Navigating the HealthTech Management Services Financial Statement Template

Transcription

1 Computer Programming Institute.Bradley is currently serving as the President of the New York Organin of Nurs Navigating the HealthTech Management Services Financial Statement Template Kevin Stringer, Assistant Vice President (AVP) About the author: Kevin Stringer provides ongoing consultation to hospital CFOs in the midwestern and northeastern United States. Stringer has more than 30 years experience in healthcare financial management. Previously, he served as CFO at Mercy Center Health Services in Watertown, New York. He also served as CFO for several hospitals in North Carolina. Stringer earned his Master s degree in Business Administration and Finance and his Bachelor s degree in Accounting from Fordham University in Bronx, New York. He is also a member of the Healthcare Financial Management Association. For more than 40 years HealthTech Management Services (HTMS) has worked with critical access, district and acute care hospitals across the United States to help them improve financial strength, build professional excellence, and grow to meet the needs of their community. HTMS provides management support services, delivering operations support, supply chain savings, accountability, and new strategic direction. HTMS also offers focused, consulting services for hospitals that require immediate help with financial restructuring, clinical quality, or operating performance. HealthTech Management Services also offers physician recruitment and executive placement services to help your organization recruit and retain qualified healthcare professionals. HealthTech Management Services 2013

2 INTRODUCTION For the first 30 years of operation, HealthTech Management Services (HTMS), formerly Brim Healthcare, reviewed their managed hospital s financial statements in a variety of formats and with various levels of detail. Because of this diversification, reviewing each hospital s financial statement was very tedious. The various formats in which the financial statement data was received made it very difficult and sometimes impossible to perform financial comparisons between all of the managed hospitals as well as published healthcare financial benchmark data. Very often the financial statements that were reviewed by the hospital Board were nothing more than a computerized printout of the hospital s balance sheet and statement of operations. It became increasingly obvious that a uniform financial reporting mechanism that was more user-friendly with meaningful benchmarks was needed in order to provide the hospitals and their Boards in the communities that we served with a competitive advantage. In the year 2000, I was charged with the task of developing a comprehensive financial statement template that would meet the needs of all of our managed hospitals regardless of their size or complexity. This template needed to be easy to use so as not to put a strain on the financial staff that was charged with producing timely financial statements for the Board. From HTMS perspective the financial statement template needed to be as inclusive as possible without getting unwieldy. It was anticipated that the information contained in the financial statement template would become the basis for providing our managed hospitals with various financial and operational comparisons to the other managed hospitals as well as published healthcare financial benchmark data. In the initial stages of development examples were gathered of various financial statements being produced in the HTMS managed hospitals. The most relevant data and the best presentation styles were then extracted from the group. Suggestions were solicited from the hospital CEO s and CFO s, HealthTech Regional Vice Presidents, and the other Regional Financial Officers (now known as AVP s). In January 2001, the first HTMS financial statement template was issued to all managed hospitals with the expectation that every managed hospital would immediately begin reporting their financial data to both HealthTech and their Boards in the new format. That first template was 13 pages including the cover page and table of contents, however it did not provide individual hospitals the opportunity to create additional schedules to highlight various components of their business that was of special interest to management and the Board. The actual contents of the financial statements included an executive summary, a balance sheet which listed assets and liabilities on 2 separate pages, a statement of operations for the month, year-to-date, and a 13 month trend which consisted of 4 pages, a cash flow statement, a page of statistics, an accounts receivable report, and a revenue and expense variance reporting page. This template provided the information that made it possible to provide a database that tracks over 150 different financial ratios. The template is updated annually to incorporate changes to industry benchmark data as well as user requested enhancements. Over the past 13 years, the financial statement template has been revised a number of times. The initial 13 pages of the financial statement template have remained basically the same, but over the years another 4 pages have been added to accommodate additional information that was deemed important by all of the key stakeholders. The current financial statement template is now the source document for six different comparative databases. Many hospitals have expanded their financial statement packets utilizing the format of the template in order to provide more detailed Page 2

