​Finance Domain: Key Concepts for the FACHE Exam

• Financial Accounting & Reporting

  • Purpose: Understand that financial accounting is primarily for external stakeholders (investors, creditors, government) to assess the organization's overall financial health.

  • Key Financial Statements: You must be able to read and interpret the three core statements.

    • Balance Sheet: A snapshot in time of what the organization owns (Assets) and what it owes (Liabilities and Equity). Key formula: Assets = Liabilities + Equity.

    • Income Statement (Statement of Operations): Shows financial performance over a period of time (e.g., a quarter or year). Key formula: Revenues - Expenses = Net Income (Profit/Loss).

    • Statement of Cash Flows: Tracks the movement of cash from Operating, Investing, and Financing activities. Crucial for understanding an organization's actual cash position.

  • Financial Ratio Analysis: Be familiar with the purpose of key ratios.

    • Liquidity Ratios (e.g., Current Ratio): Measures the ability to meet short-term obligations.

    • Profitability Ratios (e.g., Operating Margin): Measures how much profit is made from patient services.

    • Debt Ratios (e.g., Debt-to-Assets): Measures the extent of debt financing.
       

• Managerial Accounting & Cost Control

  • Purpose: Understand that managerial accounting is for internal leaders to make decisions, plan, and control operations.

  • Cost Concepts:

    • Fixed Costs: Costs that do not change with patient volume (e.g., rent, salaries for administrative staff).

    • Variable Costs: Costs that change directly with patient volume (e.g., medical supplies, hourly clinical staff wages).

    • Direct vs. Indirect Costs (Overhead): Direct costs can be traced to a specific service or department (e.g., a surgeon's time for a procedure), while indirect costs cannot (e.g., hospital administration, utilities).

  • Budgeting:

    • Operating Budget: The day-to-day plan for revenues and expenses.

    • Capital Budget: The plan for major, long-term investments (covered below).

    • Variance Analysis: The process of comparing actual results to the budget to identify and explain differences. This is a key management function.
       

• Revenue Cycle Management (RCM)

  • Definition: The entire process of managing claims processing, payment, and revenue generation. It starts with patient scheduling and ends when the account is paid in full.

  • Key Steps:

    1. Patient Scheduling & Registration: Capturing accurate demographic and insurance information.

    2. Insurance Verification & Authorization: Confirming coverage and getting pre-approval for services.

    3. Charge Capture, Coding, & Billing: Translating services into billable codes (e.g., CPT, ICD-10) and submitting a claim.

    4. Denials Management: Investigating and appealing denied claims.

    5. Payment Posting & Collections: Applying payments and managing patient balances.

  • Key Metric: Days in Accounts Receivable (A/R): A measure of the average number of days it takes to collect payment. A lower number is better.
     

• Reimbursement Models & Payer Mix

  • Fee-for-Service (FFS): The traditional model where providers are paid for each individual service. This model incentivizes volume.

  • Prospective Payment Systems (PPS): Methods where payment is determined before services are rendered.

    • DRGs (Diagnosis-Related Groups): Used by Medicare for inpatient hospital stays. The hospital receives a fixed payment based on the patient's diagnosis, regardless of the actual cost of care.

    • Capitation: A fixed payment per member per month (PMPM) paid to a provider, regardless of how many services the member uses. This model shifts financial risk to the provider.

  • Value-Based Purchasing (VBP): A broad category where payment is linked to quality, efficiency, and patient satisfaction, not just volume. Includes models like Accountable Care Organizations (ACOs) and Bundled Payments.

  • Payer Mix: The percentage of revenue coming from different payers (e.g., Medicare, Medicaid, Commercial Insurance, Self-Pay). This mix has a huge impact on an organization's financial stability.
     

• Capital Budgeting & Long-Term Investments

  • Definition: The process for making decisions about major investments, such as building a new wing, purchasing an MRI machine, or implementing a new IT system.

  • Key Evaluation Techniques:

    • Payback Period: How long it takes for an investment to generate enough cash flow to recover its initial cost.

    • Net Present Value (NPV): A method that calculates the value of an investment by comparing the present value of its future cash inflows to the initial cost. If NPV is positive, the project is generally considered financially viable.

    • Internal Rate of Return (IRR): The discount rate at which the NPV of a project equals zero. It represents the expected rate of return on the investment.