FINANCIAL MANAGEMENT IN HEALTH CARE JOHN MEIER MD, MBA, CPE, FAAP, FACP. April 14, 2018

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1 FINANCIAL MANAGEMENT IN HEALTH CARE JOHN MEIER MD, MBA, CPE, FAAP, FACP April 14, 2018

2 SOUTHERN REGIONAL AHEC AMA PRA Category 1 Credit hours (Day 1) and 5.25 hours (Day 2) Credit Statement: The Southern Regional AHEC designates this live activity for a maximum of 13.0 hours AMA PRA Category 1 Credit(s). Physicians should claim only the credit commensurate with the extent of their participation in the activity. Accreditation: This activity has been planned and implemented in accordance with the Essentials and Standards of the North Carolina Medical Society (NCMS) through the joint providership of the Southern Regional AHEC and the North Carolina Medical Society Foundation. The Southern Regional AHEC is accredited by the NCMS to provide continuing medical education for physicians. Disclosure Statement: The Southern Regional AHEC adheres to ACCME Essential Areas and Policies regarding industry support of continuing medical education. Disclosure of faculty/planning committee members and commercial relationships have been made known and there are no unresolved conflicts. Speakers are also expected to openly disclose a discussion of any off-label, experimental, or investigational use of drugs or devices in their presentations. Planning committee members and presenters (and their family members) have no relevant financial disclosures to make: Dr. Kristina Natt och Dag, Dr. John Meier, Dr. Roger Mayer, Erin Grover, Dr. Dev Sangvai, Jennifer Bigger. There was no commercial support received for this session.

3 Ice Breaker Share one item from the top 10 of you personal bucket list. Based upon my experiences in this course so far, my most favorite financial concept/statement is. What questions/concerns do you have about finance, accounting, financial management?

4 Learning Objectives Develop conceptual framework of financial structure and management Focus on nature, scope and functions of financial management as it applies to health care Identify key business skills to master in current context of health care Develop basic understanding of key financial accounting terms and concepts Develop basic understanding of key corporate finance terms and concepts Be able to apply basic accounting and financial concepts Understand the importance of and being capable of following George

5 From the Big Picture to the Practice Level General Business The activity of making, buying and selling of goods or providing services in exchange for money The language of business is accounting Corporate finance is how the business is structured (equity and debt) Corporate Finance is also determining which products or projects to spend time doing - an investment decision and then a financing decision The key to any corporate entity s survival and any project s success is cash flow Day to day operations payroll Projects Capital Intensive build a new tower Labor Intensive - population health

6 Key concepts Financial Accounting Balance Sheet Income Statement Cash Flow Corporate Finance Corporate Structure Blend of Equity and Debt Investment Decision Application of NPV Financing Decision Where do you get the cash to fund the project

7 Key Concepts Financial Terms Match Terms with Definitions

8 Key concepts - Balance Sheet Assets exceed Liabilities, Net : good protoplasm Liabilities exceed Assets, Net : not so good protoplasm

9 Key Concepts Income Statement Q1 Q2 Q3 Q4 Healthy food Junk Food Skip Meal Exercise Sleep Stress Level Work Time Vacation Time Family Time Personal Time

10 Key Concepts Cash Flow Q1 Q2 Q3 Q4 Change to Healthy Food Change to Junk Food Change in Weight Change to HgbA1C Change to SBP Change in Exercise Change to Sleep Change to Stress Change to Family Change to Personal Change to Work

11 Key Concept Balance Sheet Purpose Summarize the corporation s assets, liabilities and value to the shareholders Elements Assets Liabilities Share Holder s Equity How to analyze Liquidity ability to meet short to medium term obligations (cash and cash equivalents) Current Ratio, Quick Ratio, Working Capital Turnover Strength debt to equity Long Term Debt Ratio, Debt to Equity Ratio, Cash Flow from Operations to Total Liabilities Efficiency profitability vs the capital employed Return on Assets, Return on Common Shareholder s Equity

12 Key Concepts Balance Sheet Assets Cash Accounts Receivable (net) Inventories Total Current Assets Land Building Less Accumulated Depreciation Total Noncurrent Assets Total Assets

