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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 – PowerPoint PPT presentation

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Title: Financial Management


1
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

2
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

3
History
  • Medicare
  • Medicaid
  • Managed Care
  • Insurance

4
Profit/Loss Revenue - Expenses
5
BUDGET
  • (Cut the Budget!!!!!)

6
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.
7
Planning
  • Strategic
  • Long Range
  • Budget

8
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

9
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)

10
Hospital Lab Budget
11
Hospital Lab Budget by Section
12
Profit/Loss Revenue - Expenses
13
Revenue
  • Billed Revenue
  • Lab Procedures X Current Fee
  • Collected Revenue
  • Billed Revenue - Contractual Allowances

14
Insurance Mix
  • Medicare 35
  • Medicaid 10
  • Trigon (Blue Cross) 25
  • Managed Care 25
  • Other 5

15
Revenue
  • Billed Revenue
  • Lab Procedures X Current Fee
  • Collected Revenue
  • Billed Revenue - Contractual Allowances
  • 40,500 54,000 - 13,500

16
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?

17
SOLUTION
  • 200 X 25 5000( billed revenue )
  • 5000 X .5(50) 2500( col. Revenue )

18
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

19
Direct Costs
Variable Costs-- changes with a change in product
volume
20
Direct Costs
Fixed Costs-- Do not change with change in
product volume
21
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

22
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

23
Indirect costs
  • Departmental
  • management
  • travel
  • telephone
  • Global (Hospital)
  • administration
  • dietary
  • computer systems
  • plant facilities

24
EXAMPLES OF INDIRECT COSTS
25
Profit/Loss Revenue Minus Expenses
Profit/Loss Collected Revenue (Net) - Total
Expenses
26
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

27
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
28
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)

29
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

30
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31
Monitoring the Budget
  • Usually monthly
  • Action plan (how to get back on budget)
  • Your involvement as lab staff

32
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)

33
Depreciation
  • Cost of item divided by useful life
  • Useful life is usually five years for lab
    equipment
  • 100,000/5years 20,000

34
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

35
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

36
COST ACCOUNTING
37
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

38
Contribution Margin
  • Price(fee) Variable cost/test Contribution
    Margin
  • Contribution Margin contributes to fixed costs
    and to profits

39
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

40
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
41
  • 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

42
Change the fee to 15.00
  • What is the profit?

43
  • 15.00 per test
  • 15,000 - 13,700 1,300 profit

44
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?

45
  • 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

46
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53
Capital Costs
  • Operational Costs
  • Capital Costs
  • Where do Capital dollars come from?

54
Profit/Loss Revenue - Expenses
55
Capital Equipment
  • Purchase
  • Lease
  • Reagent Rental
  • Cost per Billable Test

56
Return On Investment
  • ROI (operating margin divided by capital
    investment)
  • Pay back period (Capital investment divided by
    operating margin x 12 months)

57
ROI
  • 150,000 X 100 300
  • 50,000
  • 40,000 X 100 80
  • 50,000
  • 18,000 X 100 18.5
  • 97,000

58
Return On Investment
  • ROI (operating margin divided by capital
    investment)
  • Pay back period (Capital investment divided by
    operating margin x 12 months)

59
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

60
ROI PROBLEM
  • The operating margin for this test is 300,000
  • Equipment purchase will cost 100,000
  • What is the return on investment(ROI)?

61
ROI SOLUTION
  • 300,000/100,000 x 100 300

62
PAY BACK PERIOD PROBLEM
  • The operating margin for this test is 300,000
  • Equipment purchase will cost 100,000
  • What is the payback period?

63
PAYBACK PERIOD SOLUTION
  • 100,000/300,000 x 12 3.99 or 4 months

64
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65
QUESTIONS
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