Assignment 2 Accounting and Audit EnforcementDue Week 7 and wor.docx

Assignment 2: Accounting and Audit Enforcement
Due Week 7 and worth 300 points
Using the Internet, Strayer databases, or the Securities and
Exchange Commission’s Website, located at
http://www.sec.gov/divisions/enforce/friactions/friactions2012.s
html, perform a search on several U.S. health care publicly-
traded companies and choose a health care organization that has
been accused of committing health care fraud.
Write a five to six (5-6) page paper in which you:
Evaluate the level of SOX regulations that applies to for-
profit and not-for-profit health care organizations, indicating
whether or not mandating SOX requirements for non-profits
might reduce fraud and increase corporate governance. Provide
support for your rationale.
Determine whether SOX has been effective in regulating
ethical behavior of for-profit health care organizations. Defend
your position.
Review the audit report issued by the external auditing firm
from the company's Website for the year it was accused of
fraud. Then, determine whether the external auditors were
negligent in preparing the audit report for the company.
Formulate an opinion regarding which Internal Control was
deficient or what GAAP was violated. Defend your position.
Determine what provision(s) of SOX was / were violated in
the health care fraud case in question. Indicate whether or not
SOX adequately provides sanctions to deter the behavior or if
changes are needed to the regulations to remedy the issue(s) and
thus ensure compliance.
Based on the fraudulent activity that occurred, recommend
two (2) improvements to the internal control environment to
reduce those occurrences. Provide detailed recommendations.

Use at least four (4) quality academic resources in this
assignment. Note: Wikipedia and other Websites do not qualify
as academic resources.
Your assignment must follow these formatting requirements:
Be typed, double spaced, using Times New Roman font (size
12), with one-inch margins on all sides; citations and references
must follow APA or school-specific format. Check with your
professor for any additional instructions.
Include a cover page containing the title of the assignment,
the student’s name, the professor’s name, the course title, and
the date. The cover page and the reference page are not included
in the required assignment page length.
The specific course learning outcomes associated with this
assignment are:
Evaluate internal controls within an organization and create a
risk assessment.
Analyze ethical theories to evaluate a decision-making
process to determine compliance with professional codes of
ethics.
Evaluate the health of organizations to assess the level of
risk in an audit engagement.
Evaluate financial data for potential fraud and prepare an
audit approach for detecting fraud.
Assess the risk of financial misstatement in an IT-based
environment.
Use technology and information resources to research issues
in accounting management.
Write clearly and concisely about accounting management
using proper writing mechanics.

FI N 513 – Health Care Finance
Copyright 2011, 2012, 2017
The Taft University System, Inc.
All rights reserved. No part of this publication may be
reproduced or transmitted in any form or by any means,
electronic or mechanical, including photocopy, recording, or
any information storage and retrieval system, without
permission in writing from the copyright holder.
FI N 5 1 3 – Health Care Finance
Course Syllabus
1

Course Syllabus
Introduction
This syllabus contains the lesson assignments for FIN513 –
Health Care Finance. This course is
designed to introduce health care accounting and finance issues
that have become part of the
everyday life of most health care executives. The course covers
types of financial decisions that
health care executives are most likely to be involved with and
provides materials that will help
you understand the conceptual basis and mechanics of financial
analysis and decision making as
they pertain to the health care industry sector.
The general basis of financial decision-making in any business
is almost always built upon
understanding three critical elements. First, most financial
decisions are based upon the use of
accounting information. Second, all business units operate
within an industry. The health area
industry is a huge, complex industry that is unlike other
industries in many areas. Third, both
accounting and finance are, in many ways, subsets of
economics.
Expected Student Learning Outcomes
Upon the successful completion of this course you should be

able to:
• Appraise the importance and uses of financial information in
health care organizations.
• Explain the common ownership forms of health care
organizations, along with their
advantages and disadvantages.
• Describe factors that influence the financial viability of a
health care organization.
• Respond to a compliance audit or investigation, particularly
when the subject of that
inquiry includes financial records.
• Explain the primary financial objective of a health care firm,
and the critical drivers of
financial performance.
• List and describe the requirements for effective financial
planning and policy-making.
Required Text:
Cleverly, W., & Cleverly, J. (2018) Essentials of health care
finance (8th Edition). Boston, MA:

Jones & Bartlett Learning.
ISBN: 9781284094633
2
Course Syllabus
Suggestions for getting the most out of this course:
• Read professional journals and periodicals.
• Participate in the course discussion forums, and learn from the
experience and
knowledge of your faculty mentor and fellow students.
• If possible, form a relationship with someone who works in an
area related to your
course. Explain that you would like to obtain their insights and
perspectives from time to
time.
Academic Engagement

Each academic course at William Howard Taft University is
assigned a semester unit value
equivalent to the commonly accepted and traditionally defined
units of academic
measurement in accredited institutions. Credit bearing courses
are measured by the
learning outcomes normally achieved through 45 hours of
student work for one semester
unit. For example, a course with a value of 3 semester units
would require a typical student
to commit 135 hours of academic engagement and preparation to
complete the course
requirements.
Lesson Assignments
This course contains a number of lesson assignments. Work
through the lessons one at a
time. Unless otherwise instructed, you should complete all
assignments for a particular
lesson in one WORD document.
When you complete all of the assignments in a lesson, submit it
to the faculty for grading
and feedback. Submit only one lesson at a time, completing
them in sequence. Continue on to
the next lesson, but be sure to incorporate any feedback
received on previous lessons into
your subsequent assignments – if necessary.
Format
Unless otherwise instructed, Lesson Assignments should be
prepared in Microsoft Word®
using the Times New Roman font, 12 point, single space, double
space between paragraphs.
Each page must be numbered and your last name and student

number included on the
upper left hand corner of each page.
Your lesson assignment responses should be evidenced from the
course textbook and/or from
peer-reviewed sources not more than 5 years old. In general,
Wikipedia is not a professionally-
reviewed resource and should not be used as an assignment
reference. Y ou m ust cite your
references so that readers can verify your conclusions, and
easily determine what is your work,
and what is paraphrased or taken directly from other sources.
Failure to give credit for the work
of others in your assignments and writing projects constitutes
plagiarism.
3
Course Syllabus
Citation Machine:
http://citationmachine.net/index2.php?start=&reqstyleid=2&new
style=2&stylebox=2
Citation Machine is an online tool to assist in proper citation of
researched information. We
recommend APA format, although you may use other approved
formats as long as you remain

consistent.
Final Examination
Final examination requirements and procedures are set forth in
the Student Handbook.
Notwithstanding any other provision in this syllabus, if you are
required to take a Final
Examination for this course you must pass the exam to pass the
course.
Academic Integrity
It is the policy of the University that any student found guilty of
cheating and/or plagiarism will
be subject to immediate dismissal from the University. All
students are required to sign a
Coursework Certification Form for each course. This form is
provided as a link in the last lesson
of each course.
Evaluation
Your grade will be influenced by the accuracy of your research
and the quality of your
writing. The extent of research necessary will vary from
assignment to assignment. In most
cases, your work product should not simply consist of quoting
from the assigned text.
When grading your assignments, the faculty will consider three
general components:

1. A demonstrated understanding of the material and the
learning objectives.
2. Your ability to articulate, synthesize and analyze the
concepts and issues presented in
the material.
3. Clear and logical composition supported by examples and
appropriate references.
If at any time you desire additional feedback, you should
contact your faculty advisor directly via
email. Feel free to ask questions about course progress, grades,
etc., at any time, and remember
that the faculty and administration are interested in helping you
learn and succeed.
The final grade for the course is determined by the sum of each
of the grades in the Lesson
Assignments. Each of the lesson assignments is weighted
equally in determining your grade for
the course. Total Possible Points = 800 (100 Points per lesson).
http://citationmachine.net/index2.php?start=&reqstyleid=2&new
style=2&stylebox=2
4

Course Syllabus
Grade GPA Percentage Comments
A 4 90-100 (Outstanding)
A- 3.67 88-89
B+ 3.33 84-87
B 3 80-83 (Satisfactory)
B- 2.67 78-79
C+ 2.33 74-77
C 2 70-73 (Passing but below the standard accepted in graduate
study)
C- 1.67 68-69
D+ 1.33 64-67
D 1 60-63
(Does not meet standard for graduate study, coursework must be
repeated for credit)
D- 0.67 59
F <0.67 58 or below (Failure)
Faculty Advisors will refer to the following grading rubric when
evaluating your
assignments:
Excellent Above

Average
Satisfactory Needs
Improvement
Unsatisfactory
Understanding
of Material and
Lesson
Objectives
Demonstrates a
thorough
understanding of the
material.
Demonstrates an
adequate
understanding of
material
Responses are
generally accurate,
but at times lacking
coherence.
Demonstrates a
marginal understanding
of the material and
lesson objectives.
Provides marginally
complete and/or
inaccurate responses
showing little

understanding of the
material
Articulation,
Synthesis and
Analysis of
Concepts
Work is articulated
consistent with the
degree level
integrating or
synthesizing
concepts in an
original and
innovative way.
Work demonstrates
a solid knowledge
of concepts and
theories with some
individual analysis
of issues.
Work demonstrates an
elementary knowledge
of concepts but lacks
original thought and
analysis.
Work is primarily
paraphrased or quoted
directly from the text or
other sources.
Responses demonstrate

little or no individual
analysis.
No individual analysis of
concepts.
Work is poorly
articulated and/or
derived entirely from
the textbook.
Composition,
Presentation,
and
References
Work presented in a
logical and coherent
way supported by
sound resources.
Citations are
composed in proper
format with few or
no errors.
Work presented is
grammatically
sound.
Resources are
appropriate and
cited in proper
format with few
errors.