3 hospital specific information to their Boards. The updated financial statement template that will be released in January 2014 will once again contain some minor revisions. Each page of the HTMS financial statement packet will be reviewed over the next few pages and will highlight the importance of each page along with the key line items on each page that one should pay special attention to during a financial statement review. It is important for the reader to know whether their hospital is a Prospective Payment Hospital (PPS) or a Critical Access Hospital (CAH), since there are different areas of focus that are important depending on the type Medicare reimbursement the hospital receives. COVER PAGE: The HTMS cover page was specifically designed to not only identify the hospital and the reporting period that the subsequent report covers, it also contains a certification statement from the financial statement preparer who is generally the hospital s CFO. The certification statement as written was not intended to be a legally binding statement, but rather a statement to the Board and other readers of the financial statements that the information included in the financial statement package was not prepared with the intention of misleading the reader, and more importantly is an accurate reflection of the hospital s current financial condition. To the best of my knowledge, I certify for the hospital that the attached financial statements do not contain any untrue statement of a material fact or omit to state a material fact that would make the financial statements misleading. I further certify that the financial statements present in all material respects the financial condition and results of operation of the hospital and all related organizations reported herein. TABLE OF CONTENTS: The purpose of this page is to direct the reader to the appropriate schedules contained within the financial statement package. EXECUTIVE SUMMARY: This page is unique to HTMS financial statement package, and is what distinguishes it from most other hospital financial reporting packages. The purpose of this page is to provide a concise, easy to read, high level overview of the hospital s financial position. It was developed primarily to assist those Board members who do not have a strong financial background to easily read and understand the hospital s monthly financial report. The page is comprised of four separate components, each summarizing a more detailed section of the financial statement packet. The first section or upper left hand corner contains a balance sheet summary that rolls up the detailed line items into the major categories contained in the asset and liability pages of the report. When reviewing this section, the first item to check is that the total assets line and the total liabilities and net assets line are the same number because as the name balance sheet implies, these two numbers must balance. The second item to check is the Net Assets line which is the next to the last line in this section. Over the years, this line has also been referred to as fund balance and has been changed Page 3

4 to reflect changes recommended by the accounting standards board. The importance of this line is that it reflects the overall net worth of the hospital if all outstanding liabilities were paid off utilizing the hospital s assets. Therefore, from period to period the reader would want to see this number increase steadily. The second section located in the middle of the left hand side of the page presents a summary of the hospital s statement of operations for both the current month and year-to-date along with the budgeted amounts for both of those periods. This summary sheet combines line items into more general categories than is contained in the detailed statement of operations in order to present a more concise reporting, and draws the reader s attention to the two most important lines for the high level review for which this page was designed. Those two lines are the bottom line which is the Total Net Surplus line and the third from the bottom line which is the Total Operating Surplus line. The difference between the two lines is non-operating revenues and expenses which includes items such as donations and realized investment income. Since these items are generally out of management s day-to-day control, the Total Operating Margin is arguably the most important line in this section. For government providers, the non-operating revenue and expenses also include interest expense and tax subsidies that are generally out of the control of management on a day-to-day basis. The third section located on the lower left hand side contains some of the hospital s key operating statistics which are the drivers of both organizational revenues and expenses. In the 2013 financial statement template release, this section contains different information for Critical Access Hospitals and Prospective Payment System hospitals. Due to the fact that the two different types of hospitals are paid by different reimbursement formulas, the most important operating statistics are different for each. The PPS hospital template contains discharges and case mix index statistics. This is important because PPS hospitals, for the majority of their business, are paid by Diagnostic Related Groups (DRG s). Each individual DRG has an assigned case mix index which is used as a payment multiplier for every inpatient discharge. Therefore, inpatient payments are based on a combined factor of the number of discharges as well as the average case mix index. As either or both of these numbers increase so does the hospital s net revenue. The CAH template does not include these statistics in the executive summary since they are not as important in the determination of their net inpatient revenue. Instead, the statistics reported on the summary sheet for CAH s include patient days and average daily acute census. These statistics are important to track since CAH s for the most part are paid on a per diem basis so the total patient days are more important than discharges. In addition, the case mix index is not part of a CAH s payment formula. However, CAH s by regulation are limited to an average length of stay (ALOS) of four days or less. It is important to monitor the ALOS to assure that the CAH status is not jeopardized by exceeding the four day maximum. Other key operating statistics tracked in this section are emergency room visits, outpatient visits, surgeries and Full Time Equivalent Employees (FTE s). Finally, the fourth section which takes up the entire right side of the executive summary page contains the most important financial ratios contained in the financial statements; all but one are presented in a graphical format. Each of the graphed ratios compares the hospital s year-to-date performance against the budgeted year-to-date performance, the prior fiscal year s performance and Page 4

