Managing Costs and

Revenues

Otar Vasadze, MD, PhD

University of Georgia
 Healthcare Financial

Management
The process of providing oversight for the healthcare
organization’s day-to-day financial operations and
planning the organization’s long-range financial
direction.
 It involves:
 Working to increase the revenues and decrease the costs of
the organization
 Organizational forecasts
 Consideration of external environmental variables
 Economy
 Insurance company policy changes
 Legislative rules and regulations, etc.

 The goal of Healthcare Financial Management is to put

organization in the best position possible.

 Healthcare Financial
Management
In order to meet its economic goals
organizations have finance
departments for performing
following tasks

 Accounting
 Finance
 Accounting

There are two types of accounting:

 Managerial Accounting – financial data are
provided concurrently or prospectively to
internal users (managers executives,
governing board)

 Financial Accounting, data are provided

retrospectively to external users
(stockholders, lenders, insurers,
government, suppliers)
 Finance

Generally includes
 Borrowing and investing funds

 Analyzing accounting information to

evaluate past decisions and make sound
decisions that will affect the future of
the organization.
 Healthcare Financial
Management
Managers at ALL levels of organization should be
involved in financial analysis and decision
making.

E.g., the manager in the radiology unit of a

hospital should be directly involved in
looking at both the revenues generated by
procedures, performed in the department
and the expenses incurred in running the
department. In addition, hiring personnel,
managing appropriate staffing ratios, making
 Tax status of Healthcare
Organizations
Healthcare Organizations can be for-profit or
not-for-profit.
For-profit, investor owned healthcare
organizations – owned by investors, or
others who have interest in making profit
from the services. Viewed as for-profit
organizations that are required to pay taxes
as a cost of doing business. (Physician
practices, skilled nursing facilities)
Not-for-profit healthcare organizations –
Historically these organizations have taken
care of the poor, needy and indigent
 Not-for-profit Healthcare
Organizations
Business-oriented (private) organizations –
private enterprises with no ownership
interests, self-sustaining from fees charged
for goods and services, exempt from income
taxes and may receive tax-deductible
contributions (donations), must provide a
certain amount of charity. Usually affiliated
with religious organizations, overwhelming
majority of US hospitals belong to this type
of Healthcare organizations.
 Not-for-profit Healthcare
Organizations
Government owned organizations and public
corporations – influenced by political
interests, are exempt from taxation.
Includes government owned hospitals,
research and training institutions,
organizations serving medically indigent
group, public health clinics.
 Financial goals by the type of
Organization
For-profit organizations – “management must
administer the assets of the enterprise in
order to obtain the greatest wealth for the
owner.”

Maximize earnings and profits, minimization of

risks.

Not-for-profit organizations – “produce the best

possible bottom line… in the context of
providing optimal patient care in the most
efficient manner.”
 Financial Governance and
Responsibility Structure
Board of Directors – in for-profit organizations.
Appointment is made based on their
professional qualifications and may or may
not be paid.

Board of Trustees – in not-for-profit

organizations. Board members serve strictly
as “volunteers” and are not paid. Appointed
based on their social status, etc., but usually
not based on their professional
 Financial Governance and
Responsibility Structure
Chief Executive Officer (CEO) – hired and
delegated authority by the board, serves as
chief administrator. Monitored through the
board’s Finance Committee.
Chief Operating Officer (COO) - often, senior
vice-president, responsible for day-to-day
operations.
The Chief Financial Officer (CFO) - responsible
for the entire financial management function:
Accounting, Financial Assets.
Depending on the size of organization COO and
 Financial Governance and
Responsibility Structure
Controller – chief accounting officer responsible
for the accounting and reporting, including
financial record keeping. Oversees patient
accounts, accounts payable, accounts
receivable, cost analysis, budgets, taxes, etc.
Treasurer - manages organization’s financial
assets, including cash management, bank
relations, investment portfolios, pensions,
capital expenditures, working capital, long-
term debts.
Internal Auditor - responsible for ensuring that
accounting, bookkeeping and reporting are
performed in accordance with nationally
 Financial Governance and
Responsibility Structure
Chief Information Officer (CIO) – responsible for
all information and data processing systems,
including medical records, data processing,
medical information systems, admitting, etc.
Independent Auditor – generally a large
accounting firm, hired to ensure that all
financial reports are accurate as to format,
content, scope.
All Managers – financial managers to the extent
that they consider asset selection, charges,
financing, reimbursement, department
budgets, etc.
 Revenues

