HFMA Exam 4 with Complete Solutions

Strategic Planning Process includes: - ANSWER-Strategic Planning Process includes: Identifying the organization's current position, including its mission, vision, and long-term goals. Conducting an internal and external assessment and comparing the organization's condition against those findings. This is often called a SWOT analysis. Define environmental Assessment - ANSWER-An environmental assessment is an examination of what's happening both internally for the organization and externally in the community or region surrounding the organization. An environmental assessment may include the following: - ANSWER-An environmental assessment may include the following: a. Analysis of regulations at state and federal levels and their impact on the organization. b. Appraisal of labor market issues, including ability to recruit clinicians and physicians. c. Assessment of the economy, employment, and business factors within the community and/or region. d. Evaluation of reimbursement mix and changes. e. Comparison of the organization's performance to its peers and others in the region or comparable entities nationwide. f. Analysis of the current, past, and potential future customers based on demographic data for the service area. g. Understanding of what the competitors in the region or market may be considering or are doing. h. Review of performance indicators: patient satisfaction, financial ratio analysis, volume and outcome reports, etc. i. The assessment provides guidance as to obstacles and opportunities available to the organization. A comprehensive budget for a medical practice includes statements projecting: - ANSWER-A comprehensive budget for a medical practice includes statements projecting: Statistics Operating expenses and revenues Capital expenditures Cash flows 4 Functions of Budget - ANSWER-Functions of Budget: 1. The budget also becomes a tool for monitoring performance against that plan. 2. The budget incorporates the strategic and operating plans for the organization, both in terms of the revenues and expenses, as well as the statistical volumes and resources associated with the plan. 3. It also provides a framework for setting priorities, securing and allocating resources efficiently, and controlling costs. 4. The budget summarizes a set of expectations integrating the impact of environmental factors and management decisions Definition of Budget - ANSWER-Budget is a formal plan for future operations expressed quantitatively Define Statistics Budget - ANSWER-Statistics The statistics budget includes the key units of service, such as new and established patient visits, procedures, ancillary exams, and other pertinent activities. The statistic may be measured as an absolute number, such as a count of procedures using specific Current Procedural Terminology (CPT) codes. Increasingly, activity is measured as a relative value unit in order to normalize the measure of resource use across a mix of visits and procedures. Statistics: Relative Value Units (RVUs) - ANSWER-Statistics: Relative Value Units (RVUs) Relative Value Units (RVUs) is an indexing technique for relating work effort to output, in order to determine work load, measure productivity, or calculate procedure costs. For example, based on a sampling, it is determined that it takes two hours to do an appendectomy and three hours to do a cholecystectomy. If a 30-minute period is used to define OR time, the appendectomy would be the equivalent of 4 RVUs and the cholecystectomy, 6 RVUs. A circulating nurse who assists with two appendectomies and one cholecystectomy will have productivity of 14 RVUs out of a potential 16 RVUs (eight hours) of work, or productivity of 87.5% Operating Expenses and Revenues - ANSWER-Operating Expenses and Revenues Operating expenses and revenues are projected on an accrual basis similar to the basis on which financial statements are prepared. Presenting financial statements on an accrual basis is the standard when dealing with larger corporate and hospital-based practices. Smaller practices and divisions within larger entities may still find it helpful to budget on a modified cash basis. The advantage of modified cash is the ease of explaining the system to clinical operating managers and the simplicity of management controls inherent in preventing commitments for expenditures greater than available cash. Capital Expenditures - ANSWER-Capital Expenditures The capital expenditure plan may range from a relatively simple list of minor equipment to be purchased based on available cash to very complex multi-year projects. Large projects such as major medical equipment, buildings including real estate, or practice acquisitions require evaluation of many of the same environmental factors and management decisions as the entire budget. The evaluation may contain a higher degree of ambiguity than the operating budget due to lack of a historical track record or access to data or past trends of the organization. Cash Flow Statement and Capital Projects - ANSWER-Cash Flow Statement and Capital Projects The cash flow statement is an important element of the comprehensive budget and is often overlooked in many organizations. The cash flow projection is often prepared in anticipation of major capital projects. In environments of increased risk taking related to managed care contracts, reliable cash flow projections have increasing importance. Explain the components of a business plan. - ANSWER-Business Plan Components: 1. An executive summary that includes a justification statement, brief history of the issue, a proposal statement, and one or two paragraphs outlining the benefits and cost of the plan. a. A justification statement: What do you want to do and why. b. A proposal statement: What this plan will fix, change, or improve. 