FASB and GAAP

Use of FASB is needed because of its importance and influence in the improvement of financial reporting and accounting practices for the purpose of regulation and standards in financial accounting.  FASB issues statements of financial accounting standards that represent authoritative expressions of generally accepted accounting principles.  It is because financial accounting as represented by the numbers does get complicated that Generally Accepted Accounting Principles (GAAP) are established so that there is uniformity about how accounting is organized, operationalized, and regulated.  Audits, both internal and external, provide support for how well the organization adheres to accounting principles and insight into the benefits of improvement.  Keep in mind that in today’s business world in general, and in the healthcare industry in particularly, the financial staff must be able to provide analyses to support contract negotiations, partnership or joint venture decisions, and, in summary, help lead the organization towards future visions.

How has your organization been able to mitigate uncompensated care spending/losses, while maintaing (or improving) the quality of patient care?  What changes or interventions have been useful in reducing bad debt and ensuring that charity care is offset by State support (to the extent possible) and provided in the most efficient manner possible?  Has your organization been able to establish key metrics for assessing the performance of its revenue cycle?  Are your organization's documentation, charge capture, billing, and collection processes supporting optimal revenue cycle results; if so, how has your organization succeeded in this regard?  How has your organization been able to reduce the number of patients in the ED that do not require emergent care or the number of inpatients that do not require inpatient care?  Has your organization fully leveraged its hard assests (e.g., beds, ORs, SPAs, etc) by recruiting physicians and building programs, in part, intended to shift the organization's mix of patients toward higher margin cases to offset programmatic loss leaders and uncompensated care, or have financial considerations been less of an influence on program building decisions?  Thoughts on any or all of these questions would be greatly appreciated!  If you're not in the delivery sector, but have a perspective on this issue, please add your comments as well!  Thanks.

With the financial market crisis,  many healthcare organizations have had to put implement a capital freeze. This occurs to maintain an A bond rating, it was necessary to increase cash on hand, decrease days in AR and stop as many capital improvements until the economy corrects itself.

How does the time value of money influence financial decisions made by your organization?

 

Evans (2006) explained that financial management recognizes the time value of money because:

 

1. Inflation reduces values over time; i.e. $1,000 today will have less value five years from now due to rising prices (inflation).
2. Uncertainty in the future; i.e. we think we will receive $1,000 five years from now, but a lot can happen over the next five years.
3. Opportunity Costs of money; $1,000 today is worth more to us than $1,000 five years from now because we can invest $1,000 today and earn a return.(Discounted Cash Flows section, ¶ 3)

 

What are the purposes of capital budgeting?

 

Capital budgeting is the course of action by which an organization chooses which long-term investments to pursue. Prospective long-term ventures are projected to produce cash flows over numerous years. Depending on the cash flows generated by the project and its cost will determine whether the capital budgeting project is accepted or rejected. Purposes:

 

1.      To identify, assess, and plan for the capital needs of the organization.

2.      To provide a basis for determining alternative sources of funding for capital needs.

3.      To provide a basis for the assessment of the impact of new capital expenditures on the operating budget.

4.      To provide a system for accounting for the capital resources of the institution.

 

What factors influence a capital budgeting analysis, and how do they influence it?

 

Cash Flows

           

The information needed to calculate an investment prospect is the anticipated cash flows related to the investment. Many projects have a hefty preliminary cash outflow as plant and equipment, and start-up costs are incurred. In the years that follow, there will be receipt of cash from sale of the service, and there will be cash outflow related to the expenses of services provided. The variation between each year’s cash receipts and cash expenditures is the net cash flow for the year.

