Cash Flow Models for Health Centers

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Cash Flow Models for Health Centers

• Presented by
• Michael Holton
• National Association of Community Health Centers,
  Inc.

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NACHC Financial/Operations Management Assistance

• Financial/Operations Management Seminars
• Telephone/email consultation
• CFO Accounting Policies and Procedures Manual
• FQHC Medicare Cost Report Manual
• FQHC Billing and Collections Manual
• CFO Onsite Assistance Program
• Survey Cost, Staffing and Productivity
• Data Comparison/Benchmarking Web-based Toolset
• Provider Visit Coding Training

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Operational Budget and Other Key Management
Indicators

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Operational And Programmatic Budgeting

• In addition to retrospective reporting of
  financial and statistical data, CHCs should
  prospectively develop operational budgets to
  assist in the management of health center service
  delivery.
• There are a several types of operational budgets
• Zero-Based Budgets
• Top-Down Budgets
• Incremental Budgets

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Operational And Programmatic Budgeting

• Zero-Based Budgeting - budgets are built from the
  unit level. Each unit of revenue (visits, rates,
  grants) and cost (FTEs, salaries, fringe, and
  OTPS line items) are created based on expected
  performance.
• Advantages
• Forces careful consideration of all items
• Allows health center to measure the impact of
  specific items
• Allows for decision-making at the lowest level
• Disadvantages
• Individual parts may not tie together as a whole
• Time-consuming

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Operational And Programmatic Budgeting

• Top-Down Budgeting - budgets are built from the
  highest level. (total revenue, total expense).
  Goals for the entire health center are applied to
  total revenue and expense, and individual
  components (sites, programs) adjust their budgets
  accordingly.
• Advantages
• Takes into account big picture
• Allows management to have large budget influence
• Measures realism of health center goals
• Disadvantages
• May ignore specific, important unit level issues

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Operational And Programmatic Budgeting

• Incremental Budgeting - previous year amounts are
  trended based on expected performance.
• Advantages
• Incorporates historical perspective with expected
  trends
• Easy to create budget quickly
• Disadvantages
• Trending from full-year vs. point in time (e.g.
  FTE that started in the middle of the year)

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Operational And Programmatic Budgeting
Under all three budget options, CHCs can develop
budgets for each department/program of the health
center and/or budget by site. The following are
some of the reasons to prepare budgets in one
form or another Department (e.g., Adult
Medicine) - allows management to understand the
yearly changes of visit volume and costs by
department. Also allows a focus on productivity
at the individual provider level. Delivery Site
- provides focus of health center operations and
visit volume as a group. By creating a profit
and loss statement by site, management can
identify where additional resources are needed.
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Budget Preparation Timeline

• Overall organization budget preparation should
  begin four months prior to the health centers
  year end.
• However, health centers should consider the
  operational budget of their 330 grant when
  determining the appropriate preparation timeline.
  330 grant budgets are due four months prior to
  grant period.

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Sample Budget Preparation Timeline

• Timeline Leading to Action
• Approved Budget
• 4 months - Executive Mgmt. Meeting with
  Department Mgrs. Site Mrgs.
• 3 months - Budget Template Distributed to
  Department Managers
• - Budget Preparation Training
• - Equipment Request Lists Prepared
• 2 months - Department Budgets due to Finance
  Department
• - Provider production, salaries, fringe
  benefits, and contractual revenue entered
  by Finance Dept.

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Budget Preparation Timeline

• Timeline Leading to Action
• Approved Budget
• 6 weeks - Finance team reviews department
  budgets
• 4 weeks - Departmental budgets returned to
  Dept. Managers for revisions
• - Meetings set with Finance Dept.
• 2 weeks - Budgets due from Dept. Managers
• 1-2 weeks - Finance team finalizes budget for
  Board of Director Meeting
• Final Approval by Board of Directors

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Department Head Responsibility

• Preparing Budget
• Review Prior Years Budget and Actual
  Expenditures
• Identify of capital equipment needs
• Provide written explanation for budget changes
  (increases or decreases of more than 10) from
  prior year
• Provide crosswalk between performance goals and
  budget requests
• During Budget Period
• Provider written explanation for variance
  between actual - budget during the fiscal year
• Ensure proper coding of invoices

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Finance Department Responsibility

• Preparing Budget
• Review projected revenues, compare against
  current contracts and reimbursement rates
• Review program-specific spending patterns
• Develop recommendations for program-specific
  spending authority
• During Budget Period
• Generate actual versus budget reports for each
  Department Head monthly
• Review with Department Head if necessary

