ACMPE Paper, October By: Timothy E. Krause, CPA, FACMPE

Transcription

1 ACMPE Paper, October 2007 By: Timothy E. Krause, CPA, FACMPE This professional paper manuscript is submitted in partial fulfillment of the requirements for election to Fellow status in the American College of Medical Practice Executives This manuscript was prepared as part of meeting various recognition criteria as set forth and may be changed from time to time by the American College of the Medical Practice Executives (ACMPE). The experiences, thought, ideas and opinions set forth are solely those of the author. They do not reflect any position on the part of ACMPE with respect to their completeness, correctness or accuracy of the paper s contents, for example, on points of law or accountancy in effect at the time of or subsequent to the date of paper completion Medical Group Management Association. All Rights Reserved.

2 Meaningful Financial Statements and Reports for the Medical Practice This exploratory professional paper is submitted in partial fulfillment of the requirements for election to the Fellow status in the American College of Medical Practice Executives. Introduction The basic financial statements as provided by the accounting profession, and used by almost every medical practice, do not provide a medical practice with the financial information necessary to make incisive and precise financial management decisions. While basic financial statements are important, it is critical that these financial statements be prepared in a format which takes into account the uniqueness of each medical practice. Furthermore, financial management reports, in addition to basic financial statements, are essential in order to manage the business of medical group practice effectively. These financial reports include reports on accounts receivable, collections, physician productivity, budgeting, etc. The healthcare industry is changing rapidly. Not only are reimbursements decreasing while costs are increasing, the business of healthcare, specifically with respect to the medical practice, increases in complexity every day. Physicians and practice administrators require accurate financial information in order to make data driven decisions. Objective This exploratory paper will provide an explanation of the basic financial statements. It will include illustrations of basic financial statements that are meaningful and relevant to the medical practice. This paper will also discuss and illustrate other financial reports that provide financial information necessary for the successful management of the medical practice. It will include research and examples of financial reports that provide physicians and practice administrators with information they want, need and understand. Included with this paper will be many financial reports, created from templates shared by administrators, who are currently using them. The creation of this paper has enabled sharing this information with others, and these illustrations and examples are of equal or greater importance than the narrative. The Basic Financial Statements Basic financial statements for any business are the Balance Sheet, the Income Statement, and the Statement of Cash Flows. The Balance Sheet can also be referred to as the Statement of Financial Condition, the Statement of Financial Position, or the Statement of Assets, Liabilities, and Owners Equity. The Income Statement is often referred to as the Statement of Operations, 1

3 the Statement of Profit and Loss (P & L), or the Statement of Revenues Collected and Expenses Paid. Balance Sheet (Exhibit 1) The Balance Sheet is often described as a snapshot of the company s financial position at a point in time. Balance Sheets list the company s assets, liabilities, and equity. Assets are anything of value that are owned by the company. Included in the category of assets are cash, accounts receivable, investments, furniture and fixtures, computers, equipment, deposits, etc. Liabilities are obligations to pay, or debts of the company, and are comprised of accounts payable, notes payable, lines of credit, payroll taxes due, retirement plan contributions due, etc. Equity is equal to invested capital plus accumulated earnings. In a corporation, invested capital is represented by common stock. In a partnership, invested capital is generally referred to as partners capital. Accumulated earnings are income of the company which have been retained in the practice and not distributed to owners. Equity is always equal to the company's assets less the company's liabilities and is the net worth of the company. The Balance Sheet is so named because it represents the following equation: 1 Assets = Liabilities + Owners Equity (Resources of (Amounts owed to (Capital provided The business) outside creditors) by owners) Income Statement (Exhibits 2 and 3) The Income Statement shows the income and expense of the company over a period of time, and shows how profitable the company has been. The Income Statement is usually for one month, one quarter, or one year, but can be for any period. Unlike the Balance Sheet, it is not a snapshot; rather it is more like a video. It shows the revenues earned, expenses paid and net income for a defined time period. Net income is an important measure of the company s performance since it represents the earnings generated (or loss incurred) for a given period of time. It is the all-inclusive bottom line that reflects the economic activity of the company. Statement of Cash Flows (Exhibit 4) Understanding a medical practice s cash flows may be more important than any other aspect of financial performance. 2 The Statement of Cash Flows reports the sources and uses of cash for a defined period using three separate major classifications. The first classification is operations which includes items that are on the Income Statement, such as revenue and operating expense. The next 2

