in Financial Management for Health-System Pharmacists
Free access

This chapter will provide an overview of the healthcare industry and health system financial accounting and reporting. The reader will gain insight into the industry and into the accounting and reporting issues facing health system leaders today. This chapter will provide important background for more in-depth information in the chapters that follow.


Healthcare is business—big business. Healthcare spending continues to rise sharply, and in the United States in 2020 it reached $4.1 trillion which equates to $12,530 per person. The portion of the Gross Domestic Product (GDP) attributed to healthcare spending rose to a record 19.7% in 2020. The unprecedented spending in 2020 was primarily due to the significant increase in federal expenditures for healthcare that occurred in response to the COVID-19 pandemic. Additionally, health spending is projected to grow at an average annual rate of 5.4% and reach $6.2 trillion by the year 2028.1

This level of spending creates enormous pressure on health system leaders at all levels to manage their organizations more effectively than many other businesses, whether organized as community-based/not-for-profit, for-profit, or as an academic medical center. Operating efficiently and generating a margin is crucial for all health systems, regardless of ownership, to maintain infrastructure, replace equipment, and implement modern technologies to keep up with consumer demand. For many health systems another important aspect of efficient operations is making interest payments on bonds and other indebtedness or making dividend payments to shareholders.


Hospitals and health systems are community-focused, mission-driven organizations, which sets them apart from most other businesses. Organizations must make sound business decisions while demonstrating their core values in addressing the needs of the communities being served. For many hospitals, especially critical access, or sole community hospitals, running an efficient operation simply equates to survival.

Another area that distinguishes hospitals and health systems from most other businesses is the number of stakeholders involved. How many other businesses provide services to customers (patients) as ordered by independent practitioners (physicians not always employed by the hospital) and paid for by a third party? Many of the supplies used by hospitals are dictated by the preferences of physicians who have no fiscal responsibility for the cost of those supplies. Other stakeholders include the employed caregivers, lenders, owners, vendors, and the community at large. These various relationships create a complex operational environment not found in many other businesses.

Efficient operations, defined by an excess of revenues over expenses, are often equated to margin. Some argue that generating margin is somehow fundamentally wrong in healthcare. However, generating a margin (or return on investment) is critical in order to replace aging equipment and facilities and to provide new technology for tomorrow’s healthcare needs. These uses of margin support the mission of the hospital/health system and it has been said that “without margin, there is no mission.”


In 2021, the United States had 6,090 hospitals. Of those, 48% were nonprofit/community hospitals and 20% were for-profit or investor owned. The remaining 32% were government, psychiatric, or other specialty institutions.2

Nonprofit community hospitals and health systems are generally organized as tax-exempt and qualify as charities under the Internal Revenue Service regulations (501 (c)(3)). As result of that tax-exempt status, they generally do not pay property tax, state or federal income tax, or sales tax. In exchange for this, they are required to reinvest monies and services back into their communities. Access to capital for these organizations is mainly through donations (usually tax deductible to the donor), bonds and other debt instruments, and by managing operations efficiently. These organizations face regular scrutiny by policymakers charged with ensuring they contribute to their communities in a meaningful way that justifies the significant tax exemptions they receive.

Beyond contributing to the community, academic medical centers have as part of their mission the responsibility to teach new healthcare professionals and funding medical research. These additional responsibilities carry a higher cost structure, which is often offset in some measure by other funding sources, such as grants, state legislative funding, and so forth.

Conversely, for-profit hospitals are investor-owned and organized as taxable entities. They are different from nonprofit organizations in that they are expected to make profits for shareholders or owners. Access to capital is mainly through the sale of stock, debt instruments, and efficient operations.

All hospitals and health systems are governed by a board of trustees, regardless of how they are organized and structured. The board is responsible for hiring or firing the Chief Executive Officer (CEO), advising the CEO and executive leadership team, and approving policies and major decisions for the organization. The board, in effect, supervises the CEO and monitors organizational performance with a focus on both current performance and long-term sustainability.

The CEO, or president, is responsible for developing and executing the strategies needed to operate the organization. This includes all aspects of clinical care and operations, financial performance, along with quality and safety. The CEO and their team are accountable to the board of directors/trustees.

In addition to the CEO, senior leadership may include a Chief Financial Officer, a Chief Operating Officer, a Chief Medical Officer, a Chief Nursing Executive, a Chief Pharmacy Officer as well as other administrative officers (legal, human resources, public affairs, digital, and information technology). Titles will vary depending upon the facility’s size, style, and organization. These senior leaders are accountable to the CEO and board for the strategic and tactical decisions made for the operation of the facility. Department leaders, such as the pharmacy director, are responsible for the day-to-day operational decisions made in the facility.


Hospital and health system operations are subject to regulatory oversight by numerous agencies and accreditation bodies. The Centers for Medicare & Medicaid Services (CMS), their approved accrediting organizations such as The Joint Commission (TJC) and DNV Healthcare (DNV), the state board of pharmacy, and the state department of health are examples of a few of the many regulatory organizations that seek to reshape the way healthcare will be delivered in the future. Consumer, payer, and employer groups have also been formed in recent years to address the issue of rising healthcare costs and how to improve healthcare outcomes. All these organizations will impact the pharmacy leader’s role in managing across the entire pharmacy enterprise.

The rising cost of caring for the indigent, uninsured, and underinsured is threatening the financial well-being of many of America’s hospitals and health systems. The number of Americans living below 200% of the Federal Poverty Level (as published by the federal government each spring) continues to increase. Although some citizens seek healthcare in free clinics, many use hospital emergency rooms for primary and urgent care. This comes at an excessive cost and, for most, is an inappropriate setting for routine healthcare.

Because of the increasing cost of health insurance premiums, many employees have found coverage to be either unaffordable or unavailable. Many Americans have decided to risk being uninsured to divert financial resources into other areas of their lives. Others may have become temporarily uninsured while in between jobs. To reduce health insurance premiums, some employers have offered health plans with high deductibles, which is the amount that beneficiaries must pay before their health insurance will begin to pay, or high co-payments, which is the total amount that the beneficiary must pay. Although these plans reduce monthly premium costs, they may become financially stressful when services are needed.

Providing care for indigent, uninsured, and underinsured Americans is challenging the resources of the healthcare system. All organizations are wrestling with this issue. The Affordable Care Act (ACA) was enacted in 2010 to improve health insurance markets for individuals and small businesses, lower healthcare costs and increase the number of people with healthcare insurance. Charity care write-offs and debt expense are among the top financial problems for hospitals. It will take a collaboration of hospitals, health systems, safety net providers, communities, payers, and the government to solve the issue. Pharmacy leaders can also play a significant role in creating pharmacy solutions for low income or indigent patients. Many pharmaceutical manufacturers offer programs that provide drugs for patients who cannot afford their medications. Dedicating resources to assist in obtaining access to these programs is a valuable contribution from today’s pharmacy leader.


