FUNDAMENTALSof

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LOUIS C. GAPENSKIWITH EDITORIAL REVIEWS BY ROD MCADAMS, KRISTIN REITER, AND DEBRA TENNYSON

AUPHA

Health Administration Press, ChicagoAssociation of University Programs in Health Administration, VA

G A T E W A Y *T O H E A L T H C A R E M A N A G E M E N T

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Preface xiii

How to Use This Book xix

Part I Foundation Concepts

Chapter 1 Introduction to Healthcare Finance 3Chapter 2 Healthcare Business Basics 26Chapter 3 Paying for Health Services 52

Part II Planning, Managing, and Control

Chapter 4 Estimating Costs 85

Chapter 5 Pricing Decisions and Profit Analysis 113Chapter 6 Planning and Budgeting 146

Chapter 7 Managing Financial Operations 177

Part III Financing and Capital Investment Decisions

Chapter 8 Business Financing and the Cost of Capital 209Chapter 9 Capital Investment Decision Basics 241

Chapter 10 Project Cash Flow Estimation and Risk Analysis 275

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Part IV Reporting Results ;,

Chapter 11 Reporting Profits 317Chapter 12 Reporting Assets, Financing, and Cash Flows 349Chapter 13 Analyzing Financial Condition 380

Index 407

V

About the Author 417

• t .

Preface xiii

How to Use This Book xix

Part I Foundation Concepts

Chapter 1 Introduction to Healthcare Finance 3

Theme Set-Up: Careers in Healthcare Management 3Learning Objectives 41.1 Introduction 51.2 Defining Healthcare Finance 51.3 Purpose of the Book 61.4 The Role of Finance in Healthcare Organizations 71.5 The Structure of the Finance Department 101.6 Healthcare Settings 111.7 Regulatory and Legal Issues 191.8 Current Challenges 20Theme Wrap-Up: Careers in Healthcare Management 21Key Concepts 22End-of-Chapter Questions 24

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Chapter 2 Healthcare Business Basics „ 26

Theme Set-Up: Business Goals 26Learning Objectives 272.1 Introduction 282.2 Concept of a Business 282.3 Legal Forms of Businesses 292.4 Alternative Forms of Ownership 342.5 Organizational Goals 382.6 Tax Laws 41Theme Wrap-Up: Business Goals 46Key Concepts 47End-of-Chapter Questions 49End-of-Chapter Problems 50

Chapter 3 Paying for Health Services 52

Theme Set-Up: Revenue Sources 52Learning Objectives 533.1 Introduction 543.2 Basic Insurance Concepts '. 543.3 Third-Party Payers 603.4 Managed Care Organizations 653.5 Alternative Reimbursement Methods 663.6 The Impact of Reimbursement on Financial Incentives and Risks 723.7 Coding: The Foundation of Fee-for-Service Reimbursement 76Theme Wrap-Up: Revenue Sources 78Key Concepts 79End-of-Chapter Questions 81

Part II Planning, Managing, and Control

Chapter 4 Estimating Costs 85

Theme Set-Up: Cost Structure 85Learning Objectives 864.1 Introduction 874.2 The Basics of Managerial Accounting 874.3 Cost Classification I: Fixed Versus Variable Costs 884.4 Cost Classification II: Direct Versus Indirect (Overhead) Costs 944.5 Cost Allocation 954.6 Activity-Based Costing 102Theme Wrap-Up: Cost Structure 105

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Key Concepts ,, 106End-of-Chapter Questions 108End-of-Chapter Problems 109

Chapter 5 Pricing Decisions and Profit Analysis 113

Theme Set-Up: Profit Analysis 113Learning Objectives .,. 1145.1 Introduction 1155.2 Healthcare Providers and the Power to Set Prices 1155.3 Price Setting Strategies 1165.4 Target Costing 1195.5 Profit Analysis 1205.6 Breakeven Analysis 1255.7 Marginal Analysis 1285.8 Profit Analysis in a Capitated Environment 1325.9 The Impact of Cost Structure on Financial Risk 136Theme Wrap-Up: Profit Analysis 137Key Concepts 139End-of-Chapter Questions ....140End-of-Chapter Problems 141

Chapter 6 Planning and Budgeting r 146

Theme Set-Up: Actual Versus Expected Results 146Learning Objectives 1486.1 Introduction 1496.2 Strategic Planning 1496.3 Operational Planning 1536.4 Introduction to Budgeting 1556.5 Budgeting Decisions 1566.6 Budget Types 1596.7 Variance Analysis 164Theme Wrap-Up: Actual Versus Expected Results 170Key Concepts 171End-of-Chapter Questions 172End-of-Chapter Problems 173