4 classification is investing activities, which includes the purchase of property and equipment, the sale of property and equipment, investing in joint ventures or securities, and other similar transactions. The third classification is financing activities which includes debt borrowings and repayments, contributions or withdrawals of capital, and the payment of dividends or distributions to owners. Cash flow statements help to explain why profit or loss is not equal to the change in Cash balance. Exhibit 4 is a statement of cash flows prepared using the indirect method. It reconciles net income to the changes in cash. In this example, the net income for the year is $9,400, while the increase in cash was only $9,200. The next example (Exhibit 5) is a statement of cash flows using the direct method. In addition, it shows the changes in cash compared to the changes in taxable income. This statement of cash flows is particularly helpful in answering a common question from physicians, "How can we have taxable income if we don't have any money in the bank?" The results of the survey conducted indicate that the cash flow statement is a very important statement for many medical practices. It is important for purposes of explaining financial matters to physicians, for projecting cash flow requirements, for projecting taxable income, and for understanding the relationship of cash with other balance sheet items, and with income statement transactions. Supplementary Information The basic financial statements will very often include supplementary information. Supplementary information is data that supplements the financial information in the Balance Sheet, Income Statement, and Statement of Cash Flows. For example, the Income Statement might include a line item for all practice locations or all staff salaries. The supplementary information included with the financial statements might break down the staff salaries into categories for MA salaries, nurses salaries, front desk salaries, and back-office salaries. Supplementary information could also be provided to report revenue and expense by location, for ancillary services, profit centers, etc. Generally, the supplementary information provides additional detail to support and explain the other basic financial statements. Basis of Accounting Financial statements are prepared using a "basis of accounting". Generally, there are three methods used, which are referred to as the accrual basis, the cash basis, or the income tax basis. It is important for the creators, readers, and users of the financial statements to understand the basis (method) of accounting used in preparation of financial statements. The primary difference between the cash and accrual methods of accounting is when revenues and expenses are recorded. The Income tax method most resembles cash basis, and adopts some elements of the accrual method. 3

5 Practice founders must decide from inception which method to use depending on the legal form of the business, its volume, whether it extends credit to patients, and the tax requirements set forth by the Internal Revenue Service (IRS). It is possible to change accounting methods later, but the process can be complicated. Therefore it is important for small business owners to decide which method to use up front, based on what will be most suitable for their particular business. Accrual Basis Under the accrual basis of accounting, revenue is recorded when it is earned, regardless of when it is received. Patient revenue is recorded when bills are generated (either directly to the patient, or to the payer). Revenue for a medical directorship or hospital stipend is recorded for the time period covered by the corresponding contract, as the periods specified by the contract pass. Generally, under the accrual basis, revenue is recorded when services are rendered, when products are delivered, or as a result of the passage of time. Expenses are recorded when incurred, regardless of when paid. The expense can be incurred as a result of goods and services received by the company, or as a result of the passage of time. For example, the expense for office supplies is recorded based on the packing slip or invoice, when the supplies are received by the company. The expense for rent is recorded in the month to which the rent applies, i.e. as a result of the passage of time. Cash Basis With the cash basis of accounting, revenue is recorded when received. Likewise, expenses are not recorded until paid. Whether the cash disbursement for an expense is prior to the physical receipt of goods or services, or whether the disbursement is delinquent when paid, the expense is not reported until cash leaves the practice. Most small medical practices will prepare financial statements on the cash basis. 3 Income Tax Basis The income tax basis of accounting is based on the principles and rules for accounting for transactions under the Federal income tax laws. 4 In most cases, the income tax basis is very similar to the cash basis of accounting, but there are several transactions which are reported for tax purposes which are different than either the cash basis or accrual basis. The income tax basis departs from the cash basis in the following ways: The expense for retirement plan contributions is reported on the accrual basis as long as the contribution is made by the due date of the company's tax return. Even though the contribution is not made during the time period covered by the income statement, it can be recorded and shown as an expense. The expense for federal income taxes can be reported for the time period to which it applies, even though the taxes are paid in a subsequent period. Prepaid expenses for periods exceeding 12 months must be capitalized. 4