Work is grammatically
sound with a few
minor errors.
Resources may be of
questionable
authority, but are
cited in proper format
with few errors.
Work contains frequent
grammatical errors.
Resources are few, non-
existent, or may be of
questionable authority.
Frequent errors in
composition, grammar
and presentation.
Quoted material is
incorporated without
the use of quotation
marks or citation
(plagiarism).
5
Course Syllabus

Course Completion Requirements
The course will be deemed completed only when all the
following has been accomplished:
• You have completed all the lesson Assignments and they have
been received by the
University
• You have passed the course Final Examination (if required)
• You have completed the Course Certification Form and it has
been received by the
University
• You have completed the Course Evaluation Survey
6
Course Syllabus
Lesson 1 – Financial I nform ation, and B illing and

Coding
Introduction
This lesson begins with an introduction to the concepts of
financial information, financial
decision-making, and forms of ownership in health care
organizations. As the health care industry
continues to grow, it is important to understand cash flow
management, how investment
decisions are made, and how financial information is used and
who uses it. The effectiveness of
financial management in health care, as in any business, in part
depends on information quality.
A good information system enables decision makers to choose a
course of action with the highest
probability of favorable results.
Financial information is particularly important to analyze the
financial condition or viability of an
organization. The financial condition helps determine whether
an organization is capable of
achieving its goals and can function at a consistent level. The
organization’s financial information
may help determine short- and long-run effects and help
evaluate investment decisions. In
addition, financial information sheds light on efficiency and
effectiveness of health care
operations and provides data to perform cost-benefit analysis.
Overall, most common uses of
financial information are:
1. evaluating the financial condition of an entity

2. evaluating stewardship within an entity
3. assessing the efficiency of operations
4. assessing the effectiveness of operations
5. determining the compliance of operation with internal and
external directives
Not all decision-makers are equally interested in every aspect of
financial information that an
organization may have. Decision-making groups, such as
governing boards or rate-setting
organizations, use financial information to assess financial
condition and efficiency.
A relatively recent but important development in health care
organizations is the separation of
financial management functions into controllership and
treasurership. While the former is mainly
responsible for such activities as establishing budgets,
preparing financial statements and
conducting cost analysis, the latter is focused on investor
relations, issuing lines of credit, and
collection policies.
This lesson provides a brief overview of the main forms of
business ownership. Four main types
of organizations in health care are discussed:

• Not-for-Profit, Business-Oriented Organizations
7
Course Syllabus
• Investor-Owned Health Care Entities
• Governmental Health Care
• Non-Governmental, Nonprofit Health Care Organizations
The second half of the lesson explains how a healthcare
provider is paid for services. In other
words, how do healthcare providers generate revenue? First, we
cover the healthcare revenue
cycle. This revenue cycle is broken down further into the
components that ultimately lead to
timely and accurate payment for products and services provided
to patients. Coding and billing
are the two core aspects of proper reimbursement in health care.
There are six stages to the revenue cycle in health care:

• Provide services
• Document services
• Establish charges
• Prepare claim/bill
• Submit claim/bill to payer
• Receive payment
The key to accurate and timely payments is documentation. The
first step in revenue generation
typically is the occurrence of an encounter with the patient.
When a patient goes to a provider,
the first part of the documentation gathered is basic information
about the patient, such as
name, address, and insurance status. This process is known as
registration. There are three key
activities of registration:
• Insurance verification
• Computation of patient’s co-payment or deductible
• Financial counseling for the patient’s portion of bill
Documentation of the services provided is the next key element
of revenue generation. In nearly
all cases, if a product or service is not supported by
documentation, it cannot receive

compensation. Coding is the bridge between medical records
and the administrative billing
systems. Coding is what allows the medical record to be utilized
for billing purposes. Coding
enables payment of charges submitted for reimbursement and
provides statistical data for the
firm’s financial planning.
8
Course Syllabus
Coding
The Health Insurance Portability and Accountability Act
(HIPAA) of 1996 provides the basis for
the present state of medical coding. There are two systems: The
International Classification of
Diseases, Tenth Revision, Clinical Modification (ICD-10-CM)
and the Healthcare Common
Procedure Coding System (HCPCS). Table 2-1 in the text
explains under which circumstances
each type of system is used.
The ICD-10-CM system, which is a classification-based system
that groups data into broad
categories, is the major coding system utilized for coding

hospital inpatient diagnoses and
procedures. ICD-10-CM is a modification of the ICD-10 code
set created by the World Health
Organization (WHO); the ICD-10 has been in use in place of the
ICD-9 system since 2015. The
ICD-10-CM system is an expanded code set that includes
health-related conditions and offers a
higher level of specificity by including separate codes for
laterality and additional characters for
greater detail. ICD-10-CM codes summarize clinical services
that lead to reimbursement for the
hospital from third-party payers.
The ICD-10 system contains both diagnosis and procedure
codes. The WHO has primary
responsibility for the diagnostic codes and CMS has the primary
responsibility for the procedural
codes.
Diagnostic codes are used to report the patient’s exact condition
during the inpatient stay.
Diagnostic codes have three to seven numeric or alphanumeric
characters. The main divisions or
chapters of codes are further broken down into code sections,
code categories, code
subcategories, and code sub-classifications. Each code in the
ICD-10-CM provides greater specificity
at the sixth and seventh character levels. The hierarchical
structure is similar to the prior ICD-9
system where the first three characters are the category of the
codes and all codes with the same
category have similar traits.
Unlike diagnostic codes, procedural codes are assigned one
code per procedure. The ICD-10-PCS
code set has expanded to always include seven characters

compared to ICD-9 procedure codes,
which could be three to four digits long with a decimal point
placed after the second digit.
To report services, supplies, and materials for Medicare and
Medicaid beneficiaries in the
ambulatory care setting, the HCPCS is utilized. The services,
supplies, and materials coded should
correspond to an appropriate ICD-10-CM code for diagnosis.
Unlike the ICD-9-CM classification-
based system that grouped data into broad categories, the
HCPCS is a nomenclature-based
system in which data have a one-to-one relationship with the
code. There are two levels of
national HCPCS codes:
1. Level I: Current Procedural Terminology (CPT) codes were
developed and are updated
annually by the American Medical Association (AMA). These
codes describe medical
services and procedures performed by health care providers.
Each code is a five-digit
numeric or alphanumeric code. Some examples of outpatient
services coded using CPT
codes include surgery, pathology, clinic visits, and radiology.
2. Level II: Codes developed by CMS to classify services or
supplies not found in the CPT
system. These are also called national codes. The five-digit
codes are structured
alphanumerically and range from A0000 to V9999.

9
Course Syllabus
Chargemaster
The chargemaster has long been a critical element in the coding,
billing, and payment process of
hospitals and health systems. The chargemaster’s primary
function is to be the computerized
repository of the charges and coding information that are used
to develop claims. In addition, the
chargemaster is increasingly being used to track utilization of
supplies and services, which can
then be analyzed by management for efficiency of resource use.
Chargemasters generally have the following six common
elements:
• Charge code
• Item description
• Department Number

• Charge/Price
• Revenue Code
• CPT/HCPCS code
Billing/Claims Preparation
Generation and submission of a hospital bill are the mechanisms
by which hospitals request
reimbursement for services provided. Billing forms are
necessary for consistency in the
information required to provide reimbursement for services
provided. There are two major billing
forms currently used to obtain reimbursement: The Uniform
Billing Form 2004 (UB–04) and the
Centers for Medicare and Medicaid Services Form Number 1500
(CMS–1500). Reimbursement of
inpatient and outpatient hospital care is obtained through
submission of the UB–04. Non-hospital
services, such as in-hospital physician services and private
office visits require the CMS–1500.
Most claims in today's environment are submitted in an
electronic format. Usually, claims are
submitted directly to the payer, or indirectly to a clearinghouse
where the claims are grouped
and then sent to the appropriate payer. The Health Insurance
Portability and Accountability Act
(HIPAA) administrative simplification provisions direct the
Secretary of Health and Human
Services to adopt standards for administrative transactions, code

sets, and identifiers, as well as
standards for protecting the security and privacy of health data.
Claims Editing
Most providers use some form of claim-editing software to
ensure that a claim is accurate and
complete. Claim-editing software uses rules-based logic to
assess provider claims information
including Current Procedural Terminology (CPT) and Health
Care Procedure Coding System
(HCPCS) procedure codes against a series of edits using a
clinically-based software system that
evaluates claim information to detect coding irregularities,
conflicts or errors.
10
Course Syllabus
CMS developed the National Correct Coding Initiative (NCCI)
to promote national correct coding
methodologies and to control improper coding that leads to
inappropriate payment of Part B
health insurance claims. The coding policies developed are
based on coding conventions defined
in the American Medical Association's CPT codes, national and

local policies and edits, coding
guidelines developed by national societies, analysis of standard
medical and surgical practice and
review of correct coding practice.
CMS has designated a series of specific edit checks that are
used in determining hospital
outpatient claim status. These edit checks are referred to as
Outpatient Code Edits (OCE). The
OCE utilizes claim-level and line-item level information in the
editing process. The claim level
information includes such data elements as "from" and
"through" dates, ICD-10-CM diagnosis
codes, type of bill, age, sex, etc. The line level information
includes such data elements as HCPCS
code with up to two modifiers, revenue code, service units, etc.
Each OCE edit results in one of six different dispositions. The
dispositions help to ensure that all
fiscal intermediaries are following similar procedures. There are
four claim level dispositions:
• Rejection—Claim must be corrected and resubmitted
• Denial—Claim cannot be resubmitted but can be appealed
• Return to provider (RTP)—Problems must be corrected and
claim resubmitted
• Suspension—Claim requires further information before it can
be processed

