Healthcare Finance Glossary

Provision of the Internal Revenue Code that relates to charitable purpose. Provides that not-for-profit hospitals qualify for tax exemption.

The process and principles for preparing and disseminating financial information. The third phase of the management control process.

The organization for which financial information is recorded and reported.

The elapsed time between financial statements. Common accounting periods include a month, a quarter, and a year.

Term used to refer to the individual assets and liabilities.

Amounts the organization is obligated to pay others, including suppliers and creditors.

Amounts due to the organization from patients, third parties, and others.

The system of accounting that recognizes revenues when earned and expenses when resources are used. See also Cash-basis accounting.

Expenses that have been incurred but not yet paid.

The cumulative amount of depreciation recognized on an asset since its purchase. An asset’s book value is equal to its purchase price less the amount of accumulated depreciation.

[(cash + marketable securities)/current liabilities] A liquidity ratio that measures how much cash and marketable securities are available to pay off all current liabilities.

Alternative method of asset valuation. Assessing in this method means the value of the asset is not changed over time to reflect changing market values.

An acquisition in which the acquiring company ends up directly owning the target’s assets and may or may not directly have responsibility for liabilities. The target corporation can either continue to exist or be liquidated.

An acquisition in which the target company remains in existence as a separate legal entity while the acquiring company owns stock of target, but does not own target’s individual assets such as inventory, equipment, or land.

Ratios that measure how efficiently an organization is using its assets to produce revenues.

A method to determine the costs of a service, product, or customer by tracing the resources consumed. ABC focuses on (1) controlling and calculating costs, (2) tracing as opposed to allocating costs, and (3) the importance of indirect costs. See also Step-down method.

A level of activity that is critical in cost variance analysis, because if management has established a set of expectations concerning how costs should behave, given changes in volume from budgeted levels, an adjustment to budgeted cost can be made for a change in volume.

A section in the indenture that defines the conditions that must be satisfied before the firm can issue any additional debt.

Organizational units responsible for their own costs that provide administrative support to other organizational units or the organization as a whole.

The initial diagnosis made upon admission to a hospital.

Term used to describe the inclusion of patients who will become high resource users in a health plan.

accumulated depreciation/depreciation expense) This ratio indicates the average number of years an organization has owned its plant and equipment.

A statistic used to allocate costs from a cost center based on a cause-and-effect relationship. For example, a common allocation base to allocate the costs of maintaining medical records is number of visits. See also Cost driver.

The accumulated depreciation taken on the asset to the date of the financial statement.

A balance sheet account that estimates the total amount of patient accounts receivable that will not be collected. Also called allowance for bad debts and allowance for doubtful accounts.

Groups of outpatient services paid on a prospective basis to hospitals by CMS.

The gradual process of paying off debt through a long series of equal periodic payments. Each payment covers a portion of the principal plus current interest. The periodic payments are equal over the lifetime of the loan, but the proportion going toward principal gradually increases.

The last phase in management control, which reports and explains deviations from budgets.

The types of services that a patient requires while in a facility; one of the factors that determine service intensity.

A series of equal cash flows made or received at regular time intervals. “Ordinary annuities” describe annuities where the cash flows occur at the end of each period, whereas for “annuities due,” the cash flows occur at the beginning of each period.

Monies provided by governmental agencies to organizations.

The percentage of each asset relative to total assets.

The resources owned by the organization. It is one of the three major categories on the balance sheet.

Funds, excluding those restricted by donors, that have been set aside for specific purposes and are not available for general use. The balance sheet presentation of assets limited as to use must differentiate between current and noncurrent assets limited as to use and separate internally designated amounts from externally designated amounts either on the balance sheet or in the notes to the financial statements.

Determines the total value or cost of a resource that is used to produce a final product.

The collective term used for financial statements once they are prepared and reviewed by an external, independent accounting firm.

The entity (usually governmental) that formally issues tax-exempt revenue bonds on behalf of the beneficiary. It is not responsible for payment of the bonds and plays no active role once the bonds are issued.

Defines the average price for a Medicare discharge with a case-mix weight of 1.0.

Uses the weights assigned by Medicare to pay for outpatient procedures to case-mix adjust individual claims. A concept similar to the average charge per Medicare discharge case-mix adjusted measure.

{current liabilities/[(total expenses – depreciation expense)/365]} This ratio measures how long, on average, it takes an organization to pay its bills.

The total APC paid weight in an outpatient visit.

A fixed cost that is avoided or eliminated if a particular service is no longer offered.

An amount owed to the organization that will not be paid. Charity care is not considered a bad debt because nothing is owed to the organization for services provided.

Recognition of the amount of charges that will not be collected from patients from whom payment was expected. See also Allowance for uncollectibles.

One of the four major financial statements of a healthcare organization. It presents a summary of the organization’s assets, liabilities, and net assets as of a certain date.

Neatly formatted reports that provide information on the organization’s performance in a limited number of areas. The reports help focus attention to key performance indicators (also referred to as key metrics or measures) that are typically defined by senior leadership.

assets = liabilities + owners’ equity) In nonprofit, business-oriented healthcare organizations, the analogous equation is assets = liabilities + net assets.

A method to describe the change in a bond’s interest rate where a 1% change equals 100 basis points. One basis point is one-hundredth of 1% in the yield of an investment.

The amount of inventory on hand at the beginning of an accounting period. See also Ending inventory.

Comparative reference points used to help determine how a business is doing with respect to similar firms in any given industry, or how it is doing relative to its primary competitors.

The unit of time for measuring use of Part A benefits. The period begins upon the beneficiary’s admission to a hospital or other facility and ends after 60 consecutive days during which the individual was not an inpatient of any hospital, skilled nursing facility, or rehabilitative facility. Although there are limits to covered benefits per benefit period, there is no limit to the number of benefit periods a beneficiary can have. The beneficiary must pay the Part A deductible for each new period.

An assignment or grading of the likelihood that an organization will not default on a bond.

Agencies that assess the credit worthiness of an organization. The three major agencies are Moody’s, Standard & Poor’s, and Fitch.

A form of long-term financing whereby the issuer receives cash and in return issues a note. The issuer agrees to make principal and/or interest payments on specific dates to the holders of the note.

The cost of a capital asset minus accumulated depreciation.

An approach to analyzing the relationship among revenues, costs, and volume. It is also called cost-volume-profit or CVP analysis.

The point at which total revenues equal total costs. It is described by the equation: (price x volume) = fixed costs + (variable cost per unit x volume).

The central document of the planning/control cycle that identifies revenues and resources that will be needed by an organization to achieve its goals and objectives. It is a quantitative expression of a plan of action stated in monetary terms and typically covers a period of 1 year.

The difference between what was planned (budgeted) and what was achieved (actual).

A committee composed of several department managers, headed by the controller, that is often used to aid in budget development and approval.

Critical in cost variance analysis. It is on this expected volume level that management establishes its commitments for resources and therefore incurs cost. An unjustified faith in volume forecasts can lock management into a sizable fixed-cost position, especially regarding labor costs.

Services provided to a patient in an encounter of care aggregated into one payment unit.

The pricing mechanism that combines services that are charged for separately into a single package with a single price.

Bonds that may be redeemed by the issuer before they mature.

A situation that occurs when a new service decreases the revenues or cash flows from existing services.

The sources of funds to finance the noncurrent assets of the organization. It is also considered the debt and equity of the organization.

The increase in the value of an investment from the time it is purchased until the time it is sold.

Assets that have a useful life greater than 1 year, such as plant, property, and equipment. Plant and equipment are depreciated over time; land (property) is not.

The budget used to forecast, and in some cases justify, the expenditures (and in some cases the sources of financing) for capital expenditures.

Costs associated with the investment in equipment and facilities. Capital expenditure items are expected to provide benefits during a reasonably long period, at least 2 or more years.

Decisions regarding the acquisition of capital assets. This decision should be separate from the decision on how to finance capital assets.

A lease in which the lessor aims to lease an asset for virtually all its economic life. In return, the lessee is committed to lease payments for the entire lease period. Also called a financial lease.

The mix of assets a healthcare organization uses to finance its business including a proportion of long-term debt and equity.

Decisions regarding the relative amount of debt and equity used to finance the organization’s noncurrent assets.

Ratios that measure how the organization’s assets are financed and/or whether the organization can take on new debt.

