CASH FLOW ANALYSIS: Real Life ACO Accounting Example

ACCOUNTABLE CARE ORGANIZATION EXAMPLE

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BY DR. DAVID EDWARD MARCINKO MBA CMP®

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What is an ACO?

ACOs are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high-quality care to their Medicare patients. The goal of coordinated care is to ensure that patients get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors.

When an ACO succeeds both in delivering high-quality care and spending health care dollars more wisely, the ACO will share in the savings it achieves for the Medicare program.

Citation: https://www.r2library.com/Resource/Title/0826102549

Case Model

Now, suppose that in a new Accountable Care Organization [ACO] contract, a certain medical practice was awarded a new global payment or capitation styled contract that increased revenues by $100,000 for the next fiscal year. The practice had a gross margin of 35% that was not expected to change because of the new business. However, $10,000 was added to medical overhead expenses for another assistant and all Account’s Receivable (AR) are paid at the end of the year, upon completion of the contract.

Cost of Medical Services Provided (COMSP):

The Costs of Medical Services Provided (COMSP) for the ACO business contract represents the amount of money needed to service the patients provided by the contract.  Since gross margin is 35% of revenues, the COMSP is 65% or $65,000.  Adding the extra overhead results in $75,000 of new spending money (cash flow) needed to treat the patients. Therefore, divide the $75,000 total by the number of days the contract extends (one year) and realize the new contract requires about $ 205.50 per day of free cash flows.

Assumptions

Financial cash flow forecasting from operating activities allows a reasonable projection of future cash needs and enables the doctor to err on the side of fiscal prudence. It is an inexact science, by definition, and entails the following assumptions:

  • All income tax, salaries and Accounts Payable (AP) are paid at once.
  • Durable medical equipment inventory and pre-paid advertising remain constant.
  • Gains/losses on sale of equipment and depreciation expenses remain stable.
  • Gross margins remain constant.
  • The office is efficient so major new marginal costs will not be incurred.

Physician Reactions:

Since many physicians are still not entirely comfortable with global reimbursement, fixed payments, capitation or ACO reimbursement contracts; practices may be loath to turn away short-term business in the ACA era.  Physician-executives must then determine other methods to generate the additional cash, which include the following general suggestions:

1. Extend Account’s Payable

Discuss your cash flow difficulties with vendors and emphasize their short-term nature. A doctor and her practice still has considerable cache’ value, especially in local communities, and many vendors are willing to work them to retain their business

2. Reduce Accounts Receivable

According to most cost surveys, about 30% of multi-specialty group’s accounts receivable (ARs) are unpaid at 120 days. In addition, multi-specialty groups are able to collect on only about 69% of charges. The rest was written off as bad debt expenses or as a result of discounted payments from Medicare and other managed care companies. In a study by Wisconsin based Zimmerman and Associates, the percentages of ARs unpaid at more than 90 days is now at an all time high of more than 40%. Therefore, multi-specialty groups should aim to keep the percentage of ARs unpaid for more than 120 days, down to less than 20% of the total practice. The safest place to be for a single specialty physician is probably in the 30-35% range as anything over that is just not affordable.

The slowest paid specialties (ARs greater than 120 days) are: multi-specialty group practices; family practices; cardiology groups; anesthesiology groups; and gastroenterologists, respectively. So work hard to get your money, faster. Factoring, or selling the ARs to a third party for an immediate discounted amount is not usually recommended.

3. Borrow with Short-Term Bridge Loans

Obtain a line of credit from your local bank, credit union or other private sources, if possible in an economically constrained environment. Beware the time value of money, personal loan guarantees, and onerous usury rates. Also, beware that lenders can reduce or eliminate credit lines to a medical practice, often at the most inopportune time.

4. Cut Expenses

While this is often possible, it has to be done without demoralizing the practice’s staff.

5.  Reduce Supply Inventories

If prudently possible; remember things like minimal shipping fees, loss of revenue if you run short, etc.

6. Taxes

Do not stop paying withholding taxes in favor of cash flow because it is illegal.

