FINANCE FIFTH EDITION
FINANCE FIFTH EDITION
JUDITH J. BAKER, PhD, CPA
R.W. BAKER, JD
NEIL R. DWORKIN, PhD
Basic Tools For Nonfinancial Managers
HEALTH CARE
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Production Credits VP, Executive Publisher: David D. Cella Publisher: Michael Brown Associate Editor: Danielle Bessette Associate Production Editor: Rebekah Linga Senior Marketing Manager: Sophie Fleck Teague Manufacturing and Inventory Control Supervisor: Amy Bacus
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Library of Congress Cataloging-in-Publication Data Names: Baker, Judith J., author. | Baker, R. W., author. | Dworkin, Neil R., author. Title: Health care finance : basic tools for nonfinancial managers / Judith Baker, R.W. Baker, and Neil R. Dworkin. Description: Fifth edition. | Burlington, Massachusetts : Jones & Bartlett Learning, [2018] | Includes
bibliographical references and index. Identifiers: LCCN 2016054734 | ISBN 9781284118216 (pbk.) Subjects: | MESH: Financial Management | Health Facilities–economics | Health Facility Administration |
United States Classification: LCC RA971.3 | NLM W 80 | DDC 362.1068/1–dc23 LC record available at https://lccn.loc.gov/2016054734
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© LFor/Shutterstock
New to This Edition……………………………………………………………………………………………….xvii
Preface ……………………………………………………………………………………………………………….. xix
Acknowledgments ………………………………………………………………………………………………… xxi
About the Authors ………………………………………………………………………………………………. xxiii
PART I—HEALTHCARE FINANCE OVERVIEW…………………………………………………………. 1
Chapter 1 Introduction to Healthcare Finance …………………………………………………….. 3 The History ……………………………………………………………………………………………. 3 The Concept ………………………………………………………………………………………….. 4 How Does Finance Work in the Healthcare Business? ……………………………….. 4 Viewpoints……………………………………………………………………………………………… 4 Why Manage? …………………………………………………………………………………………. 5 The Elements of Financial Management ………………………………………………….. 5 The Organization’s Structure ………………………………………………………………….. 5 Two Types of Accounting ………………………………………………………………………… 7 Information Checkpoint …………………………………………………………………………. 9 Key Terms ………………………………………………………………………………………………. 9 Discussion Questions ………………………………………………………………………………. 9 Notes …………………………………………………………………………………………………….. 9
Chapter 2 Four Things the Healthcare Manager Needs to Know About Financial Management Systems ………………………………………………………11
What Does the Manager Need to Know? …………………………………………………. 11 How the System Works in Health Care ……………………………………………………. 11 The Information Flow …………………………………………………………………………… 12 Basic System Elements…………………………………………………………………………… 14 The Annual Management Cycle …………………………………………………………….. 18 Communicating Financial Information to Others …………………………………… 20 Information Checkpoint ……………………………………………………………………….. 20 Key Terms …………………………………………………………………………………………….. 20 Discussion Questions …………………………………………………………………………….. 20 Notes …………………………………………………………………………………………………… 21
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Chapter 3 The Digital Age: Changing the Landscape of Healthcare Finance ………………………………………………………………………………………23
High-Tech and High-Touch Approaches ………………………………………………… 23 Patient Engagement ……………………………………………………………………………… 23 Social Media …………………………………………………………………………………………. 24 Resource Allocation ……………………………………………………………………………… 25 Changes in Health Information Technology …………………………………………… 25 Population Health and the Digital Age: Crossing at
the Intersection ………………………………………………………………………………… 26 Additional Trends and Complexities: Other Delivery Systems ………………….. 27 Summary …………………………………………………………………………………………….. 27 Information Checkpoint ……………………………………………………………………….. 28 Key Terms …………………………………………………………………………………………….. 28 Other Acronymns …………………………………………………………………………………. 28 Discussion Questions …………………………………………………………………………….. 28 Notes …………………………………………………………………………………………………… 28
PART II—RECORD FINANCIAL OPERATIONS ………………………………………………………..31
Chapter 4 Assets, Liabilities, and Net Worth………………………………………………………..33 Overview ……………………………………………………………………………………………… 33 What Are Examples of Assets? ……………………………………………………………….. 34 What Are Examples of Liabilities? ………………………………………………………….. 35 What Are the Different Forms of Net Worth? ………………………………………….. 35 Information Checkpoint ……………………………………………………………………….. 36 Key Terms …………………………………………………………………………………………….. 36 Discussion Questions …………………………………………………………………………….. 36
Chapter 5 Revenues (Inflow) ……………………………………………………………………………37 Overview ……………………………………………………………………………………………… 37 Receiving Revenue for Services ……………………………………………………………… 37 Sources of Healthcare Revenue ……………………………………………………………… 39 Grouping Revenue for Planning and Control …………………………………………. 42 Information Checkpoint ……………………………………………………………………….. 45 Key Terms …………………………………………………………………………………………….. 45 Discussion Questions …………………………………………………………………………….. 45 Notes …………………………………………………………………………………………………… 46
