. Thus, it is considered a basic transaction record. In this
example, time in and time out are recorded daily. The resulting regular and overtime hours are
recorded separately for each day worked. Although the appearance of the time card may vary,
and it may be recorded within a computer instead of on a hard copy, the essential transaction is
shown in columns 1 and 2, with regular time in column 1 and overtime in column2. Nonpro
ductive time is shown in column 3, and columns 1, 2, and 3 are totaled to arrive at column 4,
labeled Total [actual] Hours. The final actual figure is the FTE figure in column 5.
The report is biweekly and thus is for a 2-week period. The standard work week amounts
to 40 hours, so the biweekly standard work period amounts to 80 hours. Note the first line
Time Card
J.F. Green
Week ending
Overtime
Overtime

Tuesday
Wednesday



Total regular hours
Total overtime

Courtesy of Resource Group, Ltd., Dallas, Texas.
Example of a Time Record
109
Productive
item, which is for the manager of the emergency department nursing service. The actual hours
worked in column 4 amount to 80, and the actual FTE figure in column 5 is 1.0. We can tell
and variance portions of this report structure will be more thoroughly discussed in the chapter
and forecasts. Appropriate staffing is the responsibility of the manager.
REGULATORY REQUIREMENTS REGARDING STAFFING
As if staffing a healthcare organization wasnt complex enough because of the typical need to
cover 24 hours a day, there are regulatory requirements that impact staffing configurations.
The IMPACT Act Staffing Report Requirements
This complexity is no more apparent than in the new (2016) skilled nursing facility staffing
requirements embodied in P.L. 113-185, the Improving Medicare Post-Acute Care Transforma
tion Act of 2014 (the IMPACT Act). In essence, the Centers for Medicare and Medicaid Services
Regulatory Specifics About Staffing Reports
tive Payment System under the heading Staffing Data Collection.
The regulation had its
genesis in the Affordable Care Act, P.L. 111-148. Section 1128I(g) specifies that a facility is
required to electronically submitdirect care staffing information, including information
for agency and contract staff, based on payroll and other verifiable and auditable data in a
Note the phrase verifiable and auditable data. Previously, facilities could
self-report such staffing information, but this information did not have to be verifiable and
Additional Reporting Requirements
r5IF
DBUFHPSZ
XPSL
DFSUJGJFE
FNQMPZFF
QFSGPSNT
\tTVDI
XIFUIFS
UIF
FNQMPZFF
The hours of care provided by each category of certified employees per resident per day
111
We draw your attention to the two phrases requiring the following: the category of work
a certified employee performs and the hours of care provided by each category of certified
employees per resident per day. What can your organization do to ensure compliance with
from government sources or from your professional organizations? And if such guidance is
made available, how do your own records compare? What adjustments or additions should
ments to these requirements will be forthcoming over each succeeding year, as experience pro
Funding Provided for Report Improvements
The IMPACT Act provides a one-time allocation of $11 million to implement these improve
Compare website and its 5-Star Rating appear in the chapter titled, Standardizing Measures
From a public domain perspective, Medicare.gov/Nursing Home Compare serves as a useful
State Certificate-of-Need (CON) Laws and Regulations
Additional regulatory sources have had an impact on staffing. Central to health planning in the
United States are Certificate-of-Need (CON) regulations. To place CON in its proper context, a
brief overview of health planning is in order.
Health Planning Background
Shortly after Medicare was enacted into law in 1965, the Comprehensive Health Planning
and Services Act (CHP) was passed in 1966. It was noteworthy insofar as it encouraged states
cation of planning that went beyond just allocating funds for hospital construction as in the
historically important Hospital Survey and Construction Act of 1946, popularly known as the
Planning was carried out by state-level CHP-A agencies and local CHP-B agencies. The for
mer was charged with developing a statewide, comprehensive plan for the delivery of health
services in each state; the latter were responsible for assessing the health-services needs of popu
While it is beyond the scope of this text to analyze in depth why the CHP program didnt
deliver as promised, suffice it to say that it had no resource development component. Resources
Congress sought to rectify CHPs shortcomings by enacting the National Health Planning
and Resources Development Act in 1974. The Act created state-level organizations that were
charged with developing and implementing the state health plan. Operationally, though, it was
the health systems agencies (HSAs), local organizations, that served a regulatory function. They
were charged with developing annual plans to improve health services in their regions.
The Certificate-of-Need (CON) Program
The regulatory leverage that states used to act on proposals for changes in health services was
(and is) the Certificate-of-Need (CON) program. The program was originally aimed at hospitals
and nursing homes that were permitted to spend funds on services, facilities, and equipment
only if a need had been identified in the HSA plan for their region. The basic assumption
underlying CON regulation is that excess capacity (in the form of facility overbuilding) directly
ning agency.
program, law, or agency according to the National Conference of State Legislatures.
These
states tend to concentrate activities on outpatient facilities and long-term care. This is largely
due to the trend toward free-standing, physician-owned facilities that constitute an increasing
How Do CON-Related Regulations Affect Staffing?
ing to expand its bed capacity, new staff such as RNs, LPNs, and possibly even therapists will be
gram capacity, new nursingrelated and social work staff will be required.
A prime example of state regulatory requirements on minimum staffing levels in nursing
homes may be found in Nursing Home Staffing Standards in State Statutes and Regulations.
every state it lists three variables:
Staff Requirement (i.e., RN, LPN/LVN per hour/per bed)
Direct Care Requirements (i.e., Two people on duty at all times)
SUMMARY
Staffing operations throughout the U.S. are obviously impacted by regulations about staffing
113
INFORMATION CHECKPOINT
What is needed?
The original record of time and the subsidiary journal
summary.
Where is it found?
The original record can be found at any check-in point; the
subsidiary journal summary can be found with a supervisor
How is it used?
It is reviewed as historical evidence of results achieved. It is
also reviewed by managers seeking to perform future staff
ing in an efficient manner.

KEY TERMS
Full-Time Equivalents (FTEs)
Nonproductive Time
Productive Time
Are you or your immediate supervisor responsible for staffing?
6.
If your state has certificate-of-need (CON) regulations in place, has your organization
1.
J. J. Baker,
Prospective Payment for Long-Term Care: An Annual Guide
(Gaithersburg, MD:
4.
What is Nursing Home Compare?, Medicare.gov, http://
www.medicare.gov/nursing
7.
R. I. Field, Health Care Regulation in America: Complexity, Confrontation, and Compro
mise (New York, NY: Oxford University Press, 2007).
8.
P. L. Barton,
Understanding the U.S. Health Services System
(4th ed.) (Chicago, IL: Health
Health Care Regulation.
11.
National Conference of State Legislatures, CONCertificate of Need State Laws,
http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx, accessed
12.
Charlene Harrington, Nursing Home Staffing Standards in State Statutes and Regulations,
The National Long-Term Care Ombudsman Resource Center, http://ltcombudsman
.org/uploads/files/support/Harrington-state-staffing-table-2010_(1).pdf, accessed
115
Report and Measure
Reporting as a Tool
UNDERSTANDING THE MAJOR REPORTS
It is not our intention to convert you into an accoun
tant.
Therefore, our discussion of the major financial reports
will center on the concept of each report and not on the
precise accounting entries that are necessary to make the
statement balance. The first concept we will discuss is that
ing, a transaction does not enter the books until cash is
enue is recorded when it is earnednot when payment
is receivedand expenses are recorded when they are
There are four basic financial statements. You can think
ment of revenue and expense, the statement of fund bal
ance or net worth, and the statement of cash flows. The four
it owes, and basically, what it is worth (although the termi
nology uses
fund balance
rather than
worth
or
for non
the combined total of what the
organization owes and what
Know what a subsidiary
illustrates these concepts. A single date (not a period of time) is at the top of
rent left-hand column amount to $963,000. Total liabilities and fund balance also amount to
$963,000; the balance sheet balances. The total liabilities amount to $545,000 and the total fund
Two types of liabilities are shown: current liabilities and long-term debt. Current liabilities
are those expected to be paid within the next yearthus current liabilities. Long-term debt
is not due within a year. (In fact, most long-term debt is due over a period of many years.) The
from the long-term debt amount and has been moved up into the current liabilities section.
Once again, because our intent is not to make an accountant of you, we will not be discussing
generally accepted accounting principles (GAAP) either. Financial accounting and the result
ing reports intended for third-party use must be prepared in accordance with GAAP. However,
managerial accounting for internal purposes in the organization does not necessarily have to
adhere to GAAP. One of the requirements of GAAP is that unrestricted fund balances be sepa
rated from restricted fund balances on the statements, so you see two appropriate line items
We should also mention that the standards underlying generally accepted accounting
principles within the United States are produced by the Financial Accounting Standards
be required to adopt certain international accounting standards as produced by the Inter
national Accounting Standards Board (IASB). Benefits would include global comparability
Any further discussion of
these accounting issues is beyond the scope of this text.
STATEMENT OF REVENUE AND EXPENSE
The formula for a very condensed statement of revenue and expense would look like this:
point in time). The concept is that revenue, or inflow, less expenses, or outflow, results in an
excess of revenue over expenses if the year has been good, or perhaps an excess of expenses
Reporting as a Too
in the left column. If the balance sheet is a snapshot, then the statement of
revenue and
expenses is a diary, because it is a record of transactions over the period of a year.
Operating


Prepaid Insurance

Property, Plant, and Equipment



long-term debt

accrued expenses

Total Current Liabilities
Long-Term Debt
Long-Term Debt
Total Liabilities



Total Fund Balances
Total Liabilities and Fund Balance
121
transactions are reported; in this
case, interest income of $5,000 under the heading Nonoperating Gains (Losses). The total
of $120,000 ($115,000 plus $5,000) is reported as an increase in fund balance. This figure
carries forward to the next major report, known as the statement of changes in fund balance.
The excess of revenue over expenses flows back into equity or fund balance through the
shows a balance at the
first of the year, then it adds the excess of revenue over expenses (in the amount of $115,000)
For the Year Ending


Total Operating Revenue
Medical/surgical services
Therapy services

Other professional services
Support services
General services

Total Operating Expenses
Interest Income


Westside Clinic Statement of Revenue and Expenses
Reporting as a Too
plus some interest income (in the amount of $5,000) to arrive at the balance at the end of
the year.
But there is one more major reportthe statement of cash flowsand we will examine it next.
STATEMENT OF CASH FLOWS
To perceive why a statement of cash flows is necessary, we must first revisit the concept of accrual
basis accounting. If cash is not paid or received when revenues and expenses are entered on the
booksthe usual situation in accrual accountingwhat happens? The other side of the entry
for revenues is accounts receivable, and the other side of the entry for
ated. (Land is an exception to this rule: it is never depreciated.) Depreciation is recognized
presents the current period cash flow. In effect, this statement takes the
basis statements and converts them to a cash flow for the period through a series of reconciling
Understanding the cash/noncash concept makes sense of this statement. The
starting point
is the income from operations, the subtotal from the statement of revenue and
is indeed $190,000. So the fourth major reportthe statement of cash flowsinterlocks with
Westside Clinic Statement of Changes in Fund Balance
For the Year Ending
Balance First of Year
Balance End of Year
123
SUBSIDIARY REPORTS
The subsidiary reports are just that; subsidiary to the major reports. These reports
support
Westside Clinic Statement of Cash Flows
For the Year Ending

Depreciation and amortization
Interest expense

Patient accounts receivable
Accounts payable and accrued

Financing Activities





Financing Activities



Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
Reporting as a Too
schedules instead of
statementsa sure sign that they are subsidiary reports.
SUMMARY
) and a checklist for review of the statement of revenue
Did land, plant, and equipment increase or decrease significantly over the prior year?
INFORMATION CHECKPOINT
What is needed?
reports plus subsidiary reports for additional
Where is it found?
Possibly in the files of your supervisor or in the finance
or in the office of the administrator.
125
How is it used?
Study the financial statement to see how they fit together;
review. Understanding how the statements work will give

KEY TERMS
Subsidiary Reports
Does the concept of revenue less expense equaling an increase in equity or fund balance
Essentials of Cost Accounting for Health Care Organizations
2.
K. Tysiac, Still in Flux: Future of IFRS in U.S. Remains Unclear After SEC report,
Journal of Accountancy
(September 2012), www.journalofaccountancy.com/Issues/2012
Reporting as a Too
Performance Measures
THE IMPORTANCE OF RATIOS
Ratios are convenient and uniform measures that are
widely adopted in healthcare financial management.
They are important because they are so widely used,
especially because they are used for credit analysis. But a
ratio is only a number. It has to be considered within the
context of the operation. There is another caveat: ratio
analysis should be conducted as a comparative analysis.
In other words, one ratio standing alone with nothing to
compare it with does not mean very much. When inter
considered, and the reasons for such differences should
be sought. It is a good practice to compare results with
regional figures from similar institutions would be a good
agerial judgment must always be exercised when working
numerator
and one as the denominator. To calculate a ratio,
bottom number (the denominator) into the top number
tive Analysis (Financial Ratios and Benchmarking) Helps
Turn Around a Hospital uses financial ratios as indicators
of financial position. We highly recommend that you spend
time with this Case Study, as it will add depth and back
ground to the contents of this chapter.
In this chapter we examine liquidity, solvency, and prof
are widely used in healthcare organizations: four liquidity
types, two solvency types, and two profitability types. All are
discussed in this chapter.
Understand four types of
Understand two types of
solvency ratios.
Understand two types of
Debt Service Coverage Ratio (DSCR)
Maximum Annual Debt Service
Total Liabilities
Profitability Ratios
Total Operating Revenues
(Earnings Before Interest and Taxes)
Courtesy of Resource Group, Ltd., Dallas, Texas.
Financial and Operating Ratios as Performance Measure
LIQUIDITY RATIOS
ratios measure short-term sufficiency. As the name implies, they measure the
Current Ratio

This ratio is considered to be a measure of short-term debt-paying ability. However, it must
The standard by which the quick ratio is measured is generally 1 to 1. This computation, at
This ratio is considered to be an even more severe test of short-term debt-paying ability (even
more than the current ratio). The quick ratio is also known as the acid-test ratio, for obvious
example indicates the organization has 30 days worth of operating expenses represented in the
129
This computation represents the number of days in receivables. The older a receivable is, the
as performance.
There is no hard and fast rule for this computation because much depends on the mix of
payers in your organization. This example indicates that the organization has 60 days worth of
collection performance. There are many days receivables regional and
national figures to
compare with your own organizations computation.
Figure 121
shows how the information for the numerator and the denominator of each
enue and expense that were discussed in the preceding chapter and illustrates the source
of each figure in the four ratios just discussed. The multiple computations for days cash on
hand and for days receivables are further broken down into a three-step process. If you study
Analysis (Financial Ratios
and Benchmarking) Helps Turn Around a Hospital, you will soon
SOLVENCY RATIOS
Solvency ratios reflect the ability of the organization to pay the annual interest and principal
nization to be solvent: in other words, to have sufficient resources to meet its long-term
Debt Service Coverage Ratio
service:
Maximum Annual Debt Service

This ratio is universally used in credit analysis and figures prominently in the Mini-Case
Study.
Financial and Operating Ratios as Performance Measure
Courtesy of Resource Group, Ltd, Dallas, Texas.
$52,00
Accounts payable and accrued expenses
293,00
Total Current Liabilities
$345,000
Long-Term Debt
$252,000
Less Current Maturities of Long-Term Debt
(52,000)
200,00
Total Liabilities
$545,000
Fund Balances
Unrestricted fund balance
$418,000
Restricted fund balance
0
Total Fund Balances
418,00
Total Liabilities and Fund Balance
$963,000
Revenue
December 31, 20X2
345,00
= 1.36
Current Rati
1,845,000
36
= 5,05
190,000
5,05
= 37.5 days
1,885,000
(40,000)
1,845,000
345,00
= 1.27
Quick Ratio
Unrestricted Cash and Cash Equivalent
Cash Operating Expenses divided by
days in period (365)
1,800,000
36
= 4,93
250,000
4,93
= 50.7 days
2,000,000
1,800,000
Information obtained elsewhere
Balance Shee
131
The liabilities to fund balance or net worth computation is represented as total liabilities divided by
Total Liabilities

computed as long-term debt divided by fund balance. This computation is somewhat equivalent
Figure 122
shows how the information for the numerator and the denominator of each
of each figure in the two solvency ratios just discussed, along with each figure inthe two profit
ability ratios still to be discussed. When multiple computations are necessary, they are further
PROFITABILITY RATIOS
revenue over operating expense. Nonprofit organizations may not call this result a profit, but
for-profit or nonprofit organizations.
Operating Margin
operating
Total Operating Revenues

Financial and Operating Ratios as Performance Measure
Courtesy of Resource Group, Ltd, Dallas, Texas.
$133,000
133,000
Unrestricted fund balance
0
Total Fund Balances
140,000
Step
963,000
= 14.54%
6. Operating Margin (%)
2,000,000
5.75%
7. Liabilities to Fund Balanc
= 1.304
. Debt Service Coverage Ratio (DSCR)
120,000
20,000
180,000
Step
2
Maximum Annual Debt Service
72,000
Information derived elsewhere
= 2.
Total Operating Revenue
Unrestricted Fund Balanc
133
This is a broad measure in common use. Note the acronym EBIT, as its use is widespread in
marking) Helps Turn Around a Hospital, you will master this process too.
INFORMATION CHECKPOINT
Where is it found?
Possibly in your supervisors file; in the administrators office;
in the chief executive officers office.
How is it used?
ments/divisions/units; also use as benchmarks at various

KEY TERMS
Debt Service Coverage Ratio (DSCR)
4.
tive purposes? If the outside information was available, what ratios would you choose to
Financial and Operating Ratios as Performance Measure
The Time Value
The purpose of these computations is to evaluate the use
of money. The manager has many options as to where
return-on-investment method, and the answer is only an
Average Investment Amount
The original investment amount is a matter of record.
The average investment amount is arrived at by taking the
the advantage of accommodating whatever depreciation
mation necessary for the computation is obtained from the
Compute an unadjusted rate
Understand how to use a
Compute an internal rate of
Understand the payback
period theory.
PRESENT-VALUE ANALYSIS
The concept of present-value analysis is based on the time value of money. Inherent in this con
cept is the fact that the value of a dollar today is more than the value of a dollar in the future:
thus the present value terminology. Furthermore, the further in the future the receipt of
your dollar occurs, the less it is worth. Think of a dollar bill dwindling in size more and more
We learned about compound interest in math class. We learned that
earns interest (assumed) at a rate of 5% for one year,
which earns interest (assumed) at the rate of 5% for another year,
and we have a compound amount at the end of year 2 amounting to $551
Using this concept, it is possible to restate the present values of $1 to be paid out or received
at the end of each of these years. It is possible to use equations, but that is not necessary
because we have present-value tables (also called look-up tables, because one can look-up
Appendix 13-A.
All of the figures on the present-value table represent the value of a dollar. The interest rate
available on this version of the table is on the horizontal columns and ranges from 1% to 20%.
The number of years in the period is on the vertical; in this version of the table, the number of
years ranges from 1 to 30. To look up a present value, find the column for the proper interest.
Then find the line for the proper number of years. Then trace down the interest column and
factor) that represents the value of $1 according to your assumptions. For example, find the
year 10 by reading down the left-hand column labeled Year. Then read across that line until
The present value of $1 under these assumptions (10 year/10%) is about 38.5 cents (shown as
culator. A reference to business analyst calculators is contained in the Appendix
entitled Web-
Based and Software Learning Tools. This can be found at the end of this text.
Besides using
either the look-up table or the business calculator, you can use a function on your computer
present value of any other number. You merely multiply the other number by the factor you
found on the tableor in the calculator or the computer. Say, for example, you want to find the
present value of $8,000 under the assumption used above (10 years/10%). You simply multiply
A compound interest table is also included at the end of this chapter in Appendix 13-B,
along with a table showing the present value of an annuity of $1.00 in Appendix 13-C, so that
The Time Value of Money
the earnings occur. This means more precision in the computation because IRR calculates from
The IRR computation is not very complicated. The computation requires two assumptions
the number of periods and find the column that
approximates the ratio computed in Step 1.
investment without incurring a loss. (You can think of that restated figure as a kind of break-
PAYBACK PERIOD
The payback period is the length of time required for the cash coming in from an investment
to equal the amount of cash originally spent when the investment was acquired. In other
to invest in a plant and/or equipment. In that case, the question can be restated as follows: If
For example, Doctor Green is considering the purchase of a machine for his office
laboratory. It will cost $300,000. He wants to find the payback period for this piece of equip
ment. To begin, Dr. Green needs to make the following assumptions. Assumption 1: Purchase
price of the equipment. Assumption 2: Useful life of the equipment. Assumption 3: Revenue
the machine will generate per year. Assumption 4: Direct operating costs associated with earn
ing the revenue. Assumption 5: Depreciation expense per year (computed as purchase price
137
Dr. Greens five assumptions are as follows:
after Taxes
Payback period computations are very common when equipment purchases are being evalu
ated. The evaluation process itself is the final subject we consider in this chapter.
EVALUATIONS
Evaluating the use of resources in healthcare organizations is an important task. There are never
enough resources to go around, and it is important to use an objective process to evaluate which
The Time Value of Money
cost-benefit of performing the evaluation.
who use it understand the printouts it produces. Understanding both input and output is key for
the managers. In summary, evaluations should be objective, the process should not be too cum
Three look-up tables are presented as appendices to this chapter. They include the following:
Present-Value Table (the present value of $1.00)
Compound Interest Table (the future value of $1.00)
Present Value of an Annuity of $1.00
INFORMATION CHECKPOINT
Information sufficient to perform these calculations.
Where is it found?
In the files of your supervisor; also in the office of the
financial
To measure the time value of money.

KEY TERMS
Present-Value Analysis
Time Value of Money
Are you able to use the present-value look-up table now? Would you prefer a computer to
139
4.
Have you had a chance to participate in an evaluation of an equipment purchase at
your workplace? If so, would you have done it differently if you had supervised the
1.
Fundamentals of Strategic Planning for Healthcare Organizations
(NewYork: The Haworth Press, 1997).
The Time Value of Money
Year
10%

0.9901
0.9615
0.9174

0.9613
0.8417

0.9151
0.8163
0.7513

0.9610
0.7629

0.9515
0.8219
0.7473
0.7130

0.7462

0.8131
0.7107
0.5132

0.6768
0.6274
0.5019

0.9143
0.7664
0.5919
10
0.7441
0.6139
11
12
0.8874
0.7014
0.3186
13
0.6810
0.4150
14
0.6611
15
0.8613
0.7430
0.6419
0.4810
0.4173
0.3152
0.2745
16
0.2919
0.2519
0.2176
17
0.7142
0.5134
0.3714
0.3166
0.2311
0.1978
18
0.5874
0.4155
0.2120
0.1799
19
0.4746
0.2765
0.2317
0.1945
0.1635
0.8195
0.3769
0.3118
0.2145
0.1784
0.1486
0.8114
0.2415
0.1987
0.1637
0.1351
0.5219
0.3418
0.1839
0.1502
0.1228
0.2618
0.2109
0.1703
0.1378
0.1117
0.7876
0.6217
0.4919
0.3901
0.3101
0.1971
0.1577
0.1264
0.1015
0.4776
0.1842
0.1460
0.1160
0.5976
0.2812
0.2198
0.1722
0.1352
0.1064
0.7644
0.2074
0.1609
0.1252
0.0976
0.0763
0.5744
0.1956
0.1504
0.1159
0.7493
0.1846
0.1406
0.1073
0.7419
0.4120
0.2314
0.1741
0.1314
Present-Value Table
(The Present Value of $1.00)
Year
11%
12%
13%
14%
15%
16%
17%
18%
19%


0.8116
0.7695
0.7432
0.7182

0.7312
0.7118
0.6913

0.6133
0.5718
0.5158

0.5674
0.5194
0.4761
0.4190
0.4019

0.4104

0.4817
0.3139

0.3762

0.1938
10
0.1911
0.1756
0.1615
11
0.3173
0.2149
0.1954
0.1778
0.1619
0.1476
0.1346
12
0.2076
0.1869
0.1685
0.1520
0.1372
0.1240
0.1122
13
0.1821
0.1625
0.1452
0.1299
0.1163
0.1042
14
0.1807
0.1597
0.1413
0.1252
0.1110
0.0876
15
0.1827
0.1599
0.1401
0.1229
0.1079
16
0.1883
0.1631
0.1415
0.1229
0.1069
0.0811
0.0618
17
0.1696
0.1456
0.1252
0.1078
18
0.1528
0.1300
0.1108
0.0376
19
0.1377
0.1161
0.0313
0.1240
0.1037
0.0611
0.0514
0.1117
0.0768
0.0217
0.1007
0.0316
0.0218
0.0181
0.0601
0.0183
0.0151
0.0817
0.0188
0.0154
0.0126
0.0197
0.0160
0.0129
0.0105
0.0417
0.0211
0.0169
0.0135
0.0109
0.0182
0.0144
0.0115
0.0419
0.0157
0.0123
0.0374
0.0174
0.0135
0.0105
0.0196
0.0151
0.0116
The Time Value of Money
Year
10%
1
1.010
1.020
1.030
1.040
1.050
1.060
1.070
1.080
1.090
1.100
2
1.020
1.040
1.061
1.082
1.102
1.124
1.145
1.166
1.188
1.210
3
1.030
1.061
1.093
1.125
1.156
1.191
1.225
1.260
1.295
1.331
4
1.041
1.082
1.126
1.170
1.216
1.262
1.311
1.360
1.412
1.464
5
1.051
1.104
1.159
1.217
1.276
1.338
1.403
1.469
1.539
1.611
6
1.062
1.120
1.194
1.265
1.340
1.419
1.501
1.587
1.677
1.772
7
1.072
1.149
1.230
1.316
1.407
1.504
1.606
1.714
1.828
1.949
8
1.083
1.172
1.267
1.369
1.477
1.594
1.718
1.851
1.993
2.144
9
1.094
1.195
1.305
1.423
1.551
1.689
1.838
1.999
2.172
10
1.105
1.219
1.344
1.480
1.629
1.791
1.967
2.159
11
1.116
1.243
1.384
1.539
1.710
1.898
2.105
12
1.127
1.268
1.426
1.601
1.796
2.012
2.518
2.813
3.138
13
1.138
1.294
1.469
1.665
1.886
2.133
2.410
14
1.149
1.319
1.513
1.732
1.980
15
1.161
1.346
1.558
1.801
3.172
4.177
16
1.173
1.373
1.605
1.873
2.183
17
1.184
1.400
1.653
1.948
3.159
18
1.196
1.428
1.702
4.717
19
1.208
1.457
1.754
2.107
3.617
4.316
5.142
6.116
1.220
1.486
1.806
2.191
1.282
1.641
10.835
1.348
1.811
5.743
7.612
10.063
13.268
17.449
Interest Table
Compound Interest of $1.00
(The Future Amount of $1.00)
13-B
Year
12%
14%
16%
18%

1.120
1.140
1.160
1.180
1.200
1.240
1.280
1.320
1.400
1.500

1.254
1.300
1.346
1.392
1.440
1.538
1.638
1.742
1.960

1.405
1.482
1.561
1.643
1.728
1.907
2.744

1.574
1.689
1.811
1.939
2.074

1.762
1.925
2.100
7.594

1.974
2.195
7.530
11.391

2.211
3.185
10.541
17.086

2.476
7.206
9.217
14.758

5.160
12.166
10
3.106
4.411
6.192
11.806
16.060
57.665
11
5.117
6.176
7.430
10.657
15.112
21.199
12
4.818
7.288
8.916
13.215
19.343
27.983
129.746
13
10.699
16.386
194.619
14
7.988
10.147
12.839
20.319
31.691
111.120
291.929
15
5.474
7.138
11.074
15.407
25.196
155.568
437.894
16
6.130
8.137
10.748
14.129
18.488
31.243
51.923
217.795
17
9.276
12.468
16.672
22.186
38.741
112.140
304.914
18
7.690
10.575
14.463
19.673
148.020
1477.900
19
8.613
12.056
16.777
23.214
31.948
108.890
195.390
597.630
2216.800
13.743
19.461
27.393
139.380
257.920
17.000
40.874
216.542
1033.600
25251.000
143.371
237.376
1645.500
4142.100
24201.432
191750.000
The Time Value of Money
Periods
10%
12%
14%
16%
18%
Periods
1.942
1.886
1.833
1.783
1.736
1.690
1.647
1.605
1.566
1.528
2.174
2.107
3.312
3.170
2.914
4.713
4.212
3.274
3.127
5.601
4.917
4.111
3.812
7.325
6.210
5.747
8.162
7.435
10
8.111
7.360
6.710
6.145
5.216
4.193
10
15
12.849
11.118
9.712
7.606
6.811
6.142
5.576
4.676
15
16.351
13.590
11.470
9.818
8.514
7.469
19.523
15.622
12.783
10.675
7.843
Present Value of an
13-C
Tools to Review
Trend Analysis,
Common Sizing, and
Forecasted Data
The process of common sizing puts information on the
same relative basis. Generally, common sizing
verting dollar amounts to percentages. If, for
example, total
to percentages allows comparative analysis. In other words,
Although such comparisons on the basis of percentages
can, and should, be performed on your own organizations
Table 141
shows how
common sizing allows a comparison of liabilities for three dif
ferent hospitals. In each case, the total liabilities equal 100%.
Then the current liabilities of hospital 1, for example, are
divided by total liabilities to find the proportionate percent
age attributable to that line item (100,000 divided by 500,000
equals 20%; 400,000 divided by 500,000 equals 80%). When
all the percentages have been computed, add them to make
sure they add to 100%. If you use a computer, computation
Table 14-2
. In this case, general services expenses for three
expense for
computed ($320,000
divided by $800,000 equals 40% and so on). The advantage
of comparative analysis is illustrated by the laundry line
Understand and use common
Understand and use trend
Understand five types of
Understand capacity level
TREND ANALYSIS
dollar
lier of the two years: that is, the base year (thus, 5,000 divided by 15,000 equals 33.3%). Trend
Table 143
tal 1 for year 1 are compared with the liabilities of hospital 1s year 2. Current
liabilities, for example,
were $100,000 in year 1 and are $150,000 in year 2, a difference of $50,000. To arrive at a percentage
difference is divided by the year 1 base figure of
Common Sizing Liability Information
Same Year for All Three Hospitals
Hospital 1
Hospital 2
Hospital 3
Current liabilities
$100,000
Long-term debt
100,000
Total liabilities
100%
100%
100%
Trend Analysis for Liabilities
Hospital 1
Year 1
Year 2
Difference
Current liabilities
$100,000
$150,000
Long-term debt
12.5%
Total liabilities
100%
100%
$100,000
Common Sizing Expense Information
Same Year for All Three Hospitals
Hospital 1
Hospital 2
Hospital 3
General services expense
Maintenance
135,000
15%
Laundry
10%
10%
10%
Housekeeping
120,000
15%
15%
Total GS expense
100%
100%
100%
Trend Analysis, Common Sizing, and Forecasted Dat
Table 144
by the year 1 base figure to obtain a percentage difference for purposes of comparison. Thus,
1 equals 50%). In Table 144, two of the four line items have negative differences: that is, year 2
when added down (subtract the negative figures from the positive figures; thus, $85,000 plus
$60,000 minus $10,000 minus $35,000 equals $100,000). The dollar figure difference is also
ANALYZING OPERATING DATA
Comparative analysis is an important tool for managers, and it is worth investing the time to
become familiar with both horizontal and vertical analysis. Managers will generally analyze their
own organizations data most of the time (rather than performing comparisons against other
organizations). With that fact in mind, we examine operating room operating data (no pun
Table 145
ning with $68,177). The difference in dollars, labeled Annual
Increase (Decrease), appears in
)&#x/Act;&#xualT;xt;�&#x/Act;&#xualT;xt;� Verticalanalysis has been performed
for the current year, and the percentage results appear in the second column (beginning with
4.97%). Vertical analysis has also been performed for the prior year, and those percentage results
appear in the fourth column (beginning with 5.70%). Horizontal analysis has been performed
appear in the far right column (beginning with
12.66%). This table is a good example of the type of operating data reports that managers receive
for planning and control purposes.
Comparative analysis is especially important to managers because it creates a common
parative data is the subject of the following chapter.
Trend Analysis for Expenses
Hospital 1
Year 1
Year 2
Difference
General services expense
Maintenance
(10,000)
Laundry
10%
Housekeeping
120,000
15%
180,000
Total GS expense
100%
100%
$100,000
151
IMPORTANCE OF FORECASTS
The dictionary defines to forecast as to calculate or predict some future event or condition,
From the managers viewpoint, forecasted data are information used for purposes of plan
ning for the future. Forecasting, to some degree or another, is often required when producing
create what if scenarios on the computer. But the important thing for managers to remember
Vertical and Horizontal Analysis for the Operating Room
Comparative Expenses


12-Month

12-Month

Increase
Account
Current Year
Prior Year
(Decrease)
Social Security
60,517
68,177
(7,660)
12.66
Pension
1.70
1.96
13.53
Health Insurance
18,507
1.55
(10,085)
119.75
Child Care
Patient Accounting
155,356
12.76
123,254
10.30
32,102
Admitting
110,254
101,040
9,214
Medical Records
91,718
7.53
7.88
Medical Waste
3,187
(810)
Sterile Procedures
7,995
10.16
Laundry
DepreciationEquipment
87,378
7.18
61,144
5.11
DepreciationBuilding
41,377
AmortizationInterest
(5,819)
1,767
0.15
(7,586)
130.37
Insurance
4,216
7,836
Administration
57,966
4.76
Medical Staff
0.14
5,130
197.91
Community Relations
49,813
40,618
9,195
18.46
Materials Management
(7,732)
11.97
Human Resources
13,276
1.11
17,790
57.27
Nursing Administration
7.75
(10,195)
12.36
Data Processing
17,815
1.46
16,119
1.35
Fiscal
17,700
1.45
16,748
1.40
Telephone
2.17
(12,283)
77,597
84,128
7.03
Environmental Services
32,874
37,354
3.12
13.63
Quality Management
10,016
8,146
18.67
Medical Staff
Continuous Quality Improvement
100.00
1,513
0.13
165.91
Total Allocated
1,217,756
100.00
1,196,447
100.00
1.75
1,211,608
Total Expense
Trend Analysis, Common Sizing, and Forecasted Dat
Forecasts Versus Projections
prospective
expected
to exist, and that reflect actions that are expected to occur. Projections, on the other hand,
are views further into the future. Because they are further into the future, we project future
We are discussing forecasts in this chapter rather than projections. Therefore, these forecasts
with actions that we can reasonably expect to occur.
Forecasting Approaches
The approach to producing a forecast usually involves three different sources of information
r5IF
r5IF
TFDPOE
MFWFM
DPNFT
GSPN
FMFDUSPOJD
BOE
TUBUJTUJDBM
JOGPSNBUJPO\r
JODMVEJOH
USFOE
BOBMZ
r5IF
QSFMJNJOBSZ
rough draft of the forecast. For example, adjusting volume upward or downward due to the
The amount and type of electronic information that is readily available greatly affects the
Common Types of Forecasts in Healthcare Organizations
The three most common types of forecasts found in most healthcare organizations include revenue
forecasts, staffing forecasts, and operating expense forecasts. (The operating expense forecast, which
is not as common, would generally cover those operating expenses other than labor.) This section
OPERATING REVENUE FORECASTS
Types of Revenue Forecasts
Forecasts of revenue will cover varying time periods. Longer-range multi-year forecasts are
Figure 141
able forecasts of revenue are a vital part of the organizations planning process and are an input
153
Figure 142
Building Revenue Forecast Assumptions
In health care, significant changes in utilization patterns can be occurring that need to be taken
into account in the managers forecast assumptions. The inexorable shift to shorter lengths
of stay for hospital inpatients over the last decade is an example of a basic shift in utilization
patient, a patient covered by private insurance, or a private pay patient. When payers are thus
identified, this information allows the appropriate payments to be associated with the service
The forecasted utilization of a service (or its volume) assumption is multiplied by the appro
priate rate, or charges, in order to arrive at forecasted revenue stated in dollars. A word of
Trend Analysis, Common Sizing, and Forecasted Dat
Five-Year Operating Revenue Forecast.
$1,000,000
warning, however: revenue forecasted at gross charges is not a valid figure. Instead, revenue
stated at allowed charges is the proper figure to use. Virtually all payers, including Medi
vice. But
the amounts these different payers have agreed to pay for the same service will vary. How to
r(SPTT
TFSWJDF
ally greater than most expected payments received for the service.
r"MMPXFE
QBZFS\bT
ment will recognize, or allow, for a certain service.
r$POUSBDUVBM
(It should also be noted that part of the payers allowed charge is generally due from the patient,
and the remaining portion of the allowed charge is actually due from the payer.)
Trend Analysis Assumptions
years and to see the trends. If such trends are found, then it makes sense to take them into
is prospective; that is, it is projecting into the future. If changes, say, in regulatory requirements
for payment are made this year, then that fact has to be taken into account.
One-Year Operating Revenue Forecast.
$1,250,000
155
STAFFING FORECASTS
tations, costs, and reports in a previous chapter. This section builds upon that information in
Staffing Forecast Considerations
Staffing forecasts are a very common type of forecast required of managers. Three important
Controllable Versus Noncontrollable Expenses
The concept of responsibility centers and controllable versus noncontrollable expenses
has been discussed earlier in this book. Essentially, controllable costs are subject to a man
agers own decision making, whereas noncontrollable costs are outside that managers
power. It is extremely difficult to make staffing forecasts with any degree of accuracy if
noncontrollable expenses are included in the managers forecast. The organizations struc
forecasts. Shared services across lines of authority are workable in theory, but often do not
work in actuality.
Figure 143
gives an example of the essential business units under the
supervision of a director of nurses. Note the responsibility centers and the support centers
Required Minimum Staff Levels
Primary Nursing Staff Classification by Line of Authority.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Health
Nursin
Nursing
Surgical
Emergency
Nursing
Education
Recruitmen
Support
Information
Systems
Support
of
Nurses
Trend Analysis, Common Sizing, and Forecasted Dat
We most often hear about a chronic lack of adequate staff, and certain parts of the country do
the country can have an overabundance during that same period. The status of the local labor
of staff available, the hourly rate to attract staff may go down, but when there is a shortage of
Staffing Forecast Components
In many cases a staffing plan is first created, and the staffing forecast follows after the plan is
Figure 144
Scheduling Requirements
Scheduling requirements should encompass all hours and days required to cover each position.
For example, see the exhibit in the discussion about staffing (Chapter 10) that illustrates a
Master Staffing Plan
The master staffing plan should include all units and all hours and days required to cover all
positions within the units. For example, see the exhibit in the discussion about staffing that
illustrates entire units by shift, covering 24 hours per day times 7 days a week.
157
Requirement
Plan
required per shift
Less
Paid Days Not Worked*
Staffing Plan
Forecast
Shift from Master
Staffing Pla
time
Annual Factor
equals
Annualized FTEs
business year divide
=
Computation Sequence to Annualize the Master Staffing Plan
r$PNQVUF
not worked) will be based on the organizations policy as to paying for days not worked.
For example, see Step 1 in the Staffing chapters exhibit for such a computation, includ
r$POWFSU
8PSLFE
in the Staffing chapters exhibit illustrates this computation.
r$BMDVMBUF
Finally, use the factor to calculate the FTEs required to fully cover the positions shifts all year
long. For example, in the Staffing chapters exhibit, the RN FTE would be 1.6 (1.6106195).
CAPACITY LEVEL ISSUES IN FORECASTING
world of health care, capacity relates to services; that is, the ability to produce or provide specific
healthcare services.
Space and Equipment Availability
The ability to provide services is automatically limited by the availability of both space and the
proper equipment to provide certain specific services. Forecasts need to take a realistic view of
Staffing Availability
Capacity is a tricky assumption to make in staffing forecasts. In some programs, particularly
those in a startup phase, overcapacity (too much staff available for the amount of work
required) is a problem. In some other organizations, under capacity (a chronic lack of
adequate staff) is the problem. Forecasting assumptions, in the best of all worlds, take these
difficulties into account. See the Mini-Case Study that demonstrates this problem of staffing
in the context of the Women, Infants, and Children (WIC) federal program.
Example of Forecasting Maximum Service Capacity
sensitivity analysis discussion in a following chapter.)
Trend Analysis, Common Sizing, and Forecasted Dat
Work Flow Description
For each infusion the nurse must perform the following steps (generalized for this
Obtain and review the patients chart
Interview the patient
Work Flow Comments
r"TTVNF
POF\bT
r0ODF
r"TTVNF
UXP\bT
r0ODF
patient demands an unusual amount of the nurses attention. (For example, a new
patients per day, Chair #2
2 patients per day, and Chair #3
2 patients per day, for a
daily total of 7 patients infused.
159
SUMMARY
In summary, the ultimate accuracy of a forecast rests on the strength of its assumptions.
INFORMATION CHECKPOINT
What is needed?
In the files of the supervisor who is responsible for staffing.
How is it used?
Use the example to learn the nature of the assumptions that

KEY TERMS
Trend Analysis
Vertical Analysis
3.
Are you or your immediate supervisor involved with staffing decisions? If so, are
you aware of how staffing forecasts are prepared in your organization? Describe an
example.
4.
Have you, in the course of your work, become involved in problems with capacity level
issues such as space and equipment availability? If so, would forecasting have assisted in
solving such problems? Describe why.
Merriam Websters Collegiate Dictionary
, 10th ed., s.v. Forecast.
2.
B. A. Brotman, M. Bumgarner, and P. Prime, Client Flow through the Women,
Infants,
Journal of Health Care Finance
, 25, no.1 (1998):
Trend Analysis, Common Sizing, and Forecasted Dat
OVERVIEW
Comparative data can become an important tool for the
manager. It is important, however, to fully understand the
COMPARABILITY REQUIREMENTS
tency, verification, and unit measurement. Each is
discussed
Three equally important elements of consistency should be
Time Periods
Time periods should be consistent. For example, a
10-month period should not be compared to a 12-month
ized, as described within this chapter.
For example, the chapter about inventory discusses
consistently for both the beginning of the year and the
end of the year.
Understand the three criteria
for true comparability.
Understand the four uses of
Annualize partial-year
Understand basic currency
Finally, if multiple years are being compared, should inflation be taken into account? The
proper application of an inflation factor is also described within this chapter.
Verification
Basically, can these data be verified? Is it reasonable? If an objective, qualified person
the data, would he or she arrive at the same conclusion and/or results? You may have to do a few
With regard to comparative data, we should ask: Is all the information being prepared or
the data to be expressed in dollars and not in some other currency such as euros (used in much
of Europe) or pounds (used in Britain and the United Kingdom). Most of the managers data
of reporting financial results for companies that have global operations, and consistency in
A MANAGERS VIEW OF COMPARATIVE DATA
preparing) are appropriate for comparison. It is equally important for the manager to perform
a comprehensive review, as described here.
recall and apply the elements of consistency. Why? Because such data will typically be used for
result in poor
The manager needs to know how to effectively review comparative data. To do so, the manager
ages (as discussed in the preceding chapter). Each different line item will have a horizontal
Table 151
the Difference column has both positive and negative numbers in it (the negative numbers
resulting in a $5,000 difference. The next line is maintenance. This department did not exceed
and actual expenses were only $270,000, so the $20,000 difference is in parentheses. In this
USES OF COMPARATIVE DATA
Four common uses of comparisons that the manager will find helpful are discussed in this
Managers are most likely to be responsible for comparing the current expenses of their depart
mat reflects both dollars and percentages, as is most common. Table 151 shows the grand
financial officer (CFO), perhapswill be responsible for making a comparative analysis of the
overall operations of the organization. This comparative analysis at a higher level will condense
nience and clarity in review.
Hospital 1
Year 2 Actual
General Services Expense
Maintenance
Laundry
(10.0)
Housekeeping
180,000
130,000
15
Total GS Expense
100
100
163
The CFO may also convert this comparative data into charts or graphs in order to tell the
story in a more visual manner. For example, the total General Service expense in Table151
Figure 151
Compare Current Actual Expenses to Prior Periods in Own Organization
Trend analysis, as explained in the preceding chapter, allows comparison of current actual
expenses to expenses incurred in prior periods of the same organization. For example, con
sider total general services expenses of $800,000 for year 1 and $900,000 for year 2. The CFO
Figure 152
information
Compare to Other Organizations
Common sizing, as explained in the preceding chapter, allows comparison of your organiza
tion to other similar organizations. To illustrate, refer to the table in a preceding
chapter
(Table 141) entitled Common Sizing Liability Information. Here we see the liabilities
of three hospitals that are the same size expressed in both dollars and in percentages.
Therefore, our CFO can convert the percentages into an informative graph, as shown in
Figure153
example,
Figure 154
. Here we have a graph of the grand totals from the table in a preceding chapter
(Table 142) entitled Common Sizing Expense Information. The percentages shown are for the
General Services departments of each hospital and have been common sized to percentages, as is
perfectly correct. However, Figure 154 attempts to compare the total General Services expense
(the total of all four general services departments) in dollars. As we can see here, hospital 1 and
hospital 3 are both 100 beds, while hospital 2 is 400 beds. Obviously a 400-bed hospital will incur
son among the three organizations.
A Comparison of Three 100-Bed Hospitals Long-Term Debt.
Hospital
Hospital
165
A Comparison of Hospital Ones Expenses Over Time.
A Comparison of Three Hospitals Total Expenses.
Hospital
Hospital
$7,000
Hospital
Hospital
son. In this case, he or she can choose size (number of beds) for this purpose. The resulting graph
Figure 155
. As you can see, hospital 1s cost per bed is $8,000, computed as follows.
The total expense of $800,000 for hospital 1 is divided by 100 beds (its size) to arrive at the $8,000
Hospital2 ($3,000,000 total expense divided
by 400 beds to equal $7,500 per bed) and hospital 3 ($900,000 total expense divided by 100 beds
to equal $9,000 per bed) have the same computations performed on their equivalent figures.
In actual fact, another step in this computation should be performed in order to make the
because beds are occupied by admitted inpatients. (Outpatients, on the other hand, use a
different mix of services.) Therefore, a more accurate comparison would
adjust the overall total
Services expense can be attributed to inpatients and that the remaining 30% can be attributed
shown, is indeed a hospital-wide expense. The CFO would then multiply $800,000 by 70% to
arrive at $420,000, representing the inpatient portion of General Services expense.
Compare to Industry Standards
In the example just given in the paragraph above, the CFO has computed his or her own hospi
tals percentage of inpatient versus outpatient utilization of General Services expense. But this
the case, computing the per-bed expense using overall expense, as shown in Figure 155, may
The CFO, however, can use the 70% inpatient and 30% outpatient expense breakdown
for another type of comparison. It should be possible to find industry standards that break
A Comparison of Hospital Ones GS Inpatient Expenses with Industry Standards.
60%
GS Inpatient Expense %
167
centages. The use of industry standards is of
particular use for decision making because it
positions the particular organization within a
large grouping of facilities that provide a simi
Healthcare organizations are particularly well
suited to use industry standards because both the
federal and state governments release a wealth
Figure 156
illustrates the CFOs graph using such a stan
dard. (The figures shown are for illustration
MAKING DATA COMPARABLE
tors, standardized measures, and currency
measures. The manager needs to know how
Because comparability requires consistency,
Table 152
operating
expenses are going to be
verted, or annualized, to a 12-month basis, as
shown in the second column of Table 152.
These computations were performed on a
is as follows. Using the first line as an example,
fore, 1 months expense is one-tenth of $50,431,
or $5,043. To
annualize for 12-months worth
of expenses, the 10-month total of $50,431 is
increased by 2 more months at $5,043 apiece
($50,431 plus $5,043 for month 11, plus
another $5,043 for month 12, equals $60,517,
Annualizing Operating Room Partial-
Year Expenses

Actual
Annualized
Account
10 Month
12 Month
Social Security
60,517
Pension
17,229
Health Insurance
7,018
Child Care
Patient Accounting
129,463
155,356
Admitting
110,254
Medical Records
76,432
91,718
Medical Waste
Sterile Procedures
Laundry
33,911
Depreciation
72,815
87,378
Depreciation
Amortization
Interest
(5,819)
Insurance
3,513
4,216
Administration
57,966
Medical Staff
Community
Relations
41,511
49,813
Materials
53,811
Human Resources
Nursing

Administration
Data Processing
14,846
17,815
Fiscal
14,750
17,700
Telephone
77,597
Environmental
Services
27,395
32,874
Quality
10,016
Medical Staff
7,870
Continuous Quality
Improvement
474
Total Allocated
1,014,796
1,217,756
1,211,608
Total Expense
Reproduced with the permission of Wolters Kluwer Law & Business
from J.J. Baker, Activity-Based Costing and Activity-Based Manage
ment for Health Care, p. 190, 1998, Aspen Publishers, Inc.
services resulting in a continuing rise in the general price level.
$900,000 for year 2. We can assume that these amounts reflect actual dollars expended in each
the Chief
Financial
Officer (CFO) decides to take such inflation into account, a government
as .05] equals 1.05). The CFO might apply the inflation factor to year 1 in order to give it a
inflation factor for a two-year
However, if the CFO wants to apply an inflation factor to a whole series of years, he or she
Tablel53
. We assume
pose we turn to the Compound Interest Table. It shows The Future Amount of $1.00, and appears
in Appendix B of the chapter about time value of money. The Future Amount of $1.00 table has
years down the left side (vertical) and percentages across the top (horizontal). We find the 10%
column and read down it for years one, two, three, and so on.
As shown in
Table 153.2
, the factor for year 2 is 1.210, for year 3 is 1.331, and so on. We carry
Table 153.1
. Now we multiply the $500,000 in columnB times the
factor for each year to arrive at the cumulative inflated amount in column D. Thus $500,000 times
the year 2 factor of 1.210 equals $605,000, and so on.
Currency Measures
typically beyond most managers responsibilities. Nevertheless, it is important for the manager to
understand that consistency in applying such measures and conversions will be a significant factor
in expressing financial results of companies that have global operations.
Exchange rates may be expressed in two ways: in U.S. dollars or per U.S. dollars. For
example, assume the euro is trading at 1.3333 in U.S. dollars and at 0.7500 per U.S. dollars.
That means if you were spending your U.S. dollar in, say, France (part of the euro area), it
would take a third as much (1.33) in your dollars to buy products priced in euros. If your French
friend, on the other hand, was spending euros for products priced in U.S. dollars, he or she
169
Country (or Area)
Currency
Yuan
Yen
Applying a Cumulative Ination Factor
SOURCE OF FACTOR IN COLUMN C BELOW:
From the Compound Interest Look-Up Table
The Future Amount of $1.00 (Appendix 13-B)
Year
Factors as shown at 10%

1.100

1.210

1.331

1.464
15
Real
Year
Dollars
Ination Factor*
Dollars**
(1.10)
1.100
(1.10)
1.210
(1.10)
1.331
(1.10)
1.464
*Assume an annual ination rate of 10%. Thus 1.00 + 0.10 = the 1.10 factor in Column C.
**Column D Nominal Dollars equals Column B times Column C.
Standardized Measures
A final word about standardized measures. Standardized measures aid comparability. They
especially assist in performance measurement. Types of standardized measures include the typi
cal hospital per-bed measure along with work load measures.
There is, of course, a whole array of uses for standardized measures. Managed care plans, for
the plan. Each physician then receives a report from the plan that illustrates his or her performance.
Finally, electronic medical records (as further discussed in following chapters) depend upon
by the very nature of the electronic system design.
CONSTRUCTING CHARTS TO SHOW THE DATA
Managers use charts to explain their projects and to report their results. Thus constructing
Types of Charts
r$PMVNO
r1JF
r#BS
r-JOF
The column charts data is presented in vertical columns. The pie chart is typically
circular
Figures 15-7, 15-8,
the pie chart, bar chart, and line chart respectively.
23 case
MD
25 case
62 case
MD
12 case
14 case
Modified from R. Hankins & J.J. Baker,
Management Accounting for Health Care Organizations
(Sudbury, MA: Jones &
171
8,000
7,000
6,000
5,000
3,000
2,000
1,000
0
MD 1
MD
Med/Surg cost
ICCU cost
Ancillary cost
Total cost
MD
Modified from R. Hankins & J.J. Baker,
Management Accounting for Health Care Organizations
(Sudbury, MA: Jones &
Chart Content and Format
Constructing the chart means answering a series of questions about content and format, as
r8IBU
r8IBU
r8IBU
TFSWF
r*T
r*G
r8IBU
r*G
Chart Templates
suite programs. Each template typically offers a drop-down menu for specifics of the format and
a second drop-down menu for the charts data input. Electronic templates also provide quick
and easy color choices for your chart presentation. You can experiment with various colors to
To summarize, the chart you construct can be simple or elaborate. It can be black and white
INFORMATION CHECKPOINT
What is needed?
How is it used?

