This book represents the fifth edition of a book published originally in 1978, entitled Essentials of Hospital Finance. The text has evolved from a book containing seven chapters that dealt largely with understanding and interpreting hospital financial statements to a comprehensive financial text. The fifth edition has 20 chapters that cover most of the major areas of financial decision making that health care executives deal with on a daily basis.
There are many reasons why this book has been so widely used over the years. No other text so fully melds the best of current finance theory with the tools needed in day-to-day practice by health care managers. The text also encompasses virtually the whole spectrum of the health care industry, including hospitals, pharmaceutical companies, health maintenance organizations, home health agencies, skilled nursing facilities, surgical centers, physician practices, hospital departments, and integrated health care systems. For those desiring to go beyond the fundamentals, some chapters have additional information in appendices.
Building on the strong foundation of the previous editions, the fifth edition introduces a number of enhancements. We have added learning objectives to the beginning of each chapter. The learning objectives orient the students to the material in the chapter and highlight some particular concepts and skills they should acquire by studying the chapter. Following the learning objectives, each chapter now also has a real-world scenario, which places the material in the chapter into the context of how the concepts and tools are used in practice. As with previous editions, each chapter concludes with a summary, followed by a large number of problems with related solutions.
Before discussing the coverage of this book, it is important to understand the objective, which has not changed in more than 20 years. This text is intended to provide a relevant and readable text for health care management students and executives. This is important to understand, because Essentials of Health Care Finance is not a traditional finance text, nor is it a traditional management or financial accounting text. It attempts to blend the topics of both accounting and finance that have become part of the everyday life of most health care executives. This text does not provide as much coverage of cost of capital, capital structure, and capital budgeting topics that is present in most financial management texts. Essentials of Health Care Finance likewise does not provide major coverage of management control and budgeting systems that are present in most cost accounting and management accounting texts. This book has tried to cover those types of financial decisions that health care executives are most likely to be involved with, and has provided material that will help them understand the conceptual basis and mechanics of financial analysis and decision making as they pertain to the health care industry sector.
CONTENT OF THE BOOK
The general basis of financial decision making in any business is almost always built upon understanding three critical elements. First, most financial decisions are based upon the use of accounting information. It is difficult to make intelligent decisions without having at least a basic understanding of accounting information. The user does not need to be a CPA, but it is essential to have a little understanding of what accounting is and is not. Second, all business units operate within an industry. The health care industry is a huge, complex industry that is unlike other industries in many areas. Unless the student has an appreciation for these critical differences, major mistakes can be made. Finally, both accounting and finance are, in many ways, subsets of economics. The principles of economics form the conceptual basis upon which many types of business decisions are made.
Chapter 1 provides some introductory linkages to the role of information in decision making. Chapter 2 provides detailed information about the economic environment of health care firms. Specific coverage of payment methods for all types of providers, from hospitals to physicians, is included. Much of Chapter 2 was rewritten for this edition. For example, this edition covers the new Medicare prospective payment systems for outpatient, home health, and skilled nursing facilities. Chapter 3 is entirely new to this edition. It provides coverage of the numerous legal and regulatory provisions that affect today's health care manager. Extensive coverage of managed care, its definition, concepts, organizational structures, and its financial implications is included in Chapter 4 and woven in throughout the remainder of the text. Managed care contracting is covered far more extensively in this edition. For example, this edition includes a sample managed care contract, with a detailed description of its key components.
Chapters 5, 6, and 7 cover financial reporting for health care firms. Specific discussions of accounting jargon are included; but, perhaps more importantly, the accounting terms are related to health care issues, such as self-insurance of professional liability.
Chapters 8, 9, and 10 cover financial analysis and financial planning. Chapter 8 has been thoroughly revised to reflect the best analytical tools and techniques available for financial statement analysis. Chapter 9 provides specific coverage of health care firms other than hospitals. Comparative financial and operating benchmark values are included for hospitals, benchmark values are included for hospitals, health maintenance organizations, nursing homes, and medical groups that are used later to evaluate the financial position of a number of different kinds of health care firms.
Chapters 11 through 14 cover cost finding, pricing, break-even analysis, budgeting, and other managerial cost accounting topics. Special integration of managed care examples and concepts has been included in this edition. This edition also features more extensive coverage of relative value units.
Chapters 15 through 18 include coverage of capital budgeting, consolidations, valuation, and capital formation topics as they pertain to health care firms. Special attention is given to capital formation in both taxable and voluntary nonprofit situations. Chapter 17 is entirely new to this edition and covers the increasingly important topics of consolidations, mergers, and acquisitions. In that chapter, we offer detailed coverage of several valuation techniques. Chapters 19 and 20 cover the topics of working capital management and cash budgeting.