Historically, health care managers have evolved from apprenticeships within technical areas. Radiology managers, for example, have risen through the technician ranks, head nurses through the nursing ranks, and so on. Often, the best technical persons have been elevated to management only to find that the skills that served them so well as technicians are insufficient in their new roles.
PURPOSE AND STRUCTURE OF THIS TEXT
Some management skills can be acquired while on the job. Organizational skills can be learned over time if the work environment allows. Leadership qualities can be present from experience outside the workplace (e.g., scouting, fraternal and social clubs, and community or neighborhood improvement associations). Other management skills, however, are highly technical in nature and do not lend themselves to an on-the-job-training approach. Among these are financial management skills.
The purpose of this text is to present the cadre of "up through the ranks" managers with a basic level of financial management principles, including understanding financial statements and ratios, preparing an operating budget, and using financial analysis to help with decision making. Those chapters that present analytical techniques also contain review problems. The solutions can be found in Appendix 1.
LEARNING TO SPEAK THE LANGUAGE
Financial management, like most scientific disciplines, has a language—a jargon-all its own. In order to function effectively, one must understand that language. This is no different from the tourist who studies French before touring
France or the baseball fan who learns the difference between a "Baltimore chop" and a "Texas leaguer."
In health care, words and phrases such as STAT, q4h, PRN, and NPO are liberally sprinkled throughout the language. To the uninformed, casual observer, these four simple statements take on a significance far in excess of their true meanings. Not understanding the language places one at a distinct disadvantage. It can throw a person off stride and place him or her on the defensive in any conversation. Consider, for example, this hypothetical scenario.
A senior administrator enters the office of a unit manager and asks for an explanation of salary performance during the most recent three-month period. "How much of this salary variance is caused by a labor rate variance? How much is the efficiency variance?" And, he asks, "What effect did volume have on the quarterly performance?" How will the unit manager respond? If he does not understand what was requested, he will not be able to provide a proper answer. If he guesses, he may respond with wrong or misleading information. If he answers that he does not understand what the senior administrator is asking, he runs the risk of appearing to be ignorant.
Beware of individuals whose reliance on the language of finance is such that they casually toss catchy phrases and buzzwords into a conversation in a way that only confuses the listener. Remember that a good communicator is one who is easily understood by all listeners. The responsibility to be a good communicator lies with the speaker, not the listener. The speaker must comprehend the listener's level of understanding and match his or her remarks to that level. The listener, too, has a responsibility: to stop the speaker and politely explain that there is a lack of understanding and that a further explanation is needed.
For the brief scenario involving the senior administrator and the unit manager, the "English language" version is as follows.
For the most recent three-month period, the actual salary level was different from the level budgeted (a variance). The senior administrator wanted to know how much of that difference was the result of hourly pay rates that were different from the rates budgeted, how much was the result of the staffs working harder than was planned for in the budget or not working as hard as was planned, and how much of the difference was a result of seeing more or fewer patients than were envisioned in the budget.
The Glossary contains financial terms that will be used throughout this text.
OVERCOMING THE MYSTIQUE
For some reason a mystique surrounds financial management. It is a misconception that mere mortals are not expected to do well when it comes to financial management techniques. The reality, however, is that financial management and the techniques associated with it are not as complicated as they seem. Beyond basic comprehension skills, one need only be able to multiply, divide, add, and subtract to achieve success. The notion that "if you can balance your checkbook, you can be a good financial manager" is true in most cases. As an assist, Appendix 2 contains over two dozen formulas commonly used in financial management.
TODAY'S HEALTH CARE DILEMMA
Health care, specifically the high cost of health care and the resulting need for reform, was one of the hottest topics of discussion during the 1992 presidential campaign year. Why health care reform? The answer lies in the fact that some 34 million Americans have no insurance coverage. At the same time, premium costs for those who are insured are growing at 15 percent per year. There is no coordinated cost containment program. Politicians are quick to grasp the fact that 34 million Americans represent a sizable block of votes. Health care progressed rapidly from an annoyance to a national campaign issue.
The recession, too, contributed to the situation. A large and vocal segment of the population lost their coverage when they lost their jobs. In turn, the states felt the effects in the form of lowered tax revenues and a swelling of medical assistance roles. The decreased state tax revenues, coupled with "balanced budget" spending caps, resulted in significant Medicaid program cuts.
But what exactly is this health care delivery system that many say is in such dire need of reform? Some facts and figures can help define it. There are just under 5,500 community hospitals operating 933,000 beds. Another 1.6 million beds are operated by the nation's 16,000 nursing homes. There are more than 601,000 active physicians.
Of the billions spent on health care, nearly 60 percent is paid to hospitals and physicians Nursing homes at 8 percent represent a real "sleeper" in that the aging of the population will increase their share over the next several years.
The bill for these services falls largely to government—Medicare and Medicaid—along with other federal and state entitlement programs. Private insurance covers a third of the cost.
In 1990, despite spending $650 billion on health care, America was the only developed nation with 15 percent of the population uninsured. Americans spent more per capita than anyone else but were not rewarded with increased life expectancy.
Health care represents more than 12 percent of the gross national product, and by the year 2000 it is expected to top 17 percent. If the trend continues, health care spending will top $1.5 trillion in the year 2000. Curiously, however, if the domestic auto industry was performing like this, there likely would be no calls for reform. People would be patting Lee Iacocca and the others on the back and telling them what a super job they had done.