2. By the end of this presentation you will be able to:  Define Fiscal Literacy & understand why it is necessary to be a leader  Recognize 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

3.  Fiscal Literacy is defined as:  Possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s goals

4.  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

5.  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

6. 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?

7.  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

9.  Core financial statement  Presents a company’s operating results over a specific period of time  Starts 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

10.  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

11. Actual REVENUES Revenues – inflows resulting from the provision of goods and services

12. Actual REVENUES Gross Revenue$1,000,000 In a hospital, Gross Revenue is generally services provide to the patient (charges)

13. Actual REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care10,000 Bad Debt5,000 Contractuals600,000 Total Deductions615,000 There are reductions made that reduce the amount of gross charges Uncompensated Care Revenue that will not be collected because the patient qualified for discount under the charity care policy; patient deemed unable to pay Bad Debt Revenue that will not be collected due to patients unwillingness to pay Contractuals Revenue that will not be collected due to contractual agreements with payors

14. 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

15. MEDICARE MEDICAID COMMERCIAL $0.30M $0.20M $0.50M Gross Contractual 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%

16. Actual REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care10,000 Bad Debt5,000 Contractuals600,000 Total Deductions615,000 Net Revenue385,000 Net Revenue is the Gross Revenue less deductions. This is the real amount expected to be collected

17. Actual REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care10,000 Bad Debt5,000 Contractuals600,000 Total Deductions615,000 Net Revenue385,000 EXPENSES Salary Expense150,000 Supply Expense75,000 Other Expense50,000 Total Expenses275,000 Expenses are outflows resulting from the acquisition of goods and services

18.  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

19.  Assumption - One tech with appropriate equipment can do 250,000 tests annually  Assumption - Salary and associated costs for one tech - $80,000 Perform 1 test 1 Tech required $80,000 Expense Perform 250,000 tests 1 Tech required $80,000 Expense At this point, the tech appears to be a fixed expense

20. Perform 250,001 tests 2 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.

21. Actual REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care10,000 Bad Debt5,000 Contractuals600,000 Total Deductions615,000 Net Revenue385,000 EXPENSES Salary Expense150,000 Supply Expense75,000 Other Expense50,000 Total Expenses275,000 EBIDA110,000 EBIDA is earnings before interest, depreciation and amortization. Subtotal that measures cash earnings from operations

22. Actual REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care10,000 Bad Debt5,000 Contractuals600,000 Total Deductions615,000 Net Revenue385,000 EXPENSES Salary Expense150,000 Supply Expense75,000 Other Expense50,000 Total Expenses275,000 EBIDA110,000 Less: Depreciation7,500 Depreciation is the allocation of fixed assets over their useful lives

23. Actual REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care10,000 Bad Debt5,000 Contractuals600,000 Total Deductions615,000 Net Revenue385,000 EXPENSES Salary Expense150,000 Supply Expense75,000 Other Expense50,000 Total Expenses275,000 EBIDA110,000 Less: Depreciation7,500 Operating Income$102,500 Total Operating Revenues less Total Operating Expenses

24. ActualBudgetVariance REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care10,000 Bad Debt5,000 Contractuals600,000 Total Deductions615,000 Net Revenue385,000 EXPENSES Salary Expense150,000 Supply Expense75,000 Other Expense50,000 Total Expenses275,000 EBIDA110,000 Less: Depreciation7,500 Operating Income$102,500 An operating statement typically displays the actual results for the period, along with the corresponding budget and variances

25.  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???

26.  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

27. 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

28.  For Step #1, we’re going to build a budget…..  Refer to your handout for assumptions  Using 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…..

29. Budget REVENUES Gross Revenue

30. Budget REVENUES Gross Revenue$1,000,000 QuantityCharge PerGross Revenue CPT #110,000$75$750,000 CPT #25,000$50$250,000 15,000$1,000,000

31. Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care Bad Debt

32. Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care30,000 Bad Debt20,000 PercentGross RevenueDeduction Uncompensated Care3.0%$1,000,000$30,000 Bad Debt2.0%$1,000,000$20,000

33. Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care30,000 Bad Debt20,000 Contractuals

34. Payor Mix Gross Revenue Contractual % Contractual Adj. Medicare30%$300,00073%$219,000 Medicaid20%$200,00077%$154,000 Commercial50%$500,00040%$200,000 $1,000,000$573,000 Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care30,000 Bad Debt20,000 Contractuals573,000

35. Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care30,000 Bad Debt20,000 Contractuals573,000 Total Deductions623,000 Net Revenue377,000 EXPENSES Salary Expense

36. Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care30,000 Bad Debt20,000 Contractuals573,000 Total Deductions623,000 Net Revenue377,000 EXPENSES Salary Expense270,000 FTEsSalary PerSalary Expense Staff1$150,000 Non-Staff3$40,000$120,000 4$270,000

37. Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care30,000 Bad Debt20,000 Contractuals573,000 Total Deductions623,000 Net Revenue377,000 EXPENSES Salary Expense270,000 Supply Expense

38. Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care30,000 Bad Debt20,000 Contractuals573,000 Total Deductions623,000 Net Revenue377,000 EXPENSES Salary Expense270,000 Supply Expense60,000 ProceduresCost PerSupply Expense 15,000$4$60,000

39. Budget REVENUES Gross Revenue$1,000,000 Less Deductions: Uncompensated Care30,000 Bad Debt20,000 Contractuals573,000 Total Deductions623,000 Net Revenue377,000 EXPENSES Salary Expense270,000 Supply Expense60,000 Other Expense10,000 Total Expenses340,000 EBIDA37,000 Less: Depreciation5,000 Operating Income$32,000 Now that we’ve established a budget, it’s time to move on to variances and variance explanations…………

40.  The variance is the difference between the budget and the actual  Revenue variances  Expense variances ActualBudgetActualBudget RevenuesExpenses Actual greater than budget = favorableActual greater than budget = unfavorable Actual less than budget = unfavorable Actual less than budget = favorable

41. Be cautious – favorable is not always good…. ActualBudgetVariance Salary 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

42. …and unfavorable is not always bad ActualBudgetVariance Supply 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

43.  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….

45. ActualBudgetVarianceExplanation 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 ActualBudgetVarianceExplanation Gross Revenue$965,000$1,000,000 VolumesCharge Per Total Charges CPT #110,000$69$690,000 CPT #25,500$50$275,000 15,500$965,000 VolumesCharge Per Total Charges CPT #110,000$75$750,000 CPT #25,000$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

46. ActualBudgetVarianceExplanation Uncompensated Care29,91530,00085Although variance is positive, we’re writing off 3.1% of gross as opposed to 3.0% in plan. More charity care than anticipated Bad Debt19,30020,000700Although 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. ActualBudgetVarianceExplanation Uncompensated Care29,91530,000 Bad Debt19,30020,000 Actual Budget Write-OffsAssumption Uncompensated Care$30,0003.0% of Gross Bad Debt$20,0002.0% of Gross Write-OffsResult Uncompensated Care$29,9153.1% of Gross Bad Debt$19,3002.0% of Gross Uncompensated Care The favorable variance is misleading. Write-offs are a higher percentage of gross revenue than anticipated Bad Debt Working as planned. Favorable variance is result of lower revenue

47. ActualBudgetVarianceExplanation Contractuals586,720573,000(13,720)Contractual write-offs are higher than expected despite lower revenues. Shift in payor mix from commercial into government payors ActualBudgetVarianceExplanation Contractuals586,720573,000

48. ActualBudgetVarianceExplanation Salary Expense300,000270,000(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) ActualBudgetVarianceExplanation Salary Expense300,000270,000 FTECost PerExpense Staff1$220,000 Non-Staff2$40,000$80,000 3$300,000 FTECost PerExpense Staff1$150,000 Non-Staff3$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

49. ActualBudgetVarianceExplanation Supply Expense62,00060,000 ActualBudgetVarianceExplanation Supply Expense62,00060,000(2,000)Due to higher than expected volumes ProceduresCost PerExpense Supplies15,500$4$62,000 ProceduresCost PerExpense Supplies15,000$4$60,000 Actual Budget Volume Variance 500 x $4 ($2,000)

50. ActualBudgetVarianceExplanation REVENUESGross 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 Care29,91530,00085Although variance is positive, we’re writing off 3.1% of gross as opposed to 3.0% in plan. More charity care than anticipated Bad Debt19,30020,000700Although 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. Contractuals586,720573,000(13,720)Contractual write-offs are higher than expected despite lower revenues. Shift in payor mix from commercial into government payors Total Deductions635,935623,000(12,935) Net Revenue329,065377,000(47,935) EXPENSESSalary Expense300,000270,000(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 Expense62,00060,000(2,000)Due to higher than expected volumes Other Expense10,000 0 Total Expenses372,000340,000(32,000) EBIDA(42,935)37,000(79,935) Less: Depreciation5,000 0 Operating Income($47,935)$32,000($79,935)

51.  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