Financial Reporting

What is the effect of revenue sources on financial reporting at the hospital? o How are the hospital’s revenues and expenses grouped for planning and control? (one section) dennis

HOW IS FINANCIAL PERFORMANCE MEASURED?
Measuring hospital financial performance is commonly performed by analyzing margins (I.e., the difference in revenue vs. expenses). Margins can be expressed by using financial ratios and as dollar amounts. OSHPD uses two financial ratios to measure a hospital’s financial performance. Both ratios compare the revenue received by a hospital against its operating expenses. The difference lies in what revenue items are included in each ratio formula. OSHPD also looks at the number of hospitals operating at a “profit” or “loss” for each of these
financial ratios.

FINANCIAL RATIOS
Operating Margin – The operating margin is the most commonly used financial ratios to measure a hospital’s financial performance. It compares a hospital’s total operating revenue against its total operating expenses, often referred to as net from operations. If total operating revenue exceeds total operating expenses, the hospital is operating at a profit and will have a positive operating margin; whereas, if total operating revenue is less than total operating expenses, the hospital is operating at a loss and will have in a negative operating margin.
Operating Margin Formula: (Total Operating Revenue – Total Operating Expenses) / Total Operating Revenue
Total operating revenue is the sum of net patient revenue and other operating revenue, where:
Net patient revenue is the amount received or expected to be received from third-party payers (insurers) and patients for hospital services provided.
Net patient revenue includes the payments received for routine nursing care, emergency services, surgery services, lab tests, etc.
Other operating revenue is the amount received from non-patients for services related to hospital operations. This includes items such as cafeteria sales, refunds on purchases, vending machine commissions, parking lot revenue, etc. Since other operating revenue typically comprises between 2% to 4% of a hospital’s total operating revenue, it often determines if a hospital’s operating margin is “in the black” (profit) or “in the red” (loss).October 2010
Total operating expenses include all expenses associated with operating the hospital, such as salaries, employee benefits, purchased services, supplies, professional fees, depreciation, rentals, interest, and insurance. It does not include bad debts or income
taxes.
Total Margin – This ratio compares a hospital’s net income against its total operating revenue. Whereas the operating margin looks only at revenue derived from operations, total margin includes all other sources of revenue and expenses that are not related to operations.
Total Margin Formula: Net Income / Total Operating Revenue
Net income (AKA “Bottom Line”) is the excess of revenue over expenses. The key difference from the operating margin is that the total margin factors in non-operating revenues and expenses, the provision for income taxes, and any extraordinary items. Total margin may differ significantly from the operating margin if substantial amounts of non-operating revenue or expenses are reported.
Non-operating revenue is the amount received from non-patients which do not relate to hospital care. Examples of non-operating revenue include investment income, unrestricted contributions, medical office building revenue, gift shop revenue, and governmental appropriations (public hospitals only). Non-operating expenses include the costs incurred related to producing non-operating revenue, such items as medical office building expenses, gift shop expenses, and loss on sale of hospital property.