Chapter 6 Expenses (Outflow) ………………………………………………………………………….47 Overview ……………………………………………………………………………………………… 47 Disbursements for Services ……………………………………………………………………. 48 Grouping Expenses for Planning and Control ………………………………………… 48 Cost Reports as Influencers of Expense Formats ……………………………………… 52 Information Checkpoint ……………………………………………………………………….. 53 Key Terms …………………………………………………………………………………………….. 54 Discussion Questions …………………………………………………………………………….. 54 Notes …………………………………………………………………………………………………… 54
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Chapter 7 Cost Classifications ………………………………………………………………………….55 Distinction Between Direct and Indirect Costs ………………………………………… 55 Examples of Direct Cost and Indirect Cost ……………………………………………… 56 Responsibility Centers …………………………………………………………………………… 57 Distinction Between Product and Period Costs ……………………………………….. 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 and Break-Even Analysis ……………………………………………….65 Distinctions Among Fixed, Variable, and Semivariable 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 Inventory Methods ……………………………………………………………………………….. 83 Inventory Tracking ……………………………………………………………………………….. 84 Inventory Distribution Systems ………………………………………………………………. 86 Calculating Inventory Turnover …………………………………………………………….. 87 Overview: The Depreciation Concept …………………………………………………….. 88 Book Value of a Fixed Asset and the Reserve for Depreciation …………………. 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 Accelerated Book Depreciation Methods ……………………………………………….. 95
Chapter 10 Staffing: Methods, Operations, and Regulations ………………………………….103 Staffing Requirements ………………………………………………………………………… 103 FTEs for Annualizing Positions ……………………………………………………………. 103 Number of Employees Required to Fill a Position: Another Way to
Calculate FTEs ……………………………………………………………………………….. 106 Regulatory Requirements Regarding Staffing ……………………………………….. 111
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Summary ……………………………………………………………………………………………. 113 Information Checkpoint ……………………………………………………………………… 114 Key Terms …………………………………………………………………………………………… 114 Discussion Questions …………………………………………………………………………… 114 Notes …………………………………………………………………………………………………. 114
PART IV—REPORT AND MEASURE FINANCIAL RESULTS ……………………………………..117
Chapter 11 Reporting as a Tool ………………………………………………………………………..119 Understanding the Major Reports ……………………………………………………….. 119 Balance Sheet …………………………………………………………………………………….. 119 Statement of Revenue and Expense ……………………………………………………… 120 Statement of Changes in Fund Balance/Net Worth ………………………………. 122 Statement of Cash Flows ……………………………………………………………………… 123 Subsidiary Reports ………………………………………………………………………………. 124 Summary ……………………………………………………………………………………………. 125 Information Checkpoint ……………………………………………………………………… 125 Key Terms …………………………………………………………………………………………… 126 Discussion Questions …………………………………………………………………………… 126 Notes …………………………………………………………………………………………………. 126
Chapter 12 Financial and Operating Ratios as Performance Measures …………………………………………………………………………………..127
The Importance of Ratios ……………………………………………………………………. 127 Liquidity Ratios …………………………………………………………………………………… 129 Solvency Ratios …………………………………………………………………………………… 130 Profitability Ratios ………………………………………………………………………………. 132 Information Checkpoint ……………………………………………………………………… 134 Key Terms …………………………………………………………………………………………… 134 Discussion Questions …………………………………………………………………………… 134
Chapter 13 The Time Value of Money ……………………………………………………………….135 Purpose ……………………………………………………………………………………………… 135 Unadjusted Rate of Return ………………………………………………………………….. 135 Present-Value Analysis …………………………………………………………………………. 136 Internal Rate of Return ……………………………………………………………………….. 137 Payback Period …………………………………………………………………………………… 137 Evaluations …………………………………………………………………………………………. 138 Resources …………………………………………………………………………………………… 139 Information Checkpoint ……………………………………………………………………… 139 Key Terms …………………………………………………………………………………………… 139 Discussion Questions …………………………………………………………………………… 139 Note …………………………………………………………………………………………………… 140 Appendix 13-A Present-Value Table
(The Present Value of $1.00) …………………………………………………………… 141
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Appendix 13-B Compound Interest Table: Compound Interest of $1.00 (The Future Amount of $1.00) ……………………………………………. 143
Appendix 13-C Present Value of an Annuity of $1.00…………………………… 145
PART V—TOOLS TO REVIEW AND MANAGE COMPARATIVE DATA ……………………….147
