Business of Surgery: The Hospital's Side

roll up here. To that, that we have oversight over. So one of the biggest things is just our financial performance, as well as the budget process creating business plans is another huge thing. Right now we're looking at, you know, creating a master plan for our main campus. Other things are metric based. How are we performing all of our KPIs? And really just keeping an eye on our finances across the board. So lots that we're going to break down and obviously we're going to kind of start right at the beginning tonight. We're going to talk a little bit about fiscal literacy and a little bit about what that involves and kind of what a role as a physician, as you know, most of our listeners out there, either you know, physicians or trainees or anything. And what does this role of fiscal literacy have to do as well as leadership in there? So first, tell me a little bit about what is fiscal literacy? Sure, so fiscal literacy is really being able to understand financial matters. So you don't have to be an expert in understanding financials, but

really understanding overarching, simple financial terms to really be able to make to make financial decisions. Oftentimes I hear that people say, I need to go back and get my MBA or I need to be able to, you know, read a lot of books or know somebody that's a CPA and that's not the case at all. How do you, or how do you start improving your fiscal literacy? So I would say the best way to do this is one to develop a good working knowledge of key financial terms, reports, processes, that there's a number of resources out there simply on the internet or podcasts that can allow you to do this. Additionally, putting together the right team. So if you find yourself in a role where you do have to make financial decisions, partnering with your experts on this so that you have the right team around you and really collaborating and communicating within the department. Everybody brings a different skill set to the team, whether it's the clinical lead, the administrative leader, the finance lead, but really all partnering together to leverage the different skill sets.

So Lauren, we're going to start with just some basic terms. I think we need to kind of set the canvas, if you will, of this. So I think a good place to start, if you will, is the operating statement. So, so what is an operating statement? Sure. So an operating statement is one of our core financial statements. It really shows the operating results over a specific period of time. We start with our revenue, and then we subtract our expenses to get our overall net income or earnings. There's a number of other names for this, such as income statement, profit and loss, statement of operations that you may hear as well. So why do organizations need this operating statement? So there's a number of reasons why an organization needs an operating statement. Number one, it's required by regulatory agencies. It also provides a uniform and understandable way for measuring financial performance. And then to monitor financial results, it gives us a tangible goal to know how we're tracking against. So one of the things that happens, Lauren, is that people hear the term key

performance indicators or KPIs. And that's really kind of what drives the financial results, these KPIs. So can you talk a little bit about that? And specifically as it relates to health care? Sure. So from a KPI standpoint, there is no, there are a number of factors that really drive the overall mission of the organization. But then in terms of this context, how do we impact our financials? So there's a number of key things that impact this. So key volumes would be one thing. How many admit patients are we admitting? How many surgeries are we doing? Really key volume indicators, setting goals of how many patients will care for in a year. There's goals around access. Are patients getting appointments when they want to? How many days are they waiting to get in to see their provider? KPIs may be around growth and recruitment. On the efficiency side, we may have goals around productivity using different benchmarking data from outside organizations to allow us to benchmark ourselves and set goals. We may have goals around efficiency and throughput. How long are our patients stay in

the hospital? Can we become more efficient in terms of our care? And then maybe around revenue cycle, our case mix index based on documentation or some examples of KPIs. So, as we talk a little bit about the operating statement going a little bit further detail, we talk about concepts such as revenue, gross revenue, what goes into that. Can you give us a little bit of some idea of what do these terms mean on a very basic level and how do we think about them again in the context of healthcare? Sure. So healthcare is a little bit different in terms of how revenue is reported. If you think simply, let's say a grocery store, I go to the grocery store, I want to buy an apple, the cost of the apple is a dollar, I pay a dollar, and I leave with that apple. Healthcare is a lot more complex than that because what we charge is not necessarily what we get paid. So from a gross revenue standpoint, this is what a hospital actually charges in terms of the services. So we have a set charge master, we have a set price for everything that we do,

be it a lab test or a surgical procedure. However, we do not ultimately get paid what we charge. And there are a number of reasons for this. So there's three different types of deductions that we look at that would then get us to our net revenue or cash in the door. So when I talk about deductions, we really componentize this into three big buckets. So there's uncompensated care, also known as charity care. This is revenue that won't be collected because the patient qualified for a discount under a charity care policy. So they meet certain criteria that we would provide the services and not expect them to pay. Then we have a bucket that we call bad debt. And this is really revenue that we should get paid, but we don't because of a patient's unwillingness to pay. This could be things like co pays the patient doesn't pay up front when they come to their visit and we're not able to collect it on the back end. It could be related to insurance deductibles again that are not collected up front from the patient. So this is money that we're owed. And then the

