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Healthcare Finance: An Introduction to Accounting and Financial Management 4th edition PDF

679 Pages·2007·4.45 MB·English
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An introduction to accounting and financial management louis c. gapenski HEALTHCARE FINANCE FOURTH EDITION Like its predecessors, this textbook teaches the reader the fundamental concepts of healthcare finance, including both financial management and accounting. fourth edition features • New or expanded coverage of - Municipal bond pools - Cost of capital for not-for-profit and small businesses - Modified internal rate of return - Supply chain management - Health savings accounts • Current information on reimbursement, along with updated real-world examples • Easy-to-grasp spreadsheet illustrations of the calculations throughout the book • Learning aids, including a glossary; self-test questions; and end-of-chapter key concepts, questions, and problems companion website Go online to access additional learning tools, including: • Bonus chapter on distributions to owners of for-profit businesses • Bonus chapter that covers capitation, rate setting, and risk sharing • Appendixes that provide lists of financial and operating indicator ratios and their definitions The companion website can be accessed at ache.org/books/HCFinance4. companion casebook Cases in Healthcare Finance, also published by Health Administration Press, is an ideal supplement to this text. Through real-world cases, it provides the opportunity to bridge the gap between learning concepts in a lecture setting and actually applying these concepts on the job. Be better prepared to deal with the multitude of issues that arise in the practice of healthcare finance. also available from health administration press Understanding Healthcare Financial Management, Fifth Edition by Louis C. Gapenski, Ph.D., in collaboration with George H. Pink, Ph.D. Healthcare Finance FOURTH EDITION gapenski BOOKCOMP, Inc. — Health Administration Press / Page i / Printer proof Healthcare Finance 4th ed. / Gapenski [First Page] [-1], (1) Lines: 0 to 21 ——— * 533.26001pt PgVar ——— Normal Page * PgEnds: PageBreak [-1], (1) HEALTHCARE FINANCE Fourth Edition BOOKCOMP, Inc. — Health Administration Press / Page ii / Printer proof Healthcare Finance 4th ed. / Gapenski [-2], (2) Lines: 21 to 147 ——— 4.0pt PgVar ——— Normal Page * PgEnds: Eject [-2], (2) AUPHA HAP Editorial Board Sandra Potthoff, Ph.D., Chair University of Minnesota Simone Cummings, Ph.D. Washington University Sherril B. Gelmon, Dr.P.H., FACHE Portland State University Thomas E. Getzen, Ph.D. Temple University Barry Greene, Ph.D. University of Iowa Richard S. Kurz, Ph.D. Saint Louis University Sarah B. Laditka, Ph.D. University of South Carolina Tim McBride, Ph.D. St. Louis University Stephen S. Mick, Ph.D. Virginia Commonwealth University Michael A. Morrisey, Ph.D. University of Alabama—Birmingham Dawn Oetjen, Ph.D. University of Central Florida Peter C. Olden, Ph.D. University of Scranton Lydia M. Reed AUPHA Sharon B. Schweikhart, Ph.D. The Ohio State University Nancy H. Shanks, Ph.D. Metropolitan State College of Denver Frederick J. Wenzel University of St. Thomas BOOKCOMP, Inc. — Health Administration Press / Page iii / Printer proof Healthcare Finance 4th ed. / Gapenski [-3], (3) Lines: 147 to 182 ——— * 145.64pt PgVar ——— Normal Page * PgEnds: PageBreak [-3], (3) HEALTHCARE FINANCE An Introduction to Accounting and Financial Management Fourth Edition Louis C. Gapenski AUPHA HAP BOOKCOMP, Inc. — Health Administration Press / Page iv / Printer proof Healthcare Finance 4th ed. / Gapenski [-4], (4) Lines: 182 to 302 ——— -16.0pt PgVar ——— Normal Page * PgEnds: Eject [-4], (4) Your board, staff, or clients may also benefit from this book’s insight. For more information on quantity discounts, contact the Health Administration Press Mar- keting Manager at (312) 424-9470. This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. It is sold, or otherwise provided, with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. The statements and opinions contained in this book are strictly those of the author and do not represent the official positions of the American College of Healthcare Executives, of the Foundation of the American College of Healthcare Executives, or of the Association of University Programs in Health Administration. Copyright © 2008 by the Foundation of the American College of Healthcare Executives. Printed in the United States of America. All rights reserved. This book or parts thereof may not be reproduced in any form without written permission of the publisher. 