Description
Assignment: You will create a formal PowerPoint (PPT) about your fictional Healthcare Business. You are preparing a presentation for your executive leadership team. The business plan must be related to the healthcare field (e.g., a doctor’s office, a home healthcare practice, a new hospital, etc.). This presentation requires correct grammar, punctuation, and APA format, including in-text citation and reference list. You are required to have a minimum of three (3) references and your references must come from any combination of refereed peer reviewed journal articles, textbooks, and or credible Internet sources. You will be answering the following organizational plan: Organizational Plan (see Exhibit 25-3):Describe your business. Name it. Describe your idea; purpose, mission, vision, background information, and description of the product and or service. The business must be related to the healthcare field (e.g., a doctor’s office, a home healthcare practice, a new hospital, etc.)Physical location where service and/or equipment that will be providedThe department responsible for the budgetThe division responsible for operationsThe directly responsible supervisorComposition of the overall management team***Attached I will provide the book where you can see Exibit 25-3 on page 311.
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FIFTH EDITION
HEALTH CARE
FINANCE
Basic Tools For Nonfinancial Managers
JUDITH J. BAKER, PhD, CPA
R.W. BAKER, JD
NEIL R. DWORKIN, PhD
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Jones & Bartlett Learning
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Library of Congress Cataloging-in-Publication Data
Names: Baker, Judith J., author. | Baker, R. W., author. | Dworkin, Neil R., author.
Title: Health care finance : basic tools for nonfinancial managers / Judith Baker, R.W. Baker, and Neil R. Dworkin.
Description: Fifth edition. | Burlington, Massachusetts : Jones & Bartlett Learning, [2018] | Includes
bibliographical references and index.
Identifiers: LCCN 2016054734 | ISBN 9781284118216 (pbk.)
Subjects: | MESH: Financial Management | Health Facilities–economics | Health Facility Administration |
United States
Classification: LCC RA971.3 | NLM W 80 | DDC 362.1068/1–dc23
LC record available at https://lccn.loc.gov/2016054734
6048
Printed in the United States of America
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© LFor/Shutterstock
Table of Contents
New to This Edition……………………………………………………………………………………………….xvii
Preface�������������������������������������������������������������������������������������������������������������������������������� xix
Acknowledgments��������������������������������������������������������������������������������������������������������������� xxi
About the Authors������������������������������������������������������������������������������������������������������������� xxiii
PART I—HEALTHCARE FINANCE OVERVIEW…………………………………………………………. 1
Chapter 1
Introduction to Healthcare Finance……………………………………………………… 3
The History…………………………………………………………………………………………….. 3
The Concept…………………………………………………………………………………………… 4
How Does Finance Work in the Healthcare Business?………………………………… 4
Viewpoints……………………………………………………………………………………………… 4
Why Manage?………………………………………………………………………………………….. 5
The Elements of Financial Management…………………………………………………… 5
The Organization’s Structure…………………………………………………………………… 5
Two Types of Accounting…………………………………………………………………………. 7
Information Checkpoint………………………………………………………………………….. 9
Key Terms……………………………………………………………………………………………….. 9
Discussion Questions……………………………………………………………………………….. 9
Notes……………………………………………………………………………………………………… 9
Chapter 2
Four Things the Healthcare Manager Needs to Know About
Financial Management Systems……………………………………………………….11
What Does the Manager Need to Know?………………………………………………….. 11
How the System Works in Health Care…………………………………………………….. 11
The Information Flow……………………………………………………………………………. 12
Basic System Elements…………………………………………………………………………… 14
The Annual Management Cycle……………………………………………………………… 18
Communicating Financial Information to Others……………………………………. 20
Information Checkpoint………………………………………………………………………… 20
Key Terms……………………………………………………………………………………………… 20
Discussion Questions……………………………………………………………………………… 20
Notes……………………………………………………………………………………………………. 21
iii
iv Table of Contents
Chapter 3
The Digital Age: Changing the Landscape of Healthcare