 

Time Value of Money

           

The time value of money is the idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received (Venture Line, 2004). Systsma (2004) provides an easy to understand example of the time value of money:

Consider putting money into a bank that pays a 10 percent return ‘compounded annually.’ The term compounded annually means that the bank calculates interest at the end of each year and adds the interest onto the initial amount deposited. In future years, interest is earned not only on the initial deposit, but also on interest earned in prior years. If we put $400 in the bank at 10 percent compounded annually, we would earn $40 of interest in the first year. At the beginning of the second year, we would have $440. The interest on the $440 would be $44. At the beginning of the third year, we would have $484 (the $400 initial deposit plus the $40 interest from the first year, plus the $44 interest from the second year). The interest for the third year would be $48.40. We would have a total of $532.40 at the end of three years. (p. 5)

 

Payback Period / NPV / IRR

Payback Period

           

The payback period signifies the sum of time that it takes for a capital budgeting project to recuperate its primary expenditures. All independent projects with a payback period less than a specified number of years should be accepted under the capital budgeting decision rule.

 

Net Present Value of Money (NPV)

           

The NPV technique of analysis establishes whether a project earns more or less than a stated desired rate of return. Projects with an optimistic NPV are likely to increase the value of the organization. Mathis (2004) proclaimed, “Thus, the NPV decision rule specifies that all independent projects with a positive NPV should be accepted” (p. 3).

 

Internal Rate of Return (IRR)

 

Mathis (2004) declared, “The IRR of a capital budgeting project is the discount rate at which the NPV of a project equals zero. The IRR decision rule indicates that all independent projects with an IRR larger than the cost of capital should be accepted” (p. 1). 

 

Risk

 

Risk is another factor that influences a capital budgeting analysis. For example, some factors to consider include (a) compensating for different levels of risks between projects, (b) recognizing risks that are specific to foreign projects, and (c) making adjustments to capital budgeting analysis by looking at the actual results (Evans, 2006).

 

How is capital budgeting used in your organization?

 

Based in Phoenix, Banner Health is one of the largest, nonprofit health care systems in the country. Banner has 20+ facilities that offer an array of services including hospital care, home care, hospice care, nursing registries, surgery centers, laboratories, rehabilitation services. These facilities are located in seven states - Alaska, Arizona, California, Colorado, Nebraska, Nevada, and Wyoming. Banner employs nearly 25,000 employees, making it one of the country's largest employers, as well. The company's Arizona Region, alone, employs nearly 17,000 people. The company has annual revenue of about $2.6 billion and assets totaling $3.1 billion. Banner’s preferred vehicle for financing via long-term debt is to issue tax-exempt revenue bonds.

 

Long Term Investments/Projects

           

Good Samaritan Regional Medical Center. Good Samaritan is a selection decision type investment made by Banner Health. The hospital is located in Phoenix, AZ. The expansion of the facility will add 117 new beds, surgical capacity, a new ambulatory services building, and a new multi-story parking garage at the cost of $90 million (Kohn and Henderson, 2003, ¶ 4).

           

Banner Estrella Medical Center. Banner Estrella is another selection type investment made by Banner Health. The facility was constructed on 50 acres in west Phoenix. This new 164-bed hospital comes with a price tag of $155 million (Kohn and Henderson, 2003, ¶ 4).

           

Mckee Medical Center. McKee, another selection type investment, is located in Loveland, CO. McKee is a 145-bed facility that specializes in neurosurgery, cardiac, and trauma care. Persons (2004) proclaims, “The $40 million expansion will add a children’s cancer center. The facility will provide health care to children in low-income families that cannot afford health care” (p 2).

           

To fund these projects, Banner Health successfully sold $325 million of hospital revenue bonds. Persons (2004) asserts, “The variable rate bonds, insured by Ambac, were sold through UBS Paine Webber, Inc., ($81,250,000 Auction Rate Series 2202A), Salomon Smith Barney ($81,250,000 Auction Rate series 2002B), and Salomon Smith Barney ($162,500,000 Non-Putable Remarketed Series 2002C)” (¶ 8).

 

 

Evans, M. (2006). Capital budgeting analysis. Retrieved September 14, 2009, from Bell Globemedia Publishing Inc. website: https://secure.globeadvisor.com/education/gigcourses/article.html?/education/gigcourses/exinfm/course03.html

 

Kohn, C., & Henderson, C. (2003, February 10) Banner health systems $325 million bond sale to pay for expansion. Managed Care Weekly Digest, 14.

