1 1 CHAPTER 1 Introduction to Healthcare Finance

1 -1 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

1 -2 Defining Healthcare Finance n The definition depends on the context. l Policy maker or manager l Type of healthcare organization n For our purposes, healthcare finance is the practice of finance, including both accounting and financial management, within health services (provider) organizations.

1 -3 Accounting Versus Financial Management n Accounting concerns the measurement, in financial (dollar) terms, of events that reflect the resources, operations, and financing of an organization. n Financial management provides theory, concepts, and tools necessary to help managers make better financial decisions. ? Are the two disciplines independent?

1 -4 Course Goal n The primary goal of this course is to introduce students to the field of healthcare finance, including: l Principles and concepts. l Applications across a wide variety of provider settings. l The impact of alternative reimbursement methods. n Along the way, some important personal finance concepts also are discussed.

1 -5 Concept of a Business n A business has the following characteristics: l Obtains financing from the marketplace. l Uses the funds to buy assets. l Operates the assets to provide goods or services. l Sell the goods or services to create revenue. ? What is the difference between a business and a pure charity?

1 -6 The Role of Finance n 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. n Finance activities include: l Planning and budgeting l Financial reporting l Capital investment decisions l Financing decisions l Working capital management l Contract management l Financial risk management

1 -7 The Four C’s The finance activities listed on the previous slide can be summarized by the four C’s: l Cost minimization l Cash sufficiency l Capital access l Control

1 -8 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?

1 -9 Health Services Settings n Health services are provided by numerous types of organizations in many different settings. n Applications presented in this course will include the following settings: l Hospital (inpatient) care l Ambulatory (outpatient) care l Long-term care l Integrated delivery systems

1 - 10 Regulatory Issues n Entry into the health services industry is heavily regulated. l Licensure l Certificate of need (CON) l Cost containment and rate review n Although designed primarily to protect consumers, critics of regulation contend that it protects providers more than consumers.

1 - 11 Legal Issues n The primary legal issue facing healthcare providers is professional liability (malpractice). n In addition, other issues include: l General liability l Antitrust l Right to die

1 - 12 Current Management Challenges n According to ACHE l Financial concerns l Medicaid reimbursement and regulation l Medicare reimbursement and regulation l Indigent care costs and bad debt losses n According to HFMA l Balancing financial and quality issues l Revenue cycle improvement l Access to capital (financing)

1 - 13 Organization of the Course n Healthcare environment l Alternative types of ownership l Taxes l Third-party payers l Reimbursement methods n Financial accounting l Basics l Income statement l Statement of changes in equity l Balance sheet l Statement of cash flows

1 - 14 Organization of the Course (Cont. ) n Managerial accounting l Basics l Cost behavior and profit planning l Cost allocation l Pricing and service decisions l Planning and budgeting n Basic financial analysis concepts l Time value analysis l Financial risk and return

1 - 15 Organization of the Course (Cont. ) n Long-term financing l Long-term debt capital l Equity (ownership) capital l Capital structure decisions l The cost of capital n Capital investment decisions l Cash flow estimation l Breakeven and profitability measures l Risk assessment l Risk incorporation

1 - 16 Organization of the Course (Cont. ) n Other potential topics l Working capital (current asset) management l Current asset (short-term) financing l Analyzing financial performance l Lease financing l Business valuation

1 - 17 Conclusion n This concludes our discussion of Chapter 1 (Introduction to Healthcare Finance). n Although not all concepts were discussed in class, you are responsible for all of the material in the text. ? Do you have any questions?