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| SECOND QUARTER:
Volume 3, Number 2
May-July 2008 Managerial Cost Accounting and Behavior in Medicine
By: Dr. David Edward Marcinko; MBA, CMP™
By: Hope Rachel Hetico; RN, MHA, CMP™
Introduction
Controlling healthcare organization costs is a function of internal controls and the decision-making process to purchase assets and make expenditures. This includes operations, processes, human resources, healthcare information technology [HIT], and purchasing. Thus, while not strictly speaking a financial strategy in past years, cost accounting is now considered by most healthcare executives as an important financial management function.
In today’s competitive marketplace, managerial cost accounting is often used to set short- and long-term healthcare entity business policy. The information is used to increase profitability by decreasing costs, increasing revenues, or decreasing operating assets. More than ever, cost accounting can mean the difference between a successful healthcare entity, and a moribund one. Managerial cost accounting consists of many goals, such as:
• Providing vital costing information for internal entity use;
• Developing pro-active future entity strategic plans information;
• Accentuating the relevancy and flexibility of financial data;
• Reviewing real-time medical service segments, rather than just total entity operations; and
• Acquiring non-financial healthcare business data
A. Cost Accounting
B Cost Behavior and Structure
1. Types of Costs
A. Fixed Costs
B. Variable Costs
C. Hybrid Costs
D. Extraneous Costs
E. Differential Costs
F. Controllable Costs
G. Opportunity Costs
H. Sunk Costs and Bias
i. Relevant Costs
j. Carrying Costs
k Future Costs
l. Human Resource Costs
m Healthcare Sector Costs
• Medicare Prospective Payment System (PPS)
• Top 10 Diagnostic Related Groups [DRGs]
• 2008: The Medicare Inpatient Prospective Payment System [IPPS]
• Highlights of the Final Rule
• The MS-DRG Classification System
• More on Hospital Acquired Conditions
• List of “Never-Events”
• More on Cost-Based Weights
• More on Outlier Thresholds
• Projected Financial Impact Analysis
• DRGs and Case-Mix Severity Rates
Services for hospital out-patients
Medical providers
Skilled nursing facilities
Home healthcare agencies
2. Cost Allocation Methods
C. Marginal Costs and Marginal Revenue
Table 1: Example Marginal Cost
D. Break-Even Analysis and Profits
E. Ambulatory Payment Classes and Physician Fiscal Credentialing
1. Ambulatory Payment Classifications
2. Physician Fiscal Credentialing
a. Managerial Accounting Methodology
Table 2: Outpatient Hospital Incentives by Payor Class
B. Continuous Quality Improvement
F. Cost of Hospital Credit
Conclusion
Readings and References
HBS-Styled Case Model
Dr. Joseph Spine — Osteopathic Physician
Checklists:
Checklist 1: Healthcare Entity Cost Concerns
Appendices:
Appendix 1: Sample Medical Capitation Cost Contract Proposal
Appendix 2: UB-92 (HCFA-CMS 1450) Claim Form
Appendix 3: HCFA-CMS 1500 Claim Form
Appendix 4: Agency for Healthcare Research and Quality: Patient Safety Indicators
ICD-9-CM and DRG Coding Updates to Version 2.1, Revision 3
Appendix 5: ICD-9-CM October 1, 2002 Updates
Appendix 6: 2008: APC Group Updates
APC Name, payment status, relative weight, pay and co-payment amounts.
Appendix 7: 2008: Median Costs for Hospital Outpatient Services by APCs
Hospital Cash Flow Analysis and Accounting Management
By: Dr. David Edward Marcinko; MBA, CMP™
By: Hope Rachel Hetico; RN, MHA, CMP™
Introduction
“Cash is King” is an expression that refers to the importance of cash flow in defining the financial health, prospects for economic success and value of a hospital, medical practice, clinic, or other healthcare business entity. A healthcare organization’s earnings become useful only when they are converted to cash. Furthermore, healthcare organizations that are expanding can acquire new assets only from free cash flow. Free cash flow, in turn, results from budgeting for excess cash flow and making prudent use of debt.
Cash flow, economic decision making, budgeting, and working capital analysis and management are at the core of strategic financial management for healthcare organizations. The discussion of these issues in this chapter will help financial managers focus on practical answers to typical questions that arise when healthcare organizations seek to improve their ability to accumulate capital or make plans to fund their economic goals.
A. About Cash Flow Analysis
Figure 1: Hospital Cash Flow Analysis and Management
B. Financial Statements
1. Net Income Statement
2. Balance Sheet Composition
Table 1: The Balance Sheet and Cash Flow Analysis
A. Net Working Capital
Sample Financial Statement and Selected Ratio Performance Measures
for a Hospitalist-Physician
Statement of Cash Flows
Table 2: Cash Flow Assumptions
Table 3: Adjustments to Net Income
Sample MSO Cash Flow Projection
4. Statement of Shareholder’s Equity
5. Financial Statement Footnotes
6. Management’s Discussion and Analysis of Financial Condition and Results of Operations
C. The Healthcare Cash Conversion Cycle
D. Cash Flow Management Issues
1. Determining Expected (Pro Forma) Cash Flows
2. The Cash Budget
Sample Cash Flow Budget
3. Pro Forma Cash Flow Corollary
4. Revenue Recognition
a. hospitals
b. medical practices
E. Revenue Cycle Management Issues
i. Medicare Payment Augmentation
ii. Medicare Cash Flow Conundrum Avoidance
iii. The Future?
F. Business Risks
1. Variance and Standard Deviation
2. Co-efficient of Variation
3. Cash Flow Planning
a. Probability Distribution
b. Expected Rate of Return
c. Cash Flow Comparisons
Table 4: Assessing the Cash Flow and Risks of Two Hospital Projects
d. Cash Flow Risk Assessment
e. Cash Flow Financial Ratios
G. Cost of Capital and Capital Structure
H. Major Methods of Capital Budgeting
1. Capital Asset Pricing Model
a. Project Cost of Capital Corollary
b. Project Cash Flow Analysis
c Discounted Payback Analysis
d. Net Present Value
e. Internal Rate of Return
f. Modified Internal Rate of Return
g. Terminal Value
h. Corollary Cost Budgeting Investment Rules
2. Weighted Average Cost of Capital
3. Bond Yield Plus Risk Premium Method
4. Discounted Cash Flow Method
5. Decision Matrix
I. Conclusion
Readings and References
HBS-Styled Case Model
The Mackenzie Hospital Clinic
Checklists:
Checklist 1: Cash Flow Management Concepts
Checklist 2: Operational Methods to Increase Cash Flow
Checklist 3: Accelerating the Cash Conversion Cycle
Checklist 4: Financial Manager Knowledge Base
Checklist 5: Financial Statements Knowledge Base
Checklist 6: Economic Business Risk Knowledge Base
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