6 There are some other minor instances where income tax basis departs from the cash basis, which can be explained in more detail by a professional tax advisor. Basis of Accounting - Which is Best? The accrual basis of accounting provides the most accurate and correct financial information for an entity, from a professional accounting standpoint. It matches revenue and expense. It records revenue in the period that revenue is earned, and it records expenses during the period in which the expenses are incurred, or when goods or services are received. The financial statements prepared on the accrual basis of accounting properly reflect the financial condition and results of operation of the entity. Although the accrual basis of accounting results in the most correct financial statement, the cash basis of accounting has its place. There isn't necessarily a best method of accounting. Although the Certified Public Accountant (CPA) might argue that the accrual method is best, many physicians with small practices might argue that the accrual method is too complex and cumbersome and provides financial information that is irrelevant to managing a medical practice. Physicians from large multi-specialty practices might argue otherwise. Cash and income tax basis accounting is more easily understood for hurried physicians, and is easier to produce. Reporting revenue is particularly difficult using the accrual method. With medical services being billed to many insurance companies under many different contracts, or to patients whose ability pay is unknown, it is difficult to know exactly how much will be collected. For some payers it is also nearly impossible to know when revenue will be collected. The real answer is that one size doesn't fit all. The MGMA Cost Surveys for Single Specialty Practices and Multi-specialty Practices: 2006 Reports Based on 2005 Data reported the following data: MGMA Cost Survey: 2006 Reports Based on 2005 Data Number of Practices Reported Tax Reporting Accounting Method Multispecialty Single Specialty Total Percent Cash % Accrual % Total , % Internal Management Accounting Method Cash % Accrual % Total , % The survey results show that 76.6% of reporting practices use the cash basis for tax reporting and 72.1% of the reporting practices use the cash basis for internal management accounting. These 5

7 numbers are certainly significant and show that most practices use the cash basis of accounting to prepare financial statements. Data included in the survey are not by type of practice or by size of practice. Therefore it is impossible to conclude from the survey results that very large practices or practices in a particular specialty use the accrual method rather than the cash method. However, large practices that need audited financial statements for banking purposes must use the accrual method. Likewise, large practices that have joint ventures with hospitals may need to use the accrual method. This paper will use the cash method of accounting to illustrate financial statements and financial information. Although the cash method of accounting will be used for discussion purposes, the concepts and conclusions will be just as meaningful and relevant to those using the income tax or accrual basis of accounting. Whichever method of accounting is used, designing financial statements to provide meaningful information requires the same approach. Accountants Reports When financial statements are prepared by CPA s, the financial statements must be accompanied by an Accountants Report. The report indicates the extent of work performed by the CPA in conjunction with the preparation of the financial statement, and will clearly indicate the level of attestation of the CPA. The financial statements can be categorized as three primary types: Audited, Reviewed, or Compiled. Audited Financial Statements Audited financial statements have been examined by CPAs following a prescribed set of standards, referred to as generally accepted auditing standards (GAAS). These standards have been determined by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA). A copy of an Audit Report is included in Exhibit 17. This is the highest level of attestation by a CPA. It indicates that the CPA has audited financial statements and believes that they are relevant, accurate, complete, and fairly represent the financial position and results of operation of the company. 5 Reviewed Financial Statements In a reviewed financial statement, the CPA provides limited assurance with respect to the fairness of the financial statement. A review is significantly less in scope than an audit. It in a review, the CPA performs two procedures with respect to the financial statements. First, the CPA makes inquiries of company personnel with respect to the use of accounting principles practices and procedures, as they relate to the preparation of the financial statements. Secondly, the CPA performs analytical procedures comparing financial data with prior years, with budgets and forecasts, and with available benchmarks. A copy of a Review Report is included in Exhibit

8 Compiled Financial Statements When a CPA prepares compiled financial statements, the CPA provides no assurance that the financial statements are fairly presented. The CPA compiles the financial statements based on financial information provided by the company. Although the CPA provides no assurance, the CPA must not report any financial information known to be incorrect. In the copy of a Compilation Report is included in Exhibit MGMA Information Center Research Research and exploratory efforts began at the MGMA Information Center. In June 2006, Craig Wiberg, Information Center Systems Manager, was a terrific resource on the availability of educational materials on medical practice financial statements and reports within the center. It was apparent at that time that there were not abundant resources of information available on the subject, even though information was frequently requested by members. Mr. Wiberg remarked that a common question has been How do I accurately present our financial statements and reports to our physicians so that they can understand them and use them to make important financial decisions? Two resources were utilized for this paper as a result of that investigation: Financial Management for Medical Groups. Medical Group Management Association, by Ernest Pavlock, and Financial Reports, Medical Group Management Information Exchange, A networking and information sharing tool, a product of information contributed by MGMA members, and compiled by MGMA. The MGMA website listed several on-line courses available to members: Key Financial Performance Indicators Cash Flow in the Practice: Understanding, Managing, Predicting It Creating Meaningful Reports for Physicians These courses appeared to have value for members, but neither of these courses directly addressed the broader subject of comprehensive and meaningful financial statements and reports for medical practices. Therefore, it was concluded that there is still room for research and education on this subject. Internet Search A search on the Internet revealed a wealth of information on financial statements, but little specifically for medical practices. One book was found, which did provide some useful information, but very little in the way of financial statement and report design for medical practices. The title of that book was Physicians Guide to Financial Statements. 7

