Chapter 1: Introduction to Healthcare Finance

healthcare financing
the system that a society uses to pay for healthcare services
health services organizations
those that provide patient care services. Examples include hospitals, medical practices, clinics, and nursing homes. Also called providers.
the measurement and recording of events that reflect the operations, assets, and financing of an organization
financial management
the use of theory, principles, and concepts developed to help managers make better financial decisions
chief financial officer (CFO)
The senior manager (or top finance dog) in a large organization’s finance department. Also called vice president-finance.
the finance department manager who handles accounting, budgeting, and reporting activities
the finance department manager who handles capital acquisition, investment management, and risk management activities.
business (practice) manager
the manager responsible for the finance function in a small healthcare organization, such as a medical practice with one or a few clinicians
horizontal system
a single business entity that owns a group of similar providers, such as hospitals
vertical system
a single business entity that owns a group of related, but not identical, providers, such as hospitals, medical practices, and nursing homes
the joint commission
the accreditation body for hospitals and other health services organizations
general acute care hospital
a hospital that treats all conditions that require a relatively short hospitalization (e.g., less than 30 days)
specialty hospital
a hospital that treats patients with a common characteristic or condition, such as a children’s or cancer hospital
government hospital
a hospital that is owned by a gov’t entity. Federal hospitals are owned by the federal government, while public hospitals are owned (or funded) by state or local governments
private not-for-profit hospital
a hospital that is not governmental but is operated for the exclusive benefit of the community
investor-owned hospital
a hospital that is owned by investors who benefit financially from its operation. Also called a for-profit hospital.
ambulatory (outpatient) care
care that is provided to patients who are not institutionalized. Typical settings include physicians’ offices, outpatient surgery centers, and walk-in clinics
Long-term care
care that is provided in either an institutional or outpatient setting that covers an extended period of time
patient capture
the concept that once a patient enters the system at one point (e.g., a doctor’s office), all services needed by that patient will be provided within the system
the process of granting “permission” for h/c (and other) professionals to practice. Most professional licenses are granted by states with the goal of protecting the public from incompetent practioners
cost-containment programs
state programs that require providers (primarily hospitals) to submit budgets each year for approval
professional liability
the responsibility of org. and individuals who provide professional services, such as hospitals and physicians, for losses that result from malpractice
What is meant by the term “healthcare finance” as it is used in the book?
– involves how society pays for the healthcare it consumes
What are the two broad areas of h/c finance?
– accounting and financial management functions
concerns the recording, in financial terms, of economic events that reflect the operations, assets, and financing of an org.
the purpose of accounting
to create and provide to interested parties, both internal (managers) and external (investors), useful information about an org. financial status and operations
financial management
is also known as Corp management, it provides the theories, concepts, and tools necessary to help managers make better financial decisions
Why is it necessary to have a book on healthcare finance as opposed to a generic finance book?
the healthcare system has changed and requires different strategies than a regular corporation. This includes different line items & rules/regulations, it’s not as predictable, uncertainty with illnesses and revenue stream
The role of finance in healthcare industry
– plan for, acquire, and use resources to maximize the efficiency (and value) of the enterprise
– it is implemented through specific activities such as planning and budgeting. Accounting is carried out under the direction of the chief financial officer and falls under the overall category of finance
– providers have redesigned their finance functions to recognize the changes that have occurred in the health services industry
Has the role increased or decreased in importance over the years?