There are two line-item level dispositions:
• Rejection—Claim is processed but line item is rejected and
can be resubmitted later
• Denial—Claim is processed but line item is rejected and
cannot be resubmitted
Lesson Learning Objectives
By the conclusion of this lesson you should be able to:
• Appraise the importance, uses (and users) of financial
information in health care
organizations.
• Explain the financial functions within an organization.
• Discuss the common ownership forms of health care
organizations, along with their
advantages and disadvantages.
• Describe the revenue cycle for health care firms.
• Explain the role of coding information in health care
organizations in claim generation.

11
Course Syllabus
• Define the two major bill types used in health care firms.
• Appraise the role of claims editing in the bill submission
process.
Reading
Study Chapters 1 and 2 of the text
View the PowerPoints for Chapters 1 & 2
Assignments
The follow ing Assignm ents should be com pleted and subm
itted to the course faculty
via the learning platform for evaluation and grading. Subm it
your responses to these
questions in one W OR D docum ent. List the question first,
and then your response.

Y our response m ust adequately cover the question w ithout
being w ordy or relying on
“yes” or “no” responses.
Short Answer Questions
1. What are the primary responsibilities of the financial
manager?
2. What are primary uses of financial information?
3. Is profit maximization the same thing as shareholder wealth
maximization?
4. What are the three primary forms of legal business
organization? What are some of the
advantages and disadvantages of each form?
5. What are social responsibility and ethics as they relate to
business-oriented
organizations? How should social responsibility and ethics
affect the decisions of even
for-profit companies?
6. What is meant by the term, “the revenue cycle”? What factors
contribute to the
complexity of the revenue cycle in health care?

7. What are the two types of forms used for health services
billing?
8. What are the six elements that should be present, at a
minimum, in all chargemasters?
9. What are HCPCS codes? How do they affect provider
payment?
10. Explain the registration process, including the activities that
comprise it.
12
Course Syllabus
Lesson Quiz
Take the quiz for this lesson. Your results on the quiz do not
affect your grade for the course.
Quizzes are designed to help you to learn important concepts in
the lesson and prepare you for
the Final Examination, if required. You may take the quiz as
many times as you wish.

13
Course Syllabus
Lesson 2 – Financial, Legal and R egulatory
Environm ent
Introduction
This lesson begins with an examination of the roles of hospitals,
doctors, private and government
insurance, and different systems for organizing and financing
care. We cover Medicare
reimbursement in particular for the following health care
sectors: hospital inpatient and
outpatient, physicians, skilled-nursing facilities, and home-
health agencies. Numerous data are
provided to show the sources of revenue for the various sectors.
P aym ent Units
The primary difference between fee-for-service and capitation
reimbursement is that under fee-
for-service, each encounter creates additional revenue for the
provider. The encounter may be
defined as a visit, a diagnosis, a hospital day, or in some other
manner, but the key feature is
that the more services that are performed, the greater the

reimbursement amount. Under
capitation, the provider is paid a fixed amount per covered life
per period (usually a month)
regardless of the amount of services provided.
Under historical cost reimbursement, payers reimburse
providers for all costs, a system that
provides little incentive to control costs. Facilities will be
lavish and amenities plush. Services that
may not truly be required might be provided because more
services lead to higher costs, which
means higher revenues. Cost-based reimbursement is the least
risky for providers because
payers more or less ensure that costs will be covered, and hence
profits will be earned.
With charges for specific services, providers have the incentive
to set high charge rates, which
leads to high revenues. However, in highly competitive markets,
there will be a constraint on how
high providers can go. Because billed charges is a fee-for-
service type of reimbursement, in
which more services result in higher revenue, a strong incentive
exists to provide the highest
possible amount of services. Providers can increase utilization,
and hence revenues, by creating
more visits, ordering more tests, and extending inpatient stay.
Although charge-based
reimbursement does encourage providers to contain costs, the
incentive is weak because charges
can be more easily increased than costs can be reduced.
Providers bear the cost-of-service risk in
that costs can exceed revenues. However, if providers set charge
rates for each type of service
provided, they can most easily ensure that revenues exceed
costs.

Under prospective payment reimbursement, provider incentives
are altered. Providers have the
incentive to reduce costs because the amount of reimbursement
is fixed and independent of the
costs actually incurred. When per diem reimbursement is used,
particularly with hospitals,
providers have an incentive to increase length of stay (LOS).
Because the early days of a
hospitalization are typically costlier to the provider than the
later days, the later days are more
profitable. Hospitals have the incentive to reduce costs during
each day of a patient stay.
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Course Syllabus
When prospective payment is made on a per diem basis, even
when stratified, one daily rate
usually covers a large number of diagnoses. Because the nature
of the services provided could
vary widely, both because of varying diagnoses as well as
intensity differences within a single
diagnosis, the provider bears the risk that costs associated with
the services provided on any day
exceed the per diem rate. However, patients with complex

diagnoses and greater intensity tend
to remain hospitalized longer, and per diem reimbursement does
differentiate according LOS. The
additional days of stay may be insufficient to make up for the
increased resources consumed. In
addition, providers bear the risk that the payer, through the
utilization review process, will
constrain LOS, and hence increase intensity during the days that
a patient is hospitalized. Thus,
under per diem, compression of services and shortened LOS can
put significant pressure on
providers’ profitability.
Capitation reimbursement reverses the actions that providers
must take to ensure financial
success. Under all prospective payment methods, the key to
provider success is to work harder,
increase utilization, and thus, increase profits. Under capitation,
the key to profitability is to work
smarter and decrease utilization. As with prospective payment,
capitated providers have the
incentive to reduce costs, but now they also have the incentive
to reduce utilization. Thus, only
those procedures that are truly medically necessary should be
performed, and treatment should
take place in the lowest-cost setting that can provide the
appropriate quality of care.
Furthermore, providers have the incentive to promote health
rather than just treat illness and
injury because a healthier population consumes fewer healthcare
services. Under capitation,
providers assume all utilization and actuarial risks along with
the risks assumed under the other
reimbursement methods. Capitation arrangements were more
common in the mid-1990s, and
have since experienced a significant decline, but have seen new

life in the form of Accountable
Care Organizations (ACOs). ACOs represent groups of
providers that come together to deliver
coordinated care to patients. The ACO can be paid on a fully
capitated basis or in some modified
method, but the end result for the payer is to have more control
over the global costs of care for
an enrolled population.
M edicare Overview
The two major government third-party payers are Medicare and
Medicaid. Medicare was
established by the federal government in 1966 to provide
medical benefits to individuals age 65
and older. Medicare consists of three separate coverages: Part A
provides hospital and some
skilled nursing home coverage; Part B covers physician
services, ambulatory surgical services,
outpatient services, and other miscellaneous services; and Part
D provides prescription-drug
coverage. The Medicare program falls under the Department of
Health and Human Services
(DHHS), which creates the specific rules of the program on the
basis of enabling legislation.
Medicare is administered by an agency under DHHS called
CMS, which was formerly called Health
Care Financing Administration (HCFA). CMS has 10 regional
offices that oversee the Medicare
program and ensure that regulations are followed. Medicare
payments to providers are not made
directly by CMS but by contractors at state or local level called
intermediaries for Part A payments
and carriers for Part B payments.
Medicaid began in 1966 as a modest program to be jointly
funded and operated by the states

and the federal government to provide a medical safety net for
low-income mothers and children
and for elderly, blind, and disabled individuals receiving
benefits from the Supplemental Security
Income (SSI) program. Congress mandated that Medicaid cover
hospital and physician care, but
states were encouraged to expand on the basic package of
benefits either by increasing the
range of benefits or extending the program to cover more
people. States with large tax bases
15
Course Syllabus
were quick to expand coverage to many groups, while states
with limited abilities to raise funds
for Medicaid were forced to establish more limited programs. A
mandatory nursing home benefit
was added in 1972. Over the years, Medicaid has provided
access to healthcare services for
many low-income individuals who otherwise would have no
insurance coverage. Furthermore,
Medicaid has become an important source of revenue for
healthcare providers, especially those
that treat large numbers of indigent patients. However,
Medicaid expenditures have been
growing at an alarming rate, and both federal and state
policymakers are struggling to find

effective ways to improve the program’s access, quality, and
cost.
The second part of lesson two concerns how all the financial
management of a healthcare
organization previously described, is shaped by the legal and
regulatory environment in which it
exists. Healthcare providers are responsible for complying with
myriad laws and regulations
addressing patient billing, cost reporting, physician
transactions, occupational health and safety,
and fair labor standards, and more. Allegations of violations of
laws and regulations are
widespread. Consequently, federal and state government interest
in combating fraudulent and
abusive practices is now widespread. High-profile settlements
involving many types of providers
and settlements into the hundreds of millions of dollars have
provided additional incentives for
the government to continue its scrutiny of the healthcare
industry.
It is incumbent on today’s financial manager to understand the
risks that noncompliance can
pose. Chapter Four covers the major areas of federal rules and
regulations that affect the
delivery of healthcare services. Some of the major topics
covered are fraud and abuse, antitrust,
Stark laws, qui tam actions, the FCA, the Emergency Medical
Transfer and Active Labor Act
(EMTALA), HIPAA, and corporate compliance programs.