A payment system in which providers receive a specific amount in advance to care for specific healthcare needs of a defined population over a specific period. Providers are usually paid on a per-member-per-month (PMPM) basis, and they assume the risk of caring for the covered population for the PMPM amount. The payments are derived from premiums paid by enrollees, and, typically, administrative fees for claims payment, case management, profit, and other costs are taken out of the premium before any payment is made to providers.

The coordination of services provided to a patient by a specific entity. It is often provided by a primary physician or by clinical experts who have the responsibility to approve, monitor, and/or evaluate the care given to a patient.

The mix of patients served by a provider classified by one or more salient characteristics (age, sex, diagnosis, acuity, etc.).

A fixed reimbursement amount depending on the type of case (hip replacement, normal newborn delivery, cardiac catheterization, etc.).

Component of a philanthropic program that defines the why donations are needed.

The balance sheet category that includes actual money on hand as well as money equivalents, such as savings and checking accounts. It excludes money restricted for something other than current operations.

The budget that projects the organization’s cash inflows and outflows. The bottom line is the amount of cash available at the end of the period.

Cash inflows and outflows resulting from activities such as obtaining grants or endowments or from borrowing or paying back long-term debt.

Cash inflows and outflows of an organization resulting from activities such as purchasing and selling investments or investing in itself by purchasing or selling noncurrent assets. It also includes transfers to and from the parent corporation.

The changes in cash resulting from the normal operating activities of the organization.

Processes and techniques focused on the acceleration of receivables and the cash conversion cycle. Reduction of the cash conversion cycle, along with the related investment of surplus funds, should be a critical objective of financial managers.

Money exceeding a minimum balance that the firm prefers to maintain to meet immediate operating expenses and minor contingencies, plus any compensating balance required by creditors.

The system of accounting that recognizes revenues when cash is received and expenses when cash is paid out. See also Accrual basis of accounting.

Comorbidity or complication (CC) and major complication and comorbidity (MCC) rates based on the MS-DRG system ranks how hospitals are performing based on the national average. It is a standard comparison that hospitals can use in order to determine whether they are properly coding the severity of a patient’s illness.

The process by which a provider justifies the necessity for capital expenditures to obtain approval from an independent agency, such as the government. If approved, a CON is issued.

An accountant who has passed certain examinations and met all other statutory and licensing requirements of a U.S. state to be certified.

Accumulation of actual paper documents or charge slips used to identify services performed, which are then posted to a patient’s account in a batch-processing mode by data processing or the business office. Alternatively, an order entry system may involve direct entry of charges to the patient’s account through a computer terminal.

A unique code reflected in the order entry system or the charge slips and also represented on the firm’s charge master (also known as CDM). There one code for each service procedure, supply item, or drug in the CDM.

A list of all items for which a firm has established specific prices.

A system used to better organize charge entry for selective services. One code is used, which then explodes into the list of supply codes used for that surgery.

See charge explosion.

A system in which providers set the rates for services. Reimbursement is based on the charge rather than being predetermined by the payer.

A type of gift transaction where an individual transfers assets to a charity in exchange for a tax benefit and a lifetime annuity.

The difference between established gross charge service rates and the amounts actually charged to indigent patients.

Free care provided to those who cannot pay for service. Also called indigent care. Each organization must have rules to differentiate it from bad debt. Some healthcare institutions may receive appropriations from the government to help offset the costs.

A request by a provider for payment for services provided to a beneficiary.

The ratio of the standard deviation divided by the mean. Large values for this ratio in a budgeting context imply large control limit corridors.

That portion of covered hospital and medical expenses, after subtraction of any deductible, for which the beneficiary is responsible. Under Part A, there is no coinsurance for the first 60 days of inpatient hospital care; from the 61st through the 90th day of inpatient care, the daily coinsurance amount is equal to one-fourth of the inpatient hospital deductible. For each of the 60 lifetime reserve days used, the daily coinsurance amount is equal to one-half of the inpatient hospital deductible. There is no coinsurance for the first 20 days of skilled nursing facility (SNF) care; from the 21st through the 100th day of SNF care, the daily coinsurance amount is equal to one-eighth of the inpatient hospital deductible. Under Part B, after the annual deductible has been met the beneficiary must generally pay 20% of the approved amount (plus any charges above the approved amount).

A borrower’s assets on which a lender has legal claim if a borrower defaults on a loan.

The interval between the generation of a bill and the actual collection of the cash from the patient or the patient’s third-party payer.

A negotiable promissory note (essentially an IOU) issued at a discount by large corporations.

A percentage of the unused portion of a credit line charged to the potential borrower. The annual fee is a function of the credit risk of the borrower and the reason for the line of credit.

Stock that entitles its holders to ownership rights in the corporation and to dividends only after the rights of preferred stockholders have been satisfied.

Related to nonprofit hospitals. Term used to describe the scope of services and support that a hospital provides in return for its tax-exempt status. Services include charity care and setting lower prices, or offering services that, from a financial perspective, might not be viable for for-profit firms.

An index created to provide a measure of the value a hospital provides to its community. It is composed of 10 measures that assess a hospital’s performance in 4 areas. It suggests that a hospital provides value to the community when it is financially viable, is appropriately reinvesting back into the facility, is maintaining a low-cost structure, has reasonable charges, and is providing high-quality care to patients.

The amount required to be maintained on deposit with the bank for such things as maintaining a credit line and fee-free checking.

The method of determining the future value of money in which interest is calculated on the cumulative principal and interest earned up to that point. See also Simple interest method.

(1) Calculating interest using the compound interest method. (2) Adjusting for the time value of money forward in time to a future value. See also Compound interest method and Discounting.

Monitoring the continued medical necessity of hospital treatment and assessing discharge needs to determine the appropriateness of payment.

Mergers that involve firms engaged in unrelated business activity.

Two or more corporations combine into a brand new corporation.

A method for adjusting financial statements while accounting for the effects of inflation. This is usually accomplished by adjusting for the purchasing power of the dollar at the end of the reporting period or the average during the fiscal year.

Alternative unit of measurement in financial reporting. This measurement reports the effects of all financial transactions in terms of constant purchasing power. The unit that is usually used is the purchasing power of the dollar at the end of the reporting period or the average during the fiscal year. The measurement is made by multiplying the unadjusted, or nominal, dollars by a price index to convert to a measure of constant purchasing power.

This is a long-term asset account that accumulates the cost of a project that has not yet been placed into service.

Uncontrollable changes in the environment that may affect the financial condition of the organization (changes in the payment system, labor shortages, and catastrophic events).

Providers with a continuum of care that runs the gamut from independent living, to assisted living, to skilled care.

An asset that, when increased, decreases the value of a related asset. Two primary examples are accumulated depreciation, which is the contra asset to properties and equipment, and the allowance for doubtful accounts, which is the contra asset to accounts receivable.

The difference between rates billed to a third-party payer, such as Medicare, and the amount that actually will be paid by that third-party payer.

The amount remaining after subtracting variable costs from revenues. When the organization is not at capacity, it is the “profit” the organization makes on providing each new unit that is available to cover all other costs. It may be determined on a total or per unit basis.

A chart that always has a central line for the average, an upper line for the control limit, and a lower line for the lower control limit.

Costs that can be influenced by a designated responsibility center or departmental manager within a defined control period.

The process of assigning payment responsibility when multiple insurers exist.

The parts of a healthcare bill for which the patient is responsible. These payments are used to prevent overutilization of services.

The resources used to produce a good or service.

The process of assigning pooled indirect costs to specific cost objects using an allocation base that represents a major function of a business.

The process by which a value is assigned to each and every resource transaction occurring between the entity being accounted for and another entity.

Organizational units responsible for providing services and controlling their costs. There are two major types: clinical and administrative.

An activity or event that causes activities to occur and thus resources to be used and costs to be incurred.

Anything for which a cost is found (a test, a visit, a patient day).

The rate of return required to undertake a project. See also Discount rate and Hurdle rate and Weighted average cost of capital (WACC).

The increasing payment from payers to cover losses from governmental and charity patients.

The relative proportion of each type of cost present in a firm.

A type of analysis whose successful use requires a sound system of standard setting, or budgeting, and a related system of cost accounting. It has great potential importance to the healthcare industry.

A payment system that uses provider cost, as opposed to charges, as the starting point to determine the amount of payment.

The underlying method for payment will be the provider’s cost.

See Break-even analysis.

A certificate attached to a bond representing the amount of interest to be paid to the holder.

The stated interest rate on a bond, as promised by the issuer.

The difference between established rates for services and rates billed to special patients, such as employees, physicians, and clergy.

Legal provisions in a bond that must be followed by the issuer. Also called a loan covenant.