Chapter 14 Trend Analysis, Common Sizing, and Forecasted Data …………………………149 Common Sizing ………………………………………………………………………………….. 149 Trend Analysis…………………………………………………………………………………….. 150 Analyzing Operating Data ……………………………………………………………………. 151 Importance of Forecasts ………………………………………………………………………. 152 Operating Revenue Forecasts ………………………………………………………………. 153 Staffing Forecasts ……………………………………………………………………………….. 156 Capacity Level Issues in Forecasting ……………………………………………………… 158 Summary ……………………………………………………………………………………………. 160 Information Checkpoint ……………………………………………………………………… 160 Key Terms …………………………………………………………………………………………… 160 Discussion Questions …………………………………………………………………………… 160 Notes …………………………………………………………………………………………………. 160
Chapter 15 Using Comparative Data ………………………………………………………………….161 Overview ……………………………………………………………………………………………. 161 Comparability Requirements ……………………………………………………………….. 161 A Manager’s View of Comparative Data ………………………………………………… 162 Uses of Comparative Data ……………………………………………………………………. 163 Making Data Comparable ……………………………………………………………………. 168 Constructing Charts to Show the Data ………………………………………………….. 171 Information Checkpoint ……………………………………………………………………… 173 Key Terms …………………………………………………………………………………………… 173 Discussion Questions …………………………………………………………………………… 174 Note …………………………………………………………………………………………………… 174
PART VI—CONSTRUCT AND EVALUATE BUDGETS ……………………………………………..175
Chapter 16 Operating Budgets …………………………………………………………………………177 Overview ……………………………………………………………………………………………. 177 Budget Viewpoints ………………………………………………………………………………. 178 Budget Basics: A Review ………………………………………………………………………. 179 Building an Operating Budget: Preparation …………………………………………. 180 Building an Operating Budget: Construction ……………………………………….. 181 Working with Static Budgets and Flexible Budgets ………………………………… 183 Budget Construction Summary ……………………………………………………………. 186 Budget Review ……………………………………………………………………………………. 186 Information Checkpoint ……………………………………………………………………… 187 Key Terms …………………………………………………………………………………………… 187
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Discussion Questions …………………………………………………………………………… 187 Notes …………………………………………………………………………………………………. 188 Appendix 16-A Creating a DRG Budget for Respiratory Care:
The Resource Consumption Approach …………………………………………….. 189 Background ……………………………………………………………………………………….. 189 A DRG Budget for Respiratory Care …………………………………………………….. 190 Notes …………………………………………………………………………………………………. 193 Appendix 16-B Reviewing a Comparative Operating Budget
Report ……………………………………………………………………………………………. 195 The Comparative Report to Review ………………………………………………………. 195 Checklist Questions and Answers for the Comparative Budget
Review ……………………………………………………………………………………………. 196
Chapter 17 Capital Expenditure Budgets ……………………………………………………………197 Overview ……………………………………………………………………………………………. 197 Creating the Capital Expenditure Budget …………………………………………….. 197 Budget Construction Tools ………………………………………………………………….. 198 Funding Requests ……………………………………………………………………………….. 200 Evaluating Capital Expenditure Proposals…………………………………………….. 202 Information Checkpoint ……………………………………………………………………… 203 Key Terms …………………………………………………………………………………………… 203 Discussion Questions …………………………………………………………………………… 204 Note …………………………………………………………………………………………………… 204 Appendix 17-A A Further Discussion of Capital Budgeting
Methods …………………………………………………………………………………………. 205 Assumptions ……………………………………………………………………………………….. 205 Payback Method …………………………………………………………………………………. 205 Unadjusted Rate of Return (AKA Accountant’s Rate of Return) …………….. 206 Net Present Value ……………………………………………………………………………….. 207 Internal Rate of Return ……………………………………………………………………….. 207
PART VII—TOOLS TO PLAN, MONITOR, AND CONTROL FINANCIAL STATUS ……..209
Chapter 18 Variance Analysis and Sensitivity Analysis ……………………………………………211 Variance Analysis Overview ………………………………………………………………….. 211 Three Types of Flexible Budget Variance ……………………………………………… 211 Two-Variance Analysis and Three-Variance Analysis Compared ………………. 212 Three Examples of Variance Analysis ……………………………………………………. 214 Summary ……………………………………………………………………………………………. 218 Sensitivity Analysis Overview ………………………………………………………………… 218 Sensitivity Analysis Tools ……………………………………………………………………… 218 Summary ……………………………………………………………………………………………. 222 Information Checkpoint ……………………………………………………………………… 222 Key Terms …………………………………………………………………………………………… 222 Discussion Questions …………………………………………………………………………… 222 Note …………………………………………………………………………………………………… 222
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Chapter 19 Estimates, Benchmarking, and Other Measurement Tools …………………….223 Estimates Overview ……………………………………………………………………………… 223 Common Uses of Estimates …………………………………………………………………. 223 Example: Estimating the Ending Pharmacy Inventory …………………………… 224 Example: Estimated Economic Impact of a New Specialty in a