• Describe factors that influence the financial viability of a
healthcare organization.
• Discuss the major reimbursement methods used in health care.
• Describe how Medicare reimburses the major types of
providers, and discuss the
implications of these methods for an organization’s resource
management.
• Understand how legal and regulatory issues shape and define
good financial
management of a healthcare organization.
• Identify the most common federal regulatory issues such as
fraud and abuse, Stark,
HIPAA privacy and security, Emergency Medical Treatment and
Active Labor Act
(EMTALA), and Internal Revenue Service (IRS requirements
for tax-exempt
organizations, as well as less common concerns that arise under
the antitrust laws, Red
Flag Rules, and state insurance regulations.
• Identify the major components of a corporate compliance plan,
including the
establishment of internal controls relating to the finances of an
organization.
16

Course Syllabus
• Be prepared to respond to a compliance audit or investigation,
particularly when the
subject of that inquiry includes financial records.
• Be aware of the most important aspects of the Patient
Protection and Affordable Care Act
of 2010 (Health Reform Act) as it relates to financial
management in the post-Reform
environment.
Reading
View the PowerPoints for Chapters 3 and 4
Assignments

1. What is the main difference between the fee-for-service and
capitation reimbursement
methods?
2. What is the primary distinction between prospective payment
and retrospective
payment?
3. What is the primary provision of the EMTALA? How could a
hospital legally avoid being
covered by the Emergency Medical Treatment and Labor Act
(EMTALA)?
4. How are Medicaid payments to providers limited by the
federal government?
5. How does the Stark Law impact physicians?
6. What federal law would be most implicated by CIO Tiffany
Technophile’s proposal? Are
there safeguards available to ensure that one or both of the
proposals remain compliant
with this federal law?
7. Compare and contrast Medicare and Medicaid.

17
Course Syllabus
Professional Development Questions
For the following problems (as applicable), assume that the
Medicare/patient split of payments is
as covered in the book. Assume that the participating/non-
participating and maximum allowable
charge are as covered in the book. Ignore the patient’s annual
deductible.
Use the following information to solve problems 1, 2 and 3.
Dr. Melissa Rose is trying to decide whether to be a Medicare-
participating physician for the
upcoming year. (Assume that her entire practice consists of
Medicare patients or at least that
her practice has slack capacity. Her Medicare patients do not
displace non-Medicare
patients.) Assume that her average charge is $120 (before
Medicare’s limiting charge is
applied), for which the average Medicare-approved amount is
$100. If she decides to be a
non-participating physician, she expects to accept assignment
80% of the time. For the
unassigned patients assume that she would set her charges at
110 percent of the Medicare-

approved fee for a nonparticipating physician. Assume that her
Medicare patient volume is
not reduced if she chooses not to participate nor if she does not
accept assignment. (Ignore
bad debt and any other factors not presented here.)
1. What will be Dr. Rose’s average reimbursement per visit if
she chooses to be a Medicare-
participating physician? (This is the total from both Medicare
and the patients.)
2. What will be Dr. Rose’s average reimbursement per visit if
she chooses not to be a
Medicare-participating physician? (This is the total from both
Medicare and the patients.)
3. Based strictly on the information presented here (ignore bad
debt, patient mix
differences, and other considerations not presented here),
should she choose to be
participating or non-participating if she wishes to maximize her
total reimbursement for
services?
Lesson Quiz

18
Course Syllabus
Lesson 3 – Com m unity B enefit, R evenue
Determ ination, Health I nsurance and M anaged Care
Introduction
This lesson focuses on the increasing attention being given to
the community benefits provided
and received by not-for-profit healthcare firms, especially
hospitals. Almost 60% of all nonfederal
hospitals in the US are not-for-profit hospitals, which means
that they are exempt from federal
income taxation. This tax exemption is the lightning rod that
has attracted public attention.
Chapter 5 considers five major sections, as described below.
1 . Tax -ex em pt status
Not-for-profit hospitals qualify for tax exemption under a

provision of the Internal
Revenue Code that relates to charitable purpose, 501(c) (3). The
Internal Revenue
Service (IRS) requires five factors to be present to support the
tax-exempt status of a
hospital. None of these five factors however reference specific
levels required for charity
care.
Starting in 2010, all not-for-profit hospitals will be required to
file Schedule H of IRS
Form 990. This schedule contains a variety of specific
information regarding the
charitable activities of not-for-profit hospitals. States have also
established some
reporting standards for tax exemption that are not uniform
across the country.
2. Areas of Community Benefit
There is a lack of consensus among parties regarding what
specific areas should or
should not be included in the assessment of community benefit.
Schedule H of IRS Form
990 provides for measurements of the following categories.
• Charity Care and Certain Other Community Benefits at Cost
• Community Building Activities
• Bad Debt, Medicare, & Collection Practices
• Management companies and joint ventures

• Facility information
• Supplemental information
The first two are generally regarded as legitimate areas of
community benefit. It is
important to recognize that it is the cost of benefits provided –
not the loss of revenue
that defines the magnitude of the benefit. For example, charges
written off for charity
care do not represent the benefit cost but rather the actual cost
of services provided.
Costs are always netted against any revenue received.
19
Course Syllabus
3. Measuring Community Value – Community Value Index ®
The CVI is composed of ten measures that assess a hospital’s
performance in four areas:
• Financial viability and plant reinvestment

• Hospital cost structure
• Hospital charge structure
• Hospital quality performance
Fundamentally, the CVI suggests that a hospital provides value
to the community when it
is financially viable, is appropriately reinvesting back into the
facility, maintains a low-cost
structure, has reasonable charges, and provides high quality
care to patients.
Of special importance are the comparisons between not-for-
profit hospitals with for-profit
hospitals. If there is little difference between for-profit
hospitals and not-for-profit
hospitals, the tax exemption becomes very difficult to justify.
4. Estimating Financial Benefits Received
The final section of Chapter 5 outlines the specific benefits that
not-for-profit healthcare
firms receive that have been cited by policy analysts over the
years. Actual methods for
estimating the dollar benefits are described via a case example.
5. Estimating Financial Benefits Provided
The specific benefits described include:

• Traditional Charity Care
• Unpaid Cost of Medicaid
• Medical Education
• Other Benefits
• Subsidized Health Services
• Community Health Services
• Cash / In-Kind Donations to the Community
• Research
20
Course Syllabus
Chapter Six covers revenue determination. There are three

payment-determination bases: cost,
fee schedule, and price related. These three payment bases may
have two different units of
payment, either specific services or bundled services. Health
care providers can control their
revenue function in three ways: Right pricing, contract
negotiation and, appropriate billing and
coding measures.
The three factors that influence pricing are desired net income,
competitive position, and market
structure. Other factors that influence pricing are market share,
capital intensity and payer mix.
A sub-factor affecting pricing under the market-structure
umbrella is price elasticity. Products or
services whose ultimate demand is strongly influenced by price
are said to be price elastic.
Health care services, while not immune from the pressures of
price elasticity, are usually less
affected than other products. The presence of health insurance
has further insulated many from
the effects of price in health care markets. Most businesses
would like to operate in an
environment in which significant barriers to entry exist to
protect them from new competitors.
Large capital investment and Certificate-of-need regulations
can prevent new health care
providers from entering a market, as well as restrict growth for
existing providers.
Health care firms must set rates at levels sufficient to maintain
their financial viability. Price
setting must also recognize that some payers may pay values
less than full or average cost.
Prices must also reflect discounts from billed charges that may
be granted to health plans or

uninsured patients. The last requirement that needs to be
included in price setting is some factor
for profit. Health care providers with either tax-exempt or
taxable status need some return to
insure their financial survival. Large write-offs or discounts to
the charge-related payer base can
and often do escalate prices to levels that are well above costs.
The relationship between hospital cost and hospital price has
changed markedly during the
period 1996 to 2008. Payers and hospitals often assess the
reasonableness of their prices based
upon comparisons with similar hospitals and/or other hospitals
in the same geographic region.
In any managed-care contract, there are two critical elements.
First, there is the payment
schedule, which describes the basis of payment and actual
payment/fee schedules. Second, there
is the actual contract language, which describes the
administration of the contractual
arrangement that determines how services are provided and
paid. From most providers’
perspectives, the key element in a managed-care contract is the
payment or compensation
schedule. For hospitals, the predominant unit of payment for
inpatient care is usually a per-day
basis. Many hospital contracts have outlier or stop-loss
provisions. This provision specifies that
the hospital may pay on a basis other than per diem or case if
charges exceed a specific limit.
Many managed-care contracts that provide for payment of
claims on a discount from billed
charges include rate-increase-limit clauses. The price-increase-
limit provision is intended to
prevent a hospital from raising its prices beyond reasonable

