Financial Acumen: Cost Management Tools

Financial Acumen:Cost Management Tools

Course Objectives

• Describe how healthcare business is different from other types of business

• Understand your department’s financial performance

• Identify the metrics used at the HSO level

• Create a plan for better financial management, focusing on finding and resolving variances

• Practice accessing your monthly reports to perform similar activities to those in class

Review:Videos and Survey

Reimbursement depends on• Payors/payor mixes• Patient Population• Length of Stay• Readmissions

Our Relationships• With physicians• With patients• Affiliations

Different from other Businesses• Customers• Ability to Pay

• Per diem• Fee for Service• Case Rates

Types of Reimbursement

Video Review: How is healthcare “business” different than other businesses?

Video Review: What is unique about the structure of BJC HealthCare?

Not for Profit

• We reinvest in ourselves • We share profits internally• We invest in capital improvements • We invest in our employees

through competitive salaries, benefits, education, and training

Community Benefit• Expanding/Adding Community

Services through our Profits• Charity care

• Education and research• Safety net services• Community health

programs

Different types of HSO• Community HSOs • Academic HSOs

Video Review:What are the Key Result Areas at BJC HealthCare?

• Patient Satisfaction/Clinical Quality• Employee Engagement• Growth• Performance Reporting• Productivity Improvement• Unit Cost Management

“Meeting financial budgets, having quality outcomes for our patients and the staff being happy with the environment.

These three intertwining things are the crux of our jobs as front-line managers.”

Elaine Thomas-HortonClinical Nurse ManagerBarnes-Jewish Hospital

“Being able to make all the metrics fit is a balancing act. Maintaining good employee engagement scores, good patient satisfaction scores, and meeting your budget is a delicate business.

You can’t go too much on the budget side. You reduce staffing to get under budget, this may make your employee engagement or your patient satisfaction scores decline. It’s all a balancing act.”

Tom ChiarelliDirector of Finance

St. Louis Children’s Hospital

From the HSOs:How do you affect the Key Result Areas at BJC HealthCare?

ActivityNot-for Profit vs. For-Profit

Characteristic Not-for-Profit For-Profit

Must provide community benefit

Profits can be distributed to individuals

Company has to pay taxes

Profits must be reinvested into the company



Must provide community benefit Yes No

Profits can be distributed to individuals






Profits can be distributed to individuals No Yes






Company has to pay taxes No Yes






Company has to pay taxes No Yes

Profits must be reinvested into the company Yes No


55%45%

$500,000,000 in Billed Charges

Total Net Revenue = $230,000,000

Managed Care = 55% reimbursement rate $151,250,000

Managed Care charges = $275,000,000

Government = 35% reimbursement $78,750,000

Government Charges = $225,000,000

Government Charges Managed Care Charges

HSO Performance:Impact of Payor Mix

HSO Performance:Why is there a difference between gross and net revenue?

Current year actual

Current year budget

Prior year actual

Total Gross revenue 88,773 85,058 78,226

Charity Care (392) (488) (337)

Revenue Deductions (38,656) (36,391) (32,974)

Net Patient Revenue 49,725 48,178 44,915

Current year actual

Current year budget

Prior year actual

Total Gross revenue 88,773 85,058 78,226

Charity Care (392) (488) (337)

Revenue Deductions (38,656) (36,391) (32,974)

Net Patient Revenue 49,725 48,178 44,915

HSO Performance:Why is there a difference between gross and net revenue?

Standard RateCharity Cases

– Payor Rates Net Revenue

Gross Revenue = our standard rate we charge for servicesRevenue Deductions = difference between our rate and reimbursement

So Net Revenue is Gross Revenue minus Charity Care payments and minus revenue deductions needed because our payors do not pay our full standard fees.

HSO Performance:Operating Margin Percentage

“How much of our revenues did we retain as profit?”

