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Accrual Method

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Revenues- When they are earned and expenses when they have been increased. Revenues are recorded on the books when billed to patients, insurance companies, and other third party payers and expenses are recorded when incurred and there is an obligation to pay.

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Cash Basis

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The industry standard is to use the cash method of accounting. The practices use their financial statements to manage and track their operations. Revenue and expenses are often compared to annual and monthly budgeted amounts. Publishers such as MGMA, use the cash basis of accounts. Practices need to know whether their collections are in line and wether or not their overhead is within reasonable limits or not.

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Financial Reporting Needs

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-Tax Reporting -Stakeholder Reporting -Management Purposes -Income Distribution Formulas

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Tax Reporting

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Independent medical groups tend to report income tax returns on an income tax or modified cash basis ("modified" because equipment is capitalized and depreciated over time and retirement plan contributions are recorded in the year in which the expense is incurred as opposed to when paid).

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Stakeholder Reporting

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In a for profit medical group, physician share-holders, lenders, and other creditors. The reporting usually consist of year-end financial statements prepared by an outside public accounting firm. level is determined by the size of the group practice.

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Management Purposes

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They should include the traditional financial statements( balance sheet, income statement, and statement of cash flows) on a monthly basis along with several dashboard indicators designed for that practice. To include: AR- # of days outstanding, Aging by payer -Overhead as a % of R -Relative value units (RVUs) produced in total and by provider and location -Receipts or revenue per RVU -Total overhead expenses per RVU -Subcategories of overhead per RVU -Human resource expense *Administrative *Business office *Nursing (RN, LPN, medical assistants) in addition, in specialties # of scans done in an imaging center and new patients for pediatrics are included.

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Income Distribution Formula

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-100% productivity based -Allocation of revenue and expenses -Splitting net income, from 100% equal to a small amount equally divided among the groups physicians and remainder based on production. Several organizations provide survey data on compensation example MGMA used to determine market compensation.

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Compensation Methods and the Stark Law

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in 1995 self-referral law went into effect. known as the Stark Law, which prohibits physicians from receiving direct compensation for ancillary services (Lab services, x-ray, and other services). While this law includes services covered only by Medicare and Medicaid, most groups find it easier to treat all insurance payers alike and do not differentiate between them.

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Charts of Accounts

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Groups -Assets -Liabilities -Revenues -Expenses build these in a general ledger system and the financial statements of any business.

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Organizational Structure of medical Groups

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-Professional Associations (PAs) -Limited Liability Company (LLCs) -Professional Limited Liability Partnership (PLLP) Some laws make it illegal for hospitals or publicly held corporations to own physician practices. this is to ensure that quality is in the hands of those who can effectively judge it. Management Service Organizations own all the assets of the physician organization and then enter into a long-term agreement (a professional service agreement).

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What Makes Healthcare Finance Unique?

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The reimbursement methods used to pay physicians for services they provide are what makes healthcare finance truly unique. -Current procedural terminology (CPT) Codes- are assigned for all procedures related to patient care that a physician performs have been assigned a CPT code

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Resource-based Relative Value Scale (RBRVS) 1992

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Based on three components -Physician work -Practice expense -Malpractice insurance expense

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Fee-for-service and Discounted Fee-for-service

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The more services provided by a medical group, the greater the revenue earned. Once a group covers it's fixed expense and variable cost it begins to make a profit. Profit on additional services as long as it is covering the variable cost. In order to be preferred providers groups were willing to accept less than their standard fee schedule, known as a discounted fee-for-service. A preferred provider is a physician who accepts an insurance company's payment while other providers do not ( meaning that a patient may need to pay more for services of a provider who does not have preferred status with the patient's insurance company).

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Capitation

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is a payment arrangement for health care service providers such as physicians or nurse practitioners. It pays a physician or group of physicians a set amount for each enrolled person assigned to them, per period of time, whether or not that person seeks care.

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Budgeting and Budget Planning and Evaluation

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Broken into: Operational Capital budget

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Budget

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Should determine the costs and expenses required to meet the needs of the organization within the budget parameters. Larger healthcare systems budget for a profit in the range of 2-4% of the net revenue each year.