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Steps To Preparing An Organizational Budget

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Step One Identify All Sites and All Programs by
Site
It is recommended that a health center prepare a
budget by building from the program/departments
up. Health Center Site Department Program
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Sample ABC Health Center
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Step Two Prepare A Projected Visit Report

• Because expenses and revenues are projected from
  visit assumptions the first step to is to develop
  an organization-wide salary list by site,
  department and program which includes FTEs, job
  title and funding source.
• Sources to Use
• Provider FTE Detail - Payroll

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ABCs Visit Report by Site
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Factors To Consider When Developing Visit Volume
Assumption

• There are various factors to consider when
  projecting visit volume. The following are a few
  examples
• User Trends
• Payor Mix
• New Sites and/or Departmental Expansion New
  Hires
• Implementation of mandatory Federal programs
  Increase/Decrease in visit volume

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Step Three Revenue Projection

• Projecting revenue includes the following five
  steps
• 1. Visits of Providers (FTEs) X Indicator
  or Projected Visits (Indicators Providers
  4,200 Visits/Year Mid-levels 2,100)
• 2. Payor Mix
• 3. Current Approved Rates (MCD, MCR, Capitation -
  PMPM and Specialty Care Visits)
• 4. Sliding Scale Contractual Adjustment
• 5. Collection (Bad Debt Expense)

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Patient Services Revenue Projections By Site and
Payor
Managed Care Capitation Revenue Average
collection 25.00 Average collection
7.50 Based on projected member months and
capitation rate
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Patient Services Revenue Projections By Program
and Payor
Managed Care Capitation Revenue Average
collection 25.00 Average collection
7.50 Based on projected member months and
capitation rate
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Patient Services Revenue Projections By Site and
Payor
Managed Care Capitation Revenue Average
collection 25.00 Average collection
7.50 Based on projected member months and
capitation rate
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Patient Services Revenue Projections By Site and
Payor
Managed Care Capitation Revenue Average
collection 25.00 Average collection
7.50 Based on projected member months and
capitation rate
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Patient Services Revenue Projections By Site and
Payor
Managed Care Capitation Revenue Average
collection 25.00 Average collection
7.50 Based on projected member months and
capitation rate
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Patient Services Revenue Projections By Site and
Payor
Managed Care Capitation Revenue Average
collection 25.00 Average collection
7.50 Based on projected member months and
capitation rate
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Patient Services Revenue Projections - Overall
Managed Care Capitation Revenue Average
collection 25.00 Average collection
7.50 Based on projected member months and
capitation rate
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Revenue Budgeting - Grant Revenue

• In budgeting 330 and other Federal grant dollars,
  the following factors should be incorporated
• Have you applied for a 330 Grant increase?
• Do you expect to be able to spend the full grant
  during the year?
• Have you received approval for any unobligated
  balances from the prior grant year?
• Have you reprogrammed any unobligated balances
  from the prior grant year?

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Revenue Budgeting - State/Local Contracts
State or Local contracts require a contract
specific budget be prepared and followed
throughout the contract term. Modifications to
the budget must be approved by the State or Local
agency. The contract specific budgets should
role into the overall organization budget.
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Projected Grant and Contracts Revenue
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Projected Interest Income and Miscellaneous
It is recommended to base projected interest
income and other miscellaneous revenue on
historical/prior year data.
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ABC Health Center Projected Revenue
DHHS Grant 1,352,000 (1) Program Income
1,675,825 Contract Services 290,000
(2) Interest Income 2,750
(2) Miscellaneous 1,766 (2) Total
Revenue 3,322,341 (1) 2003 current service
level 1.5 (2) Same as annualized 2003 revenues
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Expense Budgeting

• Important factors to consider
• Health center growth (number of units)
• Inflation or salary increases (unit costs)
• Fringe benefit changes
• Fixed vs. variable expenses

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Step Four Budget Expenditures

• KEY POINTS TO BUDGETING EXPENDITURES
• Review prior year financial statements
• Review first 6 months internal financial
  statement
• Base expenditures on first 6 months financial
  statement
• Compare to prior year for major differences -
  Reconcile
• Increase or decrease appropriate cost due to
  visit volume variance
• Increase or decrease due to unit cost differences

