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1. Describe key methodologies for the practical application of financial management in healthcare organizations. 1.1 Describe financial management in health care. 1.2 Describe accounting and finance in health care. 1.3 Discuss the sources and uses of resources in the public sector, particularly healthcare

organizations.

Reading Assignment

Chapter 1: Introduction to Financial Management

Unit Lesson

In this unit, you will begin to explore what current and future managers need to understand about financial management in healthcare. This is essential learning for aspiring healthcare workers and clinical service directors, so please make the most of your learning opportunity here in this course. You definitely need this understanding in order to succeed and advance in the future of United States medicine.

Many students who enter this course come from clinical backgrounds or perhaps other professional fields— they are not accountants. There may be a tendency to say to oneself as you begin this course, “let’s just leave the accounting to the folks in the business office.” But that is not how it works in a modern healthcare facility. Even if you do not plan to be a financial officer yourself, you must learn to communicate effectively with financial officers in order to advocate for your department and accomplish good things for your patients and your staff. Today you must speak the language of finance in order to succeed as a healthcare manager, and that is true at any level of the organization. This unit begins your journey to understanding and being comfortable with the basics of financial management as applied to medicine.

First of all, you will discover that financial management is the subset of management that focuses on generating financial information that can be used to improve healthcare decision making. It includes both accounting and finance. Accounting is a system for keeping track of the financial status of an organization and the financial results of its activities. It is subdivided into two major areas: (1) managerial accounting relates to generating any financial information that managers can use to improve the future results of the organization, and (2) financial accounting provides retrospective information about the results of operations and the financial position of the organization. Finance focuses on the alternative source and uses of the organization’s financial resources.

Public sector organizations obtain their financing from a variety of sources and use them for a wide variety of purposes. Spending on health care exceeds $2 trillion each year. Combined, the federal, state, and local health care and not-for-profit sectors’ spending equals roughly half of the U.S. gross domestic product (GDP). If an organization does not have adequate financial resources, it is practically impossible to achieve the goals of the organization. Earning a profit is essential for most organizations. Profits provide an organization with a safety margin. Organizations must be able to replace their equipment and facilities and often want to expand their services over time as well as adopt new technologies. Consequently, a reasonable level of profit is necessary (Finkler, Purtell, Calabrese, & Smith, 2013).

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The field of financial management attempts to generate useful financial information that is free of value judgments. You will learn that it is not the role of financial managers to say what the organization should do. Financial management provides financial information that can help managers make decisions.

One of the key concepts that you will encounter in this unit is national healthcare spending and where the money actually comes from. You will learn that private insurance is still the number one source of funding for healthcare in our nation, representing 32% of total healthcare dollars. Next is Medicare at 20% and then Medicaid at 15%. Collectively, the government programs make up 35% of spending. That is why government, both state and federal, has so much influence in medicine and also why government is so crucial to our success! Out-of-pocket expenditures make up just 12% of healthcare spending in the U.S., and investment comprises just six percent. A variety of other small funding sources make up the remaining 15% of spending (Finkler et al., 2013).

That has been part of our problem in American healthcare, since out-of-pocket spending makes up such a small portion of total healthcare spending, there has been little emphasis on keeping medical prices low. When Americans go to the grocery store, they are acutely aware of prices, because they are paying the entire bill themselves. United States’ consumers will often change stores over a few pennies price difference for the same product, but when they shop for healthcare, Americans are much less concerned with price. After all, government and insurance are picking up most of the tab anyway. Over a period of decades, this lack of attention to price, and perhaps lack of competition on price, has led to America having the highest healthcare costs in the world. Please see the graphic below, provided by the Organization for Economic Cooperation and Development.

As you can see, Americans not only spend more for healthcare than any other nation, we actually spend two to three times as much as many other developed nations. For example, as compared with Japan (which actually has better health outcomes than the U.S.) we spend almost three times as much. As compared to Israel (with similar health outcomes to the U.S.) we spend four times as much (Kane, 2012).

Thus, you can easily see why so much emphasis is being placed on healthcare reform in the United States today. Some argue that our outlandish spending for healthcare hurts every other aspect of our society. We have less money for education than other nations because we spend so much money at the hospital and clinic. We have less money for the arts, less money for good roadways and other infrastructure. We have less

(Kane, 2012)

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Title money for defending ourselves because we spend so much on medical care. Here is a crucial consideration: we are not healthier as a result of so much spending.

Now that you have a bit better understanding of the healthcare spending problem, let’s look next at what our massive healthcare spending actually buys. We have seen where the money comes from, but where does it go? Hospitals get the largest piece of the healthcare dollar. They receive 31% of total spending. Physicians and clinics are next at 20%, and prescription medications follow at 10%. A variety of other areas receive about 5-7% each, those include dental services, health insurance administration cost, and nursing care (Finkler et al., 2013). You can see why there is so much attention on hospitals when the topic comes around to healthcare costs. If we truly are to get a handle on national healthcare spending, it all starts at the hospital level. Many CSU students and graduates work in hospitals, and now you will understand why there is so much scrutiny of everything that we do in the hospital today.

Conclusion

Every student in this course will have heard by now about the Patient Protection and Affordable Care Act (PPACA), sometimes known as Obamacare. Implementation of this law is underway, making this an especially important time to study medical finance. PPACA brings about massive changes in the way that healthcare is funded, and it will change both where healthcare money comes from, and where it goes. You will learn more about this fundamental change in U.S. healthcare as you move through the course.

Remember this: times of great change are times of great opportunity. These are times of great change for American medicine. Strong leadership has never been more important than it is today. That is why there are so many CEO, CFO, and senior management opportunities available today, and why the salaries for these positions have climbed into six figure levels, comparable to what physicians themselves are earning. There has never been a better time to enter the healthcare field, and never a better time to study healthcare finance. Congratulations on your decision to take this course!

References

Finkler, S. A., Purtell, R. M., Calabrese, T. D., & Smith, D. L. (2013). Financial management for public, health, and not-for-profit organizations (4th ed.). Upper Saddle River, NJ: Prentice Hall.

Kane, J. (2012). Health costs: How the U.S. compares with other countries. PBS Newshour. Retrieved from http://www.pbs.org/newshour/rundown/health-costs-how-the-us-compares-with-other- countries/