An entity that is owed money for lending funds or supplying goods or services on credit.

Alternative method of asset valuation. This method of valuation revalues the assets in each reporting period. The assets are stated at their current value rather than their acquisition cost. This method recognizes gains or losses from holding assets before sale or retirement.

Assets that will be used or consumed within 1 year. Some organizations use a period of less than 1 year.

An organization’s financial obligations that are to be paid within 1 year.

The amount of principal that will be repaid on the indebtedness within the coming year. It does not equal the total amount of the payments that will be made during that year.

Codes for reporting medical services and procedures performed by physicians. See also Healthcare Common Procedure Coding System (HCPCS).

current assets to current liabilities) A liquidity ratio that measures the proportion of all current assets to all current liabilities to determine how easily current debt can be paid off. It is one of the most commonly used ratios.

Alternative method of financial reporting. Often referred to as current cost accounting.

Subset of balanced scorecards. Neatly formatted reports that provide information on the organization’s performance in a limited number of areas. The reports help focus attention to key performance indicators (also referred to as key metrics or measures) that are typically defined by senior leadership.

{[cash marketable securities]/[(operating expenses – depreciation)/365]} A ratio that indicates the number of days’ worth of expenses an organization can cover with its most liquid assets (cash and marketable securities).

[net accounts receivable/(net patient revenues/365)] This ratio indicates how quickly a hospital is converting its receivables into cash. It provides an estimate of how many days’ revenues are yet to be collected.

An unsecured bond, one that is not backed by any specific lien on the property.

Borrowing money from others at a cost in the form of interest. It is an alternative to equity financing. See also Equity financing.

The percentage of the firm’s investment that the board permits to be financed with debt.

[(excess of revenues over expenses + interest expense + depreciation expense)/(interest expense + principal payments)] A ratio that measures an organization’s ability to pay back a loan.

This fund represents a cushion for the investors if the issuer gets into some type of fiscal crisis.

Curves that relate future collections to past billings that are a common way to develop forecasts of patient receipts.

A set amount the patient is responsible for paying before third-party coverage begins. These are used to prevent overutilization of services.

It is one of several measures for contract negotiation assessment. Specifically, it shows the amount of contractual allowances deducted from gross charges. A lower percentage is clearly more desirable because additional net revenue results with the lower value.

The process of voiding existing indenture covenants and removing the bonds from the issuer’s financial statements.

Monies received that have not yet been earned. One of the most common types of deferred revenues is the receipt of capitation on the basis of per member per month.

An estimate/measure of how much a tangible asset (such as plant or equipment) has been “used up” during an accounting period. It is an expense that does not require any cash outflow under the accrual basis of accounting. See also Accumulated depreciation.

This fund is sometimes set up to equal the cumulative difference between debt principal repayment and depreciation expense on the depreciable assets financed with debt.

Employee, whether full or part time, whose focus is on fundraising activities. Incentives for development officers should be related to expectations for giving.

A patient classification system that categorizes patients into groups that are clinically coherent and homogeneous with respect to resource use. The prospective payment system uses approximately 550 DRGs as the basis for payment to hospitals.

Costs that are traced to a cost object. See also Indirect costs and Cost object.

An organization’s mission, vision, values, and goals, used in strategic planning.

(1) A reduction in the charge for services. (2) When the market rate is higher than the coupon rate, a bond is said to be selling at a discount from its par value. See also Premium.

(1) The returns that must be generated on a project to compensate the organization for its risk. (2) The returns the organization is forgoing by investing its money in one project as opposed to an alternative of similar risk. See also Cost of capital and Hurdle rate and Weighted average cost of capital (WACC).

Cash flows that have been adjusted (discounted) to their present value to account for the cost of capital (over time) and the time value of money.

The process of adjusting for the time value of money backward in time to present value. See also Compounding.

A negotiated reduction from list price granted to a health plan or uninsured patient.

A hospital that serves a relatively large volume of low-income patients.

A separate Medicare payment that is provided to a hospital that treats a large percentage of Medicaid- and Medicaid-eligible patients.

The sale of a portion of the firm to an outside party with cash or equivalent consideration received by the divesting firm.

The portion of profit an organization distributes to investors. By law, only investor-owned healthcare organizations can distribute dividends outside the organization.

Funds provided by a private entity or individual without the requirement of repayment. Donations can be either restricted or unrestricted. Also called philanthropy.

Method of cost allocation that is a refinement of the step-down method. Instead of closing the individual department after allocating its costs, it is kept open and receives the costs of other indirect departments. After one complete allocation sequence, the former departments are then closed, using the normal step-down method.

The difference between rates billed and amounts expected to be recovered.

See Diagnosis-related groups.

Indicates that an individual is entitled for both Medicare and Medicaid coverage.

A principle that states that the value of assets must always equal the combined value of liabilities and residual interest (also called net assets). This basic accounting equation may be stated as follows: assets = liabilities + net assets

Money that is due to an intermediary payer (Medicare, Blue Cross, etc.) from the organization that is, as yet, unpaid.

Under Medicare, this includes certain medical supplies and items such as hospital beds and wheelchairs used in a patient’s home.

When codes are left off the charge master and entered later by health information management personnel. Also referred to as soft coding.

Responsibilities to transfer economic resources or provide services to other entities in the future, usually in return for economic resources received from other entities in the past through the purchase of assets, the receipt of services, or the acceptance of loans.

Scarce means, limited in supply but essential to economic activity. They include supplies, buildings, equipment, money, claims to receive money, and ownership interests in other enterprises.

The relationship of the firm’s outputs to its stated goals and objectives.

(1) Measuring inputs against outputs. (2) The cost of service per unit rendered.

The difference between actual quantity (Ia) and budgeted quantity (Ib) multiplied by budgeted price (Pb).

A process whereby bills are sent electronically to third parties through electronic data interfacing.

Indirect and noncash compensation paid to an employee that includes such items as social security, unemployment, workers compensation, vacation, pension, and health insurance.

All services and products provided to the patient during a specific treatment at a healthcare firm.

The amount of inventory on hand at the end of an accounting period. See also Beginning inventory.

Funds contributed to be held intact for generating income. The income may or may not be restricted for specific purposes.

The value of all capital invested in the business, represented as follows: market value of equity + net debt. Also termed firm value or total value.

The purchase of assets with contributed and internally generated funds. See also Debt financing.

The rate at which a firm’s equity position is increasing. It is a critical measure of long-term financial success and a direct indicator of the firm’s asset growth potential.

The expected average cost, considering both capital and operating cost, over the life of the project. Calculated by dividing the sum of the present value of operating costs over the life of the project and the present value of the investment cost by the discount factor for an annualized stream of equal payments.

Amounts due to (or from) third-party payers for advances or overpayments (or underpayments) from third parties.

Operating income plus other income. This is analogous to net income before taxes in for-profit entities.

An actual outlay of cash that may or may not be recognized as an accounting expense at the time of payment.

A measure of the resources used to generate revenue and/or provide a service. Often used synonymously with costs. See also Cost.

The budget used to forecast operating expenses.

[(actual cost per unit – budgeted cost per unit) x actual volume] The difference between the variable expenses that would have been expected at the actual volume and those actually incurred.

[(actual volume – budgeted volume) x budgeted cost per unit] The portion of total variance that is due to actual volume being either higher or lower than budgeted volume. It is the difference between the expenses forecast in the original budget and what would have been expected at the actual volume.

An extremely unusual and infrequent occurrence.

The amount the bond will be worth when it “matures” in the future.

The selling of accounts receivable at a discount, usually to a bank, to obtain cash.

(1) When actual revenues are higher than budgeted revenues. (2) When actual expenses are lower than budgeted expenses. See also Unfavorable variance.

A study that looks at factors affecting an issue’s ability to generate the necessary cash flows to meet principal and interest requirements.

Mortgage insurance provided by the Federal Housing Administration that guarantees the principal and interest on a loan for a healthcare provider.

Arrangements in which providers receive payment for “necessary” services as the services are provided.

The actual payment is predetermined and is unrelated to either the provider’s cost or the provider’s actual prices.

The branch of accounting that provides general-purpose financial statements or reports to aid many decision-making groups, internal and external to the organization, in making a variety of decisions.

Staff at the healthcare firm can advise the patient regarding eligibility for discounts through the firm’s charity care policy or governmental programs such as Medicaid. Staff can help the patient complete the necessary documents required for coverage.

Document that outlines an organization’s short- and long-term financial strategies and goals; can be provided to potential donors to demonstrate fiscal responsibility and how the organization intends to use the money it receives.

