The Context of Health Care Financial Management p. 1 Introduction p. 1 Rising Health Care Costs p. 3 The Payment System p. 3 Technology p.

The Context of Health Care Financial Management p. 1 Introduction p. 1 Rising Health Care Costs p. 3 The Payment System p. 3 Technology p. 5 The Aging Population p. 5 AIDS p. 6 Litigation p. 6 The Uninsured p. 6 Efforts to Control Costs p. 7 Efforts by Payors to Control Health Care Costs p. 7 DRGs p. 9 Capitation p. 9 Global Payments p. 9 Cutting Delivery Costs p. 10 Shift to Outpatient Services p. 11 Cost Accounting Systems p. 11 Information Services Technology p. 11 Mergers and Acquisitions p. 11 Reengineering/Redesign p. 11 Cost Control Issues with Ethical Overtones p. 12 Summary p. 12 Health Care Financial Statements p. 13 Introduction p. 14 The Balance Sheet p. 16 Assets p. 19 Current Assets p. 20 Non-Current Assets p. 22 Liabilities p. 25 Current Liabilities p. 25 Non-Current Liabilities p. 27 Net Assets p. 27 Stockholders' Equity p. 28 Footnotes to Financial Statements p. 29 The Statement of Operations p. 29 Unrestricted Revenues, Gains, and Other Support p. 32 Net Patient Service Revenues p. 32 Premium Revenues p. 32 Other Revenues p. 32 Net Assets Released from Restriction p. 34 Expenses p. 34

Depreciation and Amortization p. 34 Interest p. 34 Provision for Bad Debt p. 35 Other Expenses p. 35 Operating Income p. 35 Other Income p. 35 Excess of Revenues over Expenses p. 36 Below the Line Items p. 36 Changes in Net Unrealized Gains and Losses on Other than Trading Securities p. 36 Increases in Long-Lived Unrestricted Net Assets p. 36 Transfers to Parent p. 37 Extraordinary Items p. 37 Increase in Unrestricted Net Assets p. 37 The Statement of Changes in Net Assets p. 38 Changes in Unrestricted Net Assets p. 39 Changes in Temporarily Restricted Net Assets p. 40 Changes in Permanently Restricted Net Assets p. 40 The Statement of Cash Flows p. 40 Cash Flows from Operating Activities p. 42 Cash Flows from Investing Activities p. 43 Cash Flows from Financing Activities p. 43 Cash and Cash Equivalents at the End of the Year p. 43 Summary p. 43 Questions and Problems p. 45 A Complete, Unannotated Set of Financial Statements for Sample Not-For-Profit Hospital p. 46 Principles and Practices of Health Care Accounting p. 51 Introduction p. 51 The Books p. 52 The Cash and Accrual Bases of Accounting p. 53 The Cash Basis of Accounting p. 53 The Accrual Basis of Accounting p. 55 An Example of the Effects of Cash Flows on Profit Reporting Under Cash and Accrual Accounting p. 55 Recording Transactions p. 57 Rules for Recording Transactions p. 60 The Recording Process p. 60 Developing the Financial Statements p. 66 The Balance Sheet p. 66 Assets p. 66 Liabilities p. 67 Net Assets p. 67

The Statement of Operations p. 68 Unrestricted Revenues, Gains, and Other Support p. 68 Operating Expenses p. 68 Operating Income and Excess of Revenues over Expenses p. 69 Increase in Unrestricted Net Assets p. 69 The Statement of Changes in Net Assets p. 69 The Statement of Cash Flows p. 70 Summary p. 71 Questions and Problems p. 72 Financial Statement Analysis p. 76 Introduction p. 76 Horizontal Analysis p. 80 Trend Analysis p. 82 Vertical (Common-Size) Analysis p. 83 Ratio Analysis p. 85 Categories of Ratios p. 87 Liquidity Ratios p. 89 Current Ratio p. 89 Quick Ratio p. 90 Acid Test Ratio p. 91 Days in Accounts Receivable p. 92 Days Cash on Hand p. 92 Average Payment Period p. 93 Liquidity Summary p. 94 Profitability Ratios p. 95 Operating Margin p. 95 Nonoperating Ratio p. 96 Return on Total Assets p. 97 Return on Net Assets p. 98 Profitability Summary p. 99 Activity Ratios p. 100 Total Asset Turnover p. 101 Fixed Asset Turnover p. 101 Age of Plant Ratio p. 102 Activity Summary p. 102 Capital Structure Ratios p. 102 Long-Term Debt to Net Assets p. 104 Net Assets to Total Assets p. 104 Times Interest Earned p. 105 Debt Service Coverage p. 106 Capital Structure Summary p. 107

