DETAILED CONTENTS Preface...xxi Part I The Healthcare Environment Chapter 1. Introduction to Healthcare Financial Management...3 Learning Objectives...3 Introduction...3 How to Use This Book...4 The Role of Financial Management in the Health Services Industry...6 Current Challenges...8 Organizational Goals...9 Tax Laws...13 Depreciation...21 Health Reform and Financial Management...25 Chapter Key Concepts...29 Chapter Models, Problems, and Mini-Cases...30 Selected Bibliography...31 Selected Websites...32 Notes...32 Supplement. Forms of Business Organization, Ownership, and Structure...33 Supplement Learning Objectives...33 Forms of Business Organization...33 Alternative Forms of Ownership...38 Organizational Structures...42 Supplement Key Concepts...46 Supplement Bibliography...47 Supplement Websites...47 Supplement Notes...47 vii
viii Detailed Contents Chapter 2. Health Insurance...49 Learning Objectives...49 Introduction...49 Insurance Concepts...50 Major Health Insurers (Third-Party Payers)...57 Private Insurers...57 Public Insurers...61 Development of Premium Rates...63 Consumer-Directed Health Plans...71 Value-Based Benefit and Insurance Design...75 Health Reform and Health Insurance...76 Chapter Key Concepts...79 Selected Case...81 Selected Bibliography...81 Selected Websites...81 Notes...82 Chapter 3. Payments to Providers...83 Learning Objectives...83 Introduction...83 Coding: The Foundation of Fee-for-Service Reimbursement...83 Generic Reimbursement Methods...85 Financial Incentives to Providers...89 Financial Risks to Providers...93 Reimbursement Methods Used by Medicare...95 Pay for Performance...100 Health Reform and Payments to Providers...109 Chapter Key Concepts...112 Chapter Models, Problems, and Mini-Cases...114 Selected Case...114 Selected Bibliography...115 Selected Websites...116 Note...116 Supplement. Risk Sharing Under Capitation...117 Supplement Learning Objectives...117 The Need for Risk Sharing...117 Primary Care Withhold: Single Risk Pool...118 Primary Care and Referral Withholds: Two Risk Pools...120
Detailed Contents ix Supplement Key Concept...124 Supplement Case...124 Part II Basic Financial Management Concepts Chapter 4. Time Value Analysis...127 Learning Objectives...127 Introduction...127 Time Lines...128 Future Value of a Lump Sum (Compounding)...129 Present Value of a Lump Sum (Discounting)...135 Opportunity Costs...139 Solving for Interest Rate and Time...141 Annuities...143 Perpetuities...148 Uneven Cash Flow Streams...150 Using Time Value Analysis to Measure ROI...152 Semiannual and Other Compounding Periods...155 Amortized Loans...159 A Review of Interest Rate Types...160 Chapter Key Concepts...162 Chapter Models, Problems, and Mini-Cases...163 Selected Case...164 Selected Resources...164 Selected Website...164 Notes...164 Integrative Application...166 The Problem...166 The Analysis...166 The Decision...168 Chapter 5. Financial Risk and Required Return...169 Learning Objectives...169 Introduction...169 The Many Faces of Financial Risk...170 Introduction to Financial Risk...171 Risk Aversion...173 Probability Distributions...173 Expected and Realized Rates of Return...175 Stand-Alone Risk...177
x Detailed Contents Portfolio Risk and Return...180 Portfolio Risk of Business Investments...190 Portfolio Risk of Stocks (Entire Businesses)...196 Portfolio Betas...197 Relevance of the Risk Measures...198 Interpretation of the Risk Measures...200 The Relationship Between Risk and Return...201 Some Thoughts About Beta and the CAPM...204 Chapter Key Concepts...205 Chapter Models, Problems, and Mini-Cases...207 Selected Case...207 Selected Bibliography...207 Selected Websites...208 Notes...208 Integrative Application...210 The Problem...210 The Analysis...210 The Decision...211 Part III Capital Acquisition Chapter 6. Debt Financing...215 Learning Objectives...215 Introduction...215 The Cost of Money...216 Long-Term Debt...217 Term Loans...217 Bonds...219 Short-Term Debt...223 Credit Ratings...224 Interest Rate Components...227 Term Structure of Interest Rates...232 Advantages and Disadvantages of Debt Financing... 234 Securities Valuation...235 The General Valuation Model...236 Debt Valuation...238 Chapter Key Concepts...251 Chapter Models, Problems, and Mini-Cases...253 Selected Cases...253
