Introduction to Introduction to Financial ManagementFinancial Management

What is financial management?What is financial management? Applications of financial managementApplications of financial management

• Organizational effectiveness evaluationsOrganizational effectiveness evaluations• Capital budgeting applicationsCapital budgeting applications• Cost of capital/financing applicationsCost of capital/financing applications• Working capital management appsWorking capital management apps• Management of financial riskManagement of financial risk

Introduction to Introduction to Financial ManagementFinancial Management

Managerial responsibilitiesManagerial responsibilities Healthcare financial management Healthcare financial management

challenges (NFP’s and Third Party challenges (NFP’s and Third Party Payment)Payment)

Sub-disciplines of financial Sub-disciplines of financial managementmanagement• AccountingAccounting• Corporate finance Corporate finance

Introduction to Introduction to Financial ManagementFinancial Management

Historical evolution of financial Historical evolution of financial management within HSO’smanagement within HSO’s• Cost accounting eraCost accounting era• Contemporary financial management eraContemporary financial management era• The role of TEFRA/PPSThe role of TEFRA/PPS

– Prospective payment methodologiesProspective payment methodologies– Shifting financial risk to providersShifting financial risk to providers– Lack of ability to shift risk by providersLack of ability to shift risk by providers– Increased need for financial management focusIncreased need for financial management focus

Introduction to Introduction to Financial ManagementFinancial Management

The Environment of Financial The Environment of Financial ManagementManagement• Organizational formsOrganizational forms

– Proprietorships (advantages, disadvantages)Proprietorships (advantages, disadvantages)– Partnerships (advantages, disadvantages)Partnerships (advantages, disadvantages)– Corporations (advantages, disadvantages)Corporations (advantages, disadvantages)– Hybrids (LLP, LLC, PC)Hybrids (LLP, LLC, PC)

• Ownership formsOwnership forms– For-profits (investor owned)For-profits (investor owned)– Not-for-profits (community owned)Not-for-profits (community owned)

Introduction to Introduction to Financial ManagementFinancial Management

For-profit organizationsFor-profit organizations• Who are they?Who are they?• Vesting of ownership rights (stock)Vesting of ownership rights (stock)• Public vs. private ownershipPublic vs. private ownership• Ownership “rights”Ownership “rights”

– Right to control operationsRight to control operations– Right to residual earningsRight to residual earnings– Right to proceeds from liquidation (after Right to proceeds from liquidation (after

creditors)creditors)

Introduction to Introduction to Financial ManagementFinancial Management

Not-for-profit organizationsNot-for-profit organizations• Who are they?Who are they?• Economic rationale for existenceEconomic rationale for existence• Vesting of ownership rightsVesting of ownership rights• CharacteristicsCharacteristics

– Tax exempt Tax exempt – Eligible for tax exempt financing (munis)Eligible for tax exempt financing (munis)– Qualify for tax-exempt charitable Qualify for tax-exempt charitable

contributionscontributions

Introduction to Introduction to Financial ManagementFinancial Management

FP vs. NFP organizationsFP vs. NFP organizations• Ownership does matterOwnership does matter

– FP - shareholder wealth maximizationFP - shareholder wealth maximization– NFP - accomplish charitable mission(s) NFP - accomplish charitable mission(s)

• Financial management approaches do Financial management approaches do not differ appreciably between the not differ appreciably between the two in realitytwo in reality

Introduction to Introduction to Financial ManagementFinancial Management

Taxation IssuesTaxation Issues• The imperative of death The imperative of death ANDAND taxes taxes• Impact of taxationImpact of taxation

– Organizational performance/valueOrganizational performance/value– Financial management objectivesFinancial management objectives

• Levels of taxationLevels of taxation– Proprietorships/partnerships -- ordinary Proprietorships/partnerships -- ordinary

income and capital gainsincome and capital gains– Corporations - ordinary income and capital Corporations - ordinary income and capital

gainsgains

Introduction to Introduction to Financial ManagementFinancial Management

Corporate taxation (cont’d)Corporate taxation (cont’d)• Operating incomeOperating income• Interest income from investmentsInterest income from investments• Dividend income from investmentsDividend income from investments• Capital gains income from investmentsCapital gains income from investments• Not-for-profit taxation issuesNot-for-profit taxation issues

– Tax exempt organizations - 501(c)(3)/501(c)Tax exempt organizations - 501(c)(3)/501(c)(4)(4)

– Unrelated business income (UBI)Unrelated business income (UBI)

Introduction to Introduction to Financial ManagementFinancial Management

Not-for-profit taxation issuesNot-for-profit taxation issues• NFP investment sources of incomeNFP investment sources of income

– Use of “temporary cash surpluses”Use of “temporary cash surpluses”– Private inurement risks with excessive Private inurement risks with excessive

surplus funds and/or longer term investmentssurplus funds and/or longer term investments

Miscellaneous taxation issuesMiscellaneous taxation issues• The use of financial leverage (debt)The use of financial leverage (debt)• ““Double taxation” of corporate dividendsDouble taxation” of corporate dividends

Introduction to Introduction to Financial ManagementFinancial Management

Miscellaneous taxation issuesMiscellaneous taxation issues• Carry-back/carry-forward provisionsCarry-back/carry-forward provisions

– Tax benefits with each provisionTax benefits with each provision

Reimbursement IssuesReimbursement Issues• Impact of reimbursement on Impact of reimbursement on

organizational financial performanceorganizational financial performance• The U.S. system of 3rd party payersThe U.S. system of 3rd party payers• Market power among 3rd party payersMarket power among 3rd party payers

Introduction to Introduction to Financial ManagementFinancial Management

Reimbursement IssuesReimbursement Issues• Generic methods of 3rd party Generic methods of 3rd party

reimbursementreimbursement– Fee for service -- cost-based, charge-based, Fee for service -- cost-based, charge-based,

prospective forms (DRG’s, APC’s)prospective forms (DRG’s, APC’s)– CapitationCapitation– Non-paymentNon-payment

• Financial management implications with Financial management implications with different forms of 3rd party different forms of 3rd party reimbursementreimbursement

Introduction to Introduction to Financial ManagementFinancial Management

Financial Management Implications Financial Management Implications of 3rd party reimbursementof 3rd party reimbursement• Accounting for reimbursement Accounting for reimbursement

revenuesrevenues• Elements of financial riskElements of financial risk• Provision of provider incentivesProvision of provider incentives

– Fee for serviceFee for service– CapitationCapitation