By the end of this presentation you will be able to: Define Fiscal Literacy & understand why it is...

FISCAL LITERACY

Lauren Klein, CPA, MAccCleveland Clinic Health System

February 6, 2015

Learning Objectives

By the end of this presentation you will be able to:Define Fiscal Literacy & understand

why it is necessary to be a leaderRecognize the components of an

operating statement & utilize to manage your business

Create a departmental budget Interactive budget exercise

Complete a variance analysis Interactive variance exercise

Fiscal LiteracyFiscal Literacy is defined as:

Possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s goals

Fiscal Literacy And Leadership

A good leader understands daily operations and the impact of decisions on financial performance

Leaders need to be able to effectively communicate financial issues of an entity

Fiscal Literacy And Leadership

A good leader should be able to successfully tell the story of their department/entity by weaving together the clinical (provider, patient, quality) AND financial issues

How Do I Improve My Fiscal Literacy?

Maybe I

should

become

a CPA?

What if I get a part-

time job at a bank?

Will that help?

Should I go back

to college?

Is there an APP on my

IPhone?

How Do I Improve My Fiscal Literacy?

Develop a good working knowledge of key financial terms, reports & processes

Put together the right team You don’t need to be a subject matter expert You should, however, know what to look for It’s important to know what type of questions to

ask Go to subject matter experts for help!

Collaborate & communicate within the department Physician lead, Administrative & Finance Leads

all working together, leveraging the different skill sets

A Good Place to Start: The Operating Statement

What Is An Operating Statement?

Core financial statementPresents a company’s operating

results over a specific period of timeStarts with revenue and then

subtracts expenses to calculate net income

Sometimes referred to as an income statement, a P&L (profit & loss), statement of operations, earnings report

Why Do We Need An Operating Statement?

Required by Regulatory Agencies, Banks, etc.

Provides a uniform and understandable mechanism for measuring financial performance

To monitor financial results Over the passage of time; allows for comparison

to previous periods Vs a Budget

Components Of An Operating Statement

ActualREVENUES

Revenues – inflows resulting from the provision of goods

and services


ActualREVENUES Gross Revenue $1,000,000

In a hospital, Gross Revenue is generally services provide to

the patient (charges)



Less Deductions: Uncompensated Care 10,000 Bad Debt 5,000 Contractuals 600,000 Total Deductions 615,000

There are reductions made that reduce

the amount of gross charges

Uncompensated CareRevenue that will not be collected because the patient qualified for discount under

the charity care policy; patient

deemed unable to pay

Bad DebtRevenue that will not be collected due to

patients unwillingness to pay

ContractualsRevenue that will not be collected due to

contractual agreements with

payors

Components Of An Operating StatementPayor Mix

MEDICARE

MEDICAID

COMMERCIAL

$1.0 M Gross Charges

$0.30M Gross

$0.20M Gross

$0.50M Gross

30%

20%

50%

The resulting percentages of the total charges is referred to

as the payor mix

Components Of An Operating StatementPayor Mix/Realization Rate

MEDICARE

MEDICAID

COMMERCIAL

$0.30M

$0.20M

$0.50M

GrossContractual

Adjustment %

75%

80%

45%

Contractual Adjustment $

Net Revenue

Realization Rate

$0.23M

$0.16M

$0.23M

$0.07M

$0.04M

$0.27M

25%

20%

55%




Net Revenue 385,000

Net Revenue is the Gross Revenue less deductions. This is the real amount

expected to be collected




Net Revenue 385,000

EXPENSES Salary Expense 150,000 Supply Expense 75,000 Other Expense 50,000 Total Expenses 275,000

Expenses are outflows resulting from the

acquisition of goods and services

Types of Expenses

Variable- costs move up and down dependent upon changes in volume

Fixed- costs consistent regardless of changes in volume

Step Variable- costs remain consistent, but do change at certain discrete changes in volume

Step Variable- Lab/Blood Gas Example

Assumption - One tech with appropriate equipment can do 250,000 tests annually

Assumption - Salary and associated costs for one tech - $80,000

Perform 1 test1 Tech required

$80,000 Expense

Perform 250,000 tests1 Tech required

$80,000 Expense

At this point, the tech appears to be a fixed expense

Step Variable- Lab/Blood Gas Example

Perform 250,001 tests2 Techs required

$160,000 Expense

The $80,000 cost remained fixed, until

we reached a discreet change in

volume. At that point, our expenses

went up.