An index that attempts to measure the four areas of financial position that collectively determine a firm’s financial strength: profits, liquidity, debt structure, and age of physical facilities.

A section of the statement of cash flows used to report activities such as borrowing and paying back loans.

How an organization chooses to finance its working capital needs.

A Medicare contractor that processes and pays Medicare institutional claims.

[total revenues/net plant and equipment] A ratio that measures the number of dollars generated for each dollar invested in an organization’s plant and equipment.

Literally, nonmovable assets. Generally used to refer to buildings and equipment.

Covers some defined time from a given budget date, usually 1 year.

Costs that stay the same in total over the relevant range as volume increases but that change inversely on a per unit basis.

Securities that pay a fixed amount of interest periodically, usually semiannually, over the lifetime of the bond.

The section of the expense budget that forecasts salary and benefits that do not change with volume.

The section of the expense budget that forecasts the cost of those supplies that will not vary as a direct result of changes in the amount of services provided (such as administrative office supplies).

A security with an interest rate that does not change during the lifetime of the bond.

A budget that adjusts revenues and/or expenses based on service volume.

Time delays in the billing and collection process. There are four categories: billing, collection, transit, and disbursement. An organization’s goal is to optimize it for incoming revenues and outgoing bills.

A type of organization whose profits can be distributed outside the organization and must pay taxes. Also called “investor-owned organizations.”

Typically used in the discounted cash flow calculation, it refers to those cash flows that are available to stakeholders (e.g., equity and debt holders) after consideration for taxes, capital expenditures, and working capital needs.

Full-time equivalent employees. Two half-time employees equal one FTE.

This is one measure used to help show how many revenue dollars are generated with a given number of full-time equivalent employees.

The costs of a service after taking into account its direct and fair share of allocated costs.

Term used for residual interest by not-for-profit healthcare organizations. Used interchangeably with net assets.

What an amount invested today (or a series of payments made over time) will be worth at a given time in the future using the compound interest method. This accounts for the time value of money. See also Present value.

A factor that, when multiplied by a present amount, yields the future value of that amount. It is calculated using the formula (1 + i)^n, where i is the interest rate and n is the number of periods. See also Present value factor (PVF).

A factor that, when multiplied by a stream of equal payments, equals the future value of that stream.

What a series of equal payments will be worth at some future date using compound interest. See also Future value factor of an annuity (FVFA) and Present value of an annuity.

(1) The difference between the amount received in selling a capital asset and its book value. (2) The difference between the purchase price of a stock and its sale price.

Persons who must preapprove the care received by a patient, such as a primary care physician who must approve a patient visiting a specialist. Gatekeepers are used in most point-of-service and HMO plans.

Operating expenses that are not contained in the labor or supplies budgets.

Bonds for which the tax revenue of a government entity is pledged.

Term often used to describe the body of rules and requirements that shape the preparation of the four primary financial statements created by the financial accountants.

A measure of the effect of geographic location on the cost of a service. It is used in calculating Medicare physician payments.

A measure of the differences in resource costs among physician fee schedule areas. There are three GPCIs, one for each relative value unit component: a work GPCI, an overhead GPCI, and a malpractice GPCI.

Payments in which the fees for all providers and suppliers (hospitals, physicians, nurses, home healthcare agencies, drugs, etc.) are included in a single negotiated amount. Often called “bundling of services.”

Realistic targets for long-range planning.

Shares are owned exclusively by the acquiring party (e.g., management) rather than by third-party investors, and there is no market for trading its shares.

Defined as the price or value paid for a business less the fair market value of the tangible assets acquired.

A committee that oversees and provides direction to the senior management of an organization that provides the goals, objectives, and approved programs used as the basis for budgetary development. In many cases it formally approves the finalized budget, especially the cash budget and budgeted financial statements.

Funds given to a healthcare organization for special purposes, usually for a limited time.

The total amount the healthcare organization charges for services before discounts and allowances.

Computer software that translates variables such as age, diagnosis, and surgical codes into the diagnosis-related group under which the Medicare payment amount is determined.

An amount defined as (return on equity (ROE)/reported income index).

Alternative method of financial reporting. Often referred to as constant dollar accounting.

Entities that receive premium payments (fixed periodic prepayment) from enrollees with the understanding that the HMO will be financially responsible for all predefined health care required by its enrollees for a specified period of time. The health care is provided through the HMO’s provider network.

Accounts created by individuals and funded with pretax dollars that can be used to pay for a variety of healthcare expenses, including large deductibles and copayments.

The HCPCS is a coding system for all services performed by a physician or supplier. It is based on the American Medical Association Physicians’ Current Procedural Terminology codes and is augmented with codes for physician and nonphysician services (such as ambulance and durable medical equipment), which are not included in CPTs.

A transaction that reduces the risk of an investment.

A technique that can be used to estimate the variable and fixed-cost coefficients of a semivariable cost function.

A public agency or private organization that is primarily engaged in providing skilled nursing services and other therapeutic services in the patient’s home. Service examples are physical, occupational, or speech therapy; medical social services; and home health aide services.

Eighty case-mix groups available for patient classification using three classification criteria: clinical severity, functional severity, and service utilization severity.

Fundraising effort designed for senior citizens, aged 70 or older, who own mortgage-free homes. The homeowners sign a revocable agreement that, upon their deaths, transfers the title to their homes to the hospital. In return, they receive a monthly payment that is based on a loan from the hospital.

A merger of two firms that operate in the same kind of business.

Palliative care, such as medical relief of pain, provided to patients who are certified to be terminally ill.

Medicare HI, also referred to as Part A, covers expenses of inpatient, hospice, skilled nursing facility, or home health agency services for individuals who are age 65 or older and are eligible for retirement benefits under the Social Security or Railroad Retirement systems. Coverage is also provided for individuals younger than age 65 who have been entitled for not less than 24 months to benefits under the Social Security or Railroad Retirement systems on the basis of disability and for certain other individuals who are medically determined to have end-stage renal disease and are covered by the Social Security or Railroad Retirement systems.

See Cost of capital and Discount rate and Weighted average cost of capital (WACC).

A diagnosis and procedure classification system published by the World Health Organization (WHO). ICD-10-CM codes are the basis for grouping patients into diagnosis-related groups and is the successor of the ICD-9-CM.

The excess of revenue over expenses; from a large number of individual operations within a healthcare entity, it is aggregated in the statement of revenues and expenses.

The bottom line in the statement of operations. It includes items such as operating and nonoperating income, contributions of long-lived assets, transfers to parent company, and extraordinary items.

Cash flows that occur solely as a result of undertaking a project. Basically, the marginal difference between alternatives.

An approach to budgeting that begins with what exists and applies a slight increase, no change, or a slight decrease to various line items, programs, or departments. See also Zero-base budgeting.

When services have been delivered but no claim has been received to date.

Legal document that states the conditions and terms of a bond.

Costs that are not traced to a cost object but must eventually be allocated across cost objects. See also Direct costs.

A department that may provide services, but they are usually not directly traceable to a specific patient encounter.

Medicare add-on payment to a teaching hospital. This allowance is related to the numbers of interns and residents at the hospital and the hospital’s bed size.

Loose affiliation of providers who agree to cover the healthcare needs of a covered population on a capitated basis, usually through a per-member-per-month payment arrangement.

The rise in an economy’s general level of prices.

All costs that go into the production of a good or service; in health care, these include costs such as medical supplies and labor expenses.

Services provided by hospitals (outpatient and inpatient), home health agencies, hospices, comprehensive outpatient rehabilitation facilities, end-stage renal disease facilities, rural health clinics, and skilled nursing facilities.

(1) The cost to borrow money. It can be expressed in dollars or as a percentage. (2) Payment to creditors for the use of money on credit.

A request for payment that does not cover a complete stay in a hospital or skilled nursing facility that is submitted by a provider when a beneficiary is still receiving services (i.e., has not yet been discharged).

Reviewing claims sent to payers to ensure that care has been appropriately described and decrease the chances that the claims will be denied. This process usually includes utilization review.

The percentage return on an investment. It is the rate of return at which the net present value equals zero. Often used as a comparison to cost of capital.

The ICD-9-CM is a diagnosis and procedure classification system. ICD-9-CM codes are the basis for grouping patients into diagnosis-related groups.

In a healthcare facility, these are items that are to be used in the delivery of healthcare services. They may range from normal business office supplies to highly specialized chemicals used in a laboratory.