Physician Practice …………………………………………………………………………… 225 Other Estimates ………………………………………………………………………………….. 226 Importance of a Variety of Performance Measures ………………………………… 226 Adjusted Performance Measures Over Time …………………………………………. 227 Benchmarking ……………………………………………………………………………………. 227 Economic Measures ……………………………………………………………………………. 229 Measurement Tools …………………………………………………………………………….. 229 Information Checkpoint ……………………………………………………………………… 231 Key Terms …………………………………………………………………………………………… 231 Discussion Questions …………………………………………………………………………… 232 Note …………………………………………………………………………………………………… 232
Chapter 20 Understanding the Impact of Data Analytics and Big Data …………………….233 Introduction ………………………………………………………………………………………. 233 Defining Data Analytics ……………………………………………………………………….. 233 Two Basic Approaches to Data Analytics ……………………………………………….. 235 Data Analytics and Healthcare Analytics Serve Many Purposes ……………….. 236 Data Mining ……………………………………………………………………………………….. 237 Impacts of Healthcare Analytics ………………………………………………………….. 238 Challenges for Healthcare Analytics …………………………………………………….. 239 Information Checkpoint ……………………………………………………………………… 239 Key Terms …………………………………………………………………………………………… 239 Discussion Questions …………………………………………………………………………… 240 Notes …………………………………………………………………………………………………. 240
PART VIII—FINANCIAL TERMS, COSTS, AND CHOICES ……………………………………….243
Chapter 21 Understanding Investment and Statistical Terms Used in Finance ……………..245 Investment Overview …………………………………………………………………………… 245 Cash Equivalents …………………………………………………………………………………. 245 Governmental Guarantor: The FDIC ……………………………………………………. 246 Long-Term Investments in Bonds…………………………………………………………. 246 Investments in Stocks ………………………………………………………………………….. 248 Privately Held Companies Versus Public Companies ……………………………… 248 Investment Indicators …………………………………………………………………………. 249 Statistics Overview ………………………………………………………………………………. 250 Commonly Used Statistical and Other Mathematical Terms …………………… 251 Information Checkpoint ……………………………………………………………………… 254 Key Terms …………………………………………………………………………………………… 254 Discussion Questions …………………………………………………………………………… 255 Notes …………………………………………………………………………………………………. 255
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Chapter 22 Business Loans and Financing Costs ………………………………………………….257 Overview of Capital Structure ………………………………………………………………. 257 Sources of Capital ……………………………………………………………………………….. 257 The Costs of Financing ……………………………………………………………………….. 258 Management Considerations About Real Estate Financing …………………….. 259 Management Decisions About Business Loans ………………………………………. 260 Information Checkpoint ……………………………………………………………………… 260 Key Terms …………………………………………………………………………………………… 260 Discussion Questions …………………………………………………………………………… 260 Appendix 22-A Sample Amortization Schedule ……………………………………. 261
Chapter 23 Choices: Owning Versus Leasing Equipment ……………………………………….263 Purchasing Equipment ……………………………………………………………………….. 263 Leasing Equipment …………………………………………………………………………….. 263 Buy-or-Lease Management Decisions ……………………………………………………. 264 Accounting Principles Regarding Leases ………………………………………………. 268 Information Checkpoint ……………………………………………………………………… 269 Key Terms …………………………………………………………………………………………… 269 Discussion Questions …………………………………………………………………………… 269 Note …………………………………………………………………………………………………… 269
PART IX—STRATEGIC PLANNING: A POWERFUL TOOL ………………………………………271
Chapter 24 Strategic Planning and the Healthcare Financial Manager ……………………..273 Major Components of the
Strategic Plan: Overview ………………………………………………………………….. 273 Introduction ………………………………………………………………………………………. 273 Six Major Components ……………………………………………………………………….. 273 Varied Approaches to Strategic Planning ……………………………………………… 275 Examples of Mission, Vision, and Value Statements ……………………………….. 276 Recognizing a Special Status or Focus Within the Statements ………………… 276 Financial Emphasis Within the Statements ……………………………………………. 278 Relaying the Message ………………………………………………………………………….. 279 The Strategic Planning Cycle and Its Process Flow ………………………………… 281 Process Flow for Creating Goals, Objectives,
and Action Plans …………………………………………………………………………….. 281 Process Flow for Creating Action Plans and Their
Performance Measures ……………………………………………………………………. 282 The Planning Cycle Over Time ……………………………………………………………. 283 Managers’ Responsibilities ………………………………………………………………….. 284 Federal Governmental Agencies Must Prepare Strategic Plans ………………. 285 Why are Federal Planning Requirements Important to Us? ……………………. 285 Introduction: Requirements, Plans, and Performance …………………………… 285 An Example: The VA Office of Information Technology IT Strategic
Planning Cycle ……………………………………………………………………………….. 288 Introduction ………………………………………………………………………………………. 288
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The VA Office of Information Technology IT Strategic Planning Cycle: An Example …………………………………………………………………………………… 288