Finance……………………………………………………………………………………….23
High-Tech and High-Touch Approaches…………………………………………………. 23
Patient Engagement………………………………………………………………………………. 23
Social Media………………………………………………………………………………………….. 24
Resource Allocation………………………………………………………………………………. 25
Changes in Health Information Technology……………………………………………. 25
Population Health and the Digital Age: Crossing at
the Intersection…………………………………………………………………………………. 26
Additional Trends and Complexities: Other Delivery Systems…………………… 27
Summary ……………………………………………………………………………………………… 27
Information Checkpoint………………………………………………………………………… 28
Key Terms……………………………………………………………………………………………… 28
Other Acronymns………………………………………………………………………………….. 28
Discussion Questions……………………………………………………………………………… 28
Notes……………………………………………………………………………………………………. 28
PART II—RECORD FINANCIAL OPERATIONS…………………………………………………………31
Chapter 4
Assets, Liabilities, and Net Worth………………………………………………………..33
Overview………………………………………………………………………………………………. 33
What Are Examples of Assets?………………………………………………………………… 34
What Are Examples of Liabilities?…………………………………………………………… 35
What Are the Different Forms of Net Worth?…………………………………………… 35
Information Checkpoint………………………………………………………………………… 36
Key Terms……………………………………………………………………………………………… 36
Discussion Questions……………………………………………………………………………… 36
Chapter 5
Revenues (Inflow)…………………………………………………………………………….37
Overview………………………………………………………………………………………………. 37
Receiving Revenue for Services………………………………………………………………. 37
Sources of Healthcare Revenue………………………………………………………………. 39
Grouping Revenue for Planning and Control………………………………………….. 42
Information Checkpoint………………………………………………………………………… 45
Key Terms……………………………………………………………………………………………… 45
Discussion Questions……………………………………………………………………………… 45
Notes……………………………………………………………………………………………………. 46
Chapter 6
Expenses (Outflow)…………………………………………………………………………..47
Overview………………………………………………………………………………………………. 47
Disbursements for Services…………………………………………………………………….. 48
Grouping Expenses for Planning and Control…………………………………………. 48
Cost Reports as Influencers of Expense Formats………………………………………. 52
Information Checkpoint………………………………………………………………………… 53
Key Terms……………………………………………………………………………………………… 54
Discussion Questions……………………………………………………………………………… 54
Notes……………………………………………………………………………………………………. 54
Table of Contents v
Chapter 7
Cost Classifications…………………………………………………………………………..55
Distinction Between Direct and Indirect Costs…………………………………………. 55
Examples of Direct Cost and Indirect Cost………………………………………………. 56
Responsibility Centers……………………………………………………………………………. 57
Distinction Between Product and Period Costs………………………………………… 60
Information Checkpoint………………………………………………………………………… 61
Key Terms……………………………………………………………………………………………… 61
Discussion Questions……………………………………………………………………………… 61
Notes……………………………………………………………………………………………………. 61
PART III—TOOLS TO ANALYZE AND UNDERSTAND FINANCIAL OPERATIONS……….63
Chapter 8
Cost Behavior and Break-Even Analysis………………………………………………..65
Distinctions Among Fixed, Variable, and Semivariable Costs…………………….. 65
Examples of Variable and Fixed Costs……………………………………………………… 69
Analyzing Mixed Costs…………………………………………………………………………… 71
Contribution Margin, Cost-Volume-Profit, and Profit-Volume Ratios…………. 73
Information Checkpoint………………………………………………………………………… 78
Key Terms……………………………………………………………………………………………… 78
Discussion Questions……………………………………………………………………………… 78
Notes……………………………………………………………………………………………………. 79
Chapter 9
Understanding Inventory and Depreciation Concepts…………………………….81
Overview: The Inventory Concept…………………………………………………………… 81
Inventory and Cost of Goods Sold (“Goods” Such as Drugs) ……………………. 82
Inventory Methods………………………………………………………………………………… 83
Inventory Tracking………………………………………………………………………………… 84
Inventory Distribution Systems……………………………………………………………….. 86
Calculating Inventory Turnover……………………………………………………………… 87
Overview: The Depreciation Concept……………………………………………………… 88
Book Value of a Fixed Asset and the Reserve for Depreciation………………….. 88
Computing Tax Depreciation…………………………………………………………………. 92
Information Checkpoint………………………………………………………………………… 93
Key Terms……………………………………………………………………………………………… 93
Discussion Questions……………………………………………………………………………… 93
Notes……………………………………………………………………………………………………. 93
Appendix 9-A A Further Discussion of Accelerated and
Units of Service Depreciation Computations……………………………………….. 95
Accelerated Book Depreciation Methods………………………………………………… 95