KEY TERMS
8,000
7,000
6,000
5,000
3,000
2,000
1,000
0
MD 1
MD
Total cost
Average cost for DRG 0xxall physicians
MD
Total Cost per Case by Physician for DRG 0xx.
Modified from R. Hankins & J.J. Baker,
Management Accounting for Health Care Organizations
(Sudbury, MA: Jones &

Key Terms
173
1.
2.
Were you also able to see the assumptions used to annualize? If so, were you able to recal
5.
Have you ever in the course of your work reviewed a financial report that applied infla
tion factors? If so, were you able to see the assumptions used to apply the factors? If not,
Merriam Websters Collegiate Dictionary
, 10th ed., s.v. Inflation.
Construct and
OVERVIEW
organizations objectives define the specific activities to be
performed, how they will be assembled, and the
particular
levels of operation, whereas the organizations perfor
American Hospital Associations (AHAs) objectives for the
1.
To provide a written expression, in quantitative
terms, of a hospitals policies and plans.
To provide a basis for the evaluation of financial per
formance in accordance with a hospitals policies and
To provide a useful tool for the control of costs.
4.
To create cost awareness throughout the organization.
revenues and expenses necessary to operate the facility. The
usual period covered is the next year (a 12-month period).
the next year as well, but are linked into a more futuristic
view. Thus, capital
Understand the difference
and capital expenditure
expenses will most likely be
identifiable versus allocated
Understand how to build an
Understand the difference
are two common types of responsibility centers: cost centers and profit centers. As shown in
Figure 161
, in cost centers the manager is responsible for controlling costs. In profit centers the
manager is responsible for both costs and revenues. Thus, we expect that a cost center operating
Figure 162
example,
monies in a
restricted fund are not to be commingled with general operations monies. Also, a restricted
Centers
responsible for
controlling costs
responsible for
both costs
and revenue
Centers
received
by the
organization
require separate
accounting
organization requires
separate accounting
transactions
Figure 163
r%JSFDU
r(FOFSBM
r'JOBODJBMSFMBUFE
Fixed Versus Variable Costs
You will recall that fixed costs do not change in total,
Variable costs,
however, rise or fall in proportion to a
change (arise or fall) in volume. You will
that volume, in the case of healthcare orga
nizations,
generally means number of procedures (outpatient
services)
or perhaps, prescriptions filled
vices).
Figure 164
operating
Identified Versus Allocated Costs.
&
A
dministrativ
e
Expense
atien
Re
la
d
Expense
y
alloc
at
ed
cost
inancia
Re
lat
ed
Expense
y no
be
included
ect
P
atient
re
ting
P
atient
re
y
identif
iable
costs
Fixed Versus Variable Costs.
x
ed C
ost
oes not
change e
ven
though
volume rises
or f
alls withi
a wide r
ange
r
iab
le C
ost
alls
in pr
oportion
to
a rise or
f
all in
volume*
amples of
lume:
Number of pr
ocedur
es or patient da
ys
179
is above and beyond his or her daily responsibilities. Understanding the usual stages, or
sequence, of budget construction as listed here assists in predicting how much time will be
required.
Construction Stages
r1MBO
r(BUIFS
r1SFQBSF
r.BLF
r1SFTFOU
QSFMJNJOBSZ
r.BLF
QSFMJNJOBSZ
r4VCNJU
Input includes both assumptions and calculations; required revisions to the draft version
would occur after upper-level management has reviewed the draft. Additional revisions will typi
Construction Elements
Fixed and Variable Cost Examples
Variable
Employers Payroll Taxes
Part-Time Temporary Contract Labor

Five-Year Equipment Lease
r'PSNBU
r#VEHFU
r"WBJMBCMF
r-FWFMT
r5JNF
Necessary resources made available to you could include, for example, special data processing
runs or extra staff assistance to locate required information. The levels of review, along with how
Figure 165
. They
include the Operating Revenue Forecast and the Staffing Plan or Forecast, along with a plan
chapter, the
however, the manager is responsible only for costs (and not for revenues), the revenue forecast
would not become part of his or her responsibility.
points (discussed in a previous chapter) should also be taken into consideration. (This step may
be undertaken at a different level and thus may not be your own responsibility.)
16
Expenditures
Pla
Operating
181
Forecasting workload is a critical part of
building a budget. The workload should tie
necessary to fore
Table161
ents total nursing hours by unit. But there is
it does not indicate, among other things,
Computations should be supported by their assumptions and should be replicable; that
is, another individual should be able to reproduce your computations when using the same
assumptions. Computations must also be comparable; that is, the same type of computation
An example of computations that must be comparable is contained in
Figure 166
Recall
tain annual FTEs and Total Paid Days Required. When cost is attached to the cost of Annual
Employee Benefit Costs. If
Nursing Hours Report
Nursing Hours
Description
Regular
42,182
3,515
N-INTENSIVE CARE

UNIT
S-INTENSIVE CARE

UNIT
S-STEPDOWN
Forecast
in the Operating
Number of Annual
Paid Days
Required
annualized
FTEs and
total paid
days per year
Salaries
Benefit Costs
one department defines total employee benefit cost one way and another department defines
contents to all involved personnel. It may also be necessary to provide training for new report

Variance
volume actually changes during the year. In the case of health care, we can use
an example of level of volume, or output. Assume that the budget
anticipated 400,000 patient
days this year (patient days equating to output of service
delivery; thus, 400,000 output units).
patient days are going to actually be achieved for
Table 162
183
workload activity.
r5IVT\r
r/FYU\r
r5IJSE\r
incurred at different levels of volume, or activity.
number of
Table 163
illustrates this concept. The table shows a volume range
procedure assumptions for revenues and variable expense plus the total fixed expenses that
Procedure
Totals
# Procedures Performed
100
[various]
15,000
Operating Income
Note: Dollar amounts shown for illustration only.
Table 164
Table 165
. The table shows a volume range of 64, 80, and 96 procedures to be performed
Range of #s of Procedures
Procedure
(Volume Range)
# Procedures Performed
100
150
Variable Expense
$150 per procedure =
15,000
Fixed Expense
[xed total amount]

Total Expense
$17,500
Operating Income
Note: Dollar amounts shown for illustration only.
Procedure
Totals
# Procedures Performed
Salaries & Employee Benets
[various]
$150,000
[various]
InsuranceGeneral
[various]
InsuranceMalpractice
[various]
10,000
DepreciationBuilding
[various]
DepreciationEquipment
[various]
100,000

Total Expenses
Operating Income
Note: Dollar amounts shown for illustration only.
185
There is no one right way to prepare an operating budget. The budget construction
depends
managers scope of
with upper-level financial officers of the organization and is beyond the scope of this chapter.
of valid and replicable assumptions and comparability are especially essential. Comparative

What is the appropriate inflow (revenues) and outflow (cost of services delivered)

Forecast service-related workload.
Forecast non-service-related workload.
5.

Range of #s of Infusions
Procedure
(Volume Range)
# Procedures Performed
Variable Expense
120,000
144,000
Fixed Expense
[xed total amount]

Total Expense
$136,000
$160,000
$184,000
Operating Income
Note: Dollar amounts shown for illustration only.
INFORMATION CHECKPOINT
Where is it found?
Probably with the supervisor who is responsible for the
How is it used?

KEY TERMS
1.
2.




Test one line-item calculation. Is the math for the dollar difference computed cor
analysis, as examined in the preceding chapter, is an important skill to acquire.
187
3.
W. O. Cleverly,
Essentials of Health Care Finance
Cost Accounting: A Managerial Emphasis
, 9th ed. (Englewood Cliffs, NJ:
A.J. C.
relative value units (RVUs).
Diagnosis-Related Groups
Diagnosis-related groups (DRGs) were developed in the early 1970s by Yale University to
system is an efficient way to measure case mix and it facilitates comparisons with other hospitals.
Specifically, price-per-case or episodes-of-care reimbursement is intended to represent the
resource intensity of hospital care utilized by patients who are classified in the specific DRG.
used during their hospital stay will vary directly with length of stay.
ume and mix of patients to be treated during the rate year is not always clear.
Relative Value Units
each product. RVUs are mistakenly thought to measure productivity. Every physician within a prac
tice consumes resources, and RVUs therefore measure their resource consumption. RVUs may
also be thought of as a measurement of time and effort put in by a physician. Therefore, the value
of RVUs is in costing or accurately measuring consumption of resources.
The patient classification system of DRGs is used in this case to classify patients as to their overall
diagnosis grouping (thus DRG 190-192 for COPD, as below). Treatments are administered in
Creating a DRG
Care: The Resource
Approach
the hospitals outpatient Respiratory Care Department. Therefore, ICD-10-CM codes (Inter
national Classification of Diseases, 10th Revision, Clinical Modifications) are used to identify
their actual diagnosis for treatment within the department (thus ICD-10-CM J44.1 = chronic
In computing projected expenses, RVUs provide the number of minutes-per-treatment and
for each treatment is converted into RVUs by using minutes-per-treatment.) Departmental
expense totals can then be converted to expense per RVU for three categories: labor, supplies,
Gross revenues are then adjusted by a percentage [rate] for each type of payer.)
The hospitals outpatient Respiratory Care Department has been reorganized in response to the
increased incidence of DRG 190-192: Chronic Obstructive Pulmonary Disease (COPD). COPD
is a progressive disease without a cure, so that the staffs main function will be to manage symp
toms. COPD ICD-10 codes include J44.1 for chronic bronchitis and J44.2 for emphysema. This
year there were 620 admissions to the department. Treatments ranged from medication admin
istration (65%), which takes 10 minutes; oxygen therapy (24%), which takes 30 minutes; and
lished by the Controller in consultation with the Chief Financial Officer are $61 per medication
Step 1: Project Volumes
(a) Calculate the current volume for each treatment.
Treatment
Admissions
Volume
Medication Administration
Oxygen Therapy
149
Bronchodilators
620 .11
Total
(b) Convert the current volumes to RVUs.
Treatment
Minutes
Minutes/GCD*
RVUs/Procedure
Volume
Total RVUs
Medication Administration
10
10/5
Oxygen Therapy
149
Bronchodilators
15
15/5
Total
*GCD = Greatest Common Denominator (equals 5)
(c) Calculate the projected volume for each treatment
Treatment
Admissions
Volume
Medication Administration
Oxygen Therapy
158
Bronchodilators
658 .11
Total
(d) Convert the projected volumes to RVUs
Treatment
Minutes
Minutes/GCD
RVUs/Procedure
Volume
Total RVUs
Medication Administration
10
10/5
Oxygen Therapy
158
Bronchodilators
15
15/5
216
Total
Step 2: Convert Projected Volumes into Projected Revenues
been an affliction of the elderly, so we are very interested in the projected and gross revenues
by Medicare, which covers 82% of our patients. (Note: Medicaid covers 13% of patients, and
Medicare
Treatment
Projected Charge
Projected Volume %
Gross Revenue Rate*
Medication Admin.
17,127
Oxygen Therapy
310
158
40,164
32,131
Bronchodilators
5,018
4,014
Total
*The DRG rate is 80% of charges.
Treatment
Projected Charge
Projected Volume %
Gross Revenue Rate*
Medication Admin.
.13
2,817
Oxygen Therapy
310
158
.13
Bronchodilators
.13
Total
10,557
8,763
*The DRG rate is 83% of charges.
191
Treatment
Projected Charge
Projected Volume %
Gross Revenue Rate*
Medication Admin.
1,214
Oxygen
Therapy
310
158
Bronchodilators
Total
*The Self-Pay rate is 93% because 7% dont pay their bills.
Step 3: Convert Projected Volumes into Projected Expenses
(a) Calculate current expenses per RVU
DRG 190-192 accounts for 35% of labor, supply, and overhead departmental expenses. The
OPD Respiratory Care Departments labor expenses are $179,385, supply expenses are
$135,670, and overhead expenses are $286,770.
.35 = 62,784/1,904* = $32.97 labor expense/RVU
.35 = 47,485/1,904 = $24.94 supply expense/RVU
.35 = 100,370/1,904 = $52.72 overhead expense/RVU
(*1904 = Total RVUs)
(b) Calculate projected expenses per RVU for next year
Overhead expenses are not expected to increase = 52.72 + 0 =
Total
(c) Calculate projected expenses per treatment
Treatment
Projected RVUs
Projected Expense/RVU
Total Projected Expense
Medication Admin.
$112.87
$96,617
Oxygen Therapy
112.87
107,001
Bronchodilators
216
112.87
Total
$227,998
In the context of the hospitals overall financial well being, the projected loss is untenable.
What strategies can help to mitigate the impact? Can expenses be reduced? Can revenue col
lection strategies be enhanced by adding more profitable treatments? Is the staffing level
optimal? Can we continue the service at a loss by having other profitable services subsidizing
Respiratory Care?
1.
J. A. Bielby, Evolution of DRGs (2010 update),
Journal of the American Health Informa
, April 2010, http://library.ahima.org/doc?oid=106590#
2.
P. L. Grimaldi and J. A. Richardson,
Diagnosis Related Groups: A Practitioners Guide
193
THE COMPARATIVE REPORT TO REVIEW
The following report provides figures for the Memorial Hospitals Operating Room and Recov
ery Room.
For the Fiscal Year October 1, 20xx to September 30, 20xx
Operating Room
Account #
Item
Actual
1010-020
RN Salaries
(10,930)
1010-030
LPN Salaries
(7.8)
1010-040
Other Nursing Salaries
11,453
1010-200
OR Supplies-Req.
57,162
(2,812)
1010-220
Supplies-Direct Purchase
1010-221
Instruments
52,310
1010-245
Uniform Expense
410
218
1010-605
Periodicals & Books
(10.7)
1010-610
Employee Education
4,192
12.6
1010-620
Maintenance
7.6
1010-730
Purchased Maintenance
816
1010-740
Purchased Service
Recovery Room
1012-020
RN Salaries
173,527
174,807
1012-040
Other Nursing Salaries
26,155
21,617
21.0
1012-200
Recovery Room Supplies-Req.
10,114
12,375
(18.3)
1012-213
1012-220
Supplies-Direct Purchase
187
1012-610
Employee Education
125
1012-620
Maintenance
1012-730
Purchased Maintenance
310
128
41.3
Report

because of elective surgery versus unplanned (emergency) surgery.
The figures should be designated as fixed and variable (see Variance column).
A.
rooms, which fall under the aegis of the Department of Surgery.
4.
Q.

A.
The line items are not all controllable by the manager; see Other Nursing Salaries,
5.
Q.

8.
Q.

Test one line-item calculation. Is the math for the dollar difference computed cor
A.
The calculations are properly computed. Note, for example, Other Nursing Salaries
that is the most obvious and of the greatest magnitude and significance given the
importance of that line item. As a manager, you have to ask: What are the possible
may be attributed to a higher-than-normal absentee rate (nurse burnout) and/or
A.
Using Account #1010-020, Operating Room RN Nursing Salaries, the variance of
Likewise, for Account #1010-040, Other Nursing Salaries, the variance of $11,453
20.1% variance
Expenditure
OVERVIEW
that are long lasting, such as equipment, buildings, and
intended to plan, monitor, and control long-term finan
with actual short-term revenues and expenses necessary to
operate the facility. For example, the Great Shores Health
Systems operations budgets may usually be created to cover
chapter.
CREATING THE CAPITAL EXPENDITURE
be identified by another name, such as capital spending
been acquired and are in place. This spending protects an
tect that which you already have. The second part of the
budget represents spending for new capital assets. In this
Recognize the reason that a
necessary.
Review the cash flow and the
Understand differences
capital
evaluating
capital expenditure
repair
and maintenance expenses), renovated, or replaced. Renovating equipment or buildings
implies a large expenditure that would be capitalized. (To be capitalized means the expendi
r&YQBOTJPO
r$SFBUJPO
GBDJMJUZ\r
r/FX
r/FX
the organization. Your facility or practice may have a template that must be used. This takes the
decision out of your hands. Otherwise, you will have to decide which tool will be most effective
As its title implies, a cash flow analysis illustrates how the projects cash is expected to move over
cash inflow. For example, if a new piece of equipment will replace an old one, and the old
represent a cash
Cash flow must also be reported as cumulative. This means the accumulated effect of
accumulated result. In our example mentioned previously: where the old equipment might
Table 171
. As you can see, the initial
expenditure or cash spent (outflow) is decreased by the cash received (inflow) to produce a
r1BZCBDL
r"DDPVOUJOH
r/FU
r*OUFSOBM
marized later.
easy to understand and highlights risks. However, it does not take either profitability or the time
takes all the cash (incoming and outgoing) into account over the life of the equipment (or, if
applicable, over the life of the relevant project). Although the NPV is based on cash flows, it also
and outgoing cash into account over the life of the equipment (or the project). It also takes
of capital budgeting. It is also an important part of the language of finance. Therefore, it is
lllustration of Cumulative Cash Flow
Received
(Outow)
(Inow)
Cash Flow
Buy new equipment
replaced
199
Figure 171
illustrates these
Startup Cost Concept
If the proposal for capital expenditures incorporates operational expenses, the concept of
startup costs must also be taken into consideration. In these cases, management believes the
cost of starting up a new service line or a new program should be included as part of the original
This section discusses the process of requesting capital expenditure funds and the types of pro
The Process of Requesting Capital Expenditure Funds
hospitals radiology department director may want new equipment, but so does the surgery
department director, and so on. The various requests for funding are often
jected to a review process in order to make decisions about where, and to whom, the available
capital expenditure funds will go. While the upper levels of management make overall decisions
about future use of funds, the departmental funding requests represent the first step in the
Required
Additional
Space or
Renovation of
Existing Space
Required
Operating Revenue Forecast
&
Staffing Plan
&
Capacity Level Checkpoint
No
Capital Money
Required
Expenditures
Plan
Capital
Expenditures
Capital Money
Required
No
complex process than, say, a two-physician practice. The corporate culture of the organization
plays a part, too. Some organizations are extremely structured, while
others are more flexible in
Types of Capital Expenditure Proposals
r"DRVJSJOH
r6QHSBEJOH
r3FQMBDJOH
r'VOEJOH
r'VOEJOH
r"DRVJSJOH
reasonable figure that contains all appropriate specifications. The number of years of useful life
The reason why an upgrade is necessary must be clearly stated. What is the impact? What will
the outcomes be from the upgrade? The upgrade costs must be a reasonable figure that also
The rationale for replacing existing equipment with new equipment must be clearly stated.
ments in technology in the new equipment that are more advanced than
increased productivity
and/or outcomes.
Funding New Programs
A proposal for new program capital expenditures must take startup costs into account. This type
of proposal will generally be more extensive than a straightforward equipment
replacement
proposal because it involves a new venture without a previous history or proven outcomes.
Funding Expansion of Existing Programs
for a new program. You will have statistics available from the existing program with which to
201
gram. The most difficult selling point may be comparison with other departments funding
This type of proposal may be the most difficult to accomplish. Capital expenditures for
future
long-term use are often postponed by decision makers in cash-strapped organizations who
must first fulfill immediate demands for funding. Consider, for example, a
pital that is hemmed in on all sides by privately owned property. The
hospital will clearly need
expansion space in the future. An adjacent privately owned property comes on the market at
expansion is not scheduled until several
years in the future, it would be wise to seriously consider this acquisition of a capital asset for
EVALUATING CAPITAL EXPENDITURE PROPOSALS
Hard Choices: Rationing Available Capital
Most businesses, including those providing healthcare services and products, have only a lim
sary, then, to ration the available capital funds. Different organizations approach the rationing
process in different ways. However, most organizations will consider the
following factors in
r/FDFTTJUZ
r$PTU
r3FUVSO
ing. The overriding question is necessity. Necessity for the request pertains to the criticality of
sons necessary? If so, how necessary?
While necessity is an overarching consideration, the cost of capital to the organization for
the proposed capital expenditure is a computation of the sort we have previously discussed in
this section. Although the answer to what is the cost of capital is provided in the form of a
cost. The term is appropriate. Assume a rationing situation where unlimited funds are not
To summarize, the decision makers must apply judgment in making all these choices. Thus, the
The Review and Evaluation Process
The degree of attention paid to evaluation and the level of management responsible for making
scoring, the basic approach generally focuses on a single proposal and evaluates it on a fixed
The objective review and evaluation may actually first involve scoring to eliminate the very
low-scoring proposals. The remaining higher scoring proposals may then be ranked in accor
The criteria may, in turn, contain quantitative items such as outcomes and/or productivity
organizations core mission.
ment, however, has a different view. How the project will be financed may be their first question
INFORMATION CHECKPOINT
What is needed?
expenditure proposal for a particular project or a specific
Where is it found?
Probably with your manager or the director of your department
or, depending on the dollar amount proposed, perhaps
How is it used?

KEY TERMS

Key Terms
203
1.
Have you ever been involved in helping to create any part of a capital expenditure
If so, which type of proposal was it? Was the proposal successful?
3.
4.
Health Care Management Review
A Further
tions presented in this chapter.
Item: Assume the purchase of a new piece of laboratory equipment is proposed.
Cost: The laboratory equipment will cost $70,000.
Remaining value (salvage value): The lab equipment will be sold for $10,000 (its salvage value)
enue. In fact, the increase of revenue over expenses is expected to amount to $20,000 per year
for the five years. The cash flow is therefore expected to be as follows: Year 0
$20,000; year5
Table 17-A1
The investment of $70,000 is recovered
remaining balance to be recovered equals
zero. Therefore, the payback period is three
nizes the cash flows that are necessary to
Year
Cash Flow
Balance
(10,000)
10,000
understand and highlights risks. However, it does not take either profitability or the time value
accounting income is divided by the average level of investment to arrive at the accounting
(a non-cash amount) from the annual cash flow.
Step 1.1: First, we must calculate the annual depreciation amount. In this example the
tion will equal the equipments cost minus its salvage value.
The equipments cost is $70,000 and its salvage value at the end of its five-year life is
estimated
to be $10,000. Therefore, the total amount to be depreciated is the difference, or $60,000. To
by five years, or $12,000 per year.
Step 1.2: Next, we must use the depreciation amount to calculate the accounting income per
year. In this example, the accounting income represents the cash flow per year of $20,000 as
Table 17-A2
Step 2.2: Now divide the total investment of $80,000 by 2. The answer of $40,000 indicates the
income divided by $40,000 average
investment,
Commentary: While the accounting rate of
take the time value of money into account.
That is why it is known as the unadjusted
Accounting Income Input

Year
Cash Flow
Depreciation
Depreciation
12,000
12,000
12,000
12,000
12,000
it takes all the cash (incoming and outgoing) into account over the life of the equipment.
Table 17-A3
been calculated; see the middle column of Table 17-A1. Also enter the salvage value.)
tor for 10% for each period. Also, include the present value factor for the salvage value.
ating period (Years 1 through 5 plus the salvage value) and then by subtracting the initial cash
expenditure of $70,000 in Year 0 from the sum of the present value computations. In this exam
shown in Table 17-A3.
The IRR computation will be compared against the cost of capital. In our example the cost of

Salvage
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Value
Present value factor
(10% cost of capital)
Present value answers
18,180
16,520
15,020
13,660
12,400
207
This example solves for an initial investment of $70,000 and a positive cash flow of $20,000
per year for five years. Because the annual amount of $20,000 is the same for each of the five
years, we can use the Present Value of an Annuity of $1 presented in
Appendix13-C for this
the annuity present value (PV) factor for five periods. We compute 70,000 divided by 20,000
Step 2: Now we refer to Appendix 13-C, the Present Value of an Annuity of $1. We look
across the 5 row (because that is the number of periods in our example). We are
amounts. To find what 15% would be, we add the 3.605 to the 3.433 and
computer program will quickly give you a precise answer.
organizations cost of capital. In our example, the cost of capital is 10%, so the 15% IRR is
clearly greater.
A variance is, basically, the difference between standard
The volume variance is the portion of the overall variance
caused by a difference between the expected workload
expected workload level and the amount that would have
The quantity variance is also known as the use variance or
Understand the three types of
Compute a contribution
of the overall variance caused by a difference between the actual and expected price of an input
multiplied by the actual quantity of goods, or labor, consumed per unit of output, and by the
Variance analysis can be performed as a two- or a three-variance analysis. (There is also a five-
production). The three-variance analysis involves the three types of variances defined above.
The makeup of the two-variance analysis is compared with the three-variance analysis in
Actual computation is illustrated in
for three-variance analysis. The A, B, C, C-1, and C-2 designations are carried forward from
Figure 182. In Figure 183, the two-variance calculation is illustrated, and a proof total
Thr
ee-V
ar
iance
Ana
olume
Va
r
iance
(A
ctivit
y
Va
r
iance)
y
Va
r
iance
(Use
Va
r
iance
, Ef
f
icienc
y
Va
r
iance)
ice
Va
r
iance
(Spending
Va
r
iance
, Ra
te

Va
r
iance)
Tw
o-V
ar
iance
Ana
olume
Va
r
iance
(A
ctivit
y
Va
r
iance)
Variance Analysis andSensitivity Analysis
calculation is likewise illustrated, and a proof total computation is also supplied at the bottom
Another oddity in variance analysis that contributes to confusion is this: all three variable cost
ance and a quantity variance computed. But the variance is not known by the same name in all
tion for all three is the same. Note, too, that variance analysis is primarily a matter of inputoutput
analysis. The inputs represent actual quantities of direct materials, direct labor, and variable
overhead used. The outputs represent the services or products delivered (e.g., produced) for
Two-Variance Analysis
Actual Cost Incurred
Applied Cost
Three-Variance Analysis
Actual Cost Incurred
Applied Cost
Two-Variance Analysis.
Actual Cost Incurred
less
C
213
the applicable time period, expressed in terms of standard quantity (in the case of materials) or
of standard hours (in the case of labor). In other words, the standard quantity or standard hours
equates to what should have been used (the standard) rather than what was actually used. This
Services
example is a flexible budget with all the variances expressed in Therapy Minutes(TMs). (Therapy
. It deals with price or
utes (TMs). The quantity variance is broken out into four subtypes
physical, occupation, speech,
Calculation of Three-Variance Analysis.
Actual Cost Incurred
less
C-1
Applied Cost
less
C-2
(equals
both, either
combined
Variance Analysis andSensitivity Analysis
Minutes. Finally, it is assumed
is compared with the actual cost of $920,000 for this activity center, a favorable price variance
this activity center, an unfavorable quantity variance of ($52,500) is realized. Exhibit 182 also
Table181
[(3) 330,000 TM
$70,000
(favorable)
Quantity
Variance
($52,500)
(unfavorable)
Overhead
Cost
divided by
# Therapy Minutes
(Activity Level)
equals
Cost per
Therapy Minute
Actual
(1) $920,000
(3) 330,000
(5) $2.79
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
215
center within a physician practice in
expense,
1.
$180,000, while 96 actual procedures at $2,250 apiece totals line 2 column C $216,000.
3.
To prove this figure, multiply the excess 16 procedures at the top of column D times
1.

Key: F = Favorable variance, while U = Unfavorable variance.
Note: Dollar amounts shown for illustration only.
Variance Analysis andSensitivity Analysis
3 column C $144,000. The 96 actual procedures times the actual increased variable drug
2.
The total variable expense difference is $31,200 (line 3 column A $151,200 less line 3
3.
sented by the 16 extra procedures (96 minus 80 equals the 16 extra) times the $1,575
4.
The remaining difference is line 3 column B $6,000. It is represented by the rise in expense
column B accounts for only the rise in expense for the planned procedures (80), while
Proof total is as follows: the column B $6,000 and the column D $25,200 equals the entire
The entire $4,000 increase in line 4 fixed expense is attributed to the flexible budget vari

Total Expense
$10,000 U
$25,200 U
Key: F = Favorable variance, while U = Unfavorable variance.
Note: Dollar amounts shown for illustration only.
217
1.
The entire operating income variance amounts to a favorable $800 (line 6 column E
2.
The Flexible Budget Variance equals an unfavorable $11,200 (line 6 column C $32,000
4.
Proof total is as follows: favorable $12,000 variance less unfavorable variance $11,200
In closing, when should variances be investigated? Variances will fluctuate within some type of
Sensitivity analysis is a what if proposition. It answers questions about what may happen if
major assumptions change or if certain predicted events do not occur. The what if feature
defined, a
predicted
with absolute precision, forecasts will always contain a degree of
uncertainty. Thus what if
analyses become important to the managers decision
making. For
example,
will the
radiology departments operating income be
departments revenue is 10% greater than
the
A common example of sensitivity analysis is computing three levels of forecast revenue:
the basic, or most likely level, which is the planned goal; a high (best case) level; and a
low (worst case) level. A chart illustrating this three-level concept for revenue appears in
Figure185
Variance Analysis andSensitivity Analysis
The contribution income statement specifically
margin within the
income statement format. You will recall that the
iable costs. The remaining difference
income.
For example, assume 100 units are sold at
revenue. Further,
variable costs
amount to $3,000 (100times $30/unit
$3,000).
margin equals $2,000 ($5,000
to the chapter about cost behavior and break-even analysis.) Now further assume that fixed
($2,000 contribution margin less $1,200 equals $800). The format of a contribution margin
income statement will appear asfollows:
must be sold in order to yield a particular operating income. We will describe the contribution
the manager because it is easily understood and can be applied in many circumstances. The
formula for the contribution margin method of determining target operating income is as
r%FTJSFE
r6OJU
r7BSJBCMF
r5PUBM
Three-Level Revenue Forecast
Hi
Fo
cast
as
219
r%FTJSFE
r6OJU
r7BSJBCMF
r5PUBM
The contribution margin per unit therefore amounts to $40 ($100 sales price per unit less

Julie Smith is the Metropolis Health Systems Director of Community Relations. She has been
informed that the Health System will participate in the first area Wellness Gala, to be held at the
organizations each have an opportunity to earn dollars for their cause. Individuals attending the
gala will be prepared to, and are expected to, purchase items from the various booths. Julies
It is now Julies responsibility to make the financial arrangements and to coordinate the
Health Systems participation in the event. Last year the booth expense was $1,000, and
Julie uses this figure as her assumption of fixed cost for the coming years event. She finds
apiece, if she can place the order within 10 days (otherwise, the cost rises after the 10 days
Variance Analysis andSensitivity Analysis
The convention center representative now e-mails Julie with news: due to a recent renova
tion of the convention center, booth rental fees have increased. It will cost Julie $1,500 for the
booth. She then adds line 2 to her worksheet with a second set of assumptions: $1,500 fixed
You will recall that the break-even point is the point at which operating revenues and costs
is its transparency. The manager can easily explain his or her results, because the computations



Variable
221
Where is it found?
Possibly with the supervisor responsible for the budget. More
likely, it will be found in the office of the strategic planner or
How is it used?
To find where and how variances have occurred during the

KEY TERMS
1.
2.
Are any of the reports you receive in the course of your work ever in a format that includes
3.
Variance Analysis andSensitivity Analysis
Measurement Tools
ESTIMATES OVERVIEW
According to the dictionary, to estimate implies a judg
ment, considered or casual, that precedes or takes the place
rBNPVOU
rWBMVF
rTJ[F
mated? Relying on estimates for input to reports (financial
COMMON USES OF ESTIMATES
Using estimates often involves trade-offs, such as gaining a
Deadlines may dictate the use of estimates because there
managers call these quick and dirty results. The quick
Estimates may be purposely used instead of a more formal
forecasting process discussed in a preceding
chapter. Situa
tions do arise where an estimate is adequate. The manager
Understand four common
Estimate ending inventory.
Understand the concept of
Understand the use of the
Compute quartiles for
measurement purposes.
(of the more precise information)? Or will estimates adequately serve the purpose? Of course,
this managers decision will depend upon the intended purpose.
Internal Monthly Statements
Estimates may be commonly used in the preparation of short-term financial statements. For
example, the monthly statements that managers receive often contain a number of estimated
a historical basis because they are typically based on the organizations prior years operating
history. Thus, if bad debts for the last two years averaged 2%, the monthly statements for the
EXAMPLE: ESTIMATING THE ENDING PHARMACY INVENTORY
Certain healthcare organizations (or departments) require accounting for inventory. The most
common example in health care, of course, is the pharmacy. Internal monthly statements of the
pharmacy are not usually expected to reflect the results of an actual physical inventory (unless
your organization has an electronic inventory programand that is another story). So what to
Figure 191
riving at the cost of goods (drugs) available for sale. So far, the steps are the same and the
Estimating the Ending Pharmacy Inventory.
Drug
Inventory
Cost of Goods
(Drugs) Sol
Drug
Inventory
(Drugs)
Available
for Sale
Recorded
Recorded
Cost of
Goods Sold
(% of Sales)
Estimate
=
_
Estimates, Benchmarking, and Other Measurement Tools
result would be the same as that in a preceding chapter, where Figure 91 illus
to record inventory.
But now we will compute an estimated cost of goods (drugs) sold. To do this:


period. This percentage figure is your estimated assumption and it will probably come
of goods [drugs] sold equals 80% cost of goods sold [drugs] for last year. The 80% is your

months drug sales amounted to $70,000, multiply the $70,000 by 80% to arrive at $56,000
3.
Finally, we will compute the estimated ending drug inventory. We subtract the cost of
goods (drugs) sold (per Step 2 above) from the cost of goods (drugs) available for sale
(per Step 1 above) to arrive at the Estimated Ending Drug Inventory for the monthly
EXAMPLE: ESTIMATED ECONOMIC IMPACT OF A NEW SPECIALTY
Estimates can be extremely general, or they can reflect considerable judgment, with line-item
Figure 192
In this case we have a four-doctor physician practice. The four MDs decide to bring another
doctor into the practice. He is a pulmonary specialist. The county is growing rapidly, economically
Direct
Nursing Costs
half-time RN
increase
Administrative
Indirect Costs
of
Unrecognized Indirect Costs
Coder training (new codes)
225
demand within this growing area to support the services of a pulmonary specialist. They want him
to join their practice, even though they have not previously had such a specialty within this practice.
in adding the pulmonary specialist to the practice. He wants the report for their four oclock
another offer.
The practice manager is trying to close the books for the month, but makes some time to
anteed salary for the first year, and they have already projected what revenue he should produce
for the first year. There is an empty office available that was acquired in the initial lease for pur
poses of future expansion. Thus, the practice manager needs to estimate the impact on basic
Part 1: Add one half-time RN for direct support. Assume existing nursing staff can take up
Part 2: Assume an overall 10% increase in practice administration operating costs. He has no
istrative staff is not overworked at present and can handle tasks imposed by an additional phy
sician. Since he disregards adding any administrative staff, he feels estimating an overall 10%
Three months after the pulmonary specialist has arrived and joined the practice, the
a memo explaining that the administrative expenses were impacted by start-up costs such as
in the office software, training about pulmonary services for the medical records transcription
ist, and training for the office biller regarding the new codes. Healso notes the front office
OTHER ESTIMATES
Other commonly used computations are actually estimates. The weighted average inventory
inventory. The resulting average cost of inventory is in fact an estimate.
ent organizations tend to lean toward using one type over another. One healthcare organiza
tion, for example, may rely heavily on one type of measure, whereas another organization may
Estimates, Benchmarking, and Other Measurement Tools
We have previously discussed how measures over time are very effective when evaluating the use of
money. The example given in
Figure 193
now combines these measures over time with a two-part
refers to adjusting for the acuity level of the patient. It
may also refer to the level of resources required to provide care for the patient with the acuity level.)
zontal axis is time, a five-year span in this case. Two lines are plotted: the first is unadjusted for case
ever, when the case mix adjustment is taken into account, the plotted line flattens out over time.
Benchmarking is the continuous process of measuring products, services, and activities against
the best levels of performance. These best levels may be found inside the organization or out
side it. Benchmarks are used to measure performance gaps.
lar to the process being examined, can be identified and examined to establish criteria for
Adjusted Performance Measures over Time.
5,000
4,000
3,000
2,000
1,000
0
Year
ear 3
Year 4
Year
Unadjusted f
or Case Mix
227
process analysis. In parametric analysis, the characteristics or attributes of similar services or
products are examined. In process analysis, the process that serves as a standard for comparison
gic planning and for process engineering, provides information about the way things should or
possibly could be. Benchmarking is a primary information-gathering approach for opportunity
assessment when it is used in this way.
Benchmarking in Health Care
Financial benchmarking compares financial measures among benchmarking groups. This is
the most common type of peer group healthcare benchmarking in use. An example of a
healthcare financial benchmarking report is provided in
Table 191
. The computation of ratios
is described later in this chapter.
utilization and service delivery, on which inflow and outflow are based, are compared with those
Financial Benchmark Example
Indicator
Total
Low Quartile
No. of hospitals
105.0
Total margin (%)
11.0
Occupancy (%)
Deductions from GPR (%)
31.3
Medicare (%GPR)
10.0
13.7
Self pay (%GPR)
7.0
7.1
Managed care plans (%GPR)*
16.0
13.0
17.0
17.5
Other third party (%GPR)
14.0
15.0
14.0
12.0
Outpatient revenue (%GPR)
21.8
17.7
No. of days in accounts receivable
74.0
Cash ow as a percentage of total debt
27.0
Long-term debt as a percentage of
Change in admissions (20032007, %)
7.0
15.8
Change in inpatient days (20032007, %)
1.8
11.1
*Note: Managed care plans other than Title XVIII or Title XIX. All amounts are ctitious.
Reproduced with the permission of Wolters Kluwer Law & Business from J.J. Baker, Activity-Based Costing and Activity-Based Man
agement for Health Care, p. 140, 1998, Aspen Publishers, Inc.
Estimates, Benchmarking, and Other Measurement Tools
organizations indicators. Objective measurement criteria are always required for best practices
Other performance measures may be made outside the actual confines of the facility. Agood
example of a widespread performance measure would be the role of community hospitals in
the performance of local economies. Nonprofit organizations in particular are concerned
about their ability to measure such performance. This case study gives a specific direction for
quality
improvement, ultimately leads managers to explore how to improve some step in a process.
causes of such variation.
Figure 194
The chief financial officer of XYZZ Hospital believes that the billing and collection
department is inefficientor, to be more specific, that the process is probably inefficient. An
activity analysis is conducted. It shows that billing personnel are spending too much time on
bills. (Resubmitting denied bills is an inefficient and nonproductive activity, as we have dis
cussed in a preceding chapter.)
the activities recorded, the number of times the activities were observed, and the percentage
of the total number of times represented by each count. In Figure 194, the total number of
times these activities were observed is 43. The number of times that processing denied bills for
resubmission (coded as PDB) was observed is 22. Thus, 100 (22/43)
horizontal axis, the
activities are listed, creating bases of equal length for the rectangles shown in the diagram. The
activities are listed in decreasing order of occurrence. Constructing the diagram in this manner
means that the most frequently observed activity lies on the left extreme of the diagram and the
least frequently observed activity on the right extreme. The heights of the rectangles are drawn to
229
30
20
10
0
RWS
LD
CD
No
.%
22
51
RW
S1
02
3
LD
61
4
CD
51
2
43
100%
PD
Process Denied Bills
RW
Review with Supervisor
LD
= Locate Documentation
= Copy Documentation
51
The next step is to locate the cumulative percentage of the activities, using the right-hand
, is 51%. (The calculation of the
RWS
74%. The 74% is plotted over the right-hand side of the rectangle
RWS.
, is
The
100%), and it is plotted over
The next step is to label the axes and add a title to the diagram. In Figure194, the tallest rect
angle could be lightly shaded to highlight the most frequent activity, suggesting the one that
may deserve first priority in problem solving.
after, if the improvement measures are effective, either the order of the bars will change or the
curve will be much flatter.
activities into account. The concern is that a very frequent problem may nevertheless imply less
frequencies, as this example does, the analyst needs to decide that the seriousness of the problem
is roughly proportional to the frequency. If seriousness fails to satisfy this criterion, then activities
should be measured in some other way. Figure 194 underlines the importance of judging the
Estimates, Benchmarking, and Other Measurement Tools
Quartile Computation
Reporting by quartiles is an effective way to show ranges of either financial or statistical results.
Quartiles represent a distribution into four classes, each of which contains one-quarter
of the whole. Each of the four classes is a quartile. Quartile computation is not very compli
cated, although several steps are involved. We can use the outpatient revenue line item in
Table 191 to illustrate the computation of quartile data. (Outpatient revenue, expressed
as a percentage of all revenue, is found on the tenth line down from the top in Table 191.)
We see from the first line that 500 hospitals were in the group used for benchmarking. The
median is found for the outpatient revenue of the entire group of hospitals. (Most computer
pitals revenue is identified as a percentage of this median. These percentages are arrayed.
In the case of this report, cutoffs were then made to arrange the arrayed percentages into
mid-quartile group.
in this report. Thus, the outpatient revenue (expressed as a percentage of gross revenue) for
the upper-quartile group in the report is 25.0; for the mid-quartile group, 21.8; and for the low-
in the left-hand column; the grand total amounts to 22%.) In summary, quartiles are based on
INFORMATION CHECKPOINT
What is needed?
An example of estimates, either used in some way in your
How is it used?

KEY TERMS
Performance
Performance Measures

Key Terms
231
3.
Does your organization use financial benchmarking? Would you use it if you had a chance
Merriam Websters Collegiate Dictionary
, 10th ed., s.v. Estimate.
Estimates, Benchmarking, and Other Measurement Tools
lytics and its impact upon the healthcare industry.
DEFINING DATA ANALYTICS
Data analytics represents the process of examining big data
to uncover hidden patterns, unknown correlations, and
What Are Healthcare Analytics?
Data analytics applied to the healthcare industry is referred
to as healthcare analytics. In addition to helping reveal
ics enables new approaches toward strategic forecasting,
analyzes for patterns or trends.
In other words, big data
enhances data analytics by applying more sophisticated
analysis techniques, by using new tools, and by sharing
Describe healthcare
Define big data and data
Recognize the differences
predictive, and prospective
Understand the impact of
Why Is Big Data Different?
Big data typically refers to volumes of data so large that traditional health information technolo
gies and systems can no longer manage or process the information. Also characteristic of big
How Is Data Volume Measured?
The basic unit of data measure is the byte, and larger measures are generally expressed in ascend
ing order, beginning with the byte. Thus, 1024 bytes equal one kilobyte (KB); 1024 kilobytes equal
Exhibit 201
illustrates these data measure units.
We need to know data volume amounts in order to allow for adequate data storage. While
storage needs will only continue to grow. Consider, for example, Kaiser Permanente: This
To put such volume into perspective, using a byte converter app we find
that one terabyte equals 1,099,511,627,776 bytes.
However, health care should focus on the relevance of the data rather than the volume of
What Is Big Data in the Healthcare Industry?
Healthcare industry data are of many types and are derived from many sources. A sampling of
r1IZTJDJBOT\b
Laboratory data
Patient data in electronic patient
Machine-generated and/or sensor
data, such as from monitoring vital
Social media posts (Twitter feeds,
blogs, and status updates on
Website pages
Information that is non-patient spe
cific (emergency care data, news
One Terabyte (TB)
1024 Terabytes
Data Volume Measures
TWO BASIC APPROACHES TO DATA ANALYTICS
can be extremely effective in dealing with healthcare tasks such as inventory control or staffing
The Predictive Analytics Approach
Figure 201
in the data. Finding relationships such as new correlations and business trends, in turn, may
lead to opportunities to improve care, reduce costs, and improve operational performance.
Two Basic Approaches to Data Analytics.
235
how many patients were treated on Rodeo Saturday night compared to the previous 20 or 30
Predictive analytics told the hospital what the likelihood was that it would need an increase in
certain services that would be relevant to these emergency room injuries. (Needing, for exam
If, however, prospective analytics had been performed, the hospital could have seen how to
specifically adjust resources for the overload. For example, if the X-ray suites were all full, the
analytics would suggest which cases could have portable X-rays brought to bedside instead of
using the suites. In other words, prospective analytics would have provided possible solutions
DATA ANALYTICS AND HEALTHCARE ANALYTICS SERVE MANY PURPOSES
Using Predictive Analytics to Answer a Patient Population Question
From a demographic perspective, predictive analytics can help answer a primary question: Who
are the most likely candidates for health services? For example, one hospital learned that their
self-pay population was split equally among men and women, with their ages falling mostly
incentives to reduce bad debt and putting a program in place in which the patients agreed to
Using Predictive Analytics in the Human Resources Department
tion of predictive analytics to peoples careers is illustrated by the following example. In 2010,
cognitive-skill assessment, and multiple-choice questions about how the applicant would handle
rules used in calculations) behind the evaluation analyzed the responses, along with factual
information gleaned from the candidates applicationas used in conjunction with in-person
interviews.
drivers of readmissions. Analytics can also provide a financial model that calculates the overall
impact of readmission rate reductions on reimbursement, cost, and value-based purchasing
Using a Sophisticated Analytics Approach to Combat Prescription Drug Fraud
Express Scripts, a national pharmacy benefit management organization, has created the
data analytics to uncover patterns of potential fraud or abuse, and scans for behavioral red
are combined with Express Scripts Health Decision Science platform (behavioral sciences,
clinical specialization, and actionable data) to identify 290 potential indicators of pharmacy
One case uncovered by the team involved a husband and wife. Over just eight months,
obtained almost 4,000 tablets from 9 physicians and 12 pharmacies. The tablets included oxy
The team member goes on to say ...upon contacting
that prohibited obtaining narcotics from other doctors. However, none of the physicians was
aware of the couples visits to the others.
DATA MINING
By using software to look for patterns in large batches of data, healthcare organizations can
and decrease costs. Data mining depends on effective data collection and working with many
A Hospitals Clinical Research Example of Data Mining
A noteworthy application of data mining to clinical medicine is occurring at Memorial-Sloan
of data produced by tumor sequencing to learn more about the biology of cancer.
They use
more-precise and cost-effective treatments for people with cancer more quickly.
237
Developing a Protocol Through Data Mining
Using a combination of clinical experience and big data analytics research, The University of
In another example illustrating the potential of big data, California-based Kaiser Permanente
analysis led to the discovery of adverse drug effects from Vioxx, an anti-inflammatory drug,
IMPACTS OF HEALTHCARE ANALYTICS
The impact of healthcare analytics reaches across the entire industry. Three examples of such
impacts follow.
Noteworthy regarding the growth in the data analytics and cloud computing business is IBMs recent
acquisition of Truven Health Analytics for $2.6 billion. The magnitude of the purchase is reflected
in the enhanced capabilities of the companys Watson Health Unit, which is a digital repository of
health-related information for approximately 300 million patients. Truvens contribution is to add
patient-related payment information to a database that already includes data from patients elec
The ultimate goal is to have Watsons artifi
Big data creates opportunities and challenges. Its revolutionary insofar that it gives healthcare
New tools and statistical techniques are used to extract meaningful information from what
Collaborative Efforts
By necessity, the generation and utilization of big data in health care involves collaboration
instrumental in integrating data, generating new knowledge, and translating knowledge into
practice. This has necessitated a shift in current patient care practices. Optums efforts have
focused on enabling physicians to utilize big data to improve the care of patients with comor
A challenge for Optum amidst their collaborative efforts is to
Thus, analytics provide the data to reshape healthcare environments in the transition from
fee-for-service to value-based reimbursement, and in so doing can help by strategically tar
Other impacts that result from enhanced data analytics and related data sharing include
CHALLENGES FOR HEALTHCARE ANALYTICS
The human resources challenge in the use of big data is well illustrated by AT&Ts Vision 2020
Plan. The essence of the challenge is to retrain its 280,000 employees to enable them to learn
coding skills and make quick business decisions based upon huge volumes of data that are all
as Google and Amazon, AT&T executives are urging staff to spend 510 hours a week in online
ing. The new systems facilitate collecting more data, quickly analyze information about what
ing the promise of big data with consumer privacy and security is an essential consideration.
Along with rising digital expectations of practitioners and patients, healthcare IT executives
know they face strict requirements related to patient privacy and data protection, leaving them
INFORMATION CHECKPOINT
What is needed?
Find a document or report that shows it has applied data
Perhaps in the IT department or in a managers office.
How is it used?
Its use depends on the item you find. It could be used for

KEY TERMS

Key Terms
239
1.
Is your organization using big data resources to address clinical and/or administrative
2.
Have you or your area of work been involved in using big data and data analytics to
3.
Consider your organization and the context in which it operates. What would be your
1.
www.sas.com
2.
Z. Budryk, 5 Health IT Terms Every Hospital CEO Must Know (June 24, 2015).
.fiercehealthcare.com/healthcare/5-health-it-terms-every-hospital-ceo-must-know
mation Technology on Managed Care Pharmacy: Today and Tomorrow,
Journal of Man
aged Care & Specialty Pharmacy,
4.
Institute for Health Technology Transformation (IHTT), Transforming Health Care
Through Big Data: Strategies for Leveraging Big Data in the Health Care Industry, 2013,
Whats a Byte? http://www.whatsabyte.com/P1/byteconverter_App.htm (accessed Febru
ary 17, 2016).
6.
W. Raghupathi and V. Raghupathi, Big Data Analytics in Healthcare: Promise and
Health Information Science and Systems,
2 (2014): 3, http://www.hissjournal
.com/content/2/1/3
7.
A. Bickmore, Prospective Analytics: The Next Thing in Healthcare Analytics,
www.healthcatalyst.com/using-prospective-analytics-to-improve-outcomes (accessed
February 17, 2016).
Healthcare Finance News
10.
http://www.mentorhealth.com/control/category/~category_id=W_
HOSPITAL/~status=live (accessed December 16, 2016).
11.
Express Scripts, INFOGRAPHIC: Prescription Drug Fraud and Abuse,
prescription-drug-fraud-and-abuse (accessed February 16, 2016).
13.
Express Scripts, Rx Addiction: One Familys 7,000 Pills, http://lab.express-scrpts
February 16, 2016).
15.
E. Kiesler, Tumor Sequencing Test Brings Personalized Treatment Options to More
.mskcc.org/blog/new-tumor-sequencing-test-will-bring-personalized-options-more-
(accessed February 2015).
16.
17.
Institute for Health Technology Transformation, Transforming Health Care Through
Big Data: Strategies for Leveraging Big Data in the Health Care Industry, http://c4fd
S. Lohr, IBM Buys Truven for $ 2.6 Billion, Adding to Trove of Patient Data,
New York
Times
, February 18, 2016, http://www.nytimes.com/2016/02/19/technology/ibm-buys-
20.
J. Shaw, Why Big Data Is a Big Deal,
Harvard Magazine
, MarchApril 2014, http://
harvardmagazine.com/2014/03/why-big-data-is-a-big-deal
21.
N. D. Shah and J. Pathak, Why Health Care May Finally Be Ready for Big Data,
Harvard Business Review
, December 3, 2014, https://hbr.org/2014/12/why-health-
care-may-finally-be-ready-for-big-data
Q. Hardy, AT&Ts New Line: Adapt, or Else,
New York Times
, December 16, 2016, www
.nytimes.com/2016/02/14/technology/gearing-up-for-the-cloud-att-tells-its-workers-
adapt-or-else.html?_r=0
241
Financial Terms,
INVESTMENT OVERVIEW
The language of investment is an integral part of the finance
world. Being knowledgeable about the meaning that lies
mon investment terms. We will briefly explore investment
terminology and related meanings for cash equivalents,
company ownership (public or private) in the context of
tion. You will recall from a previous chapter that current
term securities (those that will mature in one year or less).
ance sheet. Long-term investments, on the other hand,
involve longer-term securities that will mature in more than
one year. These investments should appear as long-term
CASH EQUIVALENTS
be liquidated and turned into cash on short notice when
needed. Healthcare organizations need to keep operat
ing monies on hand. But it is not usually practical to hold
those monies in a non-interest-bearing checking account.
Instead, the chief financial officer will probably decide to
Actual cash includes not just currency (the dollar bills
Understand what the FDIC
Understand the difference
Understand the difference
companies and public
companies.
Define Gross Domestic
Understand the difference
Describe the differences
among mean, median,
Statistical Terms Used
r$FSUJGJDBUFT
r(PWFSONFOU
5SFBTVSZ
5SFBTVSZ
r.POFZ
All of these short-term investments should be not only very liquid, but low risk. (A prudent chief
Certificates of deposit can be purchased for various short periods of time (30 days, 60days,
period, or term, expires, without paying a penalty.
Government securities that rank as cash equivalents include both Treasury bills and Treasury
notes. Treasury bills are typically issued with maturities of 3, 6, or 12 months. There is a mini
mum dollar amount to purchase. A Treasury bill pays the full amount invested if redeemed at
maturity. If the bill is redeemed prior to maturity, however, the amount received may be either
Treasury notes are typically issued with longer maturitiesyears instead of months. The
shortest maturity period for a Treasury note is one year. A one-year note would be classified as
servative instruments. Portfolio managers, who are expected to manage responsibly and thus
draw funds by writing what is actually a draft against the fund, although most everyone thinks
GOVERNMENTAL GUARANTOR: THE FDIC
In the United States, the Federal Deposit Insurance Corporation (FDIC) preserves and pro
institutions by identifying and monitoring and addressing risks to the deposit insurance funds;
through December 31, 2009. However, this was supposed to be a temporary increase and the
FDIC deposit insurance was supposed to be restored to its usual limit of $100,000 after that date.
Savings, checking, and other deposit accounts are combined to reach the deposit insurance limit.
Deposits held in different categories of ownershipsuch as single or joint accountsmay be
It is important to note that not all
A bond is a long-term debt instrument under which a borrower agrees to make payments of
interest and principal on particular dates to the holder of the debt (the bond). We have titled
Understanding Investment and Statistical Terms
this section long-term investments in bonds, but in actuality the bondholder is a creditor,
because bonds are liabilities to the issuing company.
Because these are long-term contracts, bonds typically mature in 20 to 30 years, although
the principal is paid at maturity. (Although there are exceptions to this rule of thumb, too.)
Three types of bonds are discussed below.
Municipal bonds are long-term obligations that are typically used to finance capital projects.
might be, for example, a county, a bridge authority, or the authority for a toll road project.
ity that issues them. This means the bonds are backed by the full taxing authority of the munici
Revenue bonds, as their name implies, are backed, or secured, by revenues of their particular
bonds through a local healthcare financing authority.
Mortgage Bonds
Mortgage bonds, as their name implies, are backed, or secured, by certain real property. When
first mortgage bonds are issued, this means the first mortgage bondholders have first claim to
FDIC-Insured
Not FDIC-Insured