It has increased
provide diagnostic and therapeutic services to individuals who require more than several hours of care, although most hospitals are actively engaged in ambulatory services as well
– open 24 hours
– of beds is a concern
– Must be licensed by the state and comply with regulations
– Aaccredited by The Joint Commission
– Provides eligibility for participation in the Medicare and Medicaid programs
– Environmental and operational changes create challenges for hospital managers
– Hospitals are considered as general acute care facilities or specialty facilities
– The number of specialty hospitals has increased
– They require lower costs because they don’t require the overhead associated with providing many services
– Hospitals vary in size, general acute care hospitals tend to be larger
– Optimal size is 400-500 beds
– Labor intensive b/c they provide continuous nursing supervision to patients
-Physicians play a role in determining a hospital’s costs and revenues and hence its financial condition
Small hospitals
Don’t benefit from economies of scale
2. Located in rural areas
3. Experience fin. Difficulties because of less flexibility to lower costs to tightening reimbursement rates
Big Hospitals
Too big to manage efficiently (diseconomies of scale)
2. Academic health centers/teaching hospitals
3. Offer a wide range of services
Government hospitals
Make up 25% of all hospitals
2. Broken down into federal and public (nonfederal) entitities
a. Federal hospitals serve special purposes (such as US Dept. of Verterans Affairs)
b. Public hospitals
Public Hospitals
– funded wholly or in part by a city, county, tax district or state
– Have converted to private not-for-profit b/c local gov’ts have found it difficulat to fund h/c services & at the same time provide other necessary public services
Private not for profit hospitals
Nongovernmental entities organized for the purpose of providing impatient h/c services
2. 80% of all private (60% of all hospitals)
3. Receive exemption from federal/state income taxes, property/sales taxes, receives tax-deductible charitable contringutions, favorable postal rates, favorable tax-exempt financing and tax-favored annuities for ees
4. Place greater emphasis on the fin. Implications of operating decisions
Investor owned hospitals
Most are owned by large corp. such as HCA (Hospital Corp. of America)
2. Pay taxes and forgo the other benefits of not-for-profit status
Ambulatory (outpatient) Care
i. Provided to patients who are not institutionalized. Includes: physician’s offices, outpatient surgery centers, and walk-in clinics
ii. Most recently, retail clinic, which is placed in a retail store
iii. Offer convenience and lower prices
iv. Technology has contriubuted to expansion
v. Easier to start business than a hospital
Long-term care
i. Provided in either an institutional or outpatient seting that covers an extended period of time
ii. Clients are too mentall or physically incapacitated to perform daily living tasks and when family members are unable to provide the help needed; ie nursing homes
3 levels to a nursing home
1. Skilled nursing
– Care closest to hospital care
– Provided under the supervision of a physician
2. Nursing
– Indiv. Who don’t require hospital or SNF care but mental/physical conditions require daily continuity of one or more medical services
3. Residential care
– Sheltered environments that do not provide professional h/c services
Integrated Delivery system
– The benefits of providing hospital care
– hospitals and physiciants are linked together
– Has the ability to assume full clinical responsibility for the h/c needs of a defined population
– Patient capture
home-health care
– nurses come to home
– hospital care is no longer needed
– i.e. diabetes
– separate arm from hospital or independently linked
benefits to an intergrated delivery system
all in one system, info. is lock-down
What role does regulation play in the healthcare industry?
It helps to control h/c costs. Licensure focuses more on physical features and safety than on patient care and outcomes.
– licensure helps to protect consumer
– certificate of need: ensures that theres a need in the area
– rate setting- manages the cost of h/c to make it affordable based on consumer income
What is the structure of the finance function within h/c organizations?
i. CFO- reports to CEO and is responsible for all finance activities within the org.
ii. Directs two senior managers who help manage the finance activities: the comptroller and treasurer
iii. Under the comptroller and treasurer, there is other managers such as patient accounts manager (reports to comptroller) and cash manager (reports to treasurer).
iv. In small bisneses, finance responsibilities are compbined and assight to one individual often call the business (practice) manager
What is the primary legal issue facing providers today?
professional liability
healthcare finance
consists of both accounting and financial management functions
finance activities by operational managers
planning and budgeting
financing decisions
capital investment decisions
financial reporting
financial and operational analysis
finance activities by finance staff
contract management
financial risk management
The finance activities at health services organizations may be summarized by the 4 c’s
certificate of need regulation
– CON legislation required providers to obtain state approval on the basis of community need for construction and renovation projects that either relate to specific services or exceed a defined threshold
primary tool of a cost-containment program
rate review system
3 types of rate review systems
1. detailed budget reviews with approval or setting of rates
2. formula methods, which use inflation formulas to set target rates
3. negotiated rates, which involve joint decision making between the provider and the rate setter
why is rate review system criticized?
Doesn’t address the issue of demand for h/c services