Religion & Spirituality

A survey of financial planning models for health care organizations

A survey of financial planning models for health care organizations
of 11
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Similar Documents
  Journal of Medical Systems, Vol. 2, No. 1. 1978 Survey of Financial Planning Models for Health Care Organizations John R. Coleman Ph.D. Frank C. Kaminsky Ph.D. and Frank McGee, M.P.A. This paper describes what if? financial planning models developed for health care administrators and financial managers to study and evaluate the economic impact of changes in a health care organization's charge structure, operating policies, reimbursement plans, and services and resources Models for inpatient and outpatient care systems are presented. The models are described in terms of input, output, and application. An assessment of the state of the art of financial planning and prospects for the future of what if?models are given. INTRODUCTION In 1976, the bill for America's health care system amounted to $139.3 billion. 1 This staggering amount represented 8.6% of the GNP -- up from 5.8% in 1965. From 1965 to 1976, the average cost per person for health care increased from $195.75 to $637.97. 2 The high cost, the double-digit rate of cost inflation for more than a decade, and the fact that some persons feel that the nation's health has not significantly im- proved despite advances in medical technology over the last quarter century a continue to cause concern among politicians, the federal government, third-party payers, health care providers, and the general public. Since the advent of Medicare, every ad- ministration has labeled the problem as America's health care crisis. Because of runaway costs, health care organizations and providers of physician and medical care services are now publicly held accountable for budgets and service costs, and are under great pressure to voluntarily contain rising costs. This pressure has been mounting since the late 1960s, when the annual increases in costs often ex- ceeded 15%. While all interested parties have been working on the rising cost problem for more than a decade, little has been accomplished, and voluntary actions in many areas From the Department of Public Administration, University of New Haven. New Haven, Connecticut, and the Department of Industrial Engineering and Operations Research, University of Massachusetts, Amherst, Massachusetts. 59 0148-5598/78/0300-0059505.00/0 9 1978 Plenum Publishing Corporation  60 oleman et al of the country are beginning to give way to regulatory action by state cost and rate regulation commissions. Still other cost control measures will soon be introduced and enforced by the more than 200 Health Systems Agencies (HSAs) formed since the passage of the National Health Planning Resources and Development Act of 1974 (PL-93-641). Health care organizations have voluntarily been trying to solve the cost and financial problems since the late 1960s. Their initial efforts to contain costs turned them inward in order to see what economies could be made, and in so doing, they began to develop and utilize up-to-date cost-finding and budget-preparation tech- niques? Methods of industrial engineering and operations research were borrowed from other industries to help find more efficient ways of managing their scarce resources?-' These early attempts to put a lid on rising costs were plagued with many technical problems. For example, when they started to use micro and macro cost-find- ing techniques, many found that the cost-finding, rate-setting, and budget-preparation methodologies in existence were not fully developed and therefore inadequate. Still others discovered that accurate cost functions could not be obtained because of the cost-accounting techniques being used and the lack of adequate cost information. 1~ Despite these difficulties, health care organizations continued to adopt systems analysis concepts from other industries to design up-to-date budgetary and financial planning systems to replace the traditional seat-of-the-pants approaches that could not longer be used in a fast changing cost environment? 4 A number of techniques for financial planning purposes were borrowed, including mathematical programming, statistical analysis, simulation, and computerized modeling. These techniques were soon adopted as the organizations began to recognize that the operating conditions where financial managers could just fine tune the accounting system were gone, and it was becoming imperative to ask what if? instead of what happened? questions. PURPOSE The purpose of this paper is to review some of the what if? financial planning models developed in the early 1970s to study the financial behavior of inpatient and outpatient health care organizations. The models will be discussed in terms of input, output, and design. Financial planning models for inpatient care organizations will be introduced first; the models developed to study the economic behavior of outpatient or ambulatory care programs will follow; and an assessment of the state of the art with prospects for financial modeling in the near future will then be presented. MODELS FOR INPATIENT CARE ORGANIZATIONS Computerized what if? financial planning models for health care organizations did not arrive until 1970. The first such model was a highly sophisticated one developed by Forsyth and Thomas 15 for Saint Francis Memorial Hospital in San Francisco. Their particular model simulates short- and long-range financial budgets for 40 periods (weeks, months, years) under different operating policies. The model contains over 500 accounting variables and can be used to (1) establish a structure of  ¬†inancial Planning Models 6 rates and