5 two different industry comparative benchmarks. The upper right hand corner graph provides information on the hospital s net days in accounts receivable which is a key indicator of the hospital s cash flow. The next graph compares both the operating margin and the total margin which are indicators of the hospital s financial performance. The third graph shows days cash on hand both from short term funds as well as all available cash. This is an indication of the hospitals liquidity as well as flexibility to take advantage of changes in the marketplace. The last graph shows the hospital s net revenue in relationship to the hospital s salary and benefit expenses. This is an indicator of the productivity of the hospital staff in relation to the revenues being generated in the hospital. The last financial ratio on the page is the financial strength index. This ratio was developed by Cleverly and Associates as an indicator of a hospital s overall financial health. Shortly after its introduction, the Healthcare Financial Management Association (HFMA) recognized it as an indicator worth monitoring. The ratio is a composition of four other key financial indicators. The formula encompasses the hospital s total margin, days cash on hand, the average age of plant and debt financing percentage. The financial strength index monitors whether the hospital is operating at a surplus, building cash reserves for unexpected operational needs, reinvesting surpluses into the hospital s plant and equipment and doing so without incurring an inordinate amount of debt. There are four categories that a hospital can fall into. A POOR hospital has a ratio lower than a A FAIR hospital s ratio is between 0 and A GOOD hospital has a ratio between 0 and 3.0, while an EXCELLENT hospital s ratio is in excess of 3.0. It is evident that this indicator relies on both short term and long term results in developing the ratio. KEY FINANCIAL RATIOS: From a Board fiduciary oversight role, this is one of the most informative pages in the financial statement package. The key financial ratios provide the reader with an overview of the overall financial performance of the hospital by looking at a variety of operating indicators. This is also where the most dramatic change in the 2014 financial statement template update occurred. Up until 2014 a single page compared approximately 25 key financial performance indicators, including the 6 ratios that are graphed on the executive summary against industry standards and prior fiscal year end results. The one drawback to this schedule has always been that although HealthTech updates the ratios on an annual basis the most recent available data is usually at least two years old. It is important that the reader is cognizant of this fact when comparing the current year data. To this end, the schedule contains footnotes that inform the reader what year the benchmark database is referencing. In 2014 the format of the page changed dramatically to assist the reader to quickly identify favorable and unfavorable changes in the ratio data. The ratio data were converted to pages containing 16 different graphs. The three least valuable ratios were dropped from the report, and the duplication of the six ratios reported on the executive summary was eliminated. In addition, the HealthTech target minimum or maximum values were incorporated into the graphs for the five ratios where HealthTech targets exist. STATISTICS: On this page the reader is provided with a variety of key operating statistics regarding the volume of patients that were provided service in the hospital. The statistics for the current month and fiscal year-to-date both provide the actual, budget and the prior year data. Page 5