2. A comprehensive narrative that describes the present situation, the reason why the situation needs to be addressed, research conducted, alternatives considered, sources of information, etc. 3. A financial analysis, including a pro forma for no less than one year. 4. A detailed action plan, including dates, resources required, and outcomes. 5. Benefits to the organization for approving the business plan. 6. Credible projections of results if the plan is not implemented. Identify the components of budgetary control. - ANSWER-... List the types of budgets - ANSWER-Three main types of Control Budgets: 1. Operating Budget 2. Capital Budget 3. Cash Budget Explain the importance of reporting on budget variances. - ANSWER-... List the types of debt instruments available for capital financing - ANSWER-... Describe the factors associated with credit ratings. - ANSWER-... Business Plans definition - ANSWER-Business Plans Business plans may be created by line department managers, executive level leaders, and possibly by consultants, or by any combination of these individuals. The plans must be sufficiently detailed to provide a road map to achieve the plan once it is approved. The plan should include an accounting of resources needed to achieve the plan. 4 functions of business plans - ANSWER-Business plans: . 1. Explain where one wishes to go and how to get there. 2. Define key performance variables and expected benchmarks or metrics by which progress can be monitored. 3. Explain the present situation (including its history) and describe the purpose of the plan (where the program is headed). 4. Force methodical thinking about what is to be accomplished and how to plan for it Operating Budget - ANSWER-Operating Budget: The operating budget places responsibility for meeting budget targets on departmental managers, where greater direct control of resources resides. Department managers are responsible primarily for controlling expenses, but also, and to a lesser extent, for meeting revenue targets. It makes sense to place responsibility in the hands of those people who can directly influence the effectiveness and efficiency of a unit's operations. Operating budgets should be prepared on a departmental level, where variances from the budget highlight deviations requiring investigation, explanation, and impact evaluation. This allows management to manage by exception and focus only on those activities producing operating results that vary from plan to plan. Statistics Budget - ANSWER-Statistical Budget The statistical budget is a forecast of the relevant activity level for each department. This defines the volume of business for the year and is expressed in terms, such as patient days, admissions, visits, etc. Typically, the terms used to express units of service, or volume, are the same terms that are used for billing purposes. For medical groups, the statistical budget summarizes historical and projected activity of the group. Careful attention should be given to assessing the key driver of practice activity. In many practices, the key driver is new and established patient visits. In specialty practices, a key driver is often referrals. Special reports are developed to identify existing and new sources of referrals. Identifying sources of referrals is one of the most important environmental factor assessments that can be prepared by a medical practice. The Resource-Based Relative Value Scale - ANSWER-The Resource-Based Relative Value Scale CMS has created a comprehensive reimbursement methodology for physician practices that incorporates several variables, including geographic location, office expense, time, and professional liability cost. This methodology is used to reimburse physicians through CMS. Each relative value unit is multiplied by a fiscal conversion factor to generate the reimbursement amount. The official name of the methodology is the resource-based relative value scale (RBRVS). A Common approach is to express RBRUV as the following 4 statistics: - ANSWER-A Common approach is to express the following 4 statistics: 1. Number of visits 2. Number of procedures 3. Number of RVUs 4. Number of RVUs per visit Revenue Budget - ANSWER-Revenue Budget The revenue budget is a straightforward set of calculations that determines the gross amounts to be generated by charging patients for the hospital's services. Units of service (from the statistical budget) X Appropriate charge rates (prices) = Gross revenue As an