13 Key Concepts Balance Sheet Liabilities and Shareholder's Equity Accounts Payable Salaries Payable Income Taxes Payable Total Current Liabilities Leases Bonds Total Long Term Debt Common Stock ($10 par value) Additional Paid in Capital Retained Earnings Total Shareholder's Equity Total Liabilities and Shareholder's Equity

14 Key Concepts Income Statement Purpose Summarize the financial activity of a corporate entity for a specific period of time Elements Revenue Expenses Net Income How to Analyze Operating Margin Ratios Asset Turnover Ratios Return on Assets/Equity EBITDA

15 Key Concepts Income Statement Income Statement Sales Revenue Less Expenses Cost of Goods Sold Selling Administrative Depreciation Interest Total Expenses Net Income before Tax Income Tax Expense Net Income EBITDA

16 Key Concepts Cash Flow Purpose Present how cash is generated and used Integrates Balance Sheet and Income Statement Liquidity Follow George!!! Elements Operations Investing Financing How to Analyze Free cash

17 Key Concepts Cash Flow Cash Flow Statement Operations Net Income Additions to Cash Flow Depreciation Expense Increase in Accounts Payable Increase in Salaries Payable Increase in Taxes Payable Subtractions from Cash Flow Increase in Accounts Receivable Increase in Inventories Cash Flow from Operations

18 Key Concepts- Cash Flow Investing Purchase Land Purchase Building Purchase Equipment Cash flow from Investing

19 Key Concepts Cash Flow Financing Issuance of Bonds Issuance of Common Stock Dividends Cash flow from Financing Net Change in Cash

20 Case Study Putting it all together Build the Balance Sheet, Income Statement and Cash Flow for.. Review Balance Sheet summary of the corporation s assets, liabilities and shareholder value Income Statement summarize the financial activity of a corporate entity for a specific period of time Cash Flow present how cash is generated and used; Follow George!!! Break Discuss Corporate Finance Financial Structure NPV

21 TIME FOR A BREAK

22 Key Concept Corporate Finance Corporate Finance How the financial assets of a corporation are structured What is a financial asset? Equity, Plant, Property, Equipment, Bonds, Loans, Lease Obligations Two Fundamental Questions In what specific assets should a company invest? How does the company raise the cash to pay for the investment? Value and Risk How is an asset valued? What are the elements of risk? How is risk priced?

23 Key Concepts Corporate Finance The Players Chief Financial Officer Senior executive Nuts and Bolts of the treasury and controller elements Participate in strategy development and execution Treasurer Banking, Cash management, Obtaining financing, Credit management, Insurance, Pension, Dividend disbursement Controller Accounting, Prepare Financial Statements, Internal Auditing, Payroll, Taxes, Prepare Budgets, Custody of records

24 Key Concepts Time value of Money A dollar today is worth more than a dollar tomorrow Present Value The current market price The value in today s dollars of a future payment Rate of Return - r The reward that investors demand for accepting a delayed payment Discount Rate 1/(1+r)^n Cost of Capital Way to quantify risk Combination of Equity and Debt Hurdle Rate The minimum rate of return that is acceptable

25 Key Concepts Net Present Value Net Present Value The value of a project/asset in today s dollars over a specific time frame. Example Build and operate an Ambulatory Healthcare Center Year 1 planning and construction Year 2 some patients start to arrive, train and ramp up employees and the facilities Year 3 more patients arrive, employees and facility are running at steady state Year 4 reach capacity most months of the year and employees and facility are running at steady state Year 5 similar to year 4 and plan to sell the whole thing to health system X at the end of the year What is our cost of capital? What is our hurdle rate? Importance of after tax cash flow. Does it make sense to do this project?

26 Key Concepts Financing Financing options Equity Debt Common (different classes) Preferred Convertible Preferred Personal Loan Bank Loan Factoring Note Convertible Notes Bonds Convertible Bonds Venues Angel Private Placement Investment Banking (private) Commercial Market

27 Key Concepts Applying to Healthcare Applying to healthcare Economics of Healthcare Financial Statements Balance Sheet Income Statement Cash Flow Investment decisions Cash flow Discount rate NPV Healthcare Strategy