1. Faculty Practice Foundation Finance 101 June, 2015 1

2. Session Objective Broaden member understanding of basic financial principles Provide members with a general overview of financial statements and how they are interpreted 2

3. Agenda Faculty Practice Foundation Overview Financial Statements  Objective of Financial Statements  Income Statement  Balance Sheet  Statement of Cash Flows Case Studies 3

4. Faculty Practice Foundation Overview Faculty Practice Foundation Inc. (FPF) Nonprofit Organization (501c3 – tax exempt) Consists of 19 individual Faculty Practice Plans (FPPs)  Separate nonprofit organizations with Unique Tax ID #’s  Individual Operating Budgets and Financial Statements Consolidated FPF Financial Statements roll up to Boston Medical Center Fiscal Year 7/1 – 6/30 (Academic Year) One FPF Board of Directors with two corporate members (BMC & BUSM) 4

5. FPF Governance (Revised as of March 2012) 5 Karen Antman Dean BUSM Kate Walsh BMC CEO FPF Board of Directors BMC CEO2: Fam Med, Pediatrics, OB/GYN BUSM Dean2: Radiology, Pathology, Emerg Med FPF CEO3: Opth, Urology, ENT, Ortho Chair of Medicine3: Derm, Neurosurg, Neurology, Psych Chair of Surgery William Creevy, MD President & CEO FPP Presidents Department Chairs Administrative Directors Mary Chapin Chief Administrative Officer J. Lindstedt, VP Finance &CFO J Camillus, VP Amb & Prof Svcs C Charyulu, VP Revenue Cycle FPF Administrative Staff Members Reserve Powers

6. Legal Relationship of FPF to BMC and BUSM BMC and BUSM are the two corporate members of the FPF Role of corporate member  Appoint FPF Board of Directors  May amend bylaws  Approval of certain actions (reserved powers) o Addition of new member o Loan agreements / guarantees o Agreement to sell, assign, convey, transfer a security interest or mortgage or otherwise encumber the accounts or assets o Merger, consolidation, reorganization, liquidation, dissolution of the FPF or a sale of all or substantially all its’ assets o Increase or decrease the number of Directors 6

7. Financial Statements Income Statement Balance Sheet Statement of Cash Flows 7

8. Objective of Financial Statements Provide information useful for the entity’s stakeholders  Owners, Management, Directors  Creditors  Regulatory agencies  Investors Support business and economic decisions  Transparency – understand the health of a business and how well resources are being manage  Management principle – If you can’t measure it, you can’t manage it Used to formulate budgets  Use historical data to create plans  Compare actuals to planned targets 8

9. Income Statement 9

10. Reports the “profitability” of operations Net income = “bottom line” Specific period of time  Monthly  Quarterly  Annual (fiscal year) Net Income = Revenue - Expenses 10

11. 11 Income Statement – Generic Example Generic Hospital - Income Statement January 2015, Month to date Operating Revenue: Net Patient Service Revenue$550,000 Other Revenue 100,000 Total Operating Revenue 650,000 Operating Expenses: Salary, Wages, & Fringe Benefits 450,000 Provision for Bad Debts 50,000 Depreciation 10,000 Other Expenses 100,000 Total Operating Expenses 610,000 Income (loss) from operation 40,000 Non-Operating Gains (losses) Total Non-operating Gains (losses) 50,000 Net Income / (Loss) $90,000

12. 12 Income Statement – Net Patient Service Revenue (NPSR) Net Patient Service Revenue consists of… Gross Patient Service Revenue (GPSR) – charges for services provided to patients (s ources include: E&M, surgery, procedures, casts, radiology, etc.) Free Care – work done for patients without insurance Contractual Adjustment – amount of charge not expected to be paid based upon contractual agreements Gross Patient Service Revenue (GPSR)$1,170,000 Free Care (20,000) Contractual Adjustment (600,000) Net Patient Service Revenue (NPSR) $550,000