\tVOEFSXSJUUFO

5SFBTVSZ
247
Debentures
Debentures are bonds that are unsecured. Instead of being backed by real property, debentures
debentures cannot be paid until any and all debt obligations that are senior to the subordinated
a bondholder is a creditor, because bonds are liabilities to the issuing company. On the other hand,
an individual or organization that buys stock in that company becomes an investor, not a creditor.
Preferred Stock
a fixed-rate dividend payment, much like a bonds interest payment. But like common stock, it
amount of the fixed-rate dividend payment. (Also note that the preferred stock dividends are
mon shares. The exchange is usually at a particular time and price, and the exchange ratio of
Stock Warrants
Stock warrants allow the owner of the warrant to purchase additional shares of stock in the
company, generally at a particular price and prior to an expiration date. Warrants do not pay
PRIVATELY HELD COMPANIES VERSUS PUBLIC COMPANIES
A small company with common stock that is not traded is known as a privately held company.
Understanding Investment and Statistical Terms
many larger public companies may be listed on one of several stock exchanges. Stock exchanges
exist to trade the stock of publicly held companies. At the time of this writing, besides mul
tiple regional exchanges such as the Chicago Stock Exchange, there is the American Stock
Exchange, known as AMEX, along with the New York Stock Exchange, known as the NYSE.
(At the time of this writing it is probable that the New York Stock Exchange will be acquired by
the Intercontinental Exchange [ICE]. If so, the NYSE acronym may be changed to reflect the
Smaller public companies, however, may not be listed on a stock exchange. The stock of
these companies is considered to be unlisted; instead, their stock is traded over the counter,
as of closing. A stock table will generally contain four columns: the first column is an abbre
viation of the public companys name, the second column is the companys symbol (an alpha
symbol), the third column is the stocks price as of closing for that day, and the fourth column is
organizations as examples, Johnson & Johnsons symbol is JNJ, while Humana, Inc.s symbol
Governmental Agency as Overseer
ganized as a somewhat different entity with somewhat different responsibilities.) The mission of
ties exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here, the
INVESTMENT INDICATORS
The annual rate of inflation (or deflation) is a typical investment indicator, as is the gross
Inflation Versus Deflation
services resulting in a continuing rise in the general price level.
Indexed to inflation means these monies will rise in accordance with an inflationary
249
Deflation, on the other hand, means a contraction in the volume of available money and
Deflation is feared because the contraction
in volume of available money and credit generally results in a fall in prices that limits and/or
reduces the countrys economic activity.
Gross Domestic Product (GDP)
The GDP measures the output of goods and services produced by labor and property located
Investors watch the GDP because this measure is considered to be the
gold standard measure of the countrys overall economic fitness. The Bureau of Economic
of the GDP. The BEA is also responsible for the price index for gross domestic purchases. The
STATISTICS OVERVIEW
This overview provides an introduction to statistics, along with a discussion of mathematics
Introduction
This section contains general definitions of statistical and other terms that may commonly be
used within the finance department. It is important to understand that our usage of statistical
terms in the world of healthcare finance is a specialized view. (For instance, in the case of one
example, we are concerned with how statistical analysis is used to score performance measures.)
In other words, we need enough information to understand the general process and what the
terms mean in general usage. As such, the following definitions are not technical, but instead
The Field of Mathematics Versus the Discipline of Statistics
The field of mathematics is broad and varied. The National Council of Teachers of Mathematics
standards are important because they help to understand the breadth and depth of mathematics.
math standards are problem solving, communication, reasoning, and connections. Content
math standards are statistics and probability, fractions and decimals, estimation, number sense,
field of mathematics includes, among other disciplines, those of statistics and probability as well
Understanding Investment and Statistical Terms
In other words, statistics often provides sophisticated analytical results, while arithmetic pro
COMMONLY USED STATISTICAL AND OTHER MATHEMATICAL TERMS
Mean, median, and mode are basic statistical concepts, but they are often confused for one
another. The following descriptions are intended to clarify the differences among them.
bers that are arranged, or ranked, in order. They can be arranged either from the highest to
: The mean is the average of numbers, or values. To obtain the average, all the values are
: The median occupies a position in a ranked series of values (numbers) in which the
same number of values appear above the median as appear below it. Or, to put it another way,
there are an equal number of values (numbers) above and below the median. (In a situation
: The mode is the number, or value, that appears for the most times (is the most frequent)
Illustrating the Difference
We show these differences in
Table 211
. Here you see a series of physicians scores. Their
Other Statistical Analysis Terms
These descriptions pertain to other types of statistical analysis terminology.
251
Measure
Measurement
Standard Deviation:
Standardized Measure or Scale:
Statistically Significant:
In general terms, a result or relationship is found to be reliable, and
Variable:
A finding or quantity that can vary, or is apt to vary. Examples of variables include just
able, because it does not vary [and thus is constant].)
Variance
Terms About Distributions
These descriptions pertain to distribution terms, such as those used to explain scoring
Frequency Distribution:
A count of how many times (how frequently) a number appears in a group
Physicians CPIA Scores
Physician
Score
Mode (The most common score)
Median (The middle score)
Total
divided by 9 = 40
Mean (The average score)
Modied from W. Vogt,
p. 178.
Illustration of Mean, Median, and Mode
Understanding Investment and Statistical Terms
Quartile:
shown to the right of the decimal point has a value of less than 1 (1 dollar, in this example).
Indicates both part of a whole (the numerator, which is the top part) and the entire
whole (the denominator, which is the total number of parts to be divided). For example, 30
cents can be written as a fraction (30/100) because the numerator is the part (30) and the
: The top part of a fraction. The numerator indicates the portion of the total under
Denominator
: The bottom part of a fraction. The denominator indicates all the values under
Percent (Percentage):
Typically 1 part or unit in every 100 parts or units. For example, 50% means
Terms About Data
These descriptions pertain to data. Note that the word data is plural. (This means that we
Data
: The factual information being analyzed. This information is typically used to measure
Data Entry
Data Processing
: Generally speaking, taking raw data and converting it into a form that can be
Data Standardization
: The process that converts data into a standard, such as the creation of
253
Terms About Time Measurements
Base Year
Performance Period
: A unit of time during which performance is measured.
way to show and see information mathematically.
There are multiple types of graphics avail
Pie Chart:
Bar chart:
Line chart:
Column chart or table:
Venn diagram:
Illustrated examples of a pie chart, bar chart, and line chart are found in the chapter, Using
To summarize, we may not tend to design a graphic for its particular use. Instead we may rely
on two or three formats that are used over and over. However, we should try to design a graphic
that communicates results that are often complex in a precise, clear and efficient manner.
INFORMATION CHECKPOINT
Where is it found?
At a newsstand or possibly within the offices of your own
How is it used?
Locate the Stock Tables section of the
Journal
umn headings in the tables and locate the names of various
stock exchanges that are included in the findings.

KEY TERMS
Corporation (FDIC)
Understanding Investment and Statistical Terms
Commission (SEC)
Stock Warrants
Do you know if your own monies on deposit are FDIC insured? If you do not know, how
Do you know of a healthcare company whose stock is publicly held? If you do not know,
3.
Do you know if any healthcare company that you have worked for (now or previously)
had issued revenue bonds that were purchased by investors? If you do not know, how
4.
Corporation, http://www.fdic.gov/about/index.html
3.
Wall Street Journal Opinion, ICE Buys NYSE,
Wall Street Journal
, December 21, 2012,
4.
U.S. Securities and Exchange Commission, The Investors Advocate: How the SEC
modified June 10, 2013, www.sec.gov/about/whatwedo.shtml
Merriam Websters Collegiate Dictionary
, 10th ed., s.v. Inflation.
8.
U.S. Department of Commerce, Bureau of Economic Analysis (BEA). News Release: Gross
Domestic Product: Fourth Quarter 2008 (Final), http://bea.gov/newsreleases/national
What Is Mathematics? p. 1,
www.2.ed.gov/pubs/EarlyMath/whatis.html
R. Hawkins and J. J. Baker.
Management Accounting for Health Care Organizations: Tools and
Techniques for Decision Support
255
Business loans, as the term implies, represent debts
debt and how much to take on are common and necessary
parts of financial planning. This type of planning involves
the organizations capital structure, as discussed in the fol
OVERVIEW OF CAPITAL STRUCTURE
debt and equity.
Capital structure means the proportion of debt versus
equity within the organization. The phrase capital structure
actually refers to the debtequity relationship. For example,
if a physician practice partnership owed $500,000 in debt and
also had $500,000 in partners equity, the partnership capital
Different industries typically have different debt
equity relationships. In the case of health care, the chief
financial officer of the organization is usually responsible
for guiding decisions about the proportion of debt. The
chief financial officer will take into account various sources
SOURCES OF CAPITAL
r#PSSPXJOH
r#PSSPXJOH
r3FUBJOJOH
r4FMMJOH
Understand what capital
Recognize four sources of
Explain an amortization
Borrowing from a lending institution is generally classified by the length of the loan. Short-
Borrowing from investors assumes the organization is big enough and has the proper legal
structure to do so. A common example of borrowing from investors is that of selling bonds.
Bonds represent the companys promise to pay at a future date. When bonds are sold, the pur
chaser expects to receive a certain amount of annual interest and also expects that the bonds
proprietary, or for-profit, company. (Of course this assumes there is an excess of funds toretain.)
Church-affiliated not-for-profits, for example, may be able to solicit donations. This example
Selling an additional interest in the organization depends on its legal structure. Typically, this
Not-for-profit organizations are bound by legal limitations and may not be able to follow this route.
described
Interest Expense
Payments on a business loan typically consist of two parts: principal and interest expense. The
principal portion of the loan payment reduces the loan itself, while the rest of the payment is
The amount of principal and the amount of interest contained in each payment are
$60,000. Monthly payments will be made over a 3-year period, and the annual, or per-year, inter
est rate will be 12%. The first 6 months of the amortization schedule for this loan is illustrated in
Table 221
of this chapter.
The interest expense for each monthly payment is computed on the principal balance
remaining after the principal portion of the previous payment has been subtracted. The
tion of Payment column. Remember that the 12% annual interest rate in this example amounts
to 1% per month. You can see how 10% of $60,000.00 amounts to a $600.00 interest payment
The remainder of the payment amountafter interest expenseis then deducted from the
principal amount due, as shown in Table221. Thus, of the $1,992.86 monthly payment 1, if
shown can vary. For example, the entire 36-month amortization schedule forthe Table221
different
from Table 221. While the basic information necessary for
The term loan costs covers expenses necessary to close the loan. Loan closing costs generally
include some expenses that would be reported in the current year and some other expenses
Suppose, for example, the Great Lakes Home Health Agency bought a tract of land
for expansion purposes. The home health agency paid a 20% down payment and obtained
mortgage financing from a local bank for the remainder of the purchase price. When
the loan was closed, meaning the transaction was completed, the statement that lists closing
costs included prorated real estate taxes and points on the loan. Points represent a certain
The prorated real estate taxes represent an expense to be reported in the current year by
the HHA. The points, however, would be spread over several years. How would this multiple-
not yet recognized as expense. Each year a certain portion of that amount would be charged
to current operations as an amortized expense. Amortization expense is a noncash expense
that is assigned to multiple reporting periods. It works much the same way as depreciation
MANAGEMENT CONSIDERATIONS ABOUT REAL ESTATE FINANCING
Real estate financing typically occurs in the form of real estate mortgages. Management must
take several important considerations into account when contemplating a real estate purchase
r8IBU
\t30*\n
r8IBU
r8IBU
r8IBU
Payment
Total
Principal
Interest Expense Portion
Remaining
Payment
Portion of Payment
of Payment
Principal Balance
$58,607.14
57,200.35
557.79
51,431.09
Loan Amortization Schedule
259
r8IBU
r*T
in managements decision-making process.
be rationed within an organization. Repaying long-term loan obligations will impact the facilitys
cash flow for years to come, and decisions to undertake a large debt load should not be made
lightly. Therefore, most institutions and/or companies have put a formal approval process into
place that generally begins with the chief financial officer and his or her staff and progresses
upward all the way to board of trustees approval, depending on the amount of the debt proposed.
Because of the implications, management decisions about business loans are often interwo
INFORMATION CHECKPOINT
Where is it found?
In the department responsible for the organizations
How is it used?

KEY TERMS
Long-Term Borrowing
Short-Term Borrowing
Total payments: 36
Total repaid: $71,742.96
Total interest paid: $11,742.96
Take any line item on the next page. If you add the amount in the principal column and the amount in the interest
Amortization
22-A
Payment

Principal
Principal
Interest
Principal
Interest
Balance
*The nal payment has been adjusted to account for payments having been rounded to the nearest cent.
36-Month Sample Amortization Schedule
Versus Leasing
Understand what purchasing
Understand what leasing
Recognize a for-profit
Recognize a not-for-profit
Purchasing equipment means taking title to, or assuming
the equipment is recorded on the organizations balance
the organizations cash reserves, or the organization could
finance all or part of the purchase. If financing occurs, the
known as a financial lease. This is a very real question that
affects business decisions. The financial lease is described
The lease-purchase is a formal agreement that may be
called a lease, but it is really a contract to purchase. This
contract-to-purchase transaction is also called a financial
be recorded on the books of the organization as a purchase.
Generally speaking, a lease must be capitalized and thus
1.
An operating lease is treated as an expense of current operations. This is in contrast to the
BUY-OR-LEASE MANAGEMENT DECISIONS
purchase
some cases, however, this is not true. The organization might decide to use cash from its own
service contracts or service agreements (to service and/or repair the equipment) are made
ment before the comparison between leasing and purchasing can occur. Why?
Because the
examine two clinics: Northside Clinic, a for-profit corporation, and Southside Clinic, a not-for-
For both Northside and Southside, assume that the equipments cost will be $50,000 if it is
purchased. Likewise, assume for both Northside and Southside that if the equipment is leased,
We also need to make assumptions about depreciation expense for the purchased equip
ment. We further assume straight-line depreciation in the amount of $10,000 for years
of depreciation, whereby the amount will be one-half of $10,000, or $5,000. We will fur
ther assume the purchased equipment will be sold for its salvage value of 10%, or $5,000,
on the first day of year 5. (Therefore, the full amount of [prior] year 4s depreciation can
for-profit is subject to income tax. We assume the federal and state income taxes will amount to
one-quarter of the total expense in each year. The depreciation expense and its equivalent tax
Choices: Owning Versus Leasing Equipment
Table 231
. Also, the same rationale is applicable for the leasing
expense in the for-profit organization.
In the following section, we compare two financial situations that affect the way the analysis
analysis, what is the major difference? As we have previously stated, the for-profit practice real
izes tax savings on expense items such as depreciation. The not-for-profit clinic does not realize
such tax savings because it does not pay taxes. Consequently, one analysis later here (the for-
profit) includes the effect of tax savings on depreciation, and the other analysis (the not-for-
equipment in a for-profit organization compared with that of a not-for-profit orga
nization.
Table 232A.1
Table 232A.2
ing versus leasing in a for-profit organization. Table 232A.1 illustrates the cost of owning. The
Depreciation Expense Computation
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Depreciation expense
$10,000
$10,000
$10,000
$10,000
Depreciation expense tax savings
Cost of OwningNorthside Clinic (For-Prot)Comparative Cash Flow
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Equipment purchase price
Depreciation expense

tax savings
Salvage value
Cost of LeasingNorthside Clinic (For-Prot)Comparative Cash Flow
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Equipment lease (rental)

payments
($11,000)
($11,000)
($11,000)
($11,000)
($11,000)
Lease expense tax

savings
265
Cost of OwningSouthside Clinic (Not-for-Prot)Comparative Cash Flow
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Equipment purchase price
Depreciation expense

tax savings
10
Salvage value
11
Cost of LeasingSouthside Clinic (Not-for-Prot)Comparative Cash Flow
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
12
Equipment lease (rental)

payments
($11,000)
($11,000)
($11,000)
($11,000)
($11,000)
13
Lease expense tax

savings
14
Table 232A.2 illustrates the cost of leasing in the for-profit organization. The equipment
Table 232B.1
Table 232B.2
owning versus leasing for the not-for-profit organization. Table 232B.1 illustrates the cost
ings from depreciation expense because it is exempt from such income taxes. Therefore, the
depreciation expense tax savings entry on line 9 is shown as not applicable, or n/a. The result
Table 232B.2 illustrates the cost of leasing in the not-for-profit organization. The equip
affected by tax savings from the lease payments because it is exempt from such income taxes.
Therefore, the lease expense tax savings entry on line 13 is shown as not applicable, or n/a.
Computing the Comparative Present Value Cost of Owning Versus Cost of Leasing
sus leasing equipment in a for-profit organization compared with that of a not-for-profit
Choices: Owning Versus Leasing Equipment
Table 232C.1
and
Table 232C.2
now illustrate the present value cost of owning versus
cash flow computed on line 4. Line 16 then shows the present value factor for each year at 8%,
which result from multiplying line 15 times line 16. The overall present value cost of owning
Table 232C.2 illustrates the present value cost of leasing in the for-profit organization.
Finally,
Table 232C.3
compares the for-profit organizations cost of owning to its cost of
The tables now illustrate the present value cost of owning versus leasing for the not-for-profit
Table 232D.1
illustrates the present value cost of owning. It first carries forward
Cost of OwningNorthside Clinic (For-Prot)Comparative Present Value
For-Prot
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
15
16
Present value factor (at 8%)
17
Present value answers =
$2,315
$2,143
18
Present value cost of owning =
($37,064)
Cost of LeasingNorthside Clinic (For-Prot)Comparative Present Value
For-Prot
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
19
Present value factor (at 8%)
Present value answers
($7,640)
($7,070)
Present value cost of leasing
Comparison of CostsNorthside Clinic (For-Prot)
Computation of Difference
267
Table 232D.2
illustrates the present value cost of leasing in the not-for-profit organization. It
present value factor for each year at 8%, which is the assumed cost of capital in this example. Line
30 contains the present value answers, which result from multiplying line 28 times line 29. The
Finally,
Table 232D.3
compares the not-for-profit organizations cost of owning to its cost
In summary, the tax effect on cash flow of for-profit versus not-for-profit will generally (but
As previously explained, financial statements used for external purposes in the United States
must follow generally accepted accounting principles, or GAAP. The treatment of equipment
leases for such accounting purposes would, of course, fall under GAAP, and the technical
Comparison of CostsSouthside Clinic (Not-for-Prot)
Computation of Difference
Cost of LeasingSouthside Clinic (Not-for-Prot)Comparative Present Value
Not-for-Prot
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Present value factor (at 8%)
Present value answer =
($11,000)
($10,186)
Present value cost of leasing =
($47,271)
Cost of OwningSouthside Clinic (Not-for-Prot)Comparative Present Value
Not-for-Prot
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Present value factor (at 8%)

Present value answer =
Present value cost of owning =
Choices: Owning Versus Leasing Equipment
INFORMATION CHECKPOINT
What is needed?
An example of a buy-or-lease management decision
Where is it found?
director.
How is it used?

KEY TERMS
Buy-or-Lease Decisions
For-Profit Organization
Not-for-Profit Organization
Present Value
1.
Have you ever been involved in a lease-or-buy decision in business? In your personal life?
1.
K. Tysiac, Still in Flux: Future of IFRS in U.S. Remains Unclear After SEC report,
Journal of Accountancy
, p.4 (September 2012). www.journalofaccountancy.com/Issues
269
A Powerful Tool
and the Healthcare
STRATEGIC PLAN: OVERVIEW
of mission, value, and vision statement types. Afederal gov
ernmental agency planning example will be presented. The
planning tools, including
tiple approaches to accomplish such planning, and there is
often confusion about the terminology used in these different
nents of strategic planning. We will also discuss the confusion
approach and related terminology.
The ultimate result of strategic planning is an actual plan,
r.JTTJPO
r7JTJPO
r0SHBOJ[BUJPOBM
7BMVFT
r(PBMT
r0CKFDUJWFT
r"DUJPO
1FSGPSNBODF
Figure
and are
Describe the six major
components of strategic
Understand the purpose
mission, vision, and value
Describe the strategic planning
cycle and its process flow.
Understand why the
governmental planning
Identify the four components
Recognize the difference
The mission statement explains the purpose of the organization. In other words, it explains
what we are now. Generally speaking, the mission statement will cover a near-future period,
Vision Statement
The vision statement explains what we want to be or perhaps what we aspire to be. It is a
look further into the future, perhaps 10 years from now. Not all organizations publicize a vision
Organizational Values
Values express the philosophy of the organization. There seems to be two approaches to
expressing values: either they are summarized into just a few meaningful phrases or they are
quite lengthy and wordy.
Goals support the
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
Statement
Statement
Plans
should tie directly into an element of the mission statement. Every goal should be considered
tive must supportand thus tie directly intoa particular strategic goal. There are typically
will be accomplished. It supports a subcomponent of the overall objective. It is a short-term plan
out. Action plans are often called by other names, such as Operational Plans, Performance
VARIED APPROACHES TO STRATEGIC PLANNING
How strategic planning is approached may be affected by the organization type and/or the
Governmental Versus Nongovernmental
Governmental entities are guided by regulatory restrictions. Among these restrictions are fed
mental organizations and specify the format, contents, and timing of the required strategic
plans. On the other hand, nongovernmental entities are not covered under these mandated
For-Profit Versus Not-For-Profit
A for-profit company is in business to make a profit (supposedly, anyway) and is answerable to its
owners. Its owner may be shareholders (for corporations) or partners (for partnerships) or pos
A not-for-profit organization, on the other hand, is expected to have a mission that is broadly
Specific Programs or Projects
In some cases the type of program or project or initiative will define the basic approach to
strategic planning. Funding sources and/or regulations may also make such demands. For
example, in some states construction of healthcare facilities is controlled by a regulatory Cer
tificate of Need process. In these states, then, strategic planning for a new facility would be
275
unknownso the project would be specially treated within theplan.
EXAMPLES OF MISSION, VISION, AND VALUE STATEMENTS
and the length of statements can vary. Their terminology and their emphasis can also vary. One
RECOGNIZING A SPECIAL STATUS OR FOCUS WITHIN THE STATEMENTS
Recognizing Non-Profit Status: Sutter Health
sion statement specifically points out its not-for-profit commitment.
We enhance the well-being of people in the communities we serve through a not-for-profit com
mitment to compassion and excellence in healthcare services.
Vision
Sutter Health leads the transformation of health care to achieve the highest levels of quality,
access and affordability.
Values
r&YDFMMFODF
r*OOPWBUJPO
r"GGPSEBCJMJUZ
r5FBNXPSL
r$PNQBTTJPO
r$PNNVOJUZ
r)POFTUZ
[Note: Sutters values are arranged in a circular graphic, with
circle.]
Tenet Healthcare Corporation is a publicly held corporation that is listed on the New York
Stock Exchange (NYSE:THC). As a for-profit corporation operating a healthcare delivery sys
Values
As we seek to improve the quality of our patients lives, to serve our communities, to provide an
Recognizing Hospital Taxing-District Status: Parkland Hospital
Parkland Hospital is the tax-supported hospital serving Dallas County, Texas. As such,
To furnish medical aid and hospital care to indigent and needy persons residing in the hospital
Vision
Recognizing the Vision and Intent of Their Founders: Mayo Clinic
The Mayo Clinic, a large nonprofit organization with a long history, provides medical care,
research, and education at locations including the Midwest, Arizona, and Florida. The Mayo
To inspire hope and contribute to health and well-being by providing the best care to every
Primary Value
Value Statements
These values, which guide Mayo Clinics mission to this day, are an expression of the vision and
277
Regions Hospital is a private not-for-profit hospital in St. Paul, Minnesota, that is over 100years
old. Regions commitment to both patients and community is very clear.
Vision
Our vision is to be the patient-centered hospital of choice of our community.
FINANCIAL EMPHASIS WITHIN THE STATEMENTS
A Foundations Financial Responsibility: Saint Barnabas Medical
exists to support a specific hospital: Saint Barnabas Medical Center, a major teaching hospital
located in Livingston, New Jersey.
The Saint Barnabas Medical Center Foundation is a charitable organization dedicated to
nurturing philanthropic support for the programs and services of Saint Barnabas Medical
Center.
These programs provide the communities we serve with the highest quality, most compas
sionate health care. To accomplish our mission, the Foundation will:
r&OTVSF
FGGFDUJWFMZ\r
SFTQPOTJCMZ\r
r$BSFGVMMZ
ers the state of Texas. This organization places its vision first and mission second, as follows.
Note also that evidence-based, or scientific, care is contained within the mission statement.
Vision
To be the first choice for cancer care.
To provide excellent, evidence-based care for each patient we serve, while advancing cancer care
for tomorrow.
Texas Oncology has three Core Values, consisting of Patient Care, Culture, and Business.
The Business Core Value is of particular interest to us. At the time of this writing, it reads as fol
r1SPNPUFT
r1SPWJEFT
EFMJWFSZ
r1SPWJEFT
TFSWJDFT
r*T
These values clearly recognize the fact that an organization must have the financial structure
RELAYING THE MESSAGE
little use unless people know about them and what they say. This section focuses upon relaying
Introducing the Message
This section presents three examples of introducing the message within the statements, as
Way, comprising the elements below, encompasses our shared sense of purpose and provides
Emphasizing Areas of Focus: American Medical Association
The American Medical Association (AMA) is, according to its website, the largest physician
organization in the nation.
to health care in the United States are physician-led, advance the physician-patient relationship,
This plan places emphasis on three particular core areas of focus, which include the
r*NQSPWJOH
r"DDFMFSBUJOH
r&OIBODJOH
EFMJWFSZ
The plan was posted electronically, and an AMA member could click on any of the three focus
279
There is an important paragraph that appears before Good Samaritans Strategic statements.
r0VS
r0VS
r0VS
r"OE
7BMVFT
Mission Expressed as a Motto
Mottos are an effective way to communicate the organizations mission. However, composing
such a short piece is much more difficult than it seems at first. Two examples follow.
Centered in Values
Compassion is perfected by excellence.
The Message Available as Website Downloads
Website downloads make the information available to anyone who has access to a computer.
This section presents two examples of making the message available as a website download.
Downloadable Summaries from Duke Medicine
The umbrella term Duke Medicine actually covers three componentsthe Duke University
ing, all based in the Raleigh-Durham, North Carolina area. Duke Medicine has created both a mis
sion and a vision that encompasses all these components. Then each component also has its own
strategic plan that feeds in turn into the combined plan.
At the time of this writing an overview of these plans was available in booklet form. The
Summaries of each strategic plan could also be downloaded. Thus Duke provides
Downloadable Visuals from Johns Hopkins Medicine
Johns Hopkins also uses a single nameJohn Hopkins Medicine
for its overall medical
enterprise. This enterprise, based in Baltimore, Maryland, includes the Johns Hopkins Health
prise. At the time of this writing it was possible to download and print out the Johns Hopkins
r"
8BMM.PVOUFE
r"
r"
Thus the message is definitely relayed, and in three possible forms, for three different display
purposes. It keeps the message visible as a reminder.
THE STRATEGIC PLANNING CYCLE AND ITS PROCESS FLOW
PROCESS FLOW FOR CREATING GOALS, OBJECTIVES,
Figure 242
You will recall that a goal is a statement of aim or purpose. In order to establish such a goal, it is
r%FGJOF
r%FUFSNJOF
r%FDJEF
ZFBS\r
r$PNQPTF
manner.
Broad Goals Become Narrower Objectives
281
achieve one part of a particular objective. Thus a single defined objective is segmented into a
ally be accomplished. The action plans relationship to objectives and to goals is also illustrated
PROCESS FLOW FOR CREATING ACTION PLANS AND THEIR
Figure 243
illustrates the multiple performance measures that make each action plan
As previously discussed, an action plan should always directly relate to the relevant com
as necessary and, as its title implies, the action plan will demonstrate how actions will be
So how will the action plan demonstrate that its actions will be accomplished? The required
actions, or operations, will be linked to a series of performance measures, as illustrated in
Figure 243. The performance measures provide accountability.
When these measures are properly designed, performance can be reported as outcomes.
This achieves desired accountability and one cycle of the planning process flow is thus
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
#
#
Process Flow for Creating Action Plans and Their Performance Measures.
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
7
6
9
8
2
3
4
5
We visualize the ideal strategic planning cycle itself as a never-ending process. In other words,
renew approach to such planning. Incidentally, planning cycle segments may be called by dif
The interaction of goals, objectives, and action plans should take feedback into account. This
feedback should be obtained as is appropriate from all levels of management within the organiza
tion. However, internal managers are not the only stakeholders involved with the strategic plan.
283
Planning Revisions and Updates Are Necessary
ticipated events can occurboth internally and externallythat require major revisions if the plan
is to be kept operational. Updates, on the other hand, are to be expected and allowance should be
Stakeholders Provide Input Within the Cycle
Stakeholders can be both internal and external. In order to maintain a manageable planning
cycle, questions need to be answered. For example, how many external stakeholders need input
Likewise, how many internal stakeholders need to provide input and/or feedback to the
plan? Who, specifically, are they? What departments or divisions do they represent within the
A plan must, above all, be operational. And to be operational, it must have financial support. How
will this financial support be provided? Will another division or project be cut in order for this to
happen? Can the consequences be predicted? If so, what will they be?
Related Timeframes
Necessary timeframes are appropriate for the particular portion of strategic planning. For
example, the plan itself typically covers a period of 4 to 5 years. If there is a vision statement, it
ity should be at least annually, and in fact may be quarterly.
Responsibility for the various segments can be assigned. The managers responsibility will gen
cific information that is desired and necessary for the plan. In other words, the manager is partici
pating in the planning function by doing his/her part in the preliminary segment of the process.
depending upon his/her staff level within the organization. However, he/she may be assigned
to work on a planning committee or a task force that contributes directly to the decision makers
in the organization. This type of assignment is an important responsibility.
Providing Accountability
The manager can definitely contribute in suggesting criteria for performance measures. The
action plan will require performance measures in order to provide the necessary accountability.
And the manager is the best person to understand what measures are needed within his/her
A well-designed planning process will also include milestones. The milestones signify the
The manager can and should be responsible for assisting in reaching certain milestones on
a timely basis. This function (one hospital CEO called it ramrodding) is another type of
accountability responsibility.
FEDERAL GOVERNMENTAL AGENCIES MUST PREPARE STRATEGIC PLANS
Agencies in the federal government are required by law to prepare strategic plans. They are also
required by law to provide reports on performance that tie to the strategic plans. This section
explains the importance of the federal planning cycle and describes its planning and perfor
mance requirements. It also provides an example of an agency strategic planning cycle.
WHY ARE FEDERAL PLANNING REQUIREMENTS IMPORTANT TO US?
The federal governments planning requirements are important to us because they provide guid
ance in the form of well-thought-out and time-tested regulated concepts and a framework for
strategic planning.
Legislative requirements for strategic planning and related performance reporting are
Legislative Requirements: Overview
Congress has enacted a law that provided for the establishment of strategic planning and
performance measurement in the federal government. This law, known as the Government
Performance and Results Act (GPRA) of 1993, required each agency of the federal govern
ment to prepare a strategic plan for program activities. These strategic plans were then to
Legislative Requirements for Strategic Planning
Each agencys strategic plan must contain the following:
r"
r(FOFSBM
285
r"
r,FZ
Strategic Plan Timeframes
The original 1993 Act required that the strategic plan cover a period of not less than five years
forward from the fiscal year in which it would be submitted. (You will recall that the federal govern
ments fiscal year is not a calendar year. Instead it begins on October 1st and ends on
September
30th.) In addition the plan was to be updated and revised at least every three years.
The plans timeframe has been subsequently revised to four years by the GPRA Moderniza
shall cover a period of not less than four years following the fiscal year in which the plan is
strategic plan. The projects for which they are responsible cant (usually) be funded if they are
A common problem involves maintaining a projects carry forward over sequential annual
tiple levels of bureaucracy within the government that hinder the approval process.
We can also turn the concept of impact around the other way. Instead of asking
How Agency Strategic Plans Are Tied to Performance
This section describes performance reporting requirements for federal agencies.
Legislative Requirements for Performance Reporting
ple years, it also required that performance plans and program performance reports be submit
ted. These requirements actually make the strategic plan itself operational because they hold
Agency Performance Plans Are Required
The GPRA Modernization Act of 2010 legislation requires the agency performance plans to be
submitted annually. The performance plans are to be posted on the Agencys website.
Agency Performance Reports Are Also Required
The Agency is also required to prepare an update report that compares actual perfor
mance achieved with performance goals as established in the performance plan. This
report is also to be posted on the Agencys website.
report, the Agency must then prepare and submit a Performance Improvement Plan to
increase program effectiveness for each unmet goal. The plan must include measurable
Strategic Mission Statements: Two Federal Departmental Examples
Two departmental examples of governmental strategic mission statement appear in this
section.
Services (HHS). This mis
Services (CMS) is
example as background information because the VAs Office of Information Technology is
the subject of the governmental planning cycle example that appears in the next section of
this chapter. Note the necessarily broad wording within both of these departmental mission
Department of Health and Human Services (HHS)
The Department of Health and Human Services (HHS) is the United States governments
There are more than 300 programs within HHS, including both the Medicare and the Med
Department of Health and Human Services (HHS) Mission Statement
The mission of the U.S. Department of Health and Human Services (HHS) is to enhance the
health and well-being of Americans by providing for effective health and human services and
social services.
wide spectrum of activities, serving the American public at every stage of life.
287
AN EXAMPLE: THE VA OFFICE OF INFORMATION TECHNOLOGY IT
STRATEGIC PLANNING CYCLE
This section contains a governmental planning cycle example. Elements of the cycle are then
defined and discussed. The section concludes with a summary of management responsibilities.
You will recall that federal planning requirements are especially important to us because these
requirements provide guidance through a time-tested and regulated framework for strategic
planning. We are about to provide a real-life illustration of the planning cycle.
We present the illustrated cycle as an excellent example of the planning process. This exam
ple is drawn from a VA Directive concerning strategic planning. The entire scope of the Direc
tives requirements is, of course, well beyond the scope of this text. We have had to generalize
The elements within this VA illustrated example include components that we have
earlier in this chapter. The components include the following:
r4FU
r4FU
1FSGPSNBODF
r%FUFSNJOF
r1SFQBSF
1FSGPSNBODF
r1SFQBSF
1FSGPSNBODF
r3FWJTF
THE VA OFFICE OF INFORMATION TECHNOLOGY IT STRATEGIC
Figure 244
illustrates the planning cycle in accordance with VA Directive 6052. The Directives
example of the planning cycle process serves our purpose very well.
THE VA PLANNING CYCLES PROCESS FLOW
Figure 244 shows the overall VA Strategic Plan and Goals at the top of the visual. This overall
apiece for the three subagencies (VHA, VBA, and NCA), plus a fourth plan for the VA Staff
Changes
Cycl
Cycl
Fiscal Year
Strategic Plans
Strategic Plans
Strategic Plans
Strategic Plans
(IT Goals/Objectives/Strategies)
Programming/IT
Capability (BRM)
Each of the four plans flow to, and relate to, VA key business priorities, goals, and objects.
The Information Technology (IT) Strategic Plan contains IT goals, objectives, and strategies.
289
Program and Operational Plans that support the IT Strategic Plan are the responsibility of
IT Performance Plans and their related Performance Measures are an outgrowth of the Program
The Tactical Plans that will carry out the Performance Plans are the responsibility of the IT
Directors and Managers. Finally, an IT Management Accountability Report is required annually
at the end of each fiscal year.
The Legislative Changes (an external factor that influences the process) are shown in a box on
the left-hand side of the visual. Their influence feeds into and impacts the overall process.
Finally, the box on the dotted line to the left reads EA/Multiyear Programming/IT
ming. We further understand it references IT Capability. The remaining portion of the acro
nym references the One VA EA Business Reference Model, or BRM. The BRM was developed
The following definitions are contained in the Office of Information Technology IT Planning
Directive. While they are specific to the Directives purpose, they provide greater depth to an
overall understanding of the illustrated cycle and its process flow.
however, strategic planning involves all parts of VA Administrations and Staff Offices.
A mission statement is brief, defines the basic purpose of the organization, and corresponds
directly with the organizations core programs and activities. An organizations
program goals
should flow from the mission statement. The mission defines the approach and means IT will
take to fulfill the mission of VA as a whole.
IT Vision
The vision defines the ideal state for IT. (It is) what an organization desires to accomplish in
A goal is a statement of aim or purpose included in a strategic plan (required under GPRA).
The strategic goal defines how an agency will carry out a major segment of its mission over a
term in nature. IT goals define the forward-thinking and transformational outcomes IT pursues
Strategic objectives are strategy components or continuous improvement activities that are
needed to create value for the customers. IT objectives further define intended program out
Program Plans
nated way to include an element of ongoing work products or projects. A program plan is
Performance Measures
and objectives are achieved. The measures should be SMART (Specific, Measurable, Achiev
able, Results-oriented, Time-limited).
IT Management Accountability Report
The IT management accountability report (IT MAR) is an annual report that provides OI&T
performance information (i.e., strategic goals, objectives, fiscal year performance goals, and
outcomes). The IT MAR is a management tool that will provide a basis for assessing the organi
zations effectiveness.
Environmental Scan: Feedback and Assessment
This section concludes with a generalized view of planning responsibilities by three levels of
Figure 245
illustrates the three levels. Any planning cycle should reflect these
291
Top-level management represents those individuals at the top of the organization chart.
These upper-level individuals should provide overall direction for the organizations mission,
vision, and strategic framework. They should be responsible for policymaking and supervi
sory guidance issues.
visory mode to those below them in the organization chart. Mid-level management should
typically provide the strategies to accomplish goals, performance measures, and operational
The managerial level should typically develop the subordinate plans that will align with mid-
TOOLS FOR STRATEGIC PLANNING: SITUATIONAL ANALYSIS
Situational analysis and feasibility studies are discussed in this section, with an emphasis on their
Primary Planning Responsibilities by Management Levels.
Mid-Level
c
framework, policy, and guidance
Provides strategies to accomplish
goals, performance measures, and
operational plans
Develops subordinate plans to alig
with mid-level operational plans an
manages the activities designed to
SITUATIONAL ANALYSIS
This section defines situational analysis (SWOT) and discusses its components.
A situational analysis does two things. It reviews the organizations internal operations for
strengths and weaknesses and it explores the organizations external environment for opportuni
ties and threats. (Thus SWOT: strengths-weaknesses-opportunities-threats.) A situational analysis
allows management to, literally, analyze the organizations situation.
SWOT Analysis as a Strategic Tool
A SWOT analysis, properly performed, can be an excellent strategic tool. The four components
of a SWOT analysis include the following:
r4USFOHUIT
r8FBLOFTTFT
r0QQPSUVOJUJFT
r5ISFBUT
The basic SWOT analysis format is illustrated in
Figure 246
and Weaknesses sectors of the matrix are labeled Internal, while the Opportunities and

Basic SWOT Analysis Format.
Strength
sW
eaknesse
Threats
Opportunities
Appendix 24-A contains Sample SWOT Worksheets. The worksheets and their supplemental
Question Guides concern Electronic Health Records (EHR) adoption and implementation.
Sequential Steps in the SWOT Analysis Project
293
Gather necessary information.
4.
Reach agreement, or consensus, on the final score for each line item on the
Commencing the SWOT Analysis Project Process
In order to commence the SWOT analysis projects process, a number of decisions must be
tion also be involved in the scoring process, or will a separate group be appointed to carry
9.
Who is responsible for taking appropriate action after the analysis and its report are
tion because such implementation requires the collaboration of multiple knowledge areas. A
It is a powerful tool when properly applied.
ational analysis, and this brief discussion features only a single approach. No matter what
FINANCIAL PROJECTIONS FOR STRATEGIC PLANNING
The type of financial projection that we discuss is this section is produced internally. These pro
jections are intended for internal use during the planning process, and are thus not intended
Projections are views into the future. We project future events, projects, or operations using a
Projections are different than forecasts, although both are considered to be prospective
(thus future) financial statements. Forecasts are based on assumptions that are expected to
exist, and that reflect actions that are expected to occur.
Projections, on the other hand, are often prepared to answer a what-if question, such as
this service/program/initiative were to be adopted? In these what-if situations
and each reflecting the actions that might occur, based on such assumptions.
Build a Planners Projection
Figure 247
Gather Enough Information
You will need enough information to make informed decisions about your projection. The
range of subjects may vary, but the information should be as up-to-date as possible.
By reasonable assumptions we mean no wildly unattainable assumptions. For example, in most
instances we will increase revenue by 200% in the
fourth quarter of next year is an assumption that
Assumptions used for the projection are key to
its success. Documenting the assumptions is an
documentation adds validity to the final prod
uct. It also provides a record of the overall pro
Prepare the Projected Statements
bled using the documented assumptions. In
accountants terminology this is known as com

Build a Planners Financial Projection.
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
295
type of review may be subjective, but it is a logical part of the process. Appropriate members
of the organization may also perform a review in order to highlight any weak spots within the
Create Alternative Scenarios
Financial Projections as Strategic Tools
constructed, they can provide information that is laid out in a logical format, supported by
assumptions that are properly explained for the knowledgeable reader. To summarize, projec
CASE STUDY: STRATEGIC FINANCIAL PLANNING IN LONG-TERM CARE
Chapter 32, Case Study: Strategic Financial Planning in Long-Term Care later in this volume
involves a case study about strategic financial planning in long-term care. The case study is
authored by Dr. Neil R. Dworkin, Emeritus Associate Professor of Management at Western Con
necticut State University. His case study merits your close attention, as it will utilize planning
concepts that have been discussed within this chapter.
INFORMATION CHECKPOINT
What is needed?
Where is it found?

