Assignment 2: Course Project Task 3—Payment for Services
When hospitals are paid for services, it is through payment structures. Payment structures include health maintenance organizations (HMOs), prefe
ed provider organizations (PPOs), and capitation rates.
In this assignment, you will use the information from M2: Assignment 3 and
M3: Assignment 1 to develop a strategic plan for the hospital to begin managed care contract negotiations. You can use the SMH data file, which you had downloaded from the Doc Sharing area, to create your plan.
Based on your understanding of the costs, you will develop a plan for contract negotiations with a managed care provider. Include in the plan:
· A strategy for contract negotiation
· Details on each facility’s costs and expected margins
· Comparisons between the three organizations, indicating which is in a stronger or weaker financial position
Using the SMH data file, you will do the following:
· Calculate inpatient gross profit for the major payers at the hospital.
· Calculate GP and GP percentage by payer.
· Comment on the results of your GP calculations.
· In this example, we assumed that patients from each payer incu
ed costs at the same rate. Is this assumption co
ect? What level of detail in cost identification should the hospital attempt to obtain? Provide your comments.
· Based on your understanding of your costs, you will develop a plan for contract negotiations with a managed care provider. In your plan, outline a strategy for contract negotiation.
· Based on your comparative analysis of the SMH, FP, and NFP facilities, is SMH in a better or worse position when it comes to contract negotiations? Provide your comments.
· Payers always want to move procedures from an inpatient setting to an outpatient setting. Why might this not be the best strategy for your financial situation? Provide your comments.
Write a 3- to 5-page paper in Microsoft Word format. All written assignments and responses should follow APA rules for attributing sources.
Use the following file naming convention: LastnameFirstInitial_M3_A2.doc.
By Tuesday, September 17, 2013, submit your assignment to the M3: Assignment 2 Dropbox.
You have the option of discussing your work with your classmates. To use this option, you need to submit your assignment to the Discussion Area below. Through the week, you can share your thoughts about your project and offer your review and comments to others who are also seeking input on their work.
Assignment 2 Grading Criteria
Created plan for SMH contract negotiations with a managed care provider and demonstrated an understanding of payment structures, payer mix, services, and managed care contracting.
Compared financial position of SMH with the FP and NFP facilities, demonstrating in-depth analysis of data.
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources, displayed accurate spelling, grammar, and punctuation.
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Course Project Task 3—Payment for Services
Case Study Analysis-SMH Revenue and Income Variables
SMH – Revenue and Income Cycle
Running Head: SMH – REVENUE AND INCOME CYCLE XXXXXXXXXX
SMH – Revenue and Income Cycle
Sakasegawa Memorial Hospital (SMH) is a not for profit organization in a major city. There are different services through which the company is able to generate revenue in which managed care is considered to be a significant part of its revenue stream. The hospital being a not for profit organization cu
ently operates from contributions and insurance contracted or negotiated payments to meet the healthcare needs of its target population.
Analysis of Revenue and Expenses
The hospital earns revenue from inpatient as well as outpatient. The inpatient revenue is calculated on the basis of patient days. The patient days distribution is for different services that are provided by the company that includes cardiology, orthopedic, medicine and other services. For all these services, the hospital offers Medicare, Medicaid, managed care and private pay services that are the main source of revenue of the company. The hospital is able to generate about 55% revenue from managed care, 37% revenue from Medicare and 6% and 2% revenue from Medicaid and private pay respectively.
If we consider the revenue-generated department wide for the services provided we can see that the company generated major revenue from medicine department. The medicine department is able to generate about 72.28% revenue whereas other services are able to generate about 12.50% of the total revenue followed by orthopedic which is 9.67% of the total revenue and cardiology ranks about 5.54% of the total revenue.
Considering the inpatient and outpatient, we can see that the major revenues are generated through inpatient. Inpatient revenue accounts for about 84% of the total revenue generated by the hospital whereas outpatient accounts for 16% of the total revenue generated
Inpatient Revenue Distribution
Even in the outpatient we can see the same trend as in the inpatient distribution that medicine department generates the highest revenue followed by other services, then orthopedic and lastly cardiology.
Apart from the primary services offered, the hospital generates income through other sources as well.
Net Patient revenue non-Medicare
Patient Revenue - Medicare Medicaid
Unrelated business revenue
Other rev - sale of asset
Other rev - othe
Net assets released from restrictions
Ttl Unrestricted Rev
The main source of revenue is through net patient revenue non Medicare which accounts for 51% of the total revenue. From patient revenue – Medicare and Medicaid the hospital generates about 36.94% of total revenue. There is different unrelated business revenue that accounts about 4.83% of the total revenue generated by the company. Contributions play most important part of unrelated business revenue. The total revenue generated by the hospital is $ XXXXXXXXXX.
Costs and Expenses
The hospital incurs different expenses for the successful operation of the business.
The hospital uses activity based costing system, which is based on the allocation basis on which the hospital distributes its total expenses. (Finkler, Ward & Cala
ese, 2011) There are different allocation basis on which the expenses are divided. The officer services, other clinical expenses, physician fees, other supplies in the personnel and other expenses are allocated based on patient days. The clinical salaries and fringe benefits are allocated based on hours of service whereas depreciation and utilities are allocated based on square feet.
The direct patient care expenses, inpatient care expenses and malpractice fees are also allocated based on patient days or on the basis of the particular department like cardiology, orthopedic and medicine.
The expenses incu
ed by the company are divided into clinical services, management and general salaries and fundraising expenses. The major expenses of the hospital are of salaries and benefits which accounts for 45.79% of the total expenses out of which 88.32% are the salaries and expenses of clinical services, 11.05% of the management and general salaries and remaining salaries are for fund raising. The salaries of the officer’s accounts for 2.12%, other salaries account for 74.61% of the total salary, 7.58% salaries account for pensions, 10.05% for pensions. The average rate for clinical salaries is 41.68.
There are other salaries as well which includes fundraising fees, accounting fees, legal fees, supplies and other, telephone, postage and shipping, occupancy, equipment rental and maintenance, printing and publications, conference conventions and meetings, interest expenses, depreciation, bad debts and other expenses
Total Salaries & Benefits
Supplies & Othe
Postage and shipping
Equipment rental and maintenance
Printing and publications
Conference conventions and meetings
Interest exp (net)
Provision for Bad debt
The total expenses borne by the company is $ XXXXXXXXXX, $ XXXXXXXXXX, XXXXXXXXXXfor clinical services, management and general and fundraising respectively. The two major expenses borne by the company are salaries and supplies, which account for 45.79% and 43.76% respectively.
Gross profit is the measure to analyze the direct expenses that the company incurs for its sales or services. For the inpatient the company is able to generate 78.08% of gross margin whereas for outpatient the gross profit margin is 71.16%.