Chapter 6: Expenses (Outflow) Overview: The Distinction Between Expense and Cost (1 of 3) Expenses are expired costs that have been used up, or consumed, while carrying on business. Expense in the broadest sense includes every expired (used up) cost that is deductible from revenue. Overview: The Distinction Between Expense and Cost (2 of 3) “Cost†is the amount of cash expended* in consideration of goods or services received (or to be received). * Or property transferred, services performed, or liability incurred. Overview: The Distinction Between Expense and Cost (3 of 3) Costs can either be expired or unexpired. Expired costs are used up in the current period and are matched against current revenues.

Unexpired costs are not yet used up and will be matched against future revenues. Overview: Confusion Over Other Terminology Confusion also exists over the term “cost†versus the term “charges†Charges are revenue, or inflow Costs are expenses, or outflows Charges add; costs take away Disbursements for Services (1 of 2) Disbursements for services represent an expense stream (an outflow) Disbursements for services can trigger payment either: when the expense is incurred; or after the expense is incurred. Disbursements for Services (2 of 2) Payment when the expense is incurred does not require the expense to enter the Accounts Payable account. Payment after the expense is incurred requires that the expense be recorded in the Accounts Payable account.

It is then cleared from Accounts Payable when payment is made. Grouping Expenses for Planning and Control Grouping by Cost Center One form of responsibility center (Study examples in Exhibits 6-1 and 6-2.) Grouping by Diagnoses and Procedure Beneficial because is matched costs and common classifications of revenues (Study the examples in Exhibits 6-3, 6-4, 6-5, and Table 6-1.) Grouping by Care Settings By care settings recognizes different sites where service is delivered. Care settings were discussed in the previous chapter. Grouping by Service Lines By service lines would be used for grouping costs if revenues were divided by service line. Service lines were discussed in the previous chapter.

Grouping by Programs Distinguishes projects that possess their own objectives, funding, and indicators (Study the example in Exhibit 6-6.) Cost Reports as Influencers of Expense Formats (1 of 2) Since the mid-1960s Annual Cost Reports are required by the Medicare Program and the Medicaid Program. Cost Reports as Influencers of Expense Formats (2 of 2) The arrangement of costs into “Cost Centers†(on the cost report) has strongly influenced the arrangement of expense line items in many healthcare information systems. Grouping Expenses by Cost Center: Example Example: A nursing home may consider the Admitting Department as a cost center. In this case, the expenses grouped under the Admitting Department may include: Administrative and Clerical Salaries Admitting Supplies Dues Periodicals and Books Employee Education Purchased Maintenance Grouping Expenses by Cost Center: Practice Exercise 6-1 (1 of 2) The Metropolis Health System groups expenses for the Intensive Care Unit into its own cost center.

Lab and Laundry expenses are likewise grouped into their own cost centers. Required: Setup a worksheet with columns across the top for three cost centers: Intensive Care Unit, Lab, and Laundry. Indicate the appropriate cost center for each of the following expenses (see following slide). Grouping Expenses by Cost Center: Practice Exercise 6-1 (2 of 2) Drugs Requisitioned Pathology Supplies Detergents and Bleach Nursing Salaries Clerical Salaries Uniforms (for Laundry Aides) Repairs (parts for microscopes) Laundry X X X Laboratory X X X Intensive Care Unit X X X Grouping Expenses by Cost Center: Assignment 6-1 (1 of 2) The Metropolis Health System’s Rehabilitation and Wellness Center offers outpatient therapy and return-to-work services plus cardiac and pulmonary rehabilitation to get people back to a normal way of living.

The Rehabilitation and Wellness Center expenses include the following (see following slide): Grouping Expenses by Cost Center: Assignment 6-1 (2 of 2) Nursing Salaries Physical Therapist Salaries Occupational Therapist Salaries Cardiac Rehab Salaries Pulmonary Rehab Salaries Patient Education Coordinator Salary Nursing Supplies Physical Therapist Supplies Occupational Therapist Supplies Cardiac Rehab Supplies Pulmonary Rehab Supplies Training Supplies Clerical Office Supplies Employee Education Administrative/Clerical salaries Administrative X X Training X X X Cardiac Pulmonary X X X X X X X Physical/Occupational Therapy Rehab X X X X X X X Doc Number XXXX Version XX Print Date 7/17/21 Project Charter Project Project Name Created By Your Name Date Creation Date Phone Your Phone Number Email Your Email Mission Instructions: â–ª You may also want to replace the Key Consulting logo with the project’s logo. â–ª Not all the sections listed here may be needed on a particular project.