Accounting had always been a profession focused on reviewing historical performance. However, that focus has changed and there is a growing focus on leveraging tools to accurately predict future performance.

Cost accounting refers to a set of procedures for recording and reporting revenues and the cost of goods and services in the aggregate and in detail. It includes methods for identifying, classifying, allocating, aggregating, and reporting. Cost accounting provides leaders the detailed cost information to facilitate decision making when managing current operations as well as helping them plan.

Recently there has been a significant shift in accounting strategy within health systems. Enterprise-wide integration of information and billing systems, along with advanced analytics and artificial intelligence, are providing finance operations leaders with the necessary information to be more forward-looking with predictive accounting. Predictive accounting processes enable decision makers to get a credible look into future performance to make better present-day decisions.

The new buzz word in today’s healthcare is Predictive Analytics. Predictive Analytics captures variables from past occurrences combined with statistical modeling via Artificial Intelligence (AI) to discover correlations and provide actionable recommendations. As data sets become larger, manual analysis is becoming less feasible. Predictive Analytics allows one to make decisions early in the process to improve patient outcomes and achieve financial goals. Wikipedia defines artificial intelligence (AI) in healthcare as technology that “uses algorithms and software to approximate human cognition in the analysis of complex medical data. The primary aim of health-related AI applications is to analyze relationships between prevention or treatment techniques and patient outcomes.”

By embedding predictive analytic models across the continuum of care, healthcare systems can leverage analytics for meaningful improvement:

  • Population Health Management—Patients at high-risk of developing a chronic condition can be identified early to avoid costly treatments later.

  • Risk Management—Identify high-risk patients who can be treated with medications which results in improved quality of care and reduced costs.

  • Readmissions—Identify patients with a high probability of being readmitted within 30 days of discharge. Clinicians can implement predischarge interventions and adjust care plans, thus avoiding readmissions.

  • Medication Adherence—Identify patients who are at high-risk for nonadherence. Early intervention will improve patient outcomes.

  • Resources—Patients who are most likely to miss appointments can be identified. The health system can send reminders or provide transportation to minimize workflow disruptions.

  • Finance—Data can be applied to streamline budgeting, clinical processes, quality metrics, and key performance indicators (KPIs).

Improving prediction is one of the key challenges healthcare faces in advancing patient care. Enhancing diagnosis, treatment plans, and understanding disease progression are key components. The advantages of improved outcomes, lowered costs, and reduced patient risk make the adoption of Predictive Analytics a priority in bringing healthcare to a new level.


Fiscal Services is the collective name for numerous financial functions often led by the chief financial officer (CFO). Table 1-1 Typical Departments within Fiscal Services lists the departments often associated with the CFO, the responsibilities, and the typical position that manages the department. Titles and specific positions vary among hospitals and health systems, and the reporting roll up of departments may vary.

TABLE 1-1.

Typical Departments within Fiscal Services



Typical Person in Charge


Manages all general ledger accounting, monthly reporting, and subsidiary ledger accounting for the organization; responsible for compilation of financial statements, maintaining fixed asset records, reconciling general ledger accounts, and communicating health system performance and performance drivers to health system leaders.


Business Office/Revenue Cycle Management

Manages all aspects of billing and collections for third party and patient accounts including financial securing, charge capture, claims billing, claims payment follow-up to ensure accurate payment receipt, denial management, and payer/claims audit management.

Revenue cycle management or business office vice president or director

Managed Care Contracting

Manages all aspects of managed care contracts including contract negotiation, contract management, and total cost of care performance reporting.

Managed care vice president or director

Financial Operations/Analytics

Partners with organization leaders to analyze financial and clinical data across the organization to understand financial performance, drivers, identify opportunities and improvements, and support strategic decision making. Also manages the forecasting and budgeting processes with organization leaders.

Financial operations vice president or director


Manages all payroll functions for the health system.

Payroll manager

Accounts Payable

Manages all payments to vendors for the health system.

Accounts payable manager

Supply Chain or Purchasing and Materials Management

Handles all procurement and materials warehousing and distribution for the health system.

Supply chain or materials vice president or director


Manages the organization’s cash and investment portfolio, balance sheet and cash forecasting, capital management and acquisition, risk management and insurance, and tax.

Treasurer or director of treasury

Cost Reporting

Prepares annual cost reports for Medicare and other governmental payers as required and keeps the organization current on changing regulations.

Reimbursement or cost reporting director


Organizes and conducts fund raising for community-based/ not-for-profit health systems.

Director of development

The CFO often reports to the Chief Executive Officer (CEO) or president and is responsible for the financial operation of the hospital or health system. CFOs play a key role in the strategic direction and are part of an integrated team of leaders across the organization functions. CFOs must have an appreciation for the full complexities of operations to fully align the financial objectives with the strategic objectives of the organization. The CFO must also ensure the integrity of the financial reporting, financial systems, and financial health of the organization. In addition, the CFO ensures compliance with financial regulations, including billing, cost reporting, accounting standards and financial covenants.


The accounting cycle includes revenue cycle, the expense cycle, “capital” items, the budget, and the monthly close and reporting process. The accounting cycle is detailed below.


Revenues are generated when services or goods are provided to patients. See the Income Statement section for a more detailed description of revenues, discounts, and net revenue. All healthcare organizations have a system in place to capture the charges for the services provided. Charge capture is when charges are entered into the patient accounting system (billing system) for services provided and bills are generated (often referred to as “dropped”). Health systems bill the patient’s insurance carrier on behalf of the patient and keep the patient informed as to the status of the claim. The insurance carrier will also inform the patient of bills received from the health system in the form of an Explanation of Benefits (EOB) statement. The EOB will provide the patient detailed information from the insurance carrier of bills received, contractual discounts taken, amounts covered by the insurance plan, and amounts that are a secondary insurance or patient responsibility based on the patient’s insurance plan coverage (such as co-payment, deductibles, or coinsurance). Once the insurance carrier (or governmental payer) pays the health system for the claim, the health system will write off the contractual discounts as appropriate and bill the patient for any patient portion due as identified by the carrier. For retail pharmacy prescription charges, the claims are typically adjudicated at the time of dispense at the contractual rate by the Pharmacy Benefits Manager (PBM) and the patient portion is identified at that time. A PBM is a third-party administrator acting on behalf of the insurer/health plan.