 

Mathis, R. (2004, February 19). Capital budgeting. Corporate Finance Live, 1-6.

 

Persons, D. (2004) Larimer county and windsor’s best in the business. Coloradoan Online, 1-3.

Systsma, S. (2004, February 19). Capital budgeting and cash flow. Financial Management, 1-13.

 

Venture Line (2004, March 3). Where everyone has an MBA. Retrieved September 14, 2009, from http://www.ventureline.com/default.asp

Which of the following is not a step in the capital budgeting process?
a. Identify and prioritize all of the requests
b. Projecting bad debt for the year
c. Project cash flows
d. Perform financial analysis

Managerial Accounting focuses primarily on all of the following except:
a. Routine budgeting processes
b. Allocation of bonuses
c. Historical Events
d. Needs of managers

 

Which method of payment provides the least incentive for the healthcare organization to provide only what is medically appropriate?
a. Per Diem
b. Per Diagnosis
c. Capitation
d. Charges

The capital budget:
a. Is completed prior to the operating budget
b. Is completed after the operating budget
c. Is completed simultaneously with the
operating budget
d. Is part of the strategic plan and therefore
completed every 5 years.

“What’s the use of running if you are not on the right road?” This is how the attached article, “Strategic Decision Making: It’s Time for Healthcare Organizations to Get Serious”, by David Young, begins. Hitting on many of the points reviewed in the assigned readings about strategic planning, the particular component that I feel was not covered in our literature, and I want to focus on, is Trade-Offs.

 

Within the article, Young points out that a high-quality strategy requires the organization to decide what it does not want to be, in addition to what it intends to be, involving having to make trade-offs. According to Young, most Healthcare organizations have not made trade-offs, and instead try to be all things to all people.  He also emphasizes that to be successful in today’s environment, healthcare providers need to determine which services they want to provide, for which types of patients, and in which areas. They then should eliminate programs that do not fit. Young also points out the importance of not being held captive by the medical staff in making trade-off decisions.

 

While pointing out increased difficulties, Young fails to focus on the inherent challenges for small non-profit hospitals to make trade-offs in strategy formulation. Young alludes to non-profits using their community service missions as a crutch; however, it is a delicate balancing act for these facilities to weigh the performance of services provided with the needs/expectations of the community being served. Cutting services is a last-resort for most community hospitals, and one that is not made lightly. However, not making these strategic trade-offs will ultimately lead to a non-profit’s demise.  My organization has made these mistakes, but it is easier to theorize about making strategic trade-offs than it is to have a narrow strategic focus in a community that expects all of its needs to be met.

 

http://www.redorbit.com/news/health/306646/strategic_decision_making_its_time_for_healthcare_organizations_to_get/index.html?source=r_health

How is hospital revenue distributed internally when paid on a DRG basis?  A question posed to me recently by our MOR:  “We saw an extra 220 cases over budget last year, how much additional revenue did this generate to offset the extra cost of adding 220 cases”   It is very easy to calculate the cost of performing 220 cases but it is challenging to determine how much revenue to allocate back to the MOR.

What is the best way for hospitals to predict near future cash flow?  Given the many variables on a individual claim such as payer, physician, services performed, and payment methodology (DRG) how does one predict with accuracy when the net revenue from a particular claim will be received?  Using gross metrics such as days in AR or overall collection rate are not specific enough if you want to predict performance in detail (e.g. performance of a service line, or a physician).

Budgeting is critical in driving the strategic plan, but it is sometimes necessary to derail the budget if immediate unforseen capital expenditure requirements occur that are necessary to position the facility for survival within its own market, i.e. some new state of the art piece of equipment that competitors have.  It is now part of our strategic plan to have a mechanism in place to survey future technology and the potential impact that it might have on our economic health.

      Oestmann (2005) pointed out, “The government provides healthcare for the indigent, elderly, military, and veterans. This is over 50% of the population cared for by governmental programs. Another 30% pay for healthcare out of their pockets (insurance premiums and co-pays). And, the remaining 20% are uninsured” (WK 5 DQ #1). These methods of healthcare delivery are a combination of private (market-place competition) and public (government regulation) models.
 

