Healthcare Finance Exam 1

Covers chapters 1-3

Ch.1

What is the Healthcare Sector (Economy)?

A diverse collection of sub-sectors that include (directly or indirectly) the healthcare of the population

Ch.1

List and explain the 6 sub-sectors of the Healthcare Sector 

1. Health services industry: providers such as physician practices, hospitals, clinics, nursing homes, and home health care agencies 

2. Health insurance industry: includes government insurers, commercial (private) insurers, self-insurers, and

3. Managed Care Industry - organizations that include both insurance and provider functions into one. (HMOs) 

4. Medical Equipment and Supplies Industry: makes durable equipment and expendable medical supplies 

5. Pharmaceutical and biotechnology: develops and markets drugs

6. Other Entities: broad category that ranges from consulting firms to educational institutions to government and research agencies  

Ch.1

Define Finance

Consists of accounting and financial management functions

Ch.1 

Define Accounting 

The recording of economic events that reflect an organization’s operations, resources, and financing 

Ch.1

Define Financial Management

Provides the theories, concepts, and tools needed to make financial decisions

Ch.1 Self-Test Questions 

What is meant by the term healthcare finance?

How the healthcare sector is financially accounted and managed by health organizations to ensure financial stability 

Ch.1 Self-Test Questions 

What is the difference between accounting and financial management? 

Accounting focuses on recording and measuring finances and communicates how the organization is doing in financial (dollars) terms. Whereas, financial management focuses on decision making. It applies the tools, concepts, and theories to help managers make good financial decisions.

Ch.1 
Describe the concept and list the characteristics of a business 

A business is an entity that  

1. obtains financing (capital) from the marketplace

2. Uses those funds to purchase assets (land, buildings, and equipment)

3. Operates the assets to create goods/services

4. Sells those goods/services to create revenue

Ch.1

List the 3 ways businesses raise capital

1. Debt financing (borrowing money( 

2. Raise money from owners (or community for nonprofits)

3. Use a combination of debt financing and raising money from owners

Ch.1 Self-Test Questions 

From a financial perspective, briefly describe a business

An entity that uses funds  obtained from the marketplace to buy assets and then create services/goods that are sold for profit.

Ch.1 Self-Test Questions 

Describe the differences between a business and a pure charity

Businesses financially sustain themselves by selling goods or services. They compete with other businesses for the consumer dollar. A charity, sustains itself through funds and contributions. Charities provide free services and do not seek a profit.

Ch.1 Self-Test Questions 

Describe the difference between a business and a government agency

Businesses financially sustain themselves by selling goods or services. They compete with other businesses for the consumer dollar. A government agency does not sell goods/services or receives contributions. They receive their revenues by taxing the population that benefits from their services/goods.

Ch.1 

Briefly explain the primary role of finance in health services organizations 

It is to plan for, acquire, and use resources to maximize the efficiency and value of the organization 

Ch.1

List the finance activities 

1. Planning and Budgeting 

2. Financial Reporting 

3. Capital Investment Decisions 

4. Financing Decisions

5. Revenue Cycle 

6. Working Capital Management 

7. Contract Management 

8. Financial Risk Management 

Ch.1

Define Capital Budgeting 

the process of analyzing and choosing new long-term assets

Ch.1 Self Test Question

List and describe The Four Cs

1. Cost - important to minimize and vital to financial success 

2. Cash - having sufficient cash to make the business run smoothly

3. Capital - having access to funds and being able to purchase assets 

4. Control - making sure financial resources are being used effectively and efficiently 

Ch.1

What is the most critical finance function and why?

Cost identification because it is more important to account for costs rather than control them

Ch.1 Self Test Question

What is the role of finance in today’s health services organization? How has it changed over time? 

It used to focus on just record keeping however, now it is uses various strategies and functions to help lead organizations into the future. It uses the following to do so

• Strategy development 

• Cost containment efforts 

• Third-party payer contract negations 

• Joint venture decisions 

• Risks Management 

• Clinical integration  

Ch.1 

What do the following stand for? 

