Part II: Record Financial Operations CHAPTER 5: EXPENSES: (OUTFLOW) Overview: The Distinction Between Expense and Cost • Expenses are expired costs that have been used up, or consumed, while carrying on business. • Expense in the broadest sense includes every expired (used up) cost that is deductible from revenue. Overview: The Distinction Between Expense and Cost • “Cost” is the amount of cash expended* in consideration of goods or services received (or to be received). *(or property transferred, services performed, or liability incurred) • Costs can either be expired or unexpired. • Expired costs are used up in the current period and are matched against current revenues. • Unexpired costs are not yet used up and will be matched against future revenues. Overview: The Distinction Between Expense and Cost • Confusion also exists over the term “cost” versus the term “charges”. • Charges are revenue, or inflow • Costs are expenses, or outflows • Charges add; costs take away. Overview: Confusion Over Other Terminology Disbursements for Services • Disbursements for services represent an expense stream (an outflow) • Disbursements for services can trigger payment either: – when the expense is incurred; or – after the expense is incurred. Disbursements for Services • Payment when the expense is incurred does not require the expense to enter the Accounts Payable account. • Payment after the expense is incurred requires the expense to be recorded in the Accounts Payable account. • It is then cleared from Accounts Payable when payment is made. Grouping Expenses for Planning and Control • Grouping by Cost Center • One form of responsibility center. • Study examples in Exhibits 5-1 and 5-2. Exhibit 5–2 General Services and Support Services Cost Centers Grouping by Diagnoses and Procedure • Beneficial because is matched costs and common classifications of revenues • Study examples in Exhibits 5-3, 5-4, 5-5 & Table 5-1 Exhibit 5–5 Example of Hospital Departmental Costs Classified by Diagnoses, MDC, and DRG Table 5–1 Example of Radiology Department Costs Classified by Procedure Code • By care settings recognizes different sites where service is delivered • Care settings were discussed in the previous chapter. Grouping by Care Settings • By service lines would be used for grouping costs if revenues were divided by service line. • Service lines were discussed in the previous chapter. Grouping by Service Lines • Distinguishes projects that posses their own objectives, funding, and indicators. • Study the example in Exhibit 5-6. Grouping by Programs Exhibit 5–6 Program Cost Center: Southside Homeless Intake Center Cost Reports As Influencers Of Expense Formats • Since the mid-1960s Annual Cost Reports are required by the Medicare Program and the Medicaid Program. Cost Reports As Influencers Of Expense Formats • The arrangement of c ...

1. Part II: Record Financial
Operations
CHAPTER 5: EXPENSES: (OUTFLOW)
Overview: The Distinction Between
Expense and Cost
• Expenses are expired costs that have been
used up, or consumed, while carrying on
business.
• Expense in the broadest sense includes every
expired (used up) cost that is deductible from
revenue.
Overview: The Distinction Between
Expense and Cost
• “Cost” is the amount of cash expended* in
consideration of goods or services received (or
to be received).
*(or property transferred, services performed,
or liability incurred)

2. • Costs can either be expired or unexpired.
• Expired costs are used up in the current
period and are matched against current
revenues.
• Unexpired costs are not yet used up and will
be matched against future revenues.
Overview: The Distinction Between
Expense and Cost
• Confusion also exists over the term “cost”
versus the term “charges”.
• Charges are revenue, or inflow
• Costs are expenses, or outflows
• Charges add; costs take away.
Overview: Confusion Over Other
Terminology
Disbursements for Services
• Disbursements for services represent an
expense stream (an outflow)
• Disbursements for services can trigger

3. payment either:
– when the expense is incurred; or
– after the expense is incurred.
Disbursements for Services
• Payment when the expense is incurred does
not require the expense to enter the Accounts
Payable account.
• Payment after the expense is incurred requires
the expense to be recorded in the Accounts
Payable account.
• It is then cleared from Accounts Payable when
payment is made.
Grouping Expenses for Planning and
Control
• Grouping by Cost Center
• One form of responsibility center.
• Study examples in Exhibits 5-1 and 5-2.
Exhibit 5–2
General

4. Services and
Support
Services Cost
Centers
Grouping by Diagnoses and Procedure
• Beneficial because is matched costs and
common classifications of revenues
• Study examples in Exhibits 5-3, 5-4, 5-5 &
Table 5-1
Exhibit 5–5 Example of Hospital
Departmental Costs Classified by
Diagnoses, MDC, and DRG
Table 5–1 Example of Radiology Department
Costs Classified by Procedure Code
• By care settings recognizes different sites
where service is delivered
• Care settings were discussed in the previous
chapter.

