Midterm Flashcards
Economic decisions
choices among competing alternatives; sacrifices are incurred in expectation of future benefits (sacrifice characteristics) -amount -timing -risk/uncertainty
Accounting
systematic recording, reporting and analysis of financial transactions
- has to be for a biz entity
- has to be measured in money
- historical costs used instead of mkt value
- record only when transactions happen rather than expected
- matching - revs and expenses are recorded in same period
cash accounting
tracks when cash was received and when it was expanded (problem: management can manipulate by paying bills and billing slowly to shower smaller cash growth; revs and expenses are not matched
accrual accounting
attempts to allocate expenses to the same period that they were used to generate revenues (problem: more complicated)
Accounting identity 1
Asset = Liabilities + Net Worth or
Assets - Liabilities = Net Worth
assets
economic resources that will provide future benefits
liabilities
claims against those resources by creditors, vendors, employees, and others
net worth
the net value of a company
Limited use assets
restricted funds for specific use
example of accrual
buy supplies on credit, book supplies as asset, but expense them as used
current assets / liabilities
cash short term investments accts receivable prepaid expenses supplies
accts payable
accrued expenses
current portion of LTD
taxes payable
non current assets / liabilities
PPE
investments
board designated funds
pensions
insurance
LTD
Types of financial ratios
liquidity: how well can organization meet short term obligations?
profitability: how profitable is organization?
capital structure: how are org’s assets financed? Can it take on new debt?
Current ratio
current assets / current liabilities
- measure of short term debt paying ability
type: liquidity desired direction: up
median: 2
Days COH
Cash - marketable securities / (total operating expenses - depreciation/365)
- measures cash on hand in relation to daily operating expenses
type: liquidity desired direction: up
median: 84 - board designated should be excluded
Days in Receivable
Net patient accounts receivable / (net patient revenues/365)
-represents number of operating revenue days in receivables
type: liquidity desired direction: down
Median: 52
Operating Margin
Operating income / total operating expenses
-indicates the proportion of profit earned for each dollar of operating revenue
type: profitability desired direction: up
Median: 3%
Return on Equity (or Net Assets)
Net Income (or Excess of Revs over Expenses) / Equity (or Net Assets)
-measures the rate of return for each dollar in net worth
Type: Profitability
Desired direction: Up
Median: 8%
Debt Service Coverage
(Net income + interest + depreciation) / interest expense + principal payments
-measure of ability to repay loans; for every dolar of debt service (principal + interest) what is the cash inflow during the period
type: capital structure
desired direction: up
Median: 4.5
Debt to Net Assets (or Equity)
LT Debt / Net Assets
-Measures the proportion of debt to net assets
Type: capital structure
Desired direction: down (due to leverage concerns)
Median hospital: .38
Debt to capitalization is similar:
LTD/LTD + Equity
Leverage
Leverage = degree of borrowed capital
- Return on net equity is magnified by debt financing
- the more debt, the greater the return on net assets is impacted by profit or loss; More debt can magnify returns when going is good, and magnify losses when things are bad
- Also true in personal finances!
Age of plant ratio
Accumulated depreciation / depreciation expense
-measures average age of fixed assets (plant and equipment)
Type: activity ratio
Desired direction: down
Median: 10.4
Other operations measures
Severity measures
- Avg length of stay
- Case mix index
Productivity measures:
- FTE per adjusted occupied bed
- paid hour per adjusted discharge
Costs and charges:
- cost per adjusted discharge
- cost per discharge, case mix and wage index adjusted
- cost per visit
Utilization:
- Avg daily census
- Occupancy percent
- Visits per day
Direct costs
Direct:
- specifically traceable
- if the operating unit did not exist, would the cost
- usually: salaries (within cost object), supplies
Indirect cost
-not directly traceable
-incurred for overall operation
-requires assignment
Usually: depreciation, administration
Allocation of costs
Sometimes you might use a ratio like sq. footage of a unit within the whole; sometimes you might try to allocate a percentage equally between all departments. Kind of a hairy thing…
Fixed costs
- Costs that do not change in relation to volume. whether you sell 1 unit or 1,000, the cost of incurring the fixed costs are the same.