last bucket is contractuals. So this is a pretty large bucket where we have teams of and contracting that really meet with the insurance companies. And they create contracts so that we have set prices in terms of what will actually get paid for specific services, which often aren't at the same level as what we would have on our charge master. So it's a little bit complex that we charge a certain amount and then we know that we're going to get paid for it. A different amount but that's the difference between gross revenue and the net revenue is the actual money coming in the door So lauren you mentioned getting paid. So there's different type of payers out there So, can you give us an example of the various type of payers and maybe how does that payer mix if you will? Contribute to that amount paid on that overall gross charges Sure. So we have a number of different payers that we generally tend to group into governmental payers, which include our Medicare and Medicaid buckets, and we have our commercial payers that tend to pay higher.

And what we often look at is the mix of these patients with these insurance types and how those may shift year over year. This can greatly impact our overall reimbursement as we see shifts between these buckets. This can somewhat be impacted by economic challenges. We're seeing this currently with you know, kind of post COVID Medicaid re enrollment, some patients shifting off Medicaid. The other bucket would be self pay, so patients that don't have any insurance that don't fall within any of these buckets. But we tend to look at the mix of governmental versus commercial with quite varying degrees of reimbursement. So, Lauren, then you throw into this pair mix of terms like realization rate, contractual adjustments, things like that. What does this all mean? Sure. So when I say realization rate, that really means if I charge, let's say I charge 20 million and I'm writing off my contractual adjustment, the amount I'm not going to receive is 80%. Right. Then the

contractual adjustment is about 20 percent of that and the net revenue would really be the money in the door here. So realization rate is just the actual net revenue divided by the gross charges of what we actually get paid. So in this case, I charged 20 million. I get paid 40. I get paid 4 million. My reimbursement or my realization rate is 20%. So wait a second, Lauren. I get these statements all the time that the doctor charges this much in gross charges, but you're telling me they don't take, the hospital doesn't take that much home? They're not just buckets of money laying around in hidden doors around the hospital? No, we definitely do not have money just coming in the door. This allows us to have a standard process. And allows us to have certain contracts in place But we are not just bringing in the money that we actually charge for these services most often we are getting much less to the tune of 30 percent of overall what we're charging So lauren kind of taking a step back

again looking back at our operating statement. We talk about You know, you talked about gross revenue, you talk about the deductions, such as the uncompensated care, bad debt, contractuals, and then that net revenue. Let's look at the expense side of the house now. Can you talk a little bit about that side of the house, what is it, and what are some typical components of that expenses? Definitely. So when we look at the expense side of the house, one of the biggest components is really our salaries, wages, and benefits. So our people, whether it's our clinical providers, our clinical support, our nurses, medical assistants, or any other shared service type support like finance or marketing. All of these people are falling to the salary expense, which is one of the largest components of running a hospital. Then we also have our medical supplies, so the actual expenses that are needed to care for a patient. So this would include things like pharmaceuticals and drugs. It would include actual medical expenses, implantables, things like linens to put on patient beds. And then there's a bucket that we would call other expenses.

This could be things like travel for people to go get education, registration fees, maintenance contracts, other things like that. And really those buckets would comprise our main expense categories. So in an example, you could basically have a million dollars in gross revenue charges by the time you get down to net revenue, you're less than 400, 000 by the time you get down to expenses, who knows what that is and how much could be into that. So it's pretty amazing. Are there different types of expenses on a very basic level that we think about? Yes, there are generally three different types of expenses that we think about. So the first one, and the most simple is fixed costs. So really costs that are consistent, regardless of changes in volume. This could be, let's say, a lease for a certain facility. It doesn't matter how many patients come in the door, we're still paying X amount for that facility each month. It could be an employee that's salaried, they make 50, 000 a year, that's not going to change

based on any variable cost. Thank you very much. On the flip side of that is variable, so costs that move up and down dependent upon changes in volume. So from a variable standpoint, this could be ratios of nurses to patients, where it's really, you know, we have 10 patients today, we need X amount of nurses, tomorrow we have 20 patients, and that would move directly. The last category that's a little bit more complex is step variable, where costs remain consistent, but do change at certain discrete changes in volume. So an example of this could be a lab tech. Maybe there is a certain type of lab test where one tech can perform 200, 000 tests a year. Once we hit above that 200, 000 threshold, at that point, you know, the tech appeared to be a fixed expense, but now we have to add an additional resource to support that. So going back to our operating statement and just thinking about the different components of that there's other terms that come up and we talked about a little bit about KPI's