Detailed Contents xi Selected Bibliography...254 Selected Websites...254 Notes...255 Integrative Application...256 The Problem...256 The Analysis...256 The Decision...258 Supplement. Interest Rate Levels, Types of Short- Term Debt, Debt Contracts, Bond Insurance, Debt Refunding, and Economic Factors That Influence Interest Rate Levels...259 Supplement Learning Objectives...259 Interest Rate Levels...259 Types of Short-Term Debt...261 Debt Contracts...266 Bond Insurance...268 Debt Refunding...269 Economic Factors That Influence Interest Rate Levels...275 Supplement Key Concepts...276 Chapter 7. Equity Financing...279 Learning Objectives...279 Introduction...279 Rights and Privileges of Common Stockholders...280 Selling New Common Stock...283 The Market for Common Stock...286 The Decision to Go Public...288 Advantages and Disadvantages of Common Stock Financing...291 Equity in Not-for-Profit Corporations...292 Common Stock Valuation...294 Security Market Equilibrium...306 Informational Efficiency...307 The Risk/Return Trade-Off...311 Chapter Key Concepts...312 Chapter Models, Problems, and Mini-Cases...313 Selected Case...313
xii Detailed Contents Selected Bibliography...313 Selected Websites...314 Notes...314 Integrative Application...316 The Problem...316 The Analysis...316 The Decision...317 Supplement. Classified Stock, Preferred Stock, Securities Regulation, and the Investment Banking Process... 318 Supplement Learning Objectives...318 Classified Stock...318 Preferred Stock...319 Securities Regulation...323 The Investment Banking Process...325 Supplement Key Concepts...330 Supplement Websites...331 Chapter 8. Lease Financing...333 Learning Objective...333 Introduction...333 Lease Parties and Types...333 Per Procedure Versus Fixed Payment Leases...335 Tax Effects...336 Balance Sheet Effects...339 Evaluation by the Lessee...342 Evaluation by the Lessor...351 Lease Analysis Symmetry...353 Setting the Lease Payment...354 Leveraged Leases...354 Motivations for Leasing...356 Chapter Key Concepts...361 Chapter Models, Problems, and Mini-Cases...362 Selected Case...362 Selected Bibliography...362 Selected Websites...363 Notes...363 Integrative Application...364 The Problem...364
Detailed Contents xiii The Analysis...364 The Decision...365 Part IV Cost of Capital and Capital Structure Chapter 9. Cost of Capital...369 Learning Objectives...369 Introduction...369 Overview of the Cost-of-Capital Estimation Process... 369 Estimating the Cost of Debt...371 Estimating the Cost of Equity to Large Investor- Owned Businesses...374 Estimating the Cost of Equity to Not-for-Profit Businesses...389 Estimating the Corporate Cost of Capital...392 An Economic Interpretation of the Corporate Cost of Capital...394 Flotation Costs...397 Divisional Costs of Capital...398 Warning! Warning! Warning!...399 Cost-of-Capital Estimation for Small Businesses...400 Factors That Influence a Business s Cost of Capital... 403 Chapter Key Concepts...404 Chapter Models, Problems, and Mini-Cases...406 Selected Case...406 Selected Bibliography...407 Selected Websites...407 Notes...408 Integrative Application...410 The Problem...410 The Analysis...410 The Decision...411 Supplement. Measuring the Cost of Fund Capital...412 Supplement Learning Objectives...412 Measuring the Cost of Fund Capital...412 Supplement Key Concepts...415 Chapter 10. Capital Structure...417 Learning Objectives...417
xiv Detailed Contents Introduction...417 Impact of Debt Financing on Risk and Return...418 Business and Financial Risk...422 Capital Structure Theory...426 The Miller Model...433 Criticisms of the MM and Miller Models...436 Financial Distress Costs...437 Trade-Off Models...438 Asymmetric Information Model of Capital Structure... 441 Summary of the Capital Structure Models...443 Application of Capital Structure Theory to Not-for-Profit Firms...446 Making the Capital Structure Decision...448 Capital Structure Decisions for Small Investor- Owned Businesses...451 Chapter Key Concepts...453 Chapter Models, Problems, and Mini-Cases...454 Selected Case...454 Selected Bibliography...455 Selected Websites...455 Notes...455 Integrative Application...458 The Problem...458 The Analysis...459 The Decision...460 Supplement. The Debt Maturity Decision...461 Supplement Learning Objectives...461 The Concept of Temporary and Permanent Assets... 461 Alternative Debt Maturity Policies...462 Conclusions Regarding Debt Maturities...464 Supplement Key Concepts...465 Part V Capital Allocation Chapter 11. Capital Budgeting...469 Learning Objectives...469 Introduction...469 Project Classifications...470
Detailed Contents xv The Role of Financial Analysis in Health Services Capital Budgeting...472 Overview of Capital Budgeting Financial Analysis... 472 Cash Flow Estimation...473 Cash Flow Estimation Example...482 Breakeven Analysis...489 Return on Investment Analysis...492 Some Final Thoughts on Breakeven and Profitability Analysis...498 Evaluating Projects with Unequal Lives...499 Economic Life Versus Physical Life (Abandonment Value)...503 Capital Budgeting in Not-for-Profit Businesses...505 The Post-Audit...508 Using Capital Budgeting Techniques in Other Contexts...510 Chapter Key Concepts...511 Chapter Models, Problems, and Mini-Cases...513 Selected Case...513 Selected Bibliography...514 Selected Website...514 Notes...515 Integrative Application...516 The Problem...516 The Analysis...516 The Decision...517 Chapter 12. Project Risk Analysis...519 Learning Objectives...519 Introduction...519 Types of Project Risk...520 Relationships Among Stand-Alone, Corporate, and Market Risks...522 Risk Analysis Illustration...523 Sensitivity Analysis...525 Scenario Analysis...528 Monte Carlo Simulation...531 Qualitative Risk Assessment...534 Incorporating Risk into the Decision Process...536