There may also be items you need to include that are not included here. â–ª Many of these items listed will be visited in more detail when you start planning. The objective of the charter is to document the information as it is known at the beginning of the project – not to get into the planning itself. â–ª Delete the blue instruction text as you move through the form. â–ª The mission, or goal, for the project should be documented in this row. What is the project ? Objectives Why is it important to achieve the project mission? What do you hope to achieve by executing the project?

Deliverables What will the project actually produce? These should be measurable items. Stakeholders Who will be on the team? Who is the project sponsor? What other stakeholders have already been identified?

Include contact information if possible. Roles and Responsibilities Are there some roles/responsibilities that need to be clarified now before the detailed planning begins? Are you clear on your responsibilities as the project manager? High-Level Work Breakdown Structure How will the project being structured at a high-level? WBS is similar to an outline of a project.

High-level WBS divides project scope into manageable chunks that a project team can understand. Project Milestone List a reference point that marks a major event in a project In-scope and out of scope Define the boundaries of a project. Document what will and will not be included in this project. Assumptions What high-level assumptions have already been made about the project? Communications What will be the main channels of communications?

Do you anticipate any communication problems that should be clarified here? How often will the team meet? Risks What are main high-level risks that have already been identified? Documentation Where will project documentation be kept? How will it be kept up-to-date?

Boundaries Are there specific items that are NOT within the scope of the project? Budget Include the total amount of money that is allocated for the project to use. Chapter 5: Revenues (Inflow) The Revenue Stream Payment After Service Is Delivered Fee-for-Service Discounted Fee for Service Payment Before Service Is Delivered Pre-Determined Per-Person Payment Rate-Setting Differences Deductions from Revenue Contractual Allowances The difference between the full established rate and the agreed-upon contractual rate to be paid Deductions from Revenue Contractual Allowances It is not uncommon for different plans to pay different contractual rates for the same service. Other Deductions from Revenue (1 of 2) Allowances for Bad Debts, aka “provision for bad debts†Estimated amounts of credit losses (bad debts) is charged to this account.

Other Deductions from Revenue (2 of 2) Charity Service Services provided to indigent patients Sources of Healthcare Revenue Revenue Sources Sources are generally called “payers.†“Payer mixâ€* is a measure often included in an organization’s profile. Many types of management reporting are arranged by payer (the revenue source). * The proportion of revenues realized from different types of payers. Revenue Sources Governmental Sources include Medicare, Medicaid, and other. Managed Care Sources are distinguished by types of plans and types of contracts. Other Sources include commercial insurers, private pay, and others.

Governmental Sources Title XVIII of the Social Security Act is commonly known as Medicare. The Medicare program currently has four parts. Title XIX of the Social Security Act is commonly known as Medicaid. The Medicaid program is state-specific. Managed Care Sources of Healthcare Revenue Types of managed care plans include health maintenance organizations (HMOs) and preferred provider organizations (PPOs).

Grouping Revenue for Planning and Control (1 of 2) Grouping revenue is an effective method for managers to use information. The method of grouping, or classification, must be consistent with the current structure of the organization. Grouping Revenue for Planning and Control (2 of 2) Grouping revenue by revenue source has just been discussed. Other approaches to grouping include: Revenue Centers Care Settings Service Lines Other classifications such as disease management Figure 5-1 Hospital Service Lines Courtesy of Resource Group, Ltd., Dallas, Texas Figure 5-2 Long-Term Care Service Lines Courtesy of Resource Group, Ltd., Dallas, Texas Figure 5-3 Home Care Service Lines Courtesy of Resource Group, Ltd., Dallas, Texas Contractual Allowances: Example 5A Contractual allowances are the difference between the full established rate and the agreed-upon rate that will be paid.

In Example 5A, the hospital's full established rate for a certain procedure is 0, but GHP has negotiated a managed care contract whereby the plan pays only for the procedure. The contractual allowance is (0 minus 90 = ) Assume that Near-By Health Plan has negotiated a managed care contract whereby it pays for the procedure. Their contractual allowance would then be (0 minus 95 = ). Contractual Allowances: Practice (1 of 2) For a particular procedure: The Medicaid allowed charge is

Chapter 6 Expenses Outflowoverview The Distinction Between Expense

Chapter 6: Expenses (Outflow) Overview: The Distinction Between Expense and Cost (1 of 3) Expenses are expired costs that have been used up, or consumed, while carrying on business. Expense in the broadest sense includes every expired (used up) cost that is deductible from revenue. Overview: The Distinction Between Expense and Cost (2 of 3) “Cost†is the amount of cash expended* in consideration of goods or services received (or to be received). * Or property transferred, services performed, or liability incurred. Overview: The Distinction Between Expense and Cost (3 of 3) Costs can either be expired or unexpired. Expired costs are used up in the current period and are matched against current revenues.