Chapter 10
Staffing: Methods, Operations, and Regulations…………………………………..103
Staffing Requirements…………………………………………………………………………. 103
FTEs for Annualizing Positions…………………………………………………………….. 103
Number of Employees Required to Fill a Position: Another Way to
Calculate FTEs………………………………………………………………………………… 106
Regulatory Requirements Regarding Staffing………………………………………… 111
vi Table of Contents
Summary…………………………………………………………………………………………….. 113
Information Checkpoint………………………………………………………………………. 114
Key Terms……………………………………………………………………………………………. 114
Discussion Questions……………………………………………………………………………. 114
Notes………………………………………………………………………………………………….. 114
PART IV—REPORT AND MEASURE FINANCIAL RESULTS………………………………………117
Chapter 11
Reporting as a Tool…………………………………………………………………………119
Understanding the Major Reports………………………………………………………… 119
Balance Sheet……………………………………………………………………………………… 119
Statement of Revenue and Expense………………………………………………………. 120
Statement of Changes in Fund Balance/Net Worth……………………………….. 122
Statement of Cash Flows………………………………………………………………………. 123
Subsidiary Reports……………………………………………………………………………….. 124
Summary…………………………………………………………………………………………….. 125
Information Checkpoint………………………………………………………………………. 125
Key Terms……………………………………………………………………………………………. 126
Discussion Questions……………………………………………………………………………. 126
Notes………………………………………………………………………………………………….. 126
Chapter 12
Financial and Operating Ratios as Performance
Measures……………………………………………………………………………………127
The Importance of Ratios…………………………………………………………………….. 127
Liquidity Ratios……………………………………………………………………………………. 129
Solvency Ratios……………………………………………………………………………………. 130
Profitability Ratios……………………………………………………………………………….. 132
Information Checkpoint………………………………………………………………………. 134
Key Terms……………………………………………………………………………………………. 134
Discussion Questions……………………………………………………………………………. 134
Chapter 13
The Time Value of Money………………………………………………………………..135
Purpose………………………………………………………………………………………………. 135
Unadjusted Rate of Return…………………………………………………………………… 135
Present-Value Analysis………………………………………………………………………….. 136
Internal Rate of Return………………………………………………………………………… 137
Payback Period……………………………………………………………………………………. 137
Evaluations………………………………………………………………………………………….. 138
Resources……………………………………………………………………………………………. 139
Information Checkpoint………………………………………………………………………. 139
Key Terms……………………………………………………………………………………………. 139
Discussion Questions……………………………………………………………………………. 139
Note……………………………………………………………………………………………………. 140
Appendix 13-A Present-Value Table
(The Present Value of $1.00)……………………………………………………………. 141
Table of Contents vii
Appendix 13-B Compound Interest Table: Compound Interest
of $1.00 (The Future Amount of $1.00)…………………………………………….. 143
Appendix 13-C Present Value of an Annuity of $1.00…………………………… 145
PART V—TOOLS TO REVIEW AND MANAGE COMPARATIVE DATA………………………..147
Chapter 14
Trend Analysis, Common Sizing, and Forecasted Data………………………….149
Common Sizing…………………………………………………………………………………… 149
Trend Analysis…………………………………………………………………………………….. 150
Analyzing Operating Data…………………………………………………………………….. 151
Importance of Forecasts……………………………………………………………………….. 152
Operating Revenue Forecasts……………………………………………………………….. 153
Staffing Forecasts ………………………………………………………………………………… 156
Capacity Level Issues in Forecasting………………………………………………………. 158
Summary…………………………………………………………………………………………….. 160
Information Checkpoint………………………………………………………………………. 160
Key Terms……………………………………………………………………………………………. 160
Discussion Questions……………………………………………………………………………. 160
Notes………………………………………………………………………………………………….. 160
Chapter 15
Using Comparative Data…………………………………………………………………..161
Overview…………………………………………………………………………………………….. 161
Comparability Requirements………………………………………………………………… 161
A Manager’s View of Comparative Data…………………………………………………. 162
Uses of Comparative Data…………………………………………………………………….. 163
Making Data Comparable…………………………………………………………………….. 168
Constructing Charts to Show the Data…………………………………………………… 171
Information Checkpoint………………………………………………………………………. 173
Key Terms……………………………………………………………………………………………. 173
Discussion Questions……………………………………………………………………………. 174
Note……………………………………………………………………………………………………. 174
PART VI—CONSTRUCT AND EVALUATE BUDGETS………………………………………………175
Chapter 16
Operating Budgets………………………………………………………………………….177
Overview…………………………………………………………………………………………….. 177
Budget Viewpoints……………………………………………………………………………….. 178
