FMW8RP

1

1. Describe key methodologies for the practical application of financial management in healthcare organizations.

Reading Assignment

Chapter 15: Financial Statement Analysis

Chapter 16: Financial Condition Analysis

Unit Lesson

The focus of Unit VIII is on providing a general framework for financial statement analysis to gain insight into the financial status of an organization. The basic framework provided is to:

 Carefully review the financial statements in detail, including reading the auditor’s opinion letter and considering the information in that letter.

 Examine the notes that accompany the financial statements.

 Calculate a series of ratios and compare them with the organization over time, other specific similar organizations, and the industry as a whole.

 Make a final assessment of the financial situation of the organization, taking all of the available information into account.

This unit will address the notes that accompany the financial statements. This includes significant accounting policies that you need to understand and apply. There will be a review of the summary of the notes provided. The unit will also explore ratio analysis and making comparisons within the major classes of ratios.

Key Learning

This is a good time to look back and reflect on your key learning from this course. Hopefully, you have a better understanding now in terms of how healthcare finance actually works, how it gets reported, and how it gets audited. As we conclude this unit, let’s look back at your key learning from this course.

Healthcare spending: Earlier in this course, we talked about healthcare spending; where does the money come from, and where does it go? That is definitely a key concept from the course. You learned that private insurance is the number one source of funding for healthcare in America, representing 32% of total healthcare dollars. Even with so many Americans currently uninsured, health insurance is the number one source of funding. Next comes Medicare at 20% and then Medicaid at 15%. Government programs overall make up 35% of spending. That may shed some light on why government has so much influence in our field. In terms of out-of-pocket expenditures, they truly make up a small portion of healthcare spending in America, just 12% of total healthcare spending (Finkler, Purtell, Calabrese, & Smith, 2013).

Where does the money go? Well, hospitals clearly get the largest piece of the healthcare dollar, receiving 31% of total medical spending each year. Doctors and clinics come next at 20%, and prescription medications are next at 10%. Several other areas receive smaller amounts, about 5-7% each. Such areas include dental services, health insurance administration cost, and nursing care (Finkler et al., 2013).

2

UNIT x STUDY GUIDE

Title

The big problem, as you likely recall, is that in America, we spend two to three times as much on healthcare as any other developed nation around the planet, and we do not have better health outcomes as a result of all that spending!

Costs in healthcare organizations: Another key concept of our course is understanding how costs change as service volumes change, and that brings up the whole topic of break-even analysis. The relationship between costs and volume has a dramatic impact on the profitability of a healthcare facility. Healthcare organizations must find a way to generate black ink on the income statement in order to survive. It makes no difference whether the organization is officially for-profit or officially not-for-profit, it must show black ink on the income statement or it will be in financial trouble very soon. The job of management, which at times is challenging, is to find a way to provide services for our patients with a margin of revenues over expenses.

Break-even analysis is crucial in healthcare. Managers who understand the relationship between costs and service volumes can apply the break-even analysis technique, a tool that assists in determining the required volume level for a program to be financially self-sufficient. Break-even analysis is crucial for effective healthcare management. Patients and doctors will request many services that they would like to have available in the community, but we need to be realistic about which ones will have sufficient volume to be financially viable for the organization.

Capital purchases: Also very important in this course, is the concept of managing capital. Capital purchases for the facility will always get special attention from the board of directors because (1) the initial cost is large, making a poor choice costly; (2) the items are generally kept a long time, so the organization often lives with any poor choices for a long time; (3) we can only understand the financial impact if we evaluate the entire lifetime of the assets; and (4) since we often pay for the asset early and receive payments as we use it later, the time value of money must be considered.

Financial statements: This course also taught you about the key financial statements. These apply to every type of business, but there are certain aspects which are unique to healthcare. The statement of financial position, commonly referred to as the balance sheet, is the first of the financial statements. The balance sheet reports the financial position of the organization at a moment in time, typically the end of a month, a quarter or the end of the fiscal year.

Balance sheets provide readers with information about a variety of different types of assets and liabilities of the entry. Some of the asset categories explored in this course are cash, marketable securities, accounts receivable, inventory, prepaid expense, and fixed assets. A variety of liability categories are also discussed, including both short-term payables and long-term debt. The residual value of the entity when liabilities are subtracted from assets represents the ownership or equity value of the entity. This may be called net worth, owner’s equity, net assets, fund balance, or a variety of other names that convey the equity concept, as appropriate for the specific type of entry.

We also discussed the results of operations. This is shown by generating an activity statement (also known as income statement) and statement of cash flows. Unlike the balance sheet, these statements report on what has happened over a period of time, rather than just disclosing the financial position of the organization at one specific point in time. The activity statement compares the entity’s revenues and other support with its expenses for a period of time, such as a fiscal year.

The activity statement, probably more than any other document which reaches the board of directors, gets intense scrutiny. It is the activity statement which shows us whether the organization has black ink for the period under consideration, meaning that it generated a profit, or whether it generated red ink showing a loss.

The cash flow statement is also very important; it looks at where the organization obtained its cash and where it spent cash during a particular period of time, a month, a quarter or a year. The focus is not only on how that much cash came and went, but also on the sources and uses of cash. The financial statements, when analyzed together, provide a clear picture of the organization’s financial health.

Conclusion

Much learning in this course, a diversity of topics has presented here, all of them important for your success as a healthcare leader. The course has also provided many case studies and problems, enabling you to test

3

UNIT x STUDY GUIDE

Title your skills and understanding of these key course concepts. Hopefully you have enjoyed the learning, and you now come away from this course with a stronger appreciation for medical finance.

Reference

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.