March 12, 2024

The PESTLE Analysis of HCA Healthcare Paper

Introduction to Healthcare Financial Management READ: • • • • Week 9 Overview “Examining the Basics of the Healthcare Revenue Cycle” “Key Strategies for Modernizing the Revenue Cycle” “Cashing in on Revenue Cycle Improvements.” DO: • • Discussions Assignment 5: Revenue Cycle Process paper is due NLT 11:59 on Day ADDITIONAL RESOURCES: • • Chapter 16 in Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Chapter 15 Gapenski’s Understanding Healthcare Financial Management (Pink & Song) Discussion With a minimum of 250 words Read “Hospital revenue cycle trends to watch in 2019 — 8 thoughts” (https://www.beckershospitalreview.com/finance/hospital-revenue-cycle-trends-to-watch-in2019-8-thoughts.html. Based on the trends you read about in the article, which of the eight trends are most evident in the healthcare industry today? Support your statements with research in a few paragraphs and post your work to the discussion forum in an original post. Once you have completed your post, review the link of at least two of your peers. ASSIGNMENT You have been recently hired at UMGC Health as a financial consultant. One of your job duties entails educating new hires on the revenue cycle process. For this assignment, you will prepare a 3-5 page white paper outlining the basic steps of the revenue cycle. • • Identify the various steps within the revenue cycle process, including admissions, case management, documentation, coding, billing, et cetera. For each step identified, provide details pertaining to the following: o Purpose of the step identified. o The individuals involved in the process (e.g., providers, transcriptionists, coders, registration clerk, etc.). o The key components of the function, such as verifying insurance, financial counseling, coding of documented services provided etc. o The consequences of failure to properly conduct the function identified. Please Note: Support your research with at least five peer-reviewed sources. The use of professional charts / graphs to reinforce written content is expected. Please respond to the following Post with a minimum of 150 words POST 1 In the current dynamic healthcare landscape, there is a pressing need for more streamlined, patient-centered operations with a heightened emphasis on enhanced outcomes and cost reduction. Healthcare leaders are tasked with adopting a proactive stance and dedicating themselves to ongoing improvements. It’s a call for adaptability and a commitment to consistently elevate standards in the face of challenges. Two prominent trends are clearly visible in today’s healthcare industry. The first is the increasing emphasis on price transparency, providing patients with a clearer understanding of the costs associated with their care. This not only empowers patients but also contributes to fostering a more competitive and accountable healthcare environment. The second noteworthy trend involves healthcare outsourcing, specifically the utilization of revenue cycle management (Becker & Ellison, 2019). This strategic approach allows organizations to streamline financial processes, enhance overall efficiency, and ultimately optimize revenue. These trends signify a broader shift within the healthcare landscape towards transparency, efficiency, and an improved patient experience. As per Becker & Ellison, there’s a CMS rule mandating hospitals to publish a list of their standards online. This move towards transparency serves a crucial purpose by enabling individuals to precisely discern the costs associated with the services they receive. It’s a significant step in providing clarity and empowering patients to make more informed decisions about their healthcare. Additionally, heightened healthcare transparency, as highlighted by the American College of Physicians in 2010, has the potential to enhance the patient-physician relationship and overall healthcare systems. This transparency not only fosters trust by keeping patients informed but also contributes to a more collaborative and informed approach to healthcare. Moreover, healthcare outsourcing stands out as another noteworthy trend in the evolving landscape of the U.S. healthcare industry, particularly as it undergoes a transition towards a value-based healthcare system. This strategic shift involves externalizing certain healthcare functions, contributing to more efficient and specialized services. According to Becker & Ellison, hospitals are increasingly choosing to outsource either specific components or the entirety of their revenue cycle management functions. This strategic decision indicates a growing recognition of the benefits that specialized outsourcing can bring to the efficiency and effectiveness of managing financial processes in healthcare. References: Becker, S., & Ellison, A. (2019). Hospital revenue cycle trends to watch in 2019 – 8 thoughts. Becker’s Hospital Review. https://www.beckershospitalreview.com/finance/hospital-revenuecycle-trends-to-watch-in-2019-8-thoughts.html Healthcare transparency focus on price and clinical performance … – ACP. (2010). https://www.acponline.org/sites/default/files/documents/advocacy/current_policy_papers/assets/t ransparency.pdf POST 2 From the selected article, one of the most relevant trends listed is the integration of health informatics and electronic health record (EHR) systems within the healthcare system. As patient care in the modern age relies a lot on information transfer and data storage, EHR can play a big factor when accepting new patients, determining treatments, creating a long -lasting patient/provider relationship and making sure that personal health information (PHI) is kept safe (Cameron, 2023). EHR usage is a health informatics trend that has dramatically changed the way that patient information is shared and stored. Though a relatively new concept, the benefits of EHR integration within hospitals and smaller practices cannot be overlooked. In the context of large healthcare systems taking over smaller practices – EHR allows for the information from the smaller practice to be seamlessly integrated with the records of the larger system…bonus points if they were using the same EHR system prior to the take -over. Enacted in 2009, the Health Information Technology for Economic and Clinical Health (HITECH) Act provided over $27 billion in funding to encourage hospital systems and solo providers to implement electronic health record systems within their practices. Even more funding was allocated to help train health workers and IT professionals in setting up this technology. Studies show that incentives from the HITECH Act were influential in accelerating the adoption of EHR technology amongst both large medical systems and small er physician-owned practices (Cohen, 2016). Studies also show that physicians’ views on the importance of the adoption of EHR technology is strongly associated with the incentives provided to them by doing so (Cohen, 2016). To receive incentives, physicians and organizations must meet meaningful use objectives, get EHR certified, and follow reporting protocols. Under the HITECH Act, eligible professionals can receive as much as $44,000 over a five year period through Medicare and even more than $60,000 through Medicaid over a six year period. Large hospitals can earn millions for integrating EHR technology (Cohen, 2016). References: Cameron, M. (2023). The Importance of EHR Integration for Practice Management. NexHealth. https://www.nexhealth.com/resources/ehr-integration Cohen M. F. (2016). Impact of the HITECH financial incentives on EHR adoption in small, physician-owned practices. International journal of medical informatics, 94, 143– 154. https://doi.org/10.1016/j.ijmedinf.2016.06.017 Module 9 Readings Health Information Management: Concepts, Principles, and Practice Chapter 8- Healthcare Informatics Standards, pgs. 204-214. Health Information Management Technology: An Applied Approach Chapter 4- Healthcare Data Sets and Standards: Standards for Electronic Data and Electronic Data Interchange, pgs.159-173. • • • • • Healthcare Data Standards Standards Developing Organizations (SDOs) (standardsportal.org) Data Standards in Healthcare: Codes, Documents, and Exchange Formats How Data Standards in Healthcare Support Interoperability What is HL7 and FHIR Assignment Standard Development Organization (SDO) The most common healthcare data standard used in digital healthcare, like the Electronic Health Record (EHR) and Health Information Exchange (HIE), is the Health Level 7 (HL7) which is both the Standard Development Organization (SDO) and the standard. Describe HL7 as an organization. What are its most common standards for exchanging and sharing healthcare data between providers? Why is it preferred for use in Electronic Health Record (EHR) and Health Information Exchange (HIE)? Who created, owns, and maintains it? What are its latest versions and format? How is FHIR (Fast Healthcare Interoperability Resources) related to HL7? Your APA formatted assignment comprising 2-4, double-spaced, typed in 12-point Times New Roman (or 11- point Calibri) excluding the Cover and Reference pages should be submitted by Tuesday mid-night. Response to Discussions POST 1 Electronic data interchange (EDI) is the electronic transfer of information such as health claims transmitted electronically, in a standard format between trading partners. It is also used to exchange patient information such as lab and medical records. At healthcare organizations, the information management department can use EDI to maintain authority over the release of information and make the process of transferrin patient information more expeditious (Shihadeh et al,1994) EDI is important in healthcare as it quickens the exchange of medical data and also increases the accuracy. With EDI, errors with manual processes such as data entry are eliminated. One of the main functions of EDI is to transmit administrative data such as patient data, insurance information, claims processing and payment information. The other main functions is to transmit clinical data such as medical record, lab data and radiology reports. The EDI format is based on standardized codes defined by the Accredited Standards Committee (ASC) X12. As stated earlier, EDI is in healthcare to exchange medical information such as patient data, medical records, claims processing, and payment information between medical providers. Obstacles for using EDI include the high cost of implementation and also the issue of integrating it with existing systems. These obstacles can be overcome by working with vendors to efficiently and effectively implement EDIs in healthcare organizations. References Kathleen M. LaTour, & Shirley Eichenwald. (2013). Health Information Management: Concepts, Principles, and Practice, Fourth Edition: Vol. 4th ed. AHIMA Press. Shihadeh S, Rooks C. The basics of EDI (electronic data interchange): a pathway to the information highway. J AHIMA. 