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CHAPTER 1 Introduction to Healthcare Finance

The first two chapters provide background information that creates the framework for financial decision making within healthcare organizations. Chapter 1 focuses on introductory material including the institutional setting for the delivery of healthcare services.

Copyright © 2012 by the Foundation of the American College of Healthcare Executives 10/24/11 Version

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Defining Healthcare Finance

The definition depends on the context.Policy maker or managerType of healthcare organization

For our purposes, healthcare finance is the practice of finance, including both accounting and financial management, within health services (provider) organizations.

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Accounting VersusFinancial Management

Accounting concerns the measurement, in financial (dollar) terms, of events that reflect the resources, operations, and financing of an organization.

Financial management provides the theory, concepts, and tools necessary to help managers make better financial decisions.

Are the two disciplines independent?

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Course Goal

The primary goal of this course is to introduce students to the field of healthcare finance, including:Principles and concepts.Applications across a wide variety of

provider settings.The impact of alternative reimbursement

methods.

Along the way, some important personal finance concepts also are discussed.

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Concept of a Business

A business has the following characteristics:Obtains financing from the marketplace.Uses the funds to buy assets.Operates the assets to provide goods or

services.Sell the goods or services to create

revenue.

What is the difference between a business and a pure charity?

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The Role of Finance

The primary role of finance within any business is to plan for, acquire, and utilize resources to maximize the efficiency (and hence value) of the organization.

Finance activities include:Planning and budgetingFinancial reportingCapital investment decisionsFinancing decisionsWorking capital managementContract managementFinancial risk management

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The Four C’s

The finance activities listed on the previous slide can be summarized by the four C’s:Cost minimizationCash sufficiencyCapital accessControl

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Finance Department Structure

At large providers (typically hospitals), the finance department typically is organized as follows: Chief financial officer

• Comptroller– Budgeting and reporting activities– Payables and receivables management

• Treasurer– Acquisition and employment of capital– Debt management– Financial risk management

What about a small medical practice?

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Health Services Settings

Health services are provided by numerous types of organizations in many different settings.

Applications presented in this course will include the following settings:Hospital (inpatient) careAmbulatory (outpatient) careLong-term careIntegrated delivery systems

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Regulatory Issues

Entry into the health services industry is heavily regulated.LicensureCertificate of need (CON)Cost containment and rate review

Although designed primarily to protect consumers, critics of regulation contend that it protects providers more than consumers.

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Legal Issues

The primary legal issue facing healthcare providers is professional liability (malpractice).

In addition, other issues include:General liabilityAntitrustRight to die

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Current Management Challenges

According to ACHEFinancial concernsMedicaid reimbursement and regulationMedicare reimbursement and regulationIndigent care costs and bad debt losses

According to HFMABalancing financial and quality issuesRevenue cycle improvementAccess to capital (financing)

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Organization of the Course

Healthcare environmentAlternative types of ownershipTaxesThird-party payersReimbursement methods

Financial accountingBasicsIncome statementStatement of changes in equityBalance sheetStatement of cash flows

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Organization of the Course (Cont.)

Managerial accountingBasicsCost behavior and profit planningCost allocationPricing and service decisionsPlanning and budgeting

Basic financial analysis conceptsTime value analysisFinancial risk and return

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Organization of the Course (Cont.)

Long-term financingLong-term debt capitalEquity (ownership) capitalCapital structure decisionsThe cost of capital

Capital investment decisionsCash flow estimationBreakeven and profitability measuresRisk assessmentRisk incorporation

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Organization of the Course (Cont.)

Other potential topicsWorking capital (current asset)

managementCurrent asset (short-term) financingAnalyzing financial performanceLease financingBusiness valuation

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This concludes our discussion of Chapter 1 (Introduction to Healthcare Finance).

Although not all concepts were discussed in class, you are responsible for all of the material in the text.

Do you have any questions?

Conclusion