13. 13 Income Statement – Other Revenue Ancillary services (includes Physical Therapy, MRI, Surgical Center) Grants Physician wages from other entities (includes Health Center revenue and Contract revenue)

14. 14 Income Statement – Operating Expenses Salary, Wages, & Fringe Benefits Physician and support staff salary, wages, and fringe benefits make up >80% of all operating expenses Provision for Bad Debts Amount of revenue expected to be collected, but not actually collected Depreciation Reduction in the value of company assets with the passage of time Other (Operating) Expenses Include: Billing company fees, Malpractice, Clinical Supplies, Institutional Fees, Rent, Administrative costs, etc. AY14 - 82% of FPF Operating Expenses were Salary & Fringe Benefits

15. 15 Income Statement – Non-Operating Gains (losses) Income derived from activities not related to core operations Includes profits (and losses) from investments, donations and other non-operating revenues and expenses

16. RatioFormulaPerformance Implication Operating Margin Net Operating IncomeMeasures a company’s profit Total Op. Revenueafter paying operating costs Total Margin Net IncomeMeasures a company’s net profit, Total Op. Revenueinclusive of both operating and non- operating costs Bad Debt % Provision for Bad DebtsMeasures the % of collectible revenue Total Patient Net Rev. or GPSRthat has been lost 16 Income Statement – Financial Indicators - Profitability

17. 17 Operating Margin (Net Operating Income / Total Op. Revenue) 6.2% = 40,000 / 650,000 Total Margin (Net Income / Total Op. Revenue) 13.8% = 90,000 / 650,000 Bad Debt % (Provision for Bad Debts / Total Patient Net Rev. or GPSR) 4.3% = 50,000 / 1,170,000* Income Statement – Financial Indicators - Profitability * See slide 12 for reference

18. Balance Sheet 18

19. Balance Sheet Presents financial position as of a specific date Lists a company’s assets  Things of value an entity owns or controls  Were acquired at a measurable cost Lists a company’s sources of funds to acquire assets  Liabilities  Equity 19 Assets = Liabilities + Equity

20. Balance Sheet – Generic Example 20 Generic Hospital – Balance Sheet January 31, 2015 Assets: Cash and cash equivalents $1,000,000 Patient Accounts Receivable 300,000 Prepaid Expenses 200,000 Total Current Assets 1,500,000 Property, Plant & Equipment 100,000 Total Non- Current Assets 100,000 Total Assets 1,600,000 Liabilities and Equity: Accounts Payable and accrued expenses 1,200,000 Total Current Liabilities 1,200,000 Long-term Debt 250,000 Total Non-Current Liabilities 250,000 Unrestricted net assets 150,000 Total Equity 150,000 Total Liabilities and Equity 1,600,000

21. Balance Sheet: Current vs. Non-Current Assets Current Assets Used in normal business cycle (1yr) Cash and cash equivalents Marketable securities - temporary investments, easily converted to cash Inventories Listed in order of decreasing “liquidity” Non-Current Assets Not expected to be depleted within 1 year Land = original cost Investments 21

22. Balance Sheet: Liabilities & Equity Liabilities Funds owed Accounts Payable and accrued expenses include - Amounts owed to suppliers Amounts owed to employees Short term loans (lines of credit) Long-term debt Equity (net assets) Funds obtained from equity investors (owners who supply “capital”) Retained earnings or accumulated net income (profit) 22

23. Balance Sheet: Current and Non-Current Liabilities Current Liabilities Obligations due within 1 year Accounts payable Accrued expenses Current portion long-term debt Non-Current Liabilities Obligations due > 1 year Long term debt Mortgage Capital leases Bond issues 23

24. RatioFormulaPerformance Implication Working Capital Curr Assets – Curr LiabillitiesIdentifies the dollar value of excess assets (liabilities) Current Ratio Current AssetsMeasures a company’s liquidity Current Liabilitiesor their ability to cover short term debt *Asset > Liability = + Financial strength Days in Patient Net Patient A/RIndicates the number of days it takes Accounts Receivable (Net Patient Rev./365)to collect payments owed to the company Days Cash on Hand (Cash + Cash Equivalents)Measures the number of days the ((Total Op. Exp. – Depreciation.)/365)business could operate with current cash available 24 Balance Sheet Financial Indicators - Liquidity

