Financial Management

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Financial Management

• Thomas J. Dilts MT(ASCP),MBPA
• Vice Chair of Administration and Operations
• Department of Pathology
• Virginia Commonwealth University Healthsystem
• Medical College of Virginia Hospitals and
  Physicians

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Financial Management

• Why is this important?
• Economics - A major driver of health care.
• Needed to understand your opportunities and fate
  of your profession
• Requirement
• Personal and Professional use

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History

• Medicare
• Medicaid
• Managed Care
• Insurance

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Profit/Loss Revenue - Expenses
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BUDGET

• (Cut the Budget!!!!!)

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Planning is the process of deciding in advance
what is to be done and how.
Most organizations operate in an environment of
change.
With a more dynamic environment the planning
function becomes critical.
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Planning

• Strategic
• Long Range
• Budget

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Budget

• Revenue (pay check) 4,000.00
• Expenses
• Rent/mortgage 950.00
• Gas for car 200.00
• Food 350.00
• Savings/vacation(escrow) 200.00
• Electric bill 185.00
• Total expenses 1,885.00
• Net income/profit 2,115.00

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Budget

• Net income/profit 2,115.00
• Whats left after bills are paid
• Revenues - Expenses Profit ( or Loss )
• (4,000.00-1,885.002,115.00)

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Hospital Lab Budget
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Hospital Lab Budget by Section
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Profit/Loss Revenue - Expenses
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Revenue

• Billed Revenue
• Lab Procedures X Current Fee
• Collected Revenue
• Billed Revenue - Contractual Allowances

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Insurance Mix

• Medicare 35
• Medicaid 10
• Trigon (Blue Cross) 25
• Managed Care 25
• Other 5

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Revenue

• Billed Revenue
• Lab Procedures X Current Fee
• Collected Revenue
• Billed Revenue - Contractual Allowances
• 40,500 54,000 - 13,500

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REVENUE PROBLEM

• 200 CBCs performed
• Current fee per CBC is 25
• All patients have Blue Cross at 50 contractual
  adjustment for each test
• What is the billed revenue and the collected
  revenue?

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SOLUTION

• 200 X 25 5000( billed revenue )
• 5000 X .5(50) 2500( col. Revenue )

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Costs (Expenses)

• Direct Costs are costs that can be directly
  identified with a given product or activity.
• Reagents
• Controls
• Tubes
• Indirect Costs cannot be identified with a given
  product or activity.
• Electricity
• Environmental services
• Management
• Computer support

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Direct Costs
Variable Costs-- changes with a change in product
volume
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Direct Costs
Fixed Costs-- Do not change with change in
product volume
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WHICH DIRECT EXPENSE IS THIS?

• Service contract for equipment
• Reagent for each test
• Quality control material
• Labor costs
• Pipet tips
• Purchase cost of equipment
• Rent of lab space

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Costs (Expenses)

• Direct Costs are costs that can be directly
  identified with a given product or activity.
• Reagents
• Controls
• Tubes
• Indirect Costs cannot be identified with a given
  product or activity.
• Electricity
• Environmental services
• Management
• Computer support

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Indirect costs

• Departmental
• management
• travel
• telephone
• Global (Hospital)
• administration
• dietary
• computer systems
• plant facilities

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EXAMPLES OF INDIRECT COSTS
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Profit/Loss Revenue Minus Expenses
Profit/Loss Collected Revenue (Net) - Total
Expenses
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Month

• Budgeted Actual Variance
• Revenue 332,000 325,000 (7,000)
• Personnel Expenses 160,000 185,000
  -25,000
• Supplies/Reagents 35,000 43,000 -8,000
• Total Expenses 195,000 228,000 -33,000

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Profit/Loss Revenue minus Expenses
97,000 325,000 - 228,000 (gross
revenue) (58,000) 170,000 - 228,000
(net revenue) (160,000) 170,000 - 330,000
(plus indirect expense) __________________________
__________________ Insurance cont. 155,000
indirect exp 102,000
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PROBLEM

• Gross revenue is 100,000
• Contractual adjustments are 40,000
• Direct variable expenses are 15,000
• Direct fixed expenses are 5,000
• All indirect expenses are 10,000
• What is the net revenue(profit)

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SOLUTION

• Gross revenue 100,000
• Contractual adjust. - 40,000
• 
  _________
• Collected revenue 60,000
• Direct expenses - 20,000
• Indirect expenses - 10,000
• 
  __________
• Net revenue(profit) 30,000