One who advises corporate clients on their financial strategy and/or is primarily involved in the distribution of securities from the issuing organization to the public.

Responsibility centers responsible for making a certain return on investments.

Bonds that have received a rating ranging from AAA to BBB (at S&P) or Aaa to Bbb (Moody’s), of which the highest are called quality ratings.

Firms owned by risk-based equity investors who expect the managers of the corporation to maximize shareholder wealth. See also For-profit.

All not-for-profit firms with annual revenues greater than $25,000 and who are exempt from federal income tax are required to file this form on an annual basis. The form contains a variety of financial information, including balance sheet and income statement data. The form also contains information on compensation for the highest paid executives.

Expenditures that are essential to consummate the financing arrangement.

An entity that sells bonds to raise money.

An arrangement that involves the joining together of two or more firms in a project or even in a new company founded jointly by the two companies.

Bonds rated BB and below by S&P or Ba and below by Moody’s. These are considered high risk and usually have a high default rate.

That part of the expense budget that forecasts the cost of fixed and variable labor.

A figure that shows how many revenue dollars are generated with a given number of full-time equivalent employees.

A long-term asset that indicates the cost of the land or constructed improvements to land, such as driveways, walkways, lighting, and parking lots.

A contract in which the lessee (user) agrees to pay the lessor (owner) a specific amount over a period of time for the use of an asset.

See Simple linear regression method.

An entity that temporarily grants the use of money or an asset to another in return for compensation, usually in the form of interest.

How much time a patient spends in a facility for services rendered or recuperation. One of the factors that determine the service intensity.

The amount of interest and principal repaid each year that remains fairly constant. Also called level-debt principal.

The purchase of the entire public stock interest of a firm, or division of a firm, financed primarily with debt.

The organization’s legal obligations to pay its creditors. Liabilities are classified as current and noncurrent. Liabilities are one of the three major categories on the balance sheet and are part of the fundamental accounting equation.

A security interest in one or more assets granted to lenders in a secured loan.

A method for estimating the cost of a capital project that reflects total costs, both operating and capital, over the project’s estimated useful life.

A beneficiary is entitled to 60 lifetime reserve days for inpatient hospital care. When more than 90 days of inpatient care are required in a benefit period, a patient may choose to draw on the reserve days. Patients are required to pay a daily coinsurance amount equal to one-half of the inpatient hospital deductible for each reserve day.

A business entity that combines the tax flow-through treatment characteristics of a partnership (i.e., no double taxation) with the liability protection of a corporation.

Another name for a limited liability company.

Limited partnerships offer limited liability to the limited partners along with tax flow-through treatment. There is at least one general partner who has unlimited liability for the partnership’s debts and obligations.

A contract between a lender and a potential borrower preauthorizing the potential borrower’s right to borrow up to a specific amount on request as long as they fulfill the terms and conditions of the contract. Also called a letter of credit.

The budget format that lists revenues and expenses by category, such as labor, travel, and supplies. Categories are sometimes broken down into subcategories. See also Performance budget and Program budget.

The ease and speed with which an asset can be turned into cash.

Ratios that answer the question: How well is the organization positioned to meet its short-term obligations?

A schedule detailing the principal and interest payments required to repay a loan. Typically, the periodic payments remain unchanged, but the proportion used to pay off the principal increases over time.

A mailbox directly accessible by a bank that deposits receipts directly into the healthcare provider’s account.

The amount owed for obligations that exceed 12 months past the date of the balance sheet.

long-term debt/net assets) A measure of the proportion of an organization’s assets that are financed by debt as opposed to equity. In for-profit organizations, it is called the long-term debt to equity ratio and is calculated using the formula (long-term debt/owners’ equity).

The total amount of multiyear debt due in future years.

Debt to be paid off in a period longer than 1 year.

A category of noncurrent assets not intended to be used for operations but only for capital appreciation and dividends that will be held for a period longer than 1 year.

Information that covers multiple periods. Used in horizontal and ratio analysis.

A key performance indicator that measures average staffing hours per a calculated equivalent patients unit, which reflects inpatient and outpatient activity adjusted for case intensity.

Any of a number of arrangements designed to control healthcare costs through monitoring, prescribing, or proscribing the provision of health care to a patient or population. See also Health maintenance organizations (HMOs).

A prepaid or capitated health plan that is a state-licensed legal entity that provides health care directly or under arrangements for its members and participates under agreement or contract in a federal Medicare managed-care program.

The purchase of the entire public stock interest of a firm, or division of a firm, financed primarily with debt when the transaction is made by management.

A system designed to gather, store, manipulate, and analyze data in order to provide information for management decision making.

The process of preparing management reports and accounts that provide financial and statistical information to managers.

Those services that each state Medicaid program is required to cover, including hospital, physician, and skilled nursing facility services.

The percentage of gross patient revenues over total expenses.

Results from increased market share.

The current traded rate for similar risk securities.

The most critical measure of performance in the market factor category. High market share often leads to higher realized prices and lower cost per unit.

Most healthcare markets are regional in nature, and there are travel limits beyond which most consumers will not venture. Greater market share leads to greater leverage when negotiating health plan contracts.

The price at which something, such as bonds and stocks, could be bought or sold today on the open market.

Short-term claims that can be bought and sold through a capital market. Examples are treasury bills, commercial paper, and certificates of deposit.

Debt that is guaranteed by all members who are a part of the master indenture.

The end of a bond’s life.

A government-sponsored program in which beneficiaries become eligible through specific means testing. Medicaid is the largest and best known example.

A joint federal-state entitlement program intended to provide basic medical services for certain groups of low-income and disabled persons.

Organizations who function as Health Maintenance Organizations (HMOs) using a managed care model to coordinate and reimburse for Medicaid services.

Organization whose main purpose is to provide administrative services (claims management, utilization review, etc.) to or for healthcare organizations.

An individual who is enrolled for coverage under the Medicare program.

An index that provides an indication of the average complexity of Medicare inpatients seen.

A determination of whether an individual meets the legal requirements for Medicare coverage (age 65 or older, disabled, or requiring kidney transplant or renal dialysis due to chronic kidney disease).

A facility, supplier, or physician who furnishes Medicare services.

The payment classification system used by Medicare for inpatient hospital services.

The combination of two or more companies, with one continuing as a legal entity while all others cease to exist; the former company’s assets and liabilities become part of the continuing company.

A statement intended to guide the organization into the future by identifying the unique attributes of the organization, why it exists, and what it hopes to achieve.

Items that reflect cash or claims to cash that are fixed in terms of the number of dollars, regardless of changes in prices.

Items that reflect cash or claims to cash that are fixed in terms of the number of dollars, regardless of changes in prices.

Pooling of investors’ funds for the purchase of a diversified portfolio of short-term financial instruments, such as treasury bills and certificates of deposit. This pooling of funds allows small investors, such as small healthcare facilities, to earn short-term money market rates on their investments.

A note payable that has as collateral real assets and that requires periodic payments.

Bonds that hold the healthcare provider’s real property and equipment as security or collateral in case of default.

Budgets that typically cover 2 to 5 years.

Guarantee of municipal debt by an insurance firm. Collapsed in 2008-2009 as a result of the mortgage loan securitization debacle.

A type of certificate of deposit that an investor may sell before maturity.

The amount expected to be collected from payers. It is calculated as (gross accounts receivable – discounts and allowances – allowance for uncollectibles).

Assets minus liabilities. One of the three major categories on the balance sheet. Traditionally known as stockholders’ equity in investor-owned organizations and fund balance in not-for-profit organizations. In not-for-profit healthcare organizations, net assets must be categorized into three categories: unrestricted, temporarily restricted, and permanently restricted.

Previously restricted assets no longer restricted because the terms of the restriction have been met.

net assets/total assets) A ratio that reflects the proportion of total assets financed by equity. In for-profit organizations it is called the equity to total asset ratio and is calculated using the formula (owners’ equity/total assets).

The section of the statement of cash flows that reports the total change in cash and cash equivalents over the accounting period.

The revenue that the organization has a right to collect. It is computed as (gross patient service revenues – contractual allowance and charity care).

This metric determines the average amount of revenue realized per equivalent discharge and is affected by payer mix.

This is one measure used to help show how many revenue dollars are generated with a given number of full-time-equivalent employees.

The difference between the initial amount paid for an investment and the related future cash inflows after they have been adjusted (discounted) by the cost of capital.

Gross proceeds less the underwriter’s fee and other issuance fees.

The difference between current assets and current liabilities.