9 Survey of Medical Practices On July 21, 2006, 162 personal letters with an attached 1-page questionnaire (see Exhibit 18) were mailed to all Colorado Medical Group Management Association (CMGMA) members who were identified as practice administrators. Recipients were asked to return the questionnaire by August 4, 2006, and to include any examples of financial reports that were particularly useful in their practice. A total of 64 questionnaires were returned along with 22 examples of financial reports attached. This represents a 35.2% response rate. Many of these reports have been included as sample reports in the Exhibit Section of this paper. ACMPE Case Studies and Professional Papers A search was conducted on the MGMA website for case studies and professional papers submitted to the American College of Medical Practice Executives using the key words financial statements. The search on resulted in a list of 312 papers. Further review of those five papers revealed that while those publications contained excellent content, and mentioned financial statements they did not appear to further the body of knowledge with respect to basic information. Because this was a self-selected sample there may be bias in favor of those members who are more experienced with financial reports, and /or personally acquainted with the author. However, because the response rate is over one-third of the CMGMA member administrators, the results can be interpreted as fairly reliable and representative of the membership. Some respondents opted to provide multiple answers to the questions, so when reviewing the tables the reader will see more than 64 answers to questions. There was one significant correlation reported of Practice size by FTE physicians with Physicians review basic practice financial statements. For the 64 responding practices, as size of practice increases, the regularity of physician review of financial statements increases as well. Practices ranged in size from one to 92 FTE physicians. Over 75% of the practices generate basic financial statements monthly, with 16% generating them quarterly. Half of the 64 practices reported that all the physicians review basic financial statements of the practice, while in 26 of the practices some of the physicians review, and in four practices none of the physicians review them. Table 4 shows that 38 percent of respondents rated the physicians as excellent in their ability to understand basic financial statements, while 55 percent were rated as average, and eight percent were rated as poor. Supplemental management reports that are provided regularly to physicians are listed in frequency order in Table 5. The top two most utilized reports are Production and Accounts 8

10 Receivable. Also, in Table 6, Reports that Physicians Understand and Value, respondents listed Production reports even more frequently than basic financial reports as being understood and valued by physicians, 34 and 30 respectively. Thirty-four practices reported benchmarking with the MGMA survey reports, while 25 practices reported never benchmarking with MGMA survey reports. The most frequently listed reason for not using the MGMA reports was listed as benchmarking is not available in my specialty. Of those 25, seven practices listed their specialty associations as being their best sources of benchmarking information. A total of 74 resources were listed as options for learning more about basic financial statements. Practice CPA was listed most frequently with 40 times, the MGMA (information center) was listed 22 times. So, even if practices are not able to benchmark directly with MGMA survey reports, they continue to use the information center for knowledge of financial statements. Table 1 Size of Practice by Number of FTE Physicians Frequency Percent 4 or under to to or more Missing 2 3 Total Table 2 Frequency that Practice Generates Basic Financial Statements Frequency Percent Monthly Quarterly Annually 3 5 Never 1 2 When requested by physicians 1 2 Total

11 Table 3 Physicians Review Basic Practice Financial Statements by FTE Physician Practice Size All Physicians Some Physicians No Physicians 4 or under to to or more Total Table 4 Physicians Review Basic Practice Financial Statements Frequency Percent All No 4 6 Some Total Table 5 Physicians Overall Ability to Understand Basic Financials Frequency Percent Excellent Average Poor 5 8 Total

12 Table 6 Management Reports that are Provided to Physicians Regularly Production 52 Accounts receivable 42 Flash 11 Payer mix 4 Coding profile by physician 4 Payer contract performance 3 Referred patients 3 Budget compared with actual 3 Financial ratios with industry standard 2 New patients 2 Charges to collection ratio 2 Total* 128 *More than one report may have been listed by practices Table 7 Reports that the Physicians Understand and Value Production 34 Basic financials 30 Flash reports 7 Accounts receivable 5 Cash flow 2 Budget 1 E & M coding 1 New patient 1 Three month comparison 1 Graphs of financials 1 Income allocation 1 Individual income statements, 1 Not sure 1 Total* 86 *More than one report may have been listed by practices 11