levels. Medical groups are often
paid on a fee-schedule basis, with limited capitation
arrangements sometimes being used. The
fee schedules are usually by CPT and, in come cases, are
directly related to Medicare’s Resource-
Based Relative Value Scale (RBRVS) payment system.
Lesson Three concludes with coverage of health insurance and
managed care. Managed-care
(MCOs), health maintenance organizations (HMOs), preferred
provider organizations (PPOs),
physician organizations (POs), physician hospital organizations
(PHOs), capitation, medical
service organizations (MSOs), consumer-directed health plans
(CDHP), and integrated delivery
systems (IDSs) are all terms and acronyms that are used freely
in today’s health care arena.
21
Course Syllabus
These terms often represent different things to different people
and often change in meaning
over time. One common thread runs through these terms: the
issue of change and market
reform that is sweeping the health care industry. Our focus in
this chapter will be primarily on the
development of managed-care plans and the development of

required premium payments for
health care coverage.
The major types of health plans are described and their growth
over the last 20 years has been
tracked. Differences between plan types are described relative
to their impact upon subscribers,
physicians, hospitals, and employers.
• Describe the current basis for tax exemption of not-for-profit
healthcare firms.
• Describe the elements of community benefit listed by key
policy groups.
• Assess the relative community benefits provided by
proprietary and not-for-profit
hospitals.
• Define basic methods of payment for healthcare firms.
• Understand the general factors that influence pricing.
• List some of the important considerations when negotiating a
health plan contract.
• Define a health maintenance organization (HMO).
• Describe the four main activities of health plans.

• List the five types of health plans and their characteristics.
• Describe the forces that influenced the development of
integrated delivery systems
(IDSs).
• Describe some of the methods by which providers are paid by
health plans.
• Discuss legal and regulatory issues that affect MCOs.
Reading
Study Chapters 5, 6, and 7 of the text
View the PowerPoints for Chapters 5, 6, and 7
22
Course Syllabus
Assignments

1. What firms must file an IRS Form 990 on an annual basis?
2. Why is the unreimbursed cost of Medicare most often not
included as an element of
community benefit?
3. List and discuss the three payment-determination bases.
4. What are the three major ways that health care providers can
control their revenue
function?
5. Why does market share matter to a health care provider?
6. Explain the four major activities of a health plan?

1. An HMO has a Point of Service (POS) option for its
members, but will pay only 80 percent
of approved charges. If a member goes out of network for a
medical procedure with a
charge of $2,000, of which $1,200 is approved, how much must
the member pay?
2. A nursing home contracts with an HMO for skilled nursing
care at $2.00 PMPM. If costs
are expected to average $120 per day, what is the maximum
utilization of days per 1,000
members that the nursing home can experience before it begins
to lose money?
Lesson Quiz
23

Course Syllabus
Lesson 4 – Accounting, Financial Statem ents, and
Accounting for I nflation
Introduction
The financial viability of a healthcare organization is the result
of numerous decisions made by a
variety of people, including care givers, administrators, boards,
lenders, community members,
and politicians. These decisions eventually result in the
organization acquiring and using
resources to provide services, incur obligations, and generate
revenue. One of the major roles of
accounting is to record these transactions and report the results
to interested parties.
This lesson begins by showing how a series of typical
transactions of a health center are recorded
on the books, and how these records are used to produce the
four major financial statements of
a not-for-profit, business-oriented healthcare organization. In
the accrual basis of accounting,
revenues are recognized when earned and expenses are
recognized when resources are used.
The accrual basis of accounting must be used in healthcare
organizations.
Major rules for recording transactions using the accrual basis of
accounting include:

• At least two accounts must be used to record a transaction.
• Increase (decrease) an asset account whenever assets are
acquired (or used).
• Increase (decrease) a liability account whenever obligations
are incurred (or paid for).
• Increase a revenue, gain, or other support account when
revenues are earned, a gain
occurs, or other support is received.
• Increase an expense account when an asset is used.
The balance sheet presents the assets, liabilities, and net assets
of a healthcare firm. The
balance sheet presents the accounting value of assets and the
source of money used to purchase
those assets at a given time. Assets are usually listed in
descending order of liquidity, or the
ability to convert to cash.
The statement of operations (or income statement in an
investor-owned firm) is a financial
statement listing the revenues, expenses, and excess or revenues
over expenses (net income) of
the firm in a period of time.
The third financial statement is the statement of changes in net
assets, called the statement of
changes in owners’ equity or stockholders’ equity in a for-profit

business. Its purpose is to explain
the changes in net assets from one period to the next. This
statement reflects increases and
decreases in net assets for permanently restricted, temporarily
restricted, and unrestricted net
asset accounts.
24
Course Syllabus
Since accrual accounting is used, the statement of operations
provides information about how
much revenue was generated and the amount of resources used
to generate those revenues. It
does not reflect cash flows. The statement of cash flow is a
financial statement that shows the
firm’s cash receipts and cash payments over a period of time.
The lesson concludes with coverage of how organizations
account for inflation. The financial
performance of healthcare organizations is of interest to
individuals and groups, including
administrators, board members, creditors, bondholders,
community members, and government
agencies. Chapter Ten presents a variety of ways to analyze the
financial statements of
healthcare organizations. The Balanced Scorecard, Dashboard

Reporting, and ratio analysis are
the three main foci.
Some of the accounts in financial statements are valued based
on historical cost accounting
principles. In times of high inflation, however, the results of
historical cost accounting can be
misleading as profit can be overstated, assets understated in
terms of current values, and capital
maintenance is only concerned with the nominal amount of the
capital invested rather than its
purchasing power. To properly understand business results over
time, it is helpful to understand
variations that result only from changes in the value of money.
For example, if the price level has
doubled over five years (the value of money has halved over
that period), then a profit of $1
million this year is not worth the same amount as that sum five
years ago. Over such a period a
business would need to have doubled its profits just to remain
level.
To adjust for the effects of changing price levels, the Financial
Accounting Standards Board
(FASB) has issued numerous pronouncements over the last 35
years. In September 1979, the
FASB issued Statement 33, which required large public
enterprises to provide supplemental
information on the effects of changing price levels in their
annual financial reports. Statement 33
required firms to disclose primarily current-cost and constant
dollar earnings; certain other
income statement items; and current cost of inventory, property,
plant, and equipment, in notes
to the financial statements. This was a major step for the FASB
and represented for the first time

that firms were required to report price-level effects in their
financial reports.
In 1986, when the inflation rate had subsided to less than 5%,
the FASB substantially modified
its initial position set forth in Statement 33 with the publication
of Statement 89. This
pronouncement left much of Statement 33 intact, except that it
designated the reporting as
voluntary. Consequently, most publicly traded companies
stopped disclosing inflation-adjusted
earnings.
• Describe the differences between financial and managerial
accounting.
• Understand core principles of accounting that guide the
preparation and dissemination of
financial information.
• Discuss the differences between the accrual- and cash-basis
methods of accounting.
25

Course Syllabus
• List the three categories of net assets.
• Discuss the accounting conventions that affect the application
of accounting principles.
• Explain why it is important to know the scope of business
being reviewed when using
financial statements.
• Understand the format and content of the balance sheet.
• Describe the format and content of the statement of
operations, the statement of
changes in net assets, and the statement of cash flows.
• Discuss the major types of asset valuation.
• Describe the alternative units of measurement in financial
reporting.
• Define the major financial reporting alternatives.
• Describe the uses of financial report information.
• Describe the difference between monetary and nonmonetary
accounts.
Reading
View the PowerPoints for Chapters 8, 9, and 10

Assignments
1. Explain the difference between the accrual basis of
accounting and the cash basis of
accounting.
2. What are the major reasons for accrual accounting?
26
Course Syllabus

3. What are the double-entry accounting system and the duality
concept? How are they
related?
4. Define and describe the purpose of fund accounting (now
called net assets). List and
describe the three categories of net assets.
5. What are the four basic financial statements?
6. For restating financial statements to convert to constant
dollars, what index is required
by the Financial Accounting Standards Board?
1. Given below is a list of account balances for Currie Hospital
as of December 31, 2013.
Prepare a balance sheet as of December 31, 2013, in proper
form. (Hint: You will need
to compute the net assets account. Assume that all net assets at
the beginning of the
year are unrestricted.)
Account Balance

Gross plant & equipment $6,000,000
Accounts payable 130,000
Inventories 100,000
Other current liabilities 70,000
Net accounts receivable 650,000
Accrued expenses 100,000
Accumulated depreciation 200,000
Long-term debt 5,000,000
Cash 210,000
27
Course Syllabus
Refer to Megatropolis Hospital’s financial statements for
calculating the ratios requested in
problems 2 to 7.