KEY TERMS
SWOT Analysis
Values Statement
how are they communicated? Are they printed, posted on a website, or available in some
2.
Have you ever been involved in a strategic planning session? If so, please describe
3.
Have you ever been involved in (or have observed) the process of a situational analysis
(SWOT)? If so, please describe how the group went about performing the analysis (but
Sutter Health, www.sutterhealth.org/about/mission (accessed May 31, 2012).
3.
4.
Parkland, www.parklandhospital.com/whoweare/mission_vision.html (accessed
Mayo Clinic, www.mayoclinic.org/about/missionvalues.html (accessed July 30, 2012).
6.
Regions Hospital, www.regionshospital.com/rh/about/index.html (accessed May 31,
7.
Saint Barnabas Medical Center, www.saintbarnabasfoundation.org/about/mission.html
8.
Texas Oncology, www.texasoncology.com/about-txo/vision-mission-history.aspx
(accessed December3, 2012).
9.
Aetna, www.aetna.com/about-aetna-insurance/aetna-corporate-profile/aetna_mission
AMA Press Release November 26, 2012, www.ama-assn.org (accessed January 16, 2013).
11.
American Medical Association, www.ama-assn.org/ana/pub/about-ama/strategic-focus
297
13.
Good Samaritan Society, www.good-sam.com/index.php/about_us/ (accessed July 30,
15.
Duke Health, www.dukemedicine.org/AboutUs (accessed July 30, 2012).
17.
John Hopkins Medicine, www.hopkinsmedicine.org/se/util/display_mod.cfm?
MODULE=/se-server/mod/mod (accessed July 30, 2012).
18.
Public Law 103-62. 103 P.L. 62; 107 Stat. 285Section 3(a), The language of the Act
says every agency, but in fact certain Executive agencies were excluded, including the
Central Intelligence Agency, the General Accounting Office, the Panama Canal Com
mission, the United States Postal Service, and the Postal Rate Commission. [See 103 P.L.
P.L. 62Section 3(a) (1), (2), (3), (5).
P.L. 62Section 3(a) (6b).
P.L. 111-352 Section 2(b).
25.
U.S. Department of Health & Human Services (HHS), HHS Agencies & Offices,
http://www.hhs.gov/about/whatwedo.html (accessed December 4, 2012).
U.S. Department of Health & Human Services (HHS), HHS Strategic Plan, http://www
27.
Administrative Law Review, www.administrativelawreview.org/publicresources/
index.php?option=com_content&view=article&id=21&Itemid=28 (accessed
February 2, 2013).
28.
29.
tegic Planning (April 23, 2009), http://www.itstrategy.oit.va.gov/docs/directive_6052
30.
M Powered Strategies, www.mpoweredstrategies.com/news/2011/12/one-va-ea-business-
reference-model/ (accessed February 2, 2013).
31.
32.
American Institute of Certified Public Accountants (AICPA), Financial Forecasts
and Projections AT Section 301 (c)(d), http://www.aicpa.org/Research/Standards
/AuditAttest/DownloadableDocuments/AT-00301.pdf
Ibid. AT Section 301 (d)(f).
Situational analysis explores an organizations internal operation for strengths and weakness
and observes the organizations external environment for opportunities and threats. The analy
sis process is often called SWOT, for strengths-weaknesses-opportunities-threats. To be effec
Electronic medical records adoption is a good subject for situational analysis. The sample
process of analysis. Other questions may be added to customize the analysis for a particular
Exhibit 24-A1
collects and summarizes the SWOT analysis scores. Both the internal and
very good; 2
poor; and
TECHNOLOGY (IT) STAFF
staff are divided into three levels, depending upon the type of work they are expected to per
form. The three levels represent IT operations staff, who are the most directly involved; the
hands-on managers, who manage the operations staff day-to-day; and the upper-level supervi
sory IT management, who manage from afar, but who are responsible for results.
Question Guide for EHR Information Technology Staff
Exhibit 24-A3
contains 10 questions about IT staff. The questions are to be answered as is
INTERNAL STRENGTHS SCORES
EHR Technology
INTERNAL WEAKNESSES SCORES
EHR Technology
EXTERNAL OPPORTUNITIES SCORES
EXTERNAL THREATS SCORES
Score 1 to 5 with 1 being very good and 5 being very poor
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
IT OPERATIONS STAFF (for each type of position listed)
Weaknesses __________________________________________________________________
Weaknesses __________________________________________________________________
Weaknesses __________________________________________________________________
HANDS-ON IT MANAGERS
Weaknesses __________________________________________________________________
Weaknesses __________________________________________________________________
Coverage (Man Hours Available)
Weaknesses __________________________________________________________________
UPPER-LEVEL SUPERVISORY IT MANAGEMENT
Weaknesses __________________________________________________________________
Weaknesses __________________________________________________________________
Coverage (Man Hours Available)
Weaknesses __________________________________________________________________
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
Technology (IT) Department Staff
301
addresses responsible staff in three other departments of the organization.
These staff members are the ones who must make electronic health records implementa
tion work within their own departments. The responsible staff members in each of these
three departments (financial, clinical, and administrative) are again divided into three levels,
depending upon the type of work they are expected to perform. The three levels represent
on managers, who are responsible for some aspect of EHR; and the upper-level supervisory
management, who manage from afar, but who are
Question Guide for Financial, Clinical, and Administrative Staff
many copies as would be necessary in order to answer these questions for each department.
addresses two subjects: computer technology and capital funding resources. The
computer technology section concerns hardware, software, space requirements, and vendors.
The section is then divided into two parts: one for overall computer systems and one for specific
staff levels: IT operations staff, hands-on IT managers, and upper-level supervisory
Cooperate/support multidisciplinary EHR adoption and implementation
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
Question Guide for EHR Internal Operations Analysis: Information Technol
STAFF RESPONSIBLE FOR SOME ASPECT OF EHR
Weaknesses __________________________________________________________________________
Weaknesses __________________________________________________________________________
Weaknesses __________________________________________________________________________
HANDS-ON MANAGERS RESPONSIBLE FOR SOME ASPECT OF EHR
Weaknesses __________________________________________________________________________
Weaknesses __________________________________________________________________________
Coverage (Man Hours Available)
Weaknesses __________________________________________________________________________
UPPER-LEVEL SUPERVISORY MANAGEMENT RESPONSIBLE FOR SOME
Weaknesses __________________________________________________________________________
Weaknesses __________________________________________________________________________
Coverage (Man Hours Available)
Weaknesses __________________________________________________________________________
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
303
ing resources. The short-term funding requirement concerns EHR transition cash flow. The
Question Guide for Technology and Capital Funding Resources
ital funding resources. Additional customized questions may supplement this initial guides
addresses four external environment subjects, including Government, Economy,
cial, clinical, and administrative staff levels: workers; hands-on managers, and upper-
level supervisory management.)
Cooperate/support multidisciplinary EHR adoption and implementation
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
Question Guide for EHR Internal Operations Analysis: Financial, Clinical, and
OVERALL COMPUTER SYSTEMS
Weaknesses __________________________________________________________________________
Weaknesses __________________________________________________________________________
Vendor Contractual Agreements (if applicable)
Weaknesses __________________________________________________________________________
Vendor Performance (if applicable)
Weaknesses __________________________________________________________________________
SPECIFIC EHR COMPUTER RESOURCES
Weaknesses __________________________________________________________________________
Weaknesses __________________________________________________________________________
Vendor Contractual Agreements (if applicable)
Weaknesses __________________________________________________________________________
Vendor Performance (if applicable)
Weaknesses __________________________________________________________________________
CAPITAL FUNDING
Short-Term EHR Transition Cash Flow Requirements
Weaknesses __________________________________________________________________________
Weaknesses __________________________________________________________________________
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
305
Question Guide for EHR External Environment Analysis
ronment. This guide may also be augmented with customized questions that relate to issues
OVERALL COMPUTER SYSTEMS
SPECIFIC EHR COMPUTER RESOURCES
Equipment costly to maintain? To operate?
Does the equipment produce desired results? Timely results?
If applicable, does the vendor produce desired results? Timely results?
CAPITAL FUNDING
Have the short-term EHR transition cash flow requirements been accurately
Are the long-term fixed capital specified for EHR implementation accurately
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
Question Guide for EHR Internal Operations Analysis: Resources Other than
GOVERNMENT (EHR impact for each governmental element listed)
Regulations About Electronic Standards (Version 5010 and ongoing versions)
FUNDING SOURCES OTHER THAN PATIENT REVENUE (impact, if any, on EHR)
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
307
GOVERNMENT (EHR impact for each governmental element listed)
Additional changes to the EHR Medicare Initiative are scheduled to occur at various
What revenues from EHR governmental sources are related to this program
Additional changes to the EHR Medicaid Initiative are scheduled to occur at various
Regulations About Electronic Standards (Version 5010 and ongoing versions)
Additional changes to the regulatory electronic standards are scheduled to occur at vari
ous points in the future. How will these initiative changes impact the organization?
Will EHR affect continuing need for medical services? If so, how?
What impact is EHR implementation projected to have on the medical services econ
How do the services they provide compare to your services?
OTHER FUNDING SOURCES (impact, if any, on EHR)
If so, what impact, if any, will EHR adoption have on such sources?
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
Creating a Business
OVERVIEW
A business plan is a document typically prepared in order
to obtain funding and/or financing. A traditional business
plan typically contains information about three major ele
financial aspects. However, the actual business plan is gen
erally constructed in a series of segments, each involving a
segments are described in this chapter.
A traditional business plan typically contains three major
r0SHBOJ[BUJPO
r.BSLFUJOH
r'JOBODJBM
may use the service and/or product. The financial segment
should contain the numbers that
illustrate how the project
period of time. We
important to begin the business plan
with an
executive summary that
outlines key points, plus a
concise description of the service and/or product
that is the subject of theplan.
Understand the construction
Describe the organization
PREPARING TO CONSTRUCT THE BUSINESS PLAN
The planning stage will shape a business plans content. The initial decisions, such as those
organization requires a certain type of format and preexisting blank spreadsheets, many of
the initial decisions have already been made for you. Otherwise, the checklist contained in
Exhibit 251 will assist you in making initial decisions for the business plans approach.
It is important to note that the level of sophistication for the overall plan should be based on
the decision makers who will be the primary audience. Another practical consideration involves
creating a grid or matrix to assist in gathering all necessary information. The grid or matrix
could also include which individuals are responsible for helping to create or collect the required
information. Finally, it is important to create a file at the beginning of the project in which all
THE SERVICE OR EQUIPMENT
The service and/or equipment description
should do a good job of describing what the
ness plan is for a project or a new ser
vice line,
then this description would expand to include
the entire project or the overall service line.
The test of a good description is whether
an individual who has never been involved in
your planning can read the description and
understand it without additional questions
THE ORGANIZATION SEGMENT
The organization segment should describe the
management team. But it should also describe
how the proposed service or equipment fits
into the organization. Who will be charged
for the controls and reporting for this pro
posal? It is important to provide a clear picture
makers about how the
proposed acquisition will be managed. Basic
authority
and supervisory responsibilities provide help
Basic Information for the
Service or Equipment Description
Service or Equipment Description
r8IBU
TFSWJDF
r8IZ
TFSWJDF
BOEPS
r8IBU
r8IZ
r3FRVJSFE
r3FHVMBUPSZ
BOEPS
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
Initial Decisions for the
Business Plan
r0VUMJOF
OFDFTTBSZ
r%FDJEF
r%FDJEF
r%FUFSNJOF
r%FUFSNJOF
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
your service or equipment should attract,
individuals who will be availing themselves of
the service or equipment and a description of
information for the decision makers. Strive
for a realistic and objective appraisal of the
timistic in its assumptions. It is wise to be
conservative about estimations of physician
and patient acceptance and usage. And it is
equally wise to be realistic when assessing the
THE FINANCIAL ANALYSIS SEGMENT
The financial segment should contain the
numbers that illustrate how the project is
expected to operate over an initial period of
time. Financial plans may range from a pro
A 1-year projection is often too short to show
true outcomes, whereas a 10-year projection
may be too long to meaningfully forecast.
Your organization will usually have a standard
jections. The standard forecasted periods for
high-tech equipment, for example, often range from 3 to 5 years. Why? Because advances in
The financial analysis for a business plan should contain a forecast of operations.
The forecast may be simple, such as a cash flow statement, or it may be more extensive.
complexity
of the project and the usual procedure for a business plan presentation that is expected in
Basic Information for the
Organization Segment
r1IZTJDBM
TFSWJDF
r1IZTJDBM
r5IF
r5IF
r5IF
TVQFSWJTPS
r$PNQPTJUJPO
Courtesy of J.J. Baker and R.W. Baker,
Dallas,Texas.
Basic Information for the
r1IZTJDJBOT
TFSWJDF
r/FX
service or equipment
r&TUBCMJTIFE
service or equipment
r&TUJNBUFE
r$PNQFUJUJPO
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
311
The Projected Cash Flow Statement
densed statementmay well be filed in the supporting work papers for the project. Necessary
The Projected Income Statement
What income statement assumptions will your
business plans financial
require? The
basic assumptions for a healthcare projects
refers to
revenue is derived from drugs and devices.
The revenue sources refers to how many
payers will pay for the service and/or drug
and device, and in what
proportion (such
mercial payers 25%). The revenue amount
pay for the service and/or drug and
payers
expected payment rate times the percentage of the total
represented by that payer.
Exhibit256,
and the pay rate for each type of employee.
number of full-time equivalents (FTEs)
for each type of employee will then be
Supplies refers to the necessary sup
plies required to perform the procedure or
service. Cost of drug or device refers to the
cost to the organization of purchasing the
device (if a drug or device is neces
sary to the service). The labor, supplies, and
cost of drug or device are costs that can be
directly attributed to the service that is the
Basic Assumptions for Business
r3FWFOVF
r3FWFOVF
r3FWFOVF
r&YQFOTFT
r-BCPS
r4VQQMJFT
r
r&RVJQNFOU
r4QBDF
r0WFSIFBE
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
Basic Assumptions for Business
r/VNCFS
r$BQJUBM
r$BQJUBM
r$BTI
r$BTI
r$PTU
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
subject of the business plan. Likewise, the equipment cost refers to the annual depreciation
expense of any equipment that is directly attributed to the service that is the subject of the
Space occupancy refers to the overall cost of occupying the space required for the ser
or procedure. Space occupancy is a catchall phrase. It includes either annual depreciation
expense (if the building is owned) or annual rent expense (if the building is leased) of the
square footage required for the service. Space occupancy also includes other related costs such
category. The actual forecast might group these expense items into one line item, or the fore
If the expenses are grouped, a footnote or a supplemental schedule should show the actual
Overhead refers to the remaining expenses of operation that are necessary to produce
the service but that are not directly attributable to that service. Examples of such overhead in a
physicians office might include items such as postage and copy paper. This amount of indirect
space occupancy example or the overhead example discussed previously here are grouped
entries will in large part be a function of the income statement projections discussed in the
will affect capital
assets (property and equip
ment), while their funding assumptions will
We believe a good business plan should
edgeable reader. Thus, the information you
include in the business plan should reflect
Basic Assumptions for Business
r$BTI
r"DDPVOUT
r*OWFOUPSJFT
r1SPQFSUZ
r"DDPVOUT
r"DDSVFE
r-POH5FSN
r&RVJUZ
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
313
the choices that you made in selecting the
assumptions for your financial analysis. For
instance, an example of considerations for
forecasting an equipment acquisition is pre
Exhibit258
. The content of the
final business plan should touch upon these
describing your assumptions that
THE EXECUTIVE SUMMARY
The executive summary should contain a well-
written and concise summary of the
entire
plan. It should not be longer than two pages;
many decision makers consider one page
utive summary first. They tend to use it as an
executive summary
either instance, the executive
summary should tell the entire story in a com
pelling manner.
The business plan should be assembled into
many of your initial decisions, such as length
and level of sophistication. A sample format
tain detail to support certain contents in the
paring
gistics are
ample, that
the pages should be numbered. (You might
also want to add the date in the footer and
perhaps a version
number as well.) Although
the report may or may not be bound, it should
You may be asked to present more than once.
Considerations for Forecasting
r0OMZ
r&RVJQNFOU
r5FDIOPMPHZ
OFX\r
r&RVJQNFOU
r.FEJDBM
r)JHI
r#VZ
r#VZ
r-FBTF
on a pay-per-procedure deal?
r)PX
r$FSUJGJDBUJPO
r4RVBSF
r*T
r$MFBOJOH
r3FQBJST
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
Sample Format for a
r5JUMF
r5BCMF
r&YFDVUJWF
4VNNBSZ
r4FSWJDF
r5IF
r5IF
r5IF
r"QQFOEJY
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
ing on the audience. Tips on presenting your
It is especially important to practice your
By constructing a well-thought-out business
plan, you have substantially increased your
STRATEGIC ASPECTS OF YOUR
Your business plan must fit into your organi
zations strategic plan. To begin to do so, you
r)PX
the overall strategic plan (the master
r)PX
fit into my department or divisions seg
ment of the organizations overall strate
r%PFT
QMBO\bT
r%PFT
r8IBU
r"SF
plan that are also addressed within the strategic plan? If so, does my plans treatment of
The previous chapter explored Strategic Planning in some depth. Other aspects contained
INFORMATION CHECKPOINT
Probably with your manager or the departmental director.
How is it used?
Tips on Presentation of the
Tips on Presenting Your Business Plan
r%FUFSNJOF
r%FUFSNJOF
r#F
r%FDJEF
r-$%
r'MJQ
r0UIFS
r1SBDUJDF
r-FBWF
Courtesy of J.J. Baker and R.W. Baker, Dallas,
Texas.
315

KEY TERMS
Overhead
Revenue Type
If so, did the plan include all three segments (organizational, marketing, and
finance)? If
Was the plan that was presented similar to what we have described in this chapter? What
Health Delivery
We begin this chapter by defining three areas: health deliv
ery systems, finance, and reimbursement. We include these
bursement fit into the overall system. We will then describe
By its very nature, the complexion and purpose of a
health delivery system cannot be considered separately
from the range of values and issues surrounding finance
and reimbursement, including the magnitude of govern
ment involvement. Healthcare finance is the linchpin of
the United States healthcare delivery system. While there
are some similarities to corporate finance (i.e., budgeting;
DEFINING HEALTH DELIVERY SYSTEMS
This section defines the health delivery system before
observing its strategic relationships within an overall system.
What Is a Health Delivery System?
A health delivery system typically contains different levels
of patient care and different sites of service, all operating
under one integrated system for the delivery of health care.
A delivery system which provides or aims to
provide a coordinated continuum of services
to a defined population and are willing to be
tion served.
Define health delivery
Define the area of healthcare
Understand the strategic
healthcare delivery systems
Understand the strategic
Recognize the strategic
third-party reimbursement
Recognize a new focus on
finance and healthcare
delivery.
r5SBJOFE
Who Are the Stakeholders in Health Delivery Systems?
Stakeholders in health delivery systems can be divided into two categories: internal and exter
nal. The internal stakeholders consist of those delivering care (clinicians), those who support
External stakeholders are varied and numerous. Their motivations may vary, but their inter
ests still center upon the delivery of care within the internal system.
Figure 261
illustrates 12
r*OTVSBODF
The pharmaceutical industry
The medical device industry
Other health industry suppliers
r&EVDBUPST
Stakeholders in Health Delivery Systems.
Overseers
Provider
Indust
ry
Industry Suppliers
Policy Makers
tors
ator
s
Internal Healthcare
Delivery: Clinicians,
Administrators &
Patients
ernment providers include federal agencies such as Medicare, Medicaid, and TRICARE, along
with state agencies. Government policy makers include Congress and many supporting fed
eral agencies such as the Office of Management and Budget (OMB), while individual states
Health care is a huge industry in the United States. Figure 261 highlights three types of
industry: pharmaceutical, medical device, and all other health industry suppliers. The all
other includes both services and supplies, as varied as computer services to food and cleaning
tors; examples include the American Hospital Association (AHA) and the American Medical
sonal interest in the health delivery system. And consumers are stakeholders because they are
impacted by rising costs of the healthcare industry as a whole.
DEFINING THE AREA OF HEALTHCARE FINANCE
What Are the Responsibilities Associated with Finance?
r1MBOOJOH
ting money in and out of the business. It is not a bad description, because the Finance Department
is primarily responsible for achieving the most beneficial financial outcome for the organization.
What Are the Duties Associated with Finance?
The duties associated with healthcare finance revolve around the successful management of
planning, controlling, organizing and directing, and decision making. Specific duties for a
financial officer will depend upon the type of organizational structure where he or she works.
all) of the planning and decision making around planning will probably be handled in the
319
head office. The onsite financial officers duties will then center mostly upon operational mat
ters such as controlling and organizing and directing. Such a large organization may have a
treasurer in addition to a chief financial officer. Or is the organization smaller, without a head
office? If so,the financial officer may have to direct all financial matters. He or she would have to
The individual performing these duties may have one of several different job titles. A descrip
Controller: Responsible for the organizations accounting functions; includes producing ac
Treasurer: Responsible for a higher level of the organizations financial activities, mainly
centering upon financial liquidity, investments, and risk management.
DEFINING THE AREA OF HEALTHCARE REIMBURSEMENT
services or procedures provided. Payment is made upon receipt of a claim (bill) from the ser
vice provider. This claim typically contains codes for specific procedures and services that tie to
relevant payment amounts. Payment of the claim may be made by a third-party payer or by the
patient directly.
What Are the Responsibilities Associated with Reimbursement?
r1SFQBSF
In addition, the reimbursement personnel are responsible for carrying out any directives
What Are the Duties Associated with Reimbursement?
r%BUB
FOUSZ
Medical coder: Enters service and procedure codes onto a claim
Medical biller: Verifies the patients insurance coverage; prepares the bill (claim form);
Billing supervisor or coordinator: Oversees scheduling, monitoring, and training of
Medical claims specialist or examiner: Reviews samples of claims for accuracy; documents
information for legal actions; provides legal support when required (this position func
tions outside the regular day-to-day operations and may work directly from the Finance
Other reimbursement duties involve management of monies received (or not received).
Incoming payments of claims must be reconciled and matched to the organizations records of
billings. And nonpayments (past-due bills) must have collection efforts made. These payment
It is also possible that the billing and collection duties may be performed by an outside con
tractor. One specialist physician that we know uses such an outside contractor.
Both medical information and billing information can now be generated in real time. For
example, the doctor may have a data entry person right in the exam room with him. (Some
times this is a nurse who has many other duties as well, but other doctors may use a scribe
whose only job is the data entry.) The doctor dictates medical notes as he performs his exami
nation and the assistant enters the information into the computer. At the end of the visit, he
nosis codes specific to a particular practice and/or specialty. A super bill allows information to
be recorded quickly and efficiently). He calls off the codes to be billed for this examination,
into the computer. The billing codes are then transmitted electronically, either to the internal
billing department or to the outside billing service. And if transmitted externally, the outside
billing service is then typically responsible for all billing and collectionfor a fee, of course.
While the above encapsulates the essence of healthcare reimbursement, two caveats are
worth mentioning. When healthcare reimbursement involves a third party, consumers may be
largely unconcerned with the costs of their care, knowing that their bills are paid by another
party. Moreover, third-party transactions may also remove providers from concerns about the
cost of care, as they may not need to confront a patient covered by insurance with the actual
Relationship Cause-and-Effect: An Example
This relationship can be described as a circular cause-and-effect. That is, finance department
actions often affect the overall delivery system, and the overall delivery system in turn often
affects the finance department. We illustrate this cause-and-effect with an example. In this
example, particular elements of the overall delivery system will affect the strategic positioning
Value-based programs are an important current trend in payment for U.S. healthcare ser
vices. Briefly, the programs rely upon digitally recorded performance measures, including
321
certain quality measures, to reflect value provided by the system. That value is then basically
It follows, then, that accurate and timely recording of such quality measures will ultimately affect
total payments, which will affect the finance departments financial strategic planning. But the
finance department has no control over how (or when) these measures are recorded. They happen
Figure 262
Note that the information generated in this example is used both internally and externally.
Step 1: A medical service is performed by a clinician. This professional is assigned to a
Step 2: The data generated from this service is recorded within an electronic health record
(EHR). It includes the service itself plus specific quality information (quality measures).
Step 3.1: The data is reported in two parts. First, the medical service portion is transmit
ted to the Reimbursement Division, who then bills the third-party payer.
The Strategic Relationship of Value-Based Programs, Quality Measures, Finance, and

im
r
sement Division
who bills the thir
d-par
ty
pa
ye
r
To
thir
d-par
ty
pa
ye
r
Fr
om thir
d-par
ty
pa
ye
r
Of the
nance Depar
tment
By the
nance Depar
tment
the
im
r
sement Divisio
Medical Ser
vices
ta
y Measur
es
or
Va
lue & P
erf
or
mance
As sho
wn
data anal
ytics
Da
ta
Anal
yz
ed
ta Repor
te
d
Ana
Becomes
Ac
tionab
le
R
esults in
y
r
P
erf
or
mance
(with Bonus/P
enalt
y)
Pa
yment Impacts
nues
,
a
medical depar
tment
Medical Ser
vice P
erf
or
med
om ser
vice perf
or
med
ta Generated
to
an EH
Da
ta Recorded
transmitted to the third-party payer, who accumulates it for future analysis.
Step 5: The outcome of this analysis becomes actionable by the payer, as shown by the
Step 6: The resulting action is a pay-for-performance bonus or penalty from the
third-party payer.
The resulting financial impact also, of course, impacts the financial position of the overall
system. Thus, the strategic relationship of the entire system versus the finance department is
ment trickles down to affect dollars received (or not received), which in turn affects both the
Strategic Analysis Relationships Within the System
outside the health delivery system itself. However, the same data can and should be analyzed for
Figure 263
The medical service data is generated and recorded via EHRs, using software installed by
b.
formed internally by the IT department or by an outside contractor.
The outcome of such analysis, as shown by data analytics, becomes actionable. This is an
within the system. While the positioning in this example may be most likely to affect the Finance
Department and its Reimbursement Division, as shown, that might not always be the case. The
result of the internal strategic analysis may reveal faults in the process and workflow at the
clinical level. Strategic relationships should then be activated to remedy the faults, wherever
must follow.
323
However, what happens if the reimbursement division fails in its responsibilities? Answer:
Cash flow for the organization is reduced. (And, in some cases, the reduction in cash flow
can be significant.) In this case, finance must react to the reimbursement situation instead of
person to raise the necessary funds and to ensure that those funds are effectively used. Spe
It is worth noting that some things are beyond the organizations control. A case-in-point
is the Centers for Medicare and Medicaid Services (CMSs) Readmission Reduction Pro
gram. Penalties are levied against hospitals for excessive readmissions within 30 days of
Internal Strategic Analysis for Value-Based Programs.
Positioning
Department
&
The Reimbursement
Division
Medical Service
Data Generated
& Recorded
Via EHRs and
software installed by
the organization
For
Value-Based Purposes
outside contractor
Becomes Actionable
For Internal Use
As shown by data
analytics
Is
Revised
responsible for
strategic planning
THIRD-PARTY REIMBURSEMENT AND GOVERNMENT EXPENDITURES:
ANOTHER STRATEGIC RELATIONSHIP
Reliance on Third-Party Reimbursement
ren. It plays the dominant role in the configuration of finance flow in the healthcare industry.
and the delivery system that it supports would take on a very different complexion, one that
while the prospective payment system pays before the service is provided.) These three types of
reimbursement mechanisms are indicative of a fee-for-service framework.
delivery systems and finance are capitation and pay-for-performance (P4P). In the former, the
provider is typically paid a fixed per-member-per-month payment for each covered participant.
This payment is to cover all medical services that have been contracted for the period.
In P4P,
they are delivering high-quality, efficient care. Thus, pay-for-performance is also referred to as
value-based purchasing (VBP), in that it ...connects reimbursement to the quality of patient
care rather than just the quantity of services received.
Government Support in Healthcare Spending
The magnitude of government support, of which third-party reimbursement is a central fea
2014, reaching $3 trillion or $9,523 per person. As a share of the nations Gross Domestic Prod
uct (GDP), health spending accounted for 17.5%, up from 17.3% in 2013.
12
See
Figure 264
for
The CMS predicts annual healthcare costs will be $4.64 trillion by 2020, which would be
nearly 20% of the U.S. GDP. Moreover, Medicares major role in the health delivery system is
illustrated by its accounting for 20% of total health spending in 2014, the majority of which
was spent on hospital care (27%) and physician services (23%).
icaid accounted for 16% of national health expenditures, comprised of acute care (68.2%),
long-term care (28.1%), and Disproportionate Share Hospital (DSH) payments (3.7%).
14
Figure 265
325
ments to qualifying hospitals that serve a larger number of Medicaid and uninsured individu
als. Although there has been a noticeable slowing in the rate of increase in annual healthcare
expenditures, the largest spending increase in 2014 was registered for prescription drugs
Medicare and Medicaid Spending for Fiscal Year 2014.
28%
68%
Services
23%
Hospital
Care
27%
All other
services
50%
16%
Medicare
20%
All other
payors
64%
Total U.S. Healthcare Spending for Fiscal Year 2014.
HEALTHCARE DELIVERY
Trending Forward Toward the Future
Medicare and Medicaid just turned 50. No statutes have had more of an impact on American
health care and well-being. That said, it should be noted that the Affordable Care Act, signed
ery. It is the largest change in healthcare financing and accessibility to health care since 1965.
CMS unveiled its Accountable Care Organization (ACO) program in 2012. The ACO model
stresses primary care coordination, primarily for the chronically ill, and beneficiary engage
measurably improving care quality and efficiency rather than simply for saving money.
The
beneficiaries. As of July 2015, there were over 750 ACOs.
The New FinanceDelivery Link Is a Challenge
As such, this new focus on the financedelivery link reflects the ongoing challenge for health
care leaders to integrate clinical and business data. Its the shift to value-based care that is mak
as those that characterize the aforementioned ACOs, both upside risk (sharing in savings) and
sician organizations, to increase their dependence on analytics modules. We need to know the
REIMBURSEMENT AND PHYSICIANS: AN ONGOING STRATEGIC
The Sustainable Growth Rate and Physician Reimbursement
Healthcare finance and reimbursement is anathema to many physicians. Aspects of Medicare
illustrate the complexity that many physicians contend with. An ongoing feature of the program
has been the Sustainable Growth Rate (SGR), which was used by CMS to control growth in
increase in expense per Medicare beneficiary did not exceed the growth in the GDP.
On March 1 of each year, the physician fee schedule was updated accordingly. This has been
Osteopathic Association (AOA) have lobbied for a permanent reform to the SGR so that physi
327
dictably, these low increases in Medicare payments have consequences: while fewer physicians
may take on new Medicare patients, other physicians may withdraw entirely from the program.
On April 14, 2015, Congress ended the doc fix by passing the Medicare Access and Childrens
Health Insurance Program (CHIP) Reauthorization Act (MACRA). This Act put an end to the
SGR physician payment formula. Providers would have seen Medicare reimbursement rates drop
by 21% starting on April 15, 2015, had this legislation not been enacted. The Act establishes an
From 2019 on, payments to providers are adjusted based on performance under a two-part
Quality Payment Program (QPP). The QPP thus includes certain payment adjustments under
the Merit-Based Incentive Payment System (MIPS). The program also provides certain payment
scores, potentially further vexing physicians, is CMSs objective to tie the majority of reimburse
ment to quality outcomes and increased beneficiary access to quality care.
ness partners. For example, starting in 2019, MIPS mandates negative payment adjustments
for providers who fall below certain performance thresholds. By 2022, some providers may see
Concurrent with the change to value-based payment and the resulting value-focused organi
zation should be a shift in leadership roles that involves more physicians. Physicians should
be employed as leaders. They have unique insight into the needs of the patient population.
Their knowledge of optimal patient outcomes and how to achieve them are critical to effectively
adopting to the new reimbursement climate based on value. Building an effective Physician
Enterprise wherein new management structures are physician directed and led requires that
In conclusion, CMSs attempt to remake the nations heathcare finance system based upon
value-based payments is a sea change. Strategic relationships are very much affected by this
INFORMATION CHECKPOINT
What is needed?
A description of your organizations health delivery system,
Where is it found?
This information may be present on your organizations web
site or within a brochure prepared for the public. In the
case of the health delivery system, it may even be found
within a PowerPoint presentation, but be careful about
How is it used?
Use will depend upon the item you find. Typically, it could be
used for marketing, for training, or even for recruitment

KEY TERMS
Health Delivery System
Information Technology
Pay-for-Performance (P4P)
ACO: Accountable Care Organization
AOA: American Osteopathic Association
CHIP: Childrens Health Insurance Program
MACRA: Medicare Access and CHIP Reauthorization Act
WHO: World Health Organization
1.
If you work in a healthcare organization, do you know how your finance operation is
3.
Do you think that the transition from fee-for-service payment to value-based payment is
4.
If you work in a healthcare organization, what percentage of your revenue is derived from
329
1.
F. Lega, Organizational Design for Health Integrated Delivery Systems: Theory and Prac
Health Policy,
2.
World Health Organization (WHO), Health Systems Service Delivery, www.who.int
/healthsystems/topics/delivery/en/, accessed December 15, 2016.
Financial Management in the introductory chapter of this text.)
4.
Accounting Tools, Chief Financial Officer (CFO) Job Description, www.accountingtools
services already rendered. We now have prospective reimbursement whereby payment
may be made for services that will be rendered in the future. Nevertheless, reimburse
8.
www.medicare.gov/hospitalcompare
9.
Health Care Financing & Organization (HCFO) & Robert Wood Johnson
Foundation (RWJF), Learning from Medicare: Prospective Payment, May
2011; also: CMS, Hospital Value-Based Purchasing, www.cms.gov/Medicare
/Quality-Initiatives-Patient-Assessment-Instruments/hospital-value-based-purchasing/,
J. McCally,
(Chicago: Irwin Professional Publishing, 1996), 176.
HCFO & RWJF, Learning from Medicare.
CMS, National Health Expenditures 2014 Highlights, https://www.cms.gov/research
/downloads/highlights.pdf, accessed February 7, 2016.
H. Larkin, ACO or No?
19.
CMS, Estimated Sustainable Growth Rate and Conversion Factor, for Medicare Pay
ments to Physicians in 2015, p. 1, www.cms.gov/medicare/medicare-fee-for-service-
payment/sustainablegratesconfact/downloads/sgr2015.pdf, accessed September 17,
Ibid., Table 6, p. 8.
Information
Technology as
Strategic Tool
Understanding Value-
Based Health Care
THE VALUE-BASED CONCEPT: INTRODUCTION
To many financial managers, the term value-based has
come to mean a combination of both quality and cost. If
cost items, like the cereal, you might first consider quality
(taste and so on) and then its cost; with larger purchases,
such as a car, you may consider the cost first and then its
quality. Either way, both cost and quality will usually enter
ery over the years. However, in the past few years, the con
cept of value-based health care has come about. A primary
feature of a value-based approach is to recognize both
Meanwhile, in todays healthcare world, the term value-
based actually has come to have multiple definitions. The
particular definition depends upon the particular focus.
For purposes of healthcare finance, value-based concepts
your car and the cereal), payment adjustments, pricing,
strategy, and patient care. When we speak of value-based
healthcare financial management, we may be referring to
different aspects of all these concepts. We can even view the
broad span of value-based population health and the role
that financial management can play.
the value-based concept in healthcare finance and related
financial management. We have divided the chapter into
several parts, and each part builds upon your understanding
Describe value-based
progress and programs in
the private and public sector.
Distinguish among different
types of value-based
Understand the basics of
value-based legislative
Describe quality
measurement in the public
Recognize various possible
Identify types of financial
Describe elements of
strategic planning in the
of the value-based concept. The remainder of the chapter will discuss the following value-based
r1SPHSFTT
VALUE-BASED PROGRESS IN THE PRIVATE SECTOR
Leaders in innovation within the private sector have adopted a variety of value and quality efforts.
Implementing Value-Based Approaches
Two examples appear below.
An Organizational System Approach
The Mayo Clinics Value Creation System and Office of Value Creation are the direct result
of this improvement strategy. The Office of Value Creation was originally tasked with owning
the various value-based projects. As time went on, however, responsibility and accountability
for quality and value efforts shifted to operational levels. This left the Office of Value Creation
available to monitor quality and value within the organization. Thus, Mayos system has been in
A Data-Driven Approach
article commented, Geisingers ...decades of investment in technology
and integration have made it a pioneer in the use of electronic medical records and other
And that is a true statement: Geisinger is indeed a pioneer. The system utilizes data-
Value-Based Research Centers
Two examples appear below.
A Center for Value-Based Care Research
The Cleveland Clinic supports its own Center for Value-Based Care Research. The Centers
researchers focus on not only identifying high-value health care, but also disseminating the
information obtained. That focus is reflected in the Centers mission statement: to make
quality healthcare possible for all Americans by conducting research to identify value in
Understanding Value-Based Health Care
A Comparative Effectiveness Research Center
The Brigham and Womens Hospital has established its own Patient-Centered Comparative
Effectiveness Research Center (PCERC). As its name suggests, the Center focuses upon compar
This Center provides value in that it studies both the comparable effectiveness of treatment
options for individual patients and the outcomes of healthcare practices. The Centers overall
Value-Based Collaboration and Affiliation
A definite effort toward both collaboration and affiliation among organizations is underway.
Two examples follow.
The High Value Healthcare Collaborative
costs. They also wanted to move best practices out to the national provider community.
worlds leading cancer centers devoted to patient care, research and education. The NCCN is
dedicated to improving the quality, effectiveness and efficiency of cancer care so that patients
VALUE-BASED PROGRESS IN THE PUBLIC SECTOR
At the time of writing, the Centers for Medicare and Medicaid Services (CMS) have a total of
planning and development stages. The
271.
These programs tie payment to
value (thus value-based). They repre
sent an important trend, because they
These VBPs are important because
they have aided in showing the way
toward value. Their structure has
provided an important foundation
to build upon. In other words, they
helped to make todays rapid changes
possible.
Hospital Value-Based Purchasing
Hospital Acquired Conditions (HAC)
Physician Value-Based Modifier (PVBM)
Skilled Nursing Facility Value-Based
Home Health Value-Based Program
Seven Federal Value-Based Programs
335
Three Hospital Value-Based Programs
Hospital Value-Based Purchasing Program
This program provides incentive payments for acute care hospitals. The payment adjustments
In other words, the hospital value-based purchasing (HVBP) program links payment to perfor
Hospital Readmission Reduction Program
The hospital readmission reduction (HRR) program provides incentive payments in order to
reduce hospital readmissions, which are costly and may be unnecessary. Reductions may be
Hospital Acquired Conditions Program
This program works in reverse: It reduces payments instead of making incentive payments. In this
other words, the hospitals that rank worst in hospital acquired conditions (HACs) are the ones
Four Other Value-Based Programs
Physician Value-Based Modifier Program
mented by CMS. The program payments began in 2015 and have been paid to ever-expanding
groups of physicians over 2016 and 2017. The program expands to include other clinicians
in 2018.
As the title implies, when an eligible claim is submitted, the payment is adjusted, or modified,
based on particular quality and cost measures performance. In other words, when the modifier
is applied to payment, it rewards both lower costs and higher quality performance. (Note that
the Physician Value-Based Modifier (PVBM) Program is also known as the Value-Modifier [VM]
Skilled Nursing Facility Value-Based Program
This program provides incentive payments to skilled nursing facilities (SNFs). The payments
ity of care, not quantity of care. At the time of this writing, the skilled nursing facility value-based
However, the IMPACT Act is moving post-acute care facilities (PACs) toward standardization
and interoperability. This legislation, which includes SNFs, may affect certain aspects of the SNF
value-based program due to standardization efforts.
Understanding Value-Based Health Care
Home Health Value-Based Program
This program was first implemented on January 1, 2016, as a home health value-based program
(HHVBP) model in nine states. Payment for those participating in the model is based on quality
performance. In an interesting concept, the participating home health agencies (HHAs) will
to progress in stages.
However, as with SNFs, the HHA value-based program may be impacted
by legislative efforts toward standardization and interoperability.
End-Stage Renal Disease Quality Initiative Program
mance. In other words, this program also links payment to performance.
Value-Based Payments
ning to pay for value and quality. For example, CMS announced two related goals for Medicare
fee-for-service payments, as follows.
native payment models are described elsewhere in this chapter.) According to CMS estimates,
Payment Goal Two
Eighty-five percent of all traditional Medicare fee-for-service payments have been tied to quality
or value by the end of 2016, and 90% will be by the end of 2018. This goal was accomplished
through certain CMS programs, including the HVBP and the HRRP.
(These programs are also
described elsewhere in this chapter.)
VALUE-BASED EDUCATION EFFORTS
The following examples illustrate just a few value-based education efforts. Note the digital
A Certificate in the Fundamentals of Value-Based Health Care
tificate in the Fundamentals of Value-Based Health Care. To obtain the certificate, students
value patient-centered healthcare delivery. Value-based improvement is measured by achieving
337
An Online Course That Earns Continuing Education Credit
The Center for Continuing Education at Cleveland Clinic provides online courses that earn
continuing education credits for healthcare professionals. One topic provided is entitled,
Value-Based Health Care; this particular online course is included in the Disease Manage
ment Clinical Decisions series and is in the form of an interactive case study.
Education Directed to Patients and Their Families
Governmental Education for Professionals
or print versions. Some provide continuing education credits as well. At this point in time,
value-based information is most commonly found within quality measurement and/or regula
tory payment updates.
VALUE-BASED LEGISLATIVE REFORM
Legislation is moving toward even more value-based programs. These programs accomplish
How Value-Based Reporting and Payments Came About: The Legislative Background
The following summary of legislative progress helps you to see the step-by-step progress toward
The early efforts toward digitizing health care covered a period of several years. One of the
more important developments during this time was requiring Medicare providers to submit
their claims for payment electronically. We consider this the first real step toward digitizing, as
forms was thus established throughout the country.
The Health Information Technology for Economic and Clinical Health (HITECH) Act was part
of the American Recovery and Reinvestment Act that was signed into law on February 17, 2009.
The HITECH Act promoted the adoption and use of health information technology (HIT)
Understanding Value-Based Health Care
and electronic health records (EHRs) through payment incentives. CMS described these EHR
Incentive Programs in a single sentence: The Medicare and Medicaid EHR Incentive Programs
pitals (CAHs) as they adopt, implement, upgrade or demonstrate meaningful use of certified
EHR technology.
The HITECH Acts legislative funding provided approximately $17 billion in incentives for
hospitals and physicians. This law will impact future healthcare information management for
Value-Based Legislative Reform: The MACRA Act
A further legislative reform to the Medicare payment structure is now in place through the
Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). This Act is briefly described
More Value-Based Legislative Reform: The IMPACT Act
Transformation (IMPACT) Act of 2014. This Act is also briefly described below. Note that, for
MACRA reforms Medicare payments to physicians and certain clinicians via the following:
r3FQFBMJOH
For the first two years, the individuals affected by the MACRA Act include physicians, physi
The MACRA reforms help CMS to move toward the value-based goal of paying for both value
quality programs: either the Merit-Based Incentive Payment System (MIPS) or the Alternative
This new value-based program combines certain parts of existing quality reporting programs.
The programs involved include certain sections of the Physician Quality Reporting System
(PQRS), the Value Modifier (VM; also known as the Value-based Payment Modifier), and the
Medicare Electronic Health Record (EHR) incentive program. (These stand-alone programs
339
Physicians and other eligible professionals will be measured in four areas. These perfor
mance areas include quality, resource use, meaningful use of certified EHR technology, and
programs, but the clinical practice improvement area is new.)
for positive or negative performance adjustments to their payments beginning in 2019.
What Are APMs?
sionals. The MACRA Act considers the following entities to be APMs that are generally eligible
r$.4
Shared Savings Program Tracks
published by CMS. These Advanced APMs are considered to be advanced because they accept
providers for the period 2019 to 2024. In addition, beginning in 2026, some providers can
receive higher annual payments. In the future we can expect increased transparency of such
physician-focused payment models (PFPMs). We can also anticipate the development of addi
Other Provisions of the Act
scope of this particular chapter.
Meaningful use still exists. At a healthcare conference in the spring of 2016, CMS acting
Administrator, Andy Slavitt, said that the meaningful use program, as it has existed, will now be
However, various media sources
What Slavitt meant was that
meaningful use is being incorporated into the MACRA Acts programs. Thus, meaningful use
still exists, but its role has evolved. To see more about how this change has come about, see
Appendix 28
Quick Facts About Post-Acute Care and the IMPACT Act
The IMPACT Act of 2014 requires that standardized patient assessment data be reported by
(IRFs), and long-term care hospitals (LTCHs).
Note that hospice, another type of post-acute
care facility, is not included in these requirements.
Understanding Value-Based Health Care
Data Interoperability
for the exchange and use of data among these PAC and other providers.
This will facilitate
Transparency and Public Reporting
Transparency and public reporting is another important element in the IMPACT Act. The Act
stipulates that there must be public reporting of PAC provider performance on both value-
Other Provisions of the Act
QUALITY MEASUREMENT: THE CONCEPT
fied. (The other value-based foundation is cost.) Note that types of quality measures can vary, as
in the process, but is an ongoing project. We hope that, in the future, public/private alignment
Quality Measures in the Private Sector
This section discusses measures use linked to payment in a large alternative payment model and
The California-Based Integrated Healthcare Association
zations, launched a statewide pay-for-performance initiative over 15 years ago. This alternative
The IHA Value-Based Pay-for-Performance (P4P) program measures quality, cost, and
r$MJOJDBM
To put the size of this program into perspective, participation in the Value-Based P4P includes
10 health plans and 200 California physician organizations with 35,000 physicians caring for
341
9 million Californians enrolled in commercial health maintenance organization (HMO) and
point of service (POS) products.
The National Committee for Quality Assurance (NCQA) is a private 501(c)3 not-for-profit orga
delivered by these plans. The Committee has developed quality standards and performance
an array of more than 60 standards, and reports on their performance are
FWFSZ
r5IFTF
r5IBU
Quality Measures in the Public Sector
Value and quality are often intertwined when discussing value-based efforts. Certain quality
measures have already been established for specific providers. These measures must first be
recorded by the provider and then transmitted as appropriate. Within the public sector, CMS
Quality Reporting Programs
Examples of CMS Quality Reporting Programs are listed below. Note that additional programs
may be developed in the near future. It is also expected that existing programs will be revised
r)PTQJUBM
Long-Term Care Hospital (LTCH) Quality Reporting Program (QRP)
We understand that upgrading efforts are ongoing for these reporting programs. Such upgrades
Challenges in Quality Measure Implementation
The staff at CMS has identified a number of challenges that may occur in quality measure
implementation from their viewpoint. This useful list of challenges can be divided into three
Understanding Value-Based Health Care
Developing patient-reported outcome measures (PROMS) and appropriate use measures
We cannot deny that challenges to quality measure implementation exist. The manager must
deal with a whole variety of management issues related to these measures. The manager faces
r)BSEXBSF
Training
To succeed, managers involved in measure development and implementation need support
from the highest levels within the organization. This support must include funding for both
VALUE-BASED PUBLIC REPORTING IN THE PRIVATE SECTOR
Sharing information about quality reporting programs with the public is another important
Public Reporting by Providers and Health Plans
Two types of reporting about value-based efforts are described below. There are, of course, a
Annual Reporting of Program Results
California
Office of the Patient Advocate (OPA), publicly reports value-based pay-for-performance results
343
Other reporting efforts by this partnership include reports
on total cost of care performance by physician organizations and the Medical Group Medi
care Report Card for medical groups caring for seniors and people with disabilities enrolled
in Medicare Advantage health plans.
37
In addition, each year the IHA also recognizes top-
performing and most-improved physician organizations. Another IHA public recognition effort
is the Excellence in Healthcare Award.
An Overview of Annual Facts and Statistics
This type of report is typically an overview. The website containing the overview then allows
the viewer to go to specific information about items of interest, including value-based efforts
for the particular year. For example, Cleveland Clinic publishes an annual year-end Facts +
Public Reporting of Quality and Value by Other Organizations
Public Reporting of Physician Credentials and Experience
groups and on individual doctors. To experiment, we typed our own GPs name into Google
These sites provide a type of value-based information, in that they can readily tell you, the
consumer, important facts about the healthcare professional. Most sites contain information
tions, malpractice suits, or board actions against him or her. The site may also provide the
results of patient satisfaction surveys or reviews, and possibly a comparative rating.
VALUE-BASED PUBLIC REPORTING IN THE PUBLIC SECTOR
National Reporting Examples
Value-based quality measurement can be readily linked to public reporting. You may be familiar
with one of the CMS Compare websites that publishes these quality measures. A brief descrip
Understanding Value-Based Health Care
Hospital Compare
The site contains a profile of each hospital. Besides general facility
information and certain other measures that are reported, the particular measure of interest
to us is Payment and Value of Care.
This value-based measure is in three parts: Medicare
spending per beneficiary, Payment measures, and Value of care. The Value of care part is
Physician Compare
At the time of writing, group practices are present on the Physician Compare CMS website.
There are plans to add individual physicians and other healthcare professionals in the future.
contains a profile of each physician, including specialties, board certification, medical school
and residency, and other information.
cian or group practice participates in one or more of four quality activities, there is a green
check mark on the profile page. (The site is careful to say, however, that participation alone
Nursing Home Compare
ity of care and staffing for all 15,000-plus nursing homes in the United States that are Medicare
and Medicaid participating.
The site provides a five-star quality rating that covers quality mea
sures, staffing, and health inspections. Each of these three elements is given an individual rat
Home Health Compare
site contains a profile of each agency, including type of ownership and services offered. The
particular items of interest to us include information about quality measures, plus a quality
5 being the highest score. Scores are based upon how the performance of a particular home
A State Reporting Example
According to an article in
Health Affairs
, just about one-half of the states in the United States
As you might suspect, the content of
these programs varies state by state. We provide one example, as follows.
The Utah Department of Health provides a Public Health Outcome Measures Report
(PHOM). The report includes 109 public health measures in an online format that is easy
345
to use. In this case, the purpose of public reporting is to promote an understanding of the
of Utahs websites, Indicator-Based Information System for Public Health (IBIS-PH), which
Intermountain Health (IH) provides an example of documented positive financial outcomes
as follows. Intermountain Health is a Utah-based not-for-profit health system with 22 hospitals
and 185 clinics in the Intermountain Medical Group, along with health insurance plans from
cine.) Intermountain piloted an integration of mental health with primary care a number of
years ago. Every primary care patient at the Intermountain Medical Group clinics receives this
coordinated care model has improved outcomes for patients. Furthermore, Intermountains
financial outcomes are positive. Specifically, while costs per member are $22 higher up front,
per-member costs are $115 lower overall annually. The annual reduced cost is due to fewer
An Overview of Financial Outcomes as a Value-Based Business Model
Harvard Business Review
has published an article entitled Turning Value-Based Health Care
care to value-based health care is inevitable. (We agree with this view.) While they discuss ben
The authors conclude that organizations short-term financial losses were strategic. The ben
efits of these value-based strategic decisions include, for example, risk-management experience.
Risk management is an integral part of many pay-for-performance alternative payment models,
and gaining such experience would be valuable. Relationship building is another strategic benefit.
Collaboration and alignment with stakeholders and physicians takes time and becomes even more
the long run. This is because it will have already embraced and adapted to a value-based financial
approach (the business model) while other organizations who have not done so will be left behind.
Large Interactive Systems Require Investment Dollars
Because of their size, large healthcare systems need large electronic health record systems. It follows
that these large electronic systems require a substantial investment. In this section, we discuss two
Understanding Value-Based Health Care
Duke University Health Systems Investment
North Carolinabased Duke University Health System (Duke) includes three hospitals along
with physician practices, home care, hospice care, and support services.
In July 2012, Duke
began a multi-year information systems project to unify electronic medical records across the
health system. The new technology was to be implemented in three phases, from mid-2012 to
The investment in this project was widely reported to be $500 million. However, when the
He explained that the $500 million figure represented total ownership costs over a seven-year
period. This amount included, therefore, the cost to maintain and upgrade the system over seven
years, in addition to the initial costs to acquire and begin to use the technology. He also explained
that the $500 million was the gross investment figure. If you add up all the costs to maintain
and to support the 135 applications that are being replaced, and if you then subtract that cost
Finally, he also pointed out that the project should be eligible to receive tens of
Kaiser Permanentes Investment
California-based Kaiser Permanente (KP) is a non-profit integrated health plan that includes
states plus the District of Columbia. The plan serves almost 10 million people.
Kaiser Permanente claims that HealthConnect, the plans comprehensive electronic record,
InfoWorld
interviewed Philip Fasano, the Chief Information Officer of KP, about the plans
EHR systems. The interviewer asked how much it cost to build the system, to which Fasano
replied, about $4 billion, a substantial amount of money, but we have 9 million members [so
(Note that the interview occurred three years prior to the
time of this writing, so the member count is different.) The CIO went on to make another
DIGITAL OUTCOMES
This section discusses value-based digital outcomes that are important for physicians and for
How Would Digital Outcomes Benefit a Physicians Practice?
Value-based alternative payment models rely upon an array of performance measures that are
reported electronically. The electronic submissions represent the record of the providers per
347
For example, physicians and other eligible professionals are in the midst of transition to
value-based payment models due to MACRA. This transition relies heavily upon electronic sub
mission of performance data, which provides certain benefits. Specifically, the physicians who
use certified EHRs and/or qualified clinical data registries (QCDRs) should benefit in twoways:
r3FEVDF
Support timely performance
Figure 271
What Are Value-Based Digital Outcome Examples in Large Healthcare Systems?
Duke University Health Systems (Dukes) information system project cost has been dis
cussed in the preceding investment section. In this section, we discuss the projects digital
outcomes.
The information system projects purpose was to unify electronic medical records across
the system. It accomplished this purpose. Value-based outcomes include medical record
access that is both seamless and in real time. Medical information can now be exchanged
The patient experience has been improved via the systems new online tool, Duke MyChart.
Finally, the organizations commitment to the project is underscored by another statistic.
Duke provided 173,000 hours of training to faculty and staff in order to ensure a smooth transi
collection &
reporting burden
performance
feedback
EPs That Us
e
R
Technologies an
d
s
MACRA Electronic Specifications Provide Benefits.
Understanding Value-Based Health Care
Kaiser Permanente
The cost of KPs HealthConnect project has been discussed in the preceding investment
section. In this section we discuss the digital outcomes for the entire KP online system. Note
that KP covers the spectrum of care, as it is both a health plan (payer) and a provider of care.
KP also has amassed a huge amount of electronic data that are being used for value-based
purposes.
For example, HealthConnect is part of KPs online portal called My Health Manager. This
portal allows patients online access to such features as appointment scheduling, refills of pre
scriptions, messages to care providers, and so on. However, another valuable feature, called the
online Patient Action Plan (oPAP), is also available. This web-based system concerns preventive
care that is personalized for the individual patient in a health action plan. Researchers who
Clinicians also benefit from KP HealthConnect features. They have access to information
about latest treatments and preventive care, and that access is already proving valuable. For
example, in one pilot project, this access to information helped physicians to reduce coronary
artery disease death by 76%.
Another Outcome: Electronic Transmission Standards Must Be Updated
plans, and other stakeholders. These standards are coordinated with and are the beginning
point for certified EHR technology. Both financial and digital outcomes depend upon such
technology. Specific versions of the standards are acceptable for certified EHR technology at
different points in time. As such, it is imperative that the related standards are updated and
VALUE-BASED STRATEGIC PLANNING BY THE PRIVATE SECTOR
Leaders in the private sector already have their value-based strategic planning underway. We
ferent approaches, the value-based aims are similar.
Recognizing That Value-Based Care Is a Long-Term Goal
The Cleveland Clinic has integrated the value-based concept throughout its organization,
including research, education, and care delivery. Dr. Tony Cosgrove, President and CEO of
Cleveland Clinic, has written in a blog that value-based health care is a breakthrough that
Finally, one of the Cleveland
Clinics web pages summarizes the organizations strategic positioning: [T]he ideal result
is fewer readmissions, less frequent hospitalization and trips to the ER. Value-based care is a
long-term goal.
349
Taking a Patient-Centered View of Value
At the Mayo Clinic, it seems obvious that the Office of Value Creation must play an important
role in value-based strategic planning. However, this Office does not operate within a silo. One
of the Quality at Mayo Clinic Update: How the Mayo Value Creation System Is Improving
Patient Care publications a few years ago makes this clear.
It says the organization, at that time, was working to define value, and the Office of Value
Creation, the Value Program in the Center for the Science of Healthcare Delivery, Government
this point, we are trying to take a patient-centered view of value at the levels of the care pyra
(And their concept at that point in time was a care pyramid consisting of complex
Focusing Upon Population Health as a Value-Based Strategy
tion believes in the achievement of a sustainable health system. To quote one comment, we
believe the focus of organizations such as D-H should no longer be just on treating illness. We
Dartmouth-Hitchcock is a leader in value-based alternative-payment models that are risk
based. This organization clearly believes that the incentives under such models will move to
keeping defined populations health as a way of controlling costs. Defined populations under
VALUE-BASED STRATEGIC PLANNING BY THE PUBLIC SECTOR
ment of Health and Human Services (DHHS). The value-based and quality programs that are
discussed within this chapter are an important part of CMS planning. Thus, because CMS is a part
of DHHS, these value-based and quality issues are tied into national quality strategy as well. This
section illustrates how CMS has fit its quality strategy goals into the national quality priorities.
(AHRQ) on behalf of the U.S. DHHS.
The NQS structure is summarized below.
Three Aims and Six Priorities
To summarize, the NQS is structured with three aims and six priorities. The three overarching
r#FUUFS
Understanding Value-Based Health Care
how they interrelate to the CMS quality strategy.
The NQS also created nine levers. Used in this sense, the term levers may be core business
ity strategy. These strategic alignment elements are as follows:
r.FBTVSFNFOU
Workforce development
Table 271
Why Are the NQS Levers Important?
The levers are important because they show how all aspects of value-based and quality programs
fit into the national strategic plan. We can recognize one or more of these nine levers in each of
the private and public sector value-based efforts that are discussed within this chapter.
CMS quality strategy coordinates with the national quality strategys priorities. In other words,
the CMS strategy fits into the national
strategy because CMS has adopted the
NQS priorities as the six CMS goals. A
National Quality Strategy Priorities Are
Converted into Domains
In order to implement these priorities,
they are converted into domains. Six
domains represent the priorities of the
NQS. These domains, as described in the
CMS Quality Strategy, are as follows:
r&GGJDJFODZ
Workforce development
351
The Lever
How It Should Work
Measurement and Feedback
Provide performance feedback to plans and provid
ers to improve care
Payment
Reward and incentivize providers to deliver high-
quality, patient-centered care
Health Information Technology
Improve communication, transparency, and effi
Innovation and Diffusion
Foster innovation in healthcare quality improve
ment and facilitate rapid adoption within and across
organizations and communities
Public Reporting
Compare treatment results, costs, and patient expe
rience for consumers
Learning and Technical Assistance
Foster learning environments that offer training,
resources, tools, and guidance to help organiza
tions achieve quality improvement goals
Certication, Accreditation, and Regulation
quality standards
Consumer Incentives and Benet Designs
Help consumers adopt health behaviors and make
informed decisions
Workforce Development
Investing in people to prepare the next generation
of healthcare professionals and support lifelong
learning for providers
How the Strategic Levers Should Work
Table 272
To take this coordination a step further, CMS has adopted the domains just described as its
Table 273
Understanding Value-Based Health Care
National Priority Domains
Efficiency & Cost Reduction
Cost
Efficiency
Appropriateness
Care Coordination
Patient and family activation
Infrastructure and processes for care coordination
Impact of care coordination
Clinical Quality of Care
Care type (preventive, acute, post-acute, chronic)
Conditions
All-cause harm
HACs
Unnecessary care
Person and Caregiver Centered Experience
Patient experience
Caregiver experience
Preference and goal-oriented care
Population and Community Health
Health behaviors
Access
Physical and social environment
Health status
National Quality Strategy Priorities Are Converted to Domains
National Quality Strategy Domains Are Linked to CMS Quality Strategy Goals
National Priority Domains
Efficiency & Cost Reduction
Make care affordable
Care Coordination
Promote effective communication & coordination
of care
Clinical Quality of Care
Promote effective prevention & treatment of
chronic disease
Make care safer by reducing harm caused while
care is delivered
Person and Caregiver Centered Experience and
Help patients & their families be involved as
partners in their care
Population and Community Health
Work with communities to help people live
healthily
More About CMS Strategic Quality Measure Development
This chapter provides an overview of NQS Priorities and Domains. The national priorities
are converted into six national domains (see Table 272). This chapter also shows how these
353
domains can then be linked to CMS goals (see Table 273). (Note that CMS goals are part
of CMSs own quality strategy.) (Also note that Exhibits 271 and Table 271 in this chapter
address another aspect of strategic planning. These two exhibits describe levers that can be
Required Implementation Changes Still to Come
Future legislative and regulatory changes will certainly occur. Some are predictable at this time,
while others are not. At the time of writing, for example, we cannot reasonably predict the
Leadership: The Essential Ingredient
support and encouragement is essential. This quote sums it up very well: [T]he investment
technology strategic priorities, along with their supporting rules and regulations, to emerge
tion for these directions. One official, who must have had an aviation background, was reported
nology, meaning that the sailing (or flying) would be smooth from now on. We hope he was
INFORMATION CHECKPOINT
Where is it found?
the organizations website. (But be careful not to borrow
educational purposes.
Understanding Value-Based Health Care