The revenue cycle is affected by the clinical department’s successful capture of charges for the services provided, the complexities of the negotiated contracts with the carrier, and the timeliness of submitting the bill payments receipt from the carrier and the patient. Charge capture is a crucial part of the revenue cycle process and requires accurate documentation of the care provided to ensure all services provided are billed. Ongoing training of staff on billing rules and regulations, continuous communication between interdisciplinary teams, documented processes, and consistent charge standards are crucial in successful charge capture. In addition, organizations should leverage technology platforms to automate and streamline the process. The goal is to accurately capture all services provided and shorten the time between when the service is provided and when the bill is produced to ensure the services are billed in accordance with regulations or payer requirements and to accelerate cash receipt. Quick turnaround of accounts receivable (amounts billed to carriers and patients that have not been collected) is crucial to provide ongoing cash flow to the organization.

Another key component to the revenue cycle is collection, and retention, of billed amounts. Billed claims should be reconciled to ensure correct and timely payment is received from the payer. This not only includes ensuring that payment for the claim is received, but also that the payment is accurate per the contractual rates. For retail pharmacy claims, this also includes reviewing the amounts adjudicated by the PBMs (pharmacy benefit managers) against contractual rates. Processes should also be in place to review, validate, and follow-up on subsequent take back of payments to ensure the organization is not only receiving, but retaining amounts contractually due. And processes should also be in place to track and manage payer claim audits. This includes providing the documentation within the time required by the audit and retaining audited amounts contractually due. As with claims capture, organizations should leverage technology platforms to automate and streamline these processes to better ensure accurate payment and payment retention.

The billing and payment accounting system is generally automated and linked with the general ledger accounting system. In some cases, the interface between the two may be manual.


Expenses are the result of commitments for costs incurred in the provision of patient services or the operation of the health system. Successful health systems have a defined process to bind the organization to financial commitments. A typical process starts with a purchase request or requisition to be completed by the department leader. This document includes information on the proposed purchase, including vendor, amount, a description of item to be purchased, the general ledger account code, the budgeted amount, and the business justification for the purchase. Purchase requisitions have established approval levels required before the final purchase order is communicated to the vendor. This can include supervisor or manager level up to senior administration, depending on the amount of the requisition. In some organizations, the purchasing department communicates the final approved purchase order to the vendor, and in others the department leader manages this. Once the items are appropriately received by the health system and an invoice is received, the accounts payable department will match the invoice with the original purchase order. If the amounts match, the invoice will be paid. If not, the documents are often returned to the originating department to resolve the discrepancy. Accounts payable will typically not pay a vendor’s invoice until all discrepancies are resolved.

Like the patient accounting system, the purchasing and accounts payable systems are most often automated and linked with the general ledger accounting system. In some cases, the interface between the systems may be manual.


Certain high dollar items with a useful life of greater than one year are generally referred to as “capital” items. They derive this name because they are reported on the balance sheet as an asset when acquired rather than on the income statement as an expense. Because capital items have a benefit of greater than one year and are high dollar items, these items are expensed, or depreciated, over the expected life of the asset. This allows the expense of the purchase to be recognized over the period the asset is used rather than all at the time of purchase. Each organization will establish the financial threshold of when an expenditure is considered capital, determine the capital budget, and establish the capital approval process.

Frequently the capital budget is divided into subcategories such as replacement infrastructure, strategic, technology, or break/fix. For many healthcare organizations capital needs can be high when compared against the capital budget available. To determine which capital items to prioritize, capital expenditures require additional review and consideration. Further analysis of the expenditure can include a pro forma, a return-on-investment calculation, and a value proposition describing the need for capital, the benefits, risks, and alternatives. Frequently subject matter experts are engaged in this process to ensure full needs of a capital purchase or project are considered before approving, such as facilities, information technology, finance, and supply chain. Many health systems have established groups or committees to review requests for prioritization and final approval. Departmental leadership should consult with the CFO to understand the specific requirements for capital purchases.


The budget is the roadmap for the organization to obtain its strategic objectives. Historically, the development of the budget was a lengthy, complicated process; however, because of enhancements in budgeting and analytical tools, and the dynamically changing healthcare industry, organizations are moving toward a more lean and timely budget process. Budgets are frequently paired with timelier monthly or quarterly forecasts that can shift with changing business and industry trends and allow leaders to adjust business plans to address these changes. Budgets are typically compiled with cross-functional teams that include department leaders, administration, and finance teams, including the CFO, the controller, and decision support analysts that closely analyze historical trends and future projections. The pharmacy director should consult with the CFO to understand the specific responsibilities for budget development.

The budget process should factor in numerous variables such as historical financial performance paired with anticipated changes in future performance including payer mix, payer contracts, patient mix, patient volumes, industry changes, and individual health system initiatives such as focused growth initiatives. These should be carried through for all service areas within the health system impacted by these factors. The completed budget is subjected to an extensive review and approval process. Approvals are obtained from senior leadership, the board of trustees, and any other governing entity. Once approved, the budget becomes the measuring stick against which monthly performance is compared.

In most health systems, department leaders are responsible for analyzing and explaining performance variances with the budget. Action plans are often required for ongoing performance that is projected to vary significantly from the budget. This requires a thorough understanding of the departmental operations or responsibility reports and the general accounting processes influencing those reports.


The controller and staff close the general ledger at the end of every month. The general ledger close accumulates all activity from the current month and resets the general ledger for the next month. For accrual basis accounting, the close includes all revenue and expenses that were incurred during the period and will include accruals for accounts receivable, accounts payable, payroll, and other liabilities. For cash basis accounting, the close will include all cash transactions for the month (see Accounting Methods below). The general ledger is typically held open for a designated number of days in the following month, many within five to 10 business days, to allow for compilation of the monthly activity, ensure accruals are made, and accounts are reviewed, complete, and accurate.

The monthly close process involves compiling many sources of data into the general ledger including the electronic health record charges, payment reconciliation system(s), accounts payable system, payroll system, and capital management system. In many organizations some of these are integrated into the same platform (such as the electronic health record and payment reconciliation, or general ledger, payroll, and capital management on one enterprise management system).

Once the general ledger is closed, the financial statements and departmental reports can be prepared and distributed for management to review. These reports include the Income Statement, Balance Sheet, and Statement of Cash Flows (see Financial Reporting below). For successful financial management it is imperative to include analysis of the financial results to understand performance drivers. These drivers should be used to determine any changes in operational processes to maximize financial performance and address any performance shortfalls. This analysis is typically performed by the financial operations analysts, department leaders, and the controller.

To further assist with this process, department leaders should ensure that invoices are processed promptly, ensure critical information about trends and operational changes is communicated to the controller and the financial operations team in a timely manner, and work with the finance operations/analytics team.


There are three basic accounting methods used by healthcare organizations: cash basis, accrual basis, and fund accounting.

