Debits and Credits                                       March 13, 2012

By Leonard Zwelling

          This is really easy.

          The first day in my Accounting 101 class in business school they taught us about debits and credits—what comes in (a plus asset) and what goes out (a plus liability). It is considered favorable if the amount that comes in is greater than the amount that goes out. It is also considered wise if, when running a business, you have some idea what you are doing to make these two things occur for then you have the greatest chance of having what comes in be greater than what goes out. Simple, right?

          Apparently not.

          The federal government does not get this at all.  It spends billions of dollars more than it has coming in and makes up the difference by borrowing what it needs to square its books. As long as interest rates remain low and China has to lend us money so we can buy the junk they dump into WalMart and Target, this may actually work. For a while. It’s not a good strategy for sustained growth, increased employment or lowering taxes.

          States, by contrast, don’t have the China borrowing card to play and have to square their budgets each year. That’s why many are deathly afraid of expanding the Medicaid population as per ObamaCare because some of that money for expansion will have to come from their coffers after 2017 and they really have no idea where it is going to come from. Health care costs are not only breaking the budget of the US, they are breaking the budgets of the states. We in Texas live at ground zero for the health care reform fiasco as we have the most uninsured in our population and a government least inclined to do a whole lot about that.

          MD Anderson should not have as complex a problem.

          What brings money in:

1.     Patient care revenue (the biggest chunk by far)

2.     Philanthropy (several hundred million per year, but surely less than 15% of the budget)

3.     Grant dollars (all direct are spent; only indirect can offset spent dollars)

4.     State allocation (under 5%)

5.     Investment income

          Note only #4 is a guaranteed fixed revenue stream.

          What do we spend money on:

1.     People-professional, administrative, classified and contractees

2.     Infrastructure-IS, buildings, etc

3.     Band-aids and IV poles

          Note that 1 and 2 are really fixed costs and do not vary all that much with the activities in the system (e.g., number of patients seen). Only #3 is a variable cost that allows us to respond to volume decreases with decreased purchases.

          Thus our big expenses are fixed and our big revenues vary with patient numbers, payer mix and reimbursement rates from private and government insurers.

          This is a precarious business we are in. We have succeeded thus far because despite the big fixed costs, the demand for our services seemed unending. With more competitors in the market, less reimbursement per unit of work, and a greater demand to prove we are better not just say it, the pressure to alter our business model is great. To do that we need to have great data on which to base decisions and have great confidence in those data and those providing it to us.

          It would seem obvious that before we have a discussion of what we need to do to improve whatever financial crisis the administration believes we are in, that we all agree on what these numbers are.

          Before we have that Faculty Forum in early April, it would be nice if the leadership provided these data to one and all so we could all be working out of the same playbook and have meaningful discussions based on reality not perception.

          It’s Accounting 101. How about it?

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