25. 25 Working Capital (Current Assets less Current Liabilities) 300,000 = 1,500,000 - 1,200,000 Current Ratio (Current Assets / Current Liabilities) 1.25 = 1,500,000 / 1,200,000 Days in Patient Acct Receivable (Net Patient A/R / (Net Patient Revenue/365)) 199 = 300,000 / (550,000*/365) Days Cash on Hand ((Cash + Cash Equivalents) / ((Total Op. Expense – Depreciation)/365)) 608 = 1,000,000 / ((610,000* – 10,000*)/365) * See income statement (slide 11) for reference

26. Statement of Cash Flow 26

27. Statement of Cash Flow Details why the amount of cash has increased or decreased Shows the flows of cash in and out of the business Statement is divided into the following three sections 1)Operating activities 2)Investing activities 3)Financing activities 27

28. Statement of Cash Flow – Generic Example 28 Generic Hospital – Statement of Cash Flow YTD for period ending January 31, 2015 Cash flows from operating activities: Patient accounts receivable $ 120,000 Accounts payable (60,000) Depreciation 70,000 Provision for bad debts 20,000 Net cash provided by operating activities 150,000 Cash flows from investing activities: Property, Plant & Equipment (110,000) Capital expenditures (20,000) Net cash used in investing activities (130,000) Cash flows from financing activities: Long-term debt & capital leases (5,000) Net cash used in financing activities (5,000) Net increase (decrease) in cash $15,000 Cash beginning of year $ 985,000 Cash balance period end $1,000,000

29. Statement of Cash Flow Impacting Activities Operating Receive payments for services provided  Decrease Patient Accounts Receivable, Increase Cash Pay suppliers for goods and services  Decrease Accounts Payable, Decrease Cash Pay employees  Decrease Accounts Payable, Decrease Cash Investing Acquire a new fixed asset  Increase Property, Plant & Equipment, Decrease Cash Financing Obtain funds by issuing long-term debt  Increase Long-term Debt, Increase Cash Repay debt  Decrease Long-term Debt, Decrease Cash 29

30. Questions? 30

31. Thank you! 31 Please provide us with some feedback and complete the class evaluation form.

32. Glossary of Terms BMC: Boston Medical Center BUSM: Boston University School of Medicine FPF: Faculty Practice Foundation Inc. FPP: Faculty Practice Plans (Departments) GPSR: Gross Patient Service Revenue NPSR: Net Patient Service Revenue A/R: Accounts Receivable A/P: Accounts Payable 32

33. Faculty Practice Foundation Finance 101: Case Studies 2015 33

34. 34 Case Study 1 Accounts Receivable Facts This practice has five physicians and a good income statement (is profitable). The practice’s policy is to pay bonuses if there is a cash surplus at the end of the year. It pays $300K in bonuses annually However, at the end of the year, despite higher revenue than expenses, there is little cash surplus The Practice plans to collect $7,000 per day

35. 35 Case Study 1: Financial Statements

36. 36 Case Study 1 Accounts Receivable Questions How much of the bonus can the practice pay right now? How long will the MDs have to wait to receive their bonus in full? What could be done to shorten the time period?

37. 37 Case Study 2 Cash Surplus Facts Revenue is down in this practice. The payer mix is poor, and CMS calculations have dramatically reduced payments during the year There are six physicians in the practice and no NPPs Salaries are $200K annually + 29.2% fringe ($258.4K) In past good years they have awarded themselves each a $50K bonus, or $300K total cost This year there is enough surplus cash to fund the bonus for one and a half more years

38. 38 Case Study 2: Financial Statements

39. 39 Case Study 2 Cash Surplus Questions What could the practice do with the extra cash? What are the implications in relation to that decision?