From an accounting perspective, a dollar of one year is no different from a dollar of another year. No recognition is given to changes in the purchasing power of the dollar because purchasing power is not measured.

Assets that provide service for a period exceeding 1 year. Sometimes referred to as long-term assets.

Financial obligations paid off over a time period longer than 1 year.

One of several measures for contract negotiation assessment. It helps to assess any possible weakness in current contract terms. Specifically, it represents the percentage of revenues not derived from Medicare or Medicaid patients. A high number indicates greater relative importance of effective contract negotiation.

Expenses of the organization incurred in non-healthcare-related activities.

Result from peripheral or incidental transactions. The definitions of peripheral and incidental transactions are not exactly clear, and the terms could be treated inconsistently. In general, the following are categorized as nonoperating gains and losses: contributions or donations that are unrestricted income from endowments, income from the investment of unrestricted funds, gains or losses on sale of property, and net rentals of facilities not used in the operation of the facility.

The income (operating revenues – operating expenses) earned in non-healthcare-related activities.

nonoperating revenues/total operating revenues) A ratio that reflects how dependent the organization is on non-patient-care-related net income.

Revenues of the organization earned in areas not related to normal operations.

Can choose to accept assignment on a case-by-case basis and has a lower Medicare fee schedule. The limiting charge is equal to 95% of the approved fee schedule.

(1) Organizations that have a special designation because they provide goods or services that result in needed community benefit. In turn, such organizations are not required to pay most taxes. (2) The designation of an organization as one that is not generally required to pay taxes and may not distribute its profits.

A legal obligation to pay the holder of the note or lien.

Key information not available in the body of the statements, such as organization’s structure, accounting practices, how charity is determined, the position of investments, which assets are restricted, and the depreciation method used.

A document that outlines the terms of the offering of a private placement security.

The cost of the supplies on hand at the beginning of the year.

The revenue and expense budgets of an organization.

The cash flows derived from an organization’s operating activities.

Funds whose purpose is to provide a dependable flow of investment earnings that can be used to supplement expected weaknesses in operating earnings.

The expenses incurred from an organization’s operating activities.

A measure of the income earned from operating activities. It is calculated as (unrestricted revenues, gains, and other support – expenses and losses).

A lease for a period shorter than the equipment’s economic life, usually cancelable.

The proportion of profit remaining after subtracting total operating expenses from operating revenues. It is calculated as (operating income/total operating revenues).

Revenues generated from an organization’s operating activities.

Proceeds lost by forgoing other opportunities.

A series of payments made or received at the end of each period.

Those that are neither current nor involve property and equipment. Typically, they are either investments or intangible assets.

A catch-all category for miscellaneous expenses and losses not included in other categories (telephone, travel, meals, etc.).

Nonoperating income.

Operating income not reported elsewhere under revenues, gains, and other support.

An extremely long or unusually high-cost inpatient hospital stay when compared with most stays classified in the same diagnosis-related group.

A provision that specifies that the hospital may pay on a basis other than per diem or case if charges exceed a specific limit. Also known as stop-loss provision.

Influence the level of costs in one of two ways: First, the absolute level of output provided may affect the quantity of resources necessary to produce the output level. Second, service intensity may affect resource requirements.

Costs in non-revenue-producing departments.

Residual interest for entities with ownership interest.

Amount that a bondholder is paid at the time of the bond’s maturity. Also called face value.

An entity that owns other companies.

See Hospital insurance (HI).

See Supplementary medical insurance (SMI).

One who agrees to accept Medicare’s payment for a service as payment in full and bills the patient for the copayment portion only.

Unincorporated businesses with two or more owners.

Payments to hospitals for costs that are excluded from the prospective payment system, including bad debt, kidney acquisition costs, and direct costs of medical education.

Revenue that results from the provision of services to patients.

A Medicare model case-mix classification model that focuses on patient and clinical characteristics to determine payment categories for home health services; based on 30-day episodes of care.

A Medicare model for payment of skilled nursing claims. Payments under the PDPM still utilize a per diem payment model; however, the inputs are slightly different.

A method to evaluate the feasibility of an investment by determining how long it would take until the initial investment is recovered. As it is usually applied, this method does not account for the time value of money.

Describes the manner by which a payer (Medicare, Medicaid, commercial health plans, and others) determines the amount to be paid for a specific healthcare claim. There are three payment bases: cost, fee schedule, and price related.

Charging patients a penalty for seeking care from out-of-network providers.

A set reimbursement per inpatient day based on the type of case.

The most common way in which providers receive capitated payments.

A budget that presents not only line items and programs but also the performance goals that each program can be expected to attain. See also Line-item budget and Program budget.

Financial and nonfinancial standards against which organizational performance is measured.

Series of payments over time, such as interest paid to bondholders.

Donated funds that cannot be used for any purpose other than those indicated by the donor.

Donated assets that have restrictions on their use that will never be removed.

An investment that generates an annuity for an indefinite period of time.

A classification of the activities of the organization into four major components, with budgeting being the focus: strategic planning, planning, implementing, and controlling.

Funds restricted for use in plant replacement and expansion.

The category of assets summarizing the amount of the major capital investments of the facility. Plant means buildings, property is land, and equipment includes a wide variety of durable items from beds to computed tomographs. Property, plant, and equipment are recorded on the organization’s books at cost and, over time, plant and equipment (but not land) are subject to depreciation.

See Per member per month (PMPM).

A hybrid between an HMO and a PPO in which patients are given the incentive to see providers participating in a defined network but may see non-network providers, though usually at some additional cost.

Programs often sponsored by the state hospital association or a regional association in which individual hospitals are involved in the financing and can obtain funds from the pool. The interest rate is usually much lower because the risk is spread across several hospitals.

A requirement that prior approval or review of service takes place before care is delivered.

An independent provider or provider network preselected by the payer to provide a specific service or range of services at predetermined (usually discounted) rates to the payer’s covered members.

(1) An amount paid by an employee or employer to pay for healthcare insurance. (2) When the market rate is lower than the coupon rate, a bond is said to be selling at a premium.

Revenues earned from capitated contracts.

A benefit paid for in advance (rent, insurance, etc.). Also called prepaid expense.

Expenditures already made for future service, such as prepayment of insurance premiums for the year, rents on leased equipment, or other similar items.

A provision that specifies the point in time at which a debt can be retired and the penalty imposed for early retirement.

The value today of a payment (or series of payments) to be received in the future taking into account the cost of capital. It is calculated using the formula: future value x present value factor [PV = FV x PVF or PV = FV x 1/(1 + i)^n]. See also Future value.

A factor used to discount future cash flows. It is the reciprocal of the future value factor and is calculated by the formula 1/(1 + i)^n. See also Future value factor (FVF).

What a series of equal payments in the future is worth today taking into account the time value of money. See also Future value of an annuity.

Concept that describes the relationship between a change in price and demand for the service or product.

The process of establishing specific prices for the services provided by the healthcare provider.

When the provider is paid for services based on some relationship to its total charges or price for the services delivered to the patient.

Primary care physician who serves as a central triage point for the referral and approval of services.

Amount invested.

The medical condition that is chiefly responsible for the admission of a patient to a hospital or for services provided by a physician or other provider. It is determined after the patient has been examined.

Prior approval for elective services that is required by the health plan before a claim can be submitted; payment may be denied if authorization is not obtained.

The sale of securities directly to investors without a public offering.

Shares of the company are held by relatively few investors and are not available to the general public.

Customized financial statements that do not necessarily conform to generally accepted accounting principles (GAAP). When they are prepared before the accounting period, they present what the organization’s financial statements will look like if all budgets are met exactly as planned. They also can be prepared for historical statements. In that case, the financial statements are remade to illustrate the effect of a proposed transaction, such as a business combination, acquisition, or proposed issue of securities. Their role is to present underlying assumptions and events that permit investors to understand the potential effect of a proposed transaction.

The elapsed time between processing a payment once received and depositing it in the bank.

The amount that a service contributes to cover all other costs after it has covered those costs that are there solely because the service is offered (its total variable cost and avoidable fixed costs) and would not be there if the service were dropped. Computed as (total contribution margin – avoidable fixed costs).

If a service’s product margin is positive, the organization will be better off financially if it continues with the service, all other things equal. Conversely, if a service’s product margin is negative, the organization will be better off financially if it discontinues the service, all else being equal.

The relationship of physical resources to the outputs that are produced through the use of those resources.

Outputs or services.

A corporate form for professionals who want to have the advantages of incorporation, also called a professional association.