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Monitoring the Budget

• Usually monthly
• Action plan (how to get back on budget)
• Your involvement as lab staff

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Setting the Test Fee

• A. Must identify all direct costs to do
  procedure
• labor
• supplies
• reagents
• equipment(depreciation)
• service and maintenance
• collecting and processing specimen
• ordering supplies - request slip
• B. Must add indirect costs.
• C. Must consider collection rate for billing.
• D. Mark up ( profit)

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Depreciation

• Cost of item divided by useful life
• Useful life is usually five years for lab
  equipment
• 100,000/5years 20,000

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SETTING THE TEST FEE EXAMPLE

• Labor 10min x 0.50/min 5.00
• Supplies 0.80
• Reagents 1.20
• Equipment(200,000/40,000) 0.50
  
• Service/maintenance 0.12
• Specimen collection/process. 1.00
• 
  _____
• Total 8.62

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SETTING TEST FEE EXAMPLE

• Direct costs 8.62
• Indirect costs(20 of dir) 1.72
• 
  _______
• 
  10.34
• Collection rate(40) 10.34/.4 25.85
• Mark up (profit) 10 25.852.59
• 28.44

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COST ACCOUNTING
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COST ACCOUNTING EXAMPLE

• Labor 10min x 0.50/min 5.00
• Supplies 0.80
• Reagents 1.20
• Equipment 0.50
• Service/maintenance 0.12
• Specimen collection/process. 1.00
• Indirect costs 1.72
  
• Total
  10.43

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Contribution Margin

• Price(fee) Variable cost/test Contribution
  Margin
• Contribution Margin contributes to fixed costs
  and to profits

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Break Even Analysis

• Break even volume Fixed costs divided by the
  Contribution Margin
• Break even volume(analysis) What is the number
  of tests I must perform to recover my costs

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Price - Variable cost per test Contribution
Margin 30.00 - 10.00 20.00
Break Even Volume Fixed Costs Contribution
Margin 500 Tests 10,000.00 20.00
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• Volume 1,000 tests
• Price 20 each
• Costs
• equipment 50
• reagents 1000 (1.00 each test)
• controls 100 (0.10 each test)
• supplies 50 (0.05 each test)
• salary 12,500 (0.50 FTE)
• Total 13,700
• Revenue 1,000 X 20 20,000
• Costs 13,700
• Profit 20,000 - 13,700 6,300

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Change the fee to 15.00

• What is the profit?

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• 15.00 per test
• 15,000 - 13,700 1,300 profit

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PROBLEM

• Test volume is now 5,000
• Assume that no additional labor is needed for the
  increased test volume
• What is the final profit for this volume?

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• 5,000 tests is volume
• Revenue 5,000 X 20 100,000
• Costs
• equipment 50
• reagents 5000(1.00 x
  5000)
• controls 500(0.10 x 5000)
• supplies 250(0.05 x 5000)
• salary 12,500
• Total Costs 18,300
• Profit 100,000 - 18,300 81,700

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Capital Costs

• Operational Costs
• Capital Costs
• Where do Capital dollars come from?

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Profit/Loss Revenue - Expenses
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Capital Equipment

• Purchase
• Lease
• Reagent Rental
• Cost per Billable Test

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Return On Investment

• ROI (operating margin divided by capital
  investment)
• Pay back period (Capital investment divided by
  operating margin x 12 months)

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ROI

• 150,000 X 100 300
• 50,000
• 40,000 X 100 80
• 50,000
• 18,000 X 100 18.5
• 97,000

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Return On Investment

• ROI (operating margin divided by capital
  investment)
• Pay back period (Capital investment divided by
  operating margin x 12 months)

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Pay Back Period

• 50,000 X 12 4 months
• 150,000
• 50,000 X 12 15 months
• 40,000
• 97,000 X 12 64.6 months (5.4 years)
• 18,000

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ROI PROBLEM

• The operating margin for this test is 300,000
• Equipment purchase will cost 100,000
• What is the return on investment(ROI)?

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ROI SOLUTION

• 300,000/100,000 x 100 300

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PAY BACK PERIOD PROBLEM

• The operating margin for this test is 300,000
• Equipment purchase will cost 100,000
• What is the payback period?

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PAYBACK PERIOD SOLUTION

• 100,000/300,000 x 12 3.99 or 4 months

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QUESTIONS