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Healthcare Finance

Dr. Mohammed Khaled M. Al-Hanawi

Assistant Professor of Health Economics and Financing
Health Services and Hospitals Administration Department
Email: mkalhanawi@kau.edu.sa
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CHAPTER 1
Healthcare Finance Basics

The first two chapters provide background

information that creates the framework for
financial decision making within healthcare
organizations. Chapter 1 focuses on several
basic concepts that underlie the study of
healthcare finance, while Chapter 2 covers
healthcare insurance and reimbursement
methodologies.
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Course Goal

The primary goal of this course is to

introduce students to the field of
healthcare finance, including:
Principles and concepts.
Applications across a wide variety of
provider settings.
The impact of alternative reimbursement
methods.
Along the way, some important personal
finance concepts also are discussed.
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Definition of Healthcare Finance

The definition depends on the context.

For purposes of this class, healthcare
finance is the practice of finance,
including both accounting and
financial management, within health
services (provider) organizations.
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Accounting Versus
Financial Management

 Accounting concerns the recording, in

financial (dollar) terms, of events that
reflect the resources, operations, and
financing of an organization.
 Financial management provides the
theory, concepts, and tools necessary to
help managers make better financial
decisions.
 Are the two disciplines independent?
(In many settings, accounting and
financial management are separate
disciplines.)
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Questions

 What is meant by the term healthcare Healthcare

financing
finance ? Healthcare financing is a separate topic that involves how society pays for the
healthcare services it consumes
The system that a
society uses to pay
for
healthcare services.

 What is the difference between

accounting and financial management ?
Accounting
Financial management
The measurement
The use of theory,
and recording of
principles, and
events that reflect the
concepts developed
operations, assets,
to help managers
and financing of an
make better financial
organization.
decisions
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Focus on Healthcare Finance

Many courses covers the topics of

accounting and financial management.
Why this course focuses on healthcare
finance?
The health services industry is unique.
The provision of healthcare services is
dominated by not-for-profit corporations.
The majority of payments made to
healthcare providers are paid by third-party
payers.
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Definition of a Business

A business has the following

characteristics:
obtains financing from the marketplace,
uses the funds to buy assets,
operates the assets to provide goods or
services,
There is a huge difference between businesses and pure charities. The main purpose of a business is to generate revenue by selling its goods and services, thus there is always a
competition between businesses in order to receive maximum revenue. On the other hand, a pure charity runs on contributions.
They receive funds through contributions from different nt organizations and apply those funds to deliver their free services.Therefore,in case of pure charity, the yearly budget has

sells the goods or services to create

been fixed by its amount of contributions received.

revenue. a business functions by

selling goods and
 What is the difference between a services (a hospital or
medical practice), but a
business and a pure charity? pure charity does not
sell goods or services.
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The Role of Finance

 The primary role of finance within any
organization is to plan for, acquire, and utilize
resources to maximize the efficiency (and
hence value) of the enterprise.
 Finance activities include:
 Planning and budgeting
 Financial reporting
 Capital investment decisions
 Financing decisions
 Working capital management
 Contract management
 Financial risk management
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The Four Cs

The finance activities listed on the

previous slide can be summarized by
the four Cs:
Cost minimization
Cash sufficiency
Capital access
Control of financial resources
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Finance Department Structure Healthcare sector:

It involves a diverse collection

of people engaged directly or
indirectly in the sub-sectors of
the healthcare population.

At large providers (typically hospitals), Conptroller :

The responsibilities of a
comptroller include

the finance department usually is accounting and reporting

activities such as preparation
of financial statements, credit
management, budget

organized as follows: preparation, and patients

account management.
Treasurer:

A treasurer is in charge of
Chief financial officer (VP-finance) financial risk management,
money as well as financial

• Controller
management, lease finance,
or endowment fund
management, among other

– Budgeting and reporting activities

things.

– Payables and receivables (patient account)

management
• Treasurer
– Acquisition and management of capital
– Cash and debt management
– Financial risk management
in small organizations,

 What about a small medical practice?

financial activities are
combined and assigned
to few individuals. It is
sometimes managed by
a single individual, who
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Health Services Settings

Health services are provided by
numerous types of organizations in
many different settings.
Applications presented in this course
will include the following settings:
Hospital (inpatient) care
Ambulatory (outpatient) care
Long-term care
Integrated delivery systems
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Health Services Settings

Hospitals:
Provide diagnostic and therapeutic
services.
Differ in function, length of stay, size, and
ownership.
Classified as either general acute care
facilities or specialty facilities.
Vary in size from fewer than 25 beds to
more than 1000 beds.
Classified by ownership as private and
governmental.
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Health Services Settings

Ambulatory (Outpatient) Care:
Encompasses services provided to
noninstitutionalized patients.
Traditional outpatient settings include
medical practices, hospital outpatient
department, and emergency departments.

Includes services provided to non institutionalized patients. The settings include medical
practices, hospital outpatient departments, ambulatory surgery centers, urgent care centers,
diagnostic imaging centers, rehabilitation/sports medicine centers and clinical laboratories
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Health Services Settings

Long-Term Care:
Entails the provision of healthcare
services and some personal services to
individuals who lack some degree of
functional ability.
Covers an extended period of time and
include both inpatients and outpatients
services, which often focus on mental
health, rehabilitation, and nursing home
care.
Concerned with levels of independent
functioning, specifically services of daily
living such as eating, bathing and
locomotion.
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Health Services Settings

Long-Term Care: (continue)
Nursing home are a major source of such
care.
• Three level of nursing home exist:
– Skilled nursing facilities: provide the level of
care closest to hospital care.
– Intermediate care facilities: are intended for
individuals who do not require hospitals or
SNF care, but whose mental or physical
conditions require daily continuity of one or
more medical services.
– Residential care facilities: are sheltered
environments that do not provide
professional healthcare services and thus
for which most health insurance programs
do not provide coverage.
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Health Services Settings

Integrated Delivery System:
Many healthcare experts have extolled the
benefits of providing hospital care,
ambulatory care, long-term care, and
business support services through a
single entity (integrated delivery system).
The benefits of such systems include:
• Patients are kept in the corporate network of
services.
• Linked organization have better access to
capital.
• The ability to recruit and retain management
and professional staff are enhanced.
• Ability to offer payer a complete package of
services.
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Organization of the Course

Healthcare environment
Basic concepts
Insurance and reimbursement
methodologies
Financial accounting
Basics
Income statement
Statement of changes in equity
Balance sheet
Statement of cash flows
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Organization of the Course (Cont.)

Managerial accounting
Basics
Organizational costing and profit (CVP)
analysis
Department costing and cost allocation
Service line costing and pricing
Financial planning and budgeting
Basic financial analysis concepts
Time value analysis
Financial risk and return
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Organization of the Course (Cont.)

Long-term financing
Long-term debt capital
Equity (ownership) capital
Capital structure decisions
The cost of capital
Capital investment decisions
Cash flow estimation
Breakeven and profitability measures
Risk assessment
Risk incorporation
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Organization of the Course (Cont.)

Other topics (not all may be covered)

Revenue cycle management
Current account management
Current asset (short-term) financing
Analyzing financial performance
Financial condition Analysis
Lease financing
Business valuation
Profit distributions to owners
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Conclusion

This concludes our discussion of

Chapter 1 (Healthcare Finance
Basics).
Although not all concepts were
discussed in class, you are
responsible for all of the material in
the text.
 Do you have any questions?