Fees paid to contract clinicians such as physicians, social workers, and physical therapists. Nursing expenses are usually reported under a category such as labor expenses.

Organizational units responsible for controlling their costs and earning revenues. There are three types of profit centers: traditional profit centers, capitated profit centers, and administrative profit centers.

Attempts to compare rates of return. The numerator is the net present value of the project, and the denominator is the investment cost.

Ratios designed to answer the question: How profitable is the organization?

A budget in which line items are presented by program. See also Line-item budget and Performance budget.

The phase of management control that determines the nature and size of programs an organization provides to accomplish its stated goals and objectives. It is the first phase of the management control process and interrelates with planning.

A variety of methods and means established by an organization to encourage giving; examples include deferred giving plans, such as unitrusts, annuity trusts, or pooled-income funds.

Lists of potential donors in a community; these are frequently the targets of fundraising campaigns.

System used by Medicare to reimburse hospitals a set amount based on the patient’s diagnosis-related group (DRG) or ambulatory patient classification (APC).

A preselected list of providers from which a patient can choose without being liable for additional costs beyond any deductibles and copayments.

A statement of operations account that estimates the portion of receivables that are not likely to be collected. The provision for bad debt is the cost recognized in a particular period only. The related allowance for uncollectibles on the balance sheet is a cumulative account.

An organization in which the assets (and accumulated earnings) belong to the public or to the charitable beneficiaries the trust was organized to serve.

A bond sold to the investing public through an underwriter (sometimes called an investment banker).

For-profit firms that buy and sell shares of their company stocks on the open market.

Relates to the acquisition of supplies and labor.

An abbreviation of a Latin phrase that means “he who as well for the king as for himself sues in this matter.” The technical legal term for the mechanism in the Federal False Claims Act that allows persons and entities with evidence of fraud against federal programs or contracts to sue the wrongdoer on behalf of the government.

A measure of the organization’s liquidity. Calculated as [(cash + marketable securities + net accounts receivable)/current liabilities].

An approach to analyzing the financial condition of an organization based on ratios calculated from line items found in the financial statements. There are four major categories of ratios: liquidity, profitability, capitalization, and activity.

See Resource-based relative value scale (RBRVS). See also Relative value unit.

The increases or decreases in the value of a stock from the time it was purchased until the time it is sold.

A qualification introduced by the payer to limit its total payment by excluding certain categories of cost or placing limits on costs that the payer deems reasonable.

The level of ROI that will permit the firm to maintain its financial viability.

When the issuer buys back the outstanding bonds from the investors.

When the outstanding bonds are not acquired by the issuer, and the present bondholders continue to maintain their investment.

A standard for measuring the value of a medical service provided by physicians relative to other medical services provided by physicians that has three components: the physician work component (reflecting physician time and intensity), the overhead component (reflecting all categories of practice expenses, exclusive of malpractice insurance costs), and the malpractice expense component (reflecting the cost of obtaining malpractice insurance).

A system used with relative value unit (RVU) costing in which weights are assigned for each of the commonly produced outputs. These assigned weights can be used to cost individual procedures.

The range over which fixed costs in total and variable costs per unit do not change.

The valuation of assets measured by the money value required to replace them.

Some types of financing require the creation of fund balances in escrow accounts under the custody of the bond trustee.

Per diem payments for each admission are case-mix adjusted using this resident classification for skilled nursing care.

A system for measuring physician input to medical services for the purpose of calculating a physician fee schedule. The relative value of each service is the sum of relative value units (RVUs) representing physician work, practice expenses, and the cost of malpractice insurance.

Organizational unit given the responsibility to carry out one or more tasks and/or achieve one or more outcomes.

A donation with conditions that must be satisfied. See also Temporarily restricted net assets.

The portion of the profits the organization keeps in-house to use in support of its mission.

A review of all services after they have been performed and only reimbursing for those services deemed medically necessary by the payer.

The ratio of net income divided by total equity. The primary financial criterion that should be used to evaluate and target financial performance in any organization.

excess of revenues over expenses/net assets) In not-for-profit healthcare organizations, a measure of the rate of return for each dollar in net assets. In for-profit organizations, a measure of the rate of return for each dollar in owners’ equity; called return on equity and has the formula (net income/owners’ equity).

excess of revenues over expenses/total assets) A measure of how much profit is earned for each dollar invested in assets. In for-profit organizations it is called return on assets and is calculated as (net income/assets).

Amounts earned by the organization from the provision of service or sale of goods.

The budget that forecasts the operating and, in some cases, the nonoperating revenues that will be earned during the budget period.

Supplementing traditional sources of revenue with new sources.

The amount of the total revenue variance that occurs because the actual average rate charged varies from that originally budgeted. It can be calculated using the formula [(actual rate – budgeted rate) x actual volume].

The portion of total variance in revenues due to the actual volume being either higher or lower than the budgeted volume. It can be computed using the formula [(actual volume – budgeted volume) x budgeted rate].

It is similar to a line of credit except that it is usually for a period longer than 1 year. Revolving credit agreements may be in effect for 2 to 3 years. Most revolving credit agreements are renegotiated before maturity.

Budgets updated on an ongoing basis, continually forecasting a given time frame, for example, 3 years in advance.

See Relative value units.

The amount paid to staff (either salaried or hourly workers).

The amount an organization would receive by selling a fixed asset, usually either at the end of a project or at the end of its useful life.

Form that must be filed with IRS 990 forms by all not-for-profit hospitals starting in 2010. Primary purpose of this form is to collect information regarding the provision of charity care by not-for-profit hospitals.

A medical condition other than the principal diagnosis that affected the treatment received or length of stay in a hospital, or services rendered by a physician or other provider.

Markets that deal in the buying and selling of bonds that have already been issued.

A loan in which specific assets are pledged as collateral.

The governmental agency charged with ensuring that market trading is fair, among other things.

Considered the opposite of mergers and acquisitions. The two major types are spin-offs and divestitures.

Similar to the high-low method regarding its mathematical solution. To derive the estimate of variable cost, the difference between the mean of the high-cost points and the mean of the low-cost points is divided by the change in output from the mean of the high-cost points to the mean of the low-cost points.

A change regarding changes in output, which is not proportional. Considered variable or fixed, depending on the size of the steps relative to the range of volume under consideration.

Costs that include elements of both fixed and variable costs.

Bonds issued at various maturities and coupon rates.

Organizational units primarily responsible for ensuring that services are provided to a population in a manner that meets the volume and quality requirements of the organization. The most basic type of responsibility centers.

One of several factors that drive total healthcare costs; also referred to as services/encounters. Intensity is determined by how long a patient is in a facility and how much care they require.

(1) The range of services offered by a provider. (2) Issues focusing on the appropriateness of care.

Services produced by a department within the production (or treatment) process.

Financing paid back in less than 1 year.

Investments liquidated within 1 year, such as certificates of deposit, commercial paper, and treasury bills.

Financing in which only the interest on the principal is calculated each period. See also Compound interest method.

A method that produces estimates of variable cost and fixed cost that minimize the variance between predicted and actual observations. In essence, it is a more precise version of the visual-fit method. Also called least-squares regression.

Method of cost allocation used in an attempt to calculate the exact cost allocation amounts. A system of equations is established, and mathematically correct allocations are computed.

Credit arrangement in which the entire principal (plus interest) must be paid on the date it is due, rather than making payments at intervals over the course of the loan; may be either on a discount or add-on basis.

Funds paid periodically to the bond trustee, who maintains the fund for the healthcare provider as part of the bond contract. A covenant may establish that part of the principal be paid each year, earmarked for the orderly retirement or the redemption of bonds before maturity. It is analogous to the principal repayment of a mortgage.

An institution that meets specified regulatory certification requirements and is engaged primarily in providing inpatient skilled nursing care and rehabilitative services.

Unincorporated businesses owned by a single individual. They do not necessarily have to be small businesses. Solo practitioner physicians often are sole proprietors.

Payment method in which the individual services provided to a patient in an encounter of care are not aggregated.

Funds donated by individuals or organizations and restricted for purposes other than plant replacement and expansion or endowment.

Relatively high-return, high-risk bonds. Sometimes called junk bonds.

A separate new legal entity that is formed with its shares distributed to existing shareholders of the parent company in the same proportions as in the parent company.

The difference between the price paid for a security by an investment banker and its sale price. Usually quoted in terms of basis points.

A HMO in which the providers are employees of the HMO.

Used in manufacturing cost accounting systems to accurately cost historical or future encounters of care.

