Speaker 1: Welcome to Chapter 11, Healthcare Finance and Budgeting. In this chapter, we're going to discuss sources of healthcare funding, we're going to discuss how insurance works, explain the importance of public insurance programs, identify specific types of budgets, and illustrate managers' use of budgets in the planning process, and explain the use of budgets as a control mechanism. The components that we're going to start out with are insurance. With that, there are subcomponents of commercial insurance, public insurance of Medicare and Medicaid, and exchange insurances from the ACA exchanges. Health insurance is essentially a mechanism to spread the risk of illness or injury occurring from any one person to a group of people. So when a person has a serious injury or illness, the cost can be so high that a single person cannot afford them. If that individual has insurance, however, the premiums paid by all members of the group managed by the insurance company will defray a significant percentage of the cost. Thus, employers, employees, and individuals pay a premium that is a contribution to a risk pool from which the cost associated with the insurance illness or injury will be paid. So employers, employees, and individuals pay the premiums. The amount of the premium will vary by level of risk. For example, health insurance premiums for coal miners will be higher than health insurance for office workers at a university because the risk of illness befalling coal miners is much higher compared to office workers who are not exposed to the elements associated with a coal mine. So the function of the insurance company is to assess the risk each person brings to the pool. The basic concept is that the insured expects their cost to be paid in total or in part by the funds deposited in the risk pool by others in the form of premium payments. So everyone paying premiums into the pool expects that when needed, their insurance will pay the costs associated with their health care. The insurance company not only collects premiums and administers payments to providers, but it also sets the rules about what is or is not a covered expense. In addition, the company invests premium dollars to provide an additional source of funds. Covered services are usually the subject of a negotiation between the employer and the insurance company and often an employee union where those exist. Because the employer is contributing the premium payment on behalf of the employee, it has significant influence on the final structure of the insurance coverage. In most cases, the employees are responsible for paying a portion of the cost for themselves and for their families in the form of a copayment or a copay and through meeting a deductible limit. Increasingly, employers are shifting the cost of insurance to employees because of the upward cost spiral in recent years. This shift takes the form of higher copays, higher deductibles, and perhaps still higher deductibles for family members of the employee. Large employers sometimes offer several plans. Sometimes they self-insure and contract with the insurance company to also administer the plan. Many of the same private insurance principles apply to public insurance. There are, however, several differences, and among the public insurance programs there are also differences. There are several parts of Medicare, for instance. For the sake of brevity and to stay within the scope, the focus here will be on Parts A and B. Part A, Medicare, covers hospitalization only. Payroll taxes levied on both employees and employers by the federal government provide the funding for Part A. It is for everyone who is older than age 65. Whether retired or not, and whether an individual wants coverage or not, enrollment in Medicare Part A is mandatory for everyone 65 and older. The tax revenues paid by employers and employees go into the Medicare Trust Fund, which then pays providers for services covered by Part A. An interesting side note to consider as you study this is this is dependent on the number of workers compared to the number of retirees that are 65 and older, or the number of people who are 65 and older. So as our population continues to age, there are less and less younger people in the workforce that are working for the employer and the employees to contribute to the Medicare Trust Fund. You can see that that is going to get upside down relatively quick with the rapid retirement and aging of the baby boomer population. Part B of Medicare is for ambulatory services such as physician office visits, and this is funded much like traditional insurance in which the beneficiary pays a premium. Part B is not mandatory, but most people enroll in Part B when they retire. The premiums paid by the retiree are subsidized by appropriations from the federal government. Appropriations from the federal government means it is funded by taxes collected from the citizens. The premiums paid by the retiree are subsidized by appropriations from the federal government or from the taxpayer, and those funds go into a separate part of the Medicare Trust Fund to pay providers for services covered by Part B. So for Medicare Parts A and B, special tax revenues, the payroll tax for Medicare Part A, general fund revenues, which is the federal subsidy for Part B, and the premiums paid by the enrollees for Part B all fund a risk pool from which providers are paid for covered services just like private insurance. Medicaid is somewhat different because it is an entitlement program intended for people whose income falls below certain levels. The program is also different because it is jointly funded by the federal government and the state. The individual states administer the program and it's subject to broad policy parameters that are set out by the federal government. There is no trust fund per se. The program is limited by appropriations of money from both the federal government and the respective state government. Thus, when state governments file the fiscal pressure, they sometimes reduce how much providers are paid or reduce the number of eligible beneficiaries to keep expenditures within limits. It's a fancy way of saying the rationing pair. To some degree, individual eligibility services covered and amounts paid to providers vary from state to state. Obviously, this