12 11 10 09 08 5 4 3 2 1 Library of Congress Cataloging-in-Publication Data Gapenski, Louis C. Healthcare finance : an introduction to accounting and financial management / Louis C. Gapenski.—4th ed. p. cm. Includes bibliographical references and index. ISBN 978-1–56793-280-5 (alk. paper) 1. Health facilities—Finance—Textbooks. 2. Health facilities—Accounting—Textbooks. I. Title. [DNLM: 1. Financial Management, Hospital. 2. Accounting. 3. Capital Financing. 4. Health Facilities—economics. WX 157 G211h 2007] RA971.3.G3695 2007 362.1068'1—dc22 2007015110 The paper used in this publication meets the minimum requirements of American National Standards for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. � �™ Acquisitions manager: Janet Davis; Project manager: Jane Calayag Health Administration Press A division of the Foundation of the American College of Healthcare Executives One North Franklin Street Suite 1700 Chicago, IL 60606 (312) 424-2800 Association of University Programs in Health Administration 2000 N. 14th Street Suite 780 Arlington, VA 22201 (703) 894-0940 BOOKCOMP, Inc. — Health Administration Press / Page v / Printer proof Healthcare Finance 4th ed. / Gapenski [First Page] [-5], (1) Lines: 0 to 58 ——— * 41.30106pt PgVar ——— Normal Page * PgEnds: PageBreak [-5], (1) BRIEF CONTENTS Preface xiii PART I The Healthcare Environment 1 Introduction to Healthcare Finance . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 The Financial Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 PART II Financial Accounting 3 Financial Accounting Basics and the Income Statement . . . . . . . . 59 4 The Balance Sheet and Statement of Cash Flows . . . . . . . . . . . . . . 93 PART III Managerial Accounting 5 Managerial Accounting Basics, Cost Behavior, and Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127 6 Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 7 Pricing and Service Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 8 Planning and Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 PART IV Basic Financial Management Concepts 9 Time Value Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 10 Financial Risk and Required Return . . . . . . . . . . . . . . . . . . . . . . . . 301 BOOKCOMP, Inc. — Health Administration Press / Page vi / Printer proof Healthcare Finance 4th ed. / Gapenski [-6], (2) Lines: 58 to 94 ——— * 235.06503pt P ——— Normal Page * PgEnds: PageBreak [-6], (2) PART V Long-Term Financing 11 Long-Term Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 12 Equity Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 13 Capital Structure and the Cost of Capital . . . . . . . . . . . . . . . . . . . 411 PART VI Capital Investment Decisions 14 The Basics of Capital Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . 451 15 Project Risk Assessment and Incorporation . . . . . . . . . . . . . . . . . . 491 PART VII Other Topics 16 Current Asset Management and Financing . . . . . . . . . . . . . . . . . . 523 17 Financial Condition Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 18 Lease Financing and Business Valuation. . . . . . . . . . . . . . . . . . . . . 597 Glossary 627 Index 647 About the Author 659 BOOKCOMP, Inc. — Health Administration Press / Page vii / Printer proof Healthcare Finance 4th ed. / Gapenski [-7], (3) Lines: 94 to 159 ——— 13.09502pt PgVar ——— Normal Page PgEnds: TEX [-7], (3) DETAILED CONTENTS Preface xiii PART I The Healthcare Environment 1 Introduction to Healthcare Finance . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Defining Healthcare Finance, 3; Purpose of the Book, 5; The Role of Finance in Health Services Organizations, 6; The Structure of the Finance Department, 8; Health Services Settings, 9; Regulatory and Legal Issues, 15; Current Challenges, 17; Organization of the Book, 17; How to Use this Book, 19 2 The Financial Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Alternative Forms of Business Organization, 25; Alternative Forms of Ownership, 30; Organizational Goals, 34; Tax Laws, 36; Third-Party Payers, 38; Managed Care Plans, 42; Alternative Reimbursement Methods, 44 PART II Financial Accounting 3 Financial Accounting Basics and the Income Statement . . . . . . . . 59 Historical Foundations of Financial Accounting, 60; The Users of Financial Accounting Information, 61; Regulation and Standards in Financial Accounting, 62; Basic Concepts of Financial Accounting, 65; Accounting Methods: Cash Versus Accrual, 68; Recording and Compiling Accounting Data, 71; Income Statement Basics, 74; Revenues, 75; Expenses, 79; Net Income, 82; Net Income Versus Cash Flow, 84; Income Statements of Investor-Owned Firms, 85; A Look Ahead: Using Income Statement Data in Financial Statement Analysis, 86 BOOKCOMP, Inc. — Health Administration Press / Page viii / Printer proof Healthcare Finance 4th ed. / Gapenski [-8], (4) Lines: 159 to 208 ——— * 27.67604pt Pg ——— Short Page * PgEnds: PageBreak [-8], (4) 4 The Balance Sheet and Statement of Cash Flows . . . . . . . . . . . . . . 93 Balance Sheet Basics, 94; Assets, 96; Liabilities, 102; Equity, 104; Fund Accounting, 108; The Statement of Cash Flows, 108; Transactions, 112; Another Look Ahead: Using Balance Sheet Data in Financial Statement Analysis, 117 PART III Managerial Accounting 5 Managerial Accounting Basics, Cost Behavior, and Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .127 The Basics of Managerial Accounting, 127; Cost Classifications: Fixed and Variable, 129; Cost Behavior, 130; Cost Classifications: Semi-Fixed, 133; Profit (CVP) Analysis, 134; Breakeven Analysis, 139; Operating Leverage, 142; Profit Analysis in a Discounted Fee-for-Service Environment, 144; Profit Analysis in a Capitated Environment, 149; The Impact of Cost Structure on Financial Risk, 156 6 Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 Direct Versus Indirect (Overhead) Costs, 163; Introduction to Cost Allocation, 164; Cost Allocation Basics, 165; Cost Allocation Methods, 169; Direct Method Illustration, 171; Changing to a Better Cost Driver, 177; Step-Down Method Illustration, 180; Activity-Based Costing, 182; Final Thoughts on Cost Allocation, 186 7 Pricing and Service Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 Healthcare Providers and the Power to Set Prices, 194; Price Setting Strategies, 195; Target Costing, 197; Setting Prices on Individual Services, 198; Setting Prices Under Capitation, 199; Setting Managed Care Plan Premium Rates, 207; Using Relative Value Units (RVUs) to Set Prices, 212; Making Service Decisions (Contract Analysis), 214 8 Planning and Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 The Planning Process, 226; Operational Planning, 229; Introduction to Budgeting, 231; Budget Types, 232; Budget Decisions, 235; Constructing a Simple Operating Budget, 237; Variance Analysis, 240; The Cash Budget, 248 BOOKCOMP, Inc. — Health Administration Press / Page ix / Printer proof Healthcare Finance 4th ed. / Gapenski [-9], (5) Lines: 208 to 269 ——— * 42.462pt PgVar ——— Short Page * PgEnds: PageBreak [-9], (5) PART IV Basic Financial Management Concepts 9 Time Value Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 Time Lines, 264; Future Value of a Lump Sum (Compounding), 265; Present Value of a Lump Sum (Discounting), 270; Opportunity Costs, 273; Solving for Interest Rate and Time, 275; Annuities, 277; Perpetuities, 282; Uneven Cash Flow Streams, 283; Using Time Value Analysis to Measure Return on Investment (ROI), 286; Semiannual and Other Compounding Periods, 290; Amortized Loans, 294 10 Financial Risk and Required Return . . . . . . . . . . . . . . . . . . . . . . . . 