Service Costs of Providers Herb Whitesell, Managing Partner Davidson, Holland & Whitesell CPAs

1. Service Costs of
Providers
Herb Whitesell, CPA, Managing Partner Davidson, Holland, Whitesell & Co., CPAs

2. Words of Wisdom
▪ What gets measured gets done
▪ A penny saved is a penny earned, hopefully to
your bottom line
▪ You are never really playing an opponent. You are
playing yourself, your own highest standards, and
when you reach your limits, that is real joy. -Arthur
Ashe

3. The New World of Managed Care
▪ Once again we move into uncharted territory
▪ There has not been much true competition yet
▪ This will change, as providers will be competing for the favor of
your MCOs as compared to other similar providers, the favor of
your customers in having made the right choices of plans, and
the favor of all your other stakeholders in fulfilling your
organization’s mission

4. My advice to you today
▪ There’s a lot more potential to a financial statement
than you likely ever knew
▪ This advice applies to the Department Supervisor
feeding budget figures to the Controller, or explaining
a budget variance, all the way to the MBA who thinks
she has done it all and seen it all.
▪ I want to get you started with something you all know
and all have, albeit to varying degrees

5. A “Top Down” Profit and Loss Statement

6. The Foundation I give you today can be crafted
to the house you are comfortable in
▪ This technology is available for almost free, with Microsoft Excel and other
competitors of which I am not that familiar
▪ Aggregation of financial data can be very frustrating and confusing when you
cannot peel back the fruit to consume what is within
▪ The background data to this is effectively a data warehouse
▪ Some Financial platforms are quite broad in scope and may include all the necessary
data elements to accomplish what I have shown you
▪ But most Providers operate from systems that may have financial data in one
application, billing in another, payroll in another, etc.
▪ Don’t feel bad, this is the norm. In fact, most or all of the current 7 LMEs operate this way
▪ The data supporting this Top Down P&L must be stored in permanency and backed up often,
under your disaster recovery policies

7. Cost Allocation Concepts
▪ My demo was admittedly simplistic, but the output is nevertheless meaningful
▪ Your output would look similar, but the cost allocation concepts would be more
sophisticated
▪ In a “full-absorption” P&L, also known as Activity Based Costing “ABC”, all costs,
variable, semi-variable and fixed, are effectively converted to variable costs
▪ In a “full-absorption, standard cost” P&L, standard or budgeted amounts are
allocated and matched to revenues, and also compared to the actual costs to
generate one to several variance accounts to be further analyzed
▪ My demonstration was full-absorption with no variances generated

8. Standard Costing vs. Actual Costing
P&L Component Actual Actual Costing Comments Standard Standard Costing Comments
Revenue - Community Living
and Supports Individual
$5.10 / 15
minutes
Actual revenues change on
the date the payer updates
the rate
5.05 / 15
minutes
Rate is estimated and set for
a specified period of time,
normally no longer than one
year
Wages to CLS
3.04 / 15
minutes
Actual payroll expenses
are spread amongst
revenues based on care
givers providing services
$3.00 / 15
minutes
Estimated avg labor rate for
this service estimated and
set for specified period, not
necessarily per care giver
Other direct expenses
$0.15/ 15
minutes
Actual payroll expenses
are spread amongst
revenues
$0.18 / 15
minutes
Estimate of same
Indirect expenses
10.3% of
revenues
Allocation bases may vary,
but again all the indirect
expenses are absorbed
10% of
revenues
% to allocate is fixed for
some time, but allocation
basis is same

9. Standard Costing Introduces Variances to be
Analyzed
▪ With standard costing, you not only analyze variances between actual results and
budgeted results, but you have additional variances between actual results and
standard costs “applied” to the P&L
▪ Using our example, actual CLS Revenue is $5.10 / unit, or $20.40 / hour.
Standard is $5.05, or $20.20 / hour.
▪ At the end of the measuring period, perhaps a month, or a year, if you billed 400
hours of CLS, your actual revenue would be 400 x $20.40, or $8,160.
▪ Standard revenue would be 400 hours x $20.20, or $8,080. Your Standard P&L
would show $8,080 CLS Revenue + $80 CLS Revenue Variance, for a total
revenue of $8,160, equal to the actual revenue

10. Choosing Which
▪ The emphasis of this presentation is for “Top Down” financials with drill backs to
underlying details, e.g., employees, units, rate per hour, cost per hour, etc.
▪ The choice of actual vs. standard is a company decision. Standards do make for
more work, but may also lend more answers when results are not as anticipated.
▪ Standard methods might also be used to supplant the normal budgeting process,
since the standard rates should be a component of the budget anyway

11. Quickbooks?
▪ So you say you are on Quickbooks and there is no way to get this level of
sophistication - You are wrong
▪ If you are using QB in the cloud, there are software “drivers” that can access the
data from the cloud and pull it into Excel
▪ If you are using QB on premise, there are 3rd party software drivers to tap into the
data on your servers
▪ I’m still not a fan of QB, but due to its affordability, it is rather ubiquitous among
providers

12. Other Advantages to Pivot Table P&Ls
▪ Once background data is loaded, pivots are quick and easy. Many hours can be
saved compared to traditional P&L and supporting documentation reporting
▪ Questions can be answered real time rather than follow up for more details
▪ Non-Concurrent comps are possible, e.g., Dec 2018 vs. Dec 2015 vs Jun 2017
▪ Profits by ???? are limited only by the imagination and the data warehouse
behind the financials. A few of the possibilities of profit analyses, all of which can
be mixed and matched:
▪ Consumer, Employee, Service, Month, Quarter, Week, Day, Payer, Location, Cost
Center, Periodic, Daily, Capitated Contracts, Alternative Payments Methods, Hour

13. Conclusion
▪ Few in the room are capable of implementing these ideas, but everyone in the
room is capable of passing this on to your bookkeeper, controller, CFO, and / or
CPA
▪ I am trying my hardest to move my clients to this type of financial reporting. It is a
process however that is not accomplished overnight
▪ I guarantee the nuggets you mine will help you make better financial decisions
and be more competitive in what will likely be a ruthless financial management
environment
▪ Q&A and contact for follow up HerbWhitesell@DHW.net 828-322-2070