Net Revenue 385,000


EBIDA 110,000

EBIDA is earnings before interest, depreciation and

amortization. Subtotal that measures cash

earnings from operations




Net Revenue 385,000


EBIDA 110,000

Less: Depreciation 7,500 Depreciation is the allocation of fixed assets

over their useful lives




Net Revenue 385,000


EBIDA 110,000

Less: Depreciation 7,500

Operating Income $102,500

Total Operating Revenues less Total Operating Expenses


Actual Budget VarianceREVENUES Gross Revenue $1,000,000


Net Revenue 385,000


EBIDA 110,000



An operating statement typically

displays the actual results for the period, along with the corresponding

budget and variances

What Is A Budget?

A revenue and expense forecast describing an entity’s financial goals

The estimates for each line item reflect what management wants and expects to achieve in upcoming periods

BUT WHY???

Why Do We Need A Budget?

Assists in making sure goals are met Capital Debt Pension Funding Etc.

Accountability of management

Can help control spending

Helps with allocation of limited resources Can use to control direction of

company

Building Blocks Of A Budget

Revenue Assumptions• Volume projections• Changes to chargemaster• Inpatient vs. Outpatient

mix• Types of procedures, tests

Payor Mix Assumptions• Patient population/

demographics• Shifts in payor mix• Changes in reimbursement

rates

Staffing/Salary

Assumptions• # of FTE’s necessary to

support volumes• Appropriate skill mix• Fixed vs. variable• Merit Increases

Other Expense

Assumptions• Level of expenses needed

to support volumes• Fixed vs. variable• Medical vs. non-medical• Inflation

Full Time Equivalent (FTE)-

A standard measure of full-time work. Often measured as 40

hours per week/2,o80 per

year

Operating Statement Exercise – Step #1

For Step #1, we’re going to build a budget…..

Refer to your handout for assumptionsUsing the assumptions, calculate out

the values for each line item, and transfer them to the budget column of the worksheet

We’ll take about 10 minutes to complete…..

Step #1 – Build A Budget

BudgetREVENUES Gross Revenue


BudgetREVENUES Gross Revenue $1,000,000 Quantity Charge Per Gross Revenue

CPT #1 10,000 $75 $750,000CPT #2 5,000 $50 $250,000

15,000 $1,000,000


BudgetREVENUES Gross Revenue $1,000,000

Less Deductions: Uncompensated Care Bad Debt



Less Deductions: Uncompensated Care 30,000 Bad Debt 20,000

Percent Gross Revenue DeductionUncompensated Care 3.0% $1,000,000 $30,000Bad Debt 2.0% $1,000,000 $20,000



Less Deductions: Uncompensated Care 30,000 Bad Debt 20,000 Contractuals


Payor Mix

Gross Revenue

Contractual %

Contractual Adj.

Medicare 30% $300,000 73% $219,000Medicaid 20% $200,000 77% $154,000Commercial 50% $500,000 40% $200,000

$1,000,000 $573,000


Less Deductions: Uncompensated Care 30,000 Bad Debt 20,000 Contractuals 573,000




Net Revenue 377,000

EXPENSES Salary Expense




Net Revenue 377,000

EXPENSES Salary Expense 270,000

FTEs Salary Per Salary ExpenseStaff 1 $150,000 $150,000Non-Staff 3 $40,000 $120,000

4 $270,000




Net Revenue 377,000

EXPENSES Salary Expense 270,000 Supply Expense




Net Revenue 377,000

EXPENSES Salary Expense 270,000 Supply Expense 60,000 Procedures Cost Per Supply Expense

Supply Expense 15,000 $4 $60,000




Net Revenue 377,000


EBIDA 37,000



Now that we’ve established a budget, it’s

time to move on to variances and variance

explanations…………

Variances To Budget

The variance is the difference between the budget and the actual

Revenue variancesExpense variances

ActualBudge

tActual

Budget

Revenues Expenses

Actual greater than budget = favorable

Actual greater than budget = unfavorableActual less than budget =

unfavorable Actual less than budget = favorable

Variances To Budget

Be cautious – favorable is not always good….

Actual Budget VarianceSalary Expense $500,000 $750,000 $250,000

For example, a result like this might send a good message at first glance……

…..but it could be the result of an issue where the area is understaffed

Variances To Budget

…and unfavorable is not always bad

Actual Budget VarianceSupply Expense $100,000 $75,000 ($25,000)

For example, a result like this might send a bad message at first glance……

…..but it could be the result of better than expected volumes, which creates a higher supply spend than planned


For Step #2, we saved you a little work by giving you the actual results for the period

You will need to : calculate the variances against the budget you

prepared do your best to come up with the variance

explanations, using the detail of the actual results provided

We’ll take about 15 minutes to complete….