The VA Planning Cycle’s Process Flow ………………………………………………….. 288 Planning Cycle Definitions for this Example …………………………………………. 290 Management Responsibilities Within the Planning Cycle ………………………. 291 Tools for Strategic Planning: Situational Analysis
and Financial Projections ………………………………………………………………… 292 Situational Analysis ……………………………………………………………………………… 293 Financial Projections for Strategic Planning …………………………………………. 294 Case Study: Strategic Financial Planning in Long-Term Care …………………. 296 Appendix 24-A: Sample SWOT Worksheets and Question Guides …………… 296 Information Checkpoint ……………………………………………………………………… 296 Key Terms …………………………………………………………………………………………… 297 Discussion Questions …………………………………………………………………………… 297 Notes …………………………………………………………………………………………………. 297 Appendix 24-A Sample SWOT Worksheets and Question Guides …………. 299 Introduction ………………………………………………………………………………………. 299 Scoring Summary Sheet for EHR Adoption and Implementation …………… 299 Three Internal Worksheets for Strengths and Weaknesses ……………………… 299 Internal Worksheet for EHR Information
Technology (IT) Staff …………………………………………………………………….. 300 Internal Worksheet for Other Staff Involved in EHR ……………………………… 302 Internal Worksheet for Technology and Capital Funding ………………………. 302 External Worksheet for Opportunities and Threats……………………………….. 304
Chapter 25 Putting It All Together: Creating a Business Plan That Is Strategic ………….309 Overview ……………………………………………………………………………………………. 309 Elements of the Business Plan ……………………………………………………………… 309 Preparing to Construct the Business Plan ……………………………………………… 310 The Service or Equipment Description ………………………………………………… 310 The Organization Segment …………………………………………………………………. 310 The Marketing Segment ……………………………………………………………………… 311 The Financial Analysis Segment …………………………………………………………… 311 The “Knowledgeable Reader” Approach to Your Business Plan ………………. 313 The Executive Summary ……………………………………………………………………… 314 Assembling the Business Plan ………………………………………………………………. 314 Presenting the Business Plan ……………………………………………………………….. 314 Strategic Aspects of Your Business Plan…………………………………………………. 315 Information Checkpoint ……………………………………………………………………… 315 Key Terms …………………………………………………………………………………………… 316 Discussion Questions …………………………………………………………………………… 316
Chapter 26 Understanding Strategic Relationships: Health Delivery Systems, Finance, and Reimbursement ………………………………………………………317
Introduction ………………………………………………………………………………………. 317 Defining Health Delivery Systems ……………………………………………………….. 317
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Defining the Area of Healthcare Finance ……………………………………………… 319 Defining the Area of Healthcare Reimbursement …………………………………. 320 Strategic Relationship Between the Healthcare Delivery System and
Finance ………………………………………………………………………………………….. 321 The Strategic Relationship Between Finance and Reimbursement …………. 323 Third-Party Reimbursement and Government Expenditures: Another
Strategic Relationship ……………………………………………………………………… 325 A New Focus on the Relationship Between Finance and Healthcare
Delivery………………………………………………………………………………………….. 327 Reimbursement and Physicians: An Ongoing Strategic Challenge ………….. 327 Information Checkpoint ……………………………………………………………………… 328 Key Terms …………………………………………………………………………………………… 329 Other Acronyms …………………………………………………………………………………. 329 Discussion Questions …………………………………………………………………………… 329 Notes …………………………………………………………………………………………………. 330
PART X—INFORMATION TECHNOLOGY AS A FINANCIAL AND STRATEGIC TOOL …..331
Chapter 27 Understanding Value-Based Health Care and Its Financial and Digital Outcomes………………………………………………………………………………….333
The Value-Based Concept: Introduction ………………………………………………. 333 Value-Based Progress in the Private Sector ……………………………………………. 334 Value-Based Progress in the Public Sector …………………………………………….. 335 Value-Based Education Efforts ……………………………………………………………… 337 Value-Based Legislative Reform ……………………………………………………………. 338 Quality Measurement: The Concept …………………………………………………….. 341 Value-Based Public Reporting in the Private Sector ……………………………….. 343 Value-Based Public Reporting in the Public Sector ……………………………….. 344 Financial Outcomes ……………………………………………………………………………. 346 Digital Outcomes ………………………………………………………………………………… 347 Value-Based Strategic Planning by the Private Sector …………………………….. 349 Value-Based Strategic Planning by the Public Sector ……………………………… 350 Conclusion: The Future ………………………………………………………………………. 354 Information Checkpoint ……………………………………………………………………… 354 Key Terms …………………………………………………………………………………………… 355 Other Acronyms …………………………………………………………………………………. 355 Discussion Questions …………………………………………………………………………… 355 Notes …………………………………………………………………………………………………. 355