1994 Aug;65(8):24, 26, 28-9; quiz 30, 32. PMID: 10135555. POST 2 Electronic Data Exchange, suggested by the name, is a standardized electronic healthcare data exchange between different systems. EDI is important as it provides a safe and efficient method to exchange clinical information and data efficiently and accurately, such as health records and claims. EDI also automates administrative and financial transactions, lowering costs and processing time while increasing systems productivity and efficiency. The primary function of EDI is to create a smoother process for exchanging electronic health information and data. It provides standards to ensure compliance with regulations and procedures. EDI X12 is a data format based on the Accredited Standards Committee (ASC) X12 standards). In addition, EDI provides a secure environment to share and compare health data information on a regional, national, and international level. Healthcare EDI can be used for benefit verification and to obtain insurance information on beneficiaries. EDI is also a valuable tool for billing and claims purposes for the submission and processing of healthcare claims. Once claims are paid, EDI could be used to facilitate electronic payments from insurance. In addition, EDI could also help track disease and monitor a particular health crisis. Some obstacles to using healthcare EDI may be the costs associated with implementing EDI in existing systems. However, EDI provides many advantages in the long-term. Privacy and security issues may also be obstacles. Implementing new systems requires adequate security systems to ensure data privacy. Healthcare organizations must also be educated on healthcare EDI and its importance in promoting, adopting, and implementing a standardized exchange system to increase efficiency and encourage accurate data exchange in the healthcare industry. REFERENCE Kathleen M. LaTour, & Shirley Eichenwald. (2013). Health Information Management: Concepts, Principles, and Practice, Fourth Edition: Vol. 4th ed. AHIMA Press. Sayles, N. B., & American Health Information Management Association. (2013). Health Information Management Technology : An Applied Approach: Vol. Fourth edition. AHIMA Press. As a small (3-4 student) group you are required to develop a financial analysis of a healthcare organization. The intent of this assignment is to evaluate the financial and operational health of the organization. You may pursue, analyze, and synthesize any information source you choose (e.g., website content, current resident personal interviews, organizational documentation, etc.). During the development process you will also be asked to review the work of at least one other group, provide feedback, and help support their development effort. This will also help you (1) learn about one other’s organization and (2) benchmark your efforts against the work of your peers. Your content should be clear, logical, and report on (at a minimum) the busin ess’ location(s) and competitive market(s). Use of a PESTLE and SWOT analysis is encouraged. From a financial perspective, your final presentations should contain analysis and discussion on 2 – 3 ratios from each of the primary financial ratio categories discussed in Week 4 (e.g., liquidity, profitability, operating efficiency, and capital structure). A five year trend analysis – including the most recent year of available information/data – is expected for each ratio selected. Interpret the ratios, the financial and market trends and provide your perspectives on the strengths and weaknesses of the organization. Do not just report the data. Tell us what it means. Ultimately, we want to know if the organization is financially sound and has strong long-term growth prospects. Why or why not? Grading will focus on content development, depth of analysis and professionalism of delivery. Your final deliverable is a presentation of no more than 10 minutes in length, developed in a professional format suitable for presentation to the Board of Directors or a CSuite executive team. · Deliverables: – A financial analysis of a healthcare organization paper- submit the papers in this folder. One per group submission is fine. Make sure to list all group members on the title page. Page count should be no less than 6 -12 pages. The Organization to be used : HCA Healthcare We selected HCA Healthcare as the healthcare organization we will analyze in the Financial and Organizational Analysis Project. Based in Nashville, Tennessee, HCA Healthcare is one of the leading providers of healthcare services in the United States. Formed as the Hospital Corporation of America in 1968, HCA Healthcare is comprised of more than 180 hospitals and approximately 2,300 sites providing patient care (HCA Healthcare, n.d.). A major factor in the group selecting HCA Healthcare as the subject of our Financial and Organizational Analysis Project, is the fact that it is a for-profit organization that is publicly traded. As a publicly traded organization on the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ), our group will have access to a considerable amount of information on HCA Healthcare to include facts on financial, operational, and strategic planning. The extensive amount of information available on HCA Healthcare will enable our group to provide a comprehensive financial and operational analysis of the organization as required for the successful completion of the project. References HCA Healthcare. (n.d.). Our history. https://hcahealthcare.com/about/our-history.dot Assigned section for me: Explain how Pestle Analysis is for HCA Healthcare PESTLE Analysis • Political • Economic • Sociological • Technological • Legal and Environment **Include graphical representation of analysis for inclusion in the paper. This will also be used for the PowerPoint presentation. It should be a 4 page paper. Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. CHAPTER REVENUE CYCLE AND CURRENT ACCOUNTS MANAGEMENT 16 Learning Objectives After studying this chapter, readers will be able to • Discuss in general terms how businesses manage cash and marketable securities. • Describe the construction and use of cash budgets. • Explain the key elements of the revenue cycle and the issues involved in its management. • Explain the basics of receivables management and why it is so important to the revenue cycle. • Describe the basic framework for supply chain management. • Explain the alternatives available for short-term financing, including the use of security to obtain loans. Introduction In our discussion of financial management leading up to this chapter, the general focus has been on long-term, strategic decisions. Another important element of healthcare finance involves the management of short-term (current) accounts, such as cash, receivables, inventories, and payables. In corporate finance, the management of current accounts is called working capital management. This chapter begins with an overview of current accounts management, followed by a brief discussion of the management of each current asset account plus revenue cycle management. These topics tie together health services operations, billing, and collections. The chapter closes with a discussion of the types of short-term financing used by healthcare providers. 625 EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 626 G a p en s k i’s H e a l th c a re Fi n a n c e An Overview of Current Accounts Management Current accounts management involves all current assets and most current liabilities. The primary goal of current accounts management is to support the operations of the business at the lowest possible cost. Clearly, a business must have the level of current assets necessary to meet its operational requirements. However, it is imprudent to hold too high a level because of the costs of carrying those assets. To illustrate the requirement for short-term financing and to review the current asset and current liability accounts, consider the situation facing Sun Coast Clinics, Inc., a for-profit operator of four walk-in clinics in South Florida. Exhibit 16.1 contains the firm’s December 2020 and April 2021 balance sheets. The provision of ambulatory care services in this part of Florida is a seasonal business. The peak season for Sun Coast is December through April, when the population of the area soars because of winter tourism and the arrival of “snow birds” (i.e., retired individuals who typically live in the North during the summer and fall months but move to residences in Florida for the winter). In December of each year, Sun Coast is finishing its slow season and preparing for its busy season. Thus, the clinic’s accounts receivable are relatively low, but its cash and inventories are relatively high. (In this example, the cash account also contains cash equivalents, which are highly liquid securities with maturities of three months or less.) By the end of April, Sun Coast has completed its busy season, so its accounts receivable are relatively high, but its cash and inventories are relatively Healthcare in Practice low in preparation for the slow summer Working Capital season. On the current liabilities side, Sun The term working capital originated in the United Coast’s accounts payable and accruals are States in the 1700s, when Yankee peddlers were relatively high at the end of April, just the main source of goods for many farmers in after the busy season. remote areas of the Northeast. These merchants Consider what happens to Sun loaded up their wagons with goods and set off on Coast’s total current assets and total cura regular route to peddle their wares. According to the economic definitions of capital (assets) rent liabilities over the December-toversus labor, the peddler’s horse and wagon conApril period. Current assets increase from stituted the business’s fixed capital (fixed assets), $200,000 to $240,000, driven by the while the merchandise was called working capital increase in accounts receivable. The clinic because it was what was sold, or turned over, to has been providing services and incurproduce a profit. Over the years, use of the term ring costs for labor and supplies; howhas evolved so that today, the term gross working capital is defined as current assets, while net ever, patient or third-party payments for working capital is defined as current assets minus those services have not yet been collected. current liabilities. Thus, the clinic must increase its capital by $40,000—an increase on the assets EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent December 2020 April 2021 Cash Accounts receivable Inventories Total current assets Net fixed assets $ 30 155 15 $200 500 $ 20 210 10 $240 500 Total assets $700 $740 Accounts payable Accruals Notes payable Total current liabilities Long-term debt Common equity $ 30 15 105 $150 150 400 $ 40 25 125 $190 140 410 Total liabilities and equity $700 $740 EXHIBIT 16.1 Sun Coast Clinics, Inc.: End-of-Month Balance Sheets (in thousands) side of the balance sheet must be financed by an increase on the liabilities and equity side. The higher volume of purchases and labor expenditures associated with increased services is partially financed by a $20,000 spontaneous increase in accounts payable and accruals, from $30,000 + $15,000 = $45,000 in December to $40,000 + $25,000 = $65,000 in April. In other words, while the clinic is waiting to collect its receivables, it is also waiting to pay some of its bills. However, the net result is an additional $40,000 − $20,000 = $20,000 current asset financing requirement in April, which Sun Coast obtained from the bank as a short-term loan (notes payable). Therefore, at the end of April, Sun Coast showed notes payable of $125,000, up from $105,000 in December. Unlike accounts payable and accrued expenses, bank loans come with an explicit cost—namely, the interest the bank charges for use of the funds. This is called a carrying cost. As this example shows, increases in short-term assets are not free. These fluctuations for Sun Coast result from seasonal factors. Similar fluctuations in current asset requirements, and hence in financing needs, can occur because of business cycles; typically, current asset requirements and financing needs contract during recessions and expand during boom times. 