Healthcare Finance an Introduction ppt

TeAM YYePG Digitally signed by TeAM YYePG DN: cn=TeAM YYePG, c=US, o=TeAM YYePG, ou=TeAM YYePG, email=yyepg@msn.com Reason: I attest to the accuracy and integrity of this document Date: 2005.07.06 08:36:22 +08'00' HEALTHCARE FINANCE AUPHA HAP Editorial Board Frederick J. Wenzel University of St. Thomas G. Ross Baker, Ph.D. University of Toronto Sharon B. Buchbinder, R.N., Ph.D. Towson University Caryl Carpenter, Ph.D. Widener University Leonard Friedman, Ph.D. Oregon State University William C. McCaughrin, Ph.D. Trinity University Thomas McIlwain, Ph.D. Medical University of South Carolina Janet E. Porter, Ph.D. University of North Carolina at Chapel Hill Lydia Reed AUPHA Louis Rubino, Ph.D., FACHE California State University—Northridge Dennis G. Shea, Ph.D. Pennsylvania State University Dean G. Smith, Ph.D. University of Michigan Mary E. Stefl, Ph.D. Trinity University Linda E. Swayne, Ph.D. University of North Carolina—Charlotte Douglas S. Wakefield, Ph.D. University of Iowa HEALTHCARE FINANCE An Introduction to Accounting and Financial Management Third Edition Louis C. Gapenski AUPHA HAP Your board, staff, or clients may also benefit from this book’s insight. For more information on quantity discounts, contact the Health Administration Press Mar- keting Manager at (312) 424-9470. This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. It is sold, or otherwise provided, with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. The statements and opinions contained in this book are strictly those of the author and do not represent the official positions of the American College of Healthcare Executives, of the Foundation of the American College of Healthcare Executives, or of the Association of University Programs in Health Administration. Copyright © 2005 by the Foundation of the American College of Healthcare Executives. Printed in the United States of America. All rights reserved. This book or parts thereof may not be reproduced in any form without written permission of the publisher. 0908070605 54321 Library of Congress Cataloging-in-Publication Data Gapenski, Louis C. Healthcare finance : an introduction to accounting and financial management / 3rd ed. p. cm. Includes bibliographical references and index. ISBN 1-56793-232-0 (alk. paper) 1. Health facilities—Finance. 2. Health facilities—Accounting. I. Title. RA971.3.G3695 2004 362.1'068'1—dc21 2004054241 The paper used in this publication meets the minimum requirements of American National Standards for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. ⅜ ϱ ™ Project manager: Jane C. Williams; acquisitions manager: Janet Davis; cover design: Matt Avery Health Administration Press A division of the Foundation of the American College of Healthcare Executives One North Franklin Street Suite 1700 Chicago, IL 60606 (312) 424-2800 Association of University Programs in Health Administration 2000 N. 14th Street Suite 780 Arlington, VA 22201 (703) 894-0940 BRIEF CONTENTS Preface xiii PART I The Healthcare Environment 1 Introduction to Healthcare Finance 3 2 The Financial Environment 21 PART II Financial Accounting 3 Financial Accounting Basics and the Income Statement 53 4 The Balance Sheet and Statement of Cash Flows 87 PART III Managerial Accounting 5 Managerial Accounting Basics, Cost Behavior, and Profit Analysis 121 6 Cost Allocation 157 7 Pricing and Service Decisions 187 8 Planning and Budgeting 219 PART IV Basic Financial Management Concepts 9 Time Value Analysis 253 10 Financial Risk and Required Return 287 PART V Long-Term Financing 11 Long-Term Debt Financing 325 12 Equity Financing 359 13 Capital Structure and the Cost of Capital 389 PART VI Capital Investment Decisions 14 The Basics of Capital Budgeting 425 15 Project Risk Assessment and Incorporation 461 PART VII Other Topics 16 Current Asset Management and Financing 491 17 Analyzing Financial Performance 527 18 Lease Financing and Business Valuation 561 Index 591 About the Author 603 DETAILED CONTENTS Preface xiii PART I The Healthcare Environment 1 Introduction to Healthcare Finance 3 Defining Healthcare Finance, 3; Purpose of the Book, 5; The Role of Finance in Health Services Organizations, 6; Health Services Settings, 8; Regulatory and Legal Issues, 14; Organization of the Book, 16; How to Use This Book, 17 2 The Financial Environment 21 Alternative Forms of Business Organization, 