CHAPTER 6

Managing and Understanding Financial Operation

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Chapter Objective
Revenue cycle (billing and collections)
Receivables management
Cash management
Inventory (supply chain) management
Operational monitoring and control

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Financial Operations
Financial operations involves the day-to-day
oversight of tasks such as billing and collections
(revenue cycle), cash management, and inventory
management.
The specifics are highly dependent on the type of
provider (hospital versus medical practice versus
nursing home, and so on).
Thus, the focus here is on fundamental concepts as
opposed to details.

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The Revenue Cycle
The revenue cycle is defined as all the activities
associated with billing and collecting for services.
In general, revenue cycle management should ensure
that:
 Patients are properly categorized by payer.
 Correct and timely billing takes place.

 Correct and timely payment is received.

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The Revenue Cycle (Cont.)
The revenue cycle includes the activities
1. Before-service activities:
Insurance verification
Certification of managed care patients
Patient financial counseling
2. At-service activities:
Insurance status verification
Service documentation/claims production

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The Revenue Cycle (Cont.)
3. After-service activities:
Claims submission
Third-party follow-up (if needed)
Dispute management
Payment receipt and posting
4. Monitoring and reporting:
Monitoring
Review and improvement

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The Revenue Cycle (Cont.)
In revenue cycle management, each of the identified
activities is closely monitored to ensure that:
The correct amount of reimbursement is collected on
each patient.
Reimbursements are collected as quickly as possible.
The costs associated with the revenue cycle are
minimized consistent with rapid and correct collections.

Two important keys to good revenue cycle

management are information technology and
electronic claims processing.
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 Receivables Management
If a service is provided for cash, the revenue is
immediately received.
If the service is provided on credit, the revenue is not
received until the receivable is collected.
Receivables management, which falls under the
general umbrella of the revenue cycle, is extremely
important to healthcare providers.

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 Accumulation(Collecting or Gathering) of Receivables
Suppose Valley Clinic contracts with an insurer
whose patients use SR 2,000 in services daily and who
pays in 40 days.
The clinic will collect receivables at a rate of SR 2,000
per day.
However, after 40 days, the receivables balance will
stabilize (become stable) at:
Receivables= Daily sales X Average collection period
= SR 2000 X 40= SR 80,000

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 Cash Management
The goal of cash management is to hold the minimum
amount necessary to meet liquidity (cash)
requirements.
The primary cash management technique is float
management

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Float Management
Float is the difference between the cash amount on the
bank’s books and the amount on the firm’s check book.
 Suppose ABC Hospital writes (Pay) SR 2,00 in checks daily. It takes 6 days
for these to be received and clear the banking system, so the bank balance is
SR 12,00 greater than the checkbook balance.
 ABC hospital receives SR 3,00 in checks daily which are cleared in 3 days,
so the checkbook is SR 9,00 greater than the bank.
Thus, the float is SR12,00 -SR9,00 = SR3,00.

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 Inventory Management
Inventory management, also called supply chain
management or materials management, is
important to providers because medical supplies are
critical to patient services.
Inventories consist of base stocks plus safety stocks.
The goal of inventory management is to meet
operational needs at the lowest cost.

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Inventory Management (Cont.)
Some inventory management techniques now being
used by providers include:
Just-in-time systems (receiving goods only as they are needed)

Stockless systems
Consigned inventory systems (Consignment inventory is a supply chain
management strategy in which you store goods in the business unit without paying the supplier
until the goods are consumed. )

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Operational Monitoring
Healthcare managers must monitor operations to
ensure that the business operates efficiently and
meets performance goals.
For the most part, monitoring involves a set of
metrics that measure various aspects of financial and
operational performance.
Here we will introduce just a few commonly used
hospital metrics that focus on managing operations.

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Outpatient Revenue Percentage

Measures the percentage of total (net) revenue due to

outpatient services. A high or low value is not necessarily bad—
it just measures the reliance on outpatients (as opposed to
inpatients and other patient sources) as a source of revenue.
Of course, if outpatient services are more profitable than
inpatient services, then a higher value would mean greater
overall profitability. Note that the ratio is multiplied by 100 to
convert the decimal form to a percentage.
Similar metric: Inpatient revenue percentage

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Occupancy Rate

Measures inpatient volume as a percentage of the number of

beds. The higher the occupancy rate, the better, unless it is so
high that the hospital does not have the capacity to deal with
emergency situations. To raise the occupancy rate, hospitals can:
 (1) increase admissions,
 (2) increase length of stay (which makes no sense under many
reimbursement schemes), or
 (3) decrease the number of beds.
Also, note that this measure is sometimes just called occupancy.

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Average Length of Stay (ALOS)

Measures the average number of days that an inpatient

stays in the hospital. Because most reimbursement is
independent of length of stay (LOS), the shorter the
LOS, the lower the cost of treatment and hence the
greater the profitability of inpatient services. Note that
this measure is often called average length of stay
(ALOS).
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Net Price per Discharge

Measures the amount of net revenue per discharge.

Because allowances have been deducted, net price per
discharge measures the actual amount of revenue
(reimbursement) per discharge. This indicator is a
measure of the market’s assessment of the value of the
inpatient services as opposed to the hospital’s
assessment.
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Cost per Discharge

Measures the average cost of each inpatient stay.

Regardless of the reimbursement methodology, lower
costs of service lead to higher profitability.

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Profit per Discharge

Measures the amount of profit earned on each inpatient

discharge. Low values (including negative values) can be
traced either to high inpatient costs or low inpatient
reimbursement, or both.
 Obviously, a lack of inpatient profitability can spell financial
trouble for hospitals. However, lack of inpatient profitability
can be offset (in whole or partially) by outpatient care profits
and/or non patient care revenues such as contributions and
grants.
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Thank You

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