Operating Income

Operating Revenue= Operating Margin

Current year actual

Current year budget

Prior year actual

Total Operating Revenue 58,728 57,204 52,662

Total Operating Expense 53,277 52,372 48,701

Operating Income/ Margin 5,451 4,832 8,961

How much of our revenue was profit?

Operating Income

Operating Revenue

= ___%

Example 5,451 58,728 = 9.28%




Operating Income Operating

Revenue = %

Current Year

Last Year

2 Years Ago

Current Year Last Year 2 years Ago





Operating Income Operating

Revenue = ___%

Current Year 21,000 368,900 5.69

Last Year 24,000 372,800 6.43

2 Years Ago 30,000 350,700 8.55

Current Year Last Year 2 Years Ago





HSO Performance:How are Budgets established?

To help set budgets, we look at • HSO history• Projections• Reimbursement• BJC Targets

Two kinds of budgets • Operating • Capital

HSO Performance:How Budgets are Established

• What is it?

• What is it based on?

• Who puts it together?

• What if conditions that the budget was

based on change?

• Who owns it?

Operating Budget:

Capital Budget:• What is it?• What is it based on?• How is it spent?

HSO Performance:How Budgets are Established

Campus Renewal Programs

Base facility renewals/renovations, infrastructure, equipment and base

discretionary I.T.

Strategic Facilities in-cluding major facilities

an equipment pur-chases

Strategic and En-terprise I.T. initia-

tives

Reserved as CEO Contingency to be managed by BJC

9% of Total Revenue

The Numbers Game

The Numbers Game

OriginalScore

OriginalScore

Percentage ofIncrease

FinalScore

( _____ - _______) / _______ = ________ %

Department Performance

Department Performance:Income Statement

• How much income the department is making or losing.

Department Performance:Income Statement Activity

1. Did this department make money in December? 2. How did actual earnings compare to budgeted

earnings, favorable or unfavorable?3. Were actual earnings favorable or unfavorable for this

month compared to last year? By how much?4. What report line provides this information?5. What types of charges are Inpatient (IP)?6. What types of charges are Outpatient (OP)?7. How did this month’s actuals of Inpatient and

Outpatient revenue compare to last year, favorable or unfavorable?

8. What are some of the “charge capture systems” you use to enter these charges?

9. What are your responsibilities for capturing charges?

Department Performance:Income Statement Activity

HSO Performance:The Income Statement…

10 minute break

It's only a penny…

Department Performance:Your Cost Management Tools

Department Performance: Unit Cost

Total Cost

+

Labor Per Stat

Supplies Per Stat

Unit Cost# of Cases

=

=

Department Performance: Calculating Unit Cost

Lab Actual Budgeted Variance

Total Expenses 1,000 1,000 0



Volume (Lab Tests) 100 150 (50)

Unit Cost

Unit Cost Variance

We had 50 fewer lab tests than we budgeted, so our volumes were down.

But was our cost per lab test also down?


Total Expenses Volume = Unit Cost

1,000 100 10

1,000 150 6.6





Unit Cost 10 6.6

Unit Cost Variance

Unit Cost Variance Budgeted Unit Cost = Unit Cost % Variance

(3.4) 6.6 (51.5%)





Unit Cost 10 6.6 (3.4)

Unit Cost Variance (3.4) 6.6 (51.5%)


Total Expenses 234,365 241,000 6,635

Volume (Lab Tests) 71,000 78,527 (7,527)

Unit Cost

Unit Cost % Variance


Unit Cost Variance Budgeted Unit Cost = Cost % Variance

Department Performance: Calculating Unit Cost - Activity


Total Expenses 234,365 241,000 6,635

Volume (Lab Tests) 71,000 78,527 (7,527)

Unit Cost 3.30 3.06 (.24)

Unit Cost % Variance (.24) 3.06 -.078 or (7.8%)


Unit Cost Variance Budgeted Unit Cost = Cost % Variance

Department Performance: Calculating Unit Cost - Activity

Department Performance: Next Key Metric - Labor Per Stat

The biggest thing you can control is labor costs. Labor can be 50-70% of your costs.