21; Alternative Forms of Ownership, 26; Organizational Goals, 29; Tax Laws, 32; Third-Party Payers, 34; Managed Care Plans, 37; Alternative Reimbursement Methods, 39 PART II Financial Accounting 3 Financial Accounting Basics and the Income Statement 53 Historical Foundations of Financial Accounting, 54; The Users of Financial Accounting Information, 55; Regulation and Standards in Financial Accounting, 56; Basic Concepts of Financial Accounting, 59; Accounting Methods: Cash Versus Accrual, 62; Recording and Compiling Accounting Data, 65; Income Statement Basics, 67; Revenues, 69; Expenses, 73; Net Income, 76; Net Income Versus Cash Flow, 78; Income Statements of Investor-Owned Firms, 79; A Look Ahead: Using Income Statement Data in Financial Statement Analysis, 80 4 The Balance Sheet and Statement of Cash Flows 87 Balance Sheet Basics, 88; Assets, 90; Liabilities, 96; Equity, 98; Fund Accounting, 102; The Statement of Cash Flows, 102; Transactions, 106; Another Look Ahead: Using Balance Sheet Data in Financial Statement Analysis, 111 PART III Managerial Accounting 5 Managerial Accounting Basics, Cost Behavior, and Profit Analysis 121 The Basics of Managerial Accounting, 121; Cost Classifications: Fixed and Variable, 123; Cost Behavior, 124; Cost Classifications: Semi-Fixed, 127; Profit (CVP) Analysis, 128; Breakeven Analysis, 133; Operating Leverage, 136; Profit Analysis in a Discounted Fee-for-Service Environment, 138; Profit Analysis in a Capitated Environment, 143; The Impact of Cost Structure on Financial Risk, 150 6 Cost Allocation 157 Direct Versus Indirect (Overhead) Costs, 157; Introduction to Cost Allocation, 158; Cost Allocation Basics, 159; Cost Allocation Methods, 162; Direct Method Illustration, 164; The Impact of Changing Cost Drivers, 171; Step-Down Method Illustration, 174; Activity Based Costing, 176; Final Thoughts on Cost Allocation, 180 7 Pricing and Service Decisions 187 Healthcare Providers and the Power to Set Prices, 188; Price Setting Strategies, 189; Target Costing, 191; Setting Prices on Individual Services, 192; Setting Prices Under Capitation, 193; Setting Managed Care Plan Premium Rates, 201; Using Relative Value Units (RVUs) to Set Prices, 206; Making the Service Decision (Contract Analysis), 208 8 Planning and Budgeting 219 The Planning Process, 220; Introduction to Budgeting, 223; Budget Types, 223; Budget Decisions, 226; Constructing a Simple Operating Budget, 228; Variance Analysis, 231; The Cash Budget, 239 PART IV Basic Financial Management Concepts 9 Time Value Analysis 253 Time Lines, 254; Future Value of a Lump Sum (Compounding), 255; Present Value of a Lump Sum (Discounting), 259; Opportunity Costs, 261; Solving for Interest Rate and Time, 263; Annuities, 265; Perpetuities, 268; Uneven Cash Flow Streams, 269; Using Time Value Analysis to Measure Financial Returns, 272; Semiannual and Other Compounding Periods, 276; Amortized Loans, 279 10 Financial Risk and Required Return 287 The Many Faces of Financial Risk, 288; Introduction to Financial Risk, 289; Risk Aversion, 290; Probability Distributions, 291; Expected and Realized Rates of Return, 292; Stand-Alone Risk, 293; Portfolio Risk and Return, 295; Measuring the Risk of Investments Held in Portfolios, 304; Portfolio Betas, 309; Relevance of the Risk Measures, 310; Interpretation of the Risk Measures, 312; The Relationship Between Risk and Required Return, 312 PART V Long-Term Financing 11 Long-Term Debt Financing 325 The Cost of Money, 325; Common Long-Term Debt Instruments, 327; Debt Contracts, 331; Bond Ratings, 333; Credit Enhancement, 335; Interest Rate Components, 335; The Term Structure of Interest Rates, 339; Debt Valuation, 341 12 Equity Financing 359 Equity in For-Profit Businesses, 359; Types of Common Stock, 362; Procedures for Selling New Common Stock, 363; The Market for Common Stock, 365; Regulation of Securities Markets, 367; The Investment Banking Process, 369; Equity in Not-for-Profit Businesses, 371; Common Stock Valuation, 373; Security Market Equilibrium, 379; Informational Efficiency, 380; The Risk/Return Trade-Off, 383 [...]