adjunct, budgets are prepared for contractual allowances, discounts to insurance companies and managed care organizations, uncompensated care, and bad debts (although bad debt is classified as an operating expense, it is commonly included on the revenue budget). Revenue Budget for Medical Practices - ANSWER-Revenue Budget for Medical Practices For medical groups, the revenue budget requires a projection of income from all sources, including fee-for-service and managed care contracts. This also assumes a projection of the group's patient load under both payment sources. It should reflect environmental factors, such as changes in fee schedules and risk pools. It should also include the impact of leadership decisions, such as recruitment or staffing changes on capacity. The practice should consider the following measures of revenue: Net revenue per physician FTE (full-time equivalent) Net revenue per visit or procedure Net revenue per RVU (relative value unit) 3 Methods of Projecting Statistics and Revenue Budgets: - ANSWER-Methods of Projecting Statistics and Revenue Budgets: Estimate of Demand Past Activity Estimate of the Number of Procedures or Patient Visits Methods of Projecting Statistics and Revenue Budgets: Define "Estimate of Demand" - ANSWER-Methods of Projecting Statistics and Revenue Budgets: Estimate of Demand The estimate of demand approach involves determining potential demand for the services of the group. It is a useful tool for planning marketing strategy, locating satellite offices, and initiating long-range planning. Because several estimates are involved, this method may have a high degree of error. It may, however, provide useful information for long-range planning and can be particularly important for the medical group providing prepaid care to patients who are members of an HMO. Estimate of demand involves three types of data: - ANSWER-Estimate of demand involves three types of data: 1. Demographic characteristics of the area 2. Patient usage rates per department 3. Desires share of market (Potential patient visits that can be expected) Methods of Projecting Statistics and Revenue Budgets: Past Activity - ANSWER-Methods of Projecting Statistics and Revenue Budgets: Past Activity Past activity assumes that the best measure of what will occur in the future is what has happened in the recent past. Only changes in the group such as additions or retirements of physicians and scheduled fee changes are projected. Past activity assumes that the activity for next year is based on current patient activity level. The past activity approach involves the following actions - ANSWER-The past activity approach involves the following actions: a. Evaluating activity by CPT procedure code b. Having data on payer class distribution c. Accurately anticipating expected changes d. Having a fee schedule for any payer representing a material volume of the practice Methods of Projecting Statistics and Revenue Budgets: Past Activity The past activity method involves accurately anticipating expected changes. For physician practices as well as healthcare facilities, these include? - ANSWER-Methods of Projecting Statistics and Revenue Budgets: Past Activity The past activity method involves accurately anticipating expected changes. For physician practices as well as healthcare facilities, these include 1. Expected changes in hours of work. 2. Changes in the mix of procedures, including the addition of new procedures. 3. Changes in fee schedules. 4. Shifts in mix of payers that might occur if a health plan enters or leaves the service area. 5. New sites of service. 6. New local competition. Methods of Projecting Statistics and Revenue Budgets: Estimate the Number of Procedures or Patient Visits - ANSWER-Methods of Projecting Statistics and Revenue Budgets: Estimate the Number of Procedures or Patient Visits The number of procedures or patient visits can be estimated based on what is planned by each physician in the group during the budget period. By applying the expected fee schedule to the projection of procedures or visits, budget or production for each physician can be determined. Estimating the number of procedures is difficult for surgeons and other specialties, such as gastroenterologists, that perform non-invasive procedures. Estimating the number of patient visits is easier for primary care and general medical specialties Physicians should be involved in estimating the number of patient visits. The number of patient visits can be estimated by gathering the following information: - ANSWER-Physicians should be involved in estimating the number of patient visits. The number of patient visits can be estimated by gathering the following information: 1. The number of days the group will be open during each month of the budget 2. Number of patients that physicians see for each month 3. Number of days that physician expects to work each month 4. The estimated number of patient visits per month Define Expense Budget - ANSWER-Expense Budget The expense budget accounts for the quantities and types of resources to be used to achieve the projected statistical volumes Components of expense budget? - ANSWER-The expense budget includes: 1. Labor. 