| Every business has its own special terminology, but | | | | monies due at the time of service, documenting the |
| many financial terms are the same across all | | | | medical service provided, translating the service into |
| businesses. Here are some basic words and their | | | | ICD9 and CPT codes, filing the claim and collecting |
| definitions as they relate to healthcare financial | | | | the contracted amount from the payer. |
| management. | | | | 9. Equipment lease. A contract to purchase or rent |
| 1. Cash Basis Accounting. This was a question on a | | | | equipment and/or purchase service over a period of |
| management test I took a long time ago! In this | | | | time. The monthly cost includes the purchase price |
| method when you pay a bill it is accounted for and | | | | and interest and although the cost over the life of |
| when you receive payment, it is accounted for. Your | | | | the lease is significantly more, it allows the practice to |
| receivables are recorded when you make deposits | | | | avoid a significant cash investment all at one time. |
| and your payables are recorded when you generate | | | | 10. Capital expenses. The purchase of a piece of |
| your payments online or by checks. Most | | | | equipment, furniture or sometimes software (usually |
| physician-owned practices use the cash method of | | | | $500 or more) that will be expensed through |
| accounting, give the doctors a draw against their | | | | depreciation. A capital budget is one that includes all |
| earnings, then distribute any additional earnings on a | | | | large expenditures the practice anticipates making |
| quarterly basis. To smooth out expenses, any bills | | | | during the year. |
| that are quarterly (malpractice sometimes is) or | | | | 11. Operating expenses. Expenses that occur in |
| annual (profit-sharing usually is), are accounted for to | | | | operating a business, for example employee salaries, |
| make sure money is not distributed prematurely. | | | | benefits, rents, utilities and marketing costs. An |
| 2. Accrual Accounting. In the accrual method, when | | | | operating budget is one that includes all expenses |
| you receive a bill, it is accounted for, and when you | | | | incurred in the daily running of the business. |
| bill someone, it is accounted for at that time instead | | | | 12. Revenue Budget. A budget that estimates the |
| of when you are paid. Your receivables are recorded | | | | revenue the practice expects to collect based on |
| when you charge the patient and your payables are | | | | physician and ancillary productivity and applying the |
| recorded when you receive a bill. (I've never worked | | | | previous year's average collection percentage to the |
| in a practice that used this method of accounting.) | | | | anticipated charges. |
| 3. Allocation. The process of deciding how each | | | | 13. Benchmarks or Key Indicators. Indicators such as |
| expense should be attributed, whether to the | | | | cost per RVU (relative value unit), cost per case in |
| practice at large or to an individual physician. For | | | | surgery, or days in A/R (accounts receivable) allow |
| example, individual physicians may be allocated | | | | practices to compare their performance to the |
| expenses for specific staff, or allocated overhead for | | | | performance of successful practices. |
| resources that only they use. | | | | 14. Return on investment (ROI). A financial ratio |
| 4. Amortized expenses. The costs for assets such as | | | | measuring the cash return from an investment |
| medical equipment and computers, which are | | | | relative to its cost. You may calculate the ROI on an |
| depreciated (expensed) over time to reflect their | | | | automated appointment reminder system and |
| usable life. | | | | calculate the cost of the system versus the |
| 5. Cost/benefit analysis. A form of analysis that | | | | reduction in no-show appointments over several |
| evaluates whether, over a given time frame, the | | | | years. |
| benefits of the new investment, or the new business | | | | 15. Time value of money. The principle that a dollar |
| opportunity, outweigh the associated costs. This | | | | received today is worth more than a dollar received |
| could be an analysis for a new lab machine, or a new | | | | at a given point in the future. Even without the |
| satellite office. | | | | effects of inflation, the dollar received today would |
| 6. Gross Collection Ratio. The total collections divided | | | | be worth more because it could be invested |
| by the total charges gives a gross collection ratio, but | | | | immediately, thereby earning additional revenue. This |
| this number usually is not meaningful as most | | | | is important in collections, as getting a partial payment |
| practices make significant adjustments for contractual | | | | from a patient today may have more value than |
| rates with payers. | | | | getting a full payment from a patient in 2 years. |
| 7. Net Collections Ratio. The total collections divided | | | | 16. Variable Costs. Costs/expenses that are incurred |
| by the charges less contractual write-offs gives a net | | | | in relation to providing services to patients. Examples |
| collection ratio. The number should be meaningful, and | | | | include the cost of medical consumables, patient |
| ideally is not decreasing in this high-deductible, medical | | | | education materials and merchant services fees for |
| bankruptcy, high-unemployment economy. Collections | | | | taking credit cards. As the volume of patients |
| ratios are the least useful when used for a monthly | | | | increases, the expenses increase. |
| analysis, and most useful when used to evaluate | | | | 17. Fixed Costs. Costs/expenses that are incurred |
| charges and collections over a year or more. | | | | regularly regardless of patient volumes. Examples |
| 8. Revenue Cycle. The process of collecting insurance | | | | include rent, utilities, and liability insurance. |
| and billing information from the patient, collecting any | | | | |