There are three main types of financial documentation healthcare practices should use to determine their financial status: revenue and expenses; adequacy of resources (capital); and ability to renew or replenish itself (Suarez, Lesneski, & Denison, 2011). The first type of documentation is revenues and expenses, which should be in balance. To measure the profitability margin, expenses are subtracted from the revenues. The most common margin measures are computed by determining the total revenue from all sources and subtracting the total expenses. Another measure is the operating margin which is computed using only operational activities revenues that are associated with non-operating revenues. The third commonly used margin is the patient care margin, considered to be at the core of the health care facility. For this margin, patient care services revenues for patient care is compared with operating costs for services for patient care (Suarez, Lesneski, & Denison, 2011).
There are also three main determinations for price setting in health care practices: cost; fee schedule; and price related (Suarez, Lesneski, & Denison, 2011). A cost method of payment means that the payment will be the provider’s cost. A fee schedule means the payment will be pre-determined and is not associated with the provider’s costs or prices and are typically negotiated in advanced. A price related payment means the provider gets paid for services associated with the price of the service to the patient.
Use your promo and get a custom paper on
"Healthcare Practice Revenue and Finance".
Medicare influences prices setting for services in healthcare practices. Medicare reimbursements are not competitive in the market. Feldman, Dowd and Coulam (2016) examined the problem of Medicare pricing and its impact on commercial insurance policies. Results of their study revealed many key findings. First, increases in private health plan prices are not likely associated with reductions in Medicare prices. Second, lower hospital quality is associated with lower Medicare prices and likely reduces services to beneficiaries. Reduced Medicare physician payments are associated with less access to services and private price decreases. Third, research on Medicare pricing is based on small, nonrandom samples and Medicare pricing is based on cherry-picked studies. Finally, one price setting alternative uses bundled service based on actual fees.
There are various decisions or actions that can be taken as a result of this information. For example, providers could bid on bundled services (Feldman, Dowd &Coulam, 2016). Providers could be free to set their own fees but based on their bundled services bids could be put in cost-sharing tiers. Beneficiaries could pay higher copayments for providers in these higher tiers. Finally, Medicare could be more flexible in billing, for example in balance billing by billing more than charge allowances.
There are many reasons for developing a healthcare practice financial plan. For one, a financial plan allows the health service organization to budget for long range solutions (Niles, 2010) Also, documenting financial data in a standardized manner helps in negotiating for funding. Additionally, a financial analysis framework provides the opportunity for quantitative analyses and illustrates transparency in accountability (Suarez, Lesneski, & Denison, 2011). Best practices for financial transparency in health care practices were identified as developing a standardized classification system to record expenses; providing an electronic data reporting infrastructure; developing revenue and expense categories based on indicators; and reporting financial results (Suarez, Lesneski, & Denison, 2010).
Developing a strategic financial plan for healthcare practices involves many steps (Niles, 2010). First, the organization should develop a mission and vision statement. This provides a conceptualization of the long range plans for the organization. Step two involves creating vision and mission statement for departments that are aligned with the overall organization’s vision and mission statements (Niles, 2010). The third step involves conducting a performance analysis of the organization and comparing this data to the organization’s historical data. Data for analysis for performance indicators may include inpatient and patient visits, admission numbers, emergency room visits, etc. Step four of the financial planning process involves developing a capital budget which aligns with the mission and vision of the organization. A capital budget refers to the assumption that the organizational will be an asset because it will generate revenue or external funding (Niles, 2010). Capital budgeting is under the umbrella of operating revenues. Step fives involves weaving the financial goals with strategic goals to assess compatibility. Health care practices need to maintain good credit which requires a good reputation. In the next step, the organization’s external environment is evaluated for new opportunities. This requires an analysis of the market and competitors. In step seven, a financial projection is developed based on new identified opportunities. In the last step, all previous steps are evaluated and revised as necessary (Niles, 2010).
Healthcare practice budgets are useful when expenses are tracked and compared to benchmarks (Borglum, 2014). Practices that do not have budgets in place risk a plethora of problems including over or under staffing, higher income taxes, supply waste, debates about compensation, and possibly embezzlement, to name a few. Borglum (2014) identifies three main steps to developing an effective budget for healthcare practices.
In the first step, expenses should be tracked appropriately (Borglum, 2014). There are established best practices for tracking expenses in healthcare practice. Additionally, budgets can be modified or created for overhead budget based on national statistics. It is also important to determine what expenses will be tracked. A best practice approach is to create a list of expense categories that are specific to the practice. The next step of the budget plan is to establish benchmarks for comparison. There are sources for obtaining benchmark data and this benchmark data should be adjusted to fit within the healthcare practice. In the final step, the actual finances of the healthcare practice should be compared with the budget on a regular basis. This requires an evaluation termed a variance analysis. This analysis reveals finance variances from the expected budget. It is recommended that variance analysis be conducted quarterly in order that problems in the budget can be addressed quickly.
The use of management control processes for health care practice is important because healthcare management are tasked with making important decisions that help shape the organization (Thompson, 2007). These decisions may include developing and recruiting staff, allocating financial resources, acquiring technologies and adding services. Healthcare administrators are concerned with both external and internal domains. External domains include regulations, needs of the community, accreditations and licensure, demands of stakeholders, competitors, Medicare and Medicaid and management care insurers. Internal domains include staffing, budgeting, patient satisfaction, financial performance, acquisition of technology and development of new services (Thompson, 2007).
There are six phases that healthcare managers implement to carry out the management control process. These six phases include planning, organizing, staffing, controlling, directing, and decision-making. In order to carry out these phases, managers should possess certain competencies, including conceptual skills, technical skills and interpersonal skills (Thompson, 2007).
Summary
There are three main types of financial documentation healthcare practices should use to determine their financial status: revenue and expenses; adequacy of resources (capital); and ability to renew or replenish itself. There are also three main determinations for price setting in health care practices: cost; fee schedule; and price related. Medicare influences prices setting for services in healthcare practices. There are many reasons for developing a healthcare practice financial plan, which requires many steps. The use of management control processes for health care practice is important because healthcare management is tasked with making important decisions that help shape the organization.
- Borglum, K. (2014). Three steps to an effective practice budget. Family Practice Management, 11(1), 46-50.
- Feldman, R., Dowd, B., & Coulam, R. (2015). Medicare’s role in determining prices throughout the health care system. Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA. Retrieved from: https://www.mercatus.org
- Niles, N.J. (2010). A case study in strategic financial planning in health service organizations. Journal of Business Case Studies, 6(5), 23-31. Retrieved from: https://www.cluteinstitute.com/ojs/index.php/JBCS/article/download/896/880
- Suarez, V., Lesneski, C., & Denison, D. (2011). Making the case for using financial indicators in local public health agencies. American Journal of Public Health, 101(3), 419-425.
doi: 10.2105/AJPH.2010.194555 - Thompson, J.M. (2007). Health services administration. In S. Chisolm (Ed.)., The health professions: Trends and opportunities in U.S. Health care (pp. 357-372). Sudbury, MA: Jones and Bartlett.