• Labor Per Stat (LPS) - the cost of labor it takes to provide a specific service. Also called:

– Labor per service, or – Labor per patient day.

• LPS formula is similar to Unit Cost formula– Total Labor Cost/# of Cases = Labor Cost

Department Performance: Labor Per Stat

How do you control the biggest thing in your budget?

• Our Labor Per Stat (LPS) Tool:

• Two ways to control your labor / improve the LPS: – Increase volume– Reduce hours

Department Performance:Calculating Labor Per Stat


Total Labor Hours 500 600 100


Labor Per Stat 5 4 (1)

Labor Per Stat % Variance

(1) 4 (25%)

Total Labor Hours Volume = Labor Per Stat

Labor Per Stat Variance

Budgeted Labor Per Stat

= % Labor Per Stat Variance

Department Performance:Calculating Labor Per Stat - Activity


Total Expenses 395,960 375,487

Volume (Lab Tests) 73,326 69,923

Unit Cost

Unit Cost % Variance

Total Hours 9,165 9,090

Volume (Lab Tests) 73,326 69,923

Labor Per Stat



Total Expenses 395,960 375,487 (20,473)

Volume (Lab Tests) 73,326 69,923 3,403

Unit Cost 5.3999 5.37 (.0299)

Unit Cost % Variance (0.56%)

Total Hours 9,165 9,090 (75)

Volume (Lab Tests) 73,326 69,923 3,403

Labor Per Stat .125 .13 .005


3.8%

Department Performance:Calculating Labor Per Stat - Activity

Department Performance:Last Key Metric – Supply Per Stat

• Supply Per Stat (SPS) - the cost of supplies to provide a specific service. Also called:

– Supplies per service, or – Supplies per patient day

• SPS formula is similar to Unit Cost formula– Total Supplies Cost/# of Cases = Supplies Cost

How do you control the Supplies in your budget?

• What affects the SPS

• Two ways to control your supplies / improve your SPS– look for these items on your Budget Variance Report:

• Big ticket items• Compare quantities

Department Performance:Last Key Metric – Supply Per Stat

Department Performance: Summary

Questions?

• Unit Cost

• Labor per Stat

• Supply per Stat

Let’s Review Important Concepts: FTE


FTE Cost: • how much we pay each employee for the FTE they provide.• range of costs

• i.e.premium for weekend-only options

IMPT: • to know how much the FTE is costing your department, as well as • how many FTEs you have for your department. Your department has a designated amount of hours per patient, test, etc. to complete work. If you run over these allotted hours, your department will have a negative FTE balance.

MONITOR: Late clock-outs AND Early clock-insYou must ensure that dollars are not directed away from patient care.


FTE Calculator

1 FTE for full year 2080 hours (Leap year 2088 hours)

1 FTE for 31 day month 177 hours (rounded)



1 FTE per pay period 80 hours

April YTD Nursing Division 3700 has paid a total of 12450 hours.

How many FTEs have been paid YTD? Total Hours Paid

Hours YTD = FTEs_______/___ = ____ FTEs

____ hrs Jan ____ hrs Feb ____ hrs Mar

+ ____ hrs Apr___ Hours YTD


FTE Calculator

1 FTE for full year 2080 hours (Leap year 2088 hours)




1 FTE per pay period 80 hours

April YTD Nursing Division 3700 has paid a total of 12450 hours.

How many FTEs have been paid YTD? Total Hours Paid

Hours YTD = FTEs12,450/685 = 18.2 FTEs

177 hrs Jan 160 hrs Feb 177 hrs Mar

+ 171 hrs Apr685 Hours YTD

Let’s Review Important Concepts: Productive/NonProductive

How do you figure out productive/nonproductive?

Activity: Productive RN Hours per Patient Day

Actual Budget Variance

Volume 200 225

Prod RN Hours 1380 1385

Prod RN Hours/Pt Day 6.9 6.15

How many productive RN Hours could have been used with a volume of 200 pt days and still deliver 6.15 Productive RN hours per pt. day?