5. Grouping by Care Settings
• By service lines would be used for grouping
costs if revenues were divided by service line.
• Service lines were discussed in the previous
chapter.
Grouping by Service Lines
• Distinguishes projects that posses their own
objectives, funding, and indicators.
• Study the example in Exhibit 5-6.
Grouping by Programs
Exhibit 5–6 Program Cost Center:
Southside Homeless Intake Center
Cost Reports As Influencers Of
Expense Formats
• Since the mid-1960s Annual Cost Reports are
required by the Medicare Program and the
Medicaid Program.

6. Cost Reports As Influencers Of
Expense Formats
• The arrangement of costs into “Cost Centers”
(on the cost report) has strongly influenced
the arrangement of expense line items in
many health care information systems.
Grouping Expenses by Cost Center:
Example
• Example: A nursing home may consider the
Admitting Department as a cost center.
• In this case, the expenses grouped under the
Admitting Department may include:
– Administrative and Clerical Salaries
– Admitting Supplies
– Dues
– Periodicals and Books
– Employee Education
– Purchased Maintenance
Grouping Expenses by Cost Center:
Practice Exercise 5-I
• The Metropolis Health System groups expenses
for the Intensive Care Unit into its own cost
center. Lab and Laundry expenses are likewise
grouped into their own cost centers. Required:

7. 1. Setup a worksheet with columns across the top
for three cost centers: Intensive Care Unit; Lab;
and Laundry.
2. Indicate the appropriate cost center for each of
the following expenses: see following slide.
Grouping Expenses by Cost Center:
Practice Exercise 5-I
Drugs Requisitioned
Pathology Supplies
Detergents and Bleach
Nursing Salaries
Clerical Salaries
Uniforms (for Laundry Aides)
Repairs (parts for microscopes)
Laundry
X
X
X
Laboratory

8. X
X
X
Intensive
Care Unit
X
X
X
Grouping Expenses by
Cost Center: Assignment 5-1
• The Metropolis Health System’s Rehabilitation
and Wellness Center offers outpatient
therapy and return-to-work services plus
cardiac and pulmonary rehabilitation to get
people back to a normal way of living.
• The Rehabilitation and Wellness Center
expenses include the following: see following
slide.
Grouping Expenses by
Cost Center: Assignment 5-1

9. Nursing Salaries
Physical Therapist Salaries
Occupational Therapist Salaries
Cardiac Rehab Salaries
Pulmonary Rehab Salaries
Patient Education Coordinator Salary
Nursing Supplies
Physical Therapist Supplies
Occupational Therapist Supplies
Cardiac Rehab Supplies
Pulmonary Rehab Supplies
Training Supplies
Clerical Office Supplies
Employee Education
Administrative/Clerical salaries
Administrative
X
X

10. Training
X
X
X
Cardiac
Pulmonary
X
X
X
X
X
X
X
Physical/Occupational
Therapy Rehab
X
X
X

11. X
X
X
X
Part II: Record Financial
Operations
CHAPTER 4: REVENUES (INFLOW)
Health Care Finance by Judith J. Baker and R.W. Baker.
Copyright © 2011 by Jones and Bartlett Publishers, LLC
The Revenue Stream
• Payment After Service Is Delivered
• Fee-for-Service
• Discounted Fee for Service
Payment Before Service is Delivered

12. • Pre-Determined Per-Person Payment
• Rate-Setting Differences
Deductions from Revenue
• Contractual Allowances
• The difference between the full established
rate and the agreed-upon contractual rate to
be paid.
Deductions from Revenue
• Contractual Allowances
• It is not uncommon for different plans to pay
different contractual rates for the same
service.
Table 4–1 Variations in Physician Office
Revenue for Two Visit Codes
Other Deductions from Revenue
• Allowances for Bad Debts, aka “provision for
bad debts”

13. • Estimated amounts of credit losses (bad
debts) is charged to this account.
Other Deductions from Revenue
• Charity Service
• Services provided to indigent patients
Sources of Health Care Revenue
• Revenue Sources
• Sources are generally called “payers.”
• “Payer mix”* is a measure often included in
an organization’s profile.
• Many types of management reporting are
arranged by payer (the revenue
source).
*the proportion of revenues realized from
different types of payers.
Revenue Sources
• Governmental Sources include Medicare,
Medicaid, and other.