Summary of Newport Clinic's Ratios p. 107 Summary p. 108 Questions and Problems p. 110 Working Capital Management p. 116 Introduction p. 117 The Working Capital Cycle p. 117 The Importance of Timing in Managing Working Capital p. 118 Working Capital Management Strategies p. 118 Asset Mix Strategy p. 118 Financing Mix Strategy p. 120 Cash Management p. 123 Sources of Temporary Cash p. 123 Bank Loans p. 123 Trade Credit p. 125 Billing, Collections, and Disbursement Policies and the Concept of Float p. 128 Investing Cash on a Short-Term Basis p. 134 Treasury Bills (T-bills) p. 134 Negotiable Certificates of Deposit (CDs) p. 134 Commercial Paper p. 135 Money Market Mutual Funds p. 135 Forecasting Cash Surpluses and Deficits--The Cash Budget p. 135 Cash Inflows p. 136 Cash Outflows p. 136 Ending Cash Balance p. 136 Accounts Receivable Management p. 138 Methods to Monitor Accounts Receivable p. 138 Methods to Finance Accounts Receivable p. 140 Factoring p. 140 Pledging Receivables as Collateral p. 141 Summary p. 141 Questions and Problems p. 143 The Time Value of Money p. 148 Introduction p. 149 The Future Value of a Dollar Invested Today p. 150 Using a Formula to Calculate Future Value p. 151 Using Tables to Compute Future Value p. 153 Using a Spreadsheet to Calculate Future Value p. 154 The Present Value of an Amount to Be Received in the Future p. 154 Using a Formula to Calculate Present Value p. 155 Using Tables to Compute Present Value p. 155 Using a Spreadsheet to Calculate Present Value p. 157

Annuities p. 157 The Future Value of an Ordinary Annuity p. 158 Using Tables to Calculate the Future Value of an Ordinary Annuity p. 158 Using a Spreadsheet to Calculate the Future Value of an Ordinary Annuity p. 159 The Future Value of an Annuity Due p. 159 The Present Value of an Ordinary Annuity p. 160 Using Tables to Calculate the Present Value of an Ordinary Annuity p. 160 Using a Spreadsheet to Calculate the Present Value of an Ordinary Annuity p. 161 The Present Value of an Annuity Due p. 162 Special Situations Where You Need to Calculate Future or Present Value p. 162 Summary p. 166 Questions and Problems p. 167 Future and Present Value Tables p. 169 The Investment Decision p. 178 Introduction p. 179 The Objectives of Capital Investment Analysis p. 179 Nonfinancial Benefits p. 181 Financial Returns p. 181 Ability to Attract Funds in the Future p. 182 Analytic Methods p. 183 The Payback Method p. 185 Analysis p. 185 Strengths and Weaknesses of the Payback Method p. 186 Net Present Value p. 187 NPV--Using the Home Health Care Agency as an Example of NPV Analysis p. 187 Decision Rules Regarding NPV p. 190 Using Spreadsheets to Calculate NPV p. 191 Strengths and Weaknesses of the NPV Method p. 191 Internal Rate of Return (IRR) p. 192 Equal Cash Flows p. 192 Unequal Cash Flows p. 193 Decision Rules with IRR p. 193 Strengths and Weaknesses of IRR Analysis p. 194 Using an NPV Analysis for a Replacement Decision p. 194 Illustrative Example p. 194 Solution p. 195 Summary p. 197 Questions and Problems p. 199 Technical Concerns Regarding Net Present Value p. 201 Determining the Amount of the Initial Investment p. 201 Included Costs p. 201

Excluded Costs p. 201 Determining the Annual Cash Flows p. 202 Operating Cash Flows p. 202 Spillover Cash Flows p. 203 Non-Regular Cash Flows and Terminal Value Cash Flows p. 203 Accuracy of Cash Flow Estimates p. 204 Determining a Discount Rate p. 204 Adjustments for Net Working Capital p. 205 Tax Implications for For-Profits in a Capital Budgeting Decision p. 208 Comprehensive Capital Budgeting Replacement Cost Example p. 210 Comparative Approach--Not-for-Profit Analysis p. 210 Existing Equipment p. 210 Replacement Equipment p. 212 Comparative Approach--For-Profit Analysis p. 212 Incremental Approach--Not-for-Profit Analysis p. 212 Incremental Approach--For-Profit Analysis p. 215 Summary p. 217 Capital Financing for Health Care Providers p. 218 Introduction p. 218 Equity Financing p. 219 Debt Financing p. 221 Sources of Debt Financing by Maturity p. 221 Amortization of a Term Loan p. 222 Sources of Debt Financing by Type of Interest Rate: Fixed and Variable Interest p. 223 Selected Types of Health Care Debt Financing p. 224 Bank Term Loans p. 224 Conventional Mortgages p. 224 FHA Program Loans p. 224 Bonds p. 224 Bond Issuance Process p. 227 Public versus Private Placement p. 227 The Steps in the Bond Issuing Process p. 227 Selected Roles of Underwriters and Trustees p. 232 Lease Financing p. 233 Operating Lease p. 233 Capital Lease p. 234 Analysis of the Lease versus Purchase Decision p. 234 Summary p. 236 Questions and Problems p. 238 Bond Valuation p. 240 Bond Valuation in Terms of Yield to Maturity p. 240