Chapter 28 New Payment Methods and Measures: MIPS and APMs for Eligible Professionals …………………………………….361
Introduction ………………………………………………………………………………………. 361 Legislative Reform and MACRA: An Overview ………………………………………. 362 Payment Choices: MIPS Versus APMs …………………………………………………… 363 MIPS Incentives ………………………………………………………………………………….. 363 How Are MIPS Physicians and Other Eligible Professionals Paid? …………… 366
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MIPS Composite Performance Score ……………………………………………………. 367 MIPS Performance Categories …………………………………………………………….. 368 How MIPS Scoring Works ……………………………………………………………………. 370 MIPS Required Reporting Affects Payment ………………………………………….. 373 Data Submission …………………………………………………………………………………. 374 APM Incentives—(Choice #2) ……………………………………………………………… 375 Eligible Professionals Within APMs ………………………………………………………. 376 How Are Advanced APM EPs Paid? ………………………………………………………. 378 How Significant Participation Works…………………………………………………….. 380 Advanced APM Participation Standards ………………………………………………. 380 Scoring Standard for APMs ………………………………………………………………….. 381 Creating Physician-Focused Payment Models (PFPMS) …………………………. 382 Building the Measurement Development Plan for MIPS and APMs:
Developing New Quality Measures …………………………………………………… 382 Timelines for Developing Quality Measures ………………………………………….. 383 A Framework for MACRA Quality Measurement …………………………………… 384 Conclusion: Benefits and Costs of the Quality Payment Program ……………. 388 Three Incentive Programs as They Existed Before MIPS: A Reference ……. 389 Alternative Payment Models: A Reference …………………………………………….. 390 Information Checkpoint ……………………………………………………………………… 392 Key Terms …………………………………………………………………………………………… 392 Discussion Questions …………………………………………………………………………… 393 Notes …………………………………………………………………………………………………. 393 Appendix 28-A Meaningful Use: Modified and Streamlined with
a New Name …………………………………………………………………………………… 397 How Meaningful Use Has Evolved ……………………………………………………….. 397 Changes to Allowable MU Stages …………………………………………………………. 398 Changes to Meaningful Use Requirements ………………………………………….. 400 Conclusion: Advancing Care Information Becomes
the New Meaningful Use …………………………………………………………………. 401 Acronyms …………………………………………………………………………………………… 403 Notes …………………………………………………………………………………………………. 403
Chapter 29 Standardizing Measures and Payment in Post-Acute Care: New Requirements ……………………………………………………………………………405
The Impact Act: New Directions for Post-Acute Care …………………………….. 405 Why Focus Attention on Post-Acute Care? ……………………………………………. 407 A New Alternative Payment Model for Four Care Settings ……………………… 408 Standardized Data and Interoperability: The Keys to PAC Reform ………….. 410 Standardizing Assessment and Measure Domains for PAC Providers ………. 411 Electronic Reporting Timelines for PAC Providers ………………………………… 413 Public Reporting: Impact Act Requirements …………………………………………. 414 Impact Act Benefits and Costs: A Summary …………………………………………… 415 Meeting Strategic Goals ………………………………………………………………………. 415 Conclusion: Innovation in the Digital Age ……………………………………………. 416 The Future: Change Is Inevitable …………………………………………………………. 418
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Information Checkpoint ……………………………………………………………………… 418 Key Terms …………………………………………………………………………………………… 419 Other Acronyms …………………………………………………………………………………. 419 Discussion Questions …………………………………………………………………………… 419 Notes …………………………………………………………………………………………………. 419
Chapter 30 ICD-10 Implementation Continues: Finance and Strategic Challenges for the Manager …………………………………………………………………………421
ICD-10 E-Records Overview and Impact ……………………………………………….. 421 Overview of the ICD-10 Coding System ………………………………………………… 421 ICD-10-CM and ICD-10-PCS Codes ………………………………………………………. 421 E-Record Standards and the ICD-10 Transition……………………………………… 422 ICD-10 Benefits and Costs ……………………………………………………………………. 423 ICD-10 Implementation: Systems Affected and Technology Issues ………….. 425 Understand Technology Issues and Problems ………………………………………. 426 An Example: Comparison of Old and New Angioplasty Codes ……………….. 428 ICD-10 Implementation: Training and Lost Productivity Costs ………………. 428 Who Gets Trained on ICD-10? ……………………………………………………………… 428 Costs of Training ………………………………………………………………………………… 429 Costs of Lost Productivity ……………………………………………………………………. 430 Introduction: About ICD-10 Key Performance Indicators ……………………… 430 Key Performance Indicators to Assess ICD-10 Progress ………………………….. 431 Using KPIs to Track ICD-10 Implementation Progress ………………………….. 432 Reviewing KPI Results …………………………………………………………………………. 434 Creating Action Plans to Deal with Problems ………………………………………… 435 Building Specific Action Plans to Correct Deficiencies…………………………… 435 ICD-10 Implementation: Situational Analysis ………………………………………… 437 Implementation Planning Recommendations ………………………………………. 437 Situational Analysis Recommendations ………………………………………………… 438 Commencing an Information Technology SWOT Matrix for ICD-10 ……… 440 Summary ……………………………………………………………………………………………. 441 Information Checkpoint ……………………………………………………………………… 441 Key Terms …………………………………………………………………………………………… 441 Discussion Questions …………………………………………………………………………… 442 Notes …………………………………………………………………………………………………. 442 Appendix 30-A ICD-10 Conversion Costs for a Midwestern