Unexpired costs are not yet used up and will be matched against future revenues. Overview: Confusion Over Other Terminology Confusion also exists over the term “cost†versus the term “charges†Charges are revenue, or inflow Costs are expenses, or outflows Charges add; costs take away Disbursements for Services (1 of 2) Disbursements for services represent an expense stream (an outflow) Disbursements for services can trigger payment either: when the expense is incurred; or after the expense is incurred. Disbursements for Services (2 of 2) Payment when the expense is incurred does not require the expense to enter the Accounts Payable account. Payment after the expense is incurred requires that the expense be recorded in the Accounts Payable account.

It is then cleared from Accounts Payable when payment is made. Grouping Expenses for Planning and Control Grouping by Cost Center One form of responsibility center (Study examples in Exhibits 6-1 and 6-2.) Grouping by Diagnoses and Procedure Beneficial because is matched costs and common classifications of revenues (Study the examples in Exhibits 6-3, 6-4, 6-5, and Table 6-1.) Grouping by Care Settings By care settings recognizes different sites where service is delivered. Care settings were discussed in the previous chapter. Grouping by Service Lines By service lines would be used for grouping costs if revenues were divided by service line. Service lines were discussed in the previous chapter.

Grouping by Programs Distinguishes projects that possess their own objectives, funding, and indicators (Study the example in Exhibit 6-6.) Cost Reports as Influencers of Expense Formats (1 of 2) Since the mid-1960s Annual Cost Reports are required by the Medicare Program and the Medicaid Program. Cost Reports as Influencers of Expense Formats (2 of 2) The arrangement of costs into “Cost Centers†(on the cost report) has strongly influenced the arrangement of expense line items in many healthcare information systems. Grouping Expenses by Cost Center: Example Example: A nursing home may consider the Admitting Department as a cost center. In this case, the expenses grouped under the Admitting Department may include: Administrative and Clerical Salaries Admitting Supplies Dues Periodicals and Books Employee Education Purchased Maintenance Grouping Expenses by Cost Center: Practice Exercise 6-1 (1 of 2) The Metropolis Health System groups expenses for the Intensive Care Unit into its own cost center.

Lab and Laundry expenses are likewise grouped into their own cost centers. Required: Setup a worksheet with columns across the top for three cost centers: Intensive Care Unit, Lab, and Laundry. Indicate the appropriate cost center for each of the following expenses (see following slide). Grouping Expenses by Cost Center: Practice Exercise 6-1 (2 of 2) Drugs Requisitioned Pathology Supplies Detergents and Bleach Nursing Salaries Clerical Salaries Uniforms (for Laundry Aides) Repairs (parts for microscopes) Laundry X X X Laboratory X X X Intensive Care Unit X X X Grouping Expenses by Cost Center: Assignment 6-1 (1 of 2) The Metropolis Health System’s Rehabilitation and Wellness Center offers outpatient therapy and return-to-work services plus cardiac and pulmonary rehabilitation to get people back to a normal way of living.

The Rehabilitation and Wellness Center expenses include the following (see following slide): Grouping Expenses by Cost Center: Assignment 6-1 (2 of 2) Nursing Salaries Physical Therapist Salaries Occupational Therapist Salaries Cardiac Rehab Salaries Pulmonary Rehab Salaries Patient Education Coordinator Salary Nursing Supplies Physical Therapist Supplies Occupational Therapist Supplies Cardiac Rehab Supplies Pulmonary Rehab Supplies Training Supplies Clerical Office Supplies Employee Education Administrative/Clerical salaries Administrative X X Training X X X Cardiac Pulmonary X X X X X X X Physical/Occupational Therapy Rehab X X X X X X X Doc Number XXXX Version XX Print Date 7/17/21 Project Charter Project Project Name Created By Your Name Date Creation Date Phone Your Phone Number Email Your Email Mission Instructions: â–ª You may also want to replace the Key Consulting logo with the project’s logo. â–ª Not all the sections listed here may be needed on a particular project.

There may also be items you need to include that are not included here. â–ª Many of these items listed will be visited in more detail when you start planning. The objective of the charter is to document the information as it is known at the beginning of the project – not to get into the planning itself. â–ª Delete the blue instruction text as you move through the form. â–ª The mission, or goal, for the project should be documented in this row. What is the project ? Objectives Why is it important to achieve the project mission? What do you hope to achieve by executing the project?

Deliverables What will the project actually produce? These should be measurable items. Stakeholders Who will be on the team? Who is the project sponsor? What other stakeholders have already been identified?

Include contact information if possible. Roles and Responsibilities Are there some roles/responsibilities that need to be clarified now before the detailed planning begins? Are you clear on your responsibilities as the project manager? High-Level Work Breakdown Structure How will the project being structured at a high-level? WBS is similar to an outline of a project.