Budget Basics: A Review……………………………………………………………………….. 179
Building an Operating Budget: Preparation………………………………………….. 180
Building an Operating Budget: Construction………………………………………… 181
Working with Static Budgets and Flexible Budgets…………………………………. 183
Budget Construction Summary…………………………………………………………….. 186
Budget Review…………………………………………………………………………………….. 186
Information Checkpoint………………………………………………………………………. 187
Key Terms……………………………………………………………………………………………. 187
viii Table of Contents
Discussion Questions……………………………………………………………………………. 187
Notes………………………………………………………………………………………………….. 188
Appendix 16-A Creating a DRG Budget for Respiratory Care:
The Resource Consumption Approach……………………………………………… 189
Background………………………………………………………………………………………… 189
A DRG Budget for Respiratory Care……………………………………………………… 190
Notes………………………………………………………………………………………………….. 193
Appendix 16-B Reviewing a Comparative Operating Budget
Report…………………………………………………………………………………………….. 195
The Comparative Report to Review……………………………………………………….. 195
Checklist Questions and Answers for the Comparative Budget
Review…………………………………………………………………………………………….. 196
Chapter 17
Capital Expenditure Budgets…………………………………………………………….197
Overview…………………………………………………………………………………………….. 197
Creating the Capital Expenditure Budget……………………………………………… 197
Budget Construction Tools…………………………………………………………………… 198
Funding Requests………………………………………………………………………………… 200
Evaluating Capital Expenditure Proposals…………………………………………….. 202
Information Checkpoint………………………………………………………………………. 203
Key Terms……………………………………………………………………………………………. 203
Discussion Questions……………………………………………………………………………. 204
Note……………………………………………………………………………………………………. 204
Appendix 17-A A Further Discussion of Capital Budgeting
Methods………………………………………………………………………………………….. 205
Assumptions………………………………………………………………………………………… 205
Payback Method………………………………………………………………………………….. 205
Unadjusted Rate of Return (AKA Accountant’s Rate of Return)……………… 206
Net Present Value………………………………………………………………………………… 207
Internal Rate of Return………………………………………………………………………… 207
PART VII—TOOLS TO PLAN, MONITOR, AND CONTROL FINANCIAL STATUS………209
Chapter 18
Variance Analysis and Sensitivity Analysis…………………………………………….211
Variance Analysis Overview…………………………………………………………………… 211
Three Types of Flexible Budget Variance………………………………………………. 211
Two-Variance Analysis and Three-Variance Analysis Compared……………….. 212
Three Examples of Variance Analysis…………………………………………………….. 214
Summary…………………………………………………………………………………………….. 218
Sensitivity Analysis Overview…………………………………………………………………. 218
Sensitivity Analysis Tools………………………………………………………………………. 218
Summary…………………………………………………………………………………………….. 222
Information Checkpoint………………………………………………………………………. 222
Key Terms……………………………………………………………………………………………. 222
Discussion Questions……………………………………………………………………………. 222
Note……………………………………………………………………………………………………. 222
Table of Contents ix
Chapter 19
Estimates, Benchmarking, and Other Measurement Tools……………………..223
Estimates Overview………………………………………………………………………………. 223
Common Uses of Estimates………………………………………………………………….. 223
Example: Estimating the Ending Pharmacy Inventory……………………………. 224
Example: Estimated Economic Impact of a New Specialty in a
Physician Practice……………………………………………………………………………. 225
Other Estimates…………………………………………………………………………………… 226
Importance of a Variety of Performance Measures…………………………………. 226
Adjusted Performance Measures Over Time………………………………………….. 227
Benchmarking…………………………………………………………………………………….. 227
Economic Measures…………………………………………………………………………….. 229
Measurement Tools……………………………………………………………………………… 229
Information Checkpoint………………………………………………………………………. 231
Key Terms……………………………………………………………………………………………. 231
Discussion Questions……………………………………………………………………………. 232
Note……………………………………………………………………………………………………. 232
Chapter 20
Understanding the Impact of Data Analytics and Big Data……………………..233
Introduction……………………………………………………………………………………….. 233
Defining Data Analytics………………………………………………………………………… 233
Two Basic Approaches to Data Analytics………………………………………………… 235
Data Analytics and Healthcare Analytics Serve Many Purposes………………… 236
Data Mining………………………………………………………………………………………… 237
Impacts of Healthcare Analytics …………………………………………………………… 238
Challenges for Healthcare Analytics……………………………………………………… 239
Information Checkpoint………………………………………………………………………. 239
Key Terms………………………………………………………………………………………..
