# Financial Aspect of Health Care. Please check the material carefully and make sure you understand what needs to be done before you ask me to accept your proposal. If you do not have access to the boo

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Financial Aspect of Health Care. Please check the material carefully and make sure you understand what needs to be done before you ask me to accept your proposal. If you do not have access to the boo

Chapter 13 Notes Overview Understand and use common sizing Understand and use trend analysis Understand five types of forecast assumptions Understand capacity level issues in forecasts Common Sizing, Trend Analysis and Forecasted Data The process of common sizing puts information on the same relative basis. It involves converting dollar amounts to percentages. Converting dollars to percentages allows for comparative analysis. Common Sizing is also referred to as Vertical Analysis because the computation of percentages is vertical. An example of converting dollars into percentages is if Total Revenue is $200,000 and that is all of the revenue, it would represent 100%. Therefore, if Radiology Revenue is $20,000 then that would represent 10% of the total ($20,000/$200,000=10%). These comparisons are usually performed within an organization, but a better comparison is comparing a particular situation with other entities. This will determine how you rate and compare to other similar organizations. See Table 13-1 and 13-2 in the textbook. Trend Analysis The process of trend analysis compares figures over several time periods. This is similar to common sizing but takes the comparisons a step forward by comparing across time. An example is if Radiology Revenue was $20,000 for the current period and $15,000 for the previous period, the difference is $5,000. This equates to a 33 1/3% difference because the trend analysis is compared to the base year which is the earlier year. $5,000/$15,000= 33 1/3%. Trend Analysis is sometimes referred to as Horizontal Analysis. See Table 13-3 and 13-4 in the textbook for examples of Horizontal Analysis. Analyzing Operating Data Managers will often need to analyze their own organizations data and that’s why it’s important to become familiar with both horizontal and vertical analysis. Importance of Forecasts The dictionary definition of forecasts is to calculate or predict some future event or condition, usually as a result of study and analysis of available pertinent data. Managers use forecasts to gather information for purposes of planning for the future. Forecasts can be short range (next year), Intermediate range (five years from today) or long range (the next decade and beyond). Forecasts are often required when producing budgets. Assumptions made by managers directly affect the results of forecasts. Forecasting Approaches There are three different sources of information and forecast assumptions. The first level derives from personnel directly involved in the operation of the department. They know the operation and can provide important ground level information. The second level comes from electronic and statistical information, including trend analysis. The third level represents executive level judgement that is typically applied to a preliminary rough draft of the budget. An example is adjusting volume based on anticipated future impact of local competition. Common Types of Forecasts in Healthcare Organizations The three most common forecasts in healthcare include revenue forecasts, staffing forecasts and operating expense forecasts. Revenue Forecasts Operating Revenue Forecasts Operating Revenue forecasts are inputs into the operating budget. Types of Revenue Forecasts Forecasts of revenue can cover different time periods. Usually, a short range forecast is completed as information required is more readily available. Long range models are utilized in order to project or predict what the organization will look like in future years. A single year forecast is generally for the coming year and is thus a short-range forecast. Building Revenue Forecast Assumptions Five important issues regarding revenue forecast assumptions are as follows: Utilization Assumptions Significant changes in utilization patterns can be occurring that need to be taken into consideration in forecast assumptions. In hospitals there has been a shift to shorter lengths of stay which effect incoming revenue. With government revenue sources looking for ways to reduce costs, rates are decreasing. In nursing homes, the switch to community based programs such as home care has a negative impact on census. Patient Mix Assumptions There is a need to specify the utilization by payor source, i.e. Medicare, Medicaid, HMO, Private etc. Contractual Allowance Assumptions The forecasted utilization of a service is multiplied by the appropriate rate or charges. It’s important to understand that gross charges are not an accurate way to project revenue. Allowed charges should be used because all payers pay different rates for the same service. To handle this, a contractual allowance is used which is the difference between the gross charge and the allowed charge. It is recorded as a reduction of the gross charge for the current period. Trend Analysis Assumptions By performing trend analysis, we compare data between or among years to see trends. If trends are identified, it makes sense to incorporate them into your forecast. Payer Change Assumptions Trend analysis uses historical date from a past period. Forecasting is prospective, that is projecting into the future. Changes in regulations going forward need to be included in your forecast. Staffing Forecasts Staffing forecasts are inputs into the operating budget. There are three important considerations when preparing staffing forecasts. Controllable vs. Noncontrollable Expenses Controllable costs are subject to a manager’s own decision making, whereas, noncontrollable costs are outside the manager’s power. Required Minimum Staff Levels Regulatory healthcare standards may set minimum staff levels for providing service in a particular unit. This is becoming much more prevalent in healthcare today. This aspect cannot be ignored in the forecast process. Labor Market Issues in Staffing Forecasts Certain geographical parts of the country have shortages of professional healthcare staff. Other areas may have an abundance of professional staff. The status of the local labor market plays an important role in staffing forecasts. Staffing Forecast Components In many cases, a staffing plan is first created and the staffing forecast follows. The staffing components are: Scheduling Requirements Master Staffing Plan Computation Sequence to Annualize the Master Staffing Plan Scheduling Requirements should encompass all hours and all days required to cover each position. Master Staffing Plan should cover all units and all hours and days required to cover all positions within the units. Computation Sequence to Annualize the Master Staffing Plan sequencing is: See Figure 13-4 in Chapter 13 and Exhibit 9-4 in Chapter 9 Compute productive and nonproductive days and net days paid Convert net days paid worked to an annual factor Calculate annual FTE’s using the factor Capacity Level Issues in Forecasting Capacity relates to services in the healthcare industry. The ability to produce and provide specific healthcare services. Space and Equipment Availability The ability to provide healthcare services is limited by the availability of both space and the proper equipment. Staffing Availability Review Exhibit 13 – 1.