productivity, efficiency, throughput. Can you talk about other aspects of that type of care? And then in there, this term EBIDA or E B I D A or E B I D T A, you'll see all sorts of different variations. You'll see all sorts of different pronunciations to it. What does this mean? Sure. So to answer your first question. So from a productivity standpoint, we tend this gives us a gauge in terms of our employees and our salary expense to say, how are we benchmarked in terms of our FTEs? So it gives us a way to really understand. Are we being productive? We have a number of different ways to report this. And as just mentioned, there are different metrics, whether you're variable, it's easier to look at, you know, a certain number of widgets to see how you're performing against that. Yeah. And how you're flexing with those certain number of widgets from an efficiency and throughput standpoint, this is really focused on from a hospital standpoint, our patient throughput, how long our patients staying in the hospital, how long is optimal, how long should they be

in the hospital per house their severity of illness. And we tend to look at length of stay and case mix index of our patients to drive this. From an EBITDA standpoint, so there's a lot of acronyms within finance, but really EBITDA is earnings before interest depreciation and amortization. And really what this is kind of the controllable. So what we have direct oversight over on a day to day basis really falls above the EBITDA line, whereas we see some of those other things, interest, depreciation from our capital purchases, things that we can't necessarily impact on a day to day basis fall below that EBITDA line. That would then get us down to our our EBITDA with the other metrics in there. So, God, this is very interesting. And when you look at a there, there's nothing, there's also depreciation in there, isn't there? So even further lowering some particular ones in there. So how does that all work? Yeah. So the depreciation gets recorded. So as we purchase capital and healthcare we buy new buildings, we buy new facilities, those are

depreciation depreciated over their useful lives and the depreciation is moved from the capital asset. Okay. On the balance sheet over to the income statement, and that goes below EBITDA, and we take out the depreciation, so the allocation of the fixed asset over the useful life to get down to an operating income number, which is really your total operating revenue minus your total operating expenses, including that depreciation figure. So Lauren let's take a step up now. There's a lot of terms that we talked about in a lot of a lot of math that goes into this, but on a very basic 10, 000 foot view level, when I'm looking at an operating statement, when I'm looking at kind of gross versus net versus operating income and versus EBITDA, is there certain things that each one of these components can kind of tell me is one cashflow is another one. How do we put this all together? Yeah, I think at the end of the day what we really like to focus on from a day to day is EBITDA. So this allows us to see our true net revenue is cashed in the

door. So how much money are we actually making on the revenue side in terms of our patients served and taking care of patients? What's that revenue stream coming in? And then on the expense side, what is that total cash outflow going out the door? And that's really our EBITDA, which is what we tend to focus on just from an earning standpoint. And then getting down to that operating income line takes into account some of those other things. But from a day to day management, EBITDA is a good place to focus. So obviously this is part of a series that kind of looks at it all and one of the other components that hopefully our listeners listen to or about to listen to is kind of the physician side of the house. This is the hospital side of the house so that we have a thorough understanding of the complete financial picture. But a part of that you mentioned was salary, wages, and benefits are a big component of the overall budget. And so when we talk about budget, let's shift gears a little bit right now. And talk about budget development in planning. So what are the financial planning goals, if you will, towards budgeting?

Yeah. So as we think about budgeting, one question, maybe why do we budget? So. In terms of setting financial planning goals, this ensures that we can generate enough cash flow from operations so that we can reinvest in our core operations. So running a hospital, taking care of patients funding strategic initiatives. That's another thing. How much money can we set aside to really fund new strategic ideas, maintaining financial sustainability of the organization, and then also being able to reinvest in other things that may be important to a hospital, like research and education. So just digging in a little bit further there, you know, when we talk about budgeting, I will hear sometimes some of the providers say, Oh, you know, that budget is just an arbitrary number. It's just something we're making money. They're making all sorts of money. It's just we didn't make budget, if you will. But, you know, that could be anything. But what you're telling me is that the goal is to say that we do have enough money to be able to do those three components. Is that right? Yes, that's

correct. Hospitals actually operate with very small margins some that aren't even making money, so it's actually a very small margin business, so we do need to plan to ensure that we can reinvest, that we can keep the lights on and continue to take care of patients. So as a part of this financial planning cycle, we got to make some assumptions in this budget process. What might that be? So in terms of assumptions, there's a number of things that we have to take a look at across the board. So I would say we start with our environment and our capacity. So what are our number of beds? What is the availability of resources that we have to care for patients? So we can make assumptions around what is the capacity that we might have? What are market factors that are going on? Demand. What is the demand that's out there? Is the patient population growing or shrinking in our market? Do we have patients coming from, you know, outside of where we live? What is the international presence? Those kinds of things that we can determine. Demand for our services. Are there big wait times and really

