Financial and Operational Leadership of Healthcare Organizations An Independent Study

Jennifer A. Parrish, MBA*, CPA

Missouri State University2013

*MBA completed August, 2013

Preface

This Independent Study, Financial and Operational Leadership of Healthcare Organizations, was undertaken while completing my MBA at Missouri State University (MSU) in 2013, under the guidance of Dr. Michael Leibert, Graduate Director within MSU’s Department of Management. When I approached him with the project, he advised that I would need more than one semester; he is both a wise, and a correct man, and I thank him for his generosity in this allowance of time. I only recently had the study printed and bound, as well as converted to a pdf file; as I review it as a complete document, I believe it was time well spent in order to both refresh and supplement my existing experience and knowledge within the healthcare industry and for financial reporting within all industries.

The result is a 234 page document, excluding the Bibliography. With the exception of writing presented within direct quotes and credited, this document is my original, independent work, in my own words. It’s based on both my experience and knowledge in my field, and reflection upon the many sources: books, articles, statistics, and projections, which I considered while completing the project, and my interpretations. All charts and graphs are my own as well, with credit provided to the sources of data. There are considerations and analyses throughout the paper, then one section titled “Management Implications and Analysis” for each Area of Study. This section contains discussion of the information and issues presented within that Area of Study, and a perspective relative to that material. These analyses and perspectives grew as the study became more complete, and as my understanding became more complete.

Area of Study One discusses legal forms of the entities that provide healthcare services and the impact of each in terms of financial issues, stakeholders to consider, and operational as well as social and legislative challenges each type of entity is subject to. Area of Study Two goes on to discuss the history of healthcare in the United States, the current continuum of care, healthcare’s evolution to integrated healthcare delivery and managed care systems, and comparisons of aspects of each. Legislation, including the Patient Protection and Affordable Care Act of 2010 (ACO), is examined for determination of impact on this evolution of integrated healthcare and managed care systems.

Area of Study Three is perhaps the most interesting in terms of potential operational and financial understanding and prediction in the near future, providing an examination of consumer demographics and utilization, coupled with analysis of the uninsured with consideration towards reasons for this, census projections as our population ages into other utilization groups, the anticipated impact, with the possible impact of the ACA. Then in this section we turn to payors. Medicare’s legislative history is first provided, examining its past and current methods of payment, DRG’s, RBRVS’s, CPT’s, the HCPCS, how these were developed, how the ACA is impacting changes thru the year 2020, and significant considerations before deciding whether to opt in as an ACO are discussed. Analyses of both individuals insured and expenditures by payor is provided, and projected as well. There is discussion of Consumer-Directed (or Driven) Health

Plans and the surrounding issues such as movement towards greater transparency and customer service orientation. Area of Study Four is last, providing the detailed reporting requirements for both for-profit (FP) and not-for-profit (NFP) healthcare organizations; many of these reporting requirements are applicable to organizations other than those within the healthcare industry. External reporting coverage includes: both FP and NFP financial statement requirements and presentation, specific discussion of FASB, GASB, and GAAP policies and procedures, as well as the SEC’s reporting requirements, codes, and deadlines. Forms such as the 10-K & 10-Q are addressed, as well as Sarbanes-Oxley (SOX), applicable to FP’s. FP and NFP financial statements and audit requirements are compared for examination of similarities and differences.

Internal reporting is then explored, as an area that, since not required, may be neglected but has great potential value to an organization. “Cost Accounting”, proper classifications of costs, and cost behaviors are discussed. Ratio analysis, benchmarking methods, benchmark development, and considerations when determining these are examined, along with productivity measures, acuity adjustments, operating indicators, and financial ratios specific to HCO’s. These measures are considered in terms of whether an organization’s measures are positive, whether these are moving in the right or wrong direction, and consideration of what other measures you have to compare to for a greater perspective, as well as determining if those measures are appropriate.

Lastly we cover healthcare payor reporting in detail: Medicare cost reporting, requirements, deadlines, exceptions to filing regulations, how to file a cost report with a dispute under protest, how to use the PS&R, the NPR, a listing of all forms and their purpose, then other payor reporting. Then IRS and SEC reporting detail is provided, with deadlines, exceptions, and forms.

Please consider that although this study was written in 2013, and there have been changes to reporting requirements since that year, for example GASB Statements No.’s 67 and 68, effective for periods beginning June 15th, 2013 and 2014 respectively, calling for government administered pension plans to report their total pension liability (unfunded pensions for defined pension plans), creating sudden and massive liabilities (unfunded outflows), which healthcare organizations or their subsidiaries may or may not be subject to, this study provides for changes like these as well. How? By providing not only the history, current issues, detailed instructions, and projections affecting financial and operational leadership, but also something equally important. It also presents the hierarchy of authority to which to turn for answers to questions when in doubt of treatment of a specific accounting, IRS, SEC, or Medicare reporting issues, as well as the specific sources to contact and to monitor in order that you and your Officers stay abreast of the changes in policies and requirements as these occur.

Because changes will occur.