- However, increasing volume allows one to spread the fixed cost along more people/units/patients
If one looked total costs in terms of fixed costs: total costs would be flat
If one looked at fixed costs per unit in terms of volume: curve sharply decreases (reflecting decreased per unit costs)
Variable costs
- Costs that DO change in relation to volume
- change in relation to output in constant, proportional manner
If one looked at graph of total costs in terms of variable: it would be an increasing line
If one looked at costs per unit in terms of volume: it would would be flat (reflecting that no matter how many widgets you sell, it still costs the same to produce an additional one)
Mixed/semi-variable/semi-fixed
- Characteristics of fixed and variable
- Base plus volume component (utils, phone)
- Step, non-proportional
Contribution margin
what can be contributed to cover fixed costs and profit
equals revenues minus total variable costs
CM = R - VC
Breakeven analysis
Breakeven occurs when total CM = fixed cost
Break even volume = total fixed costs / per unit price (revenue) - per unit variable costs
Cost-Volume-Profit Formula
revenue - [variable costs + fixed costs] = profit
(# units * price per unit) - [(# units * variable cost per unit) + fixed costs] = profit
revenue = # units * price per unit
variable cost = # units * variable cost per unit
fixed cost = total fixed costs
CT scan exercise where: scan supplies per scan: 10 scan labor per scan: 20 total deprec for scanner: 250,000 price/unit: 150
contrib margin per unit?
breakeven volume?
breakeven revenue
what if we wanted to make profit of 50k?
1) CM = 150 - 30, so 120
2) 250000/150-30 = 2084
3) 2084*150
4) 300000/150-30 =
Workload
Volume doesn’t equal workload; diff activities require different amts of work or resources
Need to adjust for case mix (complexity)
Cost efficiency and labor productivity are point of metrics
The fixed cost dilemma
- assuming we eliminate unwarranted variation, cutting volume in half only means that we have taken revenues away from hospitals but not any fixed costs
- so savings may not be great for hospital
budgets
organizational instrument that conveys org objectives, assembly of ops, levels of org, basis for performance eval (variance)
-objectives: to provide a written, quantative expression of the policies/plans of the entity
operating budgets
deals with short term revenues and expenses to operate
capital budgets
deals with large capital expenditures in the future.
static budget
defined then does not change
flexible budget
adjusted to reflect actual experience
more time and effort
addresses workloads, control and planning
trend analysis
comparing data over time
valuable for managers to see changes in performance, efficacy of interventions
variance
difference between anticipated and actuals
sometimes you are wrong… (variance)
- due to volume: thought there would be more total knees/more workload
- due to intensity (quantity of resources): caused by difference between expected and actual quantity of input needed per unit of output
- due to prices: thought price of gas would be X instead of Y
staffing challenges
mix of providers
need 24/7/365
account for non-productive time and shortages
Annualizing staffing
- determine productive and non-productive time using FTEs
- 1 FTE = 2080 hrs (5258)
So 1 FTE could hypo work 260 days in a year (52*5=260)
- but 10 fed holidays, 24 sick/vacation days, means we are down to 226 (260-34=226)
- open 365 days/year
- Number of FTEs to hire for 1 shift for 365 = 365/226 = 1.62
- Number of FTEs needed to hire for 250 = 250/226 = 1.11
How to Solve Cost Crisis in HC main points
- charges are not good surrogates for provider costs
- hospital overhead costs are not too complex to allocate them accurately
- most health care costs are not fixed
The Fixed Cost Dilemma
fixed costs dilemma leaves most costs insensitive to changes in volume, so clinical QI creates add’l capacity rather than bottom line savings