xvi Detailed Contents Final Risk Assessment and Incorporation for the MRI Project...539 Incorporating Debt Capacity into the Decision Process...541 Adjusting Cash Outflows for Risk...542 Real (Managerial) Options...544 The Real Option of Abandonment...548 An Overview of the Capital Budgeting Decision Process...551 Capital Rationing...553 Chapter Key Concepts...555 Chapter Models, Problems, and Mini-Cases...557 Selected Cases...557 Selected Bibliography...558 Selected Websites...558 Notes...558 Integrative Application...560 The Problem...560 The Analysis...560 The Decision...562 Part VI Financial Condition Analysis and Forecasting Chapter 13. Financial Condition Analysis...565 Learning Objectives...565 Introduction...565 Financial Reporting in the Health Services Industry... 566 Financial Statement Analysis...572 Ratio Analysis...573 Tying the Ratios Together: Du Pont Analysis...586 Operating Indicator Analysis...588 Limitations of Financial Statement and Operating Indicator Analyses...593 Economic Value Added...595 Benchmarking...597 Key Performance Indicators and Dashboards...598 Chapter Key Concepts...599 Chapter Models, Problems, and Mini-Cases...601 Selected Cases...601 Selected Bibliography...601
Detailed Contents xvii Selected Websites...602 Notes...603 Integrative Application...604 The Problem...604 The Analysis...604 The Decision...605 Supplement. Market Value Ratios, Common Size Analysis, and Percentage Change Analysis...606 Supplement Learning Objectives...606 Market Value Ratios...606 Common Size Analysis...607 Percentage Change Analysis...609 Supplement Key Concepts...611 Chapter 14. Financial Forecasting...613 Learning Objectives...613 Introduction...613 Strategic Planning...613 Operational Planning...616 Financial Planning...617 Revenue Forecasts...619 Creating Forecasted Financial Statements...623 Constant Growth Forecasting...623 Factors That Influence the External Financing Requirement...630 Problems with the Constant Growth Method...633 Real-World Forecasting...634 Computerized Financial Forecasting Models...638 Financial Controls...640 Chapter Key Concepts...641 Chapter Models, Problems, and Mini-Cases...642 Selected Cases...643 Selected Bibliography...643 Selected Websites...644 Notes...644 Integrative Application...645 The Problem...645 The Analysis...646 The Decision...648
xviii Detailed Contents Part VII Other Topics Chapter 15. Revenue Cycle and Current Accounts Management... 651 Learning Objectives...651 Introduction...651 Cash Management...652 Marketable Securities Management...661 Revenue Cycle Management...662 Supply Chain Management...671 Current Liability Management...673 Chapter Key Concepts...677 Chapter Models, Problems, and Mini-Cases...678 Selected Cases...679 Selected Bibliography...679 Selected Websites...681 Notes...681 Integrative Application...683 The Problem...683 The Analysis...683 The Decision...684 Supplement. Long-Term Securities Management, Credit Policy, and the EOQ Model...686 Supplement Learning Objectives...686 Long-Term Securities Management...686 Credit Policy...687 The Economic Ordering Quantity Model...691 Supplement Key Concepts...697 Chapter 16. Business Combinations and Valuation...699 Learning Objectives...699 Introduction...699 Level of Merger Activity...700 Motives for Mergers: The Good, the Bad, and the Ugly...702 Types of Mergers...706 Hostile Versus Friendly Takeovers...707 Mergers Involving Not-for-Profit Businesses...708 Business Valuation...710 Unique Problems in Valuing Small Businesses...718
Detailed Contents xix Setting the Bid Price...719 Structuring the Takeover Bid...722 Due Diligence Analysis...723 Corporate Alliances...724 Goodwill...726 Chapter Key Concepts...727 Chapter Models, Problems, and Mini-Cases...728 Selected Cases...729 Selected Bibliography...729 Selected Websites...730 Notes...730 Integrative Application...731 The Problem...731 The Analysis...732 The Decision...733 Supplement. Merger Regulation, the Role of Investment Bankers, and Who Wins? The Empirical Evidence... 734 Supplement Learning Objectives...734 Merger Regulation...734 The Role of Investment Bankers...739 Who Wins? The Empirical Evidence...741 Supplement Key Concepts...743 Glossary...745 Appendix: Key Formulas in Chapters...771 Index...785 About the Authors...817