aligning in terms of what do we think the volumes we can achieve going into the next year? From a staffing requirements, once we really determine our volumes, that's usually the 1st step really aligning in terms of volume revenue. How many patients can we serve? How many new providers are we recruiting? We look at things like productivity of those providers as well. And then we flip to the other side, which is really the resourcing assumptions. So in terms of staffing, what types of resources do we need to staff the volumes that we've set forth in terms of growth types of employees, whether it's nurses or medical assistants or coders setting standards for those FTEs or full time equivalents, for example. And then the last piece is really the rest of the expenses outside of staffing. Like we talked about before, our fixed costs, our variable costs, can we look at cost per unit? Is there a way to become more efficient in a certain type of

procedure? Can we standardize the supplies that we're using, for example? So there's a number of assumptions that go into building a budget. Lauren, you mentioned FTEs or full time equivalents. Can you talk a little bit more about what this is? I know we're going to talk a little bit about it in the other podcast, but just kind of frame this for us. Sure. So in terms of what a full time equivalent is, it's just a way to measure a full time full time of work. So it's measured as 40 hours of productive work per week, or 2, 080 hours per year. So really one FTE equals 40 hours of work per week. So you could, for example, have a headcount that's different than an FTE. I could have two people from a headcount standpoint, but they're each part time, and then they would each be 0. 5 of an FTE. So, Lauren, if a budget is done well and the forecasts are sound, if the budget is done well and the forecast is sound what does that give the kind of the hospital side of the house? What does it do?

So, if we have a sound budget, we really have, we have set goals going into the next year and that gives us time. Usually this is done towards the end of the year, but really gives us time to prepare to make sure we're set up for success going into the next year. We have a level of comfort that we're going to be financially sustainable. We have plans in place to achieve both the revenue and expense goals to hit a certain margin to know that we will continue to sustain and do the things that we want to do while also being able to focus on strategic items that the organization or hospital wants to drive forward. But the budget isn't always right or the budget is right and we miss it and that's called variances. So can you talk a little bit about variances the budget? Derek. So from a variance standpoint, again, a budget is done at a certain point in time. There's a lot of organizations that are starting to look at dynamic planning. So how do you continue to iterate on a budget and continue to forecast so that you're not just stuck

with one plan at a set point in time? So continuous forecasting is really important. And what we do when we have a set budget, and we look at variances to budget, we understand what is driving those. So it could be on the revenue side from a revenue standpoint, for example, we could be seeing the number of patients we expected to, but maybe the revenue or cash coming in the door is not what we expected. And this would be because of those deductions that we discussed. Maybe we have more patients that are now in the self pay bucket that. No longer have their Medicaid, and we're not getting reimbursed at the same level as we were in the previous year. So there's certainly things that can be unexpected. Same thing on the expense side. We could have certain pricing with supply chain for a specific drug, and maybe that vendor changes the pricing. And these can be really significant variances that we see of things that are unpredictable. But what it allows us to do is kind of reset understand what the variances are, come up with plans to

mitigate. Maybe there's things within that realm that we can focus on, or maybe there's things we need to do entirely different and focus on other areas of the hospital where we have opportunity. So when we talk about both revenues and expenses, some of the terms that we talk about is it favorable or unfavorable? And in general, we think that favorable is good and unfavorable is bad, but there can be instances where favorable isn't always that good. And Conversely, that unfavorable isn't always bad. Can you give us a couple of instances of that? Sure. So an example of this, for example, we could say, oh, salaries and wages are below plan. And this is favorable because expenses are less than plan, but if these salaries and wages are provider salaries that we need to see patients and we're losing revenue because we don't have this expense, this is not necessarily a favorable variance. So it's always really important to put the variances within context and same thing on the flip side. Maybe my medical supplies are. 100,