KEY TERMS
IMPACT Act
MACRA
Merit-Based Incentive
Value-Based Program
Value Modifier (VM)
HAC: Hospital Acquired Conditions Program
HHVBP: Home Health Value-Based Program
HVBP: Hospital Value-Based Purchasing Program
LTCH-QRP: Long-Term Care Hospital Quality Reporting Program
PVBM: Physician Value-Based Modified Program
SNFVBP: Skilled Nursing Facility Value-Based Program
1.
Using your organization as a point-of-reference, how would you define value-based
2.
If senior management appointed you to chair a committee to adopt such a concept,
4.
Identify the essential elements of a National Quality Strategy. Describe how they are
5.
Describe the recent key elements to legislative reform of the Medicare payment structure.
1.
Mayo Clinic, Quality at Mayo Clinic: 2013 Update: How the Mayo Value Creation Sys
tem Is Improving Patient Care, publication # MC6312-33rev0413, www.mayo.edu/pmts
355
2.
C. Weaver, A Health-Care Model in Coal Country,
, September
3.
Cleveland Clinic, Center for Value-Based Care Research, https://my.clevelandclinic
.org/services/medicine-institute/research/Center-for-Value-Based-Care-Research,
4.
Brigham and Womens Hospital, Patient-Centered Comparative Effectiveness Research
Center, www.brighamandwomens.org/research/centers/pcerc/default.aspx, accessed
5.
Dartmouth-Hitchcock, Our Collaborations, www.dartmouth-hitchcock.org/about
6.
7.
Centers for Medicare and Medicaid Services [CMS], CMS Value-Based Programs,
https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments
/Value-Based-Programs/Value-Based-Programs.html
CMS, Hospital Value-Based Purchasing, last modified October 30, 2015, https://www
-based-purchasing/index.html?redirect=/Hospital-Value-Based-Purchasing/
9.
CMS, Readmissions Reduction Program (HRRP), last modified April 18, 2016,
https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps
10.
CMS, Hospital-Acquired Condition (HAC) Reduction Program, www.cms.gov/Medicare
/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based-Programs/HAC
11.
CMS, The Value Modifier (VM) Program, https://www.cms.gov/Medicare/Quality
-Initiatives-Patient-Assessment-Instruments/Value-Based-Programs/VMP/Value
-Modifier-VM-or-PVBM.html
12.
CMS, The Skilled Nursing Facility Value-Based Purchasing Program (SNFVBP),
https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments
/Value-Based-Programs/Other-VBPs/SNF-VBP.html
13.
CMS, The Home Health Value-Based Purchasing (HHVBP) Model, https://www
.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based
-Programs/Other-VBPs/HHVBP.html
14.
www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value
-Based-Programs/Other-VBPs/ESRD-QIP.html
15.
CMS, What Are the Value-Based Programs? www.cms.gov/Medicare/Quality
-Initiatives-Patient-Assessment-Instruments/Value-Based-Programs/MACRA-MIPS
16.
U.S. Department of Health and Human Services, HHS Reaches Goal of Tying 30 Per
cent of Medicare Payments to Quality Ahead of Schedule, March 2016, www.hhs.gov
18.
The Dartmouth Institute, The TDI Certificate in the Fundamentals of Value-Based
Health Care, accessed April 14, 2016, www.tdiprofessionaleducation.org/tdi-certificate
Understanding Value-Based Health Care
19.
Cleveland Clinic Center for Continuing Education, Disease Management Clinical
Decisions: Value-Based Health Care, www.clevelandclinicmeded.com/online/casebased
20.
Cleveland Clinic Patient and Family Health Education Center, Diseases and Condi
tions: Value-Based Care, https://my.clevelandclinic.org/health/diseases_conditions
MLN Homepage, Centers for Medicare and Medicaid Services, www.cms.gov/outreach
22.
CMS, What Are the Value-Based Programs?
P.L. 114-10 (April 16, 2015) 129 STAT 121
26.
28.
CMS, IMPACT Act Spotlights and Announcements, last modified August 31, 2016, https://
www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Post-Acute
-Care-Quality-Initiatives/IMPACT-Act-of-2014/Spotlights-and-Announcements-.html
P.L. 113
31.
ifornia, September 2015, www.iha.org/sites/default/files/resources/vbp4-fact-sheet
National Committee for Quality Assurance, About NCQA, www.ncqa.org/about-ncqa,
37.
Integrated Healthcare Association, Results and Public Reporting, accessed May 9,
2016, www.iha.org/our-work/accountability/value-based-p4p/results-public-reporting
39.
Cleveland Clinic, Facts + Figures: 2015 Year-End, updated March 16, 2016, https://
2012, www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=65
41.
Medicare.gov, What is Hospital Compare? www.medicare.gov/hospitalcompare
42.
357
44.
Medicare.gov, About Physician Compare, www.medicare.gov/physiciancompare
45.
Medicare.gov, Information Available on Physician Compare, www.medicare.gov
/physiciancompare/staticpages/aboutphysiciancompare/informationavailable,
46.
Medicare.gov, About the Data, www.medicare.gov/physiciancompare/staticpages/data
47.
Medicare.gov, What is Nursing Home Compare? www.medicare.gov/nursinghomecompare
48.
Medicare.gov, What are the 5-Star Quality Ratings? www.medicare.gov/Nursing
Medicare.gov, Strengths and Limitations, www.medicare.gov/NursingHomeCompare
50.
Medicare.gov, What is Home Health Compare? www.medicare.gov/homehealthcompare
51.
.gov/HomeHealthCompare/About/What-Information-Is-Available.html, accessed May
52.
Medicare.gov, Quality of Patient Care Star Ratings, www.medicare.gov
/HomeHealthCompare/About/Patient-Care-Star-Ratings.html, accessed May 10, 2016.
53.
Health Affairs, Health Policy Briefs: Public Reporting on Quality and Costs,
www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=65, accessed March 8,
54.
Utah Department of Health, Public Health Outcome Measures Report, April 2014,
55.
L. S. Kaiser and T. H. Lee, Turning Value-Based Health Care into a Real Business
Harvard Business
Review,
October 8, 2015, https://hbr.org/2015/10/turning
57.
Duke University Health System, Duke Human Resources: About Duke University
Health System, https://www.hr.duke.edu/jobs/duke_durham/duhs.php, accessed
58.
Duke University Health System, Duke Starts to Transfer to Digital Electronic Health
Records,
www.wral.com/lifestyles/goaskmom/blogpost/11364264/?comment_order
=forward
59.
-and-duke-university-hospital/view, accessed May 18, 2016.
60.
www.ecu.edu/cs-admin/news
62.
Kaiser Permanente, Who We Are, www.kaiserpermanentejobs.org/who-we
-are.aspx,
Understanding Value-Based Health Care
63.
Kaiser Permanente, About Us: Connectivity, https://share.kaiserpermanente.org
Duke University Health System, Dukes New Medical Records System Improves Patient
_office/news/duke-s-new-medical-records-system-improves-patient-abilities-and-access
69.
Kaiser Permanente, Patient Access to Online Health Action Plans Enhances Rate of
Kaiser Permanente, About Us: Connectivity.
71.
Z. Budryk, How Value-Based Care Will Change Healthcare, September 26, 2013,
http://www.fiercehealthcare.com/healthcare/how-value-based-care-will-change
Cleveland Clinic, Diseases and Conditions: Value-Based Care.
74.
Dartmouth-Hitchcock, What Is Population Health? www.dartmouth-hitchcock.org
76.
U.S. Department of Health and Human Services, The National Quality Strategy:
80.
L. S. Kaiser and T. H. Lee, Turning Value-Based Health Care into a Real Business
359
and Measures:
Eligible Professionals
sionals. The chapter has several parts, as follows, and each
r0WFSWJFX
PG
."$3"
BOE
UIF
QBZNFOU
DIPJDFT
UIBU
r$IPJDF
structured, who is eligible for MIPS, and facts about
r%FUBJMT
r%FUBJMT
QFSGPSNBODF
the related quality measures are created, and their
r$IPJDF

JT
GPS
"1.
JODFOUJWFT
IPX
UIJT
DIPJDF
JT
structured, the various APM models, and facts about
r%FUBJMT
the three incentive programs as they existed before MIPS
This chapter should be read in conjunction with the
preceding chapter, Understanding Value-Based Health
Care and Its Financial and Digital Outcomes. While this
chapter provides a view of the healthcare industrys overall
pay-for-performance choices
in the Quality Payment
Recognize the three existing
incentive programs that were
Identify the four MIPS
performance categories.
Describe how the MIPS
Composite Performance Score
Identify the Advanced APM
significant participation
Understand the Scoring
Discuss the framework for
value-based effort, along with the legislative sequence that came before the MACRA require
ments. (See the section entitled Value-Based Legislative Reform in the preceding chapter.)
LEGISLATIVE REFORM AND MACRA: AN OVERVIEW
This section provides an overview of legislative reform as it pertains to MACRA.
The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) was signed into law on
April 16, 2015. The law is grouped into categories, and each category is identified by a title num
ber and heading. This chapter concerns new pay-for-performance incentives (MIPS and APMs)
for physicians and other eligible professionals, which is located under Title I.
Repeal of the Sustainable Growth Rate, or SGR, is a true legislative reform. The short history of
SGR that follows explains why reform was necessary.
The SGR was a formula used to calculate Medicare payments to physicians. Each year, the
ing, then the physicians base rate payment amount would increase. However, if the physicians
spending increase exceeded the increase in the GDP, then the physicians base rate payment
2003: A law blocking the formulas cuts was passed.
20042005: Congress passes annual fixes that disregard the formulas cuts.
2015: The SGR formula is repealed by law.
ment rates. This meant, for example, if last years blocked cut was 4% and this years cut was 5%,
then the pay cut would now amount to a cumulative total cut of 9%, and so on, year after year.
Basically, at this point the SGR formula was broken. It was not sustainable. And to repeal it
and replace the long-standing SGR formula with an entirely different approach to physician
payment, as MACRA does, is true legislative reform.
New Pay-for-Performance Incentives (MIPS and APMs)
MACRA provides new physician pay-for-performance incentives that replace the repealed
participation is in the new Merit-Based Incentive Payment System, or MIPS. The second type
Advanced Alternative Payment Model (APM).
performance measures and/or requirements are described in the following sections of this
chapter.
Other Provisions of the Act
As previously explained, subjects covered by this law are grouped into categories, and each
category is identified by a title number and heading. Four other categories, and titles, are
included in the Act. Title II concerns extenders; in other words, a series of programs and
other funding efforts receive an extension within this title. Title III concerns an extension, or
reauthorization, of the Childrens Health Insurance Program (CHIP). (You will notice that
updates and adjustments. The final Title V is labelled as miscellaneous and covers an array of
PAYMENT CHOICES: MIPS VERSUS APM
MACRA provides for two value-based pay-for-performance initiatives: MIPS and APMs. The
the Quality Payment Program includes both MIPS and APM types of incentive payments.
Because MACRA provides two choices for payment, eligible professionals must generally opt for
Figure 281
illustrates the two choices. Note that the start date
(Year 1) for both MIPS and APM incentive payments is 2019.
Physicians Can Choose One of Two Pay-for-Performance Incentive Tracks.
k
#
1
t-
Ba
sed Ince
nt
iv
e
Pa
ym
en
t Sy
st
em
(MIPS)

k
#2
t
Mo
dels (APM
)
Beginning
In
1
363
MIPS Payment Structure
The MIPS payment structure consists of modified inputs from three existing programs, plus one
new category. The three existing incentive programs whose modified measures are combined
into MIPS inputs are described below. The fourth, new MIPS category is called Clinical Practice
Improvement Activities. It is further described later in this chapter.
Figure 282
illustrates the
Three Existing Incentive Programs Are Combined into MIPS
Many modified features of three existing incentive programs are combined into MIPS. They
include the: Physician Quality Reporting System (PQRS) program, the Value Modifier
program,
These Three Programs End as Stand-Alones as MIPS Begins
At the time of this writing, payments will end in 2018 for these three programs. In other words,
MIPS and APMs) takes over.
Figure 283
illustrates the changeover.
Figure 284
Four Pay-for-Performance Inputs Are Combined into MIPS.
Quality
Reportin
System
(PQRS)
Value-Based
Paymen
Modifier
(VBPM)
Electroni
Health
Records
(MU/EHR)
Practic
Improvement
Activities
Merit-Based Incentive
Payment System
(MIPS)
Eligible Professionals for MIPS
This section describes both eligible professionals included and excluded from MIPS as follows.
Note that the Centers for Medicare and Medicaid Services (CMS) have chosen to use the term
eligible clinicians instead of eligible professionals. The description below uses the legislative
d
RS
gf
ul
Use of

R
in
Disappear at the end of
to report PQRS quality
measures ends
(negative modifiers)
associated with Value-
Based Modifier end
365
Eligible Professionals Categories Subject to MIPS Will Increase
Five categories of eligible professionals (EPs) are
subject to MIPS for the first two payment years.
sionals, and eight more professional categories
have been suggested for addition in the third
year.
lists the five EPs types included
in years one and two, plus the eight types that
Who May Be Excluded from MIPS?
As discussed previously, physicians and cer
tain other eligible professionals have a choice
als who chose the APM methods may also be
sionals will fall below the low-volume threshold
and will be excluded. (The low-volume threshold
of this chapter.) Finally, an eligible professional
PROFESSIONALSPAID?
This section summarizes performance scores
EPs Are Scored on Performance
Eligible professionals for MIPS are scored
on performance. Their performance will be
rated on a scale that ranges from maximum
Summary of MIPS Payment Adjustments
MIPS EPs receive an automatic base increase
MIPS Eligible Professionals
Inclusion Varies by Timeline
For Years One & Two (2019 & 2020)*
r1IZTJDJBO
r1IZTJDJBO
r/VSTF
r$MJOJDBM
r$FSUJGJFE
4FDSFUBSZ
suchas:
r1IZTJDBM
r0DDVQBUJPOBM
r$FSUJGJFE
r$MJOJDBM
r4QFFDIMBOHVBHF
r$MJOJDBM
r/VSTF
r%JFUJUJBOT
*Timeline may change
Professionals Who May Be
r*T
r*T
r*T
for the performance period
r*T
of this writing there is zero automatic base increase from 2020 through 2025, with a 0.25%
These EPs are then at risk for performance adjustments to their payments beginning in 2019.
maximum and minimum in 2025. The payment percentage amounts by year are illustrated
Figure 285
MACRA also allows an extra bonus for exceptional performance. The bonus amount of $500
program. Participants become eligible for the bonus based on increases in their MIPS performance
scores. (The scoring increase for exceptional performance is topped at an additional 10%.)
This section provides an overview of the MIPS composite performance score.
Composite Performance Score
The MIPS composite performance score (CPS) consists of four parts. Each part is a separate
performance category within the composite score. (Note that some of their descriptive titles
r2VBMJUZ
r"EWBODJOH
(a.k.a. Meaningful Use of Electronic Health Records)
r$MJOJDBM
r$PTU
(a.k.a. Resource Use)
MIPS Payment Adjustments and Timelines.
Modified from CMS, Path to Value: The Medicare Access & CHIP Reauthorization Act of 2015, p. 9 and p. 18.
MI
PS
20152018*
2019
2020
2021
20222024
2025
2026 & Onward
(1) Automatic** Base
In
crease
0.5%
0.5%
0.0
.0%
0.0%
0.0%
0.25
Performance Adjustments at
*+
4%
+5%
+7
%+
9%
+9
%
Neutral Adjustment
0.0%
0.0%
0.0%
0.0%
0.0%
Maximum Negative Adjustment***
4%
5%
7
9%
9
**
Auto
matic
an
nu
al base conversion
factor increase
of
0.5% also in effect for period 2015
*A
nn
ta
ls

mu
367
The payment adjustment illustrated in Figure 285 begins with the clinicians (or groups)
CPS. The CPS is a unified scoring system that converts measures and/or activities into points,
allows partial credit, and provides advance information about what is needed for top-perfor
MIPS Scoring Uses Weighted Averages
MIPS scoring uses weighted averages within the CPS that will change the performance
categories weighting from year to year.
Figure 286
illustrates these changes. The figure
shows how the distribution of weighted averages may shift from 2019 to 2021. In other words,
MIPS PERFORMANCE CATEGORIES
Each performance category is made up of a series of individual measures. The clinician chooses,
within limits, which measures to report within each category. A brief summary about each cat
egory follows. The four categories are also illustrated in
Figure 287
This category contains streamlined measures from the PQRS and the Quality portion of the
Value Modifier (VM) program. Required reporting for this category consists of six measures,
rather than the nine measures previously required by PQRS. There is also more emphasis on
outcome measurement. The Year 1 proposed weight of 50% subsequently became 60%.
As initially proposed, the eligible clinicians (EPs) or groups are allowed to choose the six
and/or specialties; thus, these measures cut across.) There is another available choice for
Weighted Averages for the MIPS Score Measures as Initially Proposed.
25%
10%
15
y
Mean
in
gf
ul EHR
Us
e*
Cl
in
ic
al Improvemen
t
Resource Us
e
y
Mean
in
gf
ul EHR
Us
in
ic
al Improvemen
t
Resource Us
e
Advancing Care Information (also known as Meaningful Use of Electronic Health
Records)
Meaningful use has gained a new name: Advancing Care Information (ACI). The ACI measures,
originally derived from the Meaningful Use EHR program, have been modified and streamlined
for use within MIPS. Quarterly reporting has been eliminated, as has the all-or-nothing thresh
old measurement of electronic health record (EHR) technology. Redundant measures and two
objectives have been eliminated to reduce the reporting burden. The Year 1 weight is 25%.
most important within their practice. These customized choices will represent key measures
of interoperability and information exchange. Flexible scoring has been implemented for all
Clinical Practice Improvement Activities (CPIA)
The new Clinical Practice Improvement performance category contains six types of activities
proposed for Year 1:
r&YQBOEFE
r1PQVMBUJPO
MIPS Performance Categories.
y
eamlined measur
es
fr
om PQRS & Qualit
y
por
tion of
VM
t
eplaces cost por
tion of
Va
lue Modif
ier
ogra
m
ancing Ca

In
rm
ation
eamlined measur
es
fr
om Meaningful Use
EHR
ogra
ctice
Imp
ment
A
ctivities
w cat
egor
y with 6
activities & 90 options
369
r$BSF
r#FOFGJDJBSZ
r1BUJFOU
r1BSUJDJQBUJPO
The Year 1 weight is 15%.
Cost (also known as Resource Use)
The cost category will assess all the applicable resource use measures that are applicable to the
particular clinician or group. This category replaces the cost portion of the Value Modifier
cerns. Year 1 weight proposed at 10% subsequently became zero.
The eligible clinician or group does not have to report measures for this category. Instead,
CMS performs the calculation. To do so, CMS will compare resource use across practices that
The clinicians (or groups) chosen measures, as reported, are accumulated into annual totals.
The clinicians totals from each categorys measures as reported are converted into points.
How Do Points Earned Become Percentage Scores?
The next step is for points earned to become percentage scores. You will recall that there
are weighted averages within the composite performance score. Figure 286 illustrates these
weights for both 2019, which is Year 1 for the Quality Payment Program and MIPS, and for 2021.
Accordingly, the Year 1 maximum score possible for each performance category will equal
that categorys weight within the overall score (the Composite Performance Score). The Year 1
Points are turned into percentage scores in this manner. First, the clinician earns points
by reporting his or her chosen measures for the first three performance categories listed
previously. (You will recall that the Cost category does not require the reporting of measures
There are a certain number of points needed to reach the maximum score for each of the
first three performance categories listed above. An example follows.
Table 281
illustrates the Year 1 proposed percentages and total points as just discussed.
Dr. Browns Scores: An Example
The points earned by an individual (or a group) are mathematically converted into the relevant
percentage. For example, Dr. Browns practice earns all 60 points in the Clinical Practice Improve
ment Activities category, so that portion of his weighted composite performance score will be
the full 15%. But due to office staff errors, some measures for the Advancing Care Information
(a.k.a. Meaningful Use) category were not properly reported for part of the performance period.
As a result, Dr. Browns practice only earned 50 points, or one-half, of the 100 points that are
needed in order to reach the maximum score. Therefore, his percentage score for this category
will be 12.5%, or one-half of the 25% maximum possible score. (Refer to the left-hand column
in Table 281 to further understand the maximum possible scores as expressed in percentages.)
All told, Dr. Browns four performance category percentage scores looked like this:
The four performance category composite scores would then be converted into a total com
posite score using the weighted averages as shown in Figure 286. How Dr. Browns scores affect
How Do Scores Become Payment Adjustments?
This section discusses the overall process of computing scores and converting them into pay
MIPS Scoring by Performance Category: An Example
MIPS Performance Category
Maximum Possible Score
(stated as a percentage)
Total Points Needed to Reach
the Maximum Score
Quality
80 to 90*
Advancing Care Information
(a.k.a. Meaningful Use)
100
Clinical Practice Improvement
Activities
Cost (a.k.a. Resource Use)
CMS calculates average score
of all resource measures that
can be attributed
*Depending on group size.
Modied from CMS Quality Program Executive Summary Table 1, p. 10 (May 2016).
371
Measures Are Submitted During the Performance Period
First, the physician (or group) records and submits selected measures during the performance
period. (We have already discussed how each practice can choose measures to report within
the four performance categories. More detail about performance periods appears in a follow
ing section.) After all these data are collected, properly reported measures are analyzed and
outcomes are calculated. The resulting computations are then converted into scores and the
scores, in turn, are converted into payment adjustments. An overview of this process follows.
(While the following section provides a general descriptive overview, the actual computations
Five Steps from Measures to MIPS Payment Adjustment
This section provides a general overview of five steps that would generally convert submitted
measures into MIPS payment adjustments. For purposes of our description, we will assume that
Analyst Jane works for CMS and is going to perform all five steps. (This is not realistic, of course,
bilities.) We will also assume that Dr. Browns individual composite score is the end result of this
Step 1: First, Analyst Jane and her team will analyze the submitted measures from all over
the country. These represent measures for the Quality, Advancing Care Information, and Clini
cal Practice Improvement Activities performance categories as submitted during the perfor
mance period. The national analysis will, of course, include Dr. Browns submitted measures
for the performance period. (The team will also compute relevant benchmarks for comparative
data sources. These calculated outcomes primarily represent the Resource Use (Cost) perfor
mance category. (Note that some of these computations may be based on the prior years data
rather than performance period data.)
formance categories and will have performed a series of statistical analyses. Now they compute
the national means and medians. They divide the results of this analysis into quartiles. Using
the quartile results, they apply standard deviation computations to divide their analysis into
three national tiers. The three tiers are labelled as high, average, and low.
Step 4: Next, Analyst Jane does two things. First, she finds the individual physician or groups
composite, or multiple-part, performance score. In our example, that would be Dr. Browns
composite performance score. Then, she assigns the doctors score to one of the three national
tiers. The doctors score will thus fall into a high, average, or low tier.
Step 5: Now that Analyst Jane knows which tier Dr. Browns score is in, she will compute
positive, neutral, or negative payment adjustment for Dr. Brown.
Figure 288
illustrates the five-step process just described. Note that this process would be
repeated each time a performance period ends. (Note also that the exact process will probably
At the time of this writing we understand that first, an eligible MIPS participant should
be able to view preliminary results, and second, that there may be certain appeal rights
established.
MIPS REQUIRED REPORTING AFFECTS PAYMENT
This section discusses required reporting and the related performance periods.
Required Reporting
Reporting on required measures is important because the reported measures directly impact
that is has been previously selectedis necessary in order for the measures to be recognized
What Is a Performance Period?
A performance period is a designated time span that is used to capture data. The data that are
captured measure how well that facility or professional or group is performing. At the time of
this writing, for example, the MIPS program performance period covers a one-year period, and
that period is a calendar year.
How Does Performance Period Reporting Affect Payments?
Timeline
ment adjustment that is based on quality and value performance. CMS has provided an exam
ple of the timeline for the first performance period under MIPS as follows.
The first MIPS performance period, for example, is calendar year 2017. CMS uses the fol
lowing year (2018 in this example) for analysis and scoring of the data collected in the prior
year. Then the next year (2019 in this example) is when the first MIPS payment adjustments are
made. In other words, the performance period reporting made two years ago directly affects the
payment adjustments received in a current year.
At the time of this writing, the first feedback was anticipated in the middle of the performance
How MIPS Scoring Works: An Overview.
ind the individual
ph
y
sician or gr
oup
composi
scor
es
omput
e the individual
ph
y
sician or gr
oup
pa
yment adjustment
e
to
High-A
vg-Lo
w
tier
s
esults in
Po
sitive
Neut
l
Neg
ativ
Pa
yment adjustment
esults in
High-A
vg-Lo
w
tie
yz
e submit
t
ed
measur
es
alculat
e
outcomes and costs
ind the national
means & quar
tile
373
period year. (This would give an opportunity for adjustments to the participants reporting pro
grams remain in existence for the period 2015 through 2018. During that four-year period,
providers are still being paid under these programs. (The three programs include the PQRS,
the Value-Modifier, and the Meaningful Use of EHR.)
DATA SUBMISSION
Individual Reporting
Individuals can choose among various options for data submission. The four performance cat
Quality Performance Category Options
Data submission choices include submission through EHRs or through a Qualified Registry
or Qualified Clinical Data Registry (QCDR). Claims submitted by providers are also part of
quality data submission, as are administrative claims. (Administrative claims means CMS
will perform any needed computations, and no special submission is required from the
Advancing Care Information (ACI) Performance Category Options
Submission choices for ACI include through EHRs, a Qualified Registry, or a QCDR. Attestation
is another available choice for this category. Administrative claims are also part of the process,
Clinical Practice Improvement Activities (CPIA) Options
Submission choices for CPIA also include through EHRs, a Qualified Registry, a QCDR, or
through attestation. Once again, administrative claims are part of the process but no action is
Resource Use (Cost) Performance Category Options
The Resource Use category entirely uses the administrative claims computation process, so no
Group Reporting
Groups have a couple of additional options. In the case of the Quality Performance category,
groups may also choose the CAHPS for MIPS Survey option. Groups of 25 or more may use the
CMS Web Interface when submitting data for the Quality, ACI, and CPIA categories.
Reporting by Intermediaries
CMS has proposed to allow certain intermediaries to submit performance category data on behalf
mation technology (HIT) vendors who obtain their data from the eligible clinicians certified
EHR technology, CMS-approved (certified) survey vendors, Qualified Registries and QCDRs.
Advanced APMs According to MACRA
MACRA considers the following to be Advanced APMs:
r$.4
r5IF
r"
r%FNPOTUSBUJPOT
These APMs are considered advanced because the participants accept risks along with rewards
(the rewards being the incentive payments). To be eligible for such payment, particular criteria
Eligible Advanced APMs Proposed for Year 1
CMS proposes specific criteria for Advanced APMs through rulemaking. These criteria fit within
MACRAs description of entities as listed above. At the time of writing, the eligible Advanced
APMs proposed for Year 1 are as follows:
r$PNQSFIFOTJWF
1SJNBSZ
r.FEJDBM
1SPHSBNT5SBDLT
r/FYU
"$0
r$PNQSFIFOTJWF
r0ODPMPHZ
It is important to note that the Comprehensive End-Stage Renal Disease Care Model is a
Figure 289
summarizes these models. It is also important to note that some
changes to the types of Year 1 proposed models may occur before actual implementation.
The eligibility for Advanced APMs will be reviewed annually. Thus, while these models are
proposed for Year 1, we are still at the beginning of this transition to value-based performance
payment models. As such, we can expect a series of modifications, expansions, and revisions
as time goes on. We can therefore expect that the choices among future multiple payment
approaches will increase. We can also expect increased transparency through public reporting
375
Another interesting option is expected to be in effect for payment in 2021. (If so, this means the
relevant performance-reporting period may be two years prior, or 2019.) This proposed option is
another type of APM, called Other Payer Advanced APMs. As the name suggests, data from payers
status. These other payers could be either private insurers or particular state Medicaid programs.
r6TF
UFDIOPMPHZ
r1SPWJEF
quality performance category.
r#FBS
NPOFUBSZ
Eligible Professionals for APMs fall into one of two categories: Qualifying (QEPs or QPs) and
Partial Qualifying (PQEPs). This distinction is important because APM payment adjustments
gible Professionals. However, CMS proposes to use a different term within its rule making. The
Qualifying Eligible Professionals (a.k.a. Qualifying Eligible Clinicians) Defined
of this chapter) and are at risk. At risk means financially at risk. In other words, the eligible
professional/clinician will bear some financial burden based on performance.
Partial Qualifying Eligible Professionals (a.k.a. Partial Qualifying Eligible Clinicians)
risk. They also bear some financial burden based on their performance.
Advanced Alternative Payment Models (APMs) as Proposed for Year 1.
Other
mo
dels
ma
y
su
bsequently be in
cluded
.
**A large
dial
ys
is
organization arrangement
.
Primary Care
Plus
Savings
Program-Track
Medical Shared
Savings
Program-Track
Generation
ACO Mode
End Stage Renal
Disease Care
Model*
Care
Model***
The Pathway Toward Becoming a Qualifying APM Participant (QP)
a particular Advanced APM may receive the same score and thus the same payment adjust
progression, or pathway, for eligible clinicians toward becoming a Qualifying APM Participant
Figure 2810
Four Steps to Find if the Eligible Clinician Will Become a Qualifying APM
Participant
the necessary thresholds.) The four steps are as follows:
CMS calculates a Threshold Score for each Advanced APM Entity.
4.
All the eligible clinicians in the Advanced APM Entity become QPs for the payment year.
Qualifying APM Participant (QP) Pathway.
eshold of par
ticipatio
me
nt
Model (APM
)
M
y
377
The result: If the threshold scores for the Advanced APM Entity are above the appropriate
particular payment year. However, if the threshold scores for the Advanced APM Entity are
below the corresponding QP threshold, then none of the eligible clinicians will become QPs for
endar year performance period. The performance period will be two years prior to the payment
year, and is thus aligned with the MIPS performance period.
HOW ARE ADVANCED APM EP
PAID?
This section discusses payment adjustments and timelines. Note that the following comments
ing section of this chapter.
Qualifying Eligible Professionals (QEPs) Payments
Incentive Payments 2019 Through 2024
from 2019 through 2024. These QEPs will also be excluded from MIPS adjustments. At the
A timeline payment summary appears later in this section.
QEP Incentive Payment Base Period Versus QP Performance Period
Advanced APM Qualifying Professionals/Clinicians. The performance period will be two years
prior to the payment year, as previously discussed, and is aligned with MIPS performance periods.
The incentive payment base period is for a different purpose. It is used to calculate how much the
5% incentive lump sum will be. To do so, the relevant payments for services are added up; then 5%
of that figure equals the 5% incentive lump sum to be received. (The relevant payments to be added
up are based on the estimated aggregate payments for professional services furnished the year
prior to the payment year...e.g. the 2019 APM Incentive Payment will be based on 2018 services.
This cycle is repeated each year. For example, as CMS explains it, the first cycle would be as fol
lows: 2017 = QP Performance Period; 2018 = Incentive Payment Base Period (to calculate the 5%);
2019 = Payment Year. Then the second cycle starts. It would be: 2018 = QP Performance Period;
2019 = Incentive Payment Base Period; 2020 = Payment Year. And the cycle would keep repeat
Partial Qualifying Eligible Professionals (PQEPs) Payments
Some eligible professionals/clinicians may be participating in an Advanced APM that does
slightly reduced threshold. Therefore, these eligible professionals/clinicians are considered to
The PQEPs receive no lump sum incentive payment. They can either choose to participate
in MIPS, or they can choose to opt out of MIPS. If they choose to participate in MIPS, they will
receive favorable weights in the MIPS scoring. If they choose to opt out instead, they will be held
harmless. In other words, they would receive no favorable payment adjustment, but neither
Summary of APM Payment Adjustments and Their Timelines
ods remain in existence for the period 2015 through 2018. In other words, during that four-year
At the time of this writing, the APM payment adjustments are scheduled to commence in
2019. As previously discussed, these APM payment adjustments are based upon the results of
reporting for a performance period two years prior to 2019. Thus, measures reported in 2017
represent the performance period for Year 1 (2019) APM incentive payments.
Table 282
What Is the Intermediate Option for Payment Adjustment Choices?
credit toward their score within the category of Clinical Practice Improvement Activities. CMS
APM Payment Adjustments and Timelines (as Proposed)
Payment Adjustments
20152018*
2019
2026 Onward
all thresholds and are at risk)
Annual Lump Sum Payment
Higher fee
updates starting
Partial Qualifying EPs
reduced thresholds
and are at risk)
No lump sum payment; can choose to participate
No lump sum paid; can opt out of
MIPS and be held harmless
*Note: PQRS, VM & EHR remain in effect for the period 2015 to 2018.
Modied from CMS, Path to Value: The Medicare Access & CHIP Reauthorization Act of 2015, p. 18.
379
HOW SIGNIFICANT PARTICIPATION WORKS
What Is Significant Participation in an Advanced APM?
Significant participation is expressed in terms of ever-increasing percentages. In other words, par
Table 283
Will These Requirements Change Over Time?
It is to be expected that specific requirements will be edited and perhaps modified as time goes
ADVANCED APM PARTICIPATION STANDARDS
Participation Standards for Advanced APMs
The financial risk standards involve the level of financial risk. If financial risk requirements are not
ment, withholding current payments due, or reducing future rates to equal the required repayment
penalty. In other words, the APM would lose money. (Of course, if the APM exceeds the standards,
it should gain, because it would receive incentive payments.) The proposed initial financial risk
Advanced APMs: Required Participation by Year (as Proposed)
Payment Years
Required participation through an
Advanced APM*
2017
2018
2019
2022 & Later
Percentage of payments
Percentage of patients
*Requirements for percentage of signicant participation, by year.
Comparable Measures
This standard requires that the APM measures be comparable to MIPS measures within
the quality performance category. As you will recall, to be comparable the measures must always
be valid and reliable. They must also be evidence-based and at least one of the measures must be
Certified EHR Technology (as Proposed)
This standard requires that in the first year of the performance period, 50% of the APM clini
cians must use certified EHR technology. And for the second year of the performance period 75
percent of the APM clinicians must use certified EHR technology.
Required Reporting for the First Year
CMS has proposed that all EPs will be reporting through MIPS for the first year. This require
SCORING STANDARD FOR APM
The APM scoring standard implements uniformity across the various types of APMs. Goals
r5IF
r5IF
QFSGPSNBODF\r
r5IF
(Note that the eligible clinicians name must be on an APM participation list by the end of the MIPS
Types of APM Entities That Qualify
At the time of this writing, the following types of APM entities qualified for the APM scoring
r$PNQSFIFOTJWF
1SJNBSZ
r.FEJDBM
r/FYU
"$0
r$PNQSFIFOTJWF
381
r0ODPMPHZ
r"MM
The Standard Aggregates Scores
Under the standard, all MIPS scores for eligible clinicians are combined, or aggregated;
weighted; and averaged to arrive at a single score at the level of the APM entity. This means
sible, the scoring standard uses performance measures that are related to that APM.
Performance scores under the standard use the same performance categories as does MIPS.
At the time of this writing, it appears that the Resource Use category will usually be not appli
cable and thus will not contribute to the score. The remaining three categories (Quality, ACI,
and CPIA) will be weighted when computing the final composite score. However, the weights
may vary according to the type of APM entity.
CREATING PHYSICIAN-FOCUSED PAYMENT MODELS (PFPMS)
The underlying legislative intent is to encourage the creation of physician-focused payment
models (PFPMs) as per the following quotation. Alternative Payment Models provide incen
tive payments for certain eligible professionals (EPs) who participate in APMs, by exempting
The overall phrase used to describe these models is physician-focused payment models
sible new models. Its title is the Physician Focused Payment Model Technical Advisory
Measuring quality and value are important for MIPS and APMs because quality and value
are the foundation of the new payment system for EPs. Since MIPS measures are more fully
mentation timelines. MIPS measures are more developed and are ready for the first stages of
What Is the Measure Development Plan (MDP)?
The Measure Development Plan (MDP) has been created in response to a MACRA require
and posted on the CMS.gov website.
A final plan is then posted at a later date. The final plan
is supposed to take comments regarding the draft plan into consideration. The plans full title is
CMS Quality Measure Development Plan: Supporting the Transition to the Merit-based Incen
tive Payment System (MIPS) and Alternative Payment Models (APMs) (Draft).
Introductory
commentary states that the law provides
both a mandate and an opportunity for the Centers for Medicare & Medicaid Services
r#FUUFS
r4NBSUFS
r)FBMUIJFS
strategic framework for the future of clinician quality measure development to support MIPS
Creating New Quality Measures for MIPS
New quality measures are an important part of the MIPS payment structure. The basic sequence
r'JSTU\r
r/FYU\r
r5IFO
to identify these identified measure and performance gaps.
36
When adding the new
in response to a published Request for Information, or RFI.) In addition, measures that
Figure 2811
illustrates the process just
MACRA called for the initial draft Measure Development Plan (MDP) to be published as of
January 1, 2016. A comment period followed. Then the final MDP was published in May 2016.
383
The Act further called for updates to the MDP to be published annually or otherwise as appro
Thus we expect to see annual updates, as required, published on a regular annual
schedule. Any updates that might be otherwise appropriate, of course, are unpredictable.
Procedural Timelines
development will be published each year by CMS no later than the first of November.
the regulatory rule-making process, a Call for Measures will be published in the first half of each
year. This allows stakeholders to submit their input. After the Call for Measures ends in June
of each year, a proposed rule will most probably be published with a multi-month comment
period. Only then will the final rule be ready to be published on the first of November.
This section discusses quality measurement concerning a framework for measurement along
Required Priorities and Domains for Quality Measures Development
MACRA-Required Priorities for Types of Measures
The Measure Development Plan (MDP) required by MACRA has been described in a previous
section of this chapter. MACRA further requires that the Measure Development Plan take four
+
rm
re
Pr
Pa
ye
r0VUDPNF
r1BUJFOU
r$BSF
r.FBTVSFT
TFSWJDFT
Figure 2812
r$MJOJDBM
r4BGFUZ
r$BSF
r1BUJFOU
r1PQVMBUJPO
r"O
Figure 2813
illustrates these requirements. The addition of an efficiency and reduction
In other words, with this addition, these six domains mirror the six NQS domains that are the
subject of the next section in this chapter.
A Framework for Quality Measurement
CMS has published a Framework for MACRA quality measurement that is linked to NQS domains.
The framework is mapped to the six National Quality Strategy (NQS) domains as follows. Note
some domain titles vary slightly as they are expanded from the NQS titles as listed above.)
Four Priorities for Types of Quality Measures as Identified by MACRA.
Data from MACRA Section 102(1)(D)(4-16-15).
e
Coordinatio
Experienc
Use of
Services
385
Clinical Quality of Care
r$BSF
r$POEJUJPOT
r4VCQPQVMBUJPOT
r"MMDBVTF
r)PTQJUBMBDRVJSFE
\t)"$T\n
r)PTQJUBMBTTPDJBUFE
r6OOFDFTTBSZ
r.FEJDBUJPO
Care Coordination
r1BUJFOU
r*OGSBTUSVDUVSF
r*NQBDU
Person- and Caregiver-Centered Experience and Outcomes
r1BUJFOU
r$BSFHJWFS
r1SFGFSFODF
r)FBMUI
r"DDFTT
r1IZTJDBM
r)FBMUI
Efficiency and Cost Reduction
r$PTU
r&GGJDJFODZ
r"QQSPQSJBUFOFTT
Car
Coordination
Caregive
Experienc
Health
Prevention
& Cost
Reductio
considered by
CM
We have illustrated this linkage in
Figure 2814
r.FBTVSFT
r.FBTVSF
Other Measure Development Considerations
r$PPSEJOBUF
r$POTJEFS
r6TF
It is also important to realize that measures will be reassessed and revised over time. We
can therefore expect that more future efforts toward standardization and ease of use for all
More About National Quality Strategys Priorities and Domains
This chapter uses a four-part sequence to show how CMS develops quality measures.
First, the Measure Development Plan for MIPS is described. (See Figure 2811.) Second,
the priorities for quality measures that are identified (and thus required) by MACRA are
described. (See Figure 2812.) Third, the quality domains that are identified (and thus
required) by MACRA legislation are described. (See Figure 2813.) And fourth, this chapter
then shows how the CMS framework for measurement ties back into the six NQS domains.
(SeeFigure2814.)
Caregiver Centered
Experience
Outcomes
Coordination
Of Care
&
Community Health
Reduction
387
CONCLUSION: BENEFITS AND COSTS OF THE QUALITY PAYMENT
One benefit of the new MIPS program is an increase in the attention to quality of care. The
paring this national baseline financial information to the providers own costs, also as computed
Costs of program participation include costs of new software plus potential hardware
zations public image and the results that are posted within the public reporting venue.
Ingredients for Success
Success of this value-based program begins with proper measure choices and continues with
measure development and implementation. Proper implementation first means the right
choices. Another crucial element is sufficient training of a focused staff who understands the
Success Also Depends Upon the Use of Qualified Electronic Transmission
Standards
ware and software, along with proper training of staff. Timely updates on software and
staff training are essential. In addition, an electronic disaster plan should be in effect and
up-to-date.
Organizational Implications
Leadership must be responsible for seeing that quality and financial incentives align properly.
Finally the organizations leadership must recognize that the digital age has arrived. It is
here, and the inevitable change that it brings must be recognized and dealt with in order to
Physician Quality Reporting System (PQRS)
ered professional services within the Medicare Part B Physician Fee Schedule (MPFS).
applies to both individual EPs and group practices and is intended to improve the quality of
r$MJOJDBM
r5ZQFT
r4FUUJOHT
r2VBMJUZ
r0UIFS
can assess their overall quality performance.
Beginning in 2015, the program applied a negative payment adjustment to certain individual
EPs and PQRS group practices. Those practitioners received negative payment adjustments
because they did not satisfactorily report data on quality measures for the relevant performance
period. Each years results stand alone, so a negative adjustment in one year does not necessar
ily mean a negative result for the following year. In other words, reporting satisfactorily for the
2016 performance period year would avoid a negative payment adjustment in the 2018 PQRS
program year. Finally, for those who might be wondering, PQRS originally had another name:
Value-Based Payment Modifier (Value Modifier)
payment adjustment to a physician (or group) based upon the quality of care compared
to the cost of care furnished to Medicare fee-for-service beneficiaries during a performance
from submitted PQRS data. (The quality score also includes three outcome measures that are
calculated by CMS from Medicare claims data.)
46
The cost composite score includes perfor
sures, also calculated by CMS, include six performance cost measures.
ment. It is important to note that the VM adjustment is separate from the PQRS as described
previously. However, the quality measures for the two programs have been aligned. The VM was
: AReference
389
phased in; it first applied to groups of 100 or more eligible professionals. By 2016, the VM was
Meaningful Use (MU) and the Electronic Health Records (EHR) Incentive Program
The EHR Incentive Programs were first implemented in 2011. The program was designed to
encourage providers to adopt, implement, upgrade and demonstrate meaningful use of certi
fied EHR technology.
Medicare EHR incentive program payments to eligible professionals,
eligible hospitals, and critical access hospitals have come to an end. Meaningful use, as defined
above, was still required, however, and at the time of this writing negative payment adjustments
have been imposed for non-use through 2018. (Note, however, that Medicaid incentive pro
Stage 2), and Stage 3. (The numerous Medicaid program variations are beyond the scope of
menu objectives and measures. However, as of 2016, the program has been streamlined. All
Meaningful Use measures have been modified and incorporated into the new Quality Payment
ment in 2019. And MU has gained a new name within the Quality Payment Program. It becomes
Use in its new Advancing Care Information form, see Appendix 28-A at the end of this chapter.
ALTERNATIVE PAYMENT MODELS: A REFERENCE
Accountable Care Organizations (ACOs)
The Medicare program offers various ACO programs, as follows.
Medicare Shared Savings Program
Savings Program ACO. The program was created to facilitate coordination and cooperation
among providers to improve the quality of care for Medicare Fee-For-Service (FFS) beneficia
ries and reduce unnecessary costs.
the growth in costs will be rewarded. Note also that data about the shared savings program
ACOs is made public.
This interesting model came about through input from stakeholders. There was concern that
smaller ACO groups would not be able to pay for the necessary investment in infrastructure
tion.) Therefore, this Advance Payment ACO model is intended to assist rural providers and
cash advanced from the shared savings that the ACO group is expected to earn.
and variable start-up costs. For that reason, according to CMS, each of these ACOs will receive
the following three types of advance payments. Note that two are upfront, one fixed and one
variable, while the third payment is monthly. The ACO will receive:
r"O
r"O
CFOFGJDJBSZ
r"
&#x/Act;&#xualT;xt;&#x 0;&#x/Act;&#xualT;xt;&#x 0;PG &#x/Act;&#xualT;xt;&#x 0;&#x/Act;&#xualT;xt;&#x 0;UIF &#x/Act;&#xualT;xt;&#x 0;&#x/Act;&#xualT;xt;&#x 0;"$0
This model is intended for a more sophisticated group of organization and providers who
are experienced in care coordination. In other words, they do not have a learning curve.
Two design elements are especially interesting in this model. First, these groups are expected
to move more quickly from the shared savings plan into a population-based payment model.
The second interesting element is that this model is supposed to work in cooperation with
private payers. It does that by aligning provider incentives, which will improve quality and
health outcomes for patients across the ACO, and achieve cost savings for Medicare, employers
and patients.
(Note that at the time of this writing, this model was closed to new applicants.)
Patient-Centered Medical Homes
The easy-to-use phrase patient-centered medical homes actually refers to a CMS demonstra
tion project with a long title. The demonstrations formal name is The Federally Qualified
Health Center Advanced Primary Care Practice, or FQHC APCP. It has a three-year life, unless it
is subsequently extended and/or expanded. As the title suggests, only federally qualified health
accepted into the demonstration, each FQHC receives a monthly management fee for each
applicable eligible Medicare beneficiary. The fee is paid quarterly and payment is automatic.
The Bundled Payments for Care Improvement (BPCI) Initiative presently covers four care mod
els. Payment is linked, or bundled, for multiple services that occur during a patients episode
of care. Organizations agree to episode-of-care payments that include both performance and
financial accountability.
391
For Model #1, the episode of care equals the inpatient stay in an acute care hospital. Payment
to the hospital is discounted from the usual Inpatient Prospective Payment System and payment
of care includes the inpatient stay, plus the post-acute care, plus all related services for are bun
by a hospital stay. However, unlike the previous model, in this case the episode of care concerns
Model #4 differs from that of Model #1. In this case one bundled payment is made to the
hospital. This payment covers all the episode-of-care services, including those of the physicians.
ment that it has received for this episode of care. (For those who are wondering, to complete
services they performed.)
Other new APM models will be developed in the near future. At the time of this writing, CMS
has recently issued a RFI or Request for Information that seeks input about possible new
INFORMATION CHECKPOINT
What is needed?
Some description of the MACRA legislation, the Quality Pay
Where is it found?
How is it used?
The use depends upon the particular item. Typical uses would
be for general information or for training or planning

KEY TERMS
Accountable Care
Organizations (ACOs)
Composite Performance
MACRA
Merit-Based Incentive
Patient-Centered Medical
Performance Period
Physician-Focused Payment
Qualifying Eligible
Value-Based Program
1.
Describe how the Merit-Based Incentive Payment System (MIPS) and the Advanced Alter
native Payment Model (APM) are illustrative of pay-for-performance.
2.
2.
B. Wynne, May the Era of Medicares Doc Fix (19972015) Rest in Peace. Now
Health Affairs Blog
/may-the-era-of-medicares-doc-fix-1997-2015-rest-in-peace-now-what; also M. A. Carey,
Congress Is Poised To Change Medicare Payment Policy. What Does That Mean
, January 16, 2014, Khn.org/news
/congress-doc-fix-sustainable-growth-rate-sgr-legislation
3.
Centers for Medicare and Medicaid Services (CMS), Proposed Policy, Payment, and
Quality Provisions Changes to the Medicare Physician Fee Schedule for Calendar Year
5.
.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based
6.
CMS, The Medicare Access and CHIP Reauthorization Act of 2015: Quality Payment
Program, https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment
-Instruments/Value-Based-Programs/MACRA-MIPS-and-APMs/Quality-Payment
Program/MACRA-NPRM-Slides.pdf, accessed June 6, 2016.
The computation steps overview as described was generalized from the composite score
the 2016 Value Modifier, September 2015, www.cms.gov/Medicare/Medicare-Fee-for
393
11.
CMS, Hospital Value-Based Purchasing, September 2015, www.cms.gov/Outreach-and
12.
CMS, MIPS: Advancing Care Information Performance Category, p. 41, www.cms.
gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based-
Programs/MACRA-MIPS-and-APSs/Advancing-Care-
Information-Presentation.pdf,
CMS, MACRA: Quality Payment Program, pp. 3940.
P.L. 114-10-(April 16, 2015) 129 STAT.121.
17.
MACRA, Delivery System Reform, Medicare Payment Reform: Whats the Quality
Payment Program? https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assess
ment-Instruments/Value-Based-Programs/MACRA-MIPS-and-APMs/MACRA-
CMS, MACRA: Quality Payment Program, pp. 63 and 68.
22.
.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based
-Programs/MACRA-MIPS-and-APMs, accessed March 17, 2016.
CMS, MACRA: Quality Payment Program, pp. 7071.
CMS, MACRA: Quality Payment Program, pp. 8792.
P.L. 114-10 (April 16, 2015) 129 STAT. 115.
P.L. 114-10 Sec 102 (April 16, 2015).
33.
CMS, CMS Quality Measure Development Plan: Supporting the Transition to the Merit-
based Incentive Payment System (MIPS) and Alternative Payment Models (APMs).
(Baltimore, MD: Author, 2015), https://www.cms.gov/Medicare/Quality-Initiatives
-Patient-Assessment-Instruments/Value-Based-Programs/MACRA-MIPS-and-APMs
/Final-MDP.pdf
Ibid., p. 3; also, CMS, CMS Quality Strategy 2016, (Baltimore, MD: Author, 2015).
MACRA Sec.102(1)(D).
MACRA Sec. 102(1)(B).
CMS, Physician Quality Reporting System, last modified August 8, 2016, www.cms.gov
CMS, Measures Codes, last modified August 31, 2016, www.cms.gov/medicare/quality
45.
.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/PhysicianFeedbackProgram
46.
https://www.cms.gov/Medicare-Fee-for-Service-Payment/PhysicianFeedbackProgram
/ValueBasedPaymentModifier.html
47.
CMS, Value-Based Payment Modifier, accessed January 20, 2016, www.cms.gov
/Medicare/Medicare-Fee-for-Service-Payment/PhysicianFeedbackProgram
/valuebasedpaymentmodifier.html
48.
CMS, Medicare and Medicaid EHR Incentive Program Basics, last modified January
12, 2016), https://www.cms.gov/regulations-and-guidance/legislation/ehrincentive
49.
CMS, 2016 Program Requirements, https://www.cms.gov/Regulations-and-Guid
ance/Legislation/EHRIncentivePrograms/2016ProgramRequirements.html, accessed
50.
CMS, Accountable Care Organizations (ACOs), last modified January 6, 2015, www.cms
.gov/Medicare/Medicare-Fee-for-Service-Payment/ACO/index.html
CMS, Shared Savings Program, http://www.cms.gov/Medicare/Medicare-Fee-for-Ser
vice-Payment/sharedsavingsprogram/index.html?redirect=/SharedSavingsProgram,
53.
CMS, Advance Payment ACO Model, pp. 12, last modified February 19, 2016, https://
innovation.cms.gov/initiatives/Advance-Payment-ACO-Model
55.
CMS, Pioneer ACO Model, https://innovation.cms.gov/initiatives/Pioneer-ACO-
57.
CMS, Federally Qualified Health Center Advanced Primary Care Practice (FQHC
APCP) Demonstration Fact Sheet, www.cms.gov/Medicare/Demonstration-Projects/
58.
60.
CMS, MACRA RFI (CMS-3321-NC), http://www.innovation.cms.gov/Files/x/macra-faq
395
HOW MEANINGFUL USE HAS EVOLVED
Meaningful Uses New Name Applies to Physicians and Other Eligible Professionals
As we have learned, in the accompanying chapter, Meaningful Use of Certified Electronic
Health Records (EHRs) has a new name. It is now known as Advancing Care Information
(ACI). It is important to understand that the new name applies to usage by physicians and other
ACI is now one component in the Merit-Based Incentive Payment System (MIPS). And MIPS
created the new incentive program is known as the Medicare Access and CHIP Reauthoriza
tion Act of 2015 (MACRA). This Act applies to physicians and other eligible professionals. The
poses, in the remainder of this Appendix, when we say physicians, we actually mean physi
Physicians and Hospitals Have Different Meaningful Use Programs
Meaningful Use (MU) programs are in place for physicians and for hospitals. Separate incen
tive programs have been implemented for physicians and for hospitals. A very brief background
summary follows.
The hospital Medicare program incentive payments spanned a four-year period. Then, begin
Streamlined with a
Do not be confused by different terminology. At the time of this writing, hospitals still use the
the new name Advancing Care Information only applies to the physician and other eligible
professionals. However, the hospitals meaningful use program has also been streamlined. Its
Physicians Use the New ACI Name Upon Quality Payment Program Implementation
The original Medicare program incentive payments for physicians spanned a similar period.
Then, beginning in calendar year 2015, eligible physicians who were not meaningful users of
ful users. They remained subject to these reductions until MACRAs Quality Payment Program
Meaningful Use had to Be Demonstrated Every Year
The Centers for Medicare and Medicaid Services (CMS) made it clear that meaningful use had
to be demonstrated every year as follows. EPs must demonstrate meaningful use every year
in order to avoid Medicare payment adjustments. For example, an eligible professional that
demonstrates meaningful use for the first time in 2013 will avoid the payment adjustment in
calendar year (CY) 2015, but will need to demonstrate meaningful use again in 2014 in order to
Reporting Periods for MU Used to Vary by Type of Provider
The typical reporting period covers 12 months. However, the beginning month and the end
still existed.) The physician and eligible professional reporting period is a CY. A CY runs like
the calendar does, from January 1 to December 31. The hospital reporting period, on the
other hand, is a fiscal year (FY). Specifically, it is the federal fiscal year. This reporting period
runs from October 1 of one year to September 30 of the following year.
However, as of 2016, MU reporting for hospitals was also converted to a CY.
This change
CHANGES TO ALLOWABLE MU STAGES
MU Has Progressed Stage by Stage
Three Original Stages of Meaningful Use
r4UBHF
r4UBHF
r4UBHF
Figure 28-A1
Stages Progressed Through a Rolling Implementation
The program allowed a rolling implementation. Under this concept, eligible providers had a
Stage 2 Was Modified
Meaningful use stages have been streamlined when preparing for use as ACI in the QPP. In
another process, however, Stage 2 Meaningful Use previously underwent a series of changes to
make MU more user-friendly. Therefore, the Stage 2 MU in use until QPP implementation has
Allowable Stages of Meaningful Use in the First Year
In 2015 or 2016, a provider demonstrating meaningful use for the first time was allowed to use
Modified Stage 2. In 2017 or 2018, the provider demonstrating meaningful use for the first time
was allowed to use either Modified Stage 2 or Stage 3. By 2018, everyone is scheduled to use
The end to multiple stages also ended the necessity for rolling implementation. These
changes then allowed a smooth progression to the streamlined MU that became ACI within the
QPP.
Table 28-A1
illustrates allowable implementation by year from 2015 through 2019 and
&
sharing
Advanced clinical
procedures