Community Hospital……………………………………………………………………….. 445 Authors’ Note …………………………………………………………………………………….. 445 Introduction ………………………………………………………………………………………. 445 The Scenario ………………………………………………………………………………………. 445 Note …………………………………………………………………………………………………… 446
PART XI—CASE STUDIES …………………………………………………………………………………….447
Chapter 31 Case Study: The Doctor’s Dilemma …………………………………………………..449 The Offer: “Sell Your Practice to Us” …………………………………………………….. 449
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Seeking to Understand Healthcare Finance Reform ……………………………… 449 Researching Acquisition Viewpoints and Industry Trends ……………………… 450 Considering Other Physicians’ Reactions ……………………………………………… 451 What Will Dr. Matthews Decide? …………………………………………………………… 451 Notes …………………………………………………………………………………………………. 451
Chapter 32 Case Study: Strategic Financial Planning in Long-Term Care …………………453 Background ……………………………………………………………………………………….. 453 Framework of the Board’s Mandate ……………………………………………………… 453 Industry Profile …………………………………………………………………………………… 454 Feasibility Determination …………………………………………………………………….. 454 Notes …………………………………………………………………………………………………. 457
Chapter 33 Case Study: Metropolis Health System ……………………………………………….459 Background ……………………………………………………………………………………….. 459 MHS Case Study …………………………………………………………………………………. 461 Appendix 33-A Metropolis Health System’s Financial Statements
and Excerpts from Notes …………………………………………………………………. 471 Excerpts from Metropolis Health System Notes to Financial
Statements …………………………………………………………………………………….. 477 Appendix 33-B Comparative Analysis Using Financial Ratios and
Benchmarking Helps Turn Around a Hospital in the Metropolis Health System ………………………………………………………………………………………. 483
Appendix 33-C Proposal to Add a Retail Pharmacy to a Hospital in the Metropolis Health System …………………… 489
PART XII—MINI-CASE STUDIES …………………………………………………………………………..495
Chapter 34 Mini-Case Study 1: The Economic Significance of Resource Misallocation: Client Flow Through the Women, Infants, and Children Public Health Program……………………………………………..497
Confronting the Operational Problem …………………………………………………. 497 The Environment ……………………………………………………………………………….. 497 The Peak-Load Problem ……………………………………………………………………… 498 Method ………………………………………………………………………………………………. 499 Results ……………………………………………………………………………………………….. 499
Chapter 35 Mini-Case Study 2: Technology in Health Care: Automating Admission Processes …………………………………………………………………..503
Assess Admissions Process ……………………………………………………………………. 503 Areas to Automate ………………………………………………………………………………. 504 Fax and Document Management …………………………………………………………. 504 Communication Is Important ………………………………………………………………. 504 Referral Tracking and Approval …………………………………………………………… 505 Analyzing Referral Activity ………………………………………………………………….. 505 Hours Saved ……………………………………………………………………………………….. 505
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Appendix A Checklists ……………………………………………………………………………………..507
Glossary ………………………………………………………………………………………………………………511
Examples and Exercises, Supplemental Materials, and Solutions …………………………………..525
Examples and Exercises ………………………………………………………………………………………… 525
Supplementary Materials: The Mechanics of Percentage Computations …………………… 578
Solutions to Practice Exercises ………………………………………………………………………………. 578
Index ………………………………………………………………………………………………………………….591
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New to This Edition
The Fifth Edition continues to provide practical information, with examples taken from real life in the healthcare finance world. For example, we have added the following:
NEW MATERIAL IN THE 5TH EDITION:
• Chapter 3 “The Digital Age: Changing the Landscape of Healthcare Finance”—This new chapter is about understanding the impact of data analytics and big data, along with other important trends in the chang- ing landscape of healthcare finance. It is important to recognize that digital advancements in health care are the drivers that enable innovation.
• Chapter 26 “Understanding Strategic Relationships: Health Delivery Systems, Finance and Reimbursement”—This new chapter focuses upon describing the strategic relationships between and 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 organization’s structure.