Megatropolis Hospital
Statement of Operations
For the Year Ended December 31, 2010
Revenues, Gains, Other Support
Net patient service revenue $ 1,500,000
Other revenue 200,000
Total Revenue 1,700,000
Ex penses
Nursing Services 1,200,000
Administrative Services 200,000
Depreciation 100,000
Other Expenses 50,000
Total Expenses 1,550,000
Operating Income 150,000
Investment Income 50,000
Excess of revenues over expenses200,000
Increase in Unrestricted Net Assets$200,000
Balance Sheet
As of December 31, 2010 (2009 omitted)
Assets
Current Assets
Cash and cash equivalents $ 50,000
Net patient receivables 350,000
Total Current Assets 400,000
Properties and Equipment
Gross properties and equipment $ 900,000
Less accumulated depreciation 475,000

Net Properties and Equipment 425,000
Total Assets $ 825,000
28
Course Syllabus
Liabilities and N et Assets
Current Liabilities
Accounts Payable 200,000
Salaries Payable 50,000
Total Current Liabilities 250,000
Notes Payable 200,000
Unrestricted Net Assets 375,000
Total Liabilities and Net Assets $825,000
2. What is Megatropolis Hospital’s operating margin?
3. What is Megatropolis Hospital’s days in accounts receivable?
4. What is Megatropolis Hospital’s long-term debt to net assets
ratio?

Lesson Quiz
29
Course Syllabus
Lesson 5 – Analyzing Financial P osition, Financial
Analysis of Alternative H ealth Care and Strategic
Financial P lanning
Introduction
The financial performance of healthcare organizations is of
interest to a number of individuals
and groups, including administrators, board members, creditors,
bondholders, community
members, and government agencies. This lesson presents a
variety of ways to analyze the

financial statements of healthcare organizations. The Balanced
Scorecard, Dashboard Reporting,
and ratio analysis were the three main foci.
Next, the lesson examines issues that are unique to other sectors
of the health care industry
including nursing homes, medical groups, and health plans.
Included is detailed coverage of how
their revenue sources differ from that of hospitals. Also covered
are some of the tools and
concepts that are helpful for analyzing their financial condition
and for understanding their
operating environment.
This lesson concludes by giving the reader an appreciation for
the relationship between strategic
planning and financial planning. They are highly interrelated
and should be conducted jointly.
The planning/control cycle has four major components: strategic
planning, planning,
implementing, and controlling. The purpose of strategic
planning is to identify the organization’s
mission and strategy to position the organization for the future.
A major activity of the strategic
planning process is an assessment of the organization’s external
and internal environments.
Whereas the organization’s strategic planning process has a
long-term focus, it also develops
shorter-term tactical and operational plans that are more
specific and identify short-term goals
and objectives in more detail regarding marketing/production,
control, and financing the
organization.

• Describe the balanced scorecard and dashboard reporting.
• Describe the four key elements of dashboard reporting.
• Explain what is most important in long-term financial success.
• Explain the primary financial objective of a healthcare firm.
• Describe the critical drivers of financial performance.
• Discuss the importance and types of performance measures.
30
Course Syllabus
• Introduce the hospital cost-index measure.
• List the major non-hospital and non-physician sectors of the
health care industry.
• Discuss the sources of revenue for the nursing-home industry.
• Discuss the major sources of revenue and expenses of medical

groups.
• List and describe the major organizational types of physician
groups.
• Describe alternative HMO organizational arrangements.
• Describe the relationship between financial planning and
strategic planning.
• List and describe the key financial policy targets for which the
board is responsible.
• List and describe the 10 requirements for effective financial
planning and policy-making.
• Explain the four steps involved in the development of a
financial plan.
• Explain how management control is used in conjunction with
the financial plan.
Reading
Review the PowerPoints for Chapters 11, 12, and 13
Assignments

(None in this Lesson)
31
Course Syllabus
Listed below are the balance sheet and statement of operations
for Wynn Memorial Nursing
Home for 2008 and 2009.
Balance Sheet for Wynn Memorial Nursing Home

2009 2008
Current Assets:
Cash and Cash Equivalents $30 $50
Net Patient Receivables 295 235
Prepaid Expenses 80 80
Total Current Assets 405 365
Plant, Property, & Equipment
Gross Plant, Property, & Equipment 350 300
(less Accumulated Depreciation) (70) (50)
Net Plant, Property, & Equipment 280 250
Construction in Progress 203 0
Total Assets $888 $615
Current Liabilities:
Accounts Payable $220 $190
Salaries Payable 75 50
Total Current Liabilities 295 240
Long-Term Liabilities:
Bonds Payable 100 20
Total Long-Term Liabilities 100 20
Net Assets 493 355
Wynn Memorial Nursing Home
Balance Sheet (in 000)
For the Years Ending December 31, 2009 and 2008

32
Course Syllabus
hibit 4-19a Statement of Operations for Wynn Memorial Nu
2009 2008
Revenues:
Net Patient Service Revenue $1,400 $1,200
Other Revenue 200 200
Total Revenues 1,600 1,400
Expenses:
Nursing Services 1,320 1,150
Administrative Services 110 100
Depreciation 20 15
General Services 50 35
Total Expenses 1,500 1,300
Operating Income 100 100
Excess of Revenues over Expenses 100 100
Wynn Memorial Nursing Home
Statement of Operations (in 000)
For the Years Ended December 31, 2009 and 2008
1. Compute Wynn Memorial Nursing Home’s current ratio.

2. Compute Wynn Memorial Nursing Home’s acid (or acid-test)
ratio.
3. Compute Wynn Memorial Nursing Home’s long-term debt to
net assets ratio.
4. Compute Wynn Memorial Nursing Home’s return on total
assets.
5. Compute Wynn Memorial Nursing Home’s operating margin.
6. Assume that a certain nursing home has two categories of
payers. Medicaid pays $60.00
per day and private pay patients pay the established per diem,
but approximately 10
percent of private-pay charges are not collected. If 50 percent of
the patients are
Medicaid and 50 percent are private pay, what rate must be set
to generate $150,000 in
profit? Variable costs are $45.00 per day and fixed costs are
expected to be $1,000,000.
Expected volume is 50,000 patient days.
33

Course Syllabus
7. Using the data of problem 6 and assuming that the nursing
home charges $100 per day,
what would be the nursing home’s required volume (in patient
days) to make $150,000
profit?
Lesson Quiz
34
Course Syllabus
Lesson 6 – Cost Concepts, P roduct Costing,
M anagem ent Control and Cost Variance Analysis

Introduction
The purpose of this lesson is to give the reader the ability to
identify and use relevant cost
information in financial decision making (e.g., addition or
elimination of programs, increases or
decreases in program size.)
Costs are classified by their traceability (direct vs. indirect),
management control (controllable vs.
non-controllable), relation to budget (budgeted vs. actual),
relation to time (avoidable, sunk,
incremental, and opportunity), and relation to activity (fixed,
variable, and mixed). These
classifications are used to improve the decision-making process
by precisely defining cost to
make it more relevant to decisions. Regardless of the
classification system, however, in most
situations, the total value of the costs is the same. Because, in
most cases, different concepts of
cost simply slice total cost in different ways, there may be
underlying relationships among the
various concepts of costs. For example, direct costs and
controllable costs may be related. In
many situations, there are standard rules of thumb that may be
used to relate cost measures.
An understanding of fixed and variable costs is a crucial
element in making such decisions. Fixed
costs are costs that do not vary in total but vary per unit over
the relevant range. Variable costs
are costs that vary in total but do not vary per unit over the
relevant range. The relevant range is
the range of activity within which the assumptions about the

cost behavior are valid.
The break-even equation can be used to determine price,
volume, fixed costs, and variable costs
per unit, if each of these other factors is known. The break-even
point is the volume at which
total revenues equal total costs. The break-even equation for
volume in units is: Volume = Fixed
Costs / (Price – Variable Costs). The results of a break-even
analysis are often presented on a
break-even chart, which displays total costs, total revenues, and
volume. The distance between
the total cost and total revenue lines on this chart represents the
amount of profit or loss the
service is experiencing at any particular volume of service. An
alternative form of this chart
portrays just the difference between the total cost and total
revenue line—net income.
Refer to Figure 14-9 Break-Even Chart
The break-even equation can be applied to capitated situations
to determine capitation rates,
utilization rates, and fixed or variable costs. The break-even
equation can also be extended to
multipayer and multiproduct situations. In conducting
multipayer analysis, which includes
capitated and fixed-fee patients, it is important not to adjust
revenues for changes in volume,
though variable costs may change.
The quantity (Price – Variable Costs) is called contribution
margin. It is the amount of profit
made on each additional unit produced if all other costs (i.e.,
fixed costs and overhead) remain
the same. It is also the amount of incremental income made on

each unit that is available to
cover all other costs.
35
Course Syllabus
In instances where there are multiple services being offered, it
is likely that there will be both
organizational fixed costs and service-specific fixed costs.
Fixed costs that are there just because
the service is being provided and would not be there if the
service were not offered are called
avoidable fixed costs. If a service is covering its own variable
and avoidable fixed costs, even
though it does not fully cover its full share of other costs (non-
avoidable fixed costs and common
costs), the organization is better off delivering the service than
not, all other things being equal
(e.g., there are no better alternatives).
Practically every healthcare provider expresses a strong and
urgent interest in developing better
cost accounting systems. The basis for this interest is easy to
understand and relates to the
nature of payment systems for healthcare providers. Before
1983, hospitals and many other
healthcare providers were paid based on actual cost. Hospitals,