1. CFO 

2. CEO 

1. Chief financial officer 

2. Chief executive officer 

Ch.1

Who are the two senior managers that help manage finance activities? List them in order and their responsibilities 

1. Comptroller

   1. budgets and reports activities 

   2. payables and receivables management 

2. Treasurer 

   1. Acquisition and management of capital (funds) 

   2. Debt management 

   3. Financial risk management

Ch.1

In the smallest health services organizations, the entire finance function is managed by who? 

Business (practice) manager 

Ch.1 Self Test

Briefly describe the typical structure of the finance department within a health services organization.

The CEO receives reports from the CFO. The CFO receives reports from the comptroller and treasurer. In very large organizations, the comptroller will have a patient accounts manager reporting to them and the treasurer will have a cash manager reporting to them. 

Ch.1 Self Test

How does the structure of the finance department differ between small and large health services organizations? 

In large organizations there is typically more of a hierarchical structure where there are multiple positions that are being reported to. Whereas, in a small organizations there is less hierarchy and can even be ran by one person.   

Ch.1 Self Test

What are some important issues facing healthcare managers today? 

• Revenue growth 

• Population health 

• Accountable care organization strategy 

• Cost containment 

Ch.1 

List management challenges according to the  ACHE survey and HFMA survey 

ACHE 

• Financial concerns 

• Medicaid 

• Medicare 

• Indigent care and bad debt losses 

HFMA 

• Balancing financial and quality issues 

• Revenue cycle improvement 

• Access to capital 

Ch.1

List the 3 forms of business

1. Sole proprietorship

2. Partnership

3. Corporation 

Ch.1 

What are the advantages and disadvantages of proprietorships and partnerships?  

Advantages

• Can be easily and inexpensively formed

• Subject to few regulations

• No corporate income taxes 

Disadvantages 

• Limited life 

• Hard to transfer ownership 

• Unlimited liability 

• Difficult to raise funds 

Ch.1 

What are the advantages and disadvantages of corporations? 

Advantages

• Unlimited life and can continue even after owners leave 

• Easy to transfer ownership 

• Limited liability 

Disadvantages 

• Cost of formation and reporting 

• Double or triple taxation for investor-owned corporations 

Ch.1

List and briefly describe the hybrid forms of organizations

• Limited Liability Partnership (LLP)

  • Partners have general business liability but are only liable for their malpractice actions

• Limited Liability company (LLC)

  • Members are taxed like partners

  • Liability like stakeholders

• Professional corporation (PC) or professional association (PA)

  • Owners have benefits of incorporation

  • Liable for malpractice 

  • Often used by individual clinicians 

Ch.1 Self Test

What are the three primary forms of business organization, and how do they differ? 

The three forms are proprietorship, partnership, and corporation. A proprietorship is owned by a single person. A partnership is owned by two or more people. A corporation is a legal entity that is separate from its owners. Both proprietorship and partnerships are easier to form, subject to a few regulations, and pay no income taxes. Whereas, a corporation has to pay double or even triple income taxes. Corporations are easier to transfer ownership, have unlimited life, and limited liability. It is also easier to raise capital.

Ch.1

What are the two forms of corporations? 

For-profit and not-for-profit 

Ch.1

Define an investor-owned (for-profit) corporation

A corporation that is owned by shareholders who furnish capital and expect to earn a return on their investment 

Ch.1 

What are the two basic rights of investor-owned corporations?

1. The right of control - they can vote for board of directors

2. Claim on the residual earnings of the firms - often get paid in dividends

Ch.1

What taxes do investor-owned corporations pay?

Property, income, and sales 

Ch.1

Define tax-exempt (not-for-profit) corporations

A corporation that has a charitable purpose is tax exempt, and has no owners; also called nonprofit corporation

Ch.1

What can not-for-profit corporations also be called?

• Tax-exempt

• 501(C)(3) corporations

• (C)(4) corporations

Ch.1

List the characteristics of a not-for-profit corporation

• No shareholders (generally) 

• Exempt from property, income, and sales taxes 

• Controlled by board of trustees 

Ch.1

What are the primary goals of an investor-owned corporation and not-for-profit corporation?

Investor-owned corporation

• Shareholder wealth maximization.

Not-for-profit corporation

• Ensure financial viability of the organization

• Goal is given by mission statement, often in terms of service to the community 

Ch.1 

What is the IRS Form 990?

What is the Schedule H?