1. What is the goal of current accounts management? 2. Describe how seasonal volume fluctuations influence current asset levels and financing requirements. 627 SELF-TEST QUESTIONS EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 628 G a p en s k i’s H e a l th c a re Fi n a n c e Cash Management Businesses need cash, which includes both actual cash on hand and cash held in commercial checking accounts, to pay for labor and materials, buy fixed assets, pay taxes, service debt, and so on. However, cash is a nonearning asset—it provides no return. Thus, similar to the overall goal of current accounts management, the goal of cash management is to minimize the amount of cash the business must hold to conduct its normal activities while having sufficient cash on hand to support operations. Maintaining sufficient cash ensures that a business is liquid, which means that it can meet its cash obligations as they come due. Conversely, a business that is illiquid cannot easily generate the cash needed to meet its obligations, and its operations suffer. A key element in a business’s cash management process is the cash budget, which we discuss in the next major section of this chapter. In essence, the cash budget tells managers how effective they are in applying the cash management techniques discussed in the following subsections. Managing Float A well-run business has more money in its checking account than the balance shown in its checkbook. Net float, or just float, is the difference between the balance shown in the bank’s records and the balance in the business’s checkbook. Alternatively, float can be calculated as the sum of the business’s two component floats: disbursement and collections. To illustrate net float and its components, assume that Gainesville Primary Care writes checks in the amount of $5,000 each day. As the checks are written, the amounts are deducted from the checkbook balance. It takes six days for these checks to be mailed, delivered, deposited, and cleared and for the amounts to be deducted from the clinic’s For Your Consideration bank account. As a result, the clinic’s checkCredit Cards—The Ultimate Float book will show a balance that is 6 × $5,000 for Individuals = $30,000 less than the balance on the Businesses, especially those with large amounts bank’s records. Considering only disburseof checks written and received, can take advantage of the float inherent in checking accounts. ments, the clinic’s actual balance at the But for most individuals, the volume of checking bank is $30,000 greater than the amount activity makes float management impractical. shown on its checkbook, so it has a positive However, there is a good source of float available $30,000 disbursement float. to individuals: credit cards. Now assume the clinic receives When you charge a purchase on a credit checks in the amount of $5,000 daily, card (but not a debit card), you are given a grace period to pay it off. So as long as you pay the but it loses four days while they are being deposited and cleared. This difference (continued) will result in 4 × $5,000 = $20,000 of float The difference between the balance shown on a business’s (or individual’s) checkbook and the balance shown on the bank’s books. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent 629 collections float. Because of the delay in (continued from previous page) depositing and clearing checks, the clinic’s full amount within the grace period, you are not balance at the bank is $20,000 less than charged interest. In essence, you buy now and that on its checkbook, which represents a pay later without any interest charges. Because negative collections float of $20,000. you receive the food or merchandise or service The clinic’s net float, which is the now and pay for it, say, 40 days later, the bank sum of the positive $30,000 disbursethat issues the credit card is extending you an interest-free loan. Smart people use credit cards ment float and negative $20,000 collecfor the convenience and for the value of the float. tions float, is $10,000. On average, the However, credit cards are only a good deal when clinic’s balance at the bank is $10,000 you have the financial means to pay them off in larger than the balance on its checkbook. full by the payment date. Some businesses are so good at managing What do you think about credit cards? In float that they carry a negative checkbook what situations are they a benefit to individuals? How can credit cards be abused? Do you own a balance but have a positive balance at the credit card? Do you use it wisely? bank. For example, one medical equipment manufacturer stated that its bank records show an average cash balance of about $200,000, while its own checkbook balance is minus $200,000—it has $400,000 of net float. A firm’s net float is a function of its ability to speed up collections on checks received and to slow down collections on checks written. Efficient businesses go to great lengths to speed up the processing of incoming checks, thus putting the funds to work faster, and they try to delay their own payments as long as possible (without engaging in unethical or illegal practices). A 2018 Federal Reserve Payments Study found that the number of checks written decreased by 3.6 percent from 2015 to 2016 and by 4.8 percent from 2016 to 2017.1 However, many people still pay their healthcare expenses by check, particularly the elderly and poor, who tend to be high users of the healthcare system. Therefore, checks will likely be used for the foreseeable future, and well-run businesses continue to recognize the value inherent in float. Acceleration of Receipts Managers have searched for ways to collect receivables faster since the day that credit transactions began. Although cash collection is the responsibility of a firm’s managers, the speed with which checks are cleared depends on the banking system. Several techniques are now used to speed collections and to get funds where they are needed, but the three most popular are lockbox services, concentration banking, and electronic claims processing. This section covers lockbox services and concentration banking. The discussion of electronic claims processing appears later in this chapter. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 630 G a p en s k i’s H e a l th c a re Fi n a n c e lockbox A post office box used by a business to receive checks at a location other than the corporate headquarters. Automated Clearing House (ACH) An electronic communication network for transmitting data from one financial institution to another. Lockboxes are one of the oldest cash management tools, and virtually all banks that offer cash management services offer lockbox services. In a lockbox system, incoming checks are sent to post office boxes rather than to corporate headquarters. For example, Health SouthWest, a regional HMO headquartered in Oklahoma City, has its Texas members send their payments to a box in Dallas, its New Mexico members send their checks to Albuquerque, and so on, rather than have all checks sent to Oklahoma City. A local bank collects the contents of each post office box (which is called “the lockbox”) and deposits the checks into the company’s local account. The bank then provides the HMO with daily records of the receipts collected, usually via an electronic data transmission system in a format that permits online updating of the firm’s receivables accounts. A lockbox system reduces the time required for a business to receive incoming checks, deposit them, and get them cleared through the banking system, so the funds are available for use more quickly. This time reduction occurs because mail time and check collection time are both reduced if the lockbox is located in the same geographic area as the customer. Lockbox services can increase the availability of funds by one to four days over the regular system for firms with customers over a large geographic area. Although lockbox systems are efficient in speeding up collections, the firm’s cash is spread among many banks. The primary purpose of concentration banking is to mobilize funds from decentralized receiving locations, whether they are lockboxes or decentralized company locations, into one or more central cash pools. In a typical concentration system, the firm’s collection banks record the deposits received each day. Based on the firm’s disbursement needs, the funds are then transferred from these collection points to a concentration bank. Concentration accounts allow firms to take maximum advantage of economies of scale in cash management and investment. Health SouthWest uses an Oklahoma City bank as its concentration bank. The HMO cash manager uses this pool for short-term investing or reallocation among its other banks. Electronic systems make concentration banking easy. The Automated Clearing House (ACH) is a communication network that sends data from one financial institution to another. Instead of using paper checks, the ACH creates electronic files that place all transactions for a particular bank in a single file and then send it to that bank. In addition to the ACH, Fedwire is used to move large sums between banks. Between the two systems, trillions of dollars are efficiently moved among banks on a daily basis. Disbursement Control Accelerated collections represent one side of using float, while controlling fund outflows is the other. Efficient cash management can only result if both inflows and outflows are managed effectively. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent No single action controls disbursements more effectively than payables centralization. This permits the firm’s managers to evaluate the payments coming due for the entire business and to meet those needs in an organized and controlled manner. Centralized disbursement also permits more efficient monitoring of payables and float balances. However, centralized disbursement does have a downside—centralized offices may have difficulty making all payments promptly, which can create ill will with suppliers and disqualify the business from receiving prompt-payment discounts. Zero-balance accounts (ZBAs) are special disbursement accounts that have a zero-dollar balance on which checks are written. Typically, a firm establishes several ZBAs in the concentration bank and funds them from a master account. As checks are presented to a ZBA for payment, funds are automatically transferred from the master account, which is an interest-earning account. If the master account has a negative balance, it is replenished by borrowing from the bank against a line of credit or by selling some securities from the firm’s marketable securities portfolio. ZBAs simplify the control of disbursements and cash balances and hence reduce the amount of idle (i.e., non-interest-bearing) cash. Whereas ZBAs are typically established at concentration banks, controlled disbursement accounts can be set up at any bank. In fact, controlled disbursement accounts were initially used only in relatively remote banks, so this technique was originally called remote disbursement. The basic technique is simple: Controlled disbursement accounts are not funded until the day’s checks are presented against the account. The key to controlled disbursement is the ability of the bank that has the account to report the total amount of checks received for clearance each morning. This early notification gives a firm’s managers sufficient time to wire funds to the controlled disbursement account to cover the checks presented for payment. 631 zero-balance account (ZBA) A bank account having a zero balance that is established by a business to handle disbursements of a particular type. Funds are transferred to ZBAs from a master account as needed to cover the checks written. Matching the Costs and Benefits of Cash Management Although the techniques discussed earlier can reduce cash balance requirements, implementing these procedures is not a costless operation. How far should a firm go in making its cash operations more efficient? As a general rule, the firm should incur these expenses only so long as the marginal returns exceed the marginal costs. The value of careful cash management depends on the opportunity costs of funds invested in cash, which, in turn, depend on the current rate of interest. For example, in the early 1980s, when interest rates were relatively high, businesses devoted a great deal of care to cash management. Today, with interest rates much lower, cash management is less valuable. Clearly, larger businesses, with larger cash balances, can better afford to hire the personnel necessary to maintain tight control over their cash positions. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 632 G a p en s k i’s H e a l th c a re Fi n a n c e Because cash management is an element of business operations in which economies of scale are present, banks place considerable emphasis on developing and marketing these services. Thus, banks can generally provide cash management services to smaller companies at lower costs than companies can achieve by operating in-house cash management systems. SELF-TEST QUESTIONS 1. What is float? 2. How do firms use float to increase cash management efficiency? 3. What are some methods businesses can use to accelerate receipts? 4. What are some methods businesses can use to control disbursements? 5. How should cash management actions be evaluated? The Cash Budget cash budget A schedule that lists a business’s expected cash inflows, outflows, and net cash flows for some future period. In chapter 8, in our discussion of financial planning and budgeting, we focused on the operating budget, which provides managers with numerous insights into the efficiency of an organization’s operations. However, the operating budget is based on accrual accounting principles and does not provide managers with much information about a business’s cash position. This situation is remedied by the cash budget. To create a cash budget, managers forecast cash collections and fixed asset and inventory requirements, along with the times such payments are expected. This information is combined with cash outlay projections for operating and financial expenses such as wages and benefits, interest payments, tax payments, and so on to produce a report showing the organization’s projected cash inflows and outflows over some specified period. Generally, the cash budget consists of individual monthly cash budgets forecast for one year, plus a more detailed daily or weekly cash budget for the coming month. The monthly cash budget is used for liquidity planning purposes, and the daily or weekly budget is used for actual cash control. Creating a cash budget does not require the application of a complex set of accounting rules. Rather, all the entries in a cash budget represent the actual movement of cash into or out of the organization. To illustrate, exhibit 16.2 contains a monthly cash budget that covers six months of 2021 for Mission County Homecare, a small for-profit home healthcare company. Mission’s cash budget, which is broken down to three sections, is typical, although there is a great deal of variation in formats used by different organizations. For ease of illustration, the cash budget is constrained to relatively few lines. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 $ 73,500 ($ 13,900) $ 15,000 $ 1,100 10,000 ($ 8,900) Surplus/Deficit Summary: 15. Cash at beginning with no borrowing 16. Cash at end with no borrowing 17. Target cash balance 18. Cumulative surplus (deficit) $ 59,600 $ 10,000 60,000 2,500 1,000 Net Cash Gain (Loss): 6. Total collections (from line 3) 7. Total purchases (from line 5) 8. Wages and salaries 9. Rent 10. Other expenses 11. Taxes 12. Payment for capital assets 13. Total payments 14. Net cash gain (loss) $ 1,100 ($ 3,500) 10,000 ($ 13,500) $104,400 $ 15,000 70,000 2,500 1,500 20,000 $109,000 ($ 4,600) $ 20,000 $ 15,000 $ 15,000 $ 10,000 Supplies Worksheet: 4. Amount of supplies ordered 5. Payments made for supplies $10,000 29,400 70,000 5,000 104,400 19,600 35,000 5,000 $ 59,600 June $150,000 $50,000 May $100,000 $50,000 April Collections Worksheet: 1. Billed charges 2. Collections: a. Within 30 days (19.6%) b. 30–60 days (70%) c. 60–90 days (10%) 3. Total collections March EXHIBIT 16.2 Mission County Homecare: May–October Cash Budget ($ 3,500) $ 46,200 10,000 $ 36,200 $104,500 $ 49,700 $154,200 $ 20,000 80,000 2,500 2,000 $ 10,000 20,000 39,200 105,000 10,000 154,200 $200,000 July $ 46,200 $ 97,300 10,000 $ 87,300 50,000 $ 123,500 $ 51,100 $274,600 $ 10,000 60,000 2,500 1,000 $ 10,000 10,000 19,600 140,000 15,000 174,600 $ 100,000 August $ 97,300 $ 113,400 10,000 $103,400 $109,600 $ 10,000 60,000 2,500 1,000 20,000 $ 93,500 $ 16,100 $ 5,000 $ 10,000 19,600 70,000 20,000 109,600 $100,000 September $ 113,400 $135,200 10,000 $125,200 $ 68,000 $ 21,800 $ 89,800 $ 5,000 60,000 2,500 500 $ 5.000 9,800 70,000 10,000 89,800 $ 50,000 October Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 633 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 634 G a p en s k i’s H e a l th c a re Fi n a n c e The first section of Mission’s cash budget contains the collections worksheet, which translates the billing for services provided into cash revenues. Because of its location in a summer resort area, Mission’s patient volume, and hence billings, peak in July. However, like most health services organizations, Mission rarely collects when services are provided. What is relevant from a cash budget perspective is not when services are provided or when billings occur but when cash is collected. Based on previous experience, Mission’s managers know that most collections occur 30 to 60 days after billing. In fact, Mission’s managers have created a collections worksheet that allows them to forecast, with some precision, the timing of collections. This worksheet was used to convert the billings shown on line 1 of exhibit 16.2 into the collection amounts shown on lines 2 and 3. To illustrate the relationship between billings and collections, consider the $100,000 of billed charges forecast for May. Of this amount, $19,600 (19.6 percent) is expected to be collected in May (within 30 days), $70,000 (70 percent) is expected to be collected in June (30–60 days after billing), and $10,000 (10 percent) is expected to be collected in July (60–90 days after billing). Thus, of the $100,000 in May billings, $19,600 + $70,000 + $10,000 = $99,600 is expected to be collected, so a small amount ($400 or 0.4 percent) is forecast to be a bad debt loss (an implicit price concession). If this pattern of collections is expected to continue, then the organization can forecast all future cash collections using a similar method. For example, the $104,400 of cash collections expected in June represents the following: (0.196 × $150,000 billed charges in June) + (0.70 × $100,000 billed charges in May) + (0.10 × $50,000 billed charges in April) = $29,400 + $70,000 + $5,000 = $104,400. The next section of Mission’s cash budget is the supplies worksheet, which accounts for timing differences between supply order and purchase. Mission’s patient volume forecasts, which are used to predict the billing amounts shown on line 1, are also used to forecast the supplies (primarily medical) needed to support patient services. These supplies are ordered and received one month prior to expected usage, as shown on line 4. However, Mission’s suppliers do not demand immediate payment. Rather, Mission has, on average, 30 days to pay for supplies after they are received, so the actual payment occurs one month after purchase, as shown on line 5. The next section combines data from the collections and supplies worksheets with other projected cash outflows to show the net cash gain (loss) for each month. Cash from collections is shown on line 6. Lines 7 through 12 list cash payments that are expected to be made during each month, including payments for supplies. Then, all payments are summed, with the total shown on line 13. The difference between