13 Table 8 Frequency of Benchmarking with MGMA Reports Frequency Percent Monthly 8 13 Quarterly 3 5 Biannually 3 5 Annually Every 2 years 1 2 Never Missing 5 6 Total Table 9 Resources for Learning More about Financial Statements Practice CPA 40 MGMA Information Center 22 Internet 5 Bookstore 2 Am already expert 2 Covered in college education 2 Not sure 1 CFO 1 Professional association conferences 1 Total* 76 *More than one resource may have been listed by practices 12

14 Basic Financial Statements for the Medical Practice Designing a Meaningful Financial Statement The basic financial statements generated for most medical practices are inadequate unless they are designed specifically for the particular medical practice. If financial statements simply report revenue and expense, without being designed to report data relevant to the uniqueness of the practice, the resulting data can be quantitatively correct but qualitatively deficient. For example, the Income Statement in Exhibit 6 is accurate and correct in every respect. However, it tells you very little about the practice. How much were the physicians salaries? Was all the revenue from individual physician production? Was there any revenue from other sources? Did the practice employ any nonphysician providers? What was the overhead percentage? There are many unanswered questions inherent in this income statement. Another sample Income Statement (Exhibit 3) is designed to report the results of operations for the same practice as in Exhibit 6. This statement was customized through collaboration with the physicians, administrator and CPA for the practice. This income statement was designed to report revenue and expense in sufficient detail organized consistent with MGMA benchmarks. Specifically, it breaks out medical revenue between medical services and vaccinations and immunizations, it breaks out support staff compensation into logical classifications, it breaks out non-physician provider cost, it breaks out physician cost, and it reports operating expenses and total overhead in a meaningful manner. A well designed income statement will provide financial information that is relevant, significant, and useful in making management decisions. The financial statement will provide data that is representative of the medical practice as a whole. In designing a meaningful financial statement for a medical practice, that is truly useful, a determination must be made as to what financial information is critical for the management of the practice. If practice decision makers state that the financial statements are not useful, then it is imperative that they be reformatted in a style that is useful. The financial statements should be designed to provide relevant, easy to understand information. Although the income statement in Exhibit 3 provides useful financial data, it still does not provide all of the financial information needed to properly manage the practice. Supplementary financial reports can provide financial data in much greater detail than the basic financial statements. Revenue can be reported by type of income, (medical services, ancillary income, medical directorships, hospital stipends, etc.), by office location, by provider, by payer, etc. The Report of Supplementary Financial Information in Exhibit 7 is an illustration of additional data that can be reported for the same pediatric practice. The Supplementary Financial Information shows that this practice has two locations. One of the locations is doing very well, and one is struggling. However, the practice administrator knows that one location will struggle since it has been in operation for less than two years. 13

15 Supplemental Financial Information can be used to drill down into financial information contained in the Basic Financial Statement. For example, additional detail can be generated to report the following kinds of information: Profit or loss by location Profit or loss by profit center Profit or loss in from ancillary services Collections by physician Collections by type of revenue And so on... Monthly Financial Statements Financial statements should be prepared timely on a monthly basis. The word timely is the key concept here. If a financial statement for June 30, 2007 is prepared and available for review on November 15, 2007, it is of limited value for purposes of making management decisions. It simply reports what has happened historically. Lack of timeliness will limit its use in being an effective management tool. Timely financial statements allow administrators and physicians to make management decisions which can positively affect the bottom line. For example, if expenses are out of line when compared to benchmarks, adjustments, and corrective action can be taken immediately. It is also very helpful to present monthly data side by side on a comparative monthly and yearly basis. Presenting income statement information in this format is generally referred to as a Trend Report. Exhibit 6 shows comparative income statement information on a monthly basis. Seasonal trends, for example, can be established and anticipated. In the example pediatric practice mentioned previously, revenue is significantly higher January through April, than it is from May through August. When expenses are reviewed on a month-to-month basis, it is easy to identify exceptions as they occur. For example, if medical supplies are unreasonably high for a particular month, a review can be made of medical supply purchases to determine if there is a problem, or if greater patient volume increased the supply requirements. Annual Financial Statements The preparation of an annual Financial Statement is essential. Normally, an annual financial statement is more accurate and comprehensive than the monthly financial statements. On an annual basis, certain accounts are reviewed and adjusted to make sure that the data are accurate and consistent with information reported on a practice s income tax returns. For a small to midsize practice, for example, the following adjustments might be made on an annual basis, if they were not be made on a monthly basis: 14