IRS Form 990

• Provides the IRS and public with financial information about not-for-profit organizations 

• “Return of Organization Exempt from Income Tax” 

Schedule H

• An attachment that provides additional information on non charitable activities

Ch.1 

Who are for-profit managers primarily concerned with satifisying?

Stockholders, however, they must also satisfy stakeholders 

Ch.1

List the four requirements the ACA added for hospitals to remain tax-exempt

1. Conducting a community health needs assessment

2. Establishing a written financial assistance policy

3. Charging patients who qualify for financial assistance amounts similar to what insured patients are charged

4. Not engaging in aggressive collection efforts before determining if a patient qualifies for financial assistance

Ch.1 Self Test

What are the major differences between investor-owned (FPs) and not-for-profit corporations (NFPs)? 

NFPs have no shareholders but they do have stakeholders. They are controlled by a board of trustees and are exempt from taxes. FPs are controlled by stockholders as they are able to vote for the board of directors. Stockholders also expect residual earnings from profits. FPs also have stakeholders but they are more concerned with satisfying stockholders.

Ch.1 Self Test

What types of requirements have been placed on NFP hospitals to make sure that they meet their charitable mission?

Since there are no shareholders, there is a board of trustees put into place to make sure the organization meets the IRS’s definition of charitable organization

Ch.1 Self Test

Briefly describe the differences in key stakeholders between investor-owned and not-for-profit businesses

In investor-owned, shareholders expect earnings from their investments. In NFPs,  the stakeholders are the community members. 

Ch.1

List the key trends following the ACA

• Sector consolidation

  • Made it easier to share patient data and adhere to clinical practice guidelines.

  • It also provides organizations with access to capital, economies of scale, negotiating power, and market share

• Population Health

  • Tracks and monitors the health status of entire patient population

  • Focuses on preventative care and avoiding unnecessary care

• Social Determinants of Health

  • Addressing the social determinants for health such as screening patients or populations for social needs

  • Connecting patients with resources in sectors outside of healthcare (food pantries)

• Clinical Integration

  • Coordinates patient care across conditions, proviers, settings, and time to achieve care that is safe, timely, effective, efficient, and patient focused 

• Technology

  • Slow to adopt due to privacy concerns 

  • Blockchain - linking data in chains so when something updates, everything in the chain updates  

• Staffing shortages 

  • With more insured patients there is now higher demand for professionals 

Ch.1 Test 

Define Accountable care organizations (ACO)

A network of healthcare providers joined together for the purpose of increasing patient service quality and reducing costs 

Ch.1 Self Test

Define a Medical Home (or patient-centered medical home)

A team-based model of care led by a personal physician who provides continuous and coordinated care throughout a patient’s lifetime to maximize health outcomes 

Ch.2 

List and briefly describe the 4 characteristics of Insurance 

1. Pooling of Losses 

   1. Basis of insurance 

   2. Losses are spread over a large group of individuals 

   3. Law of large numbers 

2. Payment only for random losses 

   1. Payments made for unforseen events

3. Risk Transfer 

   1. Transferring the risk from an individual to the insurer who is in a better spot financial to handle the risk 

4. Indemnification 

   1. Reimbursement to the insured if a loss occurs

   2. Takes place when insurer pays insured or providor in whole or in part for expenses related to insured’s illness / injury

Ch.2

Define adverse selection 

Individuals who are more likely to have claims are also more likely to purchase insurance while those least likely to have claims do not

*Huge issue for insurance companies 

Ch.2

Define Moral Hazard 

Problem faced by insurance companies because individuals are more likely to use unneeded health services when they are not paying the full cost of those services 

Ch.2

List the two ways insurance companies fight Moral Hazard 

1. Coinsurance - requiring individuals to pay a certain percentage of medical expenses 

2. Co-payment - similar but in dollar terms 

Ch.2

Define Third-Party Payers 

Outside party that pays for part or all of a patient’s healthcare services L

Ch.2

List private third-party insurers

1. Blue Cross Blue Shield 

2. Blue Shield 

3. Commercial

   1. Formed by life insurance companies, casualty insurance companies, and companies that were formed to exclusively offer healthcare insurance  

4. Self-Insurers

   1. Make the conscious decisions to bear the risks associated with healthcare costs 

Ch.2

List public third-party insurers 

1. Medicare

2. Medicaid

Ch.2

What are the two broad classifications of payment methods? 