Hyper-Growth Model:

Now, let us again suppose that the practice has attracted nine more similar medical contracts. If we multiple the above example tenfold, the serious nature of potential cash flow problem becomes apparent. In other words, the practice has increased revenues to one million dollars, with the same 35% margin, 65% COMSP and $100,000 increase in operating overhead expenses.  Using identical mathematical calculations, we determine that $750,000 / 365days equals $2,055.00 per day of needed new free cash flows!  Hence, indiscriminate growth without careful contract evaluation and cash flow analysis is a prescription for potential financial disaster.

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Physician Couples and Money Management

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On Cash Management Techniques

By Rick Kahler MS CFP® www.KahlerFinancial.com

Rick Kahler MS CFPMoney is just one of many challenges to becoming part of a couple; especially for physicians. Probably the most common question couples ask me concerns the best way to handle their cash management.

Specifically, they wonder if they should combine all their cash flow into one joint checking account, keep everything separate, or have some combination of both.

Stock Answers

My stock answer is “yes.” It seems that, the older I become, the fewer right answers there are and the more often I say, “It depends.” This is one of those situations where there is no one best method.

Future Physicians

Let’s consider the advantages and disadvantages of each approach.

  1. Combining everything in one joint account

The plus side of this scenario is that there is total financial transparency as to where the money comes from and goes to. Each party has full access to and opportunity to be fully aware of the money flow. It’s easy to track. There are no secrets.

Which brings us to the downside: there are no secrets, no autonomy. Each party can see the other’s spending and spend the other’s money. This works well in some relationships where the shared belief is, “My money is your money and your money is my money.” It doesn’t work well absent that philosophy. I find this scenario is often problematic when one or both of the parties want autonomy over how they spend their money without the watchful (often critical) eye of the other. Often this arrangement doesn’t work well in second marriages or where both parties have careers.

  1. Keeping everything completely separate

The positive of this scenario is that each party has complete autonomy and control over his or her money. This often works well for two-career couples or second marriages where both partners came into the union with significant pensions or assets. It may also be a good fit for unmarried couples. If one partner is a spendthrift, it can protect the other partner from unauthorized purchases.

The negatives are that it can be more difficult to manage joint expenses like housing costs and that neither party has any specifics into the spending of the other. If a partner has any type of addiction, separate accounts can serve to enable the addiction by hiding the extent of the problem from the other partner.

  1. Combination of joint and separate accounts

The advantage to this scenario is that it provides more autonomy than putting everything into a joint account, yet it offers an easier way to manage joint expenses. It can often result in a clear agreement on what is mine, yours, and ours. Some couples have a system where each one’s earnings are their own, and they each contribute put fixed amounts into joint account. Another method is to deposit all the income into the joint account and give each partner a periodic allowance.

The disadvantages to this are the need to manage three accounts and to decide who writes the checks from the joint account.

Spouses

Case Example:

Personally, my wife and I use the third option. As the major breadwinner, I deposit most of my income into the joint account, from which she pays all the family bills. A smaller amount of my income goes into my separate account that I use to pay for private schooling, funding 529 plans, and personal care like massages and haircuts.

Assessment

Problems often arise when partners assume the money should be managed (or is being managed) in a certain way. No matter which approach couples use, the most important factor is to discuss it and agree, as equal partners, to a system that works for them.

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  1. Physician Cash Maximization Rules
  2. On Emergency Funds for Physicians
  3. Essential Insights on Successful Physician Budgeting

Conclusion

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How Medical and Financial Professionals can Teach their Children Fiscal Discipline

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Exercising Pediatric Fiscal Discipline

By Andrew D. Schwartz CPA

Andrew SchwartzI’m a CPA and my wife is a CFP (Certified Financial Planner). Many ME-P readers are the same; or are doctors or nurses; or MBAs, PhD, CFAs; or other learned professionals, etc.

Even so, I think together we’ve done a lousy job teaching our two kids – Jonathan (age 15) and Lizzie (age 14) – much about personal finances. We have also done little to help them learn anything about exercising fiscal discipline.

Over the years, we’ve toyed with monthly allowances and paying our kids for doing their household chores. The problem is that we have never been consistent with doling out the promised $20 per month or with enforcing the rules they need to follow to even be eligible to receive their allowance.