14. • Managed Care Sources distinguished by types
of plans and types of contracts.
• Other Sources include commercial insurers,
private pay, and others.
Governmental Sources
• Title XVIII of the Social Security Act is
commonly known as Medicare
• The Medicare program currently has four
parts.
• Title XIX of the Social Security Act is commonly
known as Medicaid
• The Medicaid program is state-specific.
Managed Care Sources of Health Care
Revenue
• Types of managed care plans include health
maintenance organizations (HMOs) and
preferred provider organizations (PPOs).
Grouping Revenue for Planning and
Control

15. • Grouping revenue is an effective method for
managers to use information.
• The method of grouping, or classification,
must be consistent with the current structure
of the organization.
Grouping Revenue for Planning and
Control
• Grouping revenue by revenue source has just
been discussed.
• Other approaches to grouping include:
– Revenue Centers
– Care Settings
– Service Lines
– Other classifications such as disease management
Exhibit 4–1 Revenues by Care Setting
Figure
4–1
Hospital
Service

16. Lines
Courtesy of
Resource
Group, Ltd.,
Dallas, Texas.
Figure 4–2 Long-Term Care Service Lines
Courtesy of Resource Group, Ltd., Dallas, Texas.
Figure 4–3 Home Care Service Lines.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Contractual Allowances: Example 4A
• Contractual allowances are difference between the full
established rate and the agreed-upon rate that will be paid.
• In Example 4-A, the hospital's full established rate for a
certain procedure is $100, but GHP has negotiated a
managed care contract whereby the plan pays only $90 for
the procedure.
• The contractual allowance is $10 ($100 minus 90 = $10)
• Assume that Near-By Health Plan has negotiated a managed
care contract whereby it pays $95 for the procedure.
• Their contractual allowance would then be $5 ($100 minus

17. 95 = $5)
Contractual Allowances: Practice
• For a particular procedure:
• The Medicaid allowed charge is
$2,700
• The Medicare allowed charge is
$3,075
• The Blue Cross/Blue Shield rate is
$3,090
• The hospital established charge is
$3,200
Contractual Allowances: Practice
1. Are there contractual allowances in this example?
2. If so, what payer is involved?
3. What are the dollar amounts of any contractual
allowances?

18. Solution
:
1. Yes
2. All three
3. $500; $125; $110
Assignment Exercise 4-1: Contractual
Allowances
• Using the worksheet: For each payer, enter the full
rate and contracted rate.
• For each payer, compute the contractual allowance.
Payer
FHP

19. HPHP
MC
UND
CCN
MO
CGN
PRU
PHCS
ANA
Contractual
Allowance
$36.30

20. 13.15
17.10
11.60
1.80
1.25
62.00
17.10
22.00
27.00
Contracted
Rate
$35.70 =
58.85 =

21. 54.90 =
60.40 =
70.20 =
70.75 =
10.00 =
54.90 =
50.00 =
45.00 =
Full
Rate
$72.00 -
72.00 -

22. 72.00 -
72.00 -
72.00 -
72.00 -
72.00 -
72.00 -
72.00 -
72.00 -
Assignment 4-2: Revenue Sources and
Grouping
Medicare Medicaid
Other

23. Public
Programs
Patients
Commercial
Insurance
Managed
Care
Contracts
ICU X
Lab X
Lab X
ICU X
ICU X

24. Lab X
Part II: Record Financial
Operations
CHAPTER 3: ASSETS, LIABILITIES
AND NET WORTH
Recording Financial Operations
• Assets, liabilities and net worth
• Are part of the language of finance
Recording Financial Operations

25. • Because assets, liabilities and net worth are
part of the language of finance, it is important
to understand both their composition and
how they fit together
Assets
• Economic resources that have expected future
benefits to the business.
Exhibit 3–1 Asset Examples
• Cash
• Accounts receivable
• Notes receivable
• Inventory

26. • Land
• Buildings
• Equipment
Liabilities
• “Outsider claims”
• Economic obligations
• Debts
• Payable to outsiders
Exhibit 3-2: Liability Examples
• Accounts payable
• Payroll taxes due

27. • Notes payable
• Mortgage payable
• Bonds payable
Net Worth
• “Insider claims”; claims held by the owners of
the business, aka owner’s equity, or net worth
Exhibit 3-3 Net Worth Terminology
Examples
• For-profit sole proprietors or partnerships:
• Owners’ Equity
• For-profit corporations:

28. • Capital Stock
• Retained Earnings
• Not-for-profit (nonprofit) companies:
• Fund Balance
How Assets, Liabilities & Net Worth Fit
Together
• The Three-Part Equation
• An accounting equation reflects a relationship
among assets, liabilities and net worth
• Assets = Liabilities + Net Worth
Assets
• Assets can be either short- or long-term.

29. • Review asset examples in Exhibit 3-1.
Liabilities
• Liabilities can also be either short- or long-
term.
• Review liability examples in Exhibit 3-2.
Net Worth Terminology
• Net worth terminology depends on the type
of organization, and may include:
• “Owners’ Equity”
• “Capital Stock” & “Retained Earnings”
• “Fund Balance”

30. • Review Exhibit 3-3 and match the net worth
terms above to the three types of
organizations.
Organization Types Affect How Net
Worth Is Expressed
• What for-profit companies can you name?
• What not-for-profit companies can you name?
• “And their net worth would be called . . . .”
Balance Sheet Classification: Practice
Exercise 3-I