High-level WBS divides project scope into manageable chunks that a project team can understand. Project Milestone List a reference point that marks a major event in a project In-scope and out of scope Define the boundaries of a project. Document what will and will not be included in this project. Assumptions What high-level assumptions have already been made about the project? Communications What will be the main channels of communications?

Do you anticipate any communication problems that should be clarified here? How often will the team meet? Risks What are main high-level risks that have already been identified? Documentation Where will project documentation be kept? How will it be kept up-to-date?

Boundaries Are there specific items that are NOT within the scope of the project? Budget Include the total amount of money that is allocated for the project to use. Chapter 5: Revenues (Inflow) The Revenue Stream Payment After Service Is Delivered Fee-for-Service Discounted Fee for Service Payment Before Service Is Delivered Pre-Determined Per-Person Payment Rate-Setting Differences Deductions from Revenue Contractual Allowances The difference between the full established rate and the agreed-upon contractual rate to be paid Deductions from Revenue Contractual Allowances It is not uncommon for different plans to pay different contractual rates for the same service. Other Deductions from Revenue (1 of 2) Allowances for Bad Debts, aka “provision for bad debts†Estimated amounts of credit losses (bad debts) is charged to this account.

Other Deductions from Revenue (2 of 2) Charity Service Services provided to indigent patients Sources of Healthcare Revenue Revenue Sources Sources are generally called “payers.†“Payer mixâ€* is a measure often included in an organization’s profile. Many types of management reporting are arranged by payer (the revenue source). * The proportion of revenues realized from different types of payers. Revenue Sources Governmental Sources include Medicare, Medicaid, and other. Managed Care Sources are distinguished by types of plans and types of contracts. Other Sources include commercial insurers, private pay, and others.

Governmental Sources Title XVIII of the Social Security Act is commonly known as Medicare. The Medicare program currently has four parts. Title XIX of the Social Security Act is commonly known as Medicaid. The Medicaid program is state-specific. Managed Care Sources of Healthcare Revenue Types of managed care plans include health maintenance organizations (HMOs) and preferred provider organizations (PPOs).

Grouping Revenue for Planning and Control (1 of 2) Grouping revenue is an effective method for managers to use information. The method of grouping, or classification, must be consistent with the current structure of the organization. Grouping Revenue for Planning and Control (2 of 2) Grouping revenue by revenue source has just been discussed. Other approaches to grouping include: Revenue Centers Care Settings Service Lines Other classifications such as disease management Figure 5-1 Hospital Service Lines Courtesy of Resource Group, Ltd., Dallas, Texas Figure 5-2 Long-Term Care Service Lines Courtesy of Resource Group, Ltd., Dallas, Texas Figure 5-3 Home Care Service Lines Courtesy of Resource Group, Ltd., Dallas, Texas Contractual Allowances: Example 5A Contractual allowances are the difference between the full established rate and the agreed-upon rate that will be paid.

In Example 5A, the hospital's full established rate for a certain procedure is $100, but GHP has negotiated a managed care contract whereby the plan pays only $90 for the procedure. The contractual allowance is $10 ($100 minus 90 = $10) Assume that Near-By Health Plan has negotiated a managed care contract whereby it pays $95 for the procedure. Their contractual allowance would then be $5 ($100 minus 95 = $5). Contractual Allowances: Practice (1 of 2) For a particular procedure: The Medicaid allowed charge is $2,700 The Medicare allowed charge is $3,075 The Blue Cross/Blue Shield rate is $3,090 The hospital established charge is $3,200 Contractual Allowances: Practice (2 of 2) Are there contractual allowances in this example?

If so, what payer is involved? What are the dollar amounts of any contractual allowances? Solution: Yes All three $500; $125; $110 Assignment Exercise 5-1: Contractual Allowances Using the worksheet: For each payer, enter the full rate and contracted rate. For each payer, compute the contractual allowance. Payer FHP HPHP MC UND CCN MO CGN PRU PHCS ANA Contractual Allowance $36.30 13.15 17.10 11.60 1.80 1.25 62.00 17.10 22.00 27.00 Contracted Rate $35.70 = 58.85 = 54.90 = 60.40 = 70.20 = 70.75 = 10.00 = 54.90 = 50.00 = 45.00 = Full Rate $72.00 – 72.00 – 72.00 – 72.00 – 72.00 – 72.00 – 72.00 – 72.00 – 72.00 – 72.00 – Assignment 5-2: Revenue Sources and Grouping Medicare Medicaid Other Public Programs Patients Commercial Insurance Managed Care Contracts ICU X Lab X Lab X ICU X ICU X Lab X

,700 The Medicare allowed charge is