Cash-basis accounting recognizes income and expense only when cash is received or disbursed. It is a simple method of accounting that does not factor in liabilities for purchases made but not yet received, and assets earned but not yet collected. Financial reports generated by cash-basis accounting can be grossly misleading and inaccurate to actual performance because it does not represent revenue when earned and the related expenses incurred. This can produce misleading income results, does not show the balance sheet asset, liability, and equity position of the organization, and does not accurately reflect the financial position of the organization. Cash-basis accounting is typically limited to individuals or small community organizations.

Accrual basis accounting accrues revenues and expenses in the proper period they were earned or incurred. This method of accounting is used for most organizations. This is a large part of the monthly closing process for the controller and staff. For accurate monthly financial statements, the controller and staff must ensure that all transactions for the month are properly recorded, regardless of whether cash has been received or paid. This method will better reflect the financial position of an organization, its revenue, expenses, income, assets, liabilities, and equity. Most of the examples and discussion in the remainder of this chapter focus on the accrual basis of accounting.

Fund accounting is typically used by governmental entities and academic medical centers. Fund accounting establishes specific funds for a variety of uses. Two examples include an equipment replacement fund and the general fund. The equipment replacement fund would be used to replace specific equipment in the future. The general fund serves as the operating fund for the entity. Many of the funds extend beyond the normal one-year cycle. This makes budgeting and maintenance of the funds a bit more complex.


The general ledger uses a set of accounts organized according to their type. The chart of accounts (COA) refers to an index of all these accounts that is organized into main categories for asset, liability, equity, revenue, and expense, typically assigned numerically in that order. These are further broken down into more detailed subcategories. Each account is given a multidigit identification code and a brief description. The number of digits in the accounts varies by health system; the examples below use six. The following table demonstrates a typical configuration for organizing the chart of accounts:

Account Range

General Account Category



Equity or Fund Balance


Deductions from Revenues


General ledger accounts are further broken down and organized within the category listed above, as noted in the examples below. Some health systems maintain more detailed general ledgers using a separate account for tracking specific details. Other health systems organize the general ledger in a broader manner and use subsidiary ledgers for further detail.

Assets typically have numerical categories assigned based on the asset type, where the first three digits are often the general asset type, with the first digit identified by the general account category (1 above). As an example, may be used for the cash accounts and may be used for receivable accounts. The last three digits are typically used for detailed breakout of these asset types. For example, accounts receivable may be broken out by patient receivables in 120.110 and third-party payer receivables in 120.120.

Liabilities (2 above) are assigned numerical categories like assets. Examples are may be used for accounts payable and may be used for accrued wages; and within accrued wages, accrued payroll may be 220.110 and accrued health insurance 220.120.

Revenue also has numerical categories assigned, where the first three digits are often the type of revenue (such as inpatient and outpatient) with the first digit as identified in the revenue chart of accounts (4 above). For example, inpatient revenue may be assigned 410 and outpatient revenue 420. For the last three digits, each revenue-producing department type is typically assigned a revenue center code. For example, the lab department may be assigned 310, the full general ledger account code for inpatient and outpatient lab revenue would be 410.310 and 420.310, respectively.

Deductions from Revenues (5 above) represent amounts that will not be collected from the gross billed charges in revenues. Deductions from revenues can include contractual discounts, provision for bad, and charity care. Contractual discounts are the difference between the health system established billed rates for the care provided and the contractual rates with the insurance carrier, government agency, or other third party. Provision for bad debt includes an estimate of the amount due to the health system that will not be realized because of non-collection. Charity care, also referred to as uncompensated care, represents care provided with no charge or at a reduced charge to people with limited income that are unable to pay for their care. Health systems have an established policy on its charity care program including qualification criteria and the amount of assistance provided.

Expenses (6 above) have numerical categories assigned based on the expense type. As an example, 610 may be used for salary and wage expense and 630 may be used for purchased services expense. The last three digits further break out each expense type, for example purchased laundry services may be 630.110 and purchased food services may be 630.120.

Department leaders should understand the organization of the chart of accounts and the appropriate use of the accounts because they are often responsible for coding purchase requisitions and invoices as well as managing performance results within their departments.


Financial reporting for healthcare organizations is regulated by several different entities. The Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB) establish Generally Accepted Accounting Principles (GAAP) that organizations must follow. The American Institute of Certified Public Accountants (AICPA) publishes an Audit and Accounting Guide for Healthcare Organizations that summarizes the reporting requirements. This section introduces the basic financial statements and their application to operational management.


The balance sheet is a valuable statement that represents the overall financial condition of an organization. The balance sheet lists assets owned by the organization on the left side of the report, and the liabilities owed and the equity of the organization on the right side of the report. Equity, or fund balance, represents the difference between the assets and the liabilities. It is called “net assets” because it reflects the amount of ownership in the organization after payment of liabilities. The balance sheet represents a given date in time and is often referred to as a “snapshot” of the entity’s assets and liabilities as of that specific date. The financial statement derives its name from the fact that the total assets must equal, or “balance” to, total liabilities and equity.

TABLE 1-2.

Typical Balance Sheets as of December 31, 2021 and 2020


December 31



Current Assets

 Cash and Cash Equivalents



 Accounts Receivable for Medical Services



  Less: Allowance for Contractual Deductions



  Less: Allowance for Bad Debts



  Net Accounts Receivable for Medical Services



 Receivable under Third Party Payer Contracts






 Prepaid Expenses



 Other Receivables



 Other Current Assets



  Total Current Assets



Land, Buildings, and Equipment

 Land and Land Improvement



 Buildings and Building Improvement






 Finanaced Leased Facilities and Equipment



 Construction In Process



 Accumulated Depreciation



  Net Land, Buildings, and Equipment






Other Assets

 Intangible Assets, Net



 Right of Use Operating Leases Assets



 Investment in Related Parties



 Other Long Term Assets



  Total Other Long Term Assets







Current Liabilities

 Accounts Payable



 Accrued Wages



 Right of Use Operating Lease Obligations



 Current Maturities of Long Term Debt



 Other Current Liabilities



  Total Current Liabilities



 Long Term Debt



Other Liabilities

 Right of Use Operating Lease Obligations



 Other Long Term Obligations



  Total Other Liabilities



  Total Liabilities



Net Assets

 Retained Earnings - Start of Year



 Net Income - Current Year



 Total Net Assets






TABLE 1-3.

Balance Sheet Definitions


Cash and Cash Equivalents

This represents the cash on hand and short term cash investments as of the balance sheet date.

Accounts Receivable for Medical Services

Accounts Receivable for Medical Services

This represents the accounts receivable from patients or payers on behalf of patients (Medicare, Medicaid, Blue Cross, Cigna, etc.). For some payers, the receivable is reduced to the net amount expected to be collected and is shown on this line at the net amount. For other payers, the gross receivable is shown on this line and an allowance for deductions from revenue is accrued.