399
Prior to ACI, new participation requirements were put into place for the period 2015 to 2017.
New Participation Requirements Began
New Medicare participation requirements were put into place for the period 2015 to 2017. The
r"EWBODFE
r"EWBODFE
r.BYJNJ[FE
Objectives and Measures Were Simplified
period, the number of objectives was also reduced. Hospital objectives were reduced to nine
Some providers were also able to claim certain alternate exclusions. One example of an
alternate exclusion is as follows. A provider who was scheduled to be in either Stage 1 or Stage2
First year demonstrating
Stage of Meaningful Use
2015
2016
2017
2018
2019 & Future Years +
2015
Modied
Stage 2
Modied
Stage 2
Modied
Stage 2
Stage 3
Stage 3
Stage 3
2016
Modied
Stage 2
Modied
Stage 2
Stage 3
Stage 3
Stage 3
2017
Modied
Stage 2
Stage 3
Stage 3
Stage 3
2018
Stage 3
Stage 3
2019 & Future Years
2019+
Stage 3
Modied fro
m CMS Table: Stage of Meaningful Use Criteria by First Year EHR Incentive Programs (4-14-2016).
Meaningful Use Stages by First Year
in 2016 may be allowed to claim an alternate exclusion for certain Public Health Reporting
that they did not previously have or did not previously intend to include in their activities for
CONCLUSION: ADVANCING CARE INFORMATION BECOMES THE NEW
This section clarifies certain aspects of the transition from MU to ACI.
A number of changes have been made to MU as it became ACI. However, the basic measure
ment structure remains. This means objectives and measures are still in use within the new
Three Types of ACI Measures
specific objective. At the time of this writing, there are three types of such measures as described
below.
System-Based Measures
r8IBU
r%P
r"SF
Action-Based Measures
r8IBU
r%P
r"SF
Percentage-Based Measures
r8IBU
r8IBU
r%P
r"SF
Figure 28-A2
401
Computing a Percentage-Based Measurement
ACI objectives may often use the percentage-based measures as described above. Therefore,
nator indicates the total number of parts available to be divided and the numerator indicates
Why Is This Subject Important?
position of the numerator should be. Therefore, it is important to understand the consequences
of selecting a denominator and the consequences of what the numerator will be. We understand
that electronic software will actually perform the calculations, but managers should know how the
Measures
Measures
Measures
certified EHR technology
system must be enabled?
measure?
measure?
Three Types of Meaningful Use Measures.
Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.
Be aware that certain exceptions exist for particular measures. These exceptions dont have to
be included in the numerator or denominator, so they wont count against you.
Summary
In summary, the Advancing Care Information performance category has a mix of new and older
ACI = Advancing Care Information
CHIP = Childrens Health Insurance Program
CY = Calendar Year
FY = Fiscal Year
MACRA = Medicare Access and CHIP Reauthorization Act of 2015
ARRA Division B. Title IV Section 4101 (HITECH Act).
3.
CMS, Understanding 2018 Medicare Quality Program Payment Adjustments
(v1.03/1/2016), p. 3, March 2016, www.cms.gov/Medicare/Quality-Initiatives-Patient
4.
CMS, Medicare and Medicaid EHR Incentive Program Basics, last modified January 12,
2016, www.cms.gov/regulations-and-guidance/legislation/ehrincentiveprograms/basics.html
5.
CMS, Stage of Meaningful Use Criteria by First Year: EHR Incentive Programs, April 14, 2016.
7.
CMS, 2016 Program Requirements, www.cms.gov/Regulations-and-Guidance/Legislation
403
Standardizing
Measures and
Acute Care: New
Requirements
THE IMPACT ACT: NEW DIRECTIONS FOR
POST-ACUTE CARE
This section focuses upon provisions of the IMPACT Act
Legislative Provisions
The Improving Medicare Post-Acute Care Transformation
(IMPACT) Act of 2014 was signed into law on October 6,
Purposes of the IMPACT Act
The IMPACT Act describes five particular purposes for the
r&OBCMF
r*NQSPWF
CFOFGJDJBSZ
r'BDJMJUBUF
r*NQSPWF
r1SPWJEF
tings; see, for example, Improve hospital discharge plan
ning, and Provide data for research, which implies future
Requirement of the IMPACT Act: Standardizing Measures
The Act requires the reporting of standardized patient
assessment data and standardized quality measure data.
The Act further requires that the standardized data be
Identify five purposes of the
IMPACT Act.
Identify four types of
facilities affected by the
IMPACT Act.
Understand three reasons
for focusing attention on
post-acute care (PAC)
Understand the concept of a
Define interoperability.
interoperable. Such standardized data
enables electronic-related uniformity,
exchangeability, and comparability across
dardized data and interoperability later in
Standardized assessment data allows
r2VBMJUZ
r*NQSPWFE
r$PPSEJOBUFE
r*NQSPWFE
Table 291
Moving Toward Creating a Uniform PAC Payment System
tings listed below. At the time of this writing, the proposed system is termed a Proposed Alter
Other Provisions of the Act
Implementing verifiable and auditable data collection about staffing in skilled nursing facilities
(SNFs) has been funded in the amount of $11 million. Facilities are required to electronically
submit...direct care staffing information, including information for agency and contract staff,
be audited in order to verify staffing information.
(See the Regulations section in the preced
Among other provisions, hospice facilities are to be inspected every three years.
tion, both hospitals and PAC providers are affected by regulations to be promulgated about the
Facilities Affected by the IMPACT Act
tings that provide care after acute care treatment
(thus post- or after- acute care). The four care
r4LJMMFE
r)PNF
r*OQBUJFOU
r-POHUFSN
\t-5$)T\n
Five IMPACT Act Purposes
Purposes of the IMPACT Act include
Improve Medicare beneficiary outcomes
ing provider access to longitudinal
Modified from CMS, The IMPACT Act
Electronic-Related
Data element
uniformity
Exchangeability
of data
Comparing data
& quality across
Quality care &
improved
Coordinated care
Improved
discharge
Modied from CMS, The IMPACT Act of 2014 and Data
Standardization,
, p. 4 (October 21, 2015).
IMPACT Act Requirements
WHY FOCUS ATTENTION ON POST-ACUTE CARE?
The Centers for Medicare and Medicaid Services (CMS) point out three valid reasons for turn
r&TDBMBUJOH
1"$
r1"$
r.FFUJOH
tals, however, are somewhat affected due to coordination of discharge planning requirements.
Control Escalating PAC Costs
Table 292
, Medicare spending amounted to $58.9
These costs are projected to continue to
(The authors will mention that fraud also plays some part in inflating these costs, particularly
in HHAs, but chasing fraud is the responsibil
Enforcement for Program Integrity] and is
Interoperability
Value-based programs need accountability in
order to work, and that accountability results
allows accountability. Ensuring that digital
information can be transmitted across these
Long-Term
(LTCHs)
Physicians and other eligible professionals are not part of this legislation.
Facilities Affected by the IMPACT Act
Three Reasons to Focus
Escalating PAC costs
PAC data standards and/or
alternative PAC payment model)
Modified from CMS, The IMPACT Act
407
Create an Alternative Post-Acute Care Payment Model
This section discusses three aspects of the new PAC alternative payment model.
the model would establish a universal PAC payment system. In other words, payment across the
The new model is possible because each of
the four affected care settings has some type
of patient assessment instrument: SNFs use
the Outcome and Assessment Information
ment Instrument (PAI), and LTCHs use the
tion (CARE). Therefore, if major information
exists in some form on each type of assessment,
then standardizing the data makes the new
Proposed Alternative PAC
1"$
Provider
Facilities
Medicare Spending
Nursing Homes
15,000
1.7 Million
Home Health Agencies (HHAs)
12,311
18.0
Inpatient Rehabilitation Facilities (IRFs)
1,166
Long-Term Care Hospitals (LTCHs)
124K
Modied from: www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments.html
Post-Acute Care Statistics
The SNFs and HHAs have by far the most assessment instrument annual submissions. At
the time of this writing, 2014 information reported 35 million OASIS (HHA) submissions and
20 million MDS (SNF) submissions. The combined 55 million submissions from these two
total of 568,000 (492,000 PAI [IRF] and 76,000 CARE [LTCH] amounted to just about one
Figure 291
illustrates this
First Steps: Implementing Uniform Measures in Three Phases
cations of applicable measures, followed by data collection and analysis of the uniform measures.
In Phase II, providers among the four
feedback. The feedback reveals how
they have performed on the uniform
measures they reported. In Phase III,
public reporting is implemented.
This reporting makes performance
by provider open information to
the public. (Note also that providers
may receive preview reports before
their information is made public.)
Figure292
Post-Acute Care (PAC) Assessment Instrument Submissions.
Data from www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments.html
d
Facilitie
s
Data
Se
(MDS
MDS
Submissions
20 Million
Agencies
Outcomes
Assessmen
Information
Se
(OASIS)
Submissions
35 Million
t
n
Facilitie
s
IRF-Patient
Assessmen
Instrument
(PAI)
Submissions
492 Thousand
e
Hospita
l
Continuity
Assessment
Record
Evaluation
(CARE)
Submissions
76 Thousan
PAC Measurement Implementation Phases.
I
Measur
e Specif
ications
Da
ta Collection
Da
ta
Ana
C
onf
idential
f
eedbac
k

C
pr
ov
ider
s about
perf
or
mance on the
measur
es
Pu
bl
ic
por
ting
of
C pr
o
vide
per
r
mance on
the measu
s
409
STANDARDIZED DATA AND INTEROPERABILITY: THE KEYS TO PAC REFORM
This section discusses standardization and interoperability.
Why Does the IMPACT Act Require Standardized Data?
(The SNFs have the MDS, the HHAs have OASIS, and so on.) This silo of electronic data
those information barriers are eliminated. Information can readily flow back and forth
throughout the four types of post-acute facilitiesthe government term for this easy flow is
interoperability.
In other words, standardized data enables electronic-related uniformity, exchangeability, and
Table 291 previously listed three electronic-related elements that are enabled by standard
data; comparing data and quality across all PAC settings. Note that all these requirements are
possible because of todays digital technology status in health care. The adoption of electronic
health records (EHR) nationwide was the key that allows todays improvements to recording
What Is Standardized Data?
Standardized Data Defined
To standardize is to make uniform. In this case, standardized data are data that are both uni
form and comparable. For example, each of the four types of PAC facilities has some type of
assessment instrument that they are already using. Certain data elements from each of these
will then be precisely comparable across each type of facility.
The example used in one CMS training session was eating. All four instruments had some type
of eating assessment item, but the wording was different for each.
Standardized data would
Mobility is another example used in the training session. Of all 17 mobility items listed, 8,
or just over half, were present on the instruments for SNFs, IRFs, and LTCHs.
Even though
What Is Interoperability?
This section defines and discusses the concept of interoperability.
Interoperability Defined
In this case, interoperability means the ability to operate or, actually, to transmit across the data
systems used by the various types of PAC facilities. Thus certain elements of a skilled nursing
homes data should be in a standard format that is comparable to the standard format for those
elements that rest in, say, a home health agency.
The IMPACT Act requires that such data be interoperable because we need for such data to
STANDARDIZING ASSESSMENT AND MEASURE DOMAINS FOR PAC PROVIDERS
Background
The CMS has evolved a framework for measurement that serves as a basic structure for measure
ment criteria. The criteria within this framework can be applied to measurements required
within the IMPACT Act legislation, as follows.
Types of measures utilized for the PAC reform should have two basic characteristics: all
adopted measures should be patient-centered and outcome-oriented.
Note that an outcome-
oriented measure should be used whenever possible. Therefore, not every measure will or can
because it is a basic concept that underlies the PAC reform approach.
Note that the IMPACT Act spe
cifically identifies assessment and
measure domains that are required
under this law. Therefore, it is espe
cially important to recognize them
and their underlying concept.
Figure 293
illustrates both measure
Two Structural Elements in the CMS Framework
es should be
patient-cent
er
ed
&
Outcome-or
ient
ed
whene
v
er possib
le
e concepts in
each of the domains that
ar
e common acr
oss
pr
o
vider
411
Standardized
The IMPACT Act specifies five assessment
domains that must be standardized. They include
r'VODUJPOBM
r$PHOJUJWF
TFSWJDFT\r
JOUFSWFOUJPOT
r.FEJDBM
r*NQBJSNFOUT
Measure Domains That Must Be Standardized
The IMPACT Act also specifies eight measure domains that must be standardized. These eight
The first and largest group of measure domains
7BSJPVT
r
4LJO
JOUFHSJUZ\r
FUD\r
UZQJDBMMZ
DFOUFSJOH
VQPO
QBUJFOU\bT
sists of information about a patient moving
r
as an individual patient moves from one
r
r
rates (in particular, readmissions that may
Five PAC Standardized
r'VODUJPOBM
r$PHOJUJWF
r4QFDJBM
TFSWJDFT\r
interventions
r.FEJDBM
r*NQBJSNFOUT
Modified from CMS, IMPACT Act of
2014 and Data Standardization,
Eight PAC Standardized
1.
2.
Skin integrity & changes in skin
5.
Transfer of health information &
6.
Resource use measures, including
estimated Medicare spending per
beneficiary
8.
Modified from CMS, IMPACT Act of
2014 and Data Standardization,
The final group is actually a single item that represents measures about resource use. Resource
use is typically a value-based measure. As such, the grouping is expected to utilize estimated
aligned as necessary, including spending per beneficiary and time period(s), plus geographic
The reporting of these quality measures is to occur through the use of a PAC assessment
instrument. Therefore, the relevant assessment instruments are to be modified as necessary
ELECTRONIC REPORTING TIMELINES FOR PAC PROVIDERS
Time Required for Measure Development
CMS estimates that developing these quality measures will take six months to two years. The
development process includes public and stakeholder input along with guidance from the
revised. (The Measure Application Partnership is a multi-stakeholder partnership that guides
the selection of performance measures for federal health programs.)
PAC Provider Timelines
At the time of this writing, certain standardized assessment domains will be implemented for
SNF, IRF, and LTCH providers as of October 1, 2018, and for HHAs as of January 1, 2019. There
is variation among the four providers as to the specific domain items they must initially report as
izing Assessment and Measure Domains for PAC Providers, discussed previously.)
It is important to understand that SNF and LTCH providers should already have begun
based programs. Thus the SNF and LTCH providers may simply be adding new measures as
required on October 1, 2018. This contrasts with IRF providers, who will be reporting their
required measures for the first time as of October 1, 2018, and with HHA providers, who will be
reporting their required measures for the first time as of January 1, 2019.
Beginning in fiscal year 2018, SNF payment rates may be reduced if applicable data is not sub
PAC Action Requirements
The most important action requirements for PAC providers are submission dates. According
to CMS, providers must submit standardized assessment data through PAC assessment instru
413
Also, at the time of this writing, IMPACT-
required measures must begin to be submitted
no later than October 1, 2018 for SNF, IRF, and
LTCH providers. IMPACT-required measures for
HHAs must begin to be submitted no later than
January 1, 2019.
These dates are illustrated in
PUBLIC REPORTING: IMPACT ACT
The IMPACT Act requires public reporting of
PAC provider performance, including both qual
Timeline for Public Reporting of Quality Measures
Note that public reporting includes not only reporting the measures themselves, but also
are to be made publicly available no later than two years after the measures application date.
Opportunity to Review
The Act stipulates that providers have the opportunity to review data and information that is
Required Improvements to the 5-Star Rating System
CMS has implemented certain improvements to the
Nursing Home Compare
websites 5-Star
Rating System. This federal website provides information about every nursing home that partici
Nursing Home Compare
ing System. Each facility is rated on a five-point scale for each of three domains (health survey,
nurse staffing, and quality measures), plus a composite scale that combines the ratings for the
Two additional improvements are as follows. First, CMS and states have implemented focused
survey inspections nationwide in order to verify staffing and quality measure information. Sec
ond, CMS has strengthened the requirements that states must maintain a user-friendly website
Action Requirements for
PAC Providers
r4VCNJU
QBUJFOUTQFDJGJD
TUBOEBSE
r4VCNJU
r#FHJO
October 1, 2018, SNF, IRF, LTCH
January 1, 2019, HHA
Modified from CMS, IMPACT Act of
2014 and Data Standardization,
IMPACT ACT BENEFITS AND COSTS: A SUMMARY
This section discusses the Acts benefits, costs, and challenges.
The IMPACT Acts benefits center upon requirements for quality improvement and a focus
r'BDJMJUBUF
1"$T
r"DIJFWF
r"MMPX
r"MMPX
Payment reform is anticipated through the creation of one or more Alternative Post-Acute Care
Payment models. This type of model is based upon the individual patients care and outcomes
instead of the facility-based payment system now in place. Thus this quality- and value-based
PAC providers will encounter transitional costs, including the following:
r3FRVJSFE
r3FMBUFE
r1PUFOUJBM
r1MBOOJOH
The Acts requirements face a challenge in implementing interoperability. A couple of years
ago, the Office of the National Coordinator for Health Information Technology (ONC) made
The challenge included unchanged provider practice patterns and a lack of standardization
We believe the IMPACT Acts requirements address both of these challenges as
This section briefly discusses goals and their underlying strategy.
Background
The CMS goals for quality strategy are to support the three aims of National Quality Strategy
415
The three NQS aims are converted into six NQS priorities. CMS, in turn, has adopted these
priorities as strategic goals for quality. (The CMS goals appear below.)
As described above, CMS has adopted a (slightly revised) version of the NQS priorities as its
quality strategy goals. The CMS goals appear as follows. (The NQS domain phrase for each
r1SPNPUF
r1SPNPUF
r.BLF
r4USFOHUIFO
$BSFHJWFS$FOUFSFE
r.BLF
r8PSL
More about goals and the National Quality Strategy can be found in the chapter entitled
Understanding Value-Based Health Care and Its Financial and Digital Outcomes.
Other Initiatives: Toward a Common Goal
Certain other initiatives are working toward the common goal of quality- and value-based
patient care. For example, HHA regulations have been modernized for the first time since
Modernized improvements
include requirements for a data-driven quality assessment, along with a performance improve
The Road Map to Interoperability
The ONC is the principal federal entity charged with coordination of nationwide efforts to
implement and use the most advanced health information technology and the electronic
exchange of health information.
It has created a 10-year Road Map to Interoperability that
outlines goals for both governance and certification standards. It calls for consistency at federal,
ability can be accomplished, then technology could seamlessly support patients health. The
IMPACT Act is an important step toward that goal of seamless digital technology.
CONCLUSION: INNOVATION IN THE DIGITAL AGE
Innovation may be defined as the introduction of something new; a new idea, method, or
nication and innovation researcher, comments upon reaction to an innovation as follows:
natives, with new means of solving problems. But the probabilities of the new alternatives
being superior to previous practice are not exactly known by the individual problem
solvers. Thus, they are motivated to seek further information about the innovation to
We visualize this type of information-seeking information approach as a sequential decision
The Process of Leadership Decisions Affects Innovation
Figure 294
illustrates three decision stages
that may lead to adoption, for example, of a particular approach to PAC reform digital choices.
Forms an opinion: This stage uses the knowledge gained to reach an understanding that
The last stage, Makes a decision, should result in one of two outcomes: The decision will
either be positive (Yes: will adopt and implement) or negative (No: will not adopt). (There
could be a third possible outcome on that last stage. R. W. once briefly worked with a boss who
would never say yes or no; instead, his decision would be Take no action either way.) We should
How can a manager help to bring about an innovative concept such as the legislative reforms
.
n
n
Makes a Decisio
Yes: Will Adopt & Implemen
t
No: Will Not Adopt*
417
Understanding the Required Framework
You as a manager can gather information and use it to understand the required framework. If
requested, you can also actually assist in gathering information to provide to your upper-level
Diffusing the Information
You as a manager can also help to establish understanding about the innovative concept
throughout your part of the organization. This could be by specific assignment or through
informal information sharing. In either case, you would be assisting by helping to diffuse the
information through individuals who need to know.
Two types of change in leadership may well impact the strategy and progress of healthcare tech
Leadership Change Within a Healthcare Organization
in a change in strategic direction. Still, this is often the case. Consequently, certain resources
may have their funds and staffing cut, or even eliminated. It is important for a manger to be
aware of this possibility, and be ready to defend his/her projects with current, well-organized
Leadership Change Within Legislative Bodies
Leadership change within legislative bodies can have a similar impact on projects in progress.
THE FUTURE: CHANGE IS INEVITABLE
The rate of change has accelerated in the digital age of health care. The IMPACT Acts reform
quality- and vision-based vision of reform. While change is inevitable, it seems these PAC pro
INFORMATION CHECKPOINT
What is needed?
How is it used?
ganization is a SNF, HHA, IRF, or LTCH, to educate staff
IMPACT Act
Post-Acute Care (PAC)
Value-Based Program
CARE = Continuity Assessment Record and Instrument
LTCH = Long-Term Care Hospital
ONC = Office of the National Coordinator for Health Information Technology
PAI = Patient Assessment Instrument
QAPI = Quality Assurance Performance Improvement
3.
Do you think the requirements to standardize data and achieve interoperability are a
1.
P. L. 113-185 Sec. 2(a); also Centers for Medicare and Medicaid Services (CMS), The
IMPACT Act of 2014 and Data Standardization,
The IMPACT Act of 2014 and Data Standardization, p. 4.
P. L. 113-185 Sec. 3(a)(1-2).
SSA Title XVIII Sec. 1899B (i)(1-3).
The IMPACT Act of 2014 and Data Standardization, p. 5.
419
The IMPACT Act of 2014 and Data Standardization, p. 10.
The IMPACT Act of 2014 and Data Standardization, p. 37.
18.
National Quality Forum, Measure Applications Partnership, www.qualityforum.org
The IMPACT Act of 2014 and Data Standardization, p. 33.
24.
.gov/medicare/provider-enrollment-and-certification/certificationandcomplianc
25.
CMS.gov, CMS Announces Two Medicare Quality Improvement Initiatives, October
6, 2014, www.cms.gov/Newsroom/MediaReleaseDatabase/Press-releases/2014
27.
D. Bowman, ONC Interoperability Road Map Draft, p. 2, October 14, 2014, www
.fiercehealthit.com/story/onc-interoperabiliity-road-map-draft-outlines-governance
The IMPACT Act of 2014 and Data Standardization, p. 18.
The IMPACT Act of 2014 and Data Standardization, p. 19.
CMS Announces Two Medicare Quality Improvement Initiatives, p. 2.
32.
HealthIT.gov, Newsroom: About ONC, www.healthit.gov/newsroom/about-onc,
Merriam Websters Collegiate Dictionary
, 10th ed., s.v. Innovation.
Diffusion of Innovations
, 4th ed., (New York: The Free Press, 1995), xvii.
ICD-10 E-RECORDS OVERVIEW AND IMPACT
This chapter provides an ICD-10 overview and describes the
OVERVIEW OF THE ICD-10 CODING SYSTEM
Revision
rability in the processing classification and presentation
dard diagnostic classification for all general epidemio
logical issues, many health management purposes, and
ration among the World Health Organization (WHO) and
many, and the United Kingdom.
The National Center for Health Statistics (NCHS) is 1 of
the 10 international centers collaborating with the WHO
in the development and revisions of the ICD. The NCHS
is an agency within the Centers for Disease Control and
Prevention (CDC). As such, NCHS is the federal agency
that is responsible for use of the ICD-10 in the United
WHO owns the ICD-10 copyright and has authorized
the development of an adaptation of ICD-10 for use in the
under the CDC, has developed a clinical modification of
Understand the six benefits
Understand why the change to
ICD-10 codes is a technology
Understand why situational
Identify the four components
-10 Implementation
Continues: Finance and
Strategic Challenges
for the Manager
the ICD-10, termed ICD-10-CM. The
ICD-10-CM replaces the ICD-9-CM.
TheICD-10-CM diagnosis classification
system has been developed for use in all
Meanwhile, the Centers for Medicare
and Medicaid Services (CMS) has devel
oped a procedure classification system,
10-PCS is for use in inpatient hospital
(Note this difference: ICD-10-CM is for
use in all types of healthcare treatment
CMS has extended the deadline for ICD-10 compliance by one year. Thus the compliance date
Figure 301
time needed to synchronize system and business process preparation and changeover to the
Providers and Suppliers Impacted by the ICD-10 Transition
The change from ICD-9 to ICD-10 has a ripple effect that impacts nearly every corner of the
healthcare industry in the United States. The companies and organizations impacted by the
port services and suppliers.
Figure 302
illustrates the entities that are affected by the ICD-10 transition. Inpatient pro
minimum, physician offices, outpatient care centers, medical diagnostic and imaging services,
home health services, other ambulatory care services, and durable medical equipment provid
ers. Support services and suppliers include health insurance carriers and third-party administra
tors, along with the vendors who provide computer system design and related services.
Note
that pharmacies (both chain and independent pharmacies) are substantially impacted by the
required electronic transaction standards updates for pharmacies, while ICD-10 adoption is
E-RECORD STANDARDS AND THE ICD-10 TRANSITION
This section discusses Version 5010 of electronic record standards and provides an example of
an
ICD-10-PC
S
Revised Final
Compliance Date
October 1, 2015

Version 5010 of Standards and the ICD-10 Transition
Version 5010 of electronic transmission standards includes infrastructure changes that were
necessary in order to prepare for the adoption of ICD-10 codes. A whole array of sequential
rules and regulations has evolved over the last two decades to create these electronic transaction
Example of Standards Use
However, two particular items are of interest to us in the context of the ICD-10 transition:
1.
It was necessary to update many electronic transaction standards in order to accommo
to be used in those electronic transactions also had to be updated. (Note
that at the time of this writing, the current standard to be adopted is Version 5010, al
2.
When the Centers for Medicare and Medicaid Services (CMS) staff compute transition
as Version 5010 (which they argue would have to occur anyway) versus the cost of adopt
ing and implementing the ICD-10 codes. We will be referring to this cost-splitting in a
efits into account. A brief summary follows.
ov
ider
s
"
'\f$!
"\b
#"




!
&
#
!
"
'$#
!

"
#
!%"
o
vider
s

"
'\r$###!
#
!
"
' 
"#
\n!%"
'\t\t#!%"
'\r#!
$#
!
&!
!%"
'
!
 
 $#
Inpatient and Outpatient Providers and Suppliers Impacted by the ICD-10 Transition.
Reproduced from 74 Federal Register 3357 (January 16, 2009).
423
r.PSF
r'FXFS
r'FXFS
r*NQSPWFE
r#FUUFS
r)BSNPOJ[BUJPO
ous paragraph, as the same concept applies to splitting benefits. Thus, the systems conversion
standards), cost savings (increase in electronic claims transactions), and operational savings
(increase in use of auxiliary transactions).
Managers should also decide what potential governmental financial assistance might be
available to their own organization. The ICD-10 conversion is, of course, part (but not all) of
this adoption process. It is therefore logical for management to consider part of the financial
incentives offered as relating tothis system conversion when analyzing benefits. The ARRA leg
Three Types of ICD-10 Adoption Costs
and are incurred in addition to the Version 5010 standards conversion costs.
15
Three recog
Training costs
CMS believes that large providers and institutions will most likely need to make system
changes and software upgrades. However, CMS also believes small providers may only need
version to Version 5010 recognizes two similar types of cost: system implementation costs and
Cash Flow Disruption Costs
proportion of claims will be rejected during this learning curve. Rejected claims lead to cash
flow disruption, and should be taken into
account when decisions are made about
If certain contracts contain stipulations
ificity of the ICD-10 codes may make such
renegotiation necessary in certain cases,
ICD-10 IMPLEMENTATION:
ICD-10 implementation affects numerous
plex technology issues, as discussed in the
Systems and Applications Affected by
The ICD-10 technology changes that we
will discuss in the following section impact
tions. It is important for the manager to
fully understand the breadth and depth
logical transition from ICD-9 to ICD-10.
Figure 303
illustrates the types of systems
and applications that must change.
Twenty-five different examples of vari
systems and applications are contained
in Figure 303, divided into three catego
1.
Necessary revisions to vendor soft
2.
Systems used to model or calculate
3.
Specifications that will need to be
Figure 303
Systems and Applications Affected
Reproduced from 74 Federal Register 3357 (January










\r\r



\f

\r

\r



\r\r


\n




\t
\r\b





\r




\b


\r \r\r\f

\b
\b\r
\r
\b\r


\f\r \r

\r




\r


\b\r


\r












\b


\r\r


\f\r
\r\b\r

\r
\b

 \r\r\r


 
 \r





\b


\b







\r\b
\b
\b\r\r


\f 

\r


\b
\r\b\r
\r



\r




\b





\r

\r


\f



\r


\f

\b\b\r


\r
\r\b\r\r

\b\b
\r\b
\r\b

425
UNDERSTAND TECHNOLOGY ISSUES AND PROBLEMS
mately 68,000 diagnosis codes, more than a 500% increase. ICD-9-CM diagnosis codes
had three to five characters in length, while ICD-10-CMs characters are three to seven
characters in length. This generally means input fields have to be lengthened in order to
accommodate seven characters. In addition, ICD-9-CMs first digit may be alpha (E or V)
or numeric, and digits two to five are numeric, while ICD-10-CMs first digit is alpha, dig
its two and three are numeric, and digits four to seven are either alpha or numeric. This
change means reprogramming will be required for many applications.
Exhibit 301
Difficult to analyze data due to nonspecific
codes
ly define diagnoses needed for medical
Digit 1 is alpha; digits 2 and 3 are numeric;
Very specific
Supports interoperability and the exchange
the United States
ICD-9-CM versus ICD-10-CM diagnosis codes. The exhibit includes six
Comparison of ICD-9-CM and ICD-10-PCS Procedure Codes
There were approximately 3,000 ICD-9-CM procedure codes; now ICD-10-PCS has approxi
mately 87,000 available procedure codes, or 29 times as many available codes. ICD-9-CM
procedure codes had three to four numbers in length, while ICD-10-CPSs characters are
alpha-numeric and seven characters in length. This generally means input fields have to be
lengthened in order to accommodate seven characters and possibly reprogrammed to accept
ICD-9-CM Procedure Codes
ICD-10-PCS Procedure Codes
Very specific
427
AN EXAMPLE: COMPARISON OF OLD AND NEW ANGIOPLASTY CODES
even used this example in a headline: Why We Need 1,170 Angioplasty Codes.
ICD-10 IMPLEMENTATION: TRAINING AND LOST PRODUCTIVITY COSTS
chapters Appendix, entitled ICD-10 Conversion Costs for a Midwestern Community Hospital.
CMS identified three types of individuals who would require varying levels of training on ICD-
It is vital that coders receive adequate training on the ICD-10 coding changes. CMS, therefore,
estimated training costs for both full-time and part-time coders. In producing cost estimates,
Specifying body part, approach, and device, including:
047K04Z Dilation of right femoral artery with drug-eluting intraluminal device, open
047K0DZ Dilation of right femoral artery with intraluminal device, open approach
047K0ZZ Dilation of right femoral artery, open approach

047K34Z Dilation of right femoral artery with drug-eluting intraluminal device, percuta

047K3DZ Dilation of right femoral artery with intraluminal device, percutaneous
CMS assumed that full-time coders were primarily dedicated to hospital inpatient coding
on the job setting for a reason. CMS further assumed that all coders will need to learn ICD-
individuals such as researchers, consultants, or auditors, for example. Or these users might
actually be inside the healthcare facility but are not coders. Such facility users might include
upper-level management, business office and accounting personnel, clinicians and clinical
training. The initial assumption was that only 1 in 10 physicians would require such knowledge.
tinuing professional education courses that they would attend anyway.)
ICD-10 training costs were estimated for each category described above: coders, code users, and
Coder Training Costs
1.
There were 50,000 full-time hospital coders that would need 40 hours of training per
coder on ICD-10-CM and ICD-10-PCS. The 40 hours of training was estimated to cost
$2,750, including lost work time of $2,200, plus $550 for the expenses of training, for a
total of $2,750 per coder.
2.
Training of full-time coders would start the year before ICD-10 implementation. It was
further assumed that 15% of training costs would be expended in this initial year, 75%
would be expended in the year of implementation, and the remaining 10% would be
3.
There were approximately 179,000 part-time coders who would require training only
amount to $110 for the expenses of training, plus $440 for lost work time, for a total of
429
Code Users Training Costs
CMS estimated there were approximately 250,000 code users, of which 150,000 would work
Physician Training Costs
1 in 10 would require training. Each physician was estimated to need four hours oftraining at
CMS used a productivity loss definition as follows: The cost resulting from a slow-down in
ductivity loss slowdown reflects the extra staff hours that are needed to code the same number
of claims per hour as prior to the ICD-10 conversion. (For instance, Jane normally codes x
claims per hour; during the first month learning the new system, she slows down to xx claims
per hour.)
CMS estimated that inpatient coders would incur productivity losses for the first six months
after ICD-10 implementation; they further estimated that productivity would increase (and
losses thus decrease) month by month over the initial six-month period until by the end of six
would take an extra 1.7 minutes per inpatient claim in the first month. At $50 per hour, 1.7
($50.00 per hour divided by 60 minutes equals $0.8333
CMS assumed the same six-month productivity loss period for outpatient coders. CMS further
assumed that outpatient claims require much less time to code. In fact, the initial assumption
was that outpatient claims would take one-hundredth of the time for a hospital inpatient claim.
Thus, one-hundredth of the inpatient 1.7 minute productivity loss equals 0.017 minutes. At the
same $50 per hour, one-hundredth of the $1.41 inpatient loss equals 0.014 per claim, or about
1.5 cents.
(To compute one-hundredth of $1.41, move the decimal to the left two places. Thus
INTRODUCTION: ABOUT ICD-10 KEY PERFORMANCE INDICATORS
This section defines Key Performance Indicators (KPIs) for ICD-10 transition and maintenance.
What Are ICD-10 Key Performance Indicators (KPIs)?
maintenance. The problems may affect productivity and/or cash flow.
How Are ICD-10 KPIs Used?
The ICD-10 KPIs are typically used for two purposes. The KPIs will track your progress in
transitioning, maintaining, and updating ICD-10 within your organization. KPIs will also provide
opportunities for improvement. Typical improvements include system revisions and/or enhance
KEY PERFORMANCE INDICATORS TO ASSESS ICD-10 PROGRESS
The following KPIs are grouped into six categories. The first two categories contain essential
These four indicators should be available to you as they should be tracked by all healthcare
Days to Final Bill: The number of days from time of service until the provider generates
Days to Payment: The number of days from the time the claim is submitted until the pro
Claims Acceptance/Rejection Rates: The percentage of claims that are accepted or
rejected during payer front-end edits. Front-end edits are those a payer performs before
the claim is entered into the payers adjudication system.
Claims Denial Rate: The percentage of claims accepted into the payers adjudication sys
Two Essential Indicators About Payment and Reimbursement Rates
These KPIs can give a picture of both payment amounts received per service and the rate of
Payment Amounts: Payment amounts that your organization receives for specific services,
especially high-volume and resource-intensive services.
Four Coder Productivity Indicators
Coder Productivity: The number of medical records coded per hour. This indicator
should be reviewed separately for each coder.
with requests for more documentation needed in order to support proper code selection.
ists with the individual coder or with the particular professional or department generating
431
tional information required to process claims. Reviewing this indicator separately by payer
Daily Charges/Claims: The number of charges or claims submitted per day. This is a pure
Three Internal Error Indicators
either by the week or the month. Again, separate reviews of particular departments will
diagnosis codes on orders. If ICD-10 implementation is running smoothly, this indicator
Use of Unspecified Codes: The volume and frequency of unspecified code use. The use
of unspecified codes may be perceived as a timesaving maneuver, but it should be tracked
Four External Error Indicators
ber of rejections in the RTP/FISS volumes.
Use of ICD-10 Codes on Prior Authorizations and Referrals: The number of orders and
TO TRACK ICD-10 IMPLEMENTATION PROGRESS
The first step in assessing ICD-10 implementation is to choose the particular KPIs that you
intend to use. You may choose from the KPIs listed in
Exhibit 304
. Your next steps are as
It is necessary to establish baselines, or points of comparison, for each of your chosen
indicators.
zation implemented ICD-10 codes. If so, you will be able to compare pre- and post-implementation
Track Your Chosen Indicators
schedule. The schedule should be reasonable as to the timing of assessment dates. For example,
should assessments occur on a monthly, quarterly, or semi-annual basis?
Compare Against Baselines
Comparison of preICD-10 implementation versus postICD-10 implementation is a most
useful process. However, early transition results compared to later transition results are also
helpful. In that case, you might find significant improvement in some areas and virtually no
Modified from CMS, ICD-10: Next Steps for ProvidersAssessment & Maintenance Toolkit.
Checklist for Assessing ICD-10 Progress: Key Performance Indicators
Volume of coder questions
RTP/FISS volumes
433
Some revisions may be desirable after tracking has been in place for several cycles. You may find
REVIEWING KPI RESULTS
payment and reimbursement provide a snapshot of your ICD-10 implementation progress.
When these six performance indicators from your baseline pre-implementation are compared
Review Coder Productivity and Internal Error Indicator Results
The four coder productivity indicators allow an overview of the internal department or division
responsible for coding. If your organization uses an outside billing service, then the important
indicator would be Requests for Additional Information. The outside billing services requests
for more information would be coming back to somewhere in your organization and would
The three internal error indicators relate to places and people within the organization other
elsewhere. Segmenting this review by departments would assist in highlighting the problem area(s).
Review External Error Indicator Results
Claims are sent back by either payers or clearinghouses for further edits. These indicator results
Other claims may be rejected. The results for this indicator have financial impact regarding cash
Try to provide a formal system for feedback regarding performance indicator results. One
CREATING ACTION PLANS TO DEAL WITH PROBLEMS
The KPIs are likely to reveal a series of different problems that will vary in their sever
r8IBU
r8IP
DBSSZ
r8IFO
r8IBU
DBSSZ
r)PX
that the plan lists all the relevant action steps required to accomplish desired actions or changes.
Clear means that the plan clearly answers the who, when, what, and communicationquestions.
In other words, has the
plan anticipated and addressed recently emerging issues, or is it already behind the times by the
This section outlines a selection of issues that could become part of specific action plans. The
Internal Coding and Systems Action Plan Issues
Action plans typically point toward solutions. Different KPIs are designed to measure perfor
mance in different areas that impact productivity, payment, and cash flow. The following issues
Isolate Internal Coding Problems
r8IBU
EJGGJDVMUZ\r
r8IP
r8PVME
r8IFO
to supplemental training and subsequent tracking to assess any improvements? If such
435
Isolate Internal Systems Problems
r"SF
r"SF
r)BWF
r"SF
TVQFSWJTPST
and coding supervisors ever communicate)?
External Coding and Payer Action Plan Issues
nal systems vendors. Producing the relevant data from your KPI process will serve to reinforce
Isolate External Coding and Payer Problems
r*T
r*T
r*G
QBZFS\r
r*G
QBZFS\r
Isolate External Systems Problems
r*G
WFOEPS\r
sponsive to your organizations problems? If not, why not?
r%P
r%PFT
staff, or is your organization a training ground for all the vendors new employees? Is this
Untangling Internal Versus External Performance Problems: An Example
able for each payer. Problem areas can best be revealed by tracking the age of claims for each
payer in 30-day intervals. Thus, how many of payer #1s claims are 030 days old? What about
3160 days old? Or 6190 days old? Or, even worse, 91120 or 121-plus days old? What about
able; these old claims should be red flags in your assessment. If you break down your aging
assessment by payer, the culprits red flags should be very evident. It may be that these old
claims sitting in your accounts receivable are claims rejected by your payer. On the one hand,
does this payer have an extraordinary number of rejected claims, and if so, why? On the other
hand, within the internal department, who is responsible for responding to rejected claims by
revising and refiling? (Or has the date for doing so on many of the old claims already passed
you by?)
Another possibility is that the old claims residing in your accounts receivable are actually
denied claims. Again, does the payer have an extraordinary number of denied claims, and if
so, why? Or, within the internal departments, who is responsible for pursuing secondary pay
ers? Why havent they been doing so? Or are the claims so old that payment from anyone is not
As in the preceding example, it is helpful to clearly understand the lines of authority concerned
with your issues. In other words, what department, office, division, or individual is in charge
of the procedures that you are attempting to revise? What is the chance that this department,
office, division, or individual will cooperate? It is likely that some member of the task force or
one of your supervisors should be able to help define the applicable lines of authority that are
ICD-10 IMPLEMENTATION: SITUATIONAL ANALYSIS
IMPLEMENTATION PLANNING RECOMMENDATIONS
CMS recommends that healthcare organizations plan for implementation of ICD-10-CM/PCS
r4UFQ
r4UFQ
r4UFQ
Figure 304
illustrates these steps. We believe that development of a timeline and a map of
Strategic Implementation and Organizing: The strategic implementation and organizing
planning step includes acquiring the resources to implement the plan and evaluating
steps. They include planning measurement tools, evaluation strategies, and actions to
437
SITUATIONAL ANALYSIS RECOMMENDATIONS
Background
You will recall that situational analysis does two things. It reviews the organizations internal oper
ations for strengths and weaknesses and it explores the organizations external environment
for opportunities and threats. Thus it is called SWOT, for strengths-weaknesses-opportunities
Situational analysis is particularly appropriate for the analysis of electronic records
pline that a situational analysis can impose. As we have previously said, it is a powerful tool
CMS recommends six steps for an ICD-10 adoption situational analysis. We believe the six
steps should be divided into two parts. The first part contains strategic steps that must be
addressed at the beginning of the project. The second part of the analysis contains devel
opmental steps that we believe can only be properly accomplished after the strategic steps
able deadlines and/or lack of sufficient planning resources do not allow the ideal two-part
process.)
Figure 305
illustrates the CMS situational analysis recommendations for ICD-10
Adapted from the Centers for Medicare and Medicaid Services, ICD-10 Clinical Modification/Procedure Coding
Figure 26

  \r 
Analysis
Implementation/
Organizing
r
Strategi
c
Control

\f\r

\t  
\t 
  
\t  \r
beginning point for the analysis. The array of stakeholders will vary depending upon the
size and nature of the healthcare organization. Payers should always be one of the stake
holders. Regulatory agencies may also be recognized as stakeholders.
2.
Impacts: Step 2 involves assessing the impact of the ICD-10 transition. Impacts on all aspects
of the organization should be recognized. As with stakeholders, the transitions impact will
also vary significantly depending upon the size and type of healthcare organization.
3.
Strategies and Goals: Step 3 involves formulating strategies and identifying goals. The
promises may have to be negotiated. Tight deadlines and/or lack of planning resources
Adapted from the Centers for Medicare and Medicaid Services. ICD-10 Clinical Modification/Procedure Coding System.
stak
eholders
impact
rm
ulate
strategies
and
identify
goals
ve
lop education/
training plans
fo
r
emplo
y
ees at all le
v
els
r
documentatio
changes
ve
lop in
r
matio
systems/technology
systems chang
implementation plan
that includes testing
and
go li

439
1.
Training Plans: Training plans must be developed for employees at all levels. The cost of train
ing for ICD-10-CM/PCS implementation is discussed and illustrated earlier in this chapter.
2.
Systems Change Implementation Plan: Information systems and/or technology systems
change implementation plans must be developed. These plans must include timelines
ficient testing time is a common pitfall.) A go live date is another important part of this
plan. If hardware and/or software vendors are involved in a facilitys implementation plan,
all timelines and the final go live date must also be coordinated closely with the vendor.
3.
Documentation Change Plan: The documentation change plan will hopefully cover
all areas of the organization where documents exist that will reflect ICD-10-CM/PCS
changes. A document inventory is the ideal beginning point for a documentation change
COMMENCING AN INFORMATION TECHNOLOGY SWOT MATRIX FOR ICD-10
Background
Building a SWOT matrix can be an important strategic process. Each of the four components of
a SWOT (strengths, weaknesses, opportunities, and threats) was discussed in a previous chapter
about strategic planning. The SWOT analysis matrix containing all four components was also
presented in that chapter. You will recall that the Strengths and Weaknesses sectors of the
matrix were labeled Internal, while the Opportunities and Threats sectors were labeled
External. We will use this format in the following section.
As to the internal components, the SWOT team or task force needs to evaluate resources and
thus identify those that should belong in the strengths and weaknesses sectors of the SWOT
Financial Resources as a main heading and Capital Resources Available as one of the Finan
The team might also enter Information Technology as a main heading. Because this is an
IT project, some of the subheadings in the strengths and weaknesses categories might include
r*5
r*5
r*5
r*5
r*5
Understand that the SWOT matrix is built as these resources are evaluated. As to the external
components, the SWOT team or task force would likewise evaluate the external opportunities
and threats as a parallel exercise. In an IT analysis such as the ICD-10 adoption issue, the team
might logically enter the governments incentive payment as an external opportunity (potential
The basic SWOT matrix in its present stage is illustrated in
Figure 306
Guides that appear as an Appendix to the Strategic Planning chapter.
SUMMARY
The four-part SWOT matrix is built as the key internal resources, both strengths and weak
ated. We can tie the CMS recommendations in the preceding section to the process of building
a SWOT matrix as follows. Identifying stakeholders and commencing to assess impacts of the
ICD-10 adoption are considered part of building the SWOT matrix. Formulating strategies and
would be influenced and should naturally carry forward from the evaluations performed as part
of the SWOT matrix-building process. Finally, the remaining three developmental steps, each of
ational analysis, and this brief discussion features only the single approach as recommended
INFORMATION CHECKPOINT
What is needed?
Where is it found?
Within your place of work or posted on the website of an industry

KEY TERMS
Key Performance Indicator (KPI)
SWOT Analysis
Version 5010 of Standards
Basic Information Technology SWOT Analysis Format.