• Chapter 27 “Understanding Value-Based Health Care and Its Financial and Digital Outcomes”—Value- based performance, the subject of this new chapter, is particularly important because it is the key to both improving patient care and reforming payment systems. Healthcare organizations should define what value means and make sure that definition is shared across the entire entity.
• Chapter 28 “New Payment Methods and Measures: MIPS and APMs for Eligible Professionals”—This new chapter highlights significant legislation and regulations that change payment methods and performance measures for physicians and other eligible professionals. The new payment method for physicians hinges upon proper reporting of new performance measures. The new system is a true reform, as it replaces a physician payment system that has been in effect for decades.
• Appendix 28-A “Meaningful Use: Modified and Streamlined with a New Name”—This new appendix de- scribes the evolution of meaningful use before and after its transition into the new physician performance measures that are described in Chapter 28.
• Chapter 29 “Standardizing Measures and Payment in Post-Acute Care: New Requirements”—This new 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. Models for a patient-centered payment system that cuts across all four care settings are also being created.
• Chapter 30 “ICD-10 Implementation Continues: Finance and Strategic Challenges for the Manager”—This 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 organization’s ICD-10 implementation progress.
Other new material in this edition includes the following:
• Chapter 9 “Understanding Inventory and Depreciation Concepts”—A new section about drug distribu- tion systems in use in hospitals has been added to this chapter.
• Chapter 10 “Staffing: Methods, Operations, and Regulation”—A new section has been added describing legislation that requires reporting “verifiable and auditable” payroll information for the “Nursing Com- pare” website, along with information about existing Certificate of Need regulations.
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• Appendix 16-A “Creating A DRG Budget for Respiratory Care: The Resource Consumption Approach”—This new appendix sets out a step-by-step DRG budget methodology.
• Appendix 16-B “Reviewing a Comparative Operating Budget Report”—This new appendix describes the review of a section from an actual operating budget report.
• Chapter 21 “Understanding Investment and Statistical Terms Used in Finance”—This chapter was origi- nally only about investment terms; it now has a new section about understanding statistical terms.
• Chapter 31 “Case Study: The Doctor’s Dilemma”—This new case study is about a physician deciding whether or not to sell his practice to a health delivery system.
MATERIAL OMITTED FROM THIS EDITION
• Two Fourth Edition chapters and a Fourth Edition appendix have been omitted because they are becoming outdated. This includes the following: Chapter 24 “Information Technology and EHR: Adoption Require- ments, Initiatives, and Management Decisions” has been replaced with the new value-based chapter.
• Appendix 24-A Accordingly, the e-Prescribing (eRx) appendix has also been omitted because the incen- tive program is ending.
• Chapter 25 “Electronic Health Records Framework: Incentives, Standards, Measures, and Meaningful Use” has been omitted because the incentives are ending.
• Relevant additions and deletions have been made to the “Examples and Exercises” section.
To summarize: A fundamental theme in the Fifth Edition is that healthcare financing is embracing the digital 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 effectively engage the patient. The upshot: Everything is connected.
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Preface
Our world of work is divided into three parts: the healthcare consultant, the instructor, and the writer. Over the years, we have taught managers in seminars, academic settings, and corporate conference rooms. Most of the managers were mid-career adults, working in all types of healthcare disciplines. We taught them and they taught us. One of the things they taught us was this: A nonfinancial manager pushed into dealing with the world of finance often feels a dislocation and a change of perspective, and that experience can be both difficult and exciting. We have listened to their questions and concerns as these managers grapple with this new world. This book is the result of their experiences, and ours.
The book is designed for use by a manager (or future manager) who does not have an educational back- ground in financial management. It has long been our philosophy that if you can truly understand how a thing works—whatever it is—then you own it. This book is created around that philosophy. In other words, we intend to make financial management transparent by showing how it works and how a manager can use it.
USING THE BOOK
All our examples are drawn from the healthcare industry. Thus users will find examples and exercises covering many types of healthcare settings and providers, including hospitals, clinics, physician practices, long-term care facilities, and home health agencies.
Standard Elements
Each chapter within these parts contains the following four elements:
• “Progress Notes” set out learning objectives at the beginning of each chapter. • An “Information Checkpoint” segment at the end of each chapter tells the user three things: information
needed, where this information can be obtained, and how this information can be used. • A “Key Terms” section follows the “Information Checkpoint.” Every Key Term is defined in the Glossary;
it is also bold faced the first time it appears in the text. • The “Discussion Questions” segment inquires about practical uses of chapter material and encourages
responses based upon experience.
Structure and Topics
The book is structured in 12 parts, as follows.
Part I: Healthcare Finance Overview [Three chapters; one is new] Part II: Record Financial Operations [Four chapters] Part III: Tools To Analyze and Understand Financial Operations [Three chapters plus appendix; new