Our Allowance System

So my family’s allowance system has evolved to something like this:

Child: “Dad and/or Mom, I’m getting together with friends. Can I have some money?”

Parent: “Sure thing, Jonathan and/or Lizzie. Will $20 be sufficient?”

Well, as my kids continue to grow up, we have reached the point where this conversation happens pretty regularly. Our kids have no incentive not to ask us for money, since we have a track record of giving them money whenever they ask. And they also don’t have an incentive to try to earn any money on their own, since we have gladly been supporting 100% of their spending.

Change is Coming

That’s all about to change. Financial responsibility for the Schwartz Clan, here we come. As a parent of a teenager, you might be asking, “How will you pull this off Andrew?”

For Christmas/Chanukah last winter, we gave each child a Pass Card issued by American Express.  These cards are only available to kids 13 or older.

Enter AMEX

According to American Express, “Pass is a prepaid reloadable Card parents give to teens. It’s safer than cash, and unlike a debit or credit card, teens can only spend what’s preloaded on the Card.” For my two kids, we loaded each card with $100, and then will reload the card on the tenth of each month with their $25 allowance.

Pass cardholders can spend money on the prepaid card pretty much anywhere that takes credit cards. And while parents do have the right to deny their kids access to cash from ATMs, we decided to set up the cards to allow ATM withdrawals. We can change this setting at any time, however. The first ATM transaction each month is free for each kid, and then there is a charge of $2 per withdrawal.

The Thought Process

In theory, when either kid spends all the money on the card, they are out of money until they next receive the $25 on the tenth of the month. Here is where my wife and I will need to exercise some parental discipline and not just dole out more spending money.

Instead, we need to try to use this opportunity to remind Jonathan or Lizzie that if they want to spend more than $25 per month, they can always babysit, shovel snow or rake leaves for our neighbors, work at my office during tax season, or try to find another job that hires 14 and 15 year-old kids to earn extra money.

Referral

Other Advantages

For parents, the Pass Card has a nifty web interface that allows parents the opportunity to view balance and purchase history online at any time, transfer additional funds into the card, or tweak the amount or frequency of the automatic reloads. Teens will also be able to logon to the Pass website under a separate login to monitor balances and activity.

According to the site, the Pass Card also provides your child some additional benefits similar to the benefits that come with the AMEX card, including:

  • Purchase Protection if an item purchased with the Pass Card breaks within 90 days
  • Roadside Assistance if your child’s car won’t start
  • Global Assist Services to provide your child with emergency services while traveling

Assessment

I hope the Pass Card works out well for my family and helps my wife and I teach my kids a little about personal finances and fiscal discipline.

Conclusion

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Physician Household Borrowing and/or Investing

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Deciding What Works?

[By Staff Reporters]fp-book4

Another way of asking the above titled question might be, “Is it smart for a doctor’s household to build savings while they are getting out of debt?”  

Financial Priorities

In the first instance, the doctor already has debt and would be increasing the terms of any loans by deferring some of the payments to savings, which is equivalent to borrowing the same amount.

In the second instance, the doctor would be taking on debt to save more money. The answer is that it makes sense to borrow money for investment purposes only if the financial gains derived from the investment are larger than the financial benefits of paying off the debt. But, who can know for sure?

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Minimum Account Payments

Assuming that a medical professional has more debt than needed, and doesn’t make contributions to a retirement account, the concern becomes: [1] should he/she make minimum payments to the debt and contribute to a retirement account; or [2] should he/she make the maximum payments toward the debt or loans, etc?

Downside Risks

It is important to understand the downside risks of a lower payment strategy. Just as stocks return more than bonds due to their higher risk, the lower payment strategy returns more because of its’ higher risk. Taking on debt to finance an investment is riskier than paying off debt for a number of reasons.

First, the US economy may continue its’ current depressionary spiral, and investments and savings could disappear as financial institutions fail. This would leave the doctor with debt that he or she could not service.

Second, the rate-of-return required to decide whether or not to borrow for investment purposes may not be achieved, leaving the doctor in worse financial shape than if he or she had just paid off the debt.