6 The discharge, patient day, average length of stay (ALOS) and average daily census (ADC) sections provide data regarding the inpatient portion of the hospital business. For PPS hospitals the discharge data should be an area of focus as PPS hospitals are paid on a discharge basis by most payers. CAH s on the other hand should be more focused on the patient day statistics as most of their reimbursement is based on a per diem payment. The average length of stay is important to both PPS and CAH s but for different reasons. A PPS hospital does not have a restriction on ALOS. However as previously mentioned, PPS hospitals are paid on a per discharge basis. This payment is the same regardless of how many days a patient stays in the hospital. A shorter ALOS is desirable since the additional expenses related to longer lengths of stay are generally not reimbursed to the hospital. CAH s on the other hand must maintain an ALOS at an average of four days or less. Key outpatient statistics are also tracked on this page. They include emergency room visits, outpatient visits, surgical procedures along with primary care clinic visits and home health visits if those services are provided by the hospital. The last four lines of this page provide information regarding FTE s and Case Mix Index (CMI). The FTE information is important to both PPS and CAH hospital s as it compares actual staffing levels to those budgeted. Inasmuch as salary expense represents the single largest expense item on any hospital s financial statements it is important to maintain staffing levels within the budget. The CMI is more important to PPS hospitals as Medicare payment rates, and often those of other payers, are based on the patient s severity of illness as indicated by the CMI. STATEMENT OF OPERATIONS: The statement of operations, sometimes referred to as the P&L (Profit and Loss) statement is reported on pages 5, 6 and Supplement A. The information contained on these four pages is identical except for the period for which the data is being reported. The information reported on page 5 is for the current month s activity, page 6 represents the fiscal year to date activity, and the two pages of Supplement A is a 13-month trend report. The first item of interest on the statement of operations is the gross charges. One question to ask is how do the charges compare to budget and is that relationship consistent with the statistical variances. The next item of note is the contractual allowances. This is the amount of charges that by law or by contract the hospital must discount to the various payers. This number should be increasing or decreasing in relationship to the charges. If not, then the question arises as to whether there has been a change in the type of services being provided or in the payer mix of the patients being served. The next important line on these pages is the total expense line. What the reader should be looking for is whether management has done a good job in managing day-to-day expenses based on the volume of patients being served during the period under review. The most important line on these pages is the operating surplus/(loss) line since it indicates whether the hospital is operating at a profit or a loss. While all HealthTech managed hospitals are not-for-profit, it is still important to generate a surplus to reinvest in buildings, equipment and services in order to continue to provide state of the art, high quality services to the communities served. The non-operating section of these pages (donations, investment income, tax subsidies) may occasionally be significant, however these are items that generally are out of the control of management s day-to- day operations. All of the above items culminate in the Page 6

7 total net surplus/(loss) line that provides the reader with the total bottom line impact of the hospital s operations for the period under review. BALANCE SHEET: The balance sheet is composed of two pages. The first page is the assets, and the second is the liabilities and net assets. These two pages provide the reader with a snapshot of the cash, building and equipment and other assets the hospital has accumulated over the years compared to the debt that was incurred both on a short term and long term basis. The net asset number is the difference between the assets reported and the liabilities reported. The net asset number should always be increasing and the higher this number is, the stronger the financial strength of the hospital. When reviewing the balance sheet there are a couple of key lines to focus on in addition to the net asset line. The first line on the asset page, which is cash and cash equivalents, is always an important number to review. As with any business, this number provides an indication of the amount of cash available for the continued day-today operations. While this number may fluctuate slightly from month to month due to timing issues of cash receipts, days short term cash on hand is recommended. The days cash on hand related to the cash reported on the balance sheet can be seen in the graph on the executive summary. The next important line to review is the net patient accounts receivable. If accounts receivable is increasing, then the hospital s day-to-day cash flow is likely decreasing. If accounts receivable continue to increase and get older, the likelihood of collecting on those accounts is diminished. The third line item to be concerned about is the amount due to third party liability line and can be found on the liability page. This line represents amounts that the hospital has been paid by Medicare, Medicaid and other third party payers that the hospital will very likely need to repay. The offset to entries on this line is usually the contractual allowance line on the statement of operations. Therefore, the hospital s operating surplus can be positively or negatively impacted by changes noted on this line. While some changes will often occur on this line, the reader should be mindful of large, particularly if they are frequent, swings in this liability and request explanations for any noted changes. All of the other lines on the two balance sheet pages are also important and should be given at least a cursory review, but for the most part the month- to- month changes are generally not substantial. CASH FLOW STATEMENT: The cash flow statement is where the hospital s surplus or loss reported on an accrual basis on the statement of operations is converted to a cash basis. More simply put, did the operations for the period generate enough cash to make all required payments without having to dip into the hospital s cash reserves. The cash flow is reported for both the current month and fiscal year- to- date. The most important line on this statement is the Net Cash Provided by Operating Activities that is located about half way down the page. As the line implies, this is where the reader can tell if the period s day- to- day operating activities produced a sufficient amount of cash to pay the bills. The second half of the statement deals with some of the more extraordinary cash flow items that occur in any given period such as capital equipment purchases, transfers of funds to or from investment accounts, payments on long term debt or entering into additional long term debt arrangements. The bottom line on the cash flow statement for both the month and year-to-date should always agree with the cash and cash equivalent number reported on the first line of the asset page. Page 7