charges, (2) manage cash flow during expansion and construction periods, (3) determine depreciation strategies, (4) locate deficit departments, and (5) adjust financial policies to satisfy some of the demands of the medical staff. The benefits and procedures for constructing a what if? financial planning model, similar to that of Forsyth and Thomas, were presented by DuFour. le Although DuFour did not describe an operational model, he pointed out how an in-house or time-shared model can be built and used for strategic planning purposes to determine the financial impact of changes in operating conditions such as the number of beds, occupancy rates, the size and mix of staff, salary increases, and reimbursement rates. By constructing a what if? model, hospital management can be provided with ac- curate and timely answers to questions such as (1) Can we afford to change our operating plans? (2) Can we pay off the long-term debt involved? (3) Are our current and future plans still meaningful in the light of changing business conditions? (4) What are the likely consequences on future operations of action being considered today? (5) What happens to our current plans of operation if the cost of money changes, if we raise rates by a given percent, if we expand or cut back in certain areas? (6) What will changes in Medicare and Medicaid cost reimbursement have on cash flow? (7) What effect will a change in admissions and occupancy rates have on the hospital's cash flow and its ability to keep the debt load at reasonable levels? (8) What are the short- and long-term consequences of a change in the patient volume and mix? In 1973, Fayollat, 17 described such a planning model called HOSPLAN: a time- sharing financial package capable of preparing a set of revenue and expense schedules for financial planning and control for either short- or long-term planning horizons. HOSPLAN (HOSpital PLANning) consists of a series of interrelated computer software packages. The basis for HOSPLAN is a number of profile/revenue/expense (P/R/E) relationships. The profile of the hospital consists of kinds of services pro- vided, measure-of-activity volumes, expected occupancy rates and number of procedures, average billing rates, salary rates, third-party reimbursement formulas, and other expense and important operating and financial conditions. The P/R/E relationships are the connecting link between revenues, expenses, and the profile. HOSPLAN is capable of preparing a set of schedules specifically designed for the hospital's accounting system. In order to use the model, financial managers must provide certain basic information related to the expected operations of the organiza- tion m including the original profile and P/R/E functions. Since the user can interact with HOSPLAN, immediate responses to any changes in the profile and P/R/E assumptions can be received on the financial condition of the hospital and the revenue and cost status of all or selected departments. The degree of detail of the revenue and expense reports can be specified by the financial manager. Options are also available to study the impact of changes in costs, bed complement, occupancy rates, volume and mix of patients, reimbursement rates, and a number of other variables included in the profile. In the same issue of Modern Hospital Montague T describes a similar financial simulator. This model can also be used on a time-sharing system and is designed to prepare pro forma financial statements for 5, 10, or as many planning periods as the user determines to be valid. The model, which operates through a teletype terminal, poses a series of what if? questions to the financial manager. Answers serve as inputs and are combined with  62 oleman et al the hospital s basic financial data and revenue, cost and reimbursement formulas to calculate instantly the economic impact of various planning assumptions. Some of the inputs involved are salaries, cost of supplies and services, capital ex- penditures, charges, patient utilization reimbursement policies, and other operational statistics used for cost allocation. The model manipulates the data through a series of modules that (a) calculate costs by cost center, (b) allocate overhead costs to revenue- producing centers, (c) calculate revenue by source of payment, (d) calculate an- ticipated depreciation, (e) compare charges to actual revenue, and (f) calculate an- ticipated per diem rates for each planning period. The output for each planning period includes (a) cost and revenue projections by cost center, (b) a list of per diem rates, (c) revenue projections by source of payment, and (d) revenue flow and total expenses and revenue. The variety of questions that can be answered through the model include (1) What will be the impact of changes in salaries by classification category? (2) What will be the impact of changes in fringe benefits? (3) What will happen when there are changes in the cost of supplies and services by cost center? (4) What will be the impact of changes in value and life of new equipment? (5) What happens when the utilization of patient services expressed in terms of sources of payment changes? (6) What is the impact when the basis for cost allocation by department is changed7 (7) What will be the impact when the charge structure is changed? In early 1974, Stepp et al. :9 described a computer financial model implemented by Clark County Memorial Hospital in JeffersonviUe, Indiana. Like the others, it can be used to study the economic impact of various financial decisions before they are implemented. Many of the typical questions facing financial managers can be answered: (1) How long can we retain our current rate structure before rising costs necessitate some form of revision? (2) Will a