Bond Valuation in Terms of Market Price p. 241 Bond Valuation For Other Payment Periods p. 243 Using Cost Information to Make Special Decisions p. 244 Introduction p. 244 Breakeven Analysis p. 245 Using the Breakeven Approach to Determine Prices, Charges, and Reimbursement p. 246 Breakeven Analysis: The Role of Fixed Costs p. 248 Breakeven Analysis: The Role of Variable Costs p. 249 Using the Breakeven Equation p. 250 Expanding the Breakeven Equation to Include Indirect Costs and Required Profit p. 255 The Breakeven Chart p. 256 Effects of Capitation on Breakeven Analysis p. 258 Contribution Margin p. 260 Product Margin p. 261 Multiple Services p. 261 Multiple Payors p. 264 Applying the Product Margin Paradigm to Making Special Decisions p. 266 Make-or-Buy Decisions p. 266 Adding-or-Dropping a Service p. 268 Expanding-or-Reducing a Service p. 268 Summary p. 269 Questions and Problems p. 271 Use Unit Cost With Caution! p. 275 Budgeting p. 277 Introduction p. 277 The Planning/Control Cycle p. 278 Strategic Planning and Planning p. 278 Controlling Activities p. 280 Organizational Approaches to Budgeting p. 281 Participation p. 282 Budget Models p. 283 Budget Detail p. 289 Budget Forecasts p. 292 Budget Modifications p. 293 Types of Budgets p. 293 The Statistics Budget p. 293 The Operating Budget p. 294 The Cash Budget p. 296 The Capital Budget p. 297 Pro Forma Financial Statements and Ratios p. 297 An Extended Example of How to Develop a Budget p. 298

The Statistics Budget p. 298 Developing Volume Projections p. 298 Converting Visit Projections to Weighted Visits p. 299 The Operating Budget p. 302 The Revenue Budget p. 302 The Expense Budget p. 304 The General and Administrative Expense Budget p. 311 The Cash Budget p. 312 The Capital Budget p. 313 Summary p. 314 Questions and Problems p. 315 Responsibility Accounting p. 317 Introduction p. 318 Decentralization p. 318 Advantages of Decentralization p. 318 Time p. 318 Information Relevance p. 318 Quality p. 319 Speed p. 320 Talent p. 320 Motivation and Allegiance p. 320 Disadvantages of Decentralization p. 320 Loss of Control p. 320 Decreased Goal Congruence p. 320 Increased Need for Coordination and Formal Communication p. 320 Lack of Managerial Talent p. 321 Types of Responsibility Centers p. 321 Service Centers p. 321 Cost Centers p. 321 Profit Centers p. 323 Traditional Profit Centers p. 323 Capitated Profit Centers p. 325 Administrative Profit Centers p. 325 Investment Centers p. 326 Measuring the Performance of Responsibility Centers p. 327 Responsibility, Authority, and Accountability p. 328 Performance Measures p. 328 Budget Variances p. 329 Revenue Variances p. 330 Develop the Flexible Budget Estimate for Revenues p. 331 Calculate the Revenue Variance Due to Changes in Volume and Rate p. 332

Expense Variances p. 333 Explain the Amount of Variance Due to Fixed Costs p. 333 Develop a Flexible Expense Budget p. 334 Calculate the Expense Variance Due to Changes in Volume and Other Factors p. 336 Beyond Variances p. 338 Other Financial Performance Measures p. 338 Summary p. 338 Questions and Problems p. 340 Alternative Payment Systems and Provider Cost p. 342 Introduction p. 342 Payment Systems p. 343 Charge-Based Systems p. 344 Historical/Market/Payor Method p. 345 Weighted-Average Method p. 345 Margin Approaches p. 346 Cost-Based Payment p. 347 Unit of Service p. 348 Reasonable and Allowable Costs p. 348 Flat Fee Systems p. 349 Managed Care and Risk Sharing p. 350 Copayments and Deductibles p. 351 Steerage and Discounts p. 351 Case Rates p. 352 Per Diem p. 353 Capitation p. 353 HMO Rates and Percent of Premium p. 356 Provider Cost Determination p. 359 The Step-Down Method p. 359 Utilities p. 359 Administrative Costs p. 362 Laboratory p. 363 Fully Allocated Costs p. 364 Activity-Based Costing p. 365 Summary p. 367 Questions and Problems p. 368 Glossary p. 371 Index p. 399 Table of Contents provided by Blackwell's Book Services and R.R. Bowker. Used with permission.