2. Supplies. 3. Books/subscriptions. 4. Dues. 5. Education and travel expenses. 6. Maintenance contracts. 7. Telephones. 8. Other resources used in the department. Define Expense Budget: Supplies - ANSWER-Expense Budget: Supplies The expense budget also includes a compilation of supply and service budget amounts. This involves a listing of the various types or categories of supplies to be consumed and services to be utilized during the budget year, along with the dollar amounts to be expended for each category. Major expense category for physician practices? - ANSWER-Salary and benefit costs represent the major expense category for most physician practices. The salary budget is based on a staffing pattern that describes the various skills necessary to operate the practice, including physicians, nurses, other clinical staff, and support staff such as reception staff or billing personnel. All of the following methods represent effective approaches for medical groups to estimate future revenues, EXCEPT: Estimate of demand. Estimate of supply. Past activity. Estimate the number of procedures or patient visits. - ANSWER-Estimate of supply. What is FTE? - ANSWER-In order to have meaningful and realistic labor budgets, the healthcare finance manager must understand the concept of full-time equivalent (FTE) personnel. An FTE is the equivalent of one full-time person who is paid for a set number of hours per year. An FTE can be one person who works all the hours, or two or more people who combine to work the equivalent hours. The FTE, in most cases as defined in health care, is one or more employees paid for a total of 2,080 hours in one year Which type of control budget places the responsibility for meeting budget targets on departmental managers? Operating budget Capital budget Cash budget Control budget - ANSWER-Operating budget Which of the following is NOT one of the main types of budgets within the operating budget? Statistical budget Revenue budget Expense budget Cash budget - ANSWER-Cash budget Capital Budget - ANSWER-The capital budget is an annual process to estimate the resources committed for new projects, equipment, and facilities. Individual capital projects may span several years due to the time requirement to develop and implement the project. Capital projects may involve the start-up or acquisition of a new practice, service, or facility. Expenditures are classified as capital based on expected benefits of two or more years and a minimum investment set by the organization. Because of the significant long-term impact of capital expenditures and the limited resources available in any organization, careful control should be exercised in making capital decisions. Two key components of Capital Budget: - ANSWER-Two key components of Capital Budget: 1. Maintenance Capital 2. Strategic Capital Define Maintenance capital - ANSWER-Maintenance capital is what is required to maintain a program or facilities at their existing level. Department managers should develop reasonable estimates for what it will cost to replace outdated technology or worn out fixtures and equipment. Define Strategic Capital- - ANSWER-Strategic Capital----Strategic capital involves the expansion of existing programs, the initiation of new programs and services, or both. Department managers with responsibility for implementing new programs or initiatives should also be involved in developing these capital requirements. It is the responsibility of senior management to prioritize and schedule capital expenditures (usually by quarter) and determine the aggregate capital budget, once all requests for maintenance and strategic capital have been identified. There are three common capital budgeting evaluation techniques: - ANSWER-There are three common capital budgeting evaluation techniques: Payback method Net present value method Return on investment (ROI) method Which type of evaluation technique takes into account the time value of money? Marginal benefit Payback method Net present value method Cumulative value method - ANSWER-Net present value The fact that a dollar received in a future year is not worth as much as a dollar today is the principle of net present value. Is this statement true or false? - ANSWER-True Capital requirements may be driven by a range of factors such as the following: - ANSWER-Capital requirements may be driven by a range of factors such as the following: Maintaining the best physical plant to remain competitive Ensuring that equipment, pharmaceutical therapies, and medical and surgical procedures are current to cutting-edge Anticipating and responding appropriately to consumer demands Differentiate Debt Service, Annual Debt Service, and Total Debt service - ANSWER-Debt Service---The required payments of principal and interest are referred to as debt service. Annual Debt Service----The required payments of principal and interest for any given year are referred to as annual debt service. Total Debt service---- sum of all debt service payments is referred to as the total debt service under the obligation. A lender allows