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Budgeting of Expenditures
Projecting the expenditures for the following
expense categories will be based on different
variables. Salaries Staffing Plan (FTEs) from
the Salary List Fringe benefits Percent of
Salaries and Wages Supplies Based on
Visits Ancillary Cost Based on Visits by Site
and Department Facility Based on Current
Leases Interest Based on Current Loan Payments
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Expense Budgeting - Staffing
Staffing is far and away the most important item
in your budget - salary and fringe typically
makes up 60 - 75 of a health center budget
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Expense Budgeting - Staffing

• Provider staffing
• Number of provider FTEs
• Provider level mix - physicians/midlevels
• Provider specialty mix - primary care,
  specialists, dentists, other provider types
• Contracted providers

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Expense Budgeting - Staffing

• Direct support staffing
• Includes nurses, nurse aides, medical attendants,
  medical/dental receptionists
• Should closely correlate to the number of
  providers
• Health centers average approximately 2.2 direct
  support staff FTEs per each provider FTE

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Expense Budgeting - Staffing

• Enabling/program staffing
• May be prescribed in a grant/contract
• Enabling staff FTEs may appear lower than
  expected, since providers may also perform
  enabling services. Health centers average
  approximately .6 enabling staff FTEs per each
  provider FTE

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Expense Budgeting - Staffing

• Overhead staffing
• Key expense driver - measure overhead salaries
  per visit and as a percentage of total cost
• Includes administration, billing, facility and
  other
• Health centers average approximately 2.9 overhead
  support staff FTEs per each provider FTE

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Salaries - Direct and Indirect Expenses
In order to properly allocate overhead/indirect
expenses salaries should be separated into DIRECT
and INDIRECT categories. Allocation of indirect
expenses should be based on the following
methodologies Administration - Percentage of
total direct expense Facility - Square
Footage Medical Records/Data Processing -
Visits Centralized Administration facility
should be allocated among sites by percentage of
total direct expense.
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Direct Expenses - Salaries
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Expense Budgeting - OTPS

• Several ways to consider OTPS line items
• Contractual - is there a contract (for example a
  lease) that specifies a dollar amount? Does this
  contract include inflation? When is the contract
  renewed?
• Fixed dollar amount - is there a pre-existing
  schedule (e.g. for interest or depreciation) that
  allows you to budget a specific amount?

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Expense Budgeting - Fixed/Variable OTPS

• 80 - 90 of health center costs are fixed, i.e.
  they will not change significantly regardless of
  health center volume unless other changes are
  made
• Variable expense indicators
• Provider FTEs (malpractice)
• Square footage (new rent or depreciation charge)
• Visits (medical supplies)

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Projected Supplies Budget

• On average 5 increase should be budgeted for
  medical, administrative and janitorial supplies.
  In projecting a percentage increase from prior
  year, consider the following
• Change is visit volume
• Open/Close of site
• Increase/Decrease in staff

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Projected Expenditures - Ancillary
The first step in budgeting ancillary expenses
is to determine for which payors the health
center is responsible for the ancillary service
and for which the payor is responsible. The
second step would be to allocate ancillary
expenses by site by payor based on visits.
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Projected Expenditures - Ancillary

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Projected Expenditures - Facility

Budgeting of facility expense is based on current
leases.
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Overall Expenses
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Total Budget
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Points To Consider

• Make Certain the Budget Balances!!!!!!
• Review Patient Revenue Factors
• Review Staffing
• BE CONSERVATIVE WHEN PROJECTING PATIENT SERVICES
  REVENUE!!!!
• (If overly aggressive projections are used, an
  unobligated balance (UOB) of Federal funds could
  result when the FSR is filed)
• Run Budget Through Uniform Data System (UDS) as a
  Check
• Compliance with Seven Performance Measures

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Financial Position Monitoring

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Budget Monitoring
THINGS DO NOT ALWAYS TURN OUT THE WAY WE WOULD
LIKE. Budgeted revenues and expenses must be
compared on a monthly basis to actual data and
prior year data. From this analysis, all
significant fluctuations will be identified,
allowing the management team to investigate and
rectify areas of concern, and if necessary,
modify the budget and create a new action plan.
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Why Differences Occur

• While monitoring the budget, there are several
  factors that may contribute to differences
  between actual and budgeted data. The following
  highlights common factors that require
  adjustments to a projected budget
• Unforeseen windfalls of revenue (e.g.,
  reinvestment money)
• Unexpected expenses (e.g., ancillary usage
  increase)
• Shift in payor mix
• Provider productivity
• Increase/decrease of visit volume
• FTEs
• Accounting entries