Chapter 7 Managing Financial Operations 177

Theme Set-Up: Revenue Cycle Management 177Learning Objectives 178

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7.1 Introduction .-: 1797.2 The Revenue Cycle and Receivables Management 1797.3 Cash Management 1887.4 Inventory Management 1907.5 Monitoring Operations 193Theme Wrap-Up: Revenue Cycle Management 199Key Concepts 200End-of-Chapter Questions........T.'.. 202End-of-Chapter Problems 203

Part III Financing and Capital Investment Decisions

Chapter 8 Business Financing and the Cost of Capital 209

Theme Set-Up: Starting a New Medical Practice 209Learning Objectives 2108.1 Introduction 2118.2 Setting Interest Rates 2118.3 Debt Financing 2128.4 Debt Contracts 2168.5 Debt Ratings ". 2178.6 Equity Financing 2198.7 The Choice Between Debt and Equity Financing 2218.8 The Choice Between Long-Term and Short-Term Debt 2278.9 Cost of Capital 229Theme Wrap-Up: Starting a New Medical Practice 234Key Concepts 235End-of-Chapter Questions 237End-of-Chapter Problems 238

Chapter 9 Capital Investment Decision Basics 241

Theme Set-Up: Evaluating a Capital Investment 241Learning Objectives '. 2429.1 Introduction 2439.2 Project Classifications 2439.3 The Role of Financial Analysis in Capital Investment Decisions 2449.4 Overview of Capital Investment Financial Analysis 2459.5 Creating the Time Line 2469.6 Breakeven Analysis 2479.7 Discounted Cash Flow Analysis 2499.8 Return on Investment 2589.9 Project Scoring 266

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9.10 The Post-Audit y 268Theme Wrap-Up: Evaluating a Capital Investment 269Key Concepts 269End-of-Chapter Questions 271End-of-Chapter Problems 271

Chapter 10 Project Cash Flow Estimation and Risk Analysis 275

Theme Set-Up: Estimating a Project's Cash Flows and Assessing Risk 275Learning Objectives 27610.1 Introduction 27710.2 Cash Flow Estimation 27710.3 Estimating the Cash Flows for the Open MRI Project 28210.4 Risk Analysis 28610.5 Incorporating Risk into the Decision Process 29510.6 An Overview of the Capital Investment Decision Process 29710.7 Capital Rationing 298Theme Wrap-Up: Estimating a Project's Cash Flows and Assessing Risk 299Key Concepts 300End-of-Chapter Questions 302End-of-Chapter Problems ?. 303

Part IV Reporting Results

Chapter 11 Reporting Profits 309

Theme Set-Up: Constructing an Income Statement 309Learning Objectives 31011.1 Introduction 31111.2 Financial Accounting 31111.3 Historical Foundation 31211.4 Financial Statement Regulation and Standards 31311.5 Reporting Methods 31411.6 Income Statement Basics : 31711.7 Revenues 31911.8 Expenses 32311.9 Operating Income 32611.10 Nonoperating Income 32711.11 Net Income 32811.12 Net Income Versus Cash Flow 33111.13 Income Statements of Investor-Owned Firms 33311.14 A Look Ahead: Financial Condition Analysis 333Theme Wrap-Up: Constructing an Income Statement 334

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Key Concepts 335End-of-Chapter Questions 337End-of-Chapter Problems 337

Chapter 12 Reporting Assets, Financing, and Cash Flows 341

Theme Set-Up: Understanding the Balance Sheet and the Statement ofCash Flows ) 341

Learning Objectives 7.7 34212.1 Introduction 34312.2 Balance Sheet Basics 34312.3 Assets 34712.4 Liabilities 35212.5 Equity (Net Assets) 35512.6 Fund Accounting 35912.7 The Statement of Cash Flows 36012.8 A Look Ahead: Financial Statement Analysis 364Theme Wrap-Up: Understanding the Balance Sheet and the Statement of

Cash Flows 365Key Concepts 365End-of-Chapter Questions 367End-of-Chapter Problems 368

Chapter 13 Analyzing Financial Condition 372

Theme Set-Up: Techniques for Evaluating Financial Statements 372Learning Objectives 37313.1 Introduction 37413.2 Financial Statement Analysis 37413.3 Interpreting the Statement of Cash Flows 37513.4 Ratio Analysis 37713.5 Comparative and Trend Analysis 38913.6 Du Pont Analysis 39013.7 Other Analytical Techniques 39513.8 Limitations of Financial Statement Analysis 396Theme Wrap-Up: Techniques for Evaluating Financial Statements 397Key Concepts 397End-of-Chapter Questions 399End-of-Chapter Problems 400

Index 407

About the Author 417