Step #2 – Variances/ExplanationsActual Budget Variance Explanation

Gross Revenue $965,000 $1,000,000 ($35,000)Volume variance is favorable $25,000 (500 more CPT #2 than expected), offset by unfavorable rate variance of $60,0000 for CPT #1, where charge has been lowered

Actual Budget Variance ExplanationGross Revenue $965,000 $1,000,000

Volumes Charge PerTotal

ChargesCPT #1 10,000 $69 $690,000CPT #2 5,500 $50 $275,000

15,500 $965,000

Volumes Charge PerTotal

ChargesCPT #1 10,000 $75 $750,000CPT #2 5,000 $50 $250,000

15,000 $1,000,000

Actual

Budget

CPT #1• Rate Variance• $6 per x 10,000• ($60,000)

CPT #2• Volume Variance• 500 x $50 per• $25,000


Uncompensated Care

29,915 30,000 85Although variance is positive, we’re writing off 3.1% of gross as opposed to 3.0% in plan. More charity care than anticipated

Bad Debt 19,300 20,000 700Although variance is positive, we are consistent with budget at a bad debt write-off of 2% of gross revenue. Positive variance is result of a smaller revenue base.

Actual Budget Variance ExplanationUncompensated Care

29,915 30,000

Bad Debt 19,300 20,000

Actual

BudgetWrite-Offs Assumption

Uncompensated Care $30,000 3.0% of GrossBad Debt $20,000 2.0% of Gross

Write-Offs ResultUncompensated Care $29,915 3.1% of GrossBad Debt $19,300 2.0% of Gross Uncompensated Care

The favorable variance is misleading. Write-offs are a higher percentage of gross revenue than anticipated

Bad DebtWorking as planned.

Favorable variance is result of lower revenue


Contractuals 586,720 573,000 (13,720)Contractual write-offs are higher than expected despite lower revenues. Shift in payor mix from commercial into government payors

Actual Budget Variance ExplanationContractuals 586,720 573,000

Medicare Medicaid Commercial0%

10%

20%

30%

40%

50%

60%

35%

25%

40%

30%

20%

50%

ActualBudget


Salary Expense 300,000 270,000 (30,000)Staff position hired at 47% higher rate than anticipated ($70,000 unfavorable) offset by savings attributable to non-staff resignation that was not filled ($40,000 favorable)

Actual Budget Variance ExplanationSalary Expense 300,000 270,000

FTE Cost Per ExpenseStaff 1 $220,000 $220,000Non-Staff 2 $40,000 $80,000

3 $300,000

FTE Cost Per ExpenseStaff 1 $150,000 $150,000Non-Staff 3 $40,000 $120,000

4 $270,000

Actual

Budget

Staff• Rate Variance• $70,000 x 1• ($70,000)

Non-staff• Volume Variance• 1 x $40,000• $40,000


Supply Expense 62,000 60,000Actual Budget Variance Explanation

Supply Expense 62,000 60,000 (2,000)Due to higher than expected volumes

Procedures Cost Per ExpenseSupplies 15,500 $4 $62,000

Procedures Cost Per ExpenseSupplies 15,000 $4 $60,000

Actual

Budget

• Volume Variance• 500 x $4• ($2,000)


REVENUES Gross Revenue $965,000 $1,000,000 ($35,000) Volume variance is favorable $25,000 (500 more CPT #2 than expected), offset by unfavorable rate variance of $60,000 for CPT #1, where charge has been lowered

Less Deductions:

Uncompensated Care 29,915 30,000 85 Although variance is positive, we’re writing off 3.1% of gross as opposed to 3.0% in plan. More charity care than anticipated

Bad Debt 19,300 20,000 700 Although variance is positive, we are consistent with budget at a bad debt write-off of 2% of gross revenue. Positive variance is result of a smaller revenue base.

Contractuals 586,720 573,000 (13,720) Contractual write-offs are higher than expected despite lower revenues. Shift in payor mix from commercial into government payors

Total Deductions 635,935 623,000 (12,935)

Net Revenue 329,065 377,000 (47,935)

EXPENSES Salary Expense 300,000 270,000 (30,000) Staff position hired at 47% higher rate than anticipated ($70,000 unfavorable) offset by savings attributable to non-staff resignation that was not filled ($40,000 favorable)

Supply Expense 62,000 60,000 (2,000) Due to higher than expected volumes

Other Expense 10,000 10,000 0

Total Expenses 372,000 340,000 (32,000)

EBIDA (42,935) 37,000 (79,935)

Less: Depreciation 5,000 5,000 0

Operating Income ($47,935) $32,000 ($79,935)

A good leader understands daily operations and the impact of decisions on financial performance – “Fiscal Literacy”

You don’t need to do it alone Create the right team Know what to ask Leverage the different skill sets

Key Points

Questions?

By the end of this presentation you will be able to: Define Fiscal Literacy & understand why it is...

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