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Revenue Estimation: Provider productivity

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Listing all providers who bill for procedures and what the individuals have produced in terms of gross charges, number of patient visits, and RVU's. Use historical data to the individual providers and ask for their input on what they think their individual production will be. Benchmark data from MGMA can be used for new providers in determining productivity.

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Types of procedures

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Take into account changes in the types of procedure that may occur. review CPT codes ignored to increase charges and RVU's and thus greater revenue for the medical group.

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Payer Mix

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number of RVU's and determine the different insurance providers to include medicare and medicaid percentages. determine the percentages for each in order to determine a shift in revenue.

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Cost Shifting

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Cost shifting occurs when a hospital or other health-care provider charges an insured patient more than it does an uninsured patient for the same procedure or service. Those with health insurance, in effect, pay for the financial loss hospitals incur when they provide services to those without insurance and patient with medicare and medicaid.

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Expense estimation

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-Number of physicians and clinic professional (providers); -Compensation for each provider; -Salary changes: -Number of support staff and compensation changes: -Compensation for each provider: -Salary changes; -Number of support staff and compensation changes; -Changes in benefit cost (e.g., pension, FICA, health insurance); -Volume and price changes for supplies and drugs; -purchased services and malpractice costs (professional fees); -Location lease or ownership costs, utilities, and so on; -Cost of borrowing (interest expense); and -Systems development.

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Capital Budgeting- Capital Requirements for Medical Groups

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Include: -Financing for equipment -Leasehold improvements -Working Capital

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Operating Margin

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(Income from Operations (before Investment Income)) divided by (Patient Services and Other operating Revenue) OM=IO/PSOR Profitability

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Debt Service Coverage

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(Net Income+Depreciation+Interest Expense) divided by (Principal Payment+Interest Expense DSC=NI+D+IE/PP+IE Liquidity and cashflow

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Debt to Total Capitalization

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(Long-term Debt) divided by (Long-term Debt+Net Assets) DTC=LTD/L-TD+NA Leverage

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Cushion Ratio

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(Unrestricted Cash and Investment) divided by (Principal Payments+Interest Expense) CR=UC+I/PP+IE Liquidity and Cashflow

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Debt Service % of Revenues

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(Principal Payment+Interest Expense) divided by (Operating revenue) DS%R=PP+IE/OR Leverage

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Financial Performance Targets

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Profitability-Operating Margin = 1-3% Liquidity and Cash Flow-Debt Service Coverage = 2-3.3x , Cushion Ratio = 4-12x Leverage -Debt Service % of Revenues=3.3-7% Debt to Capitalization=30-60%

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Financial and Operating Ratios

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Months revenue is Accounts Receivable This ratio measures the number of months revenues that are uncollected in accounts receivable, providing an idea of how successful the medical group is in collecting its patient receivables.

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Gross Collection Ratio

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Measures the percentage of gross charges for which cash payments were received. (Cash Received from third-party payers and customers( statement of cash Flow)) divided by (Gross Fees (income Statement))

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Net Collection Ratio

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This ratio measures the % of net charges for which cash payments were received. The net collection paid is calculated the same as gross collection ratio. (Cash Received from third-party payers and customers( statement of cash Flow)) divided by (Net Fees (income Statement)) To analyzing third-party reimbursement if calculated separately for each payer to help determine the better payers and ensure that each payer is paying as contracted.

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Accounts Receivable Aging

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Track Aging in medical groups of collection fees. Will measure the ability of the firm to collect payment promptly from third party payers and customers. As accounts receivables get older it become more difficult to collect. Some insurance provider have a time limit on billing for services.

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Taxation and Organization Structure

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C Corporations Professional Service Corporations S Corporations LLCs and LLPs Not-for-profit Organizations

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C Corporations

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is a traditional tax-paying corporation. The corporation must pay taxes on taxable income at a federal tax rate of 35 percent.

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Professional Service Corporations

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Do not have the benefit of graduated tax rates. A flat rate of 35% tax rate.

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S Corporations

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known as pass-through entities because they do not pay corporate income taxes; however the individual shareholders must pay taxes on the profits at the individual level(i.e., the profits are pass through the corporation to the individual). The benefits of being an S corporation are great if an organization has high level of profits or sells its assets. They are limited in the the number of shareholders they can have.