16 Depreciation expense is calculated and posted Profit-sharing and pension plan expenses are posted Interest expense for the year is posted Notes payable are adjusted to actual Fixed asset purchases are verified Even though every effort should be made on a monthly basis to prepare and present accurate financial statements, every account should be diligently reviewed and verified on an annual basis to ensure accuracy. When the practice prepares financial statements internally, it is considered best practices for the annual financial statements to be prepared independently by the CPA firm representing the practice. The annual financial statement may be Audited, Reviewed, or Compiled. Comparative annual financial statements that include the previous year prove to be valuable in summarizing financial changes. In the annual compiled financial statement shown in Exhibit 2 the revenues have increased by $362,000 and Net Income has increased a loss of $3,300 to a profit of $9,400. Other changes on a line item basis can also be observed. Benchmarking with MGMA Surveys Annual and monthly financial statements can be compared with outside benchmarks. MGMA is recognized as the best source for medical practice benchmarks, and the administrator will use these resources as well as other external sources. The Cost Survey and the Physician Compensation and Production Survey have stood the test of time. Including other benchmarking resources such as specialty specific associations (BONES for orthopaedic surgery or MedAxiom for cardiology) contributes reliability and credibility to the benchmarking process. If the practice financial statements provide information using the same terminology and definitions, comparisons can be readily made using external benchmarks. Because medical practices come in all sizes, specialties, and shapes, the benchmarking data from MGMA are published many ways on a percentage basis, a per FTE physician basis, or per FTE provider basis, and where sufficient data are available, on a specialty basis. Benchmarking Financial Indicators Included as Exhibit 8 is an analysis showing various financial indicators from an Anesthesia Practice compared with benchmarks taken from the MGMA Cost Survey and the Physician Compensation and Production Survey 2006 Reports Based on 2005 Data. As can be seen from this example, the Anesthesia Practice has benchmarked its practice on any per FTE basis (except for payer mix). By using MGMA benchmarks on a per FTE basis, it is possible to compare practices of any size with relevant and comparable data. 15

17 Benchmarking Revenues and Expenses As seen in Exhibit 9, we can compare revenue, physicians compensation, staff expenses, and overhead. In this example, the expense for support staff seems to be too high when compared with MGMA benchmarks and warrants further examination. One tactic to determine underlying reasons would be to investigate individual staff compensation, and benchmark with the statelevel MGMA compensation survey report. The Colorado Medical Group Management Association (CMGMA) currently publishes an annual report of healthcare staff salaries, as well as physician salaries that provide state-level information. The administrator in this practice could also break down staff compensation into the categories used by MGMA - which include general administrative, receptionists, medical assistance, registered nurses, etc. By benchmarking at a more detailed level, the administrator could determine if there were one group of employees where overstaffing or overpayment was occurring. Benchmarking in Flash Reports Benchmarking in Flash Reports is also a very powerful tool. In Dashboard Report illustrated in Exhibit 15, accounts receivable data is compared with MGMA benchmarks. In the Flash Report illustrated in Exhibit 14, total overhead, as a percentage, is compared with MGMA benchmarks. Management Reports Management Reports which contain financial data not detailed in Basic Financial Statements are necessary and valuable for ongoing monitoring of the practice. These reports supply comprehensive financial information behind the Basic Financial Statements. Included are reports on clinical activities, accounts receivable and collections, physician productivity, physician charges, charges for ancillary services, compensation by physician, trend reports, payer mix reports etc. 8 These reports can be even more important, than the basic financial statements for quick decision making. If a medical practice is underperforming financially, the basic financial statements will show only revenue and expense, and assets and liabilities the symptoms. The practice administrator can observe that revenue is down compared with prior years. Likewise, the administrator can observe that expenses are higher. If revenue is down and expenses are higher, the net income of the practice will obviously be down. What is not visible in the Basic Financial Statements is, Why is revenue down?, or Why are expenses up? The management reports must act as tests to discover the real cause of the disease. MGMA reports that 92.28% of practices surveyed provided physicians with financial and management reports in addition to Basic Financial Statements. 9 Physician Productivity Tests run to examine revenue would be physician productivity and charge reports. The productivity reports might be in terms of patient visits, patient consults, RVUs, or some other 16