Financial Aspect of Health Care. Please check the material carefully and make sure you understand what needs to be done before you ask me to accept your proposal. If you do not have access to the boo

Chapter 12 Notes Overview Compute an unadjusted rate of return Understand how to use a present-value table Compute an internal rate of return Understand the payback period theory The Time Value of Money These computations are used to evaluate the use of money. This will provide a guide to assist the manager in evaluating the different alternatives regarding the resources an organization has on how money should be spent. Unadjusted Rate of Return This is an unsophisticated method used to determine the return on investment. There are two ways to calculate the unadjusted rate of return. 1. Average Annual Net Income / Original Investment Amount = Rate of Return OR 2. Average Annual Net Income / Average Investment Amount = Rate of Return Given these assumptions: Average Annual Net Income = $ 200,000 Original Investment amount = $ 600,000 Unrecovered asset cost at the end of the useful life = $ 50,000 An example using the original investment amount, number 1 above: If the average annual net income is $ 200,000 and the original investment amount is $ 600,000, then $200,000 / $600,000 = 33% Unadjusted rate of return An example using the average investment amount, number 2 above: If the average annual net income is $ 200,000, the unrecovered asset cost at the end of the useful life is $ 50,000 and the original investment amount is $600,000, then: Step 1 – Compute the average investment amount for the unrecovered asset cost. At the Beginning of estimated useful life = $600,000 At end of useful life = $ 50,000 Sum $650,000 Divided by 2 = $325,000 = average investment amount $200,000 / $325,000 = 61.53% Unadjusted rate of return Present Value Analysis The concept of present value analysis is based on the time value of money. The value of a dollar today is more than the value in a future period. The further in the future you look, the less that dollar will be worth. Using examples in Appendix 12 – A in the textbook. Internal Rate of Return – IRR This is another return on investment method. It uses a discounted cash flow technique. The IRR is the rate of interest that discounts future net inflows from the proposed investment down to the amount invested. This method is similar to the previous methods but adds the concept of time to the calculation. The IRR calculates from period to period, whereas the other two methods rely on average investments. To calculate IRR: Assumptions: Find the initial cost of the investment Find the estimated annual net cash inflow the investment will generate Find the useful life of the asset Steps: Divide the initial cost of the investment by the estimated annual net cash inflow it will generate. The answer is a ratio. Use the Look Up Table. Find the number of periods. Look across the line for the number of periods and find the column that approximates the ratio computed in Step 1. Initial cost of the investment = $16,950 Estimated Annual net cash inflow the investment will generate = $3,000 Useful life of the asset – 10 years $16,950 / $3,000 = 5.650 Using the Look Up Table for Present Value of Annuities on Page 404, match the # of years along left column with where 5.650 intersects, see the interest percentage. Payback Period The Payback Period is the length of time required for cash coming in from an investment to equal the amount of cash originally spent when the investment was purchased. The Payback Period concept is used in evaluating whether to invest in plant and/or equipment. We must establish if it’s worth spending the money and to do that, you need to determine a best case and worst case scenario as the calculation is based on assumptions of some type of return. Please see the Excel spreadsheet with a detailed explanation of the calculation of the payback period.

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