Financial Management of Health Care Organizations - An Introduction to Fundamental Tools, Concepts and Applications
Thoroughly revised, this third edition of Financial Management of Health Care Organizations offers an introduction to the most-used tools and techniques of health care financial management. Comprehensive in scope, the book covers a broad range of topics that include an overview of the health care system and evolving reimbursement methodologies; health care accounting and financial statements; managing cash, billings, and collections; the time value of money and analyzing and financing major...
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Thoroughly revised, this third edition of Financial Management of Health Care Organizations offers an introduction to the most-used tools and techniques of health care financial management. Comprehensive in scope, the book covers a broad range of topics that include an overview of the health care system and evolving reimbursement methodologies; health care accounting and financial statements; managing cash, billings, and collections; the time value of money and analyzing and financing major capital investments; determining cost and using cost information in decision-making; budgeting and performance measurement; and pricing. "This new edition of Financial Management of Health Care Organizations builds on the excellent contents of its prior editions, by again simplifying complex health care financial concepts in ways its targeted audience can truly comprehend. It is notably rich with discussions of contemporary issues and is structured in a way that makes for enhanced instructional flexibility and practical adaptation. The authors continue to demonstrate a keen understanding of the challenging issues of the day."—Dalton A. Tong, MBA, CPA, Senior Associate, Health Policy and Management, Johns Hopkins Bloomberg School of Public Health "The third edition of Financial Management of Health Care Organizations continues to provide in-depth and cogent understanding of the important financial topics, including financial accounting, managerial accounting, capital and operating budgeting, revenue flows, and cost management, that health care executives and managers must have. This text has been a valuable resource for my graduate students as well as clinical and non-clinical managers in executive education settings."—Mark Covaleski, PhD, MBA, Robert Beyer Professor of Managerial Accounting and Control, and Professor of Health Care Financial Management, School of Business, University of Wisconsin at Madison
List of Tables, Figures, and Exhibits. Preface. TheAuthors. Acknowledgments. 1 THE CONTEXT OF HEALTH CARE FINANCIAL MANAGEMENT. Introduction. Rising Health Care Costs. The Payment System. Technology 6. The Aging Population. Prescription Drug Costs and Medicare Part D. Chronic Diseases. Compliance and Litigation. The Uninsured. Efforts to Control Costs. Efforts by Payors to Control Health Care Costs. DRGs. Capitation. Global Payments. APCs. Pay-for-Performance. Cutting Delivery Costs. Shift to Outpatient Services. Cost Accounting Systems. Information Services Technology. Mergers and Acquisitions. Reengineering/Redesign. Alternative Forms of Care. Retail Health Care. Medical Tourism. Medical Home. Cost Control Issues with Ethical Overtones. Summary. Key Terms. Questions and Problems. 2 HEALTH CARE FINANCIAL STATEMENTS. Introduction. The Balance Sheet. Assets. Current Assets. Noncurrent Assets. Liabilities. Current Liabilities. Noncurrent Liabilities. Net Assets. Stockholders' Equity. Notes to Financial Statements. The Statement of Operations. Unrestricted Revenues, Gains, and Other Support. Net Patient Service Revenues. Premium Revenues. Other Revenues. Net Assets Released from Restriction. Expenses. Depreciation and Amortization. Interest. Provision for Bad Debts. Other Expenses. Operating Income. Other Income. Excess of Revenues over Expenses. Below the Line Items. Change in Net Unrealized Gains and Losses on Other than Trading Securities. Increases in Long-Lived Unrestricted Net Assets. Transfers to Parent. Extraordinary Items. Increase in Unrestricted Net Assets. The Statement of Changes in Net Assets. Changes in Unrestricted Net Assets. Changes in Temporarily Restricted Net Assets. Changes in Permanently Restricted Net Assets. The Statement of Cash Flows. Cash Flows from Operating Activities. Cash Flows from Investing Activities. Cash Flows from Financing Activities. Cash and Cash Equivalents at the End of the Year. Summary. Key Terms. Key Equations. Questions and Problems. Appendix A: Financial Statements for Sample Not-for-Profi t Hospital and For-Profi t Hospital and Notes to Financial Statement. 3 PRINCIPLES AND PRACTICES OF HEALTH CARE ACCOUNTING. Introduction. The Books. Cash and Accrual Bases of Accounting. Cash Basis of Accounting. Accrual Basis of Accounting. An Example of the Effects of Cash Flows on Profit. Reporting Under Cash and Accrual Accounting. Recording Transactions. Rules for Recording Transactions. The Recording Process. Developing the Financial Statements. The Balance Sheet. Assets. Liabilities. Net Assets. The Statement of Operations. Unrestricted Revenues, Gains, and Other Support. Operating Expenses. Operating Income and Excess of Revenues over Expenses. Increase in Unrestricted Net Assets. Statement of Changes in Net Assets. Statement of Cash Flows. Summary. Key Terms. Questions and Problems. 4 FINANCIAL STATEMENT ANALYSIS. Introduction. Horizontal Analysis. Trend Analysis. Vertical (Common-Size) Analysis. Ratio Analysis. Categories of Ratios. Key Points to Consider When Using and Interpreting Ratios. Liquidity Ratios. Current Ratio. Quick Ratio. Acid-Test Ratio. Days in Accounts Receivable. Days Cash on Hand. Average Payment Period. Liquidity Summary. Revenue, Expense, and Profi tability Ratios. Operating Revenue per Adjusted Discharge. Operating Expense per Adjusted Discharge. Salary and Benefi t Expense as a Percentage of Total Operating Expense. Operating Margin. Nonoperating-Revenue Ratio. Return on Total Assets. Return on Net Assets. Revenue, Expense, and Profitability Summary. Activity Ratios. Total Asset Turnover. Fixed Asset Turnover. Age-of-Plant Ratio. Activity Summary. Capital Structure Ratios. Long-Term Debt to Net Assets. Net Assets to Total Assets. Times Interest Earned. Debt Service Coverage. Capital Structure Summary. Summary of Newport Hospital's Ratios. Summary. Key Terms. Key Equations. Questions and Problems. 5 WORKING CAPITAL MANAGEMENT. Introduction. The Working Capital Cycle. Working Capital Management Strategies. Asset Mix Strategy. Financing Mix Strategy. Cash Management. Sources of Temporary Cash. Bank Loans. Lines of Credit. Commitment Fees. Compensating Balance. Transaction Notes. Trade Credit or Payables. Revenue Cycle Management. Scheduling or Preregistration. Registration. Charge Capture. Coding. Billing. Payment. Collecting Cash Payments. Decentralized Collection Centers and Concentration Banking. Lockboxes. Wire Transfers. Investing Cash on a Short-Term Basis. Treasury Bills (T-bills). Negotiable Certifi cates of Deposit. Commercial Paper. Money Market Mutual Funds. Forecasting Cash Surpluses and Defi cits—The Cash Budget. Cash Inflows. Cash Outflows. Ending Cash Balance. Accounts Receivable Management. Methods to Monitor Accounts Receivable. Methods to Finance Accounts Receivable. Factoring. Pledging Receivables as Collateral. Methods to Monitor Revenue Cycle Performance. Laws and Regulation for Billing Compliance. Health Insurance Portability and Accountability Act. Summary. Key Terms. Key Equations Questions and Problems. 6 THE TIME VALUE OF MONEY. Introduction. Future Value of a Dollar Invested Today. Using a Formula to Calculate Future Value. Using Tables to Compute Future Value. Using a Spreadsheet to Calculate Future Value. Present Value of an Amount to Be Received in the Future. Using a Formula to Calculate Present Value. Using Tables to Compute Present Value. Using a Spreadsheet to Calculate Present Value. Annuities. Future Value of an Ordinary Annuity. Using Tables to Calculate the Future Value of an Ordinary Annuity. Using a Spreadsheet to Calculate the Future Value of an Ordinary Annuity. Future Value of an Annuity Due. Present Value of an Ordinary Annuity. Using Tables to Calculate the Present Value of an ordinary Annuity. Using a Spreadsheet to Calculate the Present Value. Present Value of an Annuity Due. Special Situations to Calculate Future or Present Value and Other Excel Functions. What If the Interest Rate Is Not Expressed as an Annual Rate? How to Compute Periodic Loan Payments Using Excel. How to Calculate the Compounded Growth Rate. How to Calculate the Present Value of Perpetual Annuities. How to Solve for the Interest Rate of a Loan with Fixed. Loan Payments. Summary. Key Terms. Key Formulas. Questions and Problems. Appendix B: Future and Present Value Tables. 7 THE INVESTMENT DECISION. Introduction. Objectives of Capital Investment Analysis. Nonfinancial Benefits. Financial Returns. Ability to Attract Funds in the Future. Analytic Methods. Payback Method. Analysis. Strengths and Weaknesses of the Payback Method. Net Present Value. Using the Small Hospital as an Example of Net Present Value Analysis. Decision Rules Regarding NPV. Using Spreadsheets to Calculate NPV. Strengths and Weaknesses of the NPV Method. Internal Rate of Return. Equal Cash Flows. Unequal Cash Flows. Decision Rules with IRR. Strengths and Weaknesses of IRR Analysis. Using an NPV Analysis for a Replacement Decision. Illustrative Example. Solution. Summary. Key Terms. Key Equations. Questions and Problems. Appendix C: Technical Concerns Regarding Net Present Value. Appendix D: Adjustments for Net Working Capital. Appendix E: Tax Implications for for-Profit Entities in a Capital Budgeting Decision. Appendix F: Comprehensive Capital Budgeting. Replacement Cost Example. Appendix Summary. 8 CAPITAL FINANCING FOR HEALTH CARE PROVIDERS. Introduction. Equity Financing. Debt Financing. Sources of Debt Financing by Maturity. Sources of Debt Financing by Type of Interest Rate. Fixed and Variable Interest. Interest Rate Swap. Selected Types of Health Care Debt Financing. Bank Term Loans. Conventional Mortgages. Pooled Equipment Financing. FHA Program Loans. Bonds. Bond Issuance Process. Public versus Private Placement. Steps in the Bond Issuing Process. Financial evaluation. Market Evaluation. Physician and Management Evaluation. Lease Financing. Operating Lease. Capital Lease. Analysis of the Lease Versus Purchase Decision. Summary. Key Terms. Key Equations. Questions and Problems. Appendix G: Bond Valuation, Loan Amortization, and Debt Capacity. 9 USING COST INFORMATION TO MAKE SPECIAL DECISIONS. Introduction. Break-Even Analysis. Using the Break-Even Approach to Determine Prices, Charges, and Reimbursement. Break-Even Analysis: The Role of Fixed Costs. Break-Even Analysis: The Role of Variable Costs. Using the Break-Even Equation. Expanding the Break-Even Equation to Include Indirect. Costs and Required Profit. The Break-Even Chart. A Shortcut to Calculating Breakeven: The Contribution Margin. Effects of Capitation on Break-Even Analysis. Product Margin. Multiple Services. Multiple Payors. Applying the Product Margin Paradigm to Making. Special Decisions. Make-or-Buy Decisions. Decision Rule. Adding or Dropping a Service. Decision Rules. Expanding or Reducing a Service. Decision Rule. Summary. Key Terms. Key Equations. Questions and Problems. 10 BUDGETING. Introduction. The Planning/Control Cycle. Strategic Planning and Planning. Controlling Activities. Organizational Approaches to Budgeting. Participation. Budget Models. Budget Detail. Budget Modifi cations. Types of Budgets. Statistics Budget. Operating Budget. Cash Budget. Capital Budget. Pro Forma Financial Statements and Ratios. An Extended Example of How to Develop a Budget. Statistics Budget. Developing Volume Projections. Converting Visit Projections to Weighted Visits. Operating Budget. Revenue Budget. Net Patient Revenues. Non-Patient Revenues. Expense Budget. Supplies Budget. Administrative and General Expense Budget. Cash Budget. Capital Budget. Summary. Key Terms. Key Equation. Questions and Problems. 11 RESPONSIBILITY ACCOUNTING. Introduction. Decentralization. Advantages of Decentralization. Time. Information Relevance. Quality. Speed. Talent. Motivation and Allegiance. Disadvantages of Decentralization. Loss of Control. Decreased Goal Congruence. Increased Need for Coordination and Formal Communication. Lack of Managerial Talent. Types of Responsibility Centers. Service Centers. Cost Centers. Profit Centers. Traditional Profit Centers. Capitated Profit Centers. Administrative Profit Centers. Investment Centers. Measuring Performance of Responsibility Centers. Responsibility, Authority, and Accountability. Performance Measures. Budget Variances. Revenue Variances. Step 1. Develop the Flexible Budget Estimate for Revenues. Step 2. Calculate the Revenue Variance Due to Changes in Volume and Rate. Expense Variances. Step 1. Explain the Amount of Variance Due to Fixed Costs. Step 2. Develop a Flexible Expense Budget. Step 3. Calculate the Expense Variance Due to Changes in Volume and Other Factors. Summary of the Example. Beyond Variances. Other Financial Performance Measures. Summary. Key Terms. Key Equations. Questions and Problems. 12 PROVIDER COST-FINDING METHODS. Introduction. Cost-to-Charge Ratio. Step-Down Method. Allocating Utilities. Allocating Administrative Costs. Allocating Laboratory Costs. Fully Allocated Cost. Activity-Based Costing. Costing Terminology. An Example. Summary. Key Terms. Questions and Problems. 13 PROVIDER PAYMENT SYSTEMS. Introduction. The Early Years, 1929 to 1965. Blue Cross and Blue Shield Established. The Middle Years, 1965 to 1983. Increasing Concerns About Costs and Access. Medicare and Medicaid. The Later Years, 1984 to Present. Diagnosis-Related Groups. Flat Fee Systems. Flat Fees for Hospitals. Flat Fees for Physicians. Flat Fees for Outpatient Care. Other Payors Follow Suit. Managed Care and Risk Sharing. Overview of Managed Care. HMOs. PPOs. POS. Methods of Managed Care Payments. Steerag. Copayments and Deductibles. Per Diem. Case Rates. Capitation. Premium Rate-Setting Methods. Percentage of Premium Capitation. Other Forms of Capitation. Evolving Issues. Pay for Reporting. Pay for Performance. Medical Errors. Consumer Choice in Health Care. Information Technology. Summary. Key Terms. Questions and Problems. Questions from Appendix H. Appendix H: Cost-Based Payment Systems. Glossary. Web Links of Interest for Health Care Financial Management. Index.