Actual Budget Variance

Volume 200 225 (11.1%)

Prod RN Hours 1380 1385 0.36%

Prod RN Hours/Pt Day 6.9 6.15 (12.2%) Formula (6.15 – 6.90) / 6.15 = (12.2%)

How many productive RN Hours could have been used with a volume of 200 pt days and still deliver 6.15 Productive RN hours per pt. day?

Formula: 200 (pt days) X 6.15 (Bud Prod RN Hrs per Pt Days) = 1230 Prod RN Hrs earned

Activity: Productive RN Hours per Patient Day

Adjusted to Volume Activity

• If the actual total census was 450 patient days, how many productive RN hours could be paid and still deliver 7.00 budgeted productive RN hours per patient day?

• If the actual total census was 350 patient days, how many productive RN

hours could be paid and still deliver 7.00 budgeted productive RN hours per patient day?

Nursing Division 2500 has a budgeted census of 400 patient days and 7.00 budget productive RN hours per patient day.

Let’s Review Important Concepts:Accruals


September October

Operating Room receives implants on patients (volume recorded) and bills them (revenue recorded).

Invoice paid for spine implants – accrual reversed.

Accrual is made to record when the expense was incurred, if it hasn’t been paid.

Net impact to October is 0.


December JanuaryInvoice dated 12/15/2012 for $1000 was received on 12/25/12 by the manager for approval.

Accounts Payable pays invoice on 1/5/2013.

Invoice sent to Accounts Payable for payment.

Let’s Review Important Concepts:Accounts Payable (AP)

Purchase orders needed for most items. Invoices are sent directly to AP for coding.

Exception: Direct pay invoices (primarily for services).You code these and send to AP for payment.

To send:Send an email to "MYBJCINVOICES". Each invoice should have a

separate pdf file. You may attach up to 5 separate invoice files in one email.

Send a fax to 314-747-1860. There should be a separate fax for each invoice.

If we have questions or encounter problems regarding Cardinal invoices, please contact Carol Payne in AP.

If you would like to set up a Recurring Payment, please email Angelina Williams in AP directly after completing the Recurring payment form found in PeopleSoft.

tel:3147471860

What to do with your Variances?

• Start by determining why it occurred.

• What are some things you could try to mitigate issues you’ve found?

• What are some examples you’ve tried?

Variances not addressed proactively will accumulate.

Actions to take to manage expenses

How do you prepare when you will be asked for explanations?• When you find a variance, dig in and look for causes• Determine steps of what you will to correct it

Make sure you:• Know your numbers

• Be able to explain your numbers: “Volume was up, I had to bring people in and pay them overtime. I expect another month like this because it’s wintertime.”

• Have ideas on how to mitigate costs

Follow UpCost Management Action Plan

• Create a way to transfer this knowledge into your job.– What steps will you take?

• Fill out Action Plan• Include a timeline for implementation.

– Email form to your manager/director one week from today.

• CLL will send you a reminder email to you and your manager/director 2, 4 and 6 weeks later with follow up questions/activities regarding your form.

• Class credit to be given after the form has been received.

Resources:Finance Support

• Finance Operations (from BJH) • Financial/Capital Analysis• Patient Access• Patient Financial Services• Health Information Management• Compliance Officer• Utilization Review Dept - works w/managers to figure out issues

Know Your Business • Review Course Objectives

– What is one thing you will do differently?

• Explain what impacts your business financially – We need to take good care of our patient

but we need to be good stewards of our resources.

• Know that what you do everyday affects our bottom line– Treat this as if its your own money.– Good management of your finances

looks good on your performance review.

Your turn!Accessing Monthly Reports

Accessing Monthly Financial ReportsSteps 1 & 2

Accessing Monthly Financial ReportsStep 7

Financial Acumen: Cost Management Tools

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Transcript of Financial Acumen: Cost Management Tools