Private Model (Market Place Competition)
 

The private model of delivering healthcare occurs when the government channels some of its responsibilities to the private sector. This occurs by switching the funding of healthcare from public healthcare models and towards employers, patients, and/or their private insurance companies. “Privatizing the delivery of healthcare implies greater reliance on individuals and institutions outside the government for the production and provision of healthcare services” (Madore, 2003, The Issue of Privatization section, ¶ 2). 

 

       Private and employer-purchased health insurance are other examples of a private model healthcare delivery system. Managed care organizations (MCOs) and health savings accounts (HSA), are other examples of the United States private model of healthcare delivery. It is believed that the competition among the various private models will keep health costs down, provide better quality of care, and improve accessibility to healthcare services.

Managed Care Organizations (MCOs)

 Managed Care Organizations (MCOs) contain healthcare costs by imposing regulatory requirements and offering incentives that encourage doctors to choose less expensive alternatives and avoid unnecessary tests or procedures. Doctors serve as primary gatekeepers. Floyd (2003) stated, “They are the point of access to specialists, hospitalizations, and other services” (p. 235).

 

       Utilization reviews force doctors to provide justification and get approval from MCOs before admitting patients to the hospital or ordering expensive tests like a Magnetic Resonance Imaging (MRI). “With capitation, the provider is given a ‘per member per month’ fee to provide all contracted services. These more stringent arrangements encourage providers to weigh the costs of care against the potential benefits and to act accordingly” (Floyd, 2003, p. 235).The most common types of Managed Care Organizations (MCOs) include Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), Individual Practice Associations (IPAs), and  Point of Service (POS).

HMOs. Members of HMOs have no choice of physicians. The three types of HMOs are staff model HMOs, group model HMOs, and network model HMOs. Staff model HMO's own and operate physician-staffed health centers that offer a broad range of medical care including laboratory, x-ray, vision, and pharmacy services. Physicians are salaried employees of the plan and treat only plan participants. The group model contracts with various medical groups and provides health services to HMO members. Network-model HMOs contract with two or more medical groups to provide health services to HMO members. Physicians often see non-HMO patients on a fee-for-service basis.

Independent practice associations (IPA). IPAs are HMOs that contract with individual physicians. Physicians practice in their own facilities and accept both HMO and non-HMO patients, The HMOs pay physicians on fee-for-service schedule, or flat annual amount per participant

Preferred provider organizations (PPOs). This type of plan contracts with preferred providers to obtain lower-cost care for plan members. Members are not required to use PPO providers, but are offered financial incentives (no or lower deductibles and co-payments), higher levels of benefits for care received from network providers, a traditional HMO with a non network coverage endorsement, and participants can elect to go outside the HMO. Providers are reimbursed subject to deductibles, coinsurance benefits, maximum lifetime benefits, and precertification rules.

Point of service (POS). The POS is a traditional HMO with a non-network coverage endorsement. Participants can elect to go outside the HMO. Providers are reimbursed subject to deductibles, coinsurance benefits, maximum lifetime benefits, and precertification rules.

Private Health Insurance

 “There are now more than 1200 private insurance companies in the nation” (Cooper & Taylor, 1997, ¶ 5). Consumers pay monthly premiums for private health insurance policies to cover medical expenditures. All plans require a yearly deductible be met before the insurance company will cover any medical expenses. The consumer is also responsible for co-pays and capitations exist.