Allowance for Deductions

This represents the difference between negotiated or regulated rates expected to be received and the gross charges in accounts receivable. An allowance is calculated and accrued for all payers whose accounts are not discounted and reported net in the line above. Often referred to as Allowance for Discounts and Contractual Adjustments.

Allowance for Bad Debt

This represents the estimated amount of bad debt included in patient receivables.

Net Patient Receivables

This represents the net amount expected to be collected from patients or payers on behalf of patients.

Receivable under Third Party Payer Contracts

This represents receivables (or payables) anticipated from filed Medicare and Medicaid cost reports, total cost of care contracts, or other ongoing or future contract provisions. These amounts are not finalized until these items are filed and finalized.


This represents supplies on hand as of the balance sheet date. Supplies includes pharmaceutical drugs, medical and surgical supplies, lab, and diagnostic imaging.

Prepaid Expenses

This represents invoices paid which benefit future periods and are therefore expensed over those future periods.

Other Receivables

This represents miscellaneous receivables not from patients and patient services.

Other Current Assets

This represents assets which are highly liquid. Generally, current assets are assets that are expected to be converted to cash in less than one year.

Land, Buildings, and Equipment

Land and Land Improvements

This represents the historical cost of land and any improvements (such as sidewalks and landscaping). Depreciation is not calculated on land.

Buildings and Building Improvements

This represents the historical cost of the buildings and building improvements.


This represents the historical cost of major moveable equipment (typically large, stationary equipment that is capable of being moved, such as lab analyzers, imaging equipment, and autos), fixed equipment (typically large equipment attached to the buildings, such as boilers, HVAC, and backup electrical generators), and certain minor equipment (typically office furnishings and equipment greater than an established dollar threshhold…amounts below that threshhold are typically expensed to supplies).

Financed Leased Facilities and Equipment

This represents leased facilities and equipment that have characteristics of owned assets in accordance with ASC 842, where the economic benefits and risks of the underlying asset transfer to the lessee. This includes transfer of ownership to the lessee or an option to purchase underlying assets, or the lease term is for the majority of the economic life of the underlying asset, or the lease payments are more than substantially all of the fair value of the underlying asset.

Construction in Progress

This represents the costs of construction projects currently in progress that have not yet been placed in service.

Accumulated Depreciation

This represents the depreciation expense recorded over time associated with the property, plant and equipment assets noted above. Depreciation is not calculated on land and on construction in progress.

Net Land, Buildings, and Equipment

Often referred to as “net book value,” this represents the depreciated cost of the land, building, and equipment assets.


This represents the cost of long-term investments. Often, specific investment categories will be reported on the Balance Sheet.

Other Assets

Intangible Assets, Net

This represents specific intangible assets associated with the organization. Goodwill from a purchase of the facility is one example.

Right of Use Operating Leases Assets

This represents the lessee’s right to use an underlying asset over the lease term in accordance with ASC 842.


Accounts Payable

This represents invoices and check request that are awaiting payment. This includes invoices and payment requests received by accounts payable as well as received but not invoiced items.

Accrued Salary & Benefits

This represents an accrual for the end of period payroll expense (payroll earned by employees but not yet paid), and accruals for other compensation related liabilities such as FICA, retirement benefits, paid time off, and health benefits.

Right of Use Operating Lease Obligations

A lessee’s obligation to make the lease payments arising from a lease, measured on a discounted basis, broken out between current (due in less than one year) and long term (due in greater than one year).

Current Maturities of Long Term Debt

This represents the portion of a debt liabilities that are coming due in the next year.

Other Current Liabilities

This represents other organization liabilities that are expected to be paid within one year.

Long Term Debt

This represents the portion of a debt liabilities that are due in greater than one year.

Other Long-Term Obligations

This represents other long-term debt or commitments by the facility.

Net Assets

Retained Earnings

This represents the accumulated earnings (losses) of the organization since its inception.

Net Income - Current Year

This represents the current year’s net income.

Assets are separated into short-term and long-term. Short-term assets are those that can be converted to cash in a short period of time, typically within a year, and include cash, accounts receivable, and inventory. Long-term assets include fixed assets such as property, plant, and equipment. Liabilities are also separated into short-term and long-term. Short-term liabilities include accounts payable, accrued salaries and wages, accrued liabilities due within a year, and short-term debts. Long-term liabilities include loans or other amounts repaid over many years. Equity, or fund balance, represents the difference between the assets and the liabilities. It is called “net assets” because it reflects the amount of ownership in the organization after payment of liabilities.

The balance sheet is necessary for managing an effective organization and understanding how much cash the organization has, and how quickly assets can be converted to cash for funding operations and working capital. Department leaders can use the balance sheet to assess operational performance such as inventory turn, with a goal to maximize inventory turns. Net days in patient accounts receivable can be managed by the revenue cycle leader. Many of the other balance sheet measures are organization wide and are used by senior leadership and the board rather than by department leaders.

TABLE 1-4.

Typical Income Statement for the Years Ended December 31, 2021 and 2020






Var %

Prior Year


Var %

Operating Revenue

 Inpatient Revenue








 Outpatient Revenue





$ 2,166,661

$ 48,739


 Other Patient Revenue








  Gross Patient Revenue
















 Uncompensated Care








 Bad Debt








 Shared Savings








  Net Patient Revenue








 Other Operating Revenue








  Total Operating revenue








Operating Expenses

 Salaries and Benefits








 Contract Labor








 Professional Fees








 Purchased Services
















 Utilities, Repair, and Maintenance








 Insurance and Rent








 Other Expenses








  Operating Expenses
















 Depreciation and Amortization








Operating Margin








 Interest Expense



$ –



$ –


Net Operating Income








 Realized Investment Income








 Unrealized Investment Income








 Other Non-Operating Income








Net Income








TABLE 1-5.

Income Statement Definitions

Gross Patient Revenue

Inpatient Revenue

Gross charges generated from all services provided for inpatient care such as facility, physician services, lab, imaging, operating room, and inpatient pharmacy.

Outpatient Revenue

Gross charges generated from all services provided for inpatient care such as facility, physician services, lab, imaging, operating room, and inpatient pharmacy.

Other Patient Revenue

Revenues generated from other sources such as nonhosptial based clinics, retail pharmacy, home infusion, and durable medical equipment rental.

Deductions from Revenue


Represents the discounts negotiated with insurance and managed care payers, and the mandated contractual adjustments from governmental payers.

Uncompensated Care

Discounts provided to indigent patients in accordance with established facility policies. Many health systems provide a partial or full discount for patients that meet income guidelines as established in the system policy, many times a sliding scale based on a percentage of the Federal Poverty Level (FPL).

Bad Debts

Represents the write-off of uncollectible accounts for patients who are unwilling to pay their balance. Hospitals are required to have a collection process and to ensure that every patient account follows that process to completion.