301 The Many Faces of Financial Risk, 302; Introduction to Financial Risk, 303; Risk Aversion, 305; Probability Distributions, 305; Expected and Realized Rates of Return, 307; Stand-Alone Risk, 308; Portfolio Risk and Return, 311; Measuring the Risk of Investments Held in Portfolios, 319; Portfolio Betas, 325; Relevance of the Risk Measures, 326; Interpretation of the Risk Measures, 327; The Relationship Between Risk and Required Return, 328 PART V Long-Term Financing 11 Long-Term Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 The Cost of Money, 341; Common Long-Term Debt Instruments, 343; Debt Contracts, 348; Bond Ratings, 350; Credit Enhancement, 352; Interest Rate Components, 352; The Term Structure of Interest Rates, 356; Economic Factors That Influence Interest Rate Levels, 358; Debt Valuation, 359 12 Equity Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 Equity in For-Profit Businesses, 379; Types of Common Stock, 383; Procedures for Selling New Common Stock, 383; The Market for Common Stock, 386; Regulation of Securities Markets, 387; The Investment Banking Process, 389; Equity in Not-for-Profit Businesses, 391; Common Stock Valuation, 393; Security Market Equilibrium, 400; Informational Efficiency, 401; The Risk/Return Trade-Off, 404 BOOKCOMP, Inc. — Health Administration Press / Page x / Printer proof Healthcare Finance 4th ed. / Gapenski [-10], (6) Lines: 269 to 331 ——— 12.05302pt Pg ——— Short Page * PgEnds: PageBreak [-10], (6) 13 Capital Structure and the Cost of Capital . . . . . . . . . . . . . . . . . . . 411 Capital Structure Basics, 411; Impact of Debt Financing on Accounting Risk and Return, 412; Capital Structure Theory, 415; Identifying the Optimal Capital Structure in Practice, 418; Not-for-Profit Businesses, 420; Cost of Capital Basics, 422; Cost of Debt Capital, 423; Cost of Equity Capital, 425; The Corporate Cost of Capital, 434; Cost of Capital Estimation for Small Businesses, 436; An Economic Interpretation of the Corporate Cost of Capital, 439 PART VI Capital Investment Decisions 14 The Basics of Capital Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . 451 Project Classifications, 452; The Role of Financial Analysis in Healthcare Capital Budgeting, 453; Overview of Capital Budgeting Financial Analysis, 454; Cash Flow Estimation, 454; Cash Flow Estimation Example, 461; Breakeven Analysis, 468; Return on Investment (Profitability) Analysis, 469; Some Final Thoughts on Breakeven and Profitability Analyses, 475; Capital Budgeting in Not-for-Profit Businesses, 475; The Post-Audit, 478; Using Capital Budgeting Techniques in Other Contexts, 479 15 Project Risk Assessment and Incorporation . . . . . . . . . . . . . . . . . . 491 Types of Project Risk, 492; Relationships Among Stand-Alone, Corporate, and Market Risk, 493; Risk Analysis Illustration, 494; Sensitivity Analysis, 496; Scenario Analysis, 499; Qualitative Risk Assessment, 502; Incorporating Risk into the Decision Process, 503; Making the Final Decision, 506; Adjusting Cash Outflows for Risk, 507; Divisional Costs of Capital, 509; An Overview of the Capital Budgeting Decision Process, 510; Capital Rationing, 512 PART VII Other Topics 16 Current Asset Management and Financing . . . . . . . . . . . . . . . . . . 523 An Overview of Short-Term Financial Management, 523; Current Asset Investment and Financing Policies, 525; Cash Management, 530; Marketable Securities Management, 534; Long-Term Securities Management, 535; Receivables Management, 536; Supply Chain Management, 541; Short-Term Financing, 544 BOOKCOMP, Inc. — Health Administration Press / Page xi / Printer proof Healthcare Finance 4th ed. / Gapenski [-11], (7) Lines: 331 to 367 ——— * 321.59901pt PgVar ——— Short Page * PgEnds: PageBreak [-11], (7) 17 Financial Condition Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 Financial Statements, 562; Financial Ratio Analysis, 565; Tying the Financial Ratios Together: Du Pont Analysis, 577; Other Analytical Techniques, 579