8 REVENUE CYCLE TRACKING REPORT: This is another page in the financial statement template that is unique to the HealthTech financial statement package. This page was originally called the accounts receivable tracking report. In 2010, a number of items were added pertaining to components of the revenue cycle other than accounts receivable prompting the name change and providing the reader with more information to assist in the explanation of changes in accounts receivable days. An achievable HealthTech target is provided for each of the revenue cycle components reported on this page. If a hospital is able to operate their revenue cycle within each of the provided targets, the reader can be assured that the hospital s accounts receivable days are within a day or two of the lowest possible level. DEBT COVENANT REPORT: The debt covenant report was one of two new schedules added to the HealthTech financial statement package in This report is especially important for Boards of Directors and Trustees when reviewing the financial statement package. This report lists all the covenants the hospital must maintain based on the agreements signed with the hospital s lenders. When reviewing this report, the reader can determine if the hospital is out of compliance or nearing non-compliance for any or all of the debt covenants. This is important as non-compliance can trigger a number of undesirable outcomes such as increased reporting requirements to the lenders, required notes to the audited financial statements, and the potential for the immediate repayment of the outstanding debt. PAYER MIX GRAPHS: This was the second report that was added to the 2013 financial statement package. The adoption of the Accountable Care Act (ACA) included the potential of expanding Medicaid coverage along with the establishment of insurance marketplaces to insure the previously uninsured population who are now required to have insurance. These changes will likely have an impact on the hospital s payer mix, and a change in payer mix will have an impact on the hospital s financial performance. During the implementation of the ACA, it will be important to review the changes to the payer mix as a change in payer mix will likely impact both the hospital s contractual allowance calculations as well as the reserve for bad debt write-offs. CAPITAL PURCHASE REPORT: This report was designed to provide the reader with an analysis of the capital purchases made during the year as compared with the capital purchases approved during the hospital s budgeting process. The importance of this schedule is that the purchase of capital equipment or the deferral of capital purchases can have a major impact on the hospital s cash flow. The reader can easily determine if cash flow has been negatively impacted by a number of capital purchases early in the fiscal year or if there will be a need for additional cash toward the end of the year if budgeted expenditures have been deferred. Page 8

9 CLINIC FINANCIAL PERFORMANCE: The inclusion of this schedule in the financial statement package is dependent on whether or not the hospital employs any primary or specialty care physicians. Many HealthTech managed hospitals have moved in the direction of employing more physicians, therefore this schedule has become increasingly important. The employment of physicians in a clinic setting is often a drain on the hospital s financial resources. This schedule provides the reader with an analysis of the amount of resources being expended in the employment of physicians, and whether there may be a shortfall in revenue to cover these expenses. This schedule goes one step further by showing the impact that the employed physicians have on the hospital s inpatient and outpatient revenues, and the overall impact to the hospital s operations if those employed physicians are not practicing in the community. VARIANCE ANALYSIS: The budget is only a planning tool that cannot anticipate all of the changes that will occur in the healthcare marketplace during the course of a fiscal year; it is only natural to expect some variances from budget. Large variances should be the exception rather than the rule. To this end, HealthTech has provided guidance to both management and to the financial statement reader regarding what level of variances should be questioned and explained on this page. HealthTech recommends that a variance in any given month that is in excess of $10,000 and also in excess of 10% of that line items expense should be explained. For a year-to-date basis, variances in excess of $30,000 and 5% of a line items expense should be explained. By utilizing these guidelines, material variances will be explained before being questioned and the reader will not be bogged down reading variance explanations for minor variances that are timing related or a function of minor operational changes. As part of the variance explanation management should also share the actions being taken in response to the significant variances. CONCLUSION The HealthTech financial statement template is an ever-changing document that is meant to provide the reader with the most pertinent information based on the ever-changing health care landscape. There is enough detail to keep an accounting professional satisfied as well as support good governance responsibilities. Hopefully this analysis will assist the many volunteer Board members who are not accounting professionals navigate the financial statement package in order to review the most pertinent items and be able to ask informed questions when necessary. HealthTech Management Services hopes that the information contained herein will be informative and helpful on industry topics. However, please note that this information is not intended to be definitive. HealthTech and its affiliates expressly disclaim any and all liability, whatsoever, for any such information and for any use made thereof. Recipients of this information should consult original source materials and qualified healthcare regulatory counsel for specific guidance in healthcare reimbursement and regulatory matters. Page 9