18 indicator. Exhibit 10 shows a management productivity report by FTE physician based on monthly patient visits for the current year and the prior year This report could be enhanced by adding other indicators, such as number of cases, RVUs, etc. By reviewing productivity reports, the administrator can determine if lower net income is the result of reduced productivity. Charges and Collections If overall productivity seems to be consistent with prior years, then there should be further investigation into why revenue is down. Management Reports for charges and collections could provide an answer, along with reviewing payer contracts. Exhibit 11 shows charges and collections for the practice in total. These reports should include data for at least two years. If there are significant variations from month to month, or year to year, reports can also be prepared showing the same information on a physician by physician basis. Accounts Receivable In the table in Exhibit 12, it is obvious that there is a problem with the billing and collection cycle. Although charges are higher than in the prior year, collections are down, the collections rate is down, and accounts receivable are up. At this point, further analysis is needed to determine why accounts receivable are in an upward trend. Perhaps physicians are submitting late charges; possibly the billing staff has experienced recent turnover and is not operating as efficiently as in the past; maybe there is a significant change in payer mix, or lower or incorrect reimbursement. The appropriate use of management reports will help the administrator answer the question. The bottom line in medical practices using cash basis accounting is revenue available after expenses for physician compensation. Management reports can assist in discovering pitfalls in advance of the printing of the bottom line. The design of management compensation reports should be consistent with the physician compensation method used in the practice. If compensation is divided equally, the management reports can be aligned with the practice as a whole. Physician Compensation A productivity-based compensation report will include data that are an integral part of the compensation formula. In the example in Exhibit 13 each physician is responsible for his/her own compensation and fringe benefits. The report shows a four physician practice where each physician is paid a year-end bonus based on their collections, less their share of the general overhead, less their salaries and direct physician expenses. 10 Compensation reports can be an effective feedback tool to individual physicians when compared on a year-to-year basis and also compared to MGMA benchmarks. These comparisons allow the physician to self evaluate performance. 17

19 Budgets Although most practices do not provide budget reports to their physicians regularly (see Table 6 on Page 18), it can be a very powerful and helpful report. Enclosed as Exhibit 16 is a sample budget report where the practice compares actual year to date and monthly results of operations to the budget. By comparing actual to budget, the practice is able to periodically develop a variance analysis, which is used to investigate significant differences between budget and actual. It allows the practice to appropriately direct its attention to exceptions and solutions. The Flash Report A Flash Report (Dashboard Report) can provide a quick summary of key points in an easy to understand format. The Flash Report is ideally a single page report presenting summarized financial data and Top and Bottom Line Indicators. A Bottom Line Indicator is a key piece of financial data that correlates directly with the financial success of a practice. For example, Bottom Line Indicators could include patient encounters, collection ratios, days in accounts receivable, RVU s, number of procedures or cases, revenue per unit (RVU or ASA), etc. Bottom Line Indicators are most meaningful when compared with prior years, or MGMA benchmarks. The Flash Report often is the favorite report of the physician. The physician can look at a one page summary and quickly take the pulse of the practice. Depending on what s contained in the Flash Report, he may know the amount of cash in the bank, the accounts receivable balance, the amount owed to the bank, days in Accounts Receivable, number of encounters, net income for the period, and many other things. Included as Exhibits 14 and 15 are Flash Reports for a pediatric practice and an anesthesiology practice. In both cases, the pulse of the practice can be quickly determined by reviewing these one page reports. Often, the Flash Report includes charts and graphs. For those who are more visually oriented, these charts and graphs can make financial data clearer. Flash Report Pediatric Group This Flash Report (Exhibit 14) includes information on physician compensation, cash balances, notes payable, accounts receivable, production, collections, and summarized financial statements for two years. In addition, it includes Bottom Line indicators which have been determined by the practice to be the most important indicators of financial success. Those indicators are: 1) ambulatory encounters and 2) collections per encounter. The financial condition of this practice is summarized very concisely by this report. 18