particular revision in the rate structure be adequate for our financial needs? (3) How much should we raise rates to compensate for a department whose volume is lower than we anticipated? (4) What will be the im- pact of opening a new department or closing an existing one? (5) How will changes in the volume and mix of patients affect our revenues and expenses? The model was built by combining a patient data base consisting of detailed in- formation on primary diagnosis, age, sex, payment type, Medicare eligibility, ser- vices consumed, length of stay, with cost and revenue data bases containing cost- revenue relationships among aU departments. The model can include the total chart of accounts, including depreciation, revenues from contributions, bad debts, and so forth. Using forecasts of patient demand, management can determine the cost, revenue, and financial impact of various charge rates, staffing patterns, and service levels. The model allows planners to experiment with a variety of alternatives; for example, changes in department size, changes in types of services, changes in charges, changes in expenses and cost allocation, and changes in reimbursement policies and rates. After going through the Economic Stabilization Program with price ceilings and wage increases, the industry realized the importance of having better methods for determining departmental costs, projecting budgets for departments, and determining the impact of various service charge and service reimbursement rates on depart- mental and master budgets. To solve the complex problem of setting service charges in such a way that each department breaks even, the total hospital breaks even, and the hospital maximizes  ¬†inancial Planning Models 6 reimbursement income within a maximum allowable percentage increase in gross revenue, the Presbyterian-University Hospital in Pittsburgh developed a com- puterized profit-loss system called PAL-Hospital Department Profit and Loss System. 2~ PAL is a generalized system designed to simulate the financial condition of the hospital for proposed service price changes in all departments of a hospital. PAL com- bines the reimbursement formulas for Medicare, Medicaid, Blue Cross, and other third-party payers with the step-down cost-allocation system. By weighting the charge ratios toward the cost-based payers and away from the self-pays, PAL determines the best price-increase schedule for the next planning period. Once a hospital is completely described by means of special cost codes, revenue codes, and reimbursement parameters, it can receive monthly reports detailing profit and loss for each third-party payer at the departmental and hospital level. PAL can be used in both an operational and a simulation mode. In the operational mode, it will generate monthly and year-to-date reports for the departments. In the simulation mode, PAL allows the user to simulate profit-loss reports for simulated changes in costs, prices, and reimbursement formulas. Using this mode, planners can conduct special sensitivity analyses for each department and the entire hospital. The sensitivity reports for each department list the cost charge sensitivity, the profit change per dollar cost change, or the profit change per dollar charge change. Once PAL is operational, financial data bases are accumulated for future statistical work. The model is currently being used by three large urban hospitals and two health centers in Pennsylvania. A similar financial system model is now being used by more than 25 hospitals across the country. 21 This model, called Financial Planning System (FPS), provides precisely the information that a hospital financial manager needs -- cost allocations, third-party cost settlements, and income sensitivity data. Some of the features of FPS are that (1) it gives precise calculations of third-party reimbursement; (2) one can use single, double, or multiple cost apportionment methods; (3) it can do per diem and per visit cost analyses; (4) it is good for accurate net forecasting; (5) it can simulate changes in revenue and cost; (6) it can perform revenue and expense income sen- sitivities; and (7) it can be tailored to the hospital's accounting system and cost reim- bursement situation. The FPS can be used to (1) prepare income statements by payer by revenue center; (2) determine the profitability of departments and the precise bottom-line impact of departmental rate changes; (3) maximize third-party reim- bursement; (4) show the results by different cost appointments or income by payer by department; (5) show the flexibility of different approaches to reclassifying and regrouping costs for cost reporting and planning purposes ; (6) list gross income by payer by revenue center; and (7) simulate the economic behavior of the hospital for several years in the future for various costing, pricing, and capital decisions. Recent adoptions of PAL and FPS by financial managers of both medium and large hospitals illustrate the importance of these models in answering what if? ques- tions that must be asked when preparing short-term budgets and long-range financial plans for the organization. Now that many hospitals have to keep costs below certain limits set by state cost commissions, and wilt probably have to operate within a price ceiling soon to be set by the federal government, wide adoption of these and similar models should become a reality. Benson and Santullano, ~2 as well as others, suggest that models like those already
Related Search
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks

We need your sign to support Project to invent "SMART AND CONTROLLABLE REFLECTIVE BALLOONS" to cover the Sun and Save Our Earth.

More details...

Sign Now!

We are very appreciated for your Prompt Action!