Exam 1 Flashcards
What are some of the industries in the healthcare sector?
Health services, Health Insurance, Medical Equipment and supplies, Pharmaceuticals and Biotechnology, and others
Healthcare Finance
How you deal with the finance of a healthcare facility. You also have to deal with deductions and third party payers
What are the two broad areas of healthcare finance?
Financial Management and Accounting
What is the difference between a business and a pure charity?
A business sustains itself by selling its goods or services; a pure charity gets its funds contributions
The role of finance in the health services industry.
Have a plan for how funds will be used, acquire,
and to use these resources to have maximum efficiency and value. Increased because of decreased reimbursements.
Hospitals
They give diagnostic and therapeutic services to individuals who require more than several hours of care (inpatient)
Ambulatory care
They work on an outpatient basis to provide quick same day services
Home health care
A range of health care that can be administered at your own home.
Long-term care
Entails the provision of healthcare services, as well as some personal services, to individuals who lack some degree of functional ability.
Integrated delivery systems
Combines hospital care, ambulatory care, long term care, and business support services into a single entity
What are the benefits attributed to integrated delivery systems?
- Patients are kept in the corporate network of services
- Providers have access to managerial and functional specialists
- Information systems
- Better access to capital
- Better recruit and retain management
- Complete package of services (“one-stop shopping”)
- Incentives can be created that encourage all providers in the system to work together for the common good of the system, which has the potential to improve quality and control costs
What role does regulation play in the health services industry?
It helps to protect the health, safety, and welfare of the public.
What is the structure of the finance function within health services organizations?
CEO - CFO - Two senior managers (Controller/Treasurer) - Patients Accounts Manager (Controller) and Cash Manager (Treasurer)
If it is small then a Business Practice Manager
What is the primary legal issue, facing providers today?
Malpractice (Professional Liability)
What are the major current concerns of healthcare managers?
Reimbursement from CMS and bad debt losses
Advantages/Disadvantages of Proprietorship
Advantages - Less tax, more control over business, no corporate tax
Disadvantages - Personally liable for debts/obligations, difficult to sell interest, life of business limited to owners
Advantages/Disadvantages of Partnership
Advantages - Low cost, ease of formation, taxation on personal income
Disadvantages - Personally liable for debts/obligations, difficult to sell interest, life of business limited to owners
Advantages/Disadvantages of Corporation
Advantages - Unlimited life, easy to transfer ownership, limited liability
Disadvantages - Double taxation (once at the corporate level and then again at the personal level), Setting up a corporation, and then filing the required periodic state and federal reports, is more costly and time consuming
Investor Owned (For Profit)
Stockholders vote on who’s on the board and other major things that will effect the entire company
Not For Profit
Stakeholders, who have a great interest in the company
They do not pay taxes; they can accept tax-deductible contributions, and they can issue tax-exempt debt
Primary goal of investor-owned corporations
Shareholder wealth maximization or stock price maximization
Primary goal of most not-for-profit healthcare corporations
Fulfill the mission statement
Differences between the finance goals of investor-owned and not-for-profit corporations
For profit want to keep the shareholders happy, while not for profit have a much higher focus on a mission statement that will lead them to a financial soundness.
In both kinds, if they aren’t financially sound, then they will fail
Agency problem
Principals hire on agents to make decisions. The problem arises when the agents begin to act out of self-interest and not what would be best for the company.
Why are tax laws important to healthcare finance?
Taxes reduce usable cash flows
What three major advantages do tax laws give to not-for-profit corporations?
- No income or property tax
- Lower/exempt debt/interest payments
- Contributions made to the corporation are tax deductible to the donor
Form 990
They report on a not-for-profit organization’s governance structure and community benefit services, to IRS
Major third-party payers
Private Insurers - Blue Cross/Blue Shield, Commercial Insurers, Self Insurers
Public Insurers - Medicare/Medicaid
What are the primary characteristics of managed care plans?
They strive to combine the provision of healthcare services with the insurance function into one single entity.
Types of managed care plans.
1) Health Maintenance Organization (HMO) – they aim to reward providers for treating patients and give little incentive to prevention or rehabilitation services
2) Preferred Provider Organization (PPO) – patients aren’t required to use a certain provider but are given incentives to do so. The insurance company has contracts with these providers.
3) Point of Service (POS) plan – they require the patient to get service from certain locations or pay a lot more to be treated.
Difference between fee-for-service reimbursement and capitation
Fee for service - you pay for the number/type of services provided
Capitation - reimbursement methodology that is based on the number of covered lives as opposed to the amount of services provided.
Provider incentives/risk for COST BASED reimbursements
Given blank check in regards to acquiring facilities, equipment, and incurring op. cost/LOW
Provider incentives/risk for CHARGE BASED reimbursements
You can set high charge rates, which lead to higher revenues/LOW
Provider incentives/risk for PER PROCEDURE reimbursements
Perform the highest costing surgery available and the most of them/MEDIUM
Provider incentives/risk for PER DIAGNOSIS reimbursements
Encourage the services that have the greatest profit and discontinue the ones that don’t bring enough in. They also want to upcode the procedure for more profit/MEDIUM
Provider incentives/risk for PER DIEM reimbursements
Increase the stay time/MEDIUM
Provider incentives/risk for BUNDLED PAYMENT reimbursements
Lower the costs in one part of treatment, so that you can raise them in another part/HIGH
Provider incentives/risk for CAPITATION reimbursements
Perform only the necessary treatments/HIGH
What medical coding systems are used to support fee-for-service payment
1) International Classification of Diseases Codes
2) Current Procedural Terminology Codes
3) Healthcare Common Procedure Coding System
Briefly describe the main provisions of healthcare reform and its implications for the practice of healthcare finance.