for example, were paid on a cost
basis by Medicare, many Blue Cross plans, and most Medicaid
programs. In this type of payment
environment, costing was important, but allocation of costs to
heavily cost-reimbursed areas was
emphasized, rather than accurate costing. Reimbursement
maximization, not accurate costing,
was the primary objective. With the advent of prospective
payment systems in the early 1980s
and the growing importance of managed care in the late 1980s,
hospitals and other healthcare
providers became concerned with the actual cost of service
delivery. Providers wanted to know
what the actual costs of producing a medical or surgical
procedure were so they could compare
these costs with the revenue received and make more intelligent
decisions about products and
product lines.
This lesson provides the reader with an understanding of
product (or service) costing in the
healthcare setting. It is imperative that today’s healthcare
manager understand the costs of
providing services. Because they are assuming more risk,
providers must be able to measure
their costs accurately. In a healthcare setting, the primary object
to be costed is a patient
encounter of some type—either inpatient Diagnosis Related
Group DRG, an outpatient visit, or
some other specific treatment category.
Cost information has value in management decision making,
which is often segregated into
planning, budgeting, and control decisions. The needs for
information may vary depending upon
the type of decision that is being made. The development of

cost information will depend to
some extent upon existing financial reporting systems. Most
financial reporting systems will share
the following dimensions:
• Cost data is usually based upon historical cost
• Cost of acquired resources are charged to departments or
responsibility centers
• Products that can be directly traced to a patient treatment
should be costed and charged
directly to the patient, regardless of whether they are in a direct
or indirect department
• Costs in indirect cost centers are allocated to direct cost
centers and eventually assigned
to products consumed in a patient treatment
36
Course Syllabus

In most healthcare firms, there are two phases in the production
(or treatment) process.
In Stage 1 of the production process, resources are acquired and
consumed within departments
or activity centers to produce a product or service. We define
the services produced by a
department as its service units (SUs). Two points need to be
emphasized. First, all departments
have SUs, but not all departments have the same number of
SUs. For example, the nursing
department may provide the following four levels of care:
acuity levels 1, 2, 3, and 4. A
laboratory, in contrast, may have 100 or more separate SUs that
relate to the provision of
specific tests. Second, not all SUs can be directly associated
with the delivery of patient care;
some of the SUs may be only indirectly associated with patient
treatment. For example,
housekeeping cleans laboratory areas, but there is no direct
association between this function
and patient treatment. However, the cleaning of a patient’s room
could be regarded as a service
that is directly associated with a patient.
Stage 2 of the production process relates to the actual
consumption of specific SUs during the
treatment of a patient. Much of the production process is
managed by the physician. This is true
regardless of the setting (hospital, nursing home, home
healthcare firm, or clinic). The physician
prescribes the specific SUs that will be required to treat a given
patient effectively. For example,
the physician determines what imaging procedures are needed,
what laboratory procedures are
required, and many other critical resource decisions.

Understanding the nature of the production process defines
leads to the definition of two sets of
costing standards. First, the specific cost of SUs from both
direct and indirect departments must
be established. We refer to this standard as a Standard Cost
Profile, or SCP. The second standard
defines the amount of specific services that will be required in
any given patient treatment.
Please note that these two systems can be established before the
fact and used as budgets or
they can be determined after the fact and used to establish
future budgets or in-control
decisions.
Accurate costing in any healthcare setting requires the cost
analyst to determine the costs of
products produced, such as lab tests and patient meals, and to
also define either the actual
quantities of products that were consumed in a patient encounter
or that will be required in a
patient encounter.
The budget is one of the most important documents of a
healthcare organization and is the
central document of the planning/control cycle. It identifies the
revenues and resources that will
be needed for the organization to achieve its goals and
objectives and allows the organization to
monitor the actual revenues generated and its use of resources
against that which were planned.
• A responsibility center is an organizational unit that has been
formally designated with
the responsibility to carry out one or more tasks and/or achieve
one or more outcomes.

Responsibility centers or departments are the organizational
units through which
management control is exercised.
• The budgeting process can be bottom-up or top-down. The
choice involves tradeoffs
between planning and control.
37
Course Syllabus
• The statistics budget forms the basis for projecting revenue
and expenses. Projected
service levels by responsibility center are required to determine
expected revenues and
expenses. Projected volumes are often based upon historical
values but modified by
some subjective estimates regarding future service volume.
• The increments of the budget often are years, quarters, or
months. The tradeoffs are
between planning (longer-range budgets) and control (shorter-
range budgets).

• Another choice in budget preparation is how often revisions
are made.
o Zero-base: Starts over every year or every other year
o Rolling (continuous): Always cover the year ahead (three- to
five-year plans)
Cost variance analysis is of great potential importance to the
healthcare industry. Successful use
of cost variance analysis requires a sound system of standard
setting, or budgeting, and a related
system of cost accounting. Perhaps the major factor impeding
the widespread adoption of more
effective cost variance analysis in the healthcare industry has
been the lack of interaction
between it and existing systems of cost accounting.
Cost accounting systems usually serve two basic informational
needs. First, they supply data
essential for product or service costing. Second, they provide
information for managerial cost
control activity. This second role is the major topic of this
chapter.
Efficiency cost is a term that is used to describe the cost
incurred when an operating system, a
department, or responsibility center is out of control when
compared to budgeted standards.
The objective of management should be to minimize the
efficiency cost in any given situation.
While accomplishing this objective, two major alternatives are
available to management: (1) the

preventive approach, and (2) the detection-correction (DC)
approach. The second approach
focuses upon variance analysis, which is the primary topic of
this chapter. There are three
primary areas of variance analysis application that are discussed
in the chapter:
• Facility-wide analysis: Seeks to explain why costs have
changed from prior period values
or budgeted values; variances are broken down into cost and
intensity of service
• Departmental analysis: Seeks to explain why costs have
deviated from a budget;
variances are broken down into three areas: price, efficiency,
and volume
• Variances for managed care plans: Seeks to provide a method
for assessing deviations
from budgeted and actual costs; variances are broken down into
four areas: enrollment,
utilization, efficiency, and case mix
38

Course Syllabus
• Discuss the four major categories of costs.
• Explain what is meant by cost behavior, and differentiate
between the five general types
of cost behavior.
• Explain the difference between controllable and
noncontrollable costs.
• Explain the role of direct and indirect costs in the costing
process.
• Describe the three methods of cost allocation.
• Describe how cost information relates to the 3 key activities
of management: planning,
budgeting, and control
• Explain the two systems necessary to accurately cost
healthcare encounters of care.
• Explain the concept of management control and how budgeting
is used as part of it.
• List the major types of budgets and describe how they are
used.
• Describe the concept of zero-base budgeting

• Describe the two major theories used for the detection of out
of control costs.
• Define variance analysis and how it is used by management.
Reading
Study Chapters 14, 15, 16 and 17 of the text
View the PowerPoints for Chapters 14, 15, 16, and 17
Assignments
39

Course Syllabus
1. Discuss the differences between efficiency and effectiveness.
2. What are the four phases of management control?
3. When would it make sense to use a flexible budget as
compared to a forecast budget?
4. Your hospital has just been told that all your cardiovascular
surgeons are transferring
their practice to a competitive hospital beginning next year.
How would this affect a
forecast of volume?
Use the follow ing inform ation for questions 1 , 2 and 3.
Your hospital has been approached by a major HMO to perform
all their MS-DRG 470 cases
(major joint procedures). They have offered a flat price of
$10,000 per case. You have reviewed
your charges for MS-DRG 470 during the last year and found
the following profile:

Average Charge $15,000
Average LOS 5 Days
Cost/Charge Variable Cost %
Routine Charge $3,600 0.80 60
Operating Room 2,657 0.80 80
Anesthesiology 293 0.80 80
Lab 1,035 0.70 30
Radiology 345 0.75 50
Medical Supplies 4,524 0.50 90
Pharmacy 1,230 0.50 90
Other Ancillary 1,316 0.80 60
Total Ancillary $11,400 0.75 50
1. In the above data set, assume that the hospital’s cost to
charge ratio is 0.80 for routine
services and 0.75 for all other ancillary services. Using this
information, what would the
average cost of MS-DRG 470 be?
2. Estimate the variable cost per MS-DRG 470 using the
departmental cost/charge ratios
and variable cost percentages.
3. The HMO in the above example has indicated that their
doctors use less expensive joint
implants. If this less expensive implant is used, your medical
supply charges would be

reduced by $2,000. What is the estimated reduction in variable
cost?
40
Course Syllabus
4. Management has studied work patterns in the housekeeping
department and estimates
the number of hours to be worked as follows. Hours worked =
(1,500 hours per month)
+ (0.50 × RVUs). For the coming month, management expects
RVUs to be 5,800. What
should budgeted labor for the month be?
Lesson Quiz