Employer Sponsored Health Insurance

The central element is a financial arrangement that pays for healthcare services through employer-purchased insurance. Group health insurance purchased by employers emerged during World War II, when wage freezes caused employers to offer benefits as a way to compete for workers. Nearly every reform since the early 1970s has sought to expand this concept. (Cooper & Taylor, 1997, ¶ 5)

The percentage of workers whose employers provided health coverage for their families fell by 10% from 1987 to 1993 and has continued to decrease. The tax deductibility of health plans, the desire for a healthy workforce and the potential for a labor strike give employers a strong incentive not to discontinue insurance. Unfortunately, annual inflation-adjusted growth in employer insurance premiums has increased as much as 18% since the late 1980s. As a result, U.S. companies have had to drop benefits. (Hackney & Rogan, 2005, p. 4)


 Public Model (Government Controlled)

The public model of healthcare delivery in the United States involves the government paying for healthcare services for some of the under or uninsured through Medicare, Medicaid, the military, Native Americans, the Veterans Administration, other local and state programs, and charity care, for those that qualify, from nonprofit healthcare organizations. Since all of these plans adhere to assorted eligibility, underwriting, benefit, and reimbursement policies, the complexness of the system is immense. However, the public models provide a safety net for some of those that are not covered through the private models of healthcare delivery.

Medicare / Medicaid

Williams, Torrens, Raffel, and Barsukiewicz (2002) declared,

The government has tried to control healthcare spending mainly through Medicare reform. By encouraging seniors to join a private plan such as a managed care organization (MCO), it was predicted that seniors would save money and have a more complete package of health coverage.

Military / VA / CHAMPVA

The military, Veterans Administration (VA), and Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA) healthcare systems are the closest forms of national or public healthcare in the United States. Many disabled veterans cannot work and the amount of money they receive from the government is not enough to buy healthcare coverage for themselves and their families. CHAMPVA covers the spouse and children of a disabled veteran. Once a child reaches 18, the coverage stops unless the child is enrolled full-time in post-secondary education, or marries. These programs take care of a large portion of the society's population. Without this coverage, many people would be left without healthcare services, increasing the number of uninsured and increasing the costs of healthcare tremendously.

Charity Care by Nonprofits

Nonprofit hospitals have a legal, financial, and ethical duty to provide charitable care to the uninsured or socioeconomically challenged in exchange for tax-exemption. These nonprofit hospitals receive donations from the community for the intended purpose to provide care to the indigent


There are various local and state programs in place to cover the uninsured.

 

References

 

  

Cooper, E. & Taylor, L. (1997, Fall). Comparing health care systems: What makes sense for the   US? Good Medicine, 35.

Floyd, E. (2003). Health care reform through rationing. Journal of Healthcare Management, 48, 1-7.

Hackney, D., & Rogan, D. (2005). A single payer health care system for the U.S. American Medical Student Association. Retrieved September 4, 2009, from http://www.amsa.org/hp/sp.cfm#compare

Madore, O. (2003). The Canadian health act: Overview and options. Parliamentary Research Branch (PRB) of the Library of Parliament. Retrieved September 4, 2009,  from http://www.parl.gc.ca/information/library/PRBpubs/944-e.htm#chistoricaltxt

Oestmann, E. (2005, February 7). Newsgroup posting. Retrieved September 4, 2009  from University of Phoenix: BSHCS.01-06.BHCSX139A-HCS440

Shah-Jahan, E. (2004, May 23). Leave a comment. Retrieved September 4, 2009, from http://www.danieldrezner.com/mt/mt-comments.cgi?entry_id=1313

Williams, S., Torrens, R.., Raffel, M., & Barsukiewicz, K. (2002). Introduction to health care in the United States. [Custom Edition for University of Phoenix]. Clifton, NY: Delmar Publishing.

It seems like we have gotten to a point where budgeting drives the stratetic planning as it is limited and often what you have drives what you can do. I wonder if this should not be that the timing is defined by resources but the strategic planning still occurs and is just refined by when and prioritized on available funds. I also find that spur of the moment demands derail the plans for the year and this becomes difficult as demands of physician groups can outweigh the organizations plan - how can buy in on this better be planned with all stakeholders and a committment to hold unless truly driven by patient care or quality to keep to the plan ?

    I found it very intersting the steps presented in strategic planning, I really liked starting with the mission but this has never been the practice where I have been has anyone had this as the structure ?

In the strategic planning, budgeting and capital allocation cycles what are the top five advantages of being a for-profit over being a non-profit hospital? Or what are the top five advantages of being a non-profit over a for-profit hospital? Input is appreciated.