PPACA
1) Expanding Medicaid eligibility
2) Subsidizing insurance premiums
3) Providing incentives for businesses to provide healthcare benefits
4) Prohibiting denial of coverage based on pre-existing conditions
5) Establishing health insurance exchanges
6) Medical Research
Describe the primary features of accountable care organizations (ACOs) and medical homes.
ACO’s - A method of integrating physicians with other healthcare providers with a goal of controlling costs and improving quality.
Medical home- A team-based model of care led by a personal physician who provides continuous and coordinated care throughout a patient’s lifetime to maximize health outcomes.
Stakeholder
All people that have an interest in the company
What stakeholders are most interested in the financial condition of a healthcare provider?
Investors/stockholders and lenders/creditors have the most interest because they have capital in the company
Goal of financial accounting
Provide information about organizations that is useful to investors
What are the GAAP?
They are a set of objectives, conventions, and principles
Four Assumptions of GAAP
Accounting entity - The organization for which a set of accounting statements applies.
Going concern - the company has the resources to continue indefinitely
Accounting period - period covered by a set of statements
Monetary unit - Dollar in the US
Four Principles of GAAP
Historical costs - report what asset was worth when purchased not todays value
Revenue recognition - revenues must be recognized in the accounting period when they were earned
Cost matching - A company records expenses in the accounting period in which it helped create revenue, not when payment was made for the expenses
Full disclosure - Financial statements contain enough information that they are not misleading
Four Constraints of GAAP
Objectivity - be based on objective, verifiable supporting data
Materiality - Only entries that are important to the operational and financial status of the organization need to be separately identified
Consistency - When a business’s financial statements are compared over extended periods, users must feel confident that they are comparing apples to apples and not apples to oranges
Conservatism - the company should use the one that affects the financial statements in the least favorable immediate way
What organizations are involved in establishing GAAP?
SEC
FASB
AICPA
Difference between gross revenues and net revenues
Gross revenue is the amount that you have billed to patients and third party payers. The net revenue has all discounts/deductions taken out
Cash Accounting
When cash exchange takes place
Accrual Accounting
When you perform the service, you record the amount that will be received before you actually have the money in hand.
Difference between Charity Care and Bad Debt Loss
Charity - Indigent patients are those who presumably are willing to pay for services provided but do not have the ability to do so.
Bad Debt - the failure to collect revenues from patients or third-party payers who do have the capacity to pay, but refuse to pay
Expense
The economic costs that a business incurs through its operations to earn revenue
Depreciation
Depreciation expense is a noncash charge against earnings on the income statement that reflects the “wear and tear” on a business’s fixed assets (buildings and equipment)
Difference between operating income and net income
Operating income comes directly from core business operating activities
Difference between net income and cash flow
Because net income uses the method of accrual accounting, the revenue is added as the services are performed and not as the cash is received. Cash flow is accounted for once the actual amount of cash changes (liquidity)
What is the purpose of the Statement of Changes in Equity?
The statement of changes in equity is a financial statement that reports how much of a business’s income statement earnings flow to the balance sheet equity account.
Basic format for Statement of Changes in Equity
Net income – dividends paid = increase in equity
Increase in equity + equity at the beginning of year = equity at the end of the year
Accounting Identity
A=L+E
What does the accounting identity tell us about a business’s equity?
Assets-Liabilities=Equity
Asset
Assets either possess or create economic benefit for the organization
Three major categories of assets
Current assets, long-term investments, and net property and equipment
What makes an asset a current asset?
An asset that is expected to be converted into cash within one accounting period
What is net working capital, and what does it measure?
A liquidity measure is equal to current assets minus current liabilities. This shows a facilities ability to pay off its short term debts.
What is the difference between long-term investments and property and equipment?
Long term investments are financial assets
Property/Equipment are considered to be real assets
Difference between gross fixed assets and net fixed assets
Fixed Asset - A business’s long-term assets, such as land, buildings, and equipment.
Net fixed assets are the value of the asset after expenses such as depreciation are subtracted
How does depreciation expense on the income statement relate to accumulated depreciation on the balance sheet?
Accumulated depreciation represents the total dollars of depreciation that have been expensed on the income statement against the historical cost of the organization’s fixed assets.
Difference between liabilities and equity
Liabilities represent claims against the assets of an organization that are fixed by contract. Equity is the amount of your entity that is owned by others usually in the form of stocks or bonds.
What makes a liability a current liability?
It is considered current if the liability will be paid off within one accounting period.
Examples of current liabilities
Notes payable and Accounts payable
Difference between long-term debt and notes payable
Long term debts are any liabilities that will be paid AFTER one accounting period and notes payable are any liabilities that will be paid WITHIN one accounting period
Difference between the equity section of a not-for-profit business and an investor-owned business
In a not for profit business the equity comes from charitable contributions, government grants, and reinvesting earnings within the business. In an investor owned business equity comes from stockholder’s equity
What is the relationship between net income on the income statement and the equity section on a balance sheet?
Net income is the same amount as the increase in equity on the balance sheet. If they don’t equal out, then you have done some part of your math wrong.
What is fund accounting, and why is it important to some healthcare providers?
A system for recording financial statement data that categorizes accounts as restricted or unrestricted. The board of directors or donator will specify that funds are to be used for a certain thing.
What is the statement of cash flows, and how does it differ from the income statement?
A financial statement that focuses on the cash flows that come into and go out of a business.
What are the three major sections of the statement of cash flows?
Cash flows from Operating, Investing, and Financing
What is the bottom line of the statement of cash flows, and how important is it?
This would be the net increase/decrease in cash. It isn’t very important because it can easily be manipulated.
Operating Cash Flow is more important because it tells us the amount of revenue from operations.