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Monitoring Cash Position
When all items are monitored and adjustments are
appropriately handled, the cash position of the
organization should be in line with budget. To
analyze cash position, compare actual cash to
capital need. This is calculated by subtracting
next months expenses less unrestricted fund
balance from cash. If the result is negative,
the organization has a cash deficiency.
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MANAGEMENT REPORTS INDICATORS
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Monitoring the Financial Condition

• Budgeting Process
• Monthly Board Reports
• Balance Sheet
• Income Statement
• Cash Flow Report
• Activity Report
• Variance Report
• Financial Status Report
• Internal Performance Measures

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INTERNAL REPORTING REQUIREMENTS

• Financial Statements (Profit / Loss)
• Cash Flow Statement
• Patient Volume
• Activity Report
• Other Reports (as requested)
• Varying Degrees of Reporting Based on User
• Board of Directors vs. Finance Committee
• Executive Director vs. Program Directors
• Finance Director

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Balance Sheet
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Statement of Operations
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Cash Flow Report
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Activity Report
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TIPS ON ANALYZING THE BALANCE SHEET

• Current Ratio current assets divided by current
  liabilities. Want this ratio to be at least 11
  and do not want to decrease over time.
• 628,000/700,500 0.901
• Unrestricted Net Assets, Available for Operations
  total unrestricted net assets less net
  investment in fixed assets.
• ( Fixed assets, net of accumulated depreciation
  reduced by outstanding debt used to purchase
  fixed assets)
• Want this measure to be positive and not to
  decrease over time.
• 102,500 - 107,500 lt5,000gt

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TIPS ON ANALYZING THE BALANCE SHEET

• Days in Reserve unrestricted net assets
  available for operations divided by average daily
  expense (total expenses less bad debt and
  depreciation divided by 365 days)
• Goal is 60 to 90 days of operating
  expenses.
• lt5,000gt/(1,957,000/182.5) lt0.47gt days
• Days in Accounts Receivable net patient
  accounts receivable, divided by average daily
  patient revenue (Patient revenue, net of
  adjustments and bad debt, excluding managed care
  capitation divided by 365 days)
• Increase in ratio indicates potential billing
  problem and could hurt cash flow.
• (372,000/(900,000-230,370)/182.5)
  101.38 days

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TIPS ON ANALYZING THE BALANCE SHEET

• Days in Accounts Payable Trade accounts payable
  and accrued expenses divided by average daily
  trade expenses (Total expenses less salaries and
  wages, donated services, bad debt and
  depreciation divided by 365 days)
• An increase indicates that you are paying your
  vendors slower, indicating a cash flow problem.
• 325,500/((2,004,500 - 1,216,475 -
  47,500)/182.5) 80.22 days
• DHHS Refundable Advance
• Indicates that you have drawn down more grant
  funds than earned, equivalent to a loan should
  not be greater than 10 of grant.
• 125,000/1,200,000 10.42

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TIPS ON ANALYZING THE STATEMENT OF OPERATIONS

• Trends and Relationships
• Analyze changes in patient revenue as compared to
  changes in patient volume (i.e., visits), prior
  year vs. current year and current year vs.
  budget.
• Any Unusual Trends Should Be Researched
• ? Change in Reimbursement Rates
• ? Shifts in Payor Mix

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TIPS ON ANALYZING THE STATEMENT OF OPERATIONS

• Analyze changes in expenses as compared to
  changes in patient volume (i.e., visits).
• Any Unusual Trends Should Be Researched
• 1. Analyze by Department
• 2. Review Costs Per Visit
• ? By Department
• ? By Ancillary Cost (e.g., Lab, X-ray)
• 3. Review Provider Productivity
• Analyze Changes in Patient Volume (visits) as
  Compared to
• ? Users (identify patient utilization trends)
• ? Providers (identify provider productivity
  trends)

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INTERNAL REPORTING REQUIREMENTS

• Health Center Management
• Daily / Weekly
• Encounters by Individual Provider Versus Standard
• Visits by Payor and Payor Mix
• Cash Position Worksheet
• Encounters - Appointments Kept versus Missed

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INTERNAL REPORTING REQUIREMENTS

• Health Center Management
• Monthly
• Revenue and Expense Statements by Department /
  Program
• New Users by Payor
• Days in Accounts Receivable by Payor Source
• User Trends-Medicaid to Selfpay
• Managed Care Actuarial Mix and Utilization
• Contract Revenue and Receivable Analysis
• Patient Revenue Per Visit by Payor Source