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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. Financial Management. Why is this important?

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Financial management

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


Financial management1
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


History
History

  • Medicare

  • Medicaid

  • Managed Care

  • Insurance



Budget
BUDGET

(Cut the Budget!!!!!)


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.


Planning
Planning done and how.

Strategic

Long Range

Budget


Budget1
Budget done and how.

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


Budget2
Budget done and how.

Net income/profit $2,115.00

  • What’s left after bills are paid

    Revenues - Expenses = Profit ( or Loss )

    ($4,000.00-$1,885.00=$2,115.00)


Hospital Lab Budget done and how.




Revenue
Revenue done and how.

Billed Revenue =

Lab Procedures X Current Fee

Collected Revenue =

Billed Revenue - Contractual Allowances


Insurance mix
Insurance Mix done and how.

Medicare 35%

Medicaid 10%

Trigon (Blue Cross) 25%

Managed Care 25%

Other 5%


Revenue1
Revenue done and how.

Billed Revenue =

Lab Procedures X Current Fee

Collected Revenue =

Billed Revenue - Contractual Allowances

$40,500 = $54,000 - $13,500


Revenue problem
REVENUE PROBLEM done and how.

  • 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?


Solution
SOLUTION done and how.

  • 200 X $25 = $5000( billed revenue )

  • $5000 X .5(50%) = $2500( col. Revenue )


Costs expenses
Costs (Expenses) done and how.

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


Direct costs
Direct Costs done and how.

Variable Costs-- changes with a change in product volume


Direct costs1
Direct Costs done and how.

Fixed Costs-- Do not change with change in product volume


Which direct expense is this
WHICH DIRECT EXPENSE IS THIS? done and how.

  • Service contract for equipment

  • Reagent for each test

  • Quality control material

  • Labor costs

  • Pipet tips

  • Purchase cost of equipment

  • Rent of lab space


Costs expenses1
Costs (Expenses) done and how.

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


Indirect costs
Indirect costs done and how.

Departmental

  • management

  • travel

  • telephone

    Global (Hospital)

  • administration

  • dietary

  • computer systems

  • plant facilities



Profit loss revenue minus expenses
Profit/Loss = Revenue Minus Expenses done and how.

Profit/Loss = Collected Revenue (Net) - Total Expenses


Month
Month done and how.

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


Profit loss revenue minus expenses1
Profit/Loss = Revenue minus Expenses done and how.

$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


Problem
PROBLEM done and how.

  • 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)


Solution1
SOLUTION done and how.

  • 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


Monitoring the budget
Monitoring the Budget done and how.

  • Usually monthly

  • Action plan –(how to get back on budget)

  • Your involvement as lab staff


Setting the test fee
Setting the Test Fee done and how.

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)


Depreciation
Depreciation done and how.

  • Cost of item divided by useful life

  • Useful life is usually five years for lab equipment

  • $100,000/5years = $20,000


Setting the test fee example
SETTING THE TEST FEE EXAMPLE done and how.

  • 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


Setting test fee example
SETTING TEST FEE EXAMPLE done and how.

  • 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%= $25.85+$2.59 =

  • $28.44


Cost accounting
COST ACCOUNTING done and how.


Cost accounting example
COST ACCOUNTING EXAMPLE done and how.

  • 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


Contribution margin
Contribution Margin done and how.

  • Price(fee) – Variable cost/test = Contribution Margin

  • Contribution Margin contributes to fixed costs and to profits


Break even analysis
Break Even Analysis done and how.

  • 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


Price - Variable cost per test= done and how.

Contribution Margin

$30.00 - $10.00 = $20.00

Break Even Volume = Fixed Costs

Contribution Margin

500 Tests = $10,000.00

$20.00


  • Volume = 1,000 tests done and how.

  • 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


Change the fee to 15 00
Change the fee to $15.00 done and how.

  • What is the profit?


$15.00 per test done and how.

$15,000 - $13,700 = $1,300 profit


Problem1
PROBLEM done and how.

  • 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?


  • 5,000 tests is volume done and how.

  • 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


Let s take a break
Let’s take a break done and how.


Capital costs
Capital Costs done and how.

  • Operational Costs

  • Capital Costs

  • Where do Capital dollars come from?



Capital equipment
Capital Equipment done and how.

  • Purchase

  • Lease

  • Reagent Rental

  • Cost per Billable Test


Return on investment
Return On Investment done and how.

  • ROI (operating margin divided by capital investment)

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


ROI done and how.

  • $150,000 X 100 = 300%

    $50,000

  • $40,000 X 100 = 80%

    $50,000

  • $18,000 X 100 = 18.5%

    $97,000


Return on investment1
Return On Investment done and how.

  • ROI (operating margin divided by capital investment)

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


Pay back period
Pay Back Period done and how.

  • $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


Roi problem
ROI PROBLEM done and how.

  • The operating margin for this test is $300,000

  • Equipment purchase will cost $100,000

  • What is the return on investment(ROI)?


Roi solution
ROI SOLUTION done and how.

  • $300,000/$100,000 x 100 = 300%


Pay back period problem
PAY BACK PERIOD PROBLEM done and how.

  • The operating margin for this test is $300,000

  • Equipment purchase will cost $100,000

  • What is the payback period?


Payback period solution
PAYBACK PERIOD SOLUTION done and how.

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


Questions
QUESTIONS done and how.


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