Financial Management and Reimbursement
Domain 3 - Financial Management and Reimbursement. This domain tests how money flows in, how costs behave, and how managers make investment and pricing decisions. Questions typically require a calculation or a judgment about which margin is relevant.
How payment works
- Medicare inpatient uses the IPPS: a DRG weight times a base rate, adjusted for wages, case mix, and outliers. Outpatient uses OPPS/APCs. Physicians are paid under the fee schedule: RVUs times the geographic practice cost index times the conversion factor.
- Medicaid and commercial contracts vary; models include fee-for-service, capitation, bundled payment, and shared savings.
- Net patient revenue = gross charges minus contractual allowances and discounts. Charity care (never expected to pay) differs from bad debt.
Cost behavior and decisions
- Separate fixed from variable costs. Contribution margin per unit = price minus variable cost. Break-even volume = fixed costs divided by contribution margin per unit.
- Capital budgeting compares NPV (preferred), IRR, and payback. Operating indicators include operating margin, days cash on hand, and days in accounts receivable.
Worked example
A new clinic has fixed costs of $600,000 per year, variable cost of $60 per visit, and expected reimbursement of $120 per visit. Contribution margin is $60; break-even is 10,000 visits. At a projected 9,000 visits, the loss is 1,000 times $60 = $60,000. Reasoning: use expected reimbursement (net), not charges; if a payer contract pays $100, contribution margin falls to $40 and break-even rises to 15,000 visits.
Traps
- Treating gross charges as revenue.
- Ignoring payer mix when modeling margin.
- Mixing capital and operating budgets.
- Forgetting uncompensated care and collection losses.