a borrower to use a specified amount of money in return for a rental fee for use of that money. The rental fee is known as: Principal. Interest. Debt service. A revenue bond. - ANSWER-Interest Capital needs may be funded through any of these four alternatives: - ANSWER-Capital needs may be funded through any of these four alternatives: Long-term debt Equity financing Joint ventures Capital lease financing Capital Sources of Financing: Long-Term Debt - ANSWER-Capital Sources of Financing: Long-Term Debt Long-term debt can be obtained from several sources. It can be obtained from a bank either as a long-term loan or as a mortgage, the difference being that the former may have no collateral, while the mortgage is collateralized by a piece of real estate. Long-term debt is most often obtained via a debt issue in the form of long-term bonds, usually tax-exempt finance offerings. Tax-Exempt Financing - ANSWER-Tax-exempt financing is usually the lowest cost debt available to a healthcare organization, but the organization must qualify as a tax-exempt (not-for-profit) organization, and then must restrict the use of the proceeds for tax-exempt purposes, and proceeds cannot be used in any way that directly benefits an individual or a for-profit organization. Physicians' office buildings are an example of a project that cannot be financed through tax-exempt borrowing. pros and cons Capital Sources of Financing: Long-Term Debt - ANSWER-Capital Sources of Financing: Long-Term Debt The advantage of a private placement is that, because only one lender exists, the costs of originating the issue are reduced. The organization and the lender can define what is important to both parties. A disadvantage might be that the private placement lender would require a particular covenant more restrictive than a public offering would require. The first step in determining how much can be borrowed? - ANSWER-The first step in determining how much can be borrowed is to perform a debt capacity test. This evaluates the capacity for future borrowings. Debt capacity is determined by the debt-to-equity ratio of the borrower. Example of debt capacity test - ANSWER-If an organization has current long-term debt of $1 million and equity of $2 million, its debt-to-equity ratio is as follows: 1,000,000/2,000,000 = 0.50 As a general rule of thumb, a debt-to-equity ratio of 1.0 or less is acceptable. A ratio above 1.0 means the total amount of debt actually exceeds the total amount of equity or fund balance. For ratios above 1.0, lenders may increase their scrutiny and consider whether to continue to lend money to the organization. Define Debt Service coverage - ANSWER-Prospective lenders are also looking for an organization's debt service coverage ability. Debt service coverage asks the question, how many times could the organization pay its principal and interest payments after paying operating expenses? Example of Debt service coverage - ANSWER-Suppose net profit after paying all operating expenses (excluding interest and depreciation) is $1.5 million. The annual principal plus interest payments equal $500,000. For this example, debt service coverage is as follows: 1,500,000/500,000 = 3 The higher this number, the more likely the organization will, under adverse conditions, be able to continue debt service payments. Interest rate and assessment of debt capacity - ANSWER-Another step in assessing debt capacity is to estimate the interest rate creditors will require in assuming the risk of lending to the organization. The interest rate will influence the size of the annual debt service as well as the effect on financial performance. The interest rate will generally be determined by obtaining a credit rating from a rating agency. Even when debt is issued without a rating, the investors will informally evaluate the creditworthiness of the issuer. Capital Sources of Financing: Credit Rating - ANSWER-Capital Sources of Financing: Credit Rating Because credit ratings have an impact on the interest rate, the factors used to establish a credit rating should be considered as part of the planning process. The healthcare industry relies on rating agencies to quantify creditworthiness using objective and measurable criteria, as well as assessments of the internal and external business environments. The agencies develop ratings intended to provide comparisons as to the likelihood a borrower will be able to repay principal and interest as scheduled. Not all bonds are rated; however, the purchasers of unrated bonds will evaluate the credit risk using a similar approach. Because the credit rating will significantly impact the cost and availability of capital financing, it is important to prepare and maintain a credit analysis. This analysis will allow the organization to compare its recent financial performance to relevant national standards. When issuing a rating on a specific organization, a ratings agency will consider the following areas: - ANSWER-When issuing a rating on a specific organization, a ratings agency will consider the following areas: 1. Financial factors 2. Management Capability 3. Medical Staff Characteristics