HM 416 Chapter 6

1. © 2018 American Health Information Management Association© 2018 American Health Information Management Association
Principles of Finance for
Health Information and
Informatics Professionals
Second Edition
Chapter 6
Expense Management

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Learning Objectives
• Relate the level of expenses to the revenue
expectations
• Compare and contrast the different workforce
classifications
• Formulate productivity metrics
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Cost vs Expense
• Expense
– Item of business outlay or effort chargeable
against revenue
– May or may not be an actual cash event
(depreciation is an expense, but not a cash
event)
• Cost
– Item traced directly to the production of
revenue
– Represents a cash event
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Types of Employees
Exempt
• Professional, managerial,
or supervisory
• Paid fixed annual salary
• Not paid for working over
or under the standard
number of hours
(typically 40)
Non-exempt
• Paid hourly
• May collect overtime for
going over standard
number of hours
• Overtime/holiday pay
premium hourly rate
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Determining FTE Requirements
• Key drivers
– Volume of work (tests per hour, charts coded per day,
etc.)
– Service standards (24-hour coverage)
– Technical skills
– Productivity standards
• Labor supply issues
– Environment – travel required?
– Labor pool
– Labor mix – full/part/contract
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Employee vs contract worker
• IRS guidelines for independent contractor status
– Behavioral control
• Type of instructions
• Training
– Financial control
• Method of payment
• Opportunity for profit or loss
– Type of relationship
• Written contract
• Benefits
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Non-Labor Costs
• Supplies
• Pharmaceuticals
• Training
• Space requirements
• Equipment
• Information Technology
• Marketing
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Productivity measures
• Ratio should include
– Numerator representing a measure of output
– Denominator representing a measure if input
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Coder productivity example
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Example – Productivity
• Total records coded per shift is below budget
• Not due to Coder FTEs – budget = actual = 5
• Due to number of records coded
• Type of record (inpatient/outpatient surgery/other) may be used as
intensity measure since size of record and number of codes is related to
patient type
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Example – Productivity
• Budget variance due to:
– Mix of records
– Number of records coded per hour by type (productivity)
• Which source, mix or productivity, explains more of the variance?
– If productivity, then implement new coder training
– In mix, then may require a budget revision
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Example – Productivity
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Example – Productivity
• Intensity (IVC) explains (2.08)/(5.8) = 36% of variance
• Input Price (IPVC) explains (3.76)/(5.8) = 64% of variance
• Coder productivity must be improved!
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Monitoring Cost of Care
• Relative Value Units (RVU)
• Three components
– Work (wRVU)
– Practice Expense (peRVU)
– Malpractice Expense (mRVU)
• Used to determine physician fee
schedule payment
• wRVU is often used as a physician
productivity metric
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Example – Capitated Contract
• United is getting $55.00 PMPM, cost budget is $50.00 PMPM, so net revenue
should be $5 PMPM or $60 per member per year
• Net revenue for contract is below budget
• What is the cause of the variance?
– Number of members
– Net revenue per member
– How much more net revenue per member is required to make the budgeted net
revenue if no more members can be recruited?
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Example – Capitated Contract
• Additional net revenue per member not adequate to make up for
member volume shortfall
• How many more members must be recruited?
– 580 (see Excel spreadsheet model and try it)
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Vendor and Contract Management
• Request for Proposal (RFP)
• Used to select a vendor for a large
engagement
• Some providers are required to
release RFPs for contracts per state
law or their own bylaws
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RFP Components
• Statement of purpose
• Background information
• Summary of deliverables
• Contract details
• How to submit a proposal
• [optional] Evaluation criteria
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Summary
• The single largest expense for a healthcare
organization is personnel
– A staff budget is a function of the number of full-time
equivalents (FTEs) and the type of employee
• Relative value units (RVUs) may be used to
standardize the cost of providing care in the
physician office setting
• To accurately perform work RVU analysis, determine
and use the FTE associated with the clinical work
– The clinical FTE (cFTE) should be calculated for all
providers
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