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LLCs and LLPs

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Limited Liability Corporations (LLCs) and Limited Liability Partnerships (LLPs) are known as hybrid organization because they have the characteristics of a corporation (limited liability) and a partnership (pass-through taxation).

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Not-for-profit Organizations

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are exempt from income taxes under the IRS code. many are established in this format in order to retain profits without paying taxes and secure tax-exempt bonds at lower interest rates.

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Medical Group Valuation

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Buy-in and Buy-out Transactions between physicians

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Easy-in/Easy-out

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Is simply a fixed amount to buy into the corporation, and the buy-out is the same. Simple $1000.00 buy-in $1000.00 buy-out. Advantage- it's simple and there is no cost to calculate the buy-in and buy-out. great for recruitment if buy-in price is low. Disadvantage- is that there is no incentive for a physician to invest in the practice as she nears retirement. As they will not be willing to invest as they are leaving the practice.

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Book Value and Adjusted Book Value

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Opportunity to reflect the value of equipment purchases. The difference between the adjusted book value and book value methods relates to the value of the equipment.When the group believes that the value of the equipment is greater than that shown on the tax return or financial statements and therefore adjusts these value method states that a piece of equipment will never be valued below 50% of cost if it is still being used. easy but results in overvaluation of the equipment. other methods include-Separate depreciation schedules that choose longer lives for some of the equipment. Using a 10 year straight line with 20% residual value is a method that has gained acceptance for many groups.

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Accounts Receivable or Deferred Compensation

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-No buy-in/no buy-out -Vesting -Traditional buy-in -Frozen accounts receivable method

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No Buy-in/No Buy-out

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used when groups are having trouble recruiting physicians. Tends to be seen in larger groups. Advantages are that it is simple and promotes recruitment. Disadvantage is that often a fairness issue arises if some of the original physicians bought into the accounts receivable or incurred the cost of the ramping up of accounts receivable when the practice stared.

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Vesting

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Is similar to the no buy-in method; however, when a physician leaves the group, he shares in the accounts receivable. The group will use vesting schedules to protect itself.The vesting schedules range from 10% per year for 10 years to 0% over the first five years and then 20%per year. prorated will apply when physician leave the practice early. disadvantage - is that the buy-in does not match the buy-out.The individual physician buying in did not pay for the accounts receivable, yet he receives them when he retires or leaves the practice.

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Defined Contribution

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Is the most common type of retirement plan in medical groups. Contribution is calculated and contributed to each individual's account. most common plans in crude 401(k), profit sharing, and pension plans.

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401(k) plans

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Allows individuals to reduce their individual compensation by up to $14,000 and and contribute it to a retirement account.

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Profit-sharing plans

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They are additional funds to the retirement account at its discretion. Based on a % of employee wages. Usually 10% is the most allowed due to maximum individual contribution of $40,000

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Pension plan

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is similar to a profit-sharing plan, with the major difference being that the amount of the contribution is fixed as a percentage of wages.

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defined benefit

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This plan defines the amount an individual will receive per month after retirement. based on age, length of service, and compensation.

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Hybrid

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combine some of the features of the defined contribution and defined benefit plan. some hybrid plans are known as target benefit plans and cash balance plans.

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Compliance requirement

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The federal Employee Retirement Income Security Act (ERISA) of 1974 sets requirements for retirements and health plans to provide protection for individuals enrolled in them.

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What are the criteria to become 501(c)(3) organization?

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The most common type of tax-exempt nonprofit organization falls under category 501(c)(3), whereby a nonprofit organization is exempt from federal income tax if its activities have the following purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports

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What makes accounting for physician groups unique?

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The reimbursement methods used to pay physicians for the services they provide are what make healthcare finance unique.

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Retirement benefits for Physicians

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Defined Contribution Defined Benefit Hybrid

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The Stark law covers only the following:

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Medicare and Medicaid

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budgeting and budget planning include:

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Annual Operating budget -Revenue --Provider Productivity --Types of Procedure --Payer Mix --Cost shifting --Expense Estimation

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