000 above a budget of 75, 000, so I'm unfavorable 25, 000 if I were to just look at that line item on a P& L statement. But the reality is that maybe I'm seeing more patients than I expected. I have more revenue. This is actually a good thing because we would expect those medical supplies to increase with seeing more patients. So like most things you know, we like to follow things longitudinally over time. And that's really this idea of trend analysis. Can you talk a little bit about that? And then kind of what is maybe what's an example of a trend analysis? And how do we take this into context within the entire financial portfolio? Sure. So trend analysis is really important because it allows us to see how things are progressing, whether it be month over month, day over day, it just allows us to see how things are flowing, the general direction. And things are moving in and then it helps us identify issues regardless of budget concerns. Graphs are an easy way to look at trends. It really allows us to see maybe we're trending up,

maybe we're trending down. And once we start to see some of those trends, it allows us to dig into what may be driving it. An example of something we could look at could be our case mix index, for example, for a hospital. How are we trending over time? And what is our goal as a hospital? If our goal is to see high acuity patients, we would expect that case mix to continue to drive up as we have a strategy to see those sicker patients. And this would just be a way for us to track, are we meeting those goals in terms of case mix, high acuity, month over month? And then we could dive into the data a level deeper to understand, you know, is it medical? Is it surgical? And digging in there. So one number doesn't always tell the whole story. And that's why we try to normalize things. And you'll see in the financial world or in the healthcare financial world that we tend to develop ratios. Can you talk or give a few examples of what this ratio might be and why might we use one or the other? Yeah, so ratio analysis can help us in a number of ways. One, it just lets us

see when I mentioned before, let's say supplies are above plan. Is this good or bad? I could look at supplies as a percent of operating revenue to see if that's in line from a ratio perspective of my actual to budget. I'm more concerned about that ratio being line of revenues up supplies are up than the versus budget. Another thing could be labor costs as a percent of operating revenue. So is that bucket of labor growing disproportionately to our operating revenue? Revenue per FTE. And that's another way we look at things as well. So it just, it has some checks and balances in terms of your revenue, your expense, and ratios between the two. So Lorna, as we finish up here, there's one concept that I want to dig a little bit deeper into, and that's relative value units, or RVUs. This is really thrown around. It's something that our trainees are going to hear a lot about their contracts, their pay may be tied to RVUs. Can you talk a little bit about what this is? Maybe a little bit of history behind it. What are the components of

it? And and maybe give us an example. Sure. So from a relative value unit, a little bit of history. This was the AMA developed and published for CPT codes in 1966. In 1989, the first RBUs for each CPT code were created, and Medicare adopted the RBU measure as a method of payment in 1992, and there's been ongoing annual review with a five year required review of this. And really, what an RBU is it's a relative value. So it really focuses on the relative level of time, skill, training, and intensity to provide a given service. And it's a standard way to look across the board to evaluate this. There's a number of components of the RVU. So the one is the physician work time, which is focused on time, skill, intensity, training, practice, expense. So this could be things like rent, equipment, supplies, non physician labor. And then malpractice, the measure of total risk that equates to the total components

of the RVU. And again, it's a uniform and consistent measurement. It's accepted as common standard. And it's really a way for hospitals to evaluate how productive their providers are in a standard way across the board and to look at like organizations to have an understanding of expectations. So when we look at RVUs and we kind of summarize it a little bit, there's, RVUs can be looked at depending on what your perspective is in CMS or physician productivity or comparison or anything. How do you how do you talk about those a little bit? Sorry, say that one more time? So if you look at RVUs and you kind of summarize RVUs, depending on how they're utilized could be from what components. So how does CMS or private payers, how do they look at RVUs or like a department, how do they look at that? What are the different components to that? Yeah. So from an RVU standpoint as I mentioned, there's the three buckets, the

work, the practice expense, as well as the malpractice. And these can be used in different ways and in various settings. So there could be different payments. Model structures where a provider is paid based on the number of RVUs they generate. So that would be one instance where this is used as actually for reimbursement purposes. In a hospital where we are a salaried model, this could look a lot different where maybe a department overall has an expectation for productivity for that department, but they Really have providers that they want to be focused on other things, whether it's research or education or some sort of leadership roles, and they give them protected time, and maybe they're okay with that person having a lower level of productivity because they're spending their time on other things. So it can definitely be used in different ways. In terms of how it's evaluated. So overall, can you give us some key takeaways in terms of this concept of fiscal literacy? Yes, definitely. So overall, a good leader understands daily

operations and the impact of decisions on financial performance, which is really what we're defining as fiscal literacy. You don't need to do it alone. Create the right team. Know enough to know what to ask. Leverage different skill sets. And then again, understanding how to complete a variance analysis, setting a budget. Being able to understand how you're tracking to your goals being able to understand your operating statement, and then finally understanding relative value units as well. Well, that's absolutely fantastic and cannot thank you enough, Lauren, for joining us here on behind the knife and truly appreciate your time in this walkthrough fiscal literacy. Great. Thank you. It's great to be here.