1. Fee-for-service 

2. Capitation

Ch.2

How is Medicare Administered?

The administration falls under the HHS, which creates specific rules of the program on the basis of enabling legislation. It is administered by an agency within the HHS called Centers for Medicare and Medicaid Services 

Ch.2

Define Managed Care Plans and list the types of plans 

A combined effort by an insurer and group of providers that aims both to increase quality of care and decrease costs 

• HMOs and PPO

Ch.2

Define HMOs 

• Health maintenance organizations 

• Services provided through a network of doctors, hospitals, and providers 

• Limited network 

• Requires you to select a primary care physician 

Ch.2 

Define PPO

• Hybrid of HMOs and traditional health plans 

• Doesn’t mandate specific provider 

• More flexible 

Ch.2

Define Health Insurance Exchanges (HIEs) 

Online marketplaces where people can research and purchase health insurance 

Ch.2

Briefly describe High-deductible health plans

HDHPS have low premiums and high deductibles. Some are linked with health savings accounts or health reimbursement arrangements, under which enrollees can use tax-advantaged accounts to pay for medical expenses

Ch.2

Define fee-for-service 

A reimbursement methodology that provides payment each time a service is provided

Ch.2

List and describe the three primary fee-for-service methods of reimbursement 

1. Cost-based 

   1. Payer agrees to reimburse the providers for the costs incurred in providing services to the insured population 

2. Charge-based 

   1. Payers pay charges according to the provider’s chargemaster (shows all the services and rates) 

3. Prospective Payment 

   1. Rates are established before services are provided  

Ch.2

Briefly describe the different units of prospective payments

1. Per procedure

   1. A separate payment is made for each procedure performed on a patient 

2. Per Diagnosis 

   1. Provider is paid a rate that depends on the patient’s diagnosis

3. Per diem

   1. Provider is paid a fixed amount each day a service is provided

4. Bundled / Global Pricing

   1. Payers make a single prospective payment that covers all the services

Ch. 2

Define Capitation

Provider is paid a fixed amount per covered life per period (usually a month) regardless of the amount of services provided

Ch.2 Self Test

What is the major difference between fee-for-services reimbursement and capitation?

Under fee-for-service, providers had the incentive to work harder and increase utilization. Under capitation, providers only do procedures deemed necessary to keep low costs and promote preventative care

Ch.2

Define Medical coding

The process of transforming descriptions of medical diagnoses and procedures into code numbers that can be universally recognized and interpreted

*Foundation of fee-for-service reimbursement systems

Ch.2

Define International Classifications of Diseases Codes (ICD)

numerical codes for designating diseases plus a variety of signs, symptoms, and external causes of injury

*diagnosis codes

Ch.2

Define Current Procedural Terminology (CPT) codes

Codes applied to medical, surgical, and diagnostic procedures

*procedure codes

Ch.2

What is the link between coding and reimbursement?

The better the coding is done, then the higher the reimbursement

Ch.2

Define Healthcare Common Procedure Coding System (HCPCS)

coding system that expands the CPT codes to include non physician services and durable equipment

Ch.2

What does Medicare use for hospital inpatient reimbursement?

The inpatient prospective payment system (IPPS)

Ch.2

Define Inpatient Prospective Payment System (IPPS)

Methodology based on an inpatients diagnosis at discharge

Ch.2 

Under IPPS, how is the amount of payment determined?

By the patient’s Medicare severity diagnosis-related group

Ch.2

How are physicians reimbursed by Medicare?

By using the resource-based relative value scale (RBRVS)

Ch.2

Describe RBRVS and how reimbursement is handled

Reimbursement is based on relative value units (RVUs) that consist of three resource components:

1. Physician work

2. Practice expenses

3. Malpractice insurance expenses

The RVU for each service is multiplied by a dollar conversion factor to determine the payment amount

Ch.2 

Explain how the healthcare reform has had an significant impact on health insurance and how providers are reimbursed. 

More people now have access to insurance coverage and new payment methods place more emphasis on value, efficiency, and patient outcomes over volume