41
Course Syllabus
Lesson 7 – Financial M athem atics, Capital P roject
Analysis, Consolidations and M ergers, and Capital
Form ation
Introduction
Financial managers must make both investment and financing
decisions. Investment decisions
involve spending money today for expected cash flows in the
future. Financing decisions involve
receiving funds today in return for a promise to make future
payments. The key to
understanding and analyzing the different investment and
financing alternatives or opportunities
is that the value of money changes over time. Financial analyses
must take into consideration the
time value of money to make appropriate investment and
financing decisions.
This lesson describes the mechanics of calculating present and
future values of unequal cash
flows and annuities. Understanding this basic financial math is
critical to more involved
investment decision analysis discussed in Chapter 19.
Capital project analysis occurs during the programming phase of
the management control

process and is the phase primarily concerned with new
programs; here, it is broadly defined to
include the selection of investment projects. Capital
expenditures are large-dollar investments
that are expected to achieve long-term benefits for an
organization (at least over two years, but
typically many years into the future).
A capital investment decision has two components: 1)
determining if the investment is
worthwhile and 2) determining how to finance the investment.
Although these two decisions are
interrelated, finance theory demonstrates that these decisions
should be separated. This chapter
focuses on the first component—determining whether a capital
investment should be undertaken.
Finally, we will explore the accounting, benefits, costs, and
valuation of consolidations and
mergers. The motives for mergers could include capturing
economies of scale or of vertical
integration, combining complementary resources, making better
use of tax shields or tax loss
carry-forwards, shifting surplus funds from one firm to another
firm that will use the funds more
profitably or distribute them to shareholders, and eliminating
inefficiencies.
Mergers should be undertaken only when the organizations are
worth more together than apart.
The gain to a merger is the present value of the merged firms
minus the sum of their separate
present values. The cost of the merger to your firm is that part
of the gain which the other firm
captures. The cost of a merger is the premium the buyer pays
for the selling firm over its value

as a separate entity. This cost is sometimes tricky to calculate;
for example, when the selling
firm’s stockholders acquire a share of the two merging firms,
thus acquiring a share of the
economic gain to the merger.
This lesson will explore how organizations raise the money for
the purchase of assets (the “left”
side of the balance sheet) using the “right” side of the balance
sheet. The basic accounting
equation suggests that there are three ways in which assets can
be financed: debt (liabilities),
equity, or a combination of the two.
42
Course Syllabus
Investor-Owned: Assets = Debt + Equity
Not-for-Profit: Assets = Debt + Net Assets
The equation shows that any increase in assets must be balanced
by a similar increase in debt
and/or equity. The structuring of debt relative to equity is called
the capital structure decision.
Another option, but usually used less often, is to sell off some
assets to purchase others. For

example, sometimes firms will sell off their accounts receivable
(typically at some discount to the
value listed on their books) to generate cash to invest in other
projects or even, in a cash crunch,
to cover the costs of day-to-day operations.
A firm’s capital structure is increasingly important to both for-
profit and not-for-profit providers.
Until recently, the cost of capital had not been a major concern
for health care providers. Like
other operational costs, the costs of debt and equity financing
were simply passed on to third-
party payers. Hospitals had no trouble accessing capital
markets, because they were virtually
guaranteed any income they needed to cover all their debts. In
today’s health care environment,
however, which is characterized by prospective and capitated
payments, the increased use of
managed care and outpatient services, and increasing cutbacks
being forced by competition,
obtaining debt and equity is a much more complicated
undertaking. Both stock and bond
financing have advantages and disadvantages.
• Explain future value and present value.
• Contrast an ordinary annuity and an annuity due.
• Calculate the future value and present value of an annuity.
• Explain the four stages of the capital decision-making process.

• List some of the kinds of information that is needed to
evaluate a capital investment
project.
• Calculate a projects’ net present value, profitability index, and
equivalent annual cost.
• Explain the concept of a discount rate and the weighted
average cost of capital.
• Understand the terminology used in the field of
consolidations, mergers and acquisitions.
• Explain some of the possible reasons why consolidations,
mergers and acquisitions occur.
• Understand common methods for valuation of a potential
target firm.
• Apply analytical methods and tools to value potential
acquisitions
• Explain the differences between debt and equity financing and
the sources of each.
43
Course Syllabus

• Explain the factors that influence the desirability of
alternative sources of financing.
• Explain what an investment banker does.
• List the major bond rating agencies and explain their role in
the debt market.
• List some of the pros and cons of retiring debt early.
Reading
Study Chapters 18, 19, 20 and 21 of the text
View the PowerPoints for Chapters 18, 19, 20, and 21
Assignments

1. What is the difference between simple interest and compound
interest?
2. What is the formula for determining the future value of an
amount?
3. What is the future value of $10,000 for an interest rate of
16% and 1 annual period of
compounding? For an annual interest rate of 16% and 2
semiannual periods of
compounding? For an annual interest rate of 16% and 4
quarterly periods of
compounding?
4. Define an annuity.
5. In the future value annuity table at any interest rate for 1
year, why is the future value
interest factor of this annuity equal to 1.00?
6. Explain the difference between a joint venture and a merger.
7. Does adding debt increase or decrease the flexibility of a
healthcare provider? Why?
8. A basis point equals how much? How many basis points are
there between 6 5/8% and 6
¾ %?

44
Course Syllabus
1. Biogen, Inc. has a cost of capital of 9%, and it has a project
with the following cash
flows. What is the NPV of this project?
Year Net Cash Flow
0 -100,000
1 -20,000
2 20,000
3 100,000
4 150,000
5 175,000
2. Your organization has been asked to invest in a continuing
care retirement center. Your
investment will be $600,000 per year for the next five years.
After five years, cash flows
will be $400,000 per year for the next 15 years. If your discount
rate is 10 percent:

a) What is the present value of the investment?
b) What is the present value of the cash flows?
c) What is the profitability index?
Lesson Quiz
45
Course Syllabus
Lesson 8 – W ork ing Capital, Cash M anagem ent and
Developing the Cash B udget

Introduction
In the daily operations of health care organizations, there is an
ongoing series of cash inflows
and outflows to pay for day-to-day expenses (e.g., supplies and
salaries). Management must
ensure that the organization has sufficient funds available to
pay for these items on a timely
basis. This is particularly problematic in health care, where it is
not unusual for payments to be
received more than two months after the patient or third-party
has been billed for services
received and where organizations have high labor and supply
costs and thin margins.
We will examine how firms should manage their short-term
working capital and cash. A firm’s
value may be negatively impacted by working capital
inefficiencies, illiquidity, and policies
adversely affecting customer relationships. We provide a
discussion of the working capital
concept, cash conversion cycles, financing and investment of
cash.
To minimize costs and plan ahead to finance deficits and invest
excess cash, a healthcare
organization needs to clearly identify the timing of its cash
inflows and outflows. The cash budget
is the best way to plan for these cash flows. It helps
management determine whether additional
financing will be needed, in what amounts and for what
duration. This information also will reveal
whether it will be possible to invest cash surplus on a short-

term basis. This lesson describes the
cash budget, and how to prepare and use it.
• Explain why cash management is especially crucial in most
sectors of the health industry.
• Explain what working capital is and why it is needed.
• Describe the activities covered in the cash budget that affect
working capital.
• Describe the tools that an organization manager can use to
manage receivables.
• List the external resources available to an organization for its
short-term financing needs.
• List and explain the criteria that should be used when
investing an organization’s cash in
the short term.
• Explain the importance of a cash budget.

• Explain why an organization needs to carry cash balances.
46
Course Syllabus
• Explain how to prepare a cash budget
Reading
View the PowerPoints for Chapters 22 and 23
Assignments

1. Define working capital. What is the difference between
working capital and net working
capital?
2. What is the purpose of working capital?
3. Compare and contrast an aggressive and conservative asset
mix strategies. (Your
comparison should address goals, liquidity and risk.)
4. What is the general rule of thumb about when to borrow long-
term or short-term?
Compare and contrast the advantages and disadvantages of
short- and long-term
borrowing to meet working capital needs.
5. What is the similarity between the cash budget and long-term
financial planning?
1. St. Luke’s Convalescent Center has $200,000 in surplus funds

that it wishes to invest in
marketable securities. If transaction costs to buy and sell the
securities are $2,200 and
the securities will be held for three months, what required
annual yield must be earned
before the investment makes economic sense?
2. Your hospital has billed charges of $4,000,000 in February.
If your collection experience
indicates that 20 percent is paid in the month billed, 40 percent
in the second month, 20
percent in the third month, and 5 percent in the fourth month,
determine the following
values:
47
Course Syllabus
a) Net patient revenue for February
b) Collections of February charges in February
c) Net accounts receivable at the end of March for February
billings

Lesson Quiz
IntroductionFinal ExaminationLesson QuizLesson QuizLesson
QuizSome of the accounts in financial statements are valued
based on historical cost accounting principles. In times of high
inflation, however, the results of historical cost accounting can
be misleading as profit can be overstated, assets understated
in...Statement of OperationsRevenues, Gains, Other SupportNet
patient service revenue $ 1,500,000ExpensesOperating
Income 150,000Investment Income 50,000Excess of
revenues over expenses 200,000Increase in Unrestricted Net
Assets$ 200,000Balance SheetAssets Current Assets Cash and
cash equivalents $ 50,000Properties and Equipment Gross
properties and equipment $ 900,000 Less accumulated
depreciation 475,000 Net Properties and Equipment
425,000Liabilities and Net AssetsTotal Liabilities and Net
Assets $ 825,000Lesson QuizLesson QuizLesson QuizLesson
QuizLesson Quiz

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