Key Terms
441
1.
Do you believe your place of work (the organization) has been affected by the ICD-10
Do you think using KPIs is a good idea? Does your organization use these types of indica

National Center for Health Statistics, International Classification of Diseases, Tenth Revision
(ICD-10), www.cdc.gov/nchs/about/major/dvs/icd10des.htm

World Health Organization, Classifications, www.who.int/classifications/icd/en/

3.
Centers for Medicare and Medicaid Services (CMS), ICD-10 Clinical Modification

4.
International Classification
Diseases, Tenth Revision, Clinical Modification
(ICD-10-CM), www.cdc.gov/nchs/icd




74 Federal Register (FR) 3357 (January 16, 2009).

CMS, New Health Care Electronic Transactions Standards Versions 5010, D.0, and 3.0,
74 Federal Register (FR) 3328 (January 16, 2009).
74 Federal Register (FR) 3348-9 (January 16, 2009).
23.
J. Zhang, Why We Need 1,170 Angioplasty Codes,
Ibid., 49816 and 74 Federal Register (FR) 3346-7 (January 16, 2009).
31.
M. Libicki and I. Brahmakulam,
The Costs and Benefits of Moving to the ICD-10 Code
(Santa Monica, CA: RAND Corporation, 2004), 10, http://www.rand.org/pubs
(January 16, 2009).
35.
CMS, ICD-10 KPIs at a Glance, March 9, 2016, www.cms.gov/Medicare/Coding/ICD10
/Downloads/ICD10KPIs20160309.pdf
CMS, ICD-10 Next Steps for Providers: Assessment & Maintenance Toolkit, February 26,
2016, https://www.cms.gov/Medicare/Coding/ICD10/Downloads/ICD10NextStepsTool
kit20160226.pdf
37.
Certain KPI information within this section may be modified and/or condensed from
ICD-10 Next Steps...Assessment & Maintenance Toolkit.
39.
Work Group for Community Health and Development at the University of Kansas,
41.
Some concepts within this section may be modified and/or condensed from ICD-10
443
Midwestern
This CMS example illustrates the computation of hospital training costs and productivity loss
costs and estimates a cost for system changes and upgrades in order to arrive at a total hospital
ICD-10 conversion cost. We have numbered the paragraphs for easy reference. (And FYI, when
To further illustrate the computation of hospital ICD-10 conversion costs, CMS staff developed
a scenario for a typical community hospital in the Midwest.
The material presented in the
a hospital. The data were drawn from the American Hospital Directory, available at www.AHD
.com. While based on an actual hospital in a Midwestern state, the data have been altered to
make calculations simpler.
The hospital has 100 beds, 4,000 discharges annually, and gross revenues of $200 million.
2.
For our scenario, we assumed that the hospital employs three full-time coders who will
require eight hours of training at $500 per coder for $1,500 ($500 times 3). While they
are in training, the hospital will have to substitute other staff, either by hiring temporary
coders if possible, or by shifting staff. The estimated cost at $50 per hour is $1,200 (8
3.
In estimating the productivity loss, we are only looking at the initial six months after
implementation. Therefore, we divided the annual number of discharges of 4,000 by 2
to equal 2,000. We assume that three-quarters of the discharges are surgical, giving us
1,500 discharges requiring use of PCS codes. Dividing this by six months yields an average
4.
We performed a similar calculation for outpatient claims. Of the 13,000 outpatient
5.
Applying the 1.7 extra minutes per discharge, we estimated it would take an extra 425
minutes (1.7 times 250) to code the discharges in the first month. At $50 per hour, the
cost per minute is $0.83 ($50 divided by 60 minutes) and the cost per claim is $1.41
($0.83 times 1.7). For the first month, the productivity loss for inpatient coding is $353
($1.41 times 250). Assuming for simplicitys sake that the resumption of productivity over
up with $59. We reduce the productivity loss by this amount each month through the
6.
assumption that outpatient claims will require one-hundredth of the time for hospital
inpatient claims, when applying the 0.17 extra minutes per claim, we estimate it would
At $50 per hour, the cost per minute is $0.83 ($50 divided by 60 minutes) and the cost per
claim is $0.14 ($0.83 times 0.017). For the first month, the productivity loss for outpatient
$15.28 by six, coming up with $2.55. We reduce the productivity loss by this amount each
month through the sixth month. Thus the total loss for the first six months will equal $53.
value that we think overstates the cost. We assumed that the hospital will have to spend
the hospitals revenue that would be diverted to funding the conversion to the ICD-10, we
tal revenue of $200 million. The costs amount to 0.15% of the hospitals annual revenues.
8.
We note that although the impact in our scenario of 0.15% is significantly larger than
We are of the opinion that, for most providers and suppliers, payers, and computer firms
cardiac surgeon, has been approached by the administrator of Clinton Memorial Hospital to
ascertain his level of interest in selling his practice. Dr. Matthews has admitting privileges at
intent according to DHHS (U.S. Department of Health & Human Services) officials is to cut
derstand the likely trajectory in their markets, to identify their desired role, and to make the sig
While still considering the hospitals entreaty, Dr. Matthews feels that he needs to learn more
ings, accountable care organizations (ACOs) and bundled payments are frequently on the
Dr. Patrick Conway, Chief Medical Officer for the Centers for Medicare and Medicaid Services
(CMS), said that through its Medicare Shared Savings Program (MSSP), 50% of all feeforservice
particularly ACOs and bundled payments, which are also expected to slow the
growth of healthcare costs. As the name implies, MSSP providers share in the savings through a
to a specific population of patients cared for by the groups clinicians. Under these risk- and
zations have incentives to keep people well.
The organizations also provide data to be used in
viders on the basis of expected costs for clinically defined episodes that may involve several
These payments are perhaps
even more key to reforming healthcare finance because they address specific issues of care and
comes amidst a trend that, at first, found the acquisition rate of hospitals acquiring medical
2013 report from the Medical Group Management Association calculated a median loss for em
This has led analysts such as Moodys to predict a pullback
will in turn boost their revenues. However, in doing so, they also incur the costs associated
This suggests that mergers, acquisitions, and partnerships will continue apace as healthcare
In fact, an outsize example of this trend is Baylor Healthcare Systems recent merger with
vider. The merger produced a system that includes 48 hospitals, more than 40,000 employees,
It
Case Study: The Doctors Dilemma
Dr. Matthews also wants to know what other physicians think about practice acquisitions. He
Amidst these complex trends, Dr. Matthews knows that many physicians who choose to sell
their practices to a hospital or hospital system believe that doing so will allow them to spend
more time with their patients. While it may appear that they have more regular hours and thus
encounter fewer administrative hassles, they also end up feeling less productive because they
monitor how they reacted to the transition. He also knows there is a need for evidencebased
We cannot predict the doctors decision, because we do not have enough information about his
practices situation. But we can pose a question: Are doctors happier now, or are costcutting
S. M. Shortell, Creating Accountable Communities for Health,
: American Hos
, 29, no. 7
3.
S. Delbanco, The Payment Reform Landscape: Bundled Payment,
Health Affairs Blog,
D. Doyle, Why the Hospital Buying Spree May Be Coming to an End, Physicians Practice,
451
5.
Medical Group Management Association, MGMA Data Drive Cost and Revenue 2013,
6.
B. Kutscher, Expect More Not-for-Profit Hospital Mergers and Acquisitions, October
, December 19,
Case Study: The Doctors Dilemma
John Maxwell, CEO of Seabury Nursing Center, a not-for-profit long-term care organization
units, and a senior citizens apartment complex financed in part by the Federal Department
of Housing and Urban Development. In keeping with its mission, Seabury hasa reputation of
potential toweaken its liquidity
and should appeal broadly to the significant baby boomer population residing in its service
decided to
4.
Sophisticated medical technology has moved into our homes. Devices that were used only
givers regularly manage dialysis treatments, infuse strong medications via central lines,
The CEO presented a profile of national home care data as compiled by the National
Association
Approximately 12 million people in the United States require some form of home
r.PSF
r"MNPTU
r.PSF
BHFG
r$POEJUJPOT

r.FEJDBSF
According to the U.S. Census Bureau, he continued, in 2010 Connecticuts population was
required
behind
In essence, he said, financial planning is influenced by the definition of programs and ser
vices in consort with the mission and goals. The next step entails financial feasibility ofthe
Case Study: Strategic Financial Planning in Long-Term Care
r5IF
r5IF
r"
r5IF
QIZTJDBM
MPDBUJPO
PG
UIF
QSPHSBN
BOE
JUT
BUUFOEBOU
DPTUT
\tFH\r
SFOU\r
OFX

DPOTUSVDUJPO\n
r"
r.FEJDBM
r1IZTJDBM
r)PNF
Reproduced from W. O. Cleverley,
Essentials of Health Care Finance, 7th ed
egic
planning
Strat
egic
planning
Mission
goal
Pr
ogramming
Desi
d
pr
ograms/
ser
vices
F
inancial
f
easibilit
y
Appr
ov
ed
pr
ograms/
ser
vices
Management
contr
ol
F
inancial
planning
Ye
s
No
455
r3FHJTUFSFE
r3FHJTUFSFE
Maxwell indicated that it would be useful to create a scenario depicting a home health visit
abstract incorporating prevailing Medicare and Medicaid reimbursement rates for a70-year-
old male with heart failure and no comorbidities in order to gain traction and project potential
care services. Productivity in the home is typically based on the average number of visits per day
Table321
A Home Health Visit Scenario
Once the board decides to move ahead with the home care program and it is approved by
the state, implementation and ongoing operations becomes a management control issue (see
organization as
Given the paucity of other home care programs in its service area, Maxwell knows that Sea
aging in place.
Other likely sources will be recently discharged patients from the regions two community hos
Case Study: Strategic Financial Planning in Long-Term Care
2x/month, every
1.
U.S. Department of Health and Human Services, Human Factors Challenges in Home
2.
Visiting Nurse Association,
VNA Healthcare Annual Report
(Hartford, CT: Hartford Health
457
& CE
O
of Senior
Citizen Housing
of Home
Care Services
of Inpatien
t
Services
g
Of
fice
r

size taxing district hospital. Although MHS has the power to raise revenues through taxes,
The Area

MHS Services

sive array of services that are accessible, cost-effective, and responsive to the communitys
needs. These services are wellness oriented in that they strive for prevention rather than
per year since2010 whereas outpatient/same-day surgery visits have had an increase of
over 50,000 per year.

A number of programmatic, service, and facility enhancements support this major transi
tion in the communitys institutional health care. They are geared to provide the quality,
convenience, affordability, and personal care that best suit the health needs of the people
whom MHS serves.
r
8FMMOFTT
r
4FSWJDFTCSJOHJOH
UIFSBQZ\r
TFSWJDFT
the home; a comfortable and affordable alternative in longer-term care.
r
4VSHFSZ
TUBZ
same-day surgery procedures have doubled at MHS.
r
4LJMMFE
/VSTJOH
'BDJMJUZJOQBUJFOU
TFSWJDF
UP
BTTJTU
QBUJFOUT
JO
SFUVSOJOH
NPSF
GVMMZ
UP
r
8FMMOFTTDPNNVOJUZ
support services for patients with cancer, health awareness events, and a womens
health resource center.
r
4FSWJDFTIFMQJOH
JOKVSZ
area businesses through consultation on injury avoidance and work-specific rehabili
tation services.
r
3FDPWFSZ
4FSWJDFTPGGFSJOH
TFSWJDFT\r

The central building for the hospital is in the center of a two-square-block area. Aphysi
cians office building is to the west. Two administrative offices, converted from former
has an L shape and sits on one corner of the western block. A laundry and maintenance
building sits on the extreme back of the property. A four-story parking garage is located
on the eastern back corner. An employee parking lot sits beside the laundry and main
tenance building. Visitor parking lots fill the front eastern portion of the property. A
helipad is on the extreme western edge of the property behind the physicians office
MHS Board of Trustees

Eight local community leaders who bring diverse skills to the board govern MHS. The
trustees generously volunteer their time to plan the strategic direction of MHS, thus
ensuring the systems ability to provide quality comprehensive health care to the
community.



The MHS medical staff is a key part of MHSs ability to provide excellence in health care.
community.

The physicians are very much a part of MHSs drive for continual improvement on the
quality of healthcare services offered in the community. MHS brings in
medical experts
from around the country to provide training in new techniques, made
possible by MHSs
posiums, and continuing education programs that permit them to remain current with

The medical staffs quality improvement program has begun a care path initiative to
track effective means for diagnosis, treatment, and follow-up. This initiative will help
avoid unnecessary or duplicate use of expensive medications or technologies.

foundation will be to secure financial and nonfinancial support for realizing the MHS
vision of providing comprehensive health care for the community.

MHS Volunteer Auxiliary

There are 500 volunteers who provide over 60,000 hours of service to MHS each year.
These men and women assist in virtually every part of the systems operations. They also

The auxiliary funds its programs and makes financial contributions to MHS through
money it raises on renting televisions and vending gifts and other items at the hospital.
purchases. The auxiliary has given $250,000 over the last five years.
Planning the Future for MHS

The MHS has identified five areas of desired service and programmatic enhancement in

I.
Ambulatory Services

Physical Medicine and Rehabilitative Services

Cardiovascular Services

IV.
Oncology Services

V.
Community Health Services

nity. Over the next five years, the MHS strategic plan will continue a tradition of quality,
Financing the Future

MHS has established a corporate depreciation fund. The funds purpose is to ease the
r#BMBODF
r4UBUFNFOU
461
r4UBUFNFOU
r4UBUFNFOU
r4DIFEVMF
1SPQFSUZ\r
r4DIFEVMF
r4DIFEVMF

Held by Trustee Under Bond
Indenture Agreement
Property, Plant, and
Current Maturities of Long-Term
Total Current Liabilities
Long-Term Debt
Long-Term Debt
Total Liabilities
Total Fund Balances
Total Liabilities and Fund
for the Year Ended March 31, 2

Other revenue
Total Operating Revenue
Nursing services

Other professional services
General services
Support services

Total Expenses


Interest income

Statistics and Organizational Structure
r)PTQJUBM
r.)4
Figure 331
r.)4
Figure 332
463
for the Year Ended March 31, 2



Depreciation and amortization

Patient accounts receivable
Other receivables
Accounts payable and accrued expenses
Reduction of bond interest payable






Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year
for the Year Ended March 31, 2



Schedule of Property, Plant, and Equipment
Schedule of Property, Plant, and Equipment
for the Year Ended March 31, 2



Total




465
for the Year Ended March 31, 2
Patient Services Revenue
Routine revenue
Laboratory

OBnursery

Emergency service

Operating rooms

Respiratory therapy
Physical therapy

Ambulance service


Substance abuse



for the Year Ended March 31, 2
Nursing Services
OBNursery
Total
Other Professional Services
Laboratory
Emergency Service
Respiratory Therapy
Ambulance Service
Total
General Services
Laundry
Total
Support Services
Payroll Taxes
Employee Welfare
Total
Total Operating Expenses
467
for the Year Ended March 31, 2






Average Length of Stay (in days)
Departmental Volume Indicators:
Respiratory therapy treatments
Laboratory workload units
(in thousands)
Courtesy of Resource Group, Ltd., Dallas, Texas.
omen
s
Health
Nursing
Nursing
Surgical
Emergency
Nursing
Education
Recruitment
Support
Information
Systems
Support
of
Nurses
&
Development
s Medicine
Courtesy of Resource Group, Ltd., Dallas, Texas.
469
.V
ice President
Ser
vice Deliv
er
y
Operations/COO
Operations
Operations
Operations
TQI
.V
ice President
Human Resources
Operations
& Placement
ning
Ser
vices
.V
ice President
Medical Management
ysician
Benefits
ysician
Recruitment
Integration
.V
ice President
General Counsel
Af
f
airs
Management
.V
ice President
Human
Af
f
airs
Outreach
Health Council
Health Improv
ement
Programs
.V
ice President
Inf
or
mation Systems/CIO
o Systems
Operations
Management
o Systems
De
v
elopment
.V
ice President
Finance/CFO
Business Of
fice
F
acilities/De
v
elopment
ysician
TQI
Systems Financial
Excerpts from Notes
Total Current Liabilities
Long-Term Debt
Less Current Portion of Long-Term Debt
Total Liabilities
Total Fund Balances
Total Liabilities and Fund Balances
for the Years Ended March 31, 20X3 and 20X2

Total Operating Revenue
Nursing services
Other professional services
General services
Support services




Total Expenses






473
for the Years Ended March 31, 20X3 and 20X2
Schedule of Property, Plant, and Equipment
for the Years Ended March 31, 20X3 and 20X2
Total

for the Years Ended March 31, 20X3 and 20X2
Patient Services Revenue
Laboratory
OBnursery
Emergency service
Respiratory therapy
Ambulance services
475
for the Years Ended March 31, 20X3 and 20X2
Nursing Services
OBNursery
Total
Other Professional Services
Laboratory
Emergency Service
Respiratory Therapy
Ambulance Services
Total
General Services
Laundry
Total
Support Services
Payroll Taxes
Employee Welfare
Total
STATEMENTS
Note 1Nature of Operations and Summary of Significant Accounting Policies
hospital is a municipal corporation and body politic created under the hospital district laws of
Inventory
Income Taxes
income
Property, Plant, and Equipment
Expenditures for property, plant, and equipment, and items that substantially increase the use

Years
Funded Depreciation
The hospitals Board of Directors has adopted the policy of designating certain funds that are
expansion
Total Operating Expenses
477
Unamortized Debt Issue Costs
penses, consistent with industry practice, would include such items as contributions of long-
accrued on an estimated basis in the period the related services are rendered and adjusted in
Contractual Agreements with Third-Party Payers
The hospital has contractual agreements with third-party payers, primarily the Medicare and
Medicaid programs. The Medicare program reimburses the hospital for inpatient ser
vices under
on the discharge diagnosis. The contractual agreement with the Medicaid program provides for
reimbursement based upon rates established by the state, subject to state appropriations. The
Donated Services
No amounts have been reflected in the financial statements for donated services. The
pays for most services requiring specific expertise. However, many individuals volunteer their
Statutes require that all deposits of the hospital be secured by federal depository insurance or
to principal and interest; or in bonds, notes, debentures, or other similar obligations of the
United States of America or its agencies; in interest-bearing savings accounts or interest-bearing
At March 31, 20X3, the carrying amount and bank balance of the hospitals deposits with
rying amount and the bank balance primarily represents checks outstanding at March 31, 20X3.
All deposits are fully insured by the Federal Deposit Insurance Corporation or collateralized
with securities held in the hospitals name by the hospital agent.
Carrying Amount
Total Investments
Total
Held by Trustee Under Bond Indenture Agreements
Total
Note 3Charity Care
The hospital voluntarily provides free care to patients who lack financial resources and are
deemed to be medically indigent. Such care is in compliance with the hospitals
These records include the amount of charges forgone for services and supplies
furnished under
its charity care policy. During the years ended March 31, 20X3 and 20X2, such charges forgone
totaled $395,000 and $375,000, respectively.
The hospital provides healthcare services through its inpatient and outpatient care
facilities.
Total
479
tal at amounts different from its established rates. Contractual adjustments under third-party
services and amounts paid by third-party payers. A summary of the payment arrangements with
Medicare
Inpatient acute care rendered to Medicare program beneficiaries is paid at prospectively
is based on clinical, diagnostic, and other factors. Inpatient nonacute care services and
hospital and audits by the Medicare fiscal intermediary. At the current year end, all Medicare
Inpatient services rendered to Medicaid program beneficiaries are reimbursed at
Blue Cross
Inpatient services rendered to Blue Cross subscribers are reimbursed under a cost reimbursement
submission of annual cost reports by the hospital and audits by Blue Cross. The Blue Cross cost
carriers, health maintenance organizations, and preferred provider organizations. The bases
Gross patient service revenue for services rendered by the hospital under the Medicare, Med
icaid, and Blue Cross payment agreements for the years ended March 31, 20X3 and 20X2, is
Note 5Property, Plant, and Equipment
The hospitals property, plant, and equipment at March 31, 20X3 and 20X2, are as follows:
Total
Construction in progress, which involves a renovation project, has not progressed in the
last 12-month period because of a zoning dispute. The project will not require significant
Note 6Long-Term Debt
Hospital Facility Revenue Bonds (Series 1995) at varying
Years Ending March 31
$475,000
Under the terms of the trust indenture the following funds (held by the trustee) were
established: an interest fund, a bond sinking fund, and a debt service reserve fund.
Interest Fund
The hospital deposits (monthly) into the interest fund an amount equal to one-sixth of the next
The hospital deposits (monthly) into the bond sinking fund an amount equal to
481
Debt Service Reserve Fund
The debt service reserve fund must be maintained at an amount equal to 10% of the
Interest Fund
hospital of approximately $100,000. Construction in progress on the renovation has not pro
depreciation cash
reserves.
decided
to use benchmarking as an aid to turn around Samples financial situation. Benchmarking will
The CFO orders two benchmarking reports: one for the hospitals that are 100 beds or less
and one for all hospitals, no matter the size. The 100-beds-or-less report will allow
rability for Sample, while the all-hospital report will give a universal or overall view of Samples
standing. Both reports appear at the end of this case study.
is the benchmark
data report for Sample General Hospital compared with hospitals less than 100 beds, whereas
Exhibit 33-B2
is the benchmark data report for Sample General Hospital compared with all
When the reports arrive, the CFO writes a description of how the data are arranged so that
1.
The percentile rankings are intended to present the hospitals performance ranked
2.
The first column, labeled Annual Average Year 1, provides a historical trend of actual
performance of the hospital in the previous year. It is provided for reference only so that
3.
The column labeled Q1 Year 2 represents the first quarter of the current year. These are
the most recent data that this service has been provided for Sample General Hospital and
are the data used in the comparison columns that follow.
4.
The column labeled 50th %ile represents the 50th percentile of all of the hospitals in the
5.
The Variance column compares the data from Q1 Year 2 of Sample General Hospital
The column labeled %ile Range indicates where Sample General Hospitals
Comparative Analysis
Using Financial Ratios and
Benchmarking Helps Turn
Around a Hospital in the
Current Quarter Benchmark
Annual Average

Year 1
Year 2
Variance

Average Length of Stay






Salary Cost per Adjusted Discharge









Deductions Percentage



Average Daily Census
Occupancy Percentage




Total Patient Days Excluding Newborns

Total Discharges Excluding Newborns

Newborn Days as a % of Total Patient

Financial PerformanceProfitability Ratios
Operating Margin
Profit Margin


(Annualized) (%)

Financial PerformanceLiquidity Ratios
Current Ratio
Quick Ratio

Financial PerformanceLeverage and Solvency Ratios


Equity Financing

Long-Term Debt to Equity
Current Quarter Benchmark
Annual Average

Year 1
Year 2
Variance
For example, review the average length of stay information for hospitals less than 100 beds in
Exhibit 33-B1. For the Q1 Year 2, Sample General Hospital has a length of stay of 3.91 versus a
benchmark comparison number of 4.06, a favorable performance against the 50th percentile
0.15 indicates an amount under the 50th percentile that, in the case of average
length of stay, would be favorable). This performance places the hospitals score in the 35th to
As the CFO already knows, Sample General Hospital is in trouble. In most cases, the
facility is
either at or below (worse than) the 50th percentile information. Most of the labor productivity
measures are in the 60th to 65th percentile range, with the cost information in the same relative
can be drawn. For example, the occupancy percentage for Sample is 46.36% versus the 50th
beneficial to the hospital? The answer is average length of stay. Sample General
length of stay of 3.91 (as discussed earlier), which is favorable compared with the peer group,
less than 100 beds. If these two statistics are observed in combination, one could say that Sample
485
Current Quarter Benchmark
Annual Average

Year 1
Year 2
Variance

Average Length of Stay








Salary Cost per Adjusted Discharge





Patient Day



Adj. Discharge


Deductions Percentage



Average Daily Census





Total Patient Days Excluding Newborns

Total Discharges Excluding Newborns

Newborn Days as a % of Total

Patient Days
Financial PerformanceProfitability Ratios
Operating Margin
Profit Margin


(Annualized) (%)

Financial PerformanceLiquidity Ratios
Current Ratio
Quick Ratio

Financial PerformanceLeverage and

Solvency Ratios


Equity Financing

Long-Term Debt to Equity
Current Quarter Benchmark
Annual Average

Year 1
Year 2
Variance
bills. In other words, all institutions have core staffing requirements, and within a certain range
of volume, most costs are fixed. Sample has 100 beds in use while the 50th percentile for its
peer group shows 66 beds in use. Samples plant is too big for its patient volume. These circum
stances can mean the hospital is heading for disaster.
ous year (labeled Year 1 on Exhibits 33-B1 and 33-B2) was not favorable. Three years previ
ous, the institution was losing money at a rate of over $1 million per month. The next two years
continued through the year labeled Year 2 on Exhibits 33-B1 and 33-B2. By using bench
costs, and controlling productivity, the
tion, with creative management and attention to both clinical quality and customer service, the
occupancy percentage rose to above the 50th percentile. Finally, the operating margin improved
dramatically. In the first quarter ofyear 2, the margin was minus 3.18. By the end of year 3, results
showed a positive margin of greater than 2.5%, a dramatic turnaround. Benchmarking assisted
487
Proposal to Add a
officer (CFO) at Sample Hospital has been attempting to find new sources of badly needed
macy within the hospital itself. If the proposal is accepted, this would generate a new revenue
stream. The CFO has prepared four exhibits, all of which appear at the end of this case study.
supported by
Exhibit 33-C2
, the retail pharmacy proposal assumptions. The profitability analy
When the controller reviewed the exhibits, she asked how the working capital of $49,789
Working Capital
Vendor financing (accounts payable)
Total Working Capital Required
building
is estimated at $80,000 and equipment purchases are estimated at $50,000 for a total
capital
a useful life of 15 years, whereas the equipment purchases are depreciated on a straight-line
sources, and no borrowing would be necessary. In addition, the total capital expenditure is pro
Year 1
Year 2
Year 3
Salaries and Wages
Contract Services and Fees
Total Expense
Year 1
Year 2
Year 3
Total Sources
Working Capital
Total Uses
Volume
Year 1
Year 2
Year 3
Courtesy of Resource Group, Ltd., Dallas, Texas.
Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Average Cost per PrescriptionYearly Increases
Year 1
Year 2
Year 3
Inflation RatesPer Year
Salary and Wages






Working Capital
Total

Year 1
Year 2
Year 3
Year 1
Year 2
Year 3
Courtesy of Resource Group, Ltd., Dallas, Texas.
491
Average Rx Sales Price
Average Rx Cost
Salaries and Wages
Contract Services and Fees
Total Expenses
Courtesy of Resource Group, Ltd., Dallas, Texas.

Years
Total Depreciation





Total Sources



Working Capital

Total Uses


Courtesy of Resource Group, Ltd., Dallas, Texas.
So how was the proposal received by the hospitals board of trustees? They first asked for a
CONFRONTING THE OPERATIONAL PROBLEM
The Women, Infants, and Children (WIC) Program, a federal program managed by the county
boards of health, provides a mandated health service under strict federal guidelines to women
politan area, can serve its clientele more efficiently in an environment of constraints. We focus
of clients through the clinic. We apply the peak-load framework from economics to this basic
The WIC program provides nutrition counseling, limited physical examinations, and food
deficiencies who
are five years old or less. WIC represents just one part of the integrated services
provided to
women and children by the county clinic. Other services include inoculations, medical visits
county clinic is advantageous because it reinforces good health practices, provides intervention
where necessary, and is convenient for the clients. However, it also complicates the manage
ment of service provision and makes it more difficult to
improve the delivery of WICs services.
To participate in the WIC program, a certification of income and health status is
required.
The first step for a client is to schedule an appointment for certification with a clinic nurse.
the clinic to pick up her vouchers for up to a year without revisiting a nurse. Vouchers may
also be picked up when a client comes to the clinic for nutritional classes, which are required
periodically.
From the providers point of view, several activities directly related to the WIC pro-
gram are managed simultaneously. They include the scheduling of appointments for
accommodating unscheduled clients who walk in seeking certification, and distributing food
*B. A. Brotman, M. Bumgarner, and P. Prime, Client Flow through the Women, Infants, and Children
Journal of Health Care Finance
ofResource Misallocation:
ClientFlow Through the
Women,Infants, and Children
PublicHealth Program*
Billie Ann Brotman, Mary Bumgarner,
In principle, the appointment system is designed to regulate these activities. In practice,
several factors, none of which are within the control of the clinic staff, undermine it. First,
because clients come to the clinic for other services as well, they often are delayed for their WIC
for child care, the clinics management has instituted a policy of waiting 20 minutes for a client
The economic problem faced by the clinic is one of demand exceeding capacity,
leading to
excessive wait times for the clinics patrons as well as inefficient use of clinic nurses and clerks.
The problem arises because the clinics services are beneficial to the health of expectant moth
ers and children, and are provided without fee to the patient. Without a price mechanism to
ration demand, quantity demanded exceeds quantity supplied. This problem is not uncom
mon. It is encountered often in the public or quasi-public sector, when the price of the good or
service does not adequately reflect the benefits of the good or service as perceived by the public.
the fact that demand for the clinics services is unpredictable. Clients often do not keep their
On the supply side, capacity constraints, coupled with a persistent lack of sufficient numbers
of experienced clerks and nurses, hamper the clinics ability to respond to unexpected demand
shifts. Moreover, due to employee turnover experienced by the clinic, few
The economic significance of the problem is one of resource misallocation. In this case,
to increase the price of the service, thereby matching demand with capacity. But because that
option is not available, efficiently managing demand and supply is necessary if the amount of
resources used in providing WIC services is to be reduced.
Federal guidelines for the WIC program leave little maneuvering room to improve the deliv
ery of services. For example, the clinic cannot refuse to see unscheduled walk-ins, all clients
more efficiently by changing the current policy of waiting 20 minutes before filling a broken
filling the appointment immediately.
We began by collecting information on the average daily client volume, the pattern of
client
flow through various services, the waiting points and times, and services rendered to the clients.
odic intervals, and included nine items:
Waiting time to see clerks for walk-ins and appointments
Waiting time to see nurses for walk-ins and appointments
Total time in the clinic for walk-ins and appointments
Figure 341
an unscheduled walk-in. All clients first see a clerk to arrange for their records to be pulled.
appointment, they see a clerk to pick up vouchers. Vouchers are also distributed at the end of
The General Purpose Simulation System for personal computer model simulates the average
flow of traffic through the clinic. Estimation of traffic flow through the clinic is initiated when the
mates the average amount of time a client spends in the clinic as well as average waiting times at
els. For comparison purposes, each version of the model is run with a 20-minute time lag before a
late appointment is filled and then run with a 1-minute lag.
Six versions of the model are estimated using different combinations of numbers
of clerks and nurses. Model A assumes that the clinic is staffed with three nurses and
three clerks, Model B with two clerks and three nurses, and Model C with two clerks and
RESULTS
Model A: Three Nurses and Three Clerks
1.
A decrease in the total time in the clinic for the client from 3 hours and 16 minutes to
499
2.
A decrease in the time spent waiting for the clerk from 1 hour and 9 minutes to
Traffic Flow.
Journal of Health Care Finance 25
Walk to WIC
Wait for Clerk
Check In
Check In
Check In
Wait
Wait
Wait
Wait
To Clerk
To Clerk
Called for
Nutrition Class
To Clerk
Pick Up Vouchers
Wait
Attend Class
Wait
Leave Building
To RN
Wait
To RN
Wait
Pick Up Vouchers
Pick Up Vouchers
Pick Up Vouchers
Wait
To Clerk
Leave Building
Leave Building
Leave Building
To Clerk
Walk-In
Class
Model B: Three Nurses and Two Clerks
1.
A decrease in the total time in the clinic for the client from 3 hours and 13 minutes to
2.
A decrease in the time spent waiting for the clerk from 1 hour and 19 minutes to
Model C: Two Nurses and Two Clerks
1.
A decrease in the total time in the clinic for the client from 1 hour and 50 minutes to
In all three versions of the model that were estimated, the results of the simulations reveal
that reducing the time before a late appointment is filled significantly decreases the time spent
in the clinic by the client, on average, for all clients. Furthermore, the time spent waiting for
both clerks and nurses decreases, the utilization of the clerks decreases, and the utilization of
Greater decreases in waiting time occur when the clinic is staffed with three nurses and either
This suggests that the clinic has little to no scheduling flexibility on days when it is understaffed,
when appointments are filled within one minute, and in every case but one, the utilization rate
of nurses increases when appointments are filled immediately. This suggests that the flow of
clients through the clinic is improved by filling appointments quickly. Utilization rates of nurses
decreases only when the clinic is staffed with three nurses and three clerks. One explanation for
Another implication of these results is that if the clinic does not implement the expedited
two nurses and two clerks or three nurses and two clerks. Both scenarios result in clients spend
ing approximately 3.25 hours in the clinic. With the 20-minute wait before rescheduling, the
clinic must be staffed with three nurses and three clerks if the time spent in the clinic by the
501
In summary, our results suggest that following a policy of immediately rescheduling missed
appointments reduces the misallocation of resources employed in the clinic and thus permits
the clinic to respond to its clients needs more efficiently. Although this
cate the increase in efficiency that could be realized through the use of a price mechanism, it
does improve the overall welfare of the clinics clients. Filling appointments immediately results
in shorter wait times for all clients, so no client is made worse off by the new policy. Moreover, as
clinics ability to monitor demand and provide services for its clients.
telegraph. He also invented the fax machine, the device that many long-term care providers rely
Needless to say, a lot has changed since then. Providers can benefit from these changes by
The first step for providers who are considering improved tools for patient intake is to
assess
r)PX
r)PX
r)PX
r)PX
r)PX
Many providers do not realize what vast mountains of paper they manage. Results from a
referrals and 32,120 pages of documents per yearan 8-foot stack of paper for the average
In a study conducted by a Canadian health policy organization, nursing facility admissions
*E. Christ, Technology in Health Care: Automating Admissions Processes,
Provider Magazine
Provider Magazine
Clearly, providers have many opportunities to streamline the admissions process. For
Once a provider has identified the steps in its admissions process, it can evaluate ways to
apply messaging, management, and workflow technologies that can improve admissions in
the following areas: fax and document management, communications, referral tracking and
Any solution that doesnt address the fax challenges will typically fall short, says Felicia Wilson,
a licensed nursing facility administrator and director of the human services program at Shorter
Providers also may not realize how frequently fax errors occur that could delay or block
inbound referrals. Typically, about 8% of outbound faxes do not reach their intended
Providers may also benefit from software that helps organize and manage those electronic
Both internal and external communications are critical to a responsive, efficient admissions
bilitation Health Care in Alexandria, Virginia, summed up the critical need for responsive
communications with referral sources: Relationships with social workers and discharge
pitals are now expediting their placing process, which, in many cases, means a patient is
That urgency means providers cannot afford to miss calls or play phone tag with
referral
referral
communications. These e-referrals still represent a small percentage of inbound referrals,
Referral tracking and approval often remains a decidedly low-tech operation. A hospital or
r/PUJGZ
r4FU
r$BQUVSF
r1SPWJEF
Admissions staff often must report referral activity to management weekly or even daily. Much
These manual processes make it extremely difficult to analyze referral activity, capacities,
and analyze referral activity across all locations. They struggle to identify and deliver the services
One of the greatest advantages of automating admissions and referral processes is the
enhanced ability to see and analyze referral activity. If a provider adopts a system that helps
tion that can help the provider make more informed decisions related to the admissions
Any provider considering solutions for automating admissions should evaluate up front what
One six-location skilled nursing provider implemented a web automation solution for
505
The good news for providers seeking similar results is that many of the associated technolo
gies are fairly simple, such as fax servers, e-mail messaging and alerting tools, and electronic
Providers may also benefit from web-based subscription solutions. Accessing a program
5.
8.
Test one line-item calculation. Is the math for the dollar difference computed

What is the appropriate inflow (revenues) and outflow (cost of services delivered) re
Forecast service-related workload.
Forecast non-service-related workload.
5.

Courtesy of J.J. Baker and R.W. Baker, Dallas, Texas.

3.
5.

r0OMZ
r&RVJQNFOUTJOHMF
r5FDIOPMPHZOFX\r
r&RVJQNFOU
r.FEJDBM
r)JHI
r#VZ
r#VZ
r-FBTF
QBZQFSQSPDFEVSF
r)PX
r$FSUJGJDBUJPO
r4RVBSF
r*T
r$MFBOJOH
r3FQBJST

509
Modified from CMS, ICD-10: Next Steps for ProvidersAssessment & Maintenance Toolkit.

Checklist for Assessing ICD-10 Progress: Key Performance Indicators
Accountable Care Organization (ACO):
An organization consisting of a group of providers who
Alternative Payment Model (APM):
Accounting System:
Records the evidence that some event has occurred in the healthcare
Accrual Basis Accounting:
Revenue is recorded when it is earned, not when payment is received.
Expenses are recorded when they are incurred, not when they are paid. The opposite of
To convert data to an annual (12-month) period.
Balance Sheet:
One of the four basic financial statements. Generally speaking, the balance
Base Year:
The continuous process of measuring products, services, and activities against
the best levels of performance. Best levels may be found inside or outside of the organization.
Book Value:
Break-Even Point:
Business Plan:
A document that is typically prepared in order to obtain funding and/or financing.
Represents the financial resources of the organization. Generally considered to be a
combination of debt and equity.
Capital Structure:
Means the proportion of debt versus equity within the organization. The
A performance measure that has been adjusted for the acuity level of the
patient and, presumably, the resource level required to provide care.
Cash Basis Accounting:
A transaction does not enter the books until cash is either received or
This type of analysis illustrates how the projects cash is expected to move
Certificate of Need (CON) Program:
Certified EHR Technology:
Chart of Accounts:
Composite Performance Score:
Composite Score:
Specifically identifies the contribution margin within the
Contribution Margin:
Controllable Expenses:
Subject to a managers own decision making and thus controllable.
Controlling:
Making sure that each area of the organization is following the plans that have
Core Objectives:
EHR Incentive Program criteria that is necessary to achieve meaningful use.
The amount of cash expended (or property transferred, services performed, or liability
incurred) in consideration of goods or services received or to be received.
Cost-Profit-Volume:
Certain rural providers qualify as CAHs under the Medicare
program. These eligible CAHs are a separate provider type and are reimbursed using a
Cross-cutting (measure):
A measure that crosses among different types of facilities (thus cuts
Allowing information to flow back and forth among different types of facilities
The accumulated effect of cash inflows and cash outflows are added
Current Ratio:
A liquidity ratio considered to be a measure of short-term debt-paying ability.
Database (also Data Base):
A liquidity ratio that indicates the number of days of operating
Days Receivables Ratio:
A liquidity ratio that represents the number of days in receivables.
Debentures:
Bonds that are unsecured. Debentures are backed by revenues that the issuing
513
Debt Service Coverage Ratio:
A solvency ratio universally used in credit analysis to measure ability
interest, depreciation, and amortization by maximum annual debt service.
A distribution into 10 classes, each of which contains one-tenth of the whole; any one
A contraction in the volume of available money and credit that results in a general
The bottom part of a fraction. The denominator indicates the total number of
parts available to be divided. See also Numerator.
Depreciation:
Information that may be stored digitally, such as in a computer or mobile device,
Direct Costs:
can therefore be specifically associated with a particular unit or department or patient.
Laboratory tests are an example of a direct cost.
Discounted Fee-for-Service:
The provider of services is paid according to an agreed-upon
contracted discount and after the service is delivered.
Either a person or other legal entity who provides drug products for human use on
wise permitted by the jurisdiction in which the person practices, or the entity is located, to
Electronic Data Interchange:
The electronic transfer of information such as electronic media
Electronic Health Record (EHR):
A health-related electronic record of an individual that
clinical decision support, support physician order entry, capture and query quality informa
tion, and exchange and integrate electronic health information. It is possible for this digital
record to contain information about a patients total health status across all providers. See
Electronic Medical Record (EMR):
The digital version of the traditional paper chart as
recorded by a single provider. See also Electronic Health Record (EHR).
Electronic Prescribing (E-Prescribing):
Transmitting a prescription or prescription-related
The transmission may be either direct or through an intermediary, including an e-prescribing
Electronic Transaction Standards:
Standards that are adopted and used to facilitate the elec
Eligible Professional:
In this context, physicians, practitioners, and other professionals who are
Claims held by the owners of the business because they have invested in the business;
Actual or expected cash outflows incurred in the course of doing business. Expenses
are the costs that relate to the earning of revenue. An example is salary expense for labor per
formed.
Expired Costs:
Costs that are used up in the current period and are matched against current
Fee-for-Service:
The provider of services is paid according to the service performed and after
the service is delivered.
inventory as the first costs moved out into cost of goods sold when a sale occurs.
Is generally for outside, or third-party, use and thus emphasizes external
Financial Forecast:
Forecasted prospective financial statements. Forecasts are based on
assumptions that are expected to exist, and that reflect actions that are expected to occur.
Financial Projection:
Projected prospective financial statements that are often prepared to
answer what-if questions. The statements project a view of future events, projects, or
Those costs that do not vary in total when activity levels or volume of operations
Forecasts:
Information used for purposes of planning for the future. Forecasts can be short,
For-Profit Organization:
515
not-for-profit organizations.
General Services Expenses:
This type of expense provides services necessary to maintain the
patient, but the service is not directly related to patient care. Examples of general services
Gross Domestic Product (GDP):
A measure of the output of goods and services produced by
responsible for releasing quarterly estimates of the GDP.
Healthcare Analytics:
Data analytics applied to the healthcare industry.
Health Delivery System:
A health system containing varying levels of care and multiple sites of
service that deliver care under one integrated system.
Health Information Exchange (HIE):
Health Information Technology (HIT):
Technology that is designed for, or supports use by,
healthcare entities or patients. Includes hardware, software, integrated technologies or
related licenses, intellectual property, upgrades, or packaged solutions.
Horizontal Analysis:
The process of comparing and analyzing figures over several time periods.
IMPACT Act:
A legislative act that requires standardized patient assessment data be reported
by four types of post-acute care facilities. Its full name is the Improving Medicare Post-
Acute Care Transformation Act of 2014.
Indirect Cost:
These costs are incurred on behalf of the overall operation and therefore cannot
be associated with the provision of specific health services. The finance office is an example
Information System:
Gathers the evidence that some event has occurred in the healthcare
Information Technology (IT):
Computer and telecommunications technology that organizes,
An idea, practice, or object that is perceived as new.
Interoperability:
Inventory:
All the items (goods) that an organization has for sale in the normal course of its
Inventory Turnover:
A ratio that shows how fast inventory is sold, or turns over.
be associated with the provision of specific health services. The finance office is a typical
Worth Ratio.
placed into inventory as the first costs moved out into cost of goods sold when a sale
occurs.
Liquidity Ratios:
tions. Liquidity ratios are measures of short-term sufficiency.
Those costs necessary to close a loan.
A legislative act that reformed Medicare payment to physicians and certain eligible
professionals (a.k.a. eligible clinicians). Its full name is the Medicare Access and CHIP
Managed Care:
providers. The central concept is coordination of all healthcare services for an indi
vidual.
Providers must show that they are meaningfully using their certified EHR
To be a meaningful user of electronic health records, the provider must be
using EHR in a meaningful manner, be connected in a way that allows electronic exchange
Measure Development Plan (MDP):
517
The median occupies a position in a ranked series of values (numbers) in which the
same number of values appears above the median as appear below it (or, in the case of an
Medicaid Program:
A federal and state matching entitlement program intended to provide
under Title XIX of the Social Security Act.
Medicare Program:
A federal health insurance program for the aged (and, in certain instances,
lished under Title XVIII of the Social Security Act.
EHR Incentive Program criteria that is necessary to achieve meaningful use.
Merit-Based Incentive Program (MIPS):
A value-based program that combines certain parts of
what we are now.
Mode:
The number or value that appears the most frequently within a series of numbers or
Mortgage Bonds:
Bonds that are backed, or secured, by certain real property.
See Equity.
Noncontrollable Expenses:
Outside the managers power to make decisions, and thus non
Nonproductive Time:
Nonprofit Organization:
Indicates the taxable status of the organization. A nonprofit (or vol
untary) organization is exempt from paying income taxes.
Not-for-Profit Organization:
The top part of a fraction. The numerator indicates the total number of parts of
the denominator taken. See also Denominator.
necessary to operate the facility.
A lease that is considered an operating expense and thus is treated as an
Operating Margin:
gin is a multipurpose measure. It is used for a number of managerial purposes and also
This type of expense provides service directly related to patient care.
Organization Chart:
Indicates the formal lines of communication and reporting and how
Organizational Values:
often expressed in a Values Statement.
Organizing:
Deciding how to use the resources of the organization to most effectively carry out
Original Records:
Overhead:
Refers to the remaining expenses of operation that are necessary to produce the
service but that are not directly attributable to that service.
els to be associated with the service utilization assumptions.
Pay-for-Performance (P4P):
measures that show they are delivering and promoting improvements in high-quality, effi
The length of time required for the cash coming in from an investment to
The proportion of revenues realized from different types of payers. A measure often
Term used for the downward adjustment of a providers payment. Apay
ment adjustment is usually viewed as a penalty.
Performance Measures:
Measures that compare and quantify performance. Performance mea
519
Performance Period:
A unit of time during which performance is measured.
For purposes of healthcare businesses, period cost is necessary to support the
existence of the organization itself, rather than actual delivery of a service. Period costs
term originated with the manufacturing industry.
Identifying objectives of the organization and identifying the steps required to
Population Health:
Health care concerned with the outcomes of an entire population instead
Predictive Analytics:
Preferred Stock:
Prescriber:
use, and who is licensed, registered, or otherwise permitted by the United States or the
Present Value Analysis:
A concept based on the time value of money. The value of a dollar today
Private Sector Organizations:
Procedures:
and control. Such a grouping will generally be by Current Procedural Terminology (or
CPT) codes, which list descriptive terms and identifying codes for medical services and
procedures performed.
Product Cost:
For the purposes of healthcare businesses, product cost is necessary to actually
deliver the service. The term originated with the manufacturing industry.
Productive Time:
Profit Center:
Makes a manager responsible for both the revenue/volume (inflow) side and
the expense (outflow) side of a department, division, unit, or program. Also known as a
responsibility center.
Profitability Ratios:
Profit-Oriented Organization:
Profit-Volume (PV) Ratio:
Prospective Analytics:
Quartile:
(even more severe than the current ratio). Computed by dividing cash and cash equivalents
Reporting System:
Produces reports of an events effect in the healthcare financial system.
Responsibility Centers:
Makes a manager responsible for both the revenue/volume (inflow)
side and the expense (outflow) side of a department, division, unit, or program. Also
known as a profit center.
Identifies trends and problems by looking at historical information
A profitability ratio generally expressed as a percentage, this is a broad
measure of profitability in common use. Computed by dividing earnings before interest and
Actual or expected cash inflows due to the organizations major business. Revenues
are amounts earned in the course of doing business. In the case of health care, revenues are
mostly earned by rendering services to patients.
Revenue Amount:
Refers to how much each payer is expected to pay for the service and/or
Revenue Sources:
Refers to how many payers will pay for the service and/or drug and device,
Revenue Type:
Salvage Value:
tions change; rises will occur, but not in direct proportion.
Those costs that vary when activity levels or volume of operations change,
but not in direct proportion. A supervisors salary is an example of a semivariable cost.
Management tool that reviews, assesses, and analyzes the organizations
internal operations for strengths and weaknesses and the organizations external environ
ing social communication and collaboration. Current examples of social media include
Facebook and Twitter.
521
Ratios that reflect the ability of the organization to pay the annual interest and
Within the context of a forecast or projection, refers to the overall cost
of occupying the space required for the service or procedure. Considered to be an
indirectcost.
Staffing:
A person or entity that has an interest in a service, program, and/or outcome.
Standardized Data:
Statement of Cash Flows:
One of the four basic financial statements, this statement reports the
current period cash flow by taking the accrual basis statements and converting them to an
effective cash flow. This is accomplished by a series of reconciling adjustments that account
ment reports the excess of revenue over expenses (or vice versa) for the period as the
excess flows into equity (or reduces equity, in the case of a loss for the period).
Stock Warrants:
Warrants allow the owner of the warrant to purchase additional shares of stock
in the company, generally at a particular price and prior to an expiration date.
A strategic objective further defines intended outcomes in order to achieve
Structured Data:
Data that adheres to standards that allow patient information to be easily
Subsidiary Journals:
general ledger.
Subsidiary Reports:
Reports that support, and thus are subsidiary to, the four major financial
Within the context of a forecast or projection, refers to the necessary supplies that
are required to perform a procedure or service. Considered to be a direct expense.
Support Services Expenses:
This type of expense provides support to both general services
expenses and to operations expenses. It is necessary for support, but it is neither directly
related to patient care nor is it a service necessary to maintain the patient. Examples of
support services are insurance and payroll taxes.
Sustainable Growth Rate (SGR):
Medicare beneficiary does not exceed the growth in the GDP.
strengths-weaknesses-opportunities-threats; thus SWOT.
Threshold:
Time Value of Money:
The present value concept, which is that the value of a dollar today is
Trend Analysis:
The process of comparing and analyzing figures over several time periods. Also
Trial Balance:
A document used to balance the general ledger accounts and to produce finan
Unexpired Costs:
Value-Based Concept:
In finance, a combination of cost and quality. Value-based concepts may
be applied to purchasing, payment, pricing, strategy, and/or patient care.
Values Statement:
See Organizational Values.
Variable Costs:
Those costs that vary in direct proportion to changes in activity levels of volume
Variance Analysis:
ties. Variance analysis analyzes these differences.
Version 5010 of Transmission Standards:
dards at the time of this writing. See Electronic Transmission Standards.
Vertical Analysis:
Vision Statement:
Voluntary Organization:
Indicates the taxable status of the organization. A voluntary (or
523
The following examples and exercises include examples, practice exercises, and assignment
designated by chapter number.
Assignment Exercise 11
Required
5.
If some cannot be identified by type, comment on what you would expect them to be; that
Assignment Exercise 12
Review the chapter text about organization charts. Also examine the organization charts
Required
1.
Refer to the Metropolis Health System (MHS) case study appearing in Chapter 33 and
read about the various types of services offered by MHS.
2.
The MHS organization chart has seven major areas of responsibility, each headed by
a senior vice president. Select one of the seven areas and design additional levels of
detail that indicate the managers. If you have considerable detail you may choose one
Exercises,
department (such as ambulatory operations) instead of the entire area of responsibility
3.
Required
1.
2.
3.
If you were a manager (at this organization), would you want to change the structure?
Assignment Exercise 22: Chart of Accounts
Review the chapter text about the chart of accounts and how it is a map of the company
Required
Find an excerpt from a healthcare organizations chart of accounts. It can be from a pub
Based on this chart of accounts excerpt, comment on what the structure of the organiza
tions reporting system appears to be.
If you were a manager (at this organization), would you want to change the system? If so,
Assignment Exercise 31
Required
1.
2.
Based on the source that you find, comment on how effective you believe this type of
E\f  E, S \f M,  S 
Would you want to use this type of patient engagement digital connection in your organi
Required
Find a source of information from a healthcare organization that claims to be addressing
2.
Review the organizations information and answer the following: Does it define the popu
lation? Does it describe the care the population is receiving? Does it describe the delivery
Practice Exercise 4I
Short-Term
Long-Term
Short-Term
Long-Term
Inventory
527
with the second balance sheet you have now obtained. What is the same? What is different?
agreed-upon contractual rate that will be paid. An example was given in the text of Chapter5 by
which the hospitals full established rate for a certain procedure is $100, but Giant Health Plan
has negotiated a managed care contract whereby the plan pays only $90 for that procedure. The
contractual allowance is $10 ($100 less $90 = $10). Assume instead that Near-By Health Plan has
negotiated its own managed care contract whereby this plan pays $95 for that procedure. In this
case the contractual allowance is $5 ($100 less $95 = $5).
Assignment Exercise 51: Contractual Allowances
Physician office revenue for visit code 99214 has a full established rate of $72.00. Of 10 different
PRU
ANA
Rates for illustration only.
E\f  E, S \f M,  S 
Required
For each payer, enter the full rate and the contracted rate.
For each payer, compute the contractual allowance.
Example 5B: Revenue Sources and Grouping Revenue
Sources of healthcare revenue are often grouped by payer. Thus, services might be grouped as
Assignment Exercise 52: Revenue Sources and Grouping Revenue
interest income. The revenue from operations is primarily received for services. MHS groups
its revenue first by cost center. Within each cost center the services revenue is then grouped by
payer.
Required
1.
ers): Medicare, Medicaid, Other Public Programs, Patients, Commercial Insurance, and
Certain situations concerning the Intensive Care Unit and the Laboratory are described
below.

are described below. For each of the six situations, indicate its number (1 through 6) and
enter the appropriate cost center (either Intensive Care Unit or Laboratory). Then place

ICU stay billed to employees insurance program.


Pathology work performed for the state.

ICU stay billed to members health plan.
529

ICU stay billed for Medicare beneficiary.

Series of allergy tests run for eligible Medicaid beneficiary.