Assessment

Ultimately, the doctor must decide if the added risks are worth the possible gain. But, the services of a fiduciary financial advisor may also be required. However, some doctors may not be ready to receive the sort of “tough-love” required in this case. 

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Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Debt Consolidation for Physicians

Advantages and Disadvantages

By Staff Reportersfp-book5

The main advantage of debt consolidation is that it allows a doctor to make one payment instead of many, and this helps avoid late fees for missed payments. The doctor may save time by having to make only one payment per month instead of many.

Other Advantages

Another advantage is that debt consolidation promotes self-discipline by transferring credit card debt (and other lines of credit) that does not require mandatory principal payments into a fixed-term loan – with mandatory payments that include both principal and interest. This is a useful tool for doctors who may find it difficult to make more than the minimum payments on their loans because they spend too much. It should be obvious that budgeting should go hand-in-hand with this process, because if the doctor continues to spend at the former level, yet now has a mandatory payment, the result can be financially devastating.

A final advantage to debt consolidation is it may result in a lower overall interest rate. This is, of course, conditional on the lender providing the consolidation.

Disadvantages

One disadvantage of debt consolidation is that it can lock a doctor into mandatory payments. Depending on the situation, this can be either a blessing or a curse. It becomes a curse when the fixed payments are so high that he/she can no longer make the full debt payments each month. Depending on the lender, and the terms of the consolidation loan, this could result in the loan being called. The effects of this are obviously detrimental to the doctor.

Other Disadvantages

A second disadvantage is that the doctor loses flexibility when he or she takes on a fixed payment that is larger than the combination of all smaller minimum payments. The fixed-payment schedule becomes detrimental when h/she has an unexpected reduction in income. The doctor without a fixed-payment schedule can increase payments to many small individual loans, and if income reduction occurs, drop the payments back down to the lower level. Then; when normal levels of income return, the higher payments can be resumed.insurance-book2

Assessment

Making larger payments requires discipline; because a lack of same was likely causative of the debt in the first place.

Conclusion

Your thoughts and comments on this Medical Executive-Post are appreciated. Have you ever been in this situation? Feel free to opine anonymously.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Defining “Deep” Physician Debt

Exiting the Quagmire

By Staff Reportersfp-book3

There is no magical method or SIMPLE button that a physician or lay household can use to get out of debt. The two most critical factors in this process are budgeting and discipline, as discussed elsewhere on this ME-P blog forum. And, a payment plan that pays off debt by a selected target date will help. Debt consolidation can also be of assistance in this regard.

Defining “Deep-Debt”

According to Eugene Schmuckler PhD, MBA, of the Institute of Medical Business Advisors Inc:

“deep debt” is any financial burden that produces negative daily thoughts, interferes with professional work and/or keeps the doctor awake at night.”

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Payment Plans and Budgets

Once a payment plan has been computed, the doctor should develop a budget that will free up enough money to make the payments. If this isn’t possible because the monthly payments are too high, the payoff period should be lengthened until the amount available for debt payment is equal to (or greater than) the readjusted monthly payment. After this, the doctor should set up a more disciplined approach to spending, budgeting and investing, going forward.

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Consumer Credit Counseling Services

Unfortunately, more than a few doctors get themselves so deeply into debt that they can’t make the minimum payments required by lenders. This is a very serious situation and usually involves negotiation for payment adjustments. Unless the doctor or his fiduciary financial advisor has experience in this area; it is a good idea to seek help from to an organization like the Consumer Credit Counseling Service.

The CCCS

The CCCS is an organization that works with those who are struggling to manage their financial debt through counseling in the areas of budgeting, understanding credit reports, and debt management. CCCS also provides educational courses for the public, with fee services ranging from $0 to a few hundred dollars. The counseling sessions focus on developing a budget that allows the client to pay all of his/her monthly expenses. The debt management program teaches about debt and also negotiates with lenders for adjusted monthly payments. CCCS tries to get the payment reduced by spreading the payments over a longer period of time and has been successful at getting lenders to reduce or even waive interest on the loans, in some cases.