Jennifer A. Parrish, MBA, CPAjenniferparrish@outlook.com

Table of Contents

Preface

Area of Study One: Legal Forms of Organizations in the United States Forms of Business Entities, Ownership, & Differences in Legal Characteristics 8Not-For-Profits: Tax Exemption Rationale, Value, & Recent IRS & Legislative Challenges to Tax Exempt Status 11Stakeholder Analysis 26*Management Implications and Analysis: Topics of Area of Study One 28Appendix 1.1: Table Summary of Not-For-Profit vs. For-Profit Legal Aspects 32Appendix 1.2: Table Listing of IRS Filings – Life Cycle of a Public Charity 33

Area of Study Two: HCO’s, Integrated Delivery Systems, and RegulationsHistory of Healthcare in the U.S. & Classifications of Providers 36Levels and Continuums of Care – with Evolution 39Integrated Delivery Systems and Managed Care – with Evolution 43

Managed Care: History, Legislation, Purpose, & Stats 45Patient Protection and Affordable Care Act 52

*Management Implications and Analysis: Topics of Area of Study Two 54Appendix 2.1: Managed Care Integrated Delivery Systems, Comparison of Aspects 59Managed Care & Integrated Delivery Systems: Types of Integration & Governance 63Healthcare Regulation, Licensure, & Accreditation Bodies 65Appendix 2.2: Table - Healthcare Provider Regulatory Bodies, Required Procedures, & Document Filings 67

Area of Study Three: Healthcare Services: Consumers & PayorsConsumers: Demographics and Utilization 70

Figures 3.1 – 3.3: IP Utilization; Figures 3.4 – 3.6: OP/Ambulatory Utilization 72

Figures 3.7 – 3.10: Analysis of Uninsured 76Tables 3.1 – 3.5: U.S. Pop. by Age, w/Age & Utilization Projections & Analysis 79

Payors: Health Insurance Enrollment & Expenditures by Payor 82Medicare Funding & Legislative History 83

Table 3.8: Medicare Summary of Coverage 85Medicare Payments: History &, Current Methods, Anticipated Adjustments; DRG's, RBRVS, FFS, CPT & HPCPS codes; Impact of the ACA, and ACO’s 86

Medicaid: Legislative History, Benefits States must Cover, & Federal Matching 92Children's Health Insurance Program (CHIP) 95Private Health Insurance: Regulations, Legislative History, Expenditures, Trends towards Consumer-Directed Health Plans, and High-Deductible Health Plans, w/Issues 96 Price Transparency Issues, Obstacles, & Legislative Attempts 105All Payors: Expenditures & Projections 111*Management Implications and Analysis: Topics of Area of Study Three 112

Table of Contents - Continued

Area of Study Four: Internal & External Organizational Reporting Requirements Financial Reporting, FASB, GAAP, and the SEC: Accounting Policies & Procedures 117

FASB's Statements of Financial Accounting Concepts (SFAC's): Financial Reporting Guidelines 118Table 4.1: For-Profit vs. Not-For-Profit Financial Statements Required (SFAC No.5) 122FASB's Statements of Financial Accounting Standards (SFAS's), & Hierarchy of GAAP/Authority 125

For-Profit Financial Reporting & Regulations: SEC Codes, Presentation, Deadlines, Forms 10-K & 10-Q, & Sarbanes-Oxley (SOX) 127

For-Profits vs. Not-For-Profits: Comparative Statements and Audit Differences 136Figures 4.1 & 4.2: Illustration of For-Profit vs. Not-For-Profit Financial Statements 140Internal Reporting, aka Cost/Managerial Accounting: Classifications of Costs,

Cost Behaviors, & Ratio Analyses 144

Benchmarking Methods, Development & Considerations 153Figures 4.5, 4.5-1, 4.5-2, 4.5-3: Productivity Calculations & Analyses 155Figure 4.6: Examples of Productivity Measures for HCO's 157Table 4.3: Operating Indicators for HCO's, with Interpretation 159Table 4.4: Financial Ratios for HCO's, with Interpretation 160

Medicare Cost Reporting: Requirements, Exemptions, the PS&R, the NPR,the CMS-2552-10 & worksheets with and without sub-providers 162

Filing the Medicare Cost Report with a Dispute 168Cost Report Worksheets: Examples, Purposes, and Discussion 180The Home Office Cost Report & HMO Cost Reporting Requirements 184

Medicaid Reporting 186IRS Reporting For-Profits: C & S Corporations, Forms, Deadlines, 187

IRS Additional Reporting Information: Supporting Financial Statements, Additional Forms and Schedules, Deadlines, & Penalties 189Quarterly Filings: Estimated Taxes, Social Security, & Medicare Taxes 195

Form 940: Federal Unemployment Tax (FUTA) & Required Payments 198IRS Reporting for Not-For-Profit 501(3)'s: Forms 990 & 990-T, UBI, Listing of IRS Reporting Issues for Subordinate Organizations 199Table 4.12: Comparison of Key Aspects of the Four Types of Healthcare Reporting 212Discussion of Similarities and Differences of Key Aspects of Healthcare Reporting 213*Management Implications and Analysis: Topics of Area of Study Four 217Appendix 4.1: SEC Code of Federal Regulations, Title 17 Commodities and Securities Exchange, & Required Notes to the Financial Statements 224

Bibliographies: Bibliography: Area of Study One 235Bibliography: Area of Study Two 238Bibliography: Area of Study Three 240Bibliography: Area of Study Four 242