Shared Savings

Represents the organizations portion of shared savings from programs with managed care plans.

Net Patient Revenue

Represents the amount of gross revenue expected to be collected from the appropriate payers.

Other Operating Revenue

Revenues from federal or other awards and grants, gift shop, cafeteria, or other nonpatient related activity the health system has.

Operating Expenses

Salaries and Benefits

Represents the cost of payroll and related benefits.

Contract Labor

Represents the cost of outsourced labor, such as temporary nursing labor.


Represents the cost of drugs, medical, surgical, and office supplies used by the organization. Often includes the cost of minor equipment (such as office equipment and furnishings). For organizations with a retail pharmacy presence, many times drugs will be separated from general supplies.

Professional Fees

Represents the cost of fees to professional medical staff for services rendered under contract. Examples may include physician services, emergency room services, medical directorships, clinical reading contracts, etc.

Contract Services

Represents the cost of services outsourced under contract to external organizations and professional and other purchased services. Examples may include an outsourced lab, housekeeping, or a grounds keeping contract, marketing, and legal and professional fees.

Repairs and Maintenance

Represents the cost of repairs and maintenance on equipment and buildings, including maintenance agreements.

Rent and Utilities

Represents the cost of leases for equipment and buildings, and the cost of building utilities (such as gas, water, and electric).

Other Operating Expenses

Represents a variety of miscellaneous operating expenses such banking fees, postage, subscriptions, licenses, and community events and donations.


Represents Earnings Before Interest, Depreciation, Taxes, and Amortization.


Represents the expense allocation of the cost of an asset over its determined useful life.

Interest Expense

Represents the expense incurred on borrowed funds/debt.

Income Taxes

Represents an estimate of the income taxes due on the pretax income shown. Includes both federal and state taxes.


The income statement, also referred to as the operating statement, the statement of revenues and expenses, and the profit and loss statement (P&L) reports the financial performance of the organization for a designated period. The designated period may be the end of the month and the year-to-date period ended that month. The income statement details the revenues earned and the related expenses incurred in the operation of the organization, the difference is the net operating income.

The income statement is a key financial report used by leadership to manage the financial performance of the organization. It is reported at many different roll up levels including overall organization performance, by type of operations, by individual department, and any other grouping or breakout used by the organization to manage performance. The income statement is generally presented with the prior year’s information and the current year’s budget. This assists management in analyzing performance to plan and trends.


The statement identifies the sources and uses of cash in the organization. The statement of cash flows must tie to the cash balance reported on the balance sheet and complement both the balance sheet and income statement. It is meant to show where cash is generated and spent and how much cash is available (referred to as liquidity) to fund operating expenses and pay down liabilities.

The three components of the statement of cash flows are cash generated from or used in operating activities, investing activities, and financing activities. Operating activities include cash generation and use from the organization’s business activities including cash from the sale of goods and services, payment for goods and supplies used in business activities, employee wage payments, rent, and any other type of operating expense. Investing activities include the purchase or sale of assets such as plants and equipment, other noncurrent assets, and investments not included in cash equivalents. Financing activities include the issuance or payment of debt and other investing activities such as bonds, common stock, and dividends.


Statistic accounts quantify nonmonetary activity that can be used to maintain statistical information for a variety of metrics. Many statistical accounts are included in the income statement and performance reports distributed to department leaders and administration.

Common statistical accounts include volume and labor measurements. A common volume statistic is Units of Service (UOS). The UOS will vary by department and function and include admissions, discharges, adjusted patient days, administrations, prescription dispenses, and procedures. A common labor statistic is full-time equivalents (FTEs). An FTE is a full-time equivalent employee which is calculated by dividing the number of person hours for the period by the number of person hours a full-time employee would be paid for that period. Another common labor statistic is hours worked.

Statistic accounts can be used at their reported value and add even more value to performance assessment when combined with other financial and nonfinancial data for performance metrics at ratios.


In addition to financial statements and statistics, performance metrics are also measured, reported, and analyzed. Organizations establish Key Performance Indicators (KPIs) which are quantifiable measures that are important to the organization and are indicators of the health of the organization. Although a KPI is a metric, a metric is not always a KPI. The key difference is that KPIs represent value drivers of the organization, whereas metrics may represent the measurement of any business activity. Good KPIs should be well defined, quantifiable, indicative of the financial performance and success of the organization, and thoroughly communicated. Table 1-6 Sample Pharmacy KPIs and Metrics provides a summary of KPIs and metrics that can be used to measure department performance. An organization’s specific KPIs and metrics should be determined based on the operational focus and strategic goals.

TABLE 1-6.

Sample Pharmacy KPIs and Metrics

KPI Measure

Volume adjusted expense

Measures expenses adjusted to account for the change in volumes

Volume adjusted wage expense

(Wage Expense/UOS variance) × (Actual Volume)

Volume adjusted supply expense

(Wage Expense/UOS variance) × (Actual Volume)

Total Operating Expense (TOE)

(TOE/UOS variance) × (Actual Volume)

Pharmacy Workload Hours

Measures the time it takes to dispense and manage medications

Relative Value Unit (RVU) × # doses

Hours Per Unit of Service (HPU)

Measures how much labor is utilized to manage department volumes

(All productive (worked) hours in the department)/UOS

Productivity Index (PI)

Measures the staffing efficiency of a department.

Productive Target FTE / Productive Actual FTE

(An index ≥100% is favorable; an index <100% is unfavorable)

Other Performance Metrics

Revenue per UOS

Measures the revenue generated per UOS

Gross revenue/UOS

Wage expense per UOS

Measures the wage expense incurred per UOS

Wage expense/UOS

Supplies expense per UOS

Measures the supplies expense incurred per UOS

Supplies expense/UOS

Pharmaceutical expense per UOS

Measures the pharmaceutical expense incurred per UOS; separate out pharmaceutical expense from total supplies expense

Pharmaceutical expense/UOS

Total operating expense per UOS

Measures the total operating expenses incurred per UOS

Total operating expense/UOS

Net operating margin per UOS

Measures the net operating margin generated per UOS

Net operating margin/UOS


Measures the drug expense of the revenue generated, as a percent of revenue

Drug expense/gross revenue

Discount %

Measures discounts as a percent of revenue

Discounts/gross revenue

Bad debt expense %

Meaures bad debt expense as a percent of revenue

Bad debt/gross revenue


Measures the number of units processed per FTE

UOS/Total FTEs

Wage expense per FTE

Measures the wage expense incurred per FTE

Wage expense/Total FTEs

Net operating margin %

Measures the net profitability of the activity in a department

(Net Revenue − Total Operating Expenses)/Net Revenue


Ratios are a concise and systemic way to organize the data contained in financial statements into a framework that creates meaningful information. A ratio is the quantitative relation between two amounts showing the number of times one value contains or is contained within the other. Ratios provide a way to bring relational comparisons to the revenue, expense, balance sheet, and metric measured activity. This is key in understanding fluctuations and trends in performance, analyzing performance trends over an extended period of time, benchmarking performance to industry and competitors, identifying strength and weak areas, and assisting the management in decision making. Table 1-7 Typical Performance Ratios lists typical performance ratios used by organizations to measure performance.