Critical in cost variance analysis. Equal to actual volume, unless there is some indication that not all output was necessary.

One of the four major financial statements. It answers the questions: Where did our cash come from and where did it go during the accounting period?

One of the four major financial statements. It explains the changes in net assets from one period to the next on the balance sheet. Also called statement of changes in owners’ equity in a for-profit business.

One of the four major financial statements. It summarizes the organization’s revenues and expenses during an accounting period as well as other items that affect its unrestricted net assets. It is analogous to, but different from, an income statement in a for-profit organization.

Budgets that forecast for a single level of activity.

Direct coding of HCPCS codes into the charge master. Also referred to as “hard coding.”

Predictions of future activity based on a mathematical model extrapolated from historical data. They can be determined from major econometric studies to simple time-series techniques.

The budget that identifies the amount of services provided, usually by payer type.

Agreements by which payers agree to send patients to selected providers in return for discounts.

A method of allocating costs that are not directly paid for (utilities, rent, administration) into those products or services to which payment is attached (day of care, a brief visit). See also Activity-based costing (ABC).

Fixed costs that increase in total at certain points as the level of activity increases, such as labor costs that increase when a new employee is added after certain volumes of service are reached.

A method used by providers to limit the risk in cases where costs incurred are significantly greater than standard reimbursements for those services.

This provision specifies that the hospital may pay on a basis other than per diem or case if charges exceed a specific limit. Also known as outlier provision.

Refer to areas of activity that may stand alone.

A method by which the organization develops its strategies and budgets to meet future financial targets.

First, a statement of mission or goals (or both) is required to provide guidance to the organization. Second, a set of programs or activities to which the organization will commit resources during the planning period is defined. There is not agreement among leading experts regarding the definition of strategic planning.

A prediction whose reliability is based on the wisdom and understanding of the forecaster. Often referred to as a “seat of the pants” method. They may have a place in the estimation of product line volumes.

An organization owned and/or managed by another organization.

Very risky “junk bonds.”

Cost already incurred. It should not be included in cost analyses of future projects.

Medicare SMI, also referred as Part B, is a voluntary insurance program that covers physician services (inside or outside of the hospital), outpatient hospital services, ambulatory services, and certain medical supplies and other services for all persons age 65 or older and persons eligible for Part A due to disability or chronic renal disease.

The expense budget that forecasts fixed and variable supplies.

Principle that states that no business entity can generate a growth rate in assets that is greater than its growth rate in equity for a prolonged period.

A technique to evaluate an organization’s strengths, weaknesses, opportunities, and threats. This technique often is used as part of the strategic planning process.

Assets that have a physical presence.

An investment that reduces the amount of income tax to be paid, often because interest and depreciation expenses are tax deductible.

Bonds in which the interest payments to the investor are exempt from Internal Revenue Service (IRS) taxation. These bonds must be issued by an organization that has received tax exemption from the IRS and be used to fund projects that qualify as “exempt uses.” Tax-exempt revenue bonds are backed by the organization’s revenues. They offer lower interest rates than do taxable bonds.

Donated funds can become unrestricted if the purpose of the funds is fulfilled before all funds are spent or if a certain agreed upon time passes.

An investment that is liquidated within 1 year, such as certificates of deposit, commercial paper, and treasury bills.

An option that permits investors to redeem their bonds at some predetermined interval-perhaps daily-at the face value. Also called a “put.”

A specified amount of time.

A form of long-term financing that typically must be paid off within 10 years. They require the borrower to pay off or amortize the principal value of the loan over its life.

The value of a bond at maturity.

An agent that agrees to pay on behalf of a patient or group of patients. Examples include Medicare, Medicaid, indemnity insurance companies, and HMOs.

The idea that a dollar today is worth more than a dollar in the future.

A form of costing used in certain procedural areas, such as in surgical areas, in which the costs are allocated per increments of time.

[(excess of revenues over expenses + interest expense)/interest expense] A ratio that enables creditors and lenders to evaluate an organization’s ability to generate earnings necessary to meet interest expense requirements. In for-profit organizations the ratio is calculated using the formula [(net income + interest expense)/interest expense]. The ratio answers the question: For every dollar in interest expense, how many dollars are there in profit before interest?

An approach to carrying out organizational tasks (e.g., budgeting) that relies heavily on higher management decision making with little employee input.

total revenues/total assets) A ratio that measures the overall efficiency of the organization’s assets to produce revenue. It answers the question: For every dollar in assets, how many dollars of revenue are being generated?

The ratio of net income to total revenue; provides information on the level of profitability at a hospital.

Price times total quantity.

The most basic classification of cost. Two major categories of costs classified in this manner are direct costs and indirect costs.

Credit granted by one firm to another firm for the purchase of services or products.

Transfer of assets from a subsidiary to its parent company.

The time elapsed between the time a check is deposited in the banking system and when the funds are available.

Financial instruments that can be purchased from the government and are considered default-free. They are among the most liquid short-term investments available. Rather than earning interest directly, they are purchased at a discount rate and redeemed at face value when they mature.

A type of horizontal analysis that looks at changes in line items compared to a base year. It is calculated as [(any subsequent year – base year)/base year] x 100.

An agent for bondholders who performs two primary functions: making the principal and interest payments to the bondholders and ensuring that the healthcare provider complies with the legal covenants of the bond.

People give to people, not to organizations.

An alternative financial reporting method that represents the present method used by accountants.

The cost of care provided to indigent patients after subtracting any payment.

A firm that brings out new securities issues, agreeing to purchase and resell them. They often work together on a given issue and help healthcare facilities issue bonds and advise management on the terms of the structure of the bonds. They sometimes guarantee the proceeds to the firm from a future security sale, in effect taking ownership of the securities.

(1) When actual revenues are lower than budgeted revenues. (2) When actual expenses are higher than budgeted expenses. See also Favorable variance.

A Medicare claim form used by institutional providers.

The collection of services that will be combined or bundled to trigger a payment amount.

The change, since the last balance sheet, in the market value of stocks held for investment. Recognized as realized gains and losses only when the stocks are sold.

All net assets (including those that have been restricted by management, the governing board, contractual agreements, or other legal documents) not restricted by donors.

A short-term loan not backed by collateral.

Results from a difference between actual volume and standard volume, or the quantity of volume actually needed.

Costs that stay the same per unit but change directly in total with a change in activity over the relevant range: (total variable cost = variable cost per unit x number of units of activity).

The expense budget that forecasts labor costs that vary as additional personnel or overtime hours are needed.

The expense budget that forecasts the costs of supplies that vary with the number of patients seen, such as disposable syringes, disposable gloves, and x-ray films. Also called the nonfixed supply budget.

A security whose interest rate changes based on market conditions.

A method used to analyze financial statements that answers the general question: What percentage of one line item is another line item? Also called common-size analysis because it converts every line item to a percentage, thus allowing comparisons among the financial statements of different organizations.

A merger between a manufacturer and a supplier. This is different from a horizontal merger between two companies that manufacture similar products.

Corporations that save cash and limit their financial risk by hiring a limited number of employees, owning few physical assets, and contracting out for most services.

Cost estimation method. Individual data points are plotted on graph paper. A straight line is then drawn through the points to provide the best fit. Visual fitting of data is a good first step in any method of cost estimation.

The product of the difference between budgeted and actual volume (Qa – Qb) and the average fixed cost budgeted (F/Qb).

Nonbusiness-oriented organizations that perform voluntary services in their communities. They are tax exempt and rely primarily on public donations for their funds.

The cost of capital or required rate of return to undertake a project. Calculated as [debt/(debt + equity) x cost of debt] + [equity/(equity + debt) x cost of equity]. See Discount rate and Hurdle rate and Cost of capital.

An approach used to eliminate mail and transit float by electronically depositing payments in the bank. Related techniques are zero-balance accounts and sweep accounts, where the bank automatically removes any excess from subsidiaries and places it in the account of the parent corporation.

Current assets. Calculated as (net working capital = current assets – current liabilities).

The activities of the organization that encompass (1) obtaining cash; (2) turning cash into resources, such as inventories and labor, and paying bills; (3) using the resources to provide services; and (4) billing patients for the services and collecting revenues so that the cycle can be continued.

Market interest rate of a bond. The rate at which the market value of a bond is equal to the bond’s present value of future coupon payments plus par value.

An approach to budgeting that regularly questions both the need for existing programs and their level of funding and the need for new programs. See also Incremental/decremental approach.

Bonds issued with a very low coupon value or with no coupon at all.