expected cash receipts and cash payments, line 6 minus line 13, is the net cash gain or loss during the month, EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent which is shown on line 14. For May, there is a forecast net cash outflow of $13,900 (the parentheses indicate a negative cash flow). Although line 14 contains the “meat” of the cash budget, lines 15 through 18 (the surplus/deficit summary) extend the basic budget data to show Mission’s monthly forecast cumulative cash position. Line 15 shows the forecast cash on hand at the beginning of each month, assuming that no borrowing takes place. Mission is expected to enter the budget period, the beginning of May, with $15,000 of cash on hand. For each succeeding month, line 15 is merely the value shown on line 16 for the previous month. The values on line 16, which are obtained by adding lines 14 and 15, show the cash on hand at the end of each month, assuming no borrowing takes place. For May, Mission expects a cash loss of $13,900 on top of a starting balance of $15,000, for an ending cash balance of $1,100, in the absence of any borrowing. This amount is the cash on hand at the beginning of June, with no borrowing amount, shown on line 15. To continue, Mission’s target cash balance (i.e., the amount that it wants on hand at the beginning of each month), which is shown on line 17, is $10,000. The target cash balance is subtracted from the forecast ending cash with no borrowing amount to determine the firm’s monthly deficit (shown in parentheses) or surplus (shown without parentheses). Because Mission expects to have ending cash in May, as shown on line 16, of only $1,100, it will have to obtain $1,100 − $10,000 = −$8,900 to bring the cash account up to the target balance of $10,000. If this amount is borrowed, as opposed to obtained from other sources such as liquidating marketable securities, the total loan outstanding will be $8,900 at the end of May. (The assumption here is that Mission will not have any loans outstanding on May 1.) The cumulative cash surplus or deficit is shown on line 18; a positive value indicates a cash surplus, while a negative value indicates a deficit. The surplus cash or deficit shown on line 18 is a cumulative amount. Thus, Mission is projected to require $8,900 in May; it has a cash shortfall during June of $4,600, as reported on line 14, so its total deficit projected for the end of June is $8,900 + $4,600 = $13,500, as shown on line 18. The same procedures are followed in subsequent months. Patient volume and billings are projected to peak in July, accompanied by increased payments for supplies, wages, and other items. However, collections are projected to increase by a greater amount than costs, and Mission expects a $49,700 net cash inflow during July. This amount is sufficient to pay off the cumulative loan (if one is used) of $13,500 and have a $36,200 cash surplus on hand at the end of the month. Patient volume, and the resulting operating costs, are expected to fall sharply in August, but collections will be the highest of any month because they will reflect the high June and July billings. As a result, Mission would EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 635 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 636 G a p en s k i’s H e a l th c a re Fi n a n c e normally be forecasting a healthy $101,100 net cash gain during the month. However, the company expects to make a cash payment of $50,000 to purchase a new computer system during August, so the forecast net cash gain is reduced to $51,100. This net gain adds to the surplus, so August is projected to end with $87,300 in surplus cash. If all goes according to the forecast, later cash surpluses will enable Mission to end this budget period with a surplus of $125,200. Mission’s managers use the cash budget for liquidity planning purposes. For example, the exhibit 16.2 cash budget indicates that Mission will need to obtain $13,500 in total to get through May and June. Thus, if the firm does not have any marketable securities to convert to cash, it will have to arrange some type of financing (loan) to cover this period. Furthermore, the budget indicates a $125,200 cash surplus at the end of October. Mission’s managers will have to consider how these funds can best be used. Perhaps the money should be paid out to owners as dividends or bonuses, used for fixed asset acquisitions, or be temporarily invested in marketable securities for later use within the business. This decision will be made on the basis of Mission’s overall financial plan. This brief illustration shows the mechanics and managerial value of the cash budget. However, before concluding the discussion, several additional points need to be made. First, if cash inflows and outflows are not uniform during the month, a monthly cash budget could seriously understate a business’s peak financing requirements. The data in exhibit 16.2 show the situation expected on the last day of each month, but on any given day during the month, it could be quite different. For example, if all payments had to be made on the fifth of each month, but collections came in uniformly throughout the month, Mission would need to borrow cash to cover withinmonth shortages. For example, August’s $123,500 cash payments may be made before Mission receives the full $174,600 in collections. In this situation, Mission would have to obtain some amount of cash to cover shortfalls in August, even though the end-of-month cash flow after all collections had been made is positive. In this case, Mission would have to prepare a weekly or daily cash budget to indicate such borrowing needs. Also, because the cash budget represents a forecast, all the values in exhibit 16.2 are expected values. If actual patient volume, collection times, supplies purchases, wage rates, and so on differ from forecast levels, the projected cash deficits and surpluses will be incorrect. Thus, there is a reasonable chance that Mission may need to obtain a larger amount of funds than is indicated on line 18. Because of the uncertainty of the forecasts, spreadsheets are particularly well suited for constructing and analyzing cash budgets. For example, Mission’s managers could change any assumption—say, projected monthly EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent 637 volume or the time third-party payers take to pay—and the cash budget would automatically and instantly be recalculated. This would show Mission’s managers exactly how the firm’s cash position changes under alternative operating assumptions. Typically, such an analysis is used to determine the size of the credit line needed to cover temporary cash shortages.2 In Mission’s case, such an analysis indicated that a $20,000 credit line is sufficient. 1. Why do organizations need a cash budget? 2. Does the cash budget require an extensive knowledge of accounting principles? 3. In your view, what is the most important line of the cash budget? SELF-TEST QUESTIONS Marketable Securities Management Many businesses hold temporary portfolios of short-term securities called marketable securities. On the balance sheet, short-term securities with maturities of three months or less are lumped in with cash and often labeled cash and cash equivalents. Short-term securities with maturities between three months and one year are reported separately as short-term investments. Although cash and marketable securities management are discussed in separate sections, in practice, they cannot be separated from one another because management of one implies management of the other. There are two primary reasons for holding marketable securities: (1) They serve as an interest-earning substitute for cash balances, and (2) they are used to hold funds that are being accumulated to meet a specific large, near-term obligation, such as a tax payment or capital expenditure. In general, the key characteristic sought in marketable securities investments is safety (preservation of principal). Most health services managers are willing to give up some return to ensure that funds are available, in the amounts expected, when needed. Large businesses, with large amounts of surplus cash, often directly own securities such as Treasury bills (short-term debt issued by the federal government). Conversely, smaller businesses are more likely to invest with a bank or a money market mutual fund because a small firm’s volume of investment simply does not warrant hiring specialists to manage a marketable securities portfolio. Small businesses often use a mutual fund and write checks on the fund to bolster the cash account as the need arises.3 Interest rates on mutual funds are somewhat lower than rates on direct investments of equivalent risk because marketable securities Securities that are held in lieu of cash, typically safe, short-term securities such as Treasury bills; called cash equivalents or short-term investments when listed on the balance sheet. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 638 G a p en s k i’s H e a l th c a re Fi n a n c e of management fees. However, for smaller companies, net returns may well be higher on mutual funds because no in-house management expense is required. The bottom line here is that, regardless of size, businesses’ marketable securities portfolios consist almost exclusively of safe, liquid investments that can be sold at any time at a predictable price. SELF-TEST QUESTIONS 1. Why do firms hold marketable securities? 2. How are these holdings reported on the balance sheet? 3. What are some securities that are commonly held as marketable securities? 4. Why are these securities preferred? Revenue Cycle Management revenue cycle The set of recurring activities and related information processing required to provide patient services and collect for those services. One of the hottest topics in healthcare finance today is revenue cycle management. Its importance stems from the fact that most healthcare providers are not paid the entire amount due for services at the same time services are rendered. Thus, providers incur cash costs for facilities, supplies, and labor but do not receive immediate payment to cover those costs. In fact, hospitals and medical practices have to wait an average of 50 days to collect from third-party payers. The revenue cycle is defined as the set of recurring business activities and related information processing necessary to bill for and collect the revenues due for services provided. More pragmatically, the revenue cycle at provider organizations should ensure that patients are properly categorized by payment obligation, that correct and timely billing takes place, and that the correct payment is promptly received. Revenue cycle activities typically are broken down into four phases based on when they occur: (1) those that occur before the service is provided, (2) those that occur simultaneously with the service, (3) those that occur after the service is provided, and (4) those that are continuous. The following are some examples of revenue cycle activities listed by phase.4 Before-Service Activities • Preservice insurance verification. The insurance status of the patient is identified immediately after the outpatient visit (or inpatient stay) is scheduled to ensure that the patient actually has the insurance indicated when the appointment was made. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent • Precertification/prior authorization (if necessary). If the insurance verification indicates that the payer requires precertification, it should be done immediately. Without precertification for services that require it, the provider runs the risk of having the claim (bill) denied even though the services were provided. • Preservice patient financial counseling. The patient should be counseled regarding the payer’s and patient’s payment responsibilities. It is not fair to present a large bill to an unsuspecting patient after the service is rendered. At-Service Activities • Time-of-service insurance verification. The patient’s insurance status should be re-verified with both the patient and the payer at the time of service to ensure that no changes have occurred since the initial verification. • Service documentation/claims production. The services provided should be documented in a way that facilitates correct claims submission. The documentation process should ensure that (1) the provider fully and correctly documents all diagnoses and services provided, (2) the services provided are coded in accordance with the payer’s claim system, (3) the code reflects the highest legitimate reimbursement amount, and (4) the claim is formatted in accordance with payer guidelines and contains all required information. After-Service Activities • Claims submission. The claim should be submitted to the payer as quickly as possible after the service is rendered. However, speed should not take precedence over accuracy because incomplete and inaccurate billing accounts for a large proportion of late payments. • Third-party follow-up. If payment is not received within 30 days, a reminder should be sent. • Denials management. Claims denial by third-party payers is one of the major impediments to timely reimbursement. Typically, most denials are caused by improper precertification or incomplete or erroneous claims submission. Prompt claims resubmission is essential to good revenue cycle management. • Payment receipt and posting. When the reimbursement is received, it must be properly deposited and credited. This activity ends the revenue cycle. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 639 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 640 G a p en s k i’s H e a l th c a re Fi n a n c e Continuous Activities • Monitoring. Once revenue cycle activities are identified and timing goals are set for each activity, the provider should implement a system of metrics (key indicators) to ensure that these goals are being met. • Review and improvement. The key indicators monitoring the revenue cycle must be continually reviewed and any deficiencies corrected. The revenue cycle requires constant attention because the external factors that influence it are constantly changing. Also, problems that occur at any point in the revenue cycle tend to have ripple effects—that is, a problem that occurs early in the cycle can create additional problems at later points in the cycle. For example, failure to obtain required precertification can lead to claim denial, which at best means delayed payFor Your Consideration ment and at worst means no payment at all. Revenue Cycle Management The ability of healthcare providin Medical Practices ers to convert services rendered into cash As in hospitals, revenue cycle management is is critical to their financial performance. an important contributor to profitability in medical practices. Yet many physicians struggle with Problems in the revenue cycle lead to lost the idea that they are businesspeople as well as and late payments, both of which degrade clinicians. provider revenues and financial condition. One of the problems frequently encounYou can think of the provider as furnishing tered in medical practices is the lack of physito the payer an interest-free loan that covcian engagement in revenue cycle management. ers the costs of the services rendered. The To create the most efficient revenue cycle process, it is essential that all physicians, espefaster the loan is repaid, the better for the cially the lead physician, be fully committed lender (provider). to the effort. Without a high level of executive sponsorship, small problems can quickly turn into large ones. When physicians are fully engaged in revenue cycle management, it becomes clear that the process is of utmost importance to the success of the practice and that the entire team needs to be on board. This is particularly true when new processes or technologies are being introduced. What do you think about the need for physician involvement in revenue cycle management? Can’t the office manager and billing and collections staff handle the task? What can be done to encourage physicians to be more supportive of the organization’s business practices? Monitoring Revenue Cycle Performance The ultimate goal of revenue cycle management is to convert services provided into cash reimbursement as quickly as possible. Thus, a provider’s patient accounts receivable plays a key role in assessing performance. The total amount of accounts receivable outstanding at any given time is determined by two factors: (1) the volume of services provided and (2) the average length of time between services and collections. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent For example, suppose Home Infusion, Inc., a home health care business, begins operations on January 1 and on the first day starts to provide services to patients billed at $1,000 each day. For simplicity, assume that all patients have the same insurance, that it takes Home Infusion two days to submit patients’ bills, and that it takes the insurer another 18 days to make the payments. Thus, it takes 20 days from delivery of service to receipt of payment. At the end of the first day, Home Infusion’s accounts receivable will be $1,000; they will rise to $2,000 by the end of the second day; by January 20, they will rise to $20,000. On January 21, another $1,000 will be added to receivables, but, assuming that the insurer pays the full amount for services provided 20 days earlier, payments for services provided on January 1 will reduce receivables by $1,000, so total accounts receivable will remain constant at $20,000. If either patient volume or the collection period changes, the amount in accounts receivable will change. Monitoring Overall Revenue Cycle Performance If a service is provided for cash, the payment is received at that time, but if the service is provided on credit, the payment is not actually received until the account is collected. If the account is never collected, the payment is never received. Thus, healthcare managers must closely monitor receivables to ensure that they are being collected in a timely manner and to uncover any deterioration in the quality of receivables. Early detection can help managers take corrective action before the situation has a significant negative impact on the organization’s financial condition. (Receivables quality is defined as the likelihood that the receivables will be collected in a timely manner and without losses.) The common approach to monitoring revenue cycle performance, both in the aggregate and by specific activity, is by using metrics. Generically, a metric is a single quantitative indicator—usually a ratio—that can be used to measure the performance of some process. The primary purpose of metrics is to monitor performance and aid in the identification of corrective action plans if performance is subpar. In this section, we discuss two metrics that monitor overall revenue cycle performance: average collection period and aging schedule. Average Collection Period. Suppose that Home Infusion provides an average of ten home health visits a day at an average net charge of $100 per visit, for a total of $1,000 in average daily billings (ADB). Assuming 250 workdays a year, the company’s annual billings total $1,000 × 250 = $250,000. Furthermore, assume that all services are paid by two third-party payers: One pays for half of the billings 15 days after the service is provided, EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 641 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 642 G a p en s k i’s H e a l th c a re Fi n a n c e average collection period (ACP) The average length of time it takes a business to collect its receivables; also called days sales outstanding (DSO) or days in patient accounts receivable. and the second pays for the other half of billings in 25 days. Home Infusion’s average collection period (ACP), also called days in patient accounts receivable, is 20 days. ACP = (0.5 × 15 days) + (0.5 × 25 days) = 20 days. Assuming a constant uniform rate of services provided, and hence billings, the accounts receivable balance at any point in time will be equal to ADB × ACP. Home Infusion’s receivables balance would be $20,000: Receivables balance = ADB × ACP = $1,000 × 20 = $20,000. What is the cost implication of carrying $20,000 in receivables? The $20,000 on the left side of the balance sheet must be financed by an equivalent amount on the right side. Home Infusion uses a bank loan, which has an interest rate of 8 percent, to finance its receivables. Thus, over a year, the firm must pay the bank 0.08 × $20,000 = $1,600 in interest to carry its receivables balance. The cost associated with carrying other current assets can be thought of in a similar way. Key Equations: Average Collection Period and Receivables Balance The average collection period (ACP) is a weighted average of the time it takes an organization to collect its receivables. Assume payer A takes 20 days to pay and contributes 40 percent of a provider’s receivables, while payer B takes 50 days and contributes 60 percent. The ACP, then, is 38 days: ACP = (0.4 × 20 days) + (0.6 × 50 days) = 8 + 30 = 38 days. With the ACP known, the receivables balance is calculated as follows: Receivables balance = ADB × ACP, where ADB is average daily billings. For example, if a provider has $5,000 in average daily billings and an ACP of 38 days, its receivables balance is $190,000: Receivables balance = ADB × ACP = $5,000 × 38 = $190,000. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent The ACP, which is a measure of the average length of time it takes patients (or third-party payers) to pay their bills, often is compared with the sector median ACP. For example, if the home health sector median ACP is 22 days, versus Home Infusion’s 20-day ACP, its collections department is doing a better-than-average job. Note, however, that even though Home Infusion’s payers are, on average, paying faster than the 22-day sector median, its two payers are paying in 15 days and 25 days. Thus, the firm’s collections department should take a hard look to see whether the ACP of the 25-day payer can be reduced to the sector median or even to the 15 days of the other payer. Why is it so important to minimize a business’s ACP? To illustrate, assume that Home Infusion’s ACP is 25 days, and its receivables balance is $25,000. Assuming an 8 percent cost of financing (carrying) its receivables, the annual carrying cost to Home Infusion is 0.08 × $25,000 = $2,000. But at its actual ACP of 20 days, its carrying cost is only 0.08 × $20,000 = $1,600. Thus, by reducing its ACP by five days, Home Infusion reduced its receivables carrying cost by $400 annually. “No big deal,” you say. True, but now consider a 500-bed hospital with $100 million in receivables and a 60-day ACP, which implies average daily billings (ADB) of $100 million ÷ 60 = $1.67 million. A reduction of ACP by five days would reduce the receivables balance to $1.67 million × 55 = $91.85 million, or by about $8 million. Assuming the same 8 percent cost of carrying receivables, the savings amounts to a substantial 0.08 × $8 million = $0.64 million = $640,000. In addition, the hospital would receive a one-time cash flow of $8 million as the receivables balance is reduced. It should be apparent that immediate cash flow as well as large savings can be obtained by reducing a business’s ACP and hence its receivables balance. Aging Schedules. An aging schedule breaks down a firm’s receivables by the age of each account. To illustrate, exhibit 16.3 contains the December 31, 2020, aging schedules of two home health companies: Home Infusion and Home Care. Both firms offer the same services and show the same total receivables balance. However, Home Infusion’s aging schedule indicates that it is collecting its receivables faster than Home Care is. Only 50 percent of Home Infusion’s receivables are more than ten days old, but 55 percent of Home Care’s receivables are more than ten days old. More important, Home Care has receivables that are more than 30 days old and even some that are more than 40 days old. Based on a sector median ACP of 22 days, Home Care’s managers should be concerned about the efficiency of the firm’s collections efforts and the ability of the late payers to make the payments due. Aging schedules cannot be constructed from the type of summary data reported in a firm’s financial statements; they must be developed from the 643 aging schedule A table that expresses a business’s accounts receivable by how long each account has been outstanding. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 644 G a p en s k i’s H e a l th c a re Fi n a n c e EXHIBIT 16.3 Aging Schedules for Two Firms Home Infusion Home Care Age of Account (Days) Value of Account Percentage of Total Value Value of Account Percentage of Total Value 0–10 11–20 21–30 31–40 Over 40 $ 10,000 7,500 2,500 0 0 50% 38 12 0 0 $ 9,000 5,000 3,000 2,000 1,000 45% 25 15 10 5 Total $20,000 100% $20,000 100% firm’s accounts receivable ledger. However, well-run businesses have computerized accounts receivable records. Thus, it is easy to determine the age of each invoice, sort electronically by age categories, and generate an aging schedule. In addition, some providers show account aging on patient billing statements. Monitoring Specific Revenue Cycle Activities Of course, overall revenue cycle performance is a function of how well the specific revenue cycle activities are performed. The following are five metrics, of many, that are commonly used to measure the performance of specific revenue cycle activities: 1. Cost to collect. This metric is used to measure the overall costeffectiveness of an organization’s revenue cycle management. It is defined as Total revenue cycle costs ÷ Total amount collected. The idea here is that it makes no sense to spend $1.50 to collect $1. 2. Point-of-service collection rate. This metric is defined as Pointof-service collections ÷ Total patient collections. Its purpose is to measure the percentage of the monies owed by patients that is collected when the service is rendered. Clearly, the more money that is collected at the time of service, the better. Collection when the patient is at the facility saves the cost of billing and ensures that the payment is made. 3. Initial denial rate. This metric, which is a broad measure of billing efficiency, is defined as Number of initial claims denied ÷ Number of claims submitted. Here, the higher the metric value, the greater the cost of collecting payments due from insurers. Claims denials increase revenue cycle costs in three ways. First, denials require additional work, and hence cost, at the billing organization. Second, EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent denials delay the receipt of payment, which increases the cost of carrying the receivables balance. Third, if the denial is permanent, the claim is never paid and the cost of service is borne by the provider. 4. Registration quality score. This metric measures the effectiveness of the patient registration process. It is defined as Number of correct patient demographic and insurance data elements at registration ÷ Total number of data elements. A high score indicates good up-front patient data collection and prevents downstream revenue cycle defects. 5. Charge lag days. This metric measures the time it takes from the day a service is provided to the day a bill is sent to the payer (patient or insurer). It is defined as Total days between service and billing ÷ Number of bills. Note this definition gives the average lag days over some time period. The metric could also be calculated by payer (patient, Medicaid, or others). Clearly, on average, the faster that bills are generated and sent, the quicker the collection. Before we end our discussion of specific metrics, it is useful to consider what makes a good metric. First and foremost, metrics are supposed to measure process performance. So good metric design starts with defining what the fundamental purpose is for the process being assessed. Only after having defined the process purpose can a discussion begin about measuring performance. In the case of the revenue cycle, the fundamental purpose can be defined as identifying the correct amount “owed” to the organization for services rendered and converting that amount into cash. Second, recognize that metrics are used to provide the organizational focus to ensure that resources are aimed at the correct activities. To further this concept, selected metrics, coupled with associated goals, are used to define incentive pay plans to motivate staff to achieve the desired results. With these goals in mind, here are several characteristics of good metrics: • Metrics must directly measure the degree of “success” of the process purpose. • Metrics must be measurable and quantitative. • Metrics must be objective and precise. • Metrics must be measurable over time. • Metrics should be easily defined and understood by all affected managers and staff. While the performance monitoring objective of metrics is apparent to most individuals, the human component evades many. Metrics play a EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 645 G a p en s k i’s H e a l th c a re Fi n a n c e EXHIBIT 16.4 Hospital Sector’s Receivables Mix Payer Percentage of Total Accounts Receivable Medicare 30.9% Managed care 22.5 Self-pay 13.2 Medicaid 13.1 Commercial insurers 11.6 Other 8.7 100.0% Data from Aspen Publishers, Hospital Accounts Receivable Analysis, 2015. major role not only in motivating staff to work better but also in communicating organizational goals and objectives. In high-performing organizations, managers and staff have a sense of purpose related to their daily activities, and metrics play a fundamental role in communicating how this purpose is achieved. Unique Problems Faced by Healthcare Providers Although the general principles of revenue cycle management discussed up to this point are applicable to all businesses, healthcare providers face some unique problems. The most obvious problem is the billing complexity created by the third-party payer system. For example, rather than having to deal with a single billing system that applies to all customers, providers have to deal with the rules and regulations of many different government and private insurers that use different payment methodologies. Thus, providers have to maintain large staffs of specialists who report to a patient accounts manager. EXHIBIT 16.5 Hospital Sector’s Aggregate Aging Schedule Age of Account (Days) Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 646 Percentage of Total Accounts Receivable (Days) 0–30 31–60 61–90 91–120 Over 120 Percent Data from Aspen Publishers, Hospital Accounts Receivable Analysis, 2015. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent For an illustration of the problem, consider exhibit 16.4, which contains the receivables mix for the hospital sector. Many of the categories listed in the exhibit include multiple payers, so the actual number of payers can easily run into the hundreds. Exhibit 16.5 provides information on how long it takes hospitals to collect receivables. Because of the large number of payers and the complexities involved in billing and follow-up actions, hospitals clearly have a great deal of difficulty collecting bills in a timely manner. On average, it takes about 50 days to collect a receivable. However, this number has decreased in recent years as hospital managers have become increasingly aware of the costs associated with carrying receivables and as automated systems have made the collections process more efficient. Despite the positive trend, about 33 percent of receivables still were more than 60 days old. In addition, the American Hospital Association estimated the cost of uncompensated care (hospital care provided for which no payment was received from the patient or insurer) in 2017 to be about $38.4 billion, or 4.2 percent of total expenses.5 To help providers collect from managed care plans in a timely fashion, many states have enacted laws that mandate “prompt” payment. For example, New York State requires that all undisputed claims by providers be paid by plans within 45 days of receipt. If prompt payment is not made, fines are assessed.6 The Revenue Cycle and Value-Based Payment Value-based reimbursement models are shifting some of the financial accountability that used to be borne by payers onto healthcare providers. Thus, there is an increasing need to monitor not only revenue cycle processes but also quality measures that contribute to the overall payments that providers receive. Much of the data needed to make improvements in care quality and patient outcomes, identify high-risk patients to better manage population health, and accurately classify patients for risk stratification and adjustment reside in providers’ clinical data systems. Many providers are investing in advanced data analytics tools that allow them to monitor quality and outcomes data in real time so that they can make adjustments to better manage the revenue cycle and maximize their collections. In addition, the proliferation of high-deductible health plans is making claims management more complex. Revenue cycle activities such as patient financial counseling, communication and price transparency, and efficient billing and collection practices are becoming critical as patients assume a greater role in managing their care. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 647 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 648 G a p en s k i’s H e a l th c a re Fi n a n c e SELF-TEST QUESTIONS 1. What is the revenue cycle? 2. What four phases make up the revenue cycle? 3. Why is proper management of the revenue cycle critical to the financial performance of healthcare providers? 4. Explain how a firm’s receivables balance is built up over time and why there are costs associated with carrying receivables. 5. Briefly discuss two metrics used to monitor overall revenue cycle performance. 6. What are some of the unique problems healthcare providers face in managing receivables? 7. What are some implications for the revenue cycle of value-based payment? Supply Chain Management supply chain management The management of the procurement, storage, and utilization of supplies; also called inventory management. The overall management of inventory, including purchasing, transportation, storage, and use or disposal, is called supply chain management or inventory management. Inventories are an essential part of virtually all business operations. As is the case with accounts receivable, inventory levels depend heavily on volume. However, whereas receivables build up after services have been provided, inventories must be acquired ahead of time. This is a critical difference, and the necessity of forecasting patient volume before establishing target inventory levels makes inventory management a difficult task. Also, because errors in inventory levels can lead either to catastrophic consequences for patients or excessive carrying cost, supply chain management in health services organizations is as important as it is difficult. Proper supply chain management requires close coordination among the marketing, purchasing, patient services, and finance departments. The patient services department is generally the first to spot changes in demand. These changes must be worked into the company’s purchasing and operating schedules, and the financial manager must arrange any financing that will be needed to support inventory buildups. Improper communication among departments, poor volume forecasts, or both can lead to disaster. The key to cost-effective supply chain management is information technology. Inventory control systems start with an inventory count in memory, and, as withdrawals are made, the system records them and revises the inventory balance. When the order point is reached, the system EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent automatically places an order, and when the order is received, the system increases the recorded balance. A good supply chain management system must be dynamic. A large provider may stock thousands of different items of inventory. Increased or decreased use of these items may have no correlation with an increase or decrease in aggregate utilization of services. As the usage rate for an item begins to rise or fall, the supply chain manager must adjust its balance to avoid running short or ending up with obsolete items. If the change in the usage rate appears to be permanent, the base inventory level should be recomputed, the safety stock should be reconsidered, and the computer model used in the control process should be reprogrammed. Today, many health services providers use the just-in-time (JIT) approach to supply chain management. JIT is a management strategy aimed at minimizing costs by having inventory items arrive on-site shortly before they are needed. This simple concept reduces the costs associated with carrying large inventories at any given point in time. To illustrate the use of JIT systems among providers, consider Bayside Memorial Hospital, which consumes large quantities of medical supplies each year. A few years ago, the hospital maintained a 25,000-square-foot warehouse to hold its medical supplies. However, as cost pressures mounted, the hospital closed its warehouse and sold the inventory to a major hospital supplier. Now the supplier is a full-time partner of Bayside in ordering and delivering the products of some 400 hospital supply companies. Bayside’s supply chain streamlining process began with daily deliveries to the hospital’s loading dock but soon expanded to a JIT system called stockless inventory. Now the supplier fills orders in exact, sometimes small, quantities and delivers them directly to departments inside the hospital, including the operating rooms and nursing floors. Bayside’s managers estimate that the stockless system has saved the hospital about $1.5 million a year since it was instituted, including $350,000 from staff reductions and $1,150,000 from inventory and facilities reductions. In addition, the hospital has converted space that was previously used as storerooms to patient care and other cash-generating uses. The distributors that offer stockless inventory systems typically add 3 to 5 percent service fees, but many large hospitals with high supplies costs can still realize savings on total inventory costs. However, the stockless inventory concept has its own set of problems. The major concern is that a stock-out, which occurs when a needed inventory item is not available, will cause a serious problem. In addition, some hospital managers are concerned that such systems create too much dependence on a single supplier, and that the cost savings will disappear as prices increase. 649 just-in-time (JIT) approach A supply chain management technique that requires suppliers to deliver inventory items in relatively small quantities as they are needed, which reduces the amount of inventory stock held; there are several variations of JIT systems. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. 650 G a p en s k i’s H e a l th c a re Fi n a n c e As stockless inventory systems become more prevalent in hospitals, more For Your Consideration and more hospitals are relying on outside The GS1 System of Standards contractors that assume both inventory Founded in 1977, GS1 is an international not-formanagement and supplier roles. In effect, profit organization dedicated to the improvement hospitals are beginning to outsource supof supply chain efficiency. GS1’s primary activity ply chain management. For example, is the development of the GS1 System, a series some hospitals are experimenting with an of standards composed of four key elements: bar codes, which are used to automatically identify inventory management program known items; eCom, which creates standardized busias point-of-service distribution, which is ness inventory messaging data; Global Data one generation ahead of stockless sysSynchronization, which allows multiple busitems. Under point-of-service programs, nesses to have consistent inventory data; and the supplier delivers supplies, intravenous EPCglobal, which establishes a system that uses solutions, medical forms, and so on to radio frequency chips to track items across the entire supply chain. the supply rooms. The supplier owns the In the US healthcare sector, many compaproducts in the supply rooms until the nies—from manufacturers to distributors to end hospital uses them, at which time the hosusers such as hospitals—are actively supporting pital pays for the items. the adoption of GS1 standards. The goals of the In addition to reducing inventories, companies involved include enhanced patient outside supply chain managers are often safety, improved supply chain management, enhanced drug control, and better connectivity to better at ferreting out waste than are their electronic health records. in-house counterparts. For example, an What do you think of the GS1 standards inventory management company found concept? How can bar codes and radio frequency that one hospital was spending $600 on chips enhance patient safety? Do you think that products used in open heart surgery, while the adoption of GS1 standards will increase or another was spending only $420. Because decrease supply chain costs? there was no meaningful difference in the procedure or outcomes, the higher-cost hospital was able to change the medical devices used in the surgery and pocket the difference. In an even more advanced form of supply chain management, some hospitals negotiate with suppliers to furnish materials on the basis of how much medical care is delivered, rather than the type and number of products used. In such agreements, providers pay suppliers a set fee for each unit of patient service provided—for example, $125 for each case-mix-adjusted patient day. Under this type of system, a hospital ties its supplies expenditures to its revenues, which, at least for now, are for the most part tied to the number of units of patient service. The end of the evolution of inventory management techniques for healthcare providers is expected to be some form of capitated payment; providers will pay suppliers a previously agreed-upon fee regardless of actual future patient volume and regardless of the amount of supplies actually consumed. EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 10/17/2023 7:07 AM via UNIVERSITY OF MARYLAND GLOBAL CAMPUS AN: 2558485 ; Kristin L. Reiter, Paula H. Song.; Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition Account: s4264928 Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. C h a p te r 16: Re ve nue Cyc le and C ur rent A c c ounts Managem ent 1. Why is good supply chain management important to a firm’s success? 2. Describe some recent trends in supply chain management by healthcare providers. SELF-TEST QUESTIONS Current Liability Management At this point in the chapter, we conclude our discussion of current assets management and turn our attention to current liabilities management. We begin with accruals and trade credit, a…

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