TABLE 1-7.

Typical Performance Ratios

Profitability Ratios (measures some aspects of profitability)

Current ratio

Measures the number of times short-term obligations can be met by short-term creditors

Current Assets

Current Liabilities

Quick ratio

Includes only liquid assets (cash, marketable securities, and accounts receivable)

Cash + Marketability Securities + Net Accts Receivable

Current Liabilities

Net days in patient accounts receivable

Measures the efficiency of the collections function

Net Patient Accounts Receivable

(Net Patient Service Revenue)/365

Average payment period

Measures how quickly an organization pays its bills

Current Liabilities

(Operating Expense − Depreciation)/365

Days cash on hand

Measures survival period of an organization receiving no further cash inflows

Cash + Marketable Securities + Unrestricted LT Investments

(Operating Expense − Depreciation)/365

Utilization Indicators (commonly used operating indicators)

Length of stay (LOS)

Measures efficiency in containing inpatient service costs

Total Inpatient Days

Total Discharges

Occupancy rate

Measures volume and utilization of inpatient services

Total Inpatient Days

Staffed Beds × Days in Period

Case mix index

Measures how sick patients are; used to make patient care costs comparable

Sum of (cases in each DRG × weight for that DRG)

Total Cases

Adjusted admissions

“Adjusted” means that outpatient revenue is converted into admissions

Total Gross Charges × Inpatient Discharges

Inpatient Charges

Adjusted patient days

When divided by 365 also called Adjusted Occupied Beds

Total Gross Charges × Inpatient Days

Inpatient Charges

Average daily census

Measures what percentage of beds are occupied

Inpatient Days


Case mix adjusted cost per patient day

Severity adjusts cost per patient day

Cost Per Patient Day

Case Mix Index

Activity Ratios (measures how efficiently assets are used in operations)

Total asset turnover

Measures how many times a year total assets are turned into revenue

Total Operating Revenue

Total Assets

Fixed asset turnover

Measures how many times a year fixed assets are turned into revenue

Total Operating Revenue

Net Fixed Assets

Current asset turnover

Measures how many times a year current assets are turned into revenue

Total Operating Revenue

Current Assets

Inventory turnover

Measures how many times a year inventory is completely replaced

Total Operating Revenue


Capital Structure Ratios (measure the degree to which assets are leveraged and used for acquiring debt)

Equity financing ratio

Measures how much of the balance sheet is owned vs financed via credit and debt

Net Assets

Total Assets

Cash flow to total debt

Measures how much cash there is to pay off all debt (ST and LT)

Net Income + Depreciation

Current Liabilities + LT Debt

Long-term debt to equity

Measures how much leverage the company is taking

LT Liabilities

Net Assets

Fixed assets financing

Measures extent to which LT debt is financed through fixed assets

LT Liabilities

Net Fixed Assets

Times interest earned

Measures how much income is generated to cover interest payments

Net Income + Interest Expense

Interest Expense

Debt service coverage

Measures how much income is generated to cover principal + interest payments

Net Income + Interest Expense + Depreciation

Principal Payment + Interest Expense

Debt capitalization

Measures total outstanding debt as a percentage of total capitalization

Total Debt

Net Assets + Total Debt


Many hospitals use a cost accounting system, also called a decision support system (DSS) to further support performance and financial management. These systems use information from the hospital’s general ledger system applied to individual patient account activity from the hospital’s billing system to perform detailed data analysis on issues affecting more than a single department of the hospital. The cost accounting systems used in hospitals today would be more accurately described as cost allocation systems, as they allocate the hospital’s total cost to the patient database and make no comparisons to budget, or a standard cost. Nonetheless, they are a valuable tool in managing the hospital’s finances.

Classification of expenses in cost accounting are different than classification of expenses on the general ledger. On the general ledger, expenses are classified as either direct or indirect. In the cost accounting process expenses are classified as fixed and variable.

Fixed expenses are defined as those expenses that do not fluctuate as volumes in the hospital change. An example of a fixed expense would be the monthly lease payment for office space or equipment. In the cost accounting process, many other expenses are considered fixed, including core staffing levels in some revenue-producing departments, and central support departments such as administration, human resources, and fiscal services.

Variable expenses are defined as those expenses that do fluctuate as volumes in the hospital change. Pharmacy drug cost is an example of a variable expense—generally the more patients that the hospital has, the higher the total drug cost is, and vice versa. Other factors, such as type of patients (cardiac, chemotherapy) also contribute to fluctuations in drug cost.

There are two drivers for the success of any cost accounting system. The first is proper determination of the fixed and variable costs associated with each item for which the hospital generates a patient charge. The second is the methodology for which variable costs are allocated within a department. The more correlated the methodology with the actual charge line item expense, the more accurate the cost accounting results. To accomplish this, an accountant, or system specialist, will conduct detailed “costing” meetings with each department manager. For example, the amount of time to prepare an IV admixture must be assigned to the drugs administered in this manner, making them more expensive in pharmacist time than a drug administered orally or by injection.

Once the costing process is complete, the allocation methodologies are loaded into the DSS. There are two major sources of data input to the DSS: electronic health record/patient billing and accounting system general ledger information. These data sources are typically loaded into the DSS monthly after the general ledger has closed for the previous month. They are maintained in the system’s database perpetually, enabling multiperiod, multiyear reporting.


The cost accounting system allows the organization to analyze profitability at a more detailed level than the general ledger can provide. It can also aggregate data across multiple general ledger departments for a more holistic view of financial performance such as by individual service line, by procedure type, physician, location, department, clinic, diagnoses, payer or payer types, any combination therein, or any other field captured in the DSS. It can also provide results by demographics such as patient region/zip code or age. This can provide additional insight into the organization’s performance and provide additional direction to strategic focuses.

Profitability can be measured at various levels. Two of the more common levels are earnings before interest, depreciation, taxes, and amortization (EBIDTA) and net income (usually before income taxes for taxpaying hospitals). Regardless of the level of profitability selected for analysis and presentation, the following items should be reflected in the cost accounting financial reports:

  • Patient Volumes (the applicable UOS−Discharges, Patient Days, Outpatient Cases, etc.)