Bill Consolidation

Another service of the debt-management program is bill consolidation. The debtor sends one payment a month to CCCS, who in turn pays the client’s bills. The education service provides seminars at which various speakers address different financial issues. A medical professional can find the location of the nearest CCCS office (or similar organizations) by calling the National Foundation for Consumer Credit referral line at 800-388-2227.

Assessment

In the climate of today, the above post is no longer one that some physicians might not heed. In fact, the days of the financial super-specialist with arcane products or sophisticated strategies that depend on a perfect storm of economic indicators, is long over. It is time to call in the financial primary care doctor and get back to basics; live on less than you make, and invest prudently, watching all costs.

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Conclusion

Your thoughts and comments on this Medical Executive-Post are appreciated. Have you ever used the serves of CCCS, or similar? Feel free to opine anonymously.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Physician Cash Maximization Rules

One Doctor- Advisor’s [How-To] Diatribe

[By Dr. David Edward Marcinko; MBA]

[Publisher-in-Chief] www.CertifiedMedicalPlanner.orgdr-david-marcinko4

For some doctors – even more than laymen – cash management is the pivotal issue in the financial planning process. Accumulation of investment assets cannot occur if cash inflows do not exceed cash outflows. On the other hand, accumulated assets are eventually spent to fund expenses during planned time periods when cash outflow exceeds inflow.

Inflation

Traditionally, financial advisors have opined that inflation has a dramatic impact on both ends of the cash management spectrum because inflation has a compounding effect. That compounding effect means that a mere ¼% change in planning assumptions about anticipated inflation can have more significant influence over long-term projected outcomes than a 5% change in the amount of a particular item of budgeted income or expense. Well, true enough if projected linearly using some Monte-Carlo type software simulation. But, in the real word, economists appreciate cost and efficiency improvements [email over snail mail] and the potential for substitution of goods [diesel fuel for gasoline – chicken for steak, etc].

fp-book2

Be More Like … my Dad

On the other hand, far too few of my fellow medical colleagues – and financial advisors – are like my dad. Not well educated by academic standards, but with common sense that seems a precious commodity, today.

Dave, he used to tell me – and still does at age 84:

“Invest your money for growth carefully – and take some risks – but don’t be too afraid of inflation.”

 Why not, dad?

“Because; if you’re not a conspicuous consumer, you’ll have less to worry about.”

Cash Management

Well, most of us are not like my dad; me included. But, his depression-mentality has never completely worn off. A doctor’s household can maximize the cash available for investing by setting up the account in this manner.

1. The first step is to open a checking account, money market account, and a brokerage account. The money market account is often included in a brokerage account.

2. The second step is to initiate electronic direct deposit of the paycheck into the money market account.

3. The third step is to determine the amount of cash reserve needed. As mentioned elsewhere on this ME-P, we are suggesting 3-5 years of cash-reserves on-hand, as an emergency fund for most medical professionals.

Once, when, and if, the amount of the reserve is determined and achieved, any extra money should be transferred to the brokerage account and invested according to personal goals, objectives and risk-tolerance. A small balance of a few thousand dollars can be kept in the checking account to prevent overdrafts. Beyond the few thousand dollars, the checking account should serve as a pass-through account where money is transferred from the money market account to cover checks written for the budgeted expenses.

Example of Managing Cash Reserve Amountsbiz-book1

A physician client recently asked me to help him increase his savings. He explained that he had a very detailed realistic budget, but had a hard time staying within the budget when cash was available; as he lectured occasionally and was fortunate to have a few extra dollars every now and then.

Recommendations

As a financial planner, and the founder of an online educational-certification program for physician focused advisors, I recommend that he set up his checking, money market and investment accounts and have his medical practice directly deposit his paycheck in the money market account. He then was to transfer only enough money to his checking account each month, to cover his very carefully budgeted and spread-sheet driven expenses. Furthermore, his money market account was to be equal to our predetermined cash reserve needs, with any excess cash transferred to his investment account and according to his financial and investing plan.

Assessment

Of course, his carefully constructed budget included no cash reserves or emergency fund!  He forgot to budget cash! And so; the usual conundrum ensued.

Conclusion

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