20 Flash Report - Anesthesia Group The Dashboard Report (Exhibit 15) includes information with respect to physician compensation, accounts receivable, productivity, and summarized financial information for two years. It includes Bottom Line indicators which are ASA units and revenue per ASA unit. For purposes of analyzing productivity, the anesthesiologist looks to ASA units, since that is the basis on which payment is rendered. For purposes of evaluating revenue, the anesthesiologist looks to revenue per unit has the key financial indicator. This report very adequately reports information on ASA units, both for the month and year to date. It also reports revenue and expense on a per unit basis. In addition, accounts receivable performance is compared with MGMA benchmarks. Bottom Line Indicators Bottom Line Indicators are key financial data that are critical indicators of financial results. These financial indicators are so critical that by themselves, they can reveal financial success. There are many different types of data and ratios that can be determined to be Bottom Line Indicators by physicians in practice administrators. Following are common indicators which could be Bottom Line Indicators: Ambulatory encounters New patients New OB patients Patient encounter hours Patients per day RVU s Procedures ASA units Reimbursement rates Overhead percentage Revenue per unit (RVU or ASA) The OB GYN Physician will use new OB patient count as a critical indicator. The Cardiac Surgeon will focus on the number of hearts. The Anesthesiologist will be keenly aware of units and revenue per unit. Each specialty in medical practice will have its own unique and important Bottom Line Indicators. Conclusion and Summary Most medical practices prepare and use Basic Financial Statements on a regular basis. These financial statements are understood by some, but not all physicians. To adequately take advantage of the value of financial statements, it is important that physicians and administrators have an above average understanding of the balance sheet, income statement, and the statement of cash flows. It is also important to understand the basis of accounting being used, and the type 19

21 of Accountants Report attached to the financial statement (if prepared by a CPA). To be of maximum value to the practice, Basic Financial Statements should be designed to provide financial information which is relevant and unique to the practice. The user of the financial statement should determine what data is necessary to adequately manage the practice and make sound financial decisions. The Basic Financial Statements should be designed to be meaningful for the practice. Often, the Basic Financial Statements will not include all of the financial information necessary. As a result, additional financial and management reports need to be generated. These reports include financial data with respect to financial indicators such as collections, charges, and counters, compensation, accounts receivable, budgets, etc. As in the case of Basic Financial Statements, these reports should be designed to provide data needed by the physicians and the practice administrator. Flash Reports can be used to combine the best of Basic Financial Statements and other financial and management reports. By summarizing key financial data from the financial statements, and key financial indicators from the management reports, it is possible to report a tremendous amount of information on one page. Flash Reports can be used to take the pulse of the practice and know very quickly how healthy the practice is. Finally, meaningful financial statements and management reports should be designed in such a way that the financial data can be compared with internal and external benchmarks. It is very important in evaluating the financial position and results of operation of a medical practice that the data can be compared with industry averages (e.g. MGMA survey data). 1 Reading and Understanding Financial Statements. Altschuler, Melvoin and Glasser LLP. 2005:3. 2 Zeller, Thomas L., PhD, CPA, Stanko, Brian B., PhD, CPA, Senagore, MD, MBA, FACS. A Physician s Guide to Financial Statements. American College of Physician Executive., 2002:49. 3 Zeller, Thomas L., PhD,CPA, Stanko, Brian B., PhD, CPA, Senagore, MD., MBA, FACS. A Physician s Guide to Financial Statements. American College of Physician Executives. 2002:18. 4 Ramos, Michael J., CPA Preparing and Reporting on Cash-and Tax-Basis Financial Statements. American Institute of Certified Public Accountant., 1998:20. 5 Pavlock, Ernest J., PhD, CPA. Financial Management for Medical Groups. Medical Group Management Association. 2000:77. 6 Pavlock, Ernest J., PhD, CPA. Financial Management for Medical Groups. Medical Group Management Association. 2000:79. 7 Pavlock, Ernest J., PhD, CPA. Financial Management for Medical Groups. Medical Group Management Association. 2000:79. 8 Tinsley, Reed, CPA. Medical Practice Management Handbook for CPAs, Policy Guide to Accounting and Tax Issues, Daily Operations, and Physicians Contracts. Harcourt Brace Professional Publishing. 1996:

22 9 Financial Reports, Medical Group Management Information Exchange, A networking and information sharing tool, Medical Group Management Association. 2003:1. 10 Johnson, Bruce A., JD, MPA, Keegan, Deborah Walker, PhD, FACMPE. Physicians Compensation Plans. 2006:

23 Independent Audit Report We have audited the accompanying balance sheets of XYZ Company as of December 31, 2006, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 2006, and the results of its operations and its cash flows for the year then ended in conformity with accounting principals generally accepted in the United States of America. Review Report We have reviewed the accompanying balance sheet of XYZ Company (a corporation) as of December 31, 2006, and the related statements of income and retained earnings and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of XYZ Company. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. Compilation Report We have compiled the accompanying balance sheet of XYZ Company (a corporation) as of December 31, 2006, and the related statements of income and retained earnings and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. Exhibit 17