  • Profitability Components:

    • + Gross Revenue

    • – Revenue Deductions

    • =Net Revenue

    • – Variable Cost

    • =Contribution Margin

    • – Fixed Cost

    • =Profit (EBIDTA, Net Income)

Contribution margin is an important measure of service line profitability as it presents the amount of incremental earnings a service line generates with changes in volumes and is an important measure when considering which service lines and areas to emphasize for volume growth. However, fixed costs must eventually be covered to generate an overall profit and must be considered, and measures to manage fixed costs must also be in place.

Further detail of the types of expenses within the variable and fixed cost categories are also captured, typically at the general ledger reporting account level, such as wage expense, purchased services, and supplies expense (and within this drug expense further broken out because of its materiality to pharmacy). This allows further insight into financial performance drivers.


Reviewing financial performance is a multidimensional process. No single financial or metric report will provide full insight into performance, trends, and drivers. Looking at pure dollar variances does not account for changes in volume, product mix, or the other related dynamics of revenue, expenses, statistics, and metrics. Also, reviewing metrics alone without integrating them into financial performance does not provide the specific revenue, expense, and margin impacts of the metrics. It is important to review all financial and metric reports and the calculated ratios from them to assess performance.

The P&L, when paired with metrics and ratios, is one of the most important reports a leader receives. The goal of managing a P&L, metrics, and ratios is to maximize margin by increasing net revenue and/or decreasing costs to generate revenue. Volume and expense management are important parts of successful financial performance, and many are directly manageable by the department leaders. Expense reviews should not only be done on the individual line item, but also volume adjusted and per UOS and compared with similar revenue related results and metrics. By looking at what it costs to produce one unit (patient day, administration, visit, x-ray, lab test, etc.), and how that cost compares to revenue generated from it, leaders will have a much better perspective of the impact on the organization.

  • Volume/UOS and expense/UOS should be reviewed for changes in relation to comparison points (such as budget, prior months, prior year). The department leader should work with the finance operations analysts to determine items such as the following. After reviewing the above, the leader should determine if there are any actions that can be taken to address any gaps or take advantage of opportunities.

  • Primary driver for the volume differences (such as a reduction or increase in providers, capacity levels, low referrals, a drop in flu cases, etc.)

  • Mix of services different than expected

  • Is the trend expected to continue?

  • How the trend compares to what is happening in the market

  • What were the leading indicators?

  • What will likely happen in future months with the volume

For hospital pharmacy, the largest expense category is supplies (driven by pharmaceuticals), which is also the most dynamic expense. Supplies expense as a line item will fluctuate with revenue because the more pharmaceuticals administered, the more pharmaceuticals are purchased. It is important for leaders to monitor their Cost-to-Charge ratios (Drug Purchases/Gross Drug Revenue). A +/−2% variance to budget may signify a charging error, an accounts payable posting error, or a change in drug mix and should be investigated. In addition, the pharmaceutical administration mix will also impact supplies expense, whereas higher dollar pharmaceutical therapies will not only drive higher supplies expense, but higher supplies expense per UOS. The higher supplies expense and supplies expense per UOS may not indicate an unfavorable financial performance and is an example of why integrated analysis beyond individual line item expense review should be considered. In the case of supplies expense, along with individual line item expense review, the cost per UOS and relational revenue per UOS should also be factored in. This will help account for volume increases and higher dollar therapies that may generate higher supplies expense and supplies expense per UOS but result in favorable margin generating performance.

Wage or labor expense is typically the second largest expense for pharmacy. Effectively managing productivity, overtime, and agency expenses will keep labor expenses aligned with expectations. Wage expense should be reviewed on the monthly P&L using line item wage expense and wage expense per UOS; however, this should also be managed more real time through productivity reporting. Utilizing daily productivity and staffing tools and reviewing weekly or biweekly productivity reports will help department leaders address performance results quickly. Leaders can research results and take timely actions to address. Departments that flex staffing to volume use productivity reporting to monitor if staffing is appropriately flexing to actual volume and departments that have fixed staffing use productivity reporting to monitor if staffing is at the target level. See Table 1-8 Sample Labor Productivity Report for a sample biweekly report that could be used.

TABLE 1-8.

Sample Labor Productivity Report

Hospital Pharmacy Services







UOS (Volume)







Productive Hours







Actual Productive Hours per UOS (HPU)







Target Productive Hours per UOS (HPU)







Actual Productive FTE







Target Productive FTE







Productive FTE Variance







FTE Productivity Index







FTE Productivity Index YTD







Agency Hours



Overtime (OT) Hours







OT % of Productive Hours








Productive Hours per UOS (HPU)

Productive hours/OUS

Actual Productive FTE

Actual productive hours/80

Target Productive FTE

Variance departments = Target HPU

Fixed departments = Target productive hours/80

Productivity Index

Target productive FTE/actual productive FTE

Index >100% is favorable; index <100% unfavorable

OT % of productive hours

Overtime hours/productive hours

Potential causes of productivity variances could include hours not flexing appropriately for volume changes, staffing levels above planned levels, incorrect staff charged to the department, incorrect hours floated in or out of the department, or incorrect pay codes used by staff. The department leader should focus on determining the root cause of the performance and if necessary, create actionable plans to address (to improve unfavorable or continue favorable) that include timelines and determine predicted gaps that may continue with an expected planned end.

Keep in mind that if the organization is using the accrual-based method of accounting, the monthly P&L will include a wage accrual for days in the current reporting month which do not necessarily line up with payroll specific reports that are generated based on the pay period days. This will cause some differences between the P&L wage expense and the payroll based reported expense. The accrual for hours worked but not paid is reversed at the beginning of the next month and replaced by a new end-of-month accrual.

Additional expense line items that the pharmacy leader should expect to see on their P&L report include but are not limited to the expense items listed in Tables 1-4 and 1-5. Many P&L reports provide the expenses at the general category level, such as “Purchased Services” but are further broken down for department leaders by more specific expense types such as “laundry services” and “lab services,” so results can be further analyzed and understood.

Some organizations will subgroup expenses between direct expenses and indirect expenses. Direct expenses are those which occur directly in the operation of the department and include pharmaceuticals, wages, medical supplies, equipment purchases, and purchased services. Indirect expenses are those that are out of the control of the department manager, such as employee benefits (time off accrual, health insurance, retirement contributions) and payer contractual adjustments within the revenue section.


Managing the finances of an organization as large and complex as many health systems are today is a huge undertaking. While the CFO sets the overall strategy and leads the work for the organization, it is up to each leader to execute and meet performance objectives for their department. Pharmacy leaders must be intimately familiar with the details of their budget and operational performance over time. Senior executives expect the pharmacy leader to provide detailed explanations for any variances to budget as well as to accurately forecast performance for the next operational period.

The pharmacy leader’s ability to analyze, understand, and communicate these variances will determine their ability to manage the department in a fiscally responsible manner. Subsequent chapters will explore many of these concepts in more detail with specific examples.