is fraught with political controversy, but the point here is that this program is a bit different from the risk pool concept associated with conventional insurance. The elements of budgeting basics include organizational purpose, organizational goals, goal timetable, and focus of staff and energy. So the organizational purpose, what is the mission of the organization? Organizational goals, what are the future directed tasks to be completed? And then what is the timetable? When do you want the goals to be accomplished? What is the timeline? And then where the organization wants the staff to focus its time and energy involves asking the question, what is the priority ranking of the goals? An understanding of revenues and expenses allows managers to help employees meet organizational goals and fulfill the organization's mission. Knowledge of budgets and what they are, what they're used for, and how to develop and defend them is key for health care managers. If managers are well-informed about the cost of running a department and they know what is being asked of their department, they are better able to deliver a plan of action that responds to the who, what, when, where, and how. Expenses are costs associated with services provided or overhead costs not directly related to generating revenue. There are two primary differences between not-for-profit and for-profit hospitals. First, not-for-profit hospitals are tax exempt, which means they do not pay federal or state income tax or local property taxes. In exchange for those exemptions, not-for-profit hospitals must demonstrate a community benefit, which is to say they must demonstrate they provide a positive value to the community in the form of charity care, community education, and support for other community service agencies. The second difference, and this one is more nuanced, is that not-for-profit hospitals reinvest revenue in excessive expenses in the services provided by the organization. Now this can sometimes be difficult to distinguish from the habits of for-profit hospitals, which use profits to grow their business. For-profit hospitals pay taxes, federal and state income taxes, as well as local property tax, and as a result they are under no legal obligation to provide community benefits such as community health education or support for community social service agencies. However, while they are not legally required to provide charity care, for-profit hospitals do provide some of that as a practical matter. The calculation of how much not-for-profit hospitals and for-profit hospitals actually spend on charity care is extraordinarily difficult because of varying accounting and business practices, but it seems the amount is roughly even. The second difference is how revenues in excessive expenses or profits are used by for-profit hospitals. For-profit hospitals are under no obligation to reinvest in the improvement of the organization. They can use all of the profit to reward the shareholders. As a practical matter, however, for-profit hospitals do reinvest in the business to retain a competitive edge by improving the care they provide to their patients. A summary for a for-profit hospital, they do pay taxes, they are not obligated to provide charity care, but they do, and profits can be used to pay dividends. They don't have to reinvest it, although they typically do to maintain a competitive edge. Not-for-profit hospitals, on the other hand, are tax-exempt. They are legally obligated to provide charity care, and their excess of revenues over expenses must be reinvested in the enterprise. Some key terms for budgeting basics are the statement of operations, contractual allowances, and charity write-off. So the statement of operations is your financial statement, sometimes referred to as a P&L, profit loss statement. It's a statement that shows the revenues, expenses, and net income of an organization. Contractual allowances are the amount a provider discounts from the cost of service in exchange for treating a higher volume of patients. So these are the amounts that an institution agrees to accept as payment in full from a particular payer. So you may have a contract with Blue Cross that pays a certain percent of Medicare, say typically 110 or so percent of Medicare, maybe 120 percent of Medicare, and that would be what you would accept regardless of what you charge because your charges have to be the same to everyone you bill. Most organizations' charges are somewhere around 180 to 200 percent of the Medicare rate, but then you write off the difference of what you negotiate as payment in full that you accept based on the coding that is submitted. Charity write-off is the cost of providing service to people who cannot pay, requiring the provider to take a financial loss. There are different types of budgets to use. One is the incremental budget, which is creating a financial plan that is increased or decreased according to previous expenditures for a set period of time. There's zero-based budgeting, which creates a financial plan for a set period of time that requires each budget item to be justified according to the unit's goals. There's a rolling budget, which is a financial plan that is reviewed and updated on a regular, ongoing basis such as every month or quarter to reflect recent activities. And there's activity-based budgeting, which creates a financial plan that focuses on the manager's allocating costs to each activity performed on behalf of the unit's responsibilities. There are different costs to be familiar with. The first is fixed cost. A fixed cost is a cost that does not vary according to use, such as number of patients. So, it's an expense that will be incurred regardless of volume or activity or usage. A variable cost is an expense that will change as the volume of activity changes. Direct cost is an expense associated with a specific activity provided by a unit. So, it's a cost that's associated with an activity. Indirect costs are those not associated with a specific activity. In conclusion, as we talk about revenues and expenses, it is important to understand revenue first. Being public and private, commercial insurance and private pay arrangements that that generate the bulk of revenue. And then expenses are all costs, whether they're fixed, variable, direct, or indirect.