Example 6A: Grouping Expenses by Cost Center
the Admitting department as a cost center. In that case the expenses grouped under the Admit
r"ENJOJTUSBUJWF
r"ENJUUJOH
r%VFT
r1FSJPEJDBMT
r&NQMPZFF
r1VSDIBTFE
Practice Exercise 6I: Grouping Expenses by Cost Center
center. Laboratory expenses and Laundry expenses are likewise grouped into their own cost
Required
1.
Intensive Care Unit, Laboratory, and Laundry.
r%SVHT
r1BUIPMPHZ
r%FUFSHFOUT
r/VSTJOH
r$MFSJDBM
r6OJGPSNT
-BVOESZ
(Hint: One of the expenses will apply to more than one cost center.)
E\f  E, S \f M,  S 
Laboratory
Laundry
Assignment Exercise 61: Grouping Expenses by Cost Center
normal way of living. The Rehabilitation and Wellness Center expenses include the following:
r/VSTJOH
r1IZTJDBM
r0DDVQBUJPOBM
r$BSEJBD
r1VMNPOBSZ
r1BUJFOU
4BMBSZ
r/VSTJOH
r1IZTJDBM
r0DDVQBUJPOBM
r$BSEJBD
r1VMNPOBSZ
r5SBJOJOH
r$MFSJDBM
r&NQMPZFF
Required
1.
tion and Wellness Center.
2.
Set up a worksheet with individual columns across the top for the cost centers you have
Study the chapter text concerning grouping expenses by diagnoses and procedures. Refer to
Exhibits 63 and 64 (about major diagnostic categories), Exhibit 65 (about DRGs and MDCs),
and Table 61 (about procedure codes) for examples of different ways to group expenses by
Assignment Exercise 62
Required
Find a listing of expenses by diagnosis or by procedure. The source of the list can be internal
(within a healthcare facility of some type) or external (such as a published article, report, or
531
Example 7A: Direct and Indirect Costs
Review the chapter text regarding direct and indirect costs. In particular, review the example
of ambulance direct costs (Exhibit 71) and indirect costs (Exhibit 72). Remember that
costs are shared they must be allocated. Also, remember that one test of a direct cost is to
ask: If the operating unit (such as a department) did not exist, would this cost not be in
Practice Exercise 7I: Identifying Direct and Indirect Costs
r.BOBHFE
r3FBM
r-JBCJMJUZ
r$MJOJD
r6UJMJUJFT
r&NFSHFODZ
Assignment Exercise 71: Allocating Indirect Costs
Study Table 71, Table 72, and review the chapter text describing how the indirect cost
is allocated. This assignment will change the allocation bases input for (A) Number of Visits
(Volume), (B) Proportion of Direct Costs, and (C) Number of Computers in Service.
Required


# Visits (Volume): PT
9,600; OT
2,400; Total

60%; OT
15%; Total

# Computers in Service: PT
10; OT
3; ST = 3; Total
the new totals for indirect costs resulting from your work. Total the new results.
E\f  E, S \f M,  S 
Practice Exercise 7II: Responsibility Centers
cations, and Ambulance Services. This director also supervises the medical records relevant to
Ambulance Services, the educational training for Security and Ambulance Services personnel,
and the human resources for Security, Communications, and Ambulance Services personnel.
Required
Of the duties and services described, all of which are supervised by one director, which areas
should be responsibility centers and which areas should be support centers? Draw them in a
Assignment Exercise 72: Responsibility Centers
Choose among the strategic financial planning Case Study in Chapter 32, the public health
tive financial statements. Designate the responsibility centers and the support centers for the
Example 8A: Fixed, Variable, and Semivariable Distinction
Practice Exercise 8I: Analyzing Mixed Costs
because the course is system-wide, there is a monthly demand for new packs. In addition, the
The education coordinator needs to know how much of the cost is fixed and how much
Required
Using the monthly utilization information presented below, find the fixed and variable portion

Training Packs
January
February
533
Assignment Exercise 81: Analyzing Mixed Costs
ing the highlow computation. She decides to rerun the results, omitting the community col
Required
May, and September. These dates coincide with the start dates of their semesters and sum
2.
The reason the education coordinator needs to know how much of the cost is fixed is
Total Number of
Training Packs
Total Cost
January
February
Example 8B: Contribution Margin
Computation of a contribution margin is simplified if the fixed and variable expense has already
E\f  E, S \f M,  S 
We can see that the total costs are $1,217,756. Of this amount, $600,822 is designated as variable
cost and $616,934 is designated as fixed ($529,556 plus $87,378 equals $616,934). For purposes
of our example, assume the Operating Room revenue amounts to $1,260,000. The contribution
Less Variable Cost
Practice Exercise 8II: Calculating the Contribution Margin
Greenside Clinic has revenue totaling $3,500,000. The clinic has costs totaling $3,450,000. Of
Required
Assignment Exercise 82: Calculating the Contribution Margin
Required
Example 8C: Cost-Volume-Profit (CVP) Ratio and Profit-Volume (PV) Ratio
Closely review the examples of ratio calculations in the chapter text. Also note that examples
Practice Exercise 83: Calculating the PV Ratio
The profit-volume (PV) ratio is also known as the contribution margin (CM) ratio. Use the same
Assignment Exercise 83: Calculating the PV Ratio and the CVP Ratio
535
Required
1.
In addition to the contribution margin figures already computed, now compute the PV
2.
Create a Cost-Volume-Profit chart. Refer to the chapter text along with Figure 86.
Assignment Exercise 91: FIFO and LIFO Inventory
Study the FIFO and LIFO explanations in the chapter.
Required
Use the format in Exhibit 91 to compute the ending FIFO inventory and the cost of
goods sold, assuming $90,000 in sales; beginning inventory 500 units @ $50; purchases of

Use the format in Exhibit 92 to compute the ending LIFO inventory and the cost of


Assignment Exercise 92: Inventory Turnover
Study the Calculating Inventory Turnover portion of the chapter closely, whereby the cost of
goods sold divided by the average inventory equals the inventory turnover.
Required
Compute two inventory turnover calculations as follows:
tory and then to compute the inventory turnover.
Use the FIFO information in the previous assignment to first compute the average inven
tory and then to compute the inventory turnover.
Example 9A: Depreciation Concept
April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The
Step 1.
E\f  E, S \f M,  S 
Step 2.
accelerated depreciation is the double-declining balance method. Unlike straight-line deprecia
Compute the first years depreciation expense: 200,000 times 20% equals 40,000.
Step 4.
Compute the carry-forward book value at the beginning of the second year: 200,000
book value beginning Year 1 less Year 1 depreciation of 40,000 equals book value at
Step 5.
Compute the second years depreciation expense: 160,000 times 20% equals 32,000.
Step 6.
Compute the carry-forward book value at the beginning of the third year:
160,000
book value beginning Year 2 less Year 2 depreciation of 32,000 equals book value at
Practice Exercise 9I: Depreciation Concept
year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No
Required
Assignment Exercise 93: Depreciation Concept
Assume that MHS purchased two additional pieces of equipment on April 1 (the first day of its
The laboratory equipment cost $300,000 and has an expected life of 5 years. The salvage
Required
537
Example 9B: Depreciation
This example shows straight-line depreciation computed at a five-year useful life with no salvage
Depreciation Expense Computation: Straight Line
Year #
Depreciation
Example 9C: Depreciation
Depreciation Expense Computation: Straight Line
Year #
Depreciation
Example 9D: Depreciation
This example shows double-declining depreciation computed at a five-year useful life with no
case 100% divided by five years equals 20%. The 20% is then doubled. In this case 20% times
2 equals 40%. Then the 40% is multiplied by the remaining balance to be depreciated. Thus
E\f  E, S \f M,  S 
Then 36,000 times 40% for year two equals 14,400 depreciation, and 36,000 minus 14,400
for all five years, and Example 9D, using the combined double-declining and straight-line
Depreciation Expense Computation: Double-Declining-Balance
Year
Depreciation
Practice Exercise 9II: Depreciation
Compute the straight-line depreciation for each year for equipment with a cost of $50,000, a
Assignment Exercise 94: Depreciation
Assignment Exercise 95: Depreciation Computation: Units-of-Service
Study the Units of Service portion of the chapter closely.
Required
Using the format in Table 9A-5, compute units of service depreciation using the follow
Total units of service
Units of service per year: Year 1
2,200; Year 2
Year 3
2,300; Year 4
2,200; Year 5
539
2.
Using the same format, compute units of service depreciation using adjusted assump
Total units of service = 10,000

Units of service per year: Year 1 = 2,200; Year 2 = 2,100;

Year 3 = 2,300; Year 4 = 2,200; Year 5 = 200
Review the chapter text about annualizing positions. In particular review Exhibit 102, which
Practice Exercise 10I: FTEs to Annualize Staffing
is working on her budget for next year. She wants to annualize her staffing plan. To do so she
allows 8 holidays, 5 sick days, and 1 education day. An employee must work one full year to earn
5 vacation days. An employee must have worked full time for three full years before earning
Required
2.
staffingplan.
Assignment Exercise 101: FTEs to Annualize Staffing
7sick days, 15 vacation days, and 3 education days, equaling 34 paid days per year not
The Laboratory is fully staffed 7 days per week and the 34 paid days per year not worked is
applicable for the lab. The Medical Records department is also fully staffed 7 days per week.
However, Medical Records is an outsourced department so the employee benefits are somewhat
E\f  E, S \f M,  S 
Required
Review the chapter text about staffing requirements to fill a position. In particular review
Exhibit 104, which contains (at the bottom of the exhibit) the staffing calculations. Remember
Practice Exercise 10II: FTEs to Fill a Position
Thus, one full-time employee works 40 hours per week. MHS also uses a standard 24-hour
ing requirements to fill his departmental positions. He has more than one Admissions office
staffed within the system. The West Admissions office typically has two Admissions officers on
duty during the day shift, one Admissions officer on duty during the evening shift, and one
Admissions officer on duty during the night shift. The day shift also has one clerical person on
duty. Staffing is identical for all seven days of the week.
Required
2.
Compute the number of FTEs required to fill the Admissions officer position and the
clerical position at the West Admissions office.
Assignment Exercise 102: FTEs to Fill a Position
Thus, one full-time employee works 40 hours per week. MHS also uses a standard 24-hour
scheduling system of three 8-hour shifts. The Director of Nursing needs to compute the staffing
requirements to fill the Operating Room (OR) positions. Since MHS is a trauma center, the OR
is staffed 24 hours a day, 7 days a week. At present, staffing is identical for all 7 days of the week,
The Operating Room department is staffed with two nursing supervisors on the day shift and
one nursing supervisor apiece on the evening and night shifts. There are two technicians on the
three RNs on the day shift, two RNs on the evening shift, and one RN plus one LPN on the night
shift. In addition, there is one aide plus one clerical worker on the day shift only.
Required
541
Required
Total Operating Revenue
Current Portion of Long-Term Debt
Required
Total Operating Revenue
Current Portion of Long-Term Debt
E\f  E, S \f M,  S 
for the Three Months Ended March 31, 2___
Total Operating Revenue
Nursing/PA salaries
Janitorial service
Total Expenses


543
Property, Plant, and Equipment
Total


Total Current Liabilities
Long-Term Debt
Less Current Portion of Long-Term Debt

Total Liabilities

Total Liabilities and Capital
E\f  E, S \f M,  S 
of these two accounts as a pair.
expense in the MHS Case Study appearing in Chapter 33. Patient accounts receivable of $7,400,000
7,400,000).
(1) What percentage of gross accounts receivable is the allowance for bad debts? (2) If the allow
Refer to Exhibit 111 and Exhibit 112s Westside Clinic statements. The Property, Plant,
statement (a.k.a. statement of revenue and expense) also rises. Think of these two accounts
as another pair.
expense in the MHS Case Study appearing in Chapter 33. Property, plant, and equipment of
is reduced by $200,000 (meaning the reserve for depreciation has risen), what happens on the
545
and the statement of revenue and expense that were discussed in the preceding chapter and
illustrates the source of each figure in the four liquidity ratios. The multiple computations in
days cash on hand and in days receivables are further broken out into a three-step process to
Practice Exercise 12I: Liquidity Ratios
Two of the liquidity ratios are illustrated in this practice exercise. Refer to Doctors Smith and
Browns financial statements appearing in the preceding exercises for Chapter 11.
Required
Assignment Exercise 121: Liquidity Ratios
Required
2.
Compute the four liquidity ratios using the MHS financial statements appearing in
and the statement of revenue and expense that were discussed in the preceding chapter and
illustrates the source of each figure in the two solvency ratios. Any multiple computations are
Practice Exercise 12II: Solvency Ratios
Refer to Doctors Smith and Browns financial statements appearing in the preceding exercises
Required
2.
Compute these ratios for Doctors Smith and Brown. To do so, you will need one addi
tional piece of information that is not present on the doctors statements: their maximum
annual debt service is $22,200.
E\f  E, S \f M,  S 
Assignment Exercise 122: Solvency Ratios
Required
Practice Exercise 12III: Profitability Ratios
Refer to Doctors Smith and Browns financial statements appearing in the preceding exercises
Required
2.
Compute these ratios for Doctors Smith and Brown. All the necessary information is pres

Assignment Exercise 123: Profitability Ratios
Required
r"WFSBHF
r0SJHJOBM
r6OSFDPWFSFE
547
r"WFSBHF
r0SJHJOBM
r6OSFDPWFSFE
Required
r"WFSBHF
r0SJHJOBM
r6OSFDPWFSFE
Required
Example 13B: Finding the Future Value (with a Compound Interest Table)
E\f  E, S \f M,  S 
also is earned on the previous interest earnings that have been left in the account. Interest is
The college fund savings account presently has a balance of $9,000 and any interest earned
Step 1.
Refer to the Compound Interest Table appearing in Appendix 13-B at the back of
this chapter. Reading across, or horizontally, find the 6% column. Reading down, or
vertically, find Year 5. Trace across the Year 5 line item to the 6% column. The factor
Step 2.
Multiply the current savings account balance of $9,000 times the factor of 1.338
to find the future value of $12,042. In five years at compound interest of 6%, the
Practice Exercise 13II: Finding the Future Value (with a Compound Interest Table)
Assume the college savings fund in the preceding example presently has a balance of $11,000
and any interest earned will be left in the account. Assume the annual interest rate will
Required
Assignment Exercise 132: Finding the Future Value (with a Compound
Interest Table)
in his practice. Today John is trying to figure what his equipment fund will amount to in four
The equipment fund savings account presently has a balance of $63,500 and any interest
earned over the next four years will be left in the account. John assumes the annual interest rate
Required
Example 13C: Finding the Present Value (with a Present-Value Table)
college. The class is presently studying retirement planning. Each student is to estimate the
549
Step 1.
Refer to the Present-Value Table appearing in Appendix 13-A at the back of this chap
ter. Reading across, or horizontally, find the 6% column. Reading down, or vertically,
find Year 15. Trace across the Year 15 line item to the 6% column. The factor is 0.4173.
Practice Exercise 13III: Finding the Present Value (with a Present-Value Table)
Required
Compute the present value of $150,000 accumulated fifteen years from now. Assume an interest
rate of 7%. (Use the Present-Value Table appearing in Appendix 13-A at the back of this chapter.)
Assignment Exercise 133: Finding the Present Value (with a Present-Value Table)
Part 1Dr. John Whitten is still figuring out his equipment fund. According to his calculations
he needs $250,000 to be accumulated six years from now. John is now trying to find the present
Required
Compute the present value of $250,000 accumulated fifteen years from now. Assume an interest
rate of 5%. (Use the Present-Value Table appearing in Appendix 13-A at the back of this chapter.)
Required
Compute the present value of $250,000 accumulated fifteen years from now assuming an inter
E\f  E, S \f M,  S 
10 years. The head of the MHS grounds crew estimates it would save $3,000 per year. He figures
this savings because just one of the present maintenance crew would be driving the tractor,
Dr. Whitten has decided to purchase equipment that has a cost of $60,000 and will produce a
Practice Exercise 13V: Payback
Assignment Exercise 135: Payback Period
reduce radiology operating costs by $5,000 per year.
Required
Which machine should be purchased? Make your payback calculations to provide the answer.
Common sizing converts numbers to percentages so that comparative analysis can be performed.
Reread the chapter text about common sizing and examine the percentages shown in Table 141.
Practice Exercise 14I: Common Sizing
551
Required
Same Year for Both Hospitals
Property, Plant, & Equipment
Assignment Exercise 141: Common Sizing
Required
Example 14B: Trend Analysis
Trend analysis allows comparison of figures over time. Reread the chapter text about trend
analysis and examine the difference columns shown in Table 143.
Practice Exercise 14II: Trend Analysis
Required
Year 1
Year 2
Property, Plant, & Equipment
Assignment Exercise 142: Trend Analysis
Required
Perform trend analysis on the MHS statement of revenue and expenses.
E\f  E, S \f M,  S 
Practice Exercise 14III: Contractual Allowance
Your units gross charges for the period to date amount to $200,000.
the revenue volume from each represents 25% of the total. (The equal proportion is
unrealistic, but serves the purpose for this exercise.)
4.





Q:

Assignment Exercise 143
Your units gross charges for the period to date amount to $200,000.
3.
The unit receives revenue from four major payers. The number of procedures performed




4.
The following contractual payment arrangements are in effect for the current period. The
percentage of the gross charge that is currently paid by each payer is as follows:




Q:
553
Assignment Exercise 144.1: Forecast Capacity Levels
Review the information in Exhibit 141. The exhibit assumes three chairs and one 40-hour RN,
for a realistic capacity level of seven patients infused per day.
Required
Assume the same three infusion chairs, but add another nurse for either four or six hours
per day. How would this change the daily capacity level for number of patients infused per day?
Assignment Exercise 144.2
Required
Increase the number of infusion chairs to four, and add another nurse for either four or six
hours per day. How would this change the daily capacity level for number of patients infused
Assignment Exercise 151: Comparable Data in a Graph
Review Figures 151 through 155. Each of the five figures presents a graph depicting some
Required
Locate healthcare information that can reasonably be compared. (1) Prepare your compara
tive data. (2) Using your data, create one or more graphs similar to those found in Figures 151
Assignment Exercise 152: Cumulative Inflation Factor for Comparable Data
Review Table 153 and the accompanying text.
Two hospitals report their annual projected revenue for five years to the local newspaper for
a story on the areas future economic outlook. However, Hospital 1 has applied a cumulative
inflation factor of 5% per year while Hospital 2 has not applied any inflation factor. Thus the
E\f  E, S \f M,  S 
Year 1
Year 2
Year 3
Year 4
Year 5
Required
Revise Hospital 2s projections by applying a cumulative inflation factor of 5% per year.
Assignment Exercise 153
The head of your department is a prominent researcher. A health research foundation has
asked him travel to London to give an important speech at a conference. He will then travel
being funded by the foundation, he will still need to take along some personal money. Conse
quently, he asks you to figure the exchange rates for $500 and for $1,000 in both pounds and
euros. He explains that he is trying to judge the spending power of U.S. dollars when con
verted to the other currencies so he can decide how much personal money to take on the trip.
Required
Locate the current exchange rates for pounds and euros and compute the currency conversion
Assignment Exercise 154: The Discovery
The Chief Financial Officer at Sample General Hospital has just discovered that the hospitals
Chief of the Medical Staffs son Jason, a student at the local community college, is paid $100 per
week year-round for grounds maintenance at the hospitals Outpatient Center.
The CFO, no fan of the Chief of Medical Staff, now wants you to prepare a report that com
center, and the hospital-affiliated nursing home down the block.
Required
tions, that presents comparable costs of grounds care. Also provide your assessment of what the
Relevant Information
So far you have assembled the following information. Now you need to decide how it can be
555
Introduction to the Three Facilities
Sample General Hospital is an older 100-bed hospital. The new Outpatient Center, built last
tive Analysis Using Financial Ratios and Benchmarking appearing in Appendix 33-B contains
belt; there is occasional frost in the winter but no snow.
Grounds Maintenance Tasks That Should Be Performed at All Three Sites
r.PXJOH
r8BML
r3BLJOH
r#MPXJOH
r'MPXFS
OFDFTTBSZ\n
r)FEHF
QFSGPSNFE
Figure Ex1
proximity to each other.
r
king
A
ge C
ent
er
Ser
vice
Je
ff
er
son Str
Pa
r
king
ample Hospita
l
Pa
r
king
ees
E\f  E, S \f M,  S 
Grounds Maintenance Arrangements for the Three Facilities
The current grounds maintenance arrangements vary among the three facilities as follows:
1. Sample General Hospital uses its Maintenance department employees for grounds care.
The hospital pays these employees $15 per hour plus 15% employee benefits; it is estimated
mower, edger, and blower, all owned by the hospital. The hospital just bought a new mower for
2. The hospitals Chief of the Medical Staffs son Jason, a student at the local community
college, is paid $100 per week year-round for grounds maintenance at the hospitals Out
weekly $100. It takes about 1.5 hours to mow, edge, and blow. Jason uses his dads riding
mower and blower, but Jason recently bought his own edger. Jason also buys fertilizer for the
grass twice a year.
3. The Nursing Facility contracts with a landscape service on a seasonally adjusted sliding
scale. The landscape service is paid $600 per month from April to October (mowing season);
$400 per month for February, March, and November; and $200 per month for November,
December, and January. The landscape service provides all their own equipment. They also
provide fertilizer and provide annuals to plant in the flower beds every quarter.
Sample General Hospital Property Description
r5IF
r5IFSF
r5IFSF
r"OPUIFS
r"
r5IF
XBMLXBZ
EJNFOTJPOT
GPMMPXT
BCPVU
GFFU
GSPOU
XBML
BCPVU
GFFU
TUBGG
r5IF
%FQBSUNFOU\bT
r5IF
TVSGBDF
PWFSIBOHJOH
Outpatient Center Property Description
r5IFSF
r5IFSF
r"MM
557
Nursing Center Property Description
Golden Age Nursing Center occupies one whole block. The grounds have many large trees.
Flower beds have been planted around the trees as well as along the front walk and entrance.
requires considerable handwork such as edging with a weedeater.
A static budget is based on a single level of operations that is never adjusted. Therefore, the
ing the year.

Variance
pated 40,000 patient days this year at an average of $600 revenue per day, or $2,400,000. Further

Now assume that only 36,000, or 90%, of the patient days are going to actually be achieved
for the year. The average revenue of $600 per day will be achieved for these 36,000 days (thus
36,000 times $600 equals $21,600,000). Further assume that, despite the best efforts of the
Chief Financial Officer, the expenses will amount to $22,000,000. The actual results would look
E\f  E, S \f M,  S 
Variance
$1,600,000
(Note: The negative actual result of (400,000) combined with the positive budget expec
ta
tion
r5IF
perday.
r*OQBUJFOU
EBZ
r5IF
r0VUQBUJFOU
r"TTVNF
for the year.
r5IF
r5IF
ZFBS
r5IF
r'VSUIFS
0GGJDFS\r
inpatient expenses will amount to $11,600,000 and the actual outpatient expenses will
Required
1.
other RevenueOutpatient. Add a Revenue Subtotal line. Likewise, make two lines for
559
Select an organization: either from the Case Studies appearing in Chapters 31, 32, 33, 33-A,
Required
1.
Required
3.
Metropolis Health System (MHS) has received a wellness grant from the charitable arm of an
area electronics company. The grant will run for 24 months, beginning at the first of the next fis
cal year. Two therapists and two registered nurses will each be spending half of their time work
ing on the wellness grant. All four individuals are full-time employees of MHS. The electronics
company has only recently begun to operate the charitable organization that awarded the grant.
als and instructions for grant transactions that MHS usually receives when grants are awarded.
Required
ware for its information systems. As part of the project, the Chief of Information Operations
(CIO) has indicated that the Information Systems (IS) department can change the format of
for the coming fiscal year. The Chief Financial Officer (CFO) has long wanted to modify what
E\f  E, S \f M,  S 
a golden opportunity to do so. To gain ammunition for the change, the CFO is preparing to
employees who will be surveyed.
Required
You may choose your role for this assignment, as follows:
Refer to the MHS Executive-Level Organization Chart (appearing as Figure 332 in the
MHS Case Study). (1) Either (a) choose any type of patient service that would be under the
direction of the Senior Vice President of Service Delivery Operations or (b) choose any other
function shown on the organization chart. (Your function could be a whole department or a
division or unit of that department. For example, you might choose Community Outreach or
you think would be mostly allocated to it. (You may use Figure 163 as a rough guide, but do not
of the MHS Case Study as a basis for allocation if these statistics are helpful. If they are not,
Example 17A: Description of Capital Expenditure Proposals Scoring System
Worthwhile Hospital typically divides the available capital expenditure funds into monies
available for inpatient purposes and monies available for outpatient purposes. This year the
The hospitals CFO is also proposing that a scoring system be used to evaluate this years
In addition to the points earned by a funding proposal, the CFO will allow one bonus point for
upgrading existing equipment and one bonus point for funding expansion of existing programs.
Practice Exercise 17I: Capital Expenditure Proposals
Jody Smith, the director who supervises the Intensive Care Units, wants to secure as much of the
561
Ted Jones, the director who supervises the Surgery Unit, also wants to secure as much of the one
million dollars available for inpatient purposes as is possible for his SurgeryUnit.
Given the CFOs new scoring system, how should Jody go about choosing exactly what to
Assignment Exercise 171: Capital Expenditure Proposals
Ted Jones, the Surgery Unit Director, is about to choose his strategy for creating a capital expen
diture funding proposal for the coming year. Teds unit needs more room. The Surgery Unit
is running at over 90% capacity. In addition, a prominent cardiology surgeon on staff at the
hospital wants to create a new cardiac surgery program that would require extensive funding
for more space and for new state-of-the-art equipment. The surgeon has been campaigning with
Required
What should Ted decide to ask for? How should he go about crafting a strategy to justify his
request, given the hospitals new scoring system?
Example 18A: Variance Analysis
Examples of how the variance analysis works are contained in Figure 181 (the elements),
Price Variance (favorable)
Quantity Variance (unfavorable)
E\f  E, S \f M,  S 
refer to Exhibit 182
Overhead
Practice Exercise 181
Exhibit 182 presents the Variance Analysis for hospital rehab services for the third quarter. For
our practice exercise we will duplicate this report for the fourth quarter. We are able to reformat
Price Variance (favorable)
Quantity Variance (unfavorable)
Overhead
Required
1.
5.
the fourth quarter.
563
Assignment Exercise 181: Variance Analysis
year. It operated 120% times 20,000 normal capacity direct labor nursing hours in routine ser
vices and it operated 120% times 20,000 normal capacity equipment hours in the laboratory.
The lab allocates overhead by measuring minutes and hours the equipment is used; thus equip
For Routine Services Nursing:
r\r
r#VEHFUFE
0WFSIFBE
$42,000 fixed plus $6,000 variable
$48,000 total.
r"DUVBM
0WFSIFBE
r"QQMJFE
0WFSIFBE
For Laboratory:
r\r
r#VEHFUFE
0WFSIFBE
\r
$59,600 fixed plus $11,400 variable
$71,000 total.
r"DUVBM
0WFSIFBE
r"QQMJFE
0WFSIFBE
Required
1.
Routine Services Nursing and a second column for Laboratory.
tine Services Nursing and a second column for Laboratory.
column for Routine Services Nursing and a second column for Laboratory.
Review the Sensitivity Analysis Overview section and Figure 185 in Chapter 18.
Assignment Exercise 182: Three-Level Revenue Forecast
Three eye-ear-nose-and-throat physicians decide to hire an experienced audiologist in order to
add a new service line to their practice.* They ask the practice manager to prepare a three-level
Assumptions: For the base level (most likely) revenue forecast, assume $200 per procedure
equals 1,000 potential procedures per year.
For the best-case revenue forecast, assume an increase in volume of one procedure per day
average, for an annual increase of 250 procedures (5 days per week times 50weeks equals 250).
E\f  E, S \f M,  S 
For the worst case revenue forecast, assume a decrease in volume of 2 procedures per day
average, for an annual decrease of 500 procedures. (The worst case is if the practice loses a
major payer.)
tives. Thus the new service line was a logical move.
Required
Using the above assumptions, prepare a three-level forecast similar to the example in Figure 185
Practice Exercise 18II
r%FTJSFE
r6OJU
r7BSJBCMF
r5PUBM
r%FTJSFE
r6OJU
r7BSJBCMF
r5PUBM
Assignment Exercise 191: Estimate of Loss
You are the practice manager for a four-physician office. You arrive on Monday morning to find
the entire office suite flooded from overhead sprinklers that malfunctioned over the weekend.
Water stands ankle-deep everywhere. The computers are fried and the contents of all the fil
The practice carries valuable papers insurance coverage for an amount up to $250,000. It is
565
the insurance company. How would you go about it? What would your summary of the losses
Assignment Exercise 192: Estimate of Replacement Cost
The landlord carries contents insurance that should cover the damage to the furnishings,
equipment, and to the computers, and the insurance company adjuster will come tomorrow
to assess the furnishings and equipment damage. However, your boss is sure that the insurance
an estimate of what has been lost and/or damaged plus an estimate of what the replacement
cost might be. How would you go about it? What would your summary of these losses look like?
Assignment Exercise 193: Benchmarking
Required
1.
Select an organization: either from the Case Studies appearing in Chapters 31, 32, 33,
2.
Prepare a list of measures that could be benchmarked for this organization. Comment on
be an organization report or it can be taken from a published source such as a journal
Assume that Figure 194 is the before diagram for the Billing department. Further assume
Review with Supervisor
RWS

Required
Assignment Exercise 195: Quartiles
Review the chapter text about quartiles and study Table 191, which indicates results in quartiles.
E\f  E, S \f M,  S 
Required
1.
Locate healthcare information (such as bed days, number of visits, payment amounts,
3.
Required
1.
3.
If you had designed this study, would you have used the same type of analysis? If so,
explain why. If not, explain why not.
industry.
Required
1.
Find a healthcare organizations description of how it, in its organization, utilizes big data.
Review their description of this usage: For what purpose? Who performs the actual analy
the results useful in some way, and is that usefulness described?
3.
so, describe how. If not, explain why not.
Assignment Exercise 211
Required
. Locate the Stock Tables section of the
Journal
the column headings in the tables and locate the names of various stock exchanges that are
included in the findings. See if you can find the abbreviated names and the stock exchange
567
Alternatively, explore the websites of three or four publicly held healthcare organizations.
Somewhere on the website they should identify their stock exchange symbol. Then go onto a
Review the chapter text about mean, median, and mode and refer to the illustration in Table 211.
Required
Locate an article that reports results expressed as the mean, the median, or the mode. Can you tell
of the median?) If so, describe your conclusions. Alternatively, locate a series of numbers such as
scores and find the mean, the median, and the mode. Illustrate them as is shown in Table 211.
Example 22A: Loan Amortization
This example illustrates the initial monthly payments of a loan with a principal balance of
Total payments: 36
Total
Practice Exercise 22I: Loan Amortization
This exercise illustrates a different principal amount than Example 22A, but computed at the
Required
Compute the first 6 months of a loan amortization schedule with a principal balance of $60,000,
E\f  E, S \f M,  S 
Total payments: 36
Total
Assignment Exercise 221: Financial Statement Capital Structures
Required
Find three different financial statements that have varying capital structures. Write a paragraph
about each that explains the debtequity relationship and that computes the percentage of
Practice Exercise 23I: Cost of Leasing
A cost of leasing table is reproduced below.
Required
Using the appropriate table from the Time Value of Money Appendices appearing as 13-A, 13-B,
and 13-C, record the present-value factor at 6% for each year and compute the present-value
Cost of Leasing: Suburban ClinicComparative Present Value
Not-for-Profit Cost of Leasing:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
569
Assignment Exercise 231: Cost of Owning and Cost of Leasing
Cost of owning and cost of leasing tables are reproduced below.
Required
Using the appropriate table from the Chapter 13 Time Value of Money Appendices appearing
as 13-A, 13-B, and 13-C, record the present-value factor at 10% for each year and compute the
able at this interest rate? Do you think your answer would change if the interest rate was 6%
Cost of Owning: Anywhere ClinicComparative Present Value
For-Profit Cost of Owning:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Present-value factor



Cost of Leasing: Anywhere ClinicComparative Present Value
For-Profit Cost
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Assignment Exercise 232
lease a new computer system. Currently they own a low-tech (and low-cost) information sys
tem. The new system will have to meet all government specifications for an electronic health
record system and will also have to connect the two office sites. It will be considerably more
sophisticated than the current hardware and software and thus will require training for office
staff, clinical staff, and the physicians. Everyone agrees there will be a learning curve in order to
reach the systems full potential.
Doctor Smith, the majority owner of the practice, wants to buy a medical records system
from Sams Club. He argues that the package is supposed to electronically prescribe, track
billings, set appointments, and keep records, so it should meet their needs. The cost of the
first installed system is supposed to be $25,000, plus $10,000 for each additional system. The
doctors are not sure if this means $25,000 for one office site plus $10,000 for the (connected)
second office site for a total of $35,000, or if this means $25,000 for the first installed system
plus $10,000 each for three more doctors, for a total of $55,000. There is also supposed to be
$4,000 to $5,000 in maintenance costs each year as part of the purchased package. Doctor
Smith proposes to pay 20% down and obtain a five-year installment loan from the local bank
E\f  E, S \f M,  S 
Doctor Jones, the youngest of the three physicians, has been recently added to the practice. A
mate began last year. While he has received a quote of $20,000 for the entire system including
record system. Consequently, the other two doctors have outvoted Doctor Jones and this system
tenance upon the lessor company, and that removing the responsibilities of ownership is
advantageous. He has received a quote of $20,000 per year for a five-year lease that includes
Required
Doctor Brown). Include a computation of comparative present value. (Refer to Assignment 231
Assignment Exercise 233
already owns. Rob Lackey, the Assistant Controller, has been asked to gather pertinent informa
tion in order to make a decision. So far Rob has found thesefacts:
2.
In order to renovate the existing vehicle, it will cost at least $100,000 to purchase and
80,000 miles. The vehicle will also need a new fuel pump and new tires, but he believes
these items would be recorded as repair and maintenance operating expenses and thus
Lease terms for ambulances also vary widely, but so far Rob believes a cost of $60,000 per
Required
How much more information should Rob have before he begins to make any calculations?
Assignment Exercise 241
571
and administrative staff levels. This IT department is tasked with adopting and implementing
Required
Step 1.
Step 2.
Summarize the scores and place the net scores in a SWOT matrix such as the one
Step 3.
Create a report to the organizations CEO that summarizes the (good or bad)
Required
Locate several healthcare organizations mission, value, and vision statements. Use public
Then fit the statements you have discovered into the chapters categories of recognizing a
Types of assumptions required for the financial portion of a business plan typically include
r8IBU
r)PX
TFSWJDFT
r)PX
r8IBU
r)PX
service?
r8IBU
r)PX
r8IBU
r*T
r*G
r*T
r*G
Practice Exercise 25I: Assumptions
E\f  E, S \f M,  S 
Required
Identify how many of the assumption items listed in the example above can be found in the
Assignment Exercise 251: Business Plan
Required
Build a business plan for this proposal. Prepare the service description using your consumer
within the hospital, but its purpose is to dispense prescriptions to carry off-site and use at home.
Use the information provided in the MHS Case Study appearing in Chapter 33 to prepare
Assignment Exercise 261
Review the chapter text that defines a health delivery system.
Required
1.
First, define a geographic area for healthcare delivery purposes. If you live in a city, it
Next, using the definition of a health delivery system within the chapter, list all the health
delivery systems that presently exist within the geographic area defined above. Make a
3.
Research how many mergers or other types of consolidation have occurred within the
past five years that have affected the systems on your list. Have any facilities closed in your
areas health delivery system relationships? If so, please describe. If not, what are your
Assignment Exercise 262
Study the chapter text concerning stakeholders in health delivery systems.
Required
study. (Internal stakeholders deliver care, support the care deliverers, or receive the care,
573
2.
Research your chosen example. Write a report about what part your chosen entity plays
3.
How much strategic power do you think your chosen example has within the overall
internal and external players within a system? Do you think that power is increasing or
Assignment Exercise 271
Required
1.
mented positive financial outcomes of Intermountain Health or the investment dollars
2.
Find a similar type of value-based financial outcome as reported by some other health
care entity. Research both information about the outcome and information about the
3.
Write a report about the findings of your research. Present your report to the class and
hold a Q&A session afterward.
Alternative Assignment Exercise 271
Required
This assignment may also be a group project. If so, divide the groups into two or more teams;
comes would benefit a particular organization (the example in the text was a physician
entity. Research both information about the outcome and information about the entity
3.
Write a report about the findings of your research. Present your report to the class and
hold a Q&A session afterward.
Assignment Exercise 272
E\f  E, S \f M,  S 
Required
1.
Find information about value-based strategic planning by either a private-sector or
health focus; there are others as well.) Describe this focus in as much depth as is possible.
3.
Do you believe this organizations focus is appropriate for value-based planning? If so,
why? Or is it too broad, too narrow, or deficient in some other manner? If so, why?
Assignment Exercise 281
Review the chapter text about physician incentives under MACRA within the chapter text. See also
the maximum incentive payments an eligible professional can receive under MIPS (Figure 285).
Required
to physicians based on implementation of MACRA/MIPS requirements. Attempt to
2.
cian if implementation were to occur.
3.
Assignment Exercise 282
Required
Assume you are an employee of a health delivery system. You are assigned to write a training
plan about MACRA, MIPS, and APMs. Training content is to be at three different levels (basic,
4.
575
Assignment Exercise 291
Review the chapter text about standardized data and interoperability.
the necessary changes to forms, processes, and scheduling in order to implement standard
a draft implementation plan. You are part of the task force.
Required
1.
List the organizations departments that will be directly affected by the transition and
will the systems home office take responsibility?
4.
Produce an outline of essential subjects to be covered in the task forces draft implemen
Assignment Exercise 292
Required
Nursing Home Compare
website as described in the chapter.
3.
Pull up the website and locate nursing homes that are in your region. How many are
listed? Review the 5-Star scores for the facilities in your region. Is there a big difference
among the scores? Describe your regions overall scores.
4.
All SNFs that accept Medicare should be represented on the website. Do you know of a
Would you find the website and the 5-Star system helpful in choosing a facility for a family
E\f  E, S \f M,  S 
Practice Exercise 30I
The Productivity Loss section of this chapter describes how the dollar amount of such loss
Assume a hospitals coders are dealing with 1,500 claims within a certain period. What would
the dollar amount of productivity loss be if the coders took an extra two minutes (instead of 1.7
Assignment Exercise 301: Information About the ICD-10-CM and ICD-10-PCS
Required
and the ICD-10-PCS procedure codes and tools for their implementation over a period of years.
Assignment Exercise 302: Hospital Conversion to ICD-10
a make-believe SWOT analysis about a conversion of electronic systems to ICD-10 as required.
Write a description of theorganizations background, including its information system. (Add
tions situation analysis. Perform the make-believe SWOT analysis using the four-part format
(internal Strengths and Weaknesses and external Opportunities and Threats).
As an alternative approach, you can use information from the Case Study about Sample Gen
believe SWOT analysis for this hospitals ICD-10 implementation.
Assignment Exercise 303: Hospital Costs To Implement
Required
Part 1Within this scenario the productivity loss for the six-month learning period is calcu
lated to be $1,233. Beginning with month 1 at $353 ($1.41 times 250 equals $353), compute the
Part 2Later in the scenario, CMS states that the hospitals total cost amounts to $303,990.
Study the explanation and summarize the totals of each type of cost discussed. When you are
finished, your total should amount to $303,990. Be prepared to show and explain how you
577
SUPPLEMENTARY MATERIALS: THE MECHANICS OF PERCENTAGE
COMPUTATIONS
As I didnt know him or anyone from the town he lived and worked in, he wasnt embarrassed
to ask me. So we believe if the vice president of a bank can ask about how to figure a percentage,
then that calculation deserves to be described within this Appendix, as follows.
The Fractions Parts: Numerator and Denominator
Reminder: A fraction has two partsthe numerator is the top number and the denominator is
the bottom number. Or, to be more precise, the numerator is the part of a fraction that is above
To calculate a fraction, the bottom number (denominator) is divided into the top number
(numerator). For example, if the numerator is 90 and the denominator is 100, divide 100
into 90. The resulting answer is 0.90. (Note that the decimal point is to the left of the 0.90
answer.)
Next Convert the Fraction to a Percentage
To obtain the percentage, we need to convert the fraction. To do so, move the decimal two
Summary
We know that your computer or tablet will perform this computation automatically, but situa
tions may still arise when you may need to calculate by hand. Its a good thing to know.
Solution to Practice Exercise 4I
E\f  E, S \f M,  S 
Solution to Practice Exercise 6I










Step 1.
579
Step 3.
Compute the fixed overhead rate as follows:
Total cost
Less: Variable portion
Total cost
Less: Variable portion
Step 1.
Divide costs into variable and fixed portions. In this case $3,450,000 times 40% equals
E\f  E, S \f M,  S 
Step 1.
Step 2.
Divide the resulting figure by the expected life (also known as estimated useful
life): 540,000 divided by 10 equals 54,000 depreciation per year for 10years.
Step 2.
Compute the first years depreciation expense: 600,000 times 20% = 120,000.
Step 4.
Compute the carry-forward book value at the beginning of the second year:
600,000 book value beginning year 1 less year 1 depreciation of 120,000 equals
Compute the second years depreciation expense: 480,000 times 20% = 96,000.
Step 6.
Compute the carry-forward book value at the beginning of the third year: 480,000
96,000
96,000
76,800
61,440
49,152
39,322
31,457
25,166
20,132
20,561
Step 1.
Compute the cost of salvage or trade-in value: 50,000 less 10% salvage value or 5,000
Step 2.
life): 45,000 divided by 5 equals 9,000 depreciation per year for 5years.
581



Vacation days



Total Operating Revenue
Current Portion of Long-Term Debt
allowance for bad debts, because we cannot find an equivalent bad debt expense on their
E\f  E, S \f M,  S 
Current Ratio
Liabilities. This ratio is considered to be a measure of short-term debt-paying ability. However,
Current Ratio Computation

Receivables, divided by Current Liabilities. This ratio is considered to be an even more severe
Debt Service Coverage Ratio (DSCR)
service. This ratio is universally used in credit analysis.

583

Profitability Ratios
Operating Margin
The operating margin, which is generally expressed as a percentage, is represented as operating
income (loss) divided by total operating revenues. This ratio is used for a number of managerial


E\f  E, S \f M,  S 
SOLUTION TO PRACTICE EXERCISE 13II: FINDING THE FUTURE VALUE
(WITH A COMPOUND INTEREST TABLE)
Step 1.
Refer to the Compound Interest Table found in Appendix 13B at the back of this
chapter. Reading across, or horizontally, find the 7% column. Reading down, or ver
tically, find Year 6. Trace across the Year 6 line item to the 7% column. The factor is
Step 2.
SOLUTION TO PRACTICE EXERCISE 13III: FINDING THE PRESENT VALUE
Step 1.
Refer to the Present-Value Table appearing in Appendix 13A at the back of this
chapter. Reading across, or horizontally, find the 7% column. Reading down, or ver
tically, find Year 15. Trace across the Year 15 line item to the 7% column. The factor
Perform calculation:
Step 1.
Step 2.
Now use the abbreviated look-up table for the Present Value of an Annuity of $1
appearing in Appendix 13C. Find the line item for the number of periods that
Step 3.
Look across the 10-year line on the table and find the column that approximates
the ratio of 5.650 (as computed in Step 1). That column contains the interest rate
Assumption 5:

585
Perform computation:
Step 2.
E\f  E, S \f M,  S 

Solution: The unit has recorded 2,000 procedures ($200,000 divided by $100 apiece equals

Solution: At 25% of the volume per payer, each payer accounts for 500 procedures (2,000
times 25% equals 500 procedures). Proof total: 500 procedures apiece times four payers


EachPayer
per day, or $19,500,000. Further assume that inpatient expenses were budgeted at $600 per
at an average of $400 revenue per visit, or $4,000,000. Further assume that outpatient expenses
587
Now assume that only 27,000, or 90%, of the patient days are going to actually be achieved
for the year. The average revenue of $650 per day will be achieved for these 27,000 days (thus
110%, or 11,000 for the year. The average revenue of $400 per visit will be achieved for these
11,000 visits (thus 11,000 times 400 equals 4,400,000). Further assume that, due to the heroic
efforts of the Chief Financial Officer, the actual inpatient expenses will amount to $11,600,000
and the actual outpatient expenses will amount to $4,000,000. The actual results would look


Because there is no one right answer, students will approach this exercise in different ways.
Required Solution to Practice Exercise 181
The Price Variance is $100,000 (favorable).
The Quantity Variance is $120,000 (unfavorable).
E\f  E, S \f M,  S 
Price Variance (favorable)
Quantity Variance (unfavorable)
Overhead
Optional Solution to Practice Exercise 18I
The $950,000 actual overhead cost represents 350,000 therapy minutes times $2.71 per therapy
Variable costs $300/unit
589
contains all of the assumption items
$50 per hour divided by 60 minutes equals $0.8333; thus 2 minutes equals $1.6667. If a hospi
tals coders are dealing with 1,500 claims, then the dollar amount of productivity loss is $2,499
E\f  E, S \f M,  S 
Advance Payment ACO model, 391
eligible professionals for, 376378, 377
Measure Development Plan for, 383, 384
Other Payer, 376
participation standards for, 380381
pay-for-performance incentives, 362363
as proposed for Year 1, 375376, 376
scoring standard for, 381382
Advancing Care Information (ACI), 369, 374
account number, 1517
Accountable Care Organizations (ACOs), 26,
ACI.
ACOs.
action-based measurement, of ACI, 401 402
analyzing referral activity, 505
case study, 483487
in healthcare industry, 234235
construction summary, 186
objectives for, 177
ambulance service center (ASC), 5658, 58
ambulatory care information system, 12, 12
annual year-end reports, 1920
annual year-end reports, 1920
annuity, present value, 136
ambulance service center
assisted-living services, 41
authority, lines of, 6, 4849, 156, 156
Bain, Alexander, 503
case study, 461462
base year, 254
593
expense grouping by, 5051
grouping by, 42
Schedule of Property, Plant, and Equipment,
CCRC.
Center for Value-Based Care Research, 334
buy-or-lease management decisions, 264268,
consistency, 161
comparing to industry standards, 167, 168
managers view of, 162163
composite performance score (CPS), of MIPS,
Comprehensive Health Planning and Services
(CCRC), 43
Centers for Medicare and Medicaid Services
quality strategy, 383
Services Act (CHP), 112113
certified EHR technology, 381
charity services, 39
Chart of Accounts for Hospitals
chief executive officer, 48
Childrens Health Insurance Program (CHIP),
CHIP.
Childrens Health Insurance Program
CHP.
Services Act
Chronic Obstructive Pulmonary Disease
Services
coder productivity, 434
595
CPT.
Current Procedural Terminology codes
Care Transformation Act, 410
cumulative cash flow, 198199
Current Procedural Terminology (CPT) codes,
healthcare industry, 234235
data entry, 253
data repository, 12
debt service coverage ratio (DSCR), 130, 133
debt service reserve fund, 482
controllers office, 55
Chronic Obstructive Pulmonary
behavior, 6578
case study, 489494
of lost productivity, 430
performance category.
performance category
disbursements for services, 48
discharges, case study, 468
discounted cash flow, 137
discounted fees for services, 38, 45
debt service coverage ratio
efficiency, specialization and, 3
electronic inventory program, 224
emergency services, 44
denominator, 253
Department of Health and Human Services
interrelationship of expense and reserve for,
overview, 88
expense grouping by, 4950, 52
hospital department codes by, 52
expense grouping by, 50
hospital department codes by, 5152
digital interoperability, post-acute care, 407, 411
597
FASB.
Quality, 454
federal governments planning, 285
fees for services, 38, 40, 41
Financial Accounting Standards Board (FASB),
history, 3
information flow, 1214
financial responsibility, healthcare foundation,
general services, 4950, 54
support services, 49
fund designator, 1617
Fundamentals of Value-Based Health Care, TDI
GAAP.
GDP.
general ledger, 1718
general services expenses, 49, 54, 168
goods sold, inventory and costs of, 8283
Government Performance and Results Act
Government Performance
graphs, scatter, 7778
HAC Program.
fiscal year, 19
center, 216, 217
for-profit company
not-for-profit organization, 275
for-profit organizations
599
High Value Healthcare Collaborative,
Home Health Value-Based Program (HHVBP),
Hospital Acquired Conditions (HAC) Program,
hospital rehab services variance analysis,
Hospital Survey and Construction Act of 1946.
Hospital Taxing-District Status, 277
Hospital Value-Based Purchasing (HVBP)
hospitals clinical research example, of data
Hospital Value-Based
health delivery system
health information technology, changes in,
Health Information Technology for Economic
health systems, case study, 459469
challenges for, 239
health delivery system
healthcare financial manager, strategic
healthcare foundation, financial responsibility,
healthcare industry, big data in, 234235
healthcare service organizations, 59
Services
HHVBP.
Home Health Value-Based
information flow, 1214
managers challenge in changes of, 424
interoperability, 26
inventory, 34, 59, 61
calculating turnover, 8788
necessary adjustments, 8586
overview, 81
overview and impact of, 421
systems and applications affected by, 425
Transformation Act of 2014
(IMPACT Act), 108, 339341,
QP performance period, 378
individual practice association (IPA) model, 41
industry trend, researching acquisition,
601
for performance reporting, 286
lengths of stay, 485486
nursing staff classification by, 156, 156
Long-term care hospitals (LTCHs), 408
LTCHs.
MACRA.
MACRS.
Recovery System
MACs.
periodic inventory system, 85
inventory turnover, calculation, 8788
indicator, 249250
IP.
IPA model.
IT.
Last-In, First-Out (LIFO) inventory
Medicare program (Title XVIII), 39-40, 52
mental health services, 40, 460
composite performance score, 367368, 368
eligible professionals for, 365367
Measure Development Plan for, 383, 384
new quality measures for, 383
pay-for-performance incentives, 362363,
Payment Adjustments and Timelines,
performance category, 369
quality, 368, 374
performance period, 373374
systems financial statements, 471482
migrant healthcare services, 40
manager, 11
maternal and child health services, 40
Value Creation System, 334
MDP.
Medicaid program (Title XIX), 40, 45, 52, 480
of 2015 (MACRA), 327328, 339340,
CMS framework for, 385387, 387
domains for, 385, 386
priorities for, 384, 385
timelines for, 383384, 384
Medicare Administrative Contractors (MACs), 40
603
NCA.
National Council of Teachers of
negative view, researching acquisition, 450
terminology, 36
New York Stock Exchange (NYSE), 249
not-for-profit organizations
for-profit company
voluntary, 6
Texas Oncology, 278
Modified Accelerated Cost Recovery System
(MACRS), 92
money, time value of, 135139
multiple performance measures, 282, 283
My Health Manager, 349
NASD.
NASD Automated Quotation system
(NASDAQ), 249
NASDAQ.
NASD Automated Quotation
(NASD), 249
National Council of Teachers of Mathematics
outpatient infusion center, capacity level
checkpoints for, 159
over the counter (OTC), 249
overhead, 313
Owners Equity, 35
P4P.
pay-for-performance
PAC.
Parkland Hospital, Hospital Taxing-District
Research Center (PCERC), 335
patients, insurance verification for, 1213
pay-for-performance (P4P), 325, 341
register, 109
PCERC.
NPV.
numerator, 253
nursing services cost centers, 4849
NYSE.
New York Stock Exchange
occupational health services, 460
Office of Value Creation, 334, 350
OffTheScale (OTS), 24
online Patient Action Plan (oPAP), 349
analysis for, 215216
case study, 468
OTC.
OTS.
605
assessing information technology, 2627
delivery systems, 27
positive usage indicator, 432
positive view, researching acquisition, 450
post-acute care (PAC)
digital interoperability, 407, 411
Transformation Act, 405407, 406f,
annuity, 136
percentage-based measurement, of ACI,
performance gaps, 227
performance measures, 127133
performance period, 254
performance reporting, legislative
requirements for, 286
periodic inventory system, 85
Physician Value-Based Modifier (PVBM)
Pioneer ACO model, 391
planners financial projection, 295296, 295
point-of-service models, 41
Qualified Registry, 374
Qualifying APM Participant (QP) pathway,
radiology services, 5859, 58
rate per day, 48
recording inventory and cost of goods sold, 82
recovery services, 460
analyzing referral activity, 505
Relative Value Units (RVUs), 189
professional services cost centers, 4849
profit center, 5758
case study, 485, 487
program cost center, 52
expenses grouped by, 5152, 52
new, 201
providing accountability, managers
Physician Value-Based
Qualified Clinical Data Registry
QP pathway.
QPP.
Qualified Clinical Data Registry (QCDR), 374
607
RIF.
RVUs.
Relative Value Units
Same-Day Surgery (SDS), 459
Schedule of Property, Plant, and Equipment,
Same-Day Surgery
Seabury Nursing Centers Home
Seaburys Planning Department, 454
Seawells
Chart of Accounts for Hospitals,
security, in business plans, 313
overview, 218
service lines, 4243, 43
services
disbursements for, 48
revenue for, 3739, 39
Westside Center, 58, 58
shortages, in inventory, 86
subsidiary reports, 124125
directors summary, 5859, 60
reserve for depreciation, 89
industry trend, 450451
negative view, 450
positive view, 450
resource use, performance category, 370, 374
Respiratory Care Department, diagnosis-related
groups for, 190193
for services, 3739
VA office of IT, 288290, 289
financial projection for, 294296, 295
legislative requirements for, 286
performance measures, 291
process flow, 281283, 281
situational analysis for, 292294
tools for, 292294
(SWOT), 440
summary, 440441
subsidiary journals, 18, 19
subsidiary reports, 124125
supplementary medical insurance (SMI), 39
support services expenses, 49, 54
Skilled Nursing Facility Value-Based Program
supplementary medical insurance
SNFVBP.
Value-Based Program
case study, 485, 487
space occupancy, 313
classification by lines of authority, 156, 156
manager responsibility, 103113
case study, 463
609
treasury bills, 246
treasury notes, 246
turning inventory, cost of goods sold, 8283
VA.
Value Modifier (VM), 336, 370, 389390
in private sector, 334335
in public sector, 335337
value-based pay-for-performance initiatives,
Value-Based Payment Modifier, 389390
value-based performance payment models,
SWOT.
Sum-of-the-Years Digits
system-based measurement, of ACI, 401 402
Texas Oncology, 278279
time value of money, 135139
for MIPS performance period, 373
traffic flow, WIC, 499, 500
Texas Oncology, 278
Visiting Nurse Association (VNA), 454
Value Modifier
VNA.
voluntary organizations, 6
Web 2.0, 23
Westside Center, services types, 58, 58
Women, Infants, and Children (WIC)
traffic flow, 499, 500
internal strategic analysis for, 324
overview, 211
summary, 218
VBP.
Venn diagram, 254

Приложенные файлы

  • pdf 10975200
    Размер файла: 7 MB Загрузок: 0

Добавить комментарий