In the Healthcare Organization revenues are

mainly generated from the Reimbursement,
either by the patients, or by third-party
(private or social insurance Plans)

In addition to this, Healthcare Organizations

may be receiving Donations, which are
mainly used for the investment purposes.
 Managing Reimbursements
from
Third-Party Payers
Retrospective Reimbursement
Charge (fee for service) – Healthcare providers
are paid close to or at 100% of their
submitted prices or rates for care provided.
No financial risks to provider.
Charges minus a discount or percentage of
charges – Healthcare Organizations offer
discounted charges to third parties in return
for large numbers of patients.
Cost plus a percentage for growth – Healthcare
organizations receive the cost for care
Managing Reimbursements
from
Third-Party
Retrospective Payers
Reimbursement (cont’d)
Cost – organization is reimbursed for the
projected cost, expressed as a percentage
of charges. Full costs (Direct costs of
providing care plus indirect costs or
overhead for running the organization) are
not recognized.
Reimbursement modified on the basis of
performance – the provider is reimbursed
based on quality measures, patient
satisfaction measures, and so on . Poses
 Managing Reimbursements
from
Third-Party Payers
Prospective Reimbursement
Per Diem – defined amount per day for care is
provided. Most common method of
reimbursement. Presents risks and
incentives. Tends to be bad for acute-only
patients, for whom greater costs are incurred
earlier in care without the opportunity to
make up differences later, when less intense
services may be needed.
 Managing Reimbursements
from
Third-Party Payers
Prospective Reimbursement
Per Diagnosis – Defined amount is paid per
diagnosis.
 DRGs (Diagnosis-Related Groups) – for hospitals
 RUGs (Resource Utilization Groups) – for nursing
homes
 HHRGs (Home Health Resource Groups) – home health
care.

Fee schedule by CPT (Current Procedural

Terminology) code, or procedure code – the
most common method for reimbursement of
specialty physicians. The more complex and
 Managing Reimbursements
from
Third-Party Payers
Prospective Reimbursement
Capitation – agreement under which a healthcare
provider is paid a fixed amount per enrollee
per month by a health plan in exchange for a
contractually specified set of medical services
in the future. The most common
reimbursement method for primary care
physicians.
The third party reimbursement system in the
healthcare has become so complex that many
organizations hire employees specializing in
 Reimbursing providers by
government-sponsored
healthcare programs
Tax Equity and Fiscal Responsibility Act of 1982
- a mandate to hospitals for a prospective
payment system with reimbursement rates
established up front for certain conditions
- Medicare became the secondary payer when
a beneficiary has other insurance
 Reimbursing providers by
government-sponsored
healthcare programs
Reimbursement to Hospitals
Contractual Allowance, “the difference between the charge
for a bed-day in the adult medicine unit and the
amount that the hospital has agreed to accept from
the patient’s insurance carrier.” McLean (2003, p. 53)

Diagnosis-Related Group (DRG) – e.g. a patient being

admitted for heart bypass surgery would receive a
higher reimbursement rate than a patient with
fractured humorous, admitted for observation.

Case Mix (Patient Mix) – combination of contractual

allowance and diagnosis-related group. E.g., in nursing
homes, where the patients on ventilation are
reimbursed at a substantially higher rate than a
 Reimbursing providers by
government-sponsored
healthcare programs
Reimbursement to Physicians
A Resource-Based Relative Value System – pays a
prospective flat fee for physician visits and is based on
Healthcare Common Procedure Coding System. E.g.,
the higher reimbursement rate afforded to a physician
for an extended initial patient visit to fully assess a
patient’s medical condition, vs. thee lower
reimbursement provided for brief follow-up visit to
asses how the prescribed medication was working.

Capitation – “a flat periodic payment per enrollee to a

healthcare provider; it is the sole reimbursement for
providing defined services to a defined population…
Generally, capitation payments are expressed as some
Reimbursing providers by
government-sponsored
healthcare programs
Reimbursement to other providers
RUGs (Resource Utilization Groups) – Skilled Nursing
Facilities

HHRGs (Home Health Resource Groups) – Home Health

Agencies.

OPPS (Outpatient Prospective Payment System) –

Outpatient hospitals and clinics.
 Types of Reimbursement by
Uninsured
The Healthcare services are much more
expensive for uninsured due to being
charged at full rate (no discounts) by the
Healthcare organization delivering the care.
In 2001 more than 1.5 million personal
bankruptcy cases in US were caused by the
expenses incurred due to the medical bills.
As a direct result, there was increase in the
amount of uncompensated, or
unreimbursed, care.
According to American Hospital Association, in
 Not-covered, or
uncompensated, care
Bad Debt – the Healthcare organization bills for
services but receives no payment. These
expenses are bsed on charges, not costs, and
are written off by the organization. Usually
used with for-profit organizations.
Charity Care – the not-for-profit organization
provides care to a patient who it knows will
be unable to pay. Level of charity care (based
on either costs or charges) must be
documented in footnotes to the financial
statements, otherwise the organization’s tax
 Classifying Costs
Frequently Utilized Methods of Classifying Costs
Method: By behaviour
Classification Example
Fixed cots – stay the same Electricity for lighting.
in relation to changes in
volume of services.
Variable costs – change Number of sutures used to
directly in relation to close incisions
changes in volume
Semi-variable costs – Labor costs are the same for
partially fixed and partially patients 1-8; then with the Joint
variable Commission standards, need
another RN to take care of the
ninth person.
 Classifying Costs
Method: by Traceability

Classification Example
Direct costs – can be traced Gauze pads used in dressing
to a particular patient, a wound
product or service
Indirect costs, aka Amount of water used during
overhead – cannot be a typical hospital stay
traced to a particular
patient or service
Full costs – both direct Treatments provided plus
costs and indirect costs. utilities used
 Classifying Costs
Method: By decision-making capability

Classification Example
Controllable costs – under Wages of certified nursing
the manager’s influence assistants per shift

Uncontrollable costs – Upper administrative hours

cannot be controlled by allocated to department
the manager
Sunk costs – already Cost of insurance paid in
incurred and cannot be advance
influenced further
Opportunity costs – No purchase of X-ray machine
proceeds lost by rejecting if money spent on new
alternatives ultrasound machine
 Classifying Costs
Before setting the prices for services it is
necessary to calculate the expenses required
for providing those services. These expenses
include:
 Direct Costs (Medicines, Salaries and Wages
of Service providers, etc.)
 Indirect Costs (Utility costs, depreciation of
assets and facilities, etc.
 Salaries and Wages of the personnel involved
in the management of organization
 Financial Management

Financial Management of the organization

includes following:
 Management of Working Capital;
 Revenue Management;
 Management of Materials and Assets;
 Budget Management.
Working Capital Management
Working capital refers to current assets, such as
inventory, cash on hand, accounts receivable
and other items, that can be converted to cash
in less than one year.
Net working capital = current assets – current
liabilities
The purpose of managing working capital is to
increase revenues and reduce expenses in
order to:
- Serve as the “catalyst” to make capital assets
productive by managing current assets as
labor and inventory
- Control the volume of resources committed to
Working Capital Management

 Manage cash flow, the amount of inflows

outflows and the cash conversion cycle
 Manage the liquidity of organization “how
quickly assets can be converted into cash”
(Zelman et al., 2003, p. 488)
 Goodwill
- Paying vendors and employees on time
- Demonstrating to lenders that the
organization is creditworthy
Managing Accounts Receivable
Hospital Department Involvement in
Managing Accounts Receivable
Department AR Involvement
Contracts Relationships with 3rd party payers
Admissions/Registration Precertification, preadmission, insurance
verification
Patient care unit (nursing, Documentation capture, charge capture for
lab, radiology, rehab, services rendered
etc.)
Medical records Coding, Quality Assurance Audits
Billing Bill preparation, billing audits
Compliance Fraud and abuse internal audits
Collections Collection policy financial counselling, 3rd party
and self-pay follow up
Legal Contracts, litigation policy, federal regulations,
patient rights
 Managing Materials and
Inventory
Materials and Inventory required for the
provision of the necessary health services and
procedures to the patient should be of the
sufficient quantity and type in order to be
used as required.

It is unacceptable for the Healthcare

organization to have the shortage of the
necessary Materials and Inventory, because it
can result in the irreversible damages to the
patient’s health, or can put at risk the life or
 Budget Management
Budgeting is the necessary part of the Annual
operational planning in organization. The
budget should include the planned Cash
Outflow, Planned Cash Inflow and the Ending
Cash.
Ending Cash = Beginning Cash + Cash Inflow –
Cash Outflow
There are several types of Budget:
 Statistical Budget – provides statistical
information, which is required for
forecasting the Materials, Human
Resources, Planned services identified by
Operational Plans.
 Investment Budget – Required for
Good of Luck in
Financial
Management!