... more important than ever to the economic well-being of the enterprise Because of its importance, managers of all types and at all levels should be thoroughly grounded in finance principles and applications; but this is easier said than done I hope that Healthcare Finance: An Introduction to Accounting and Financial Management will help you understand the finance problems currently faced by healthcare. .. resources, and financing of an organization In general, the purpose of accounting is to create and provide to interested parties, both internal and external, useful information about an organization’s financial status and operations Whereas accounting provides a rational means by which to measure a business’s financial performance and assess operations, financial management, or corporate finance, provides... concepts, and tools necessary to help managers make better financial decisions Of course, the boundary between accounting and financial management is blurred; certain aspects of accounting involve decision making, and much of the application of financial management theory and concepts requires accounting data Chapter 1: Introduction to Healthcare Finance 1 What is meant by the term healthcare finance? 2... organization’s chief financial officer (CFO) and hence falls under the overall category of finance In general, finance activities include: • Planning and budgeting First and foremost, business finance involves evaluating the financial effectiveness of current operations and planning for the future Budgets play an important role in this process • Financial reporting For a variety of reasons, it is important... in the very important area of healthcare finance Defining Healthcare Finance What is healthcare finance? Surprisingly, there is no single answer to that question because the definition of healthcare finance depends, for the most part, on the context in which the term is used Thus, in writing this book, our first step was to decide how to define healthcare finance.” We began by examining the healthcare sector... the basics of financial and managerial accounting Here, my goal is not to turn clinicians or generalist managers into accountants, but to present those accounting concepts that are most critical to managerial decision making The book then discusses the basic foundations of financial management before progressing to demonstrate how healthcare managers can apply financial management theory and principles... costs Generally, managers at all levels are involved, to some extent, in short-term asset management, which is often called working capital management Chapter 1: Introduction to Healthcare Finance 7 • Contract management In today’s healthcare environment, health services organizations must negotiate, sign, and monitor contracts with managed care organizations and third-party payers The financial staff typically... tasks, but managers at all levels are involved in these activities and must be aware of their effects on operating decisions • Financial risk management Many financial transactions that take place to support the operations of a business can, themselves, increase the business’s risk Thus, an important finance activity is to control financial risk In times of high profitability and abundant financial resources,... physician hospital organization (PHO), which is a separate organization formed by a hospital and a physician group to provide contracted healthcare services to managed care plans and, when permitted, directly to employers The PHO must provide utilization and quality management, physician credentialing, claims processing, marketing, and revenue distribution for the system Another common type is the management... pricing and service decisions, and planning and budgeting In Part IV (Basic Financial Analysis Concepts), the focus moves from accounting to financial management Chapter 9 covers time value analysis, which provides techniques for valuing future cash flows, and Chapter 10 presents financial risk and required return—two of the most important concepts in financial decision making Part V (Long-Term Financing) . finance principles and applications; but this is easier said than done. I hope that Healthcare Finance: An Introduction to Accounting and Fi- nancial Management will help you understand the finance. Environment 1 Introduction to Healthcare Finance 3 Defining Healthcare Finance, 3; Purpose of the Book, 5; The Role of Finance in Health Services Organizations, 6; Health Services Settings, 8; Regulatory and. The Healthcare Environment 1 Introduction to Healthcare Finance 3 2 The Financial Environment 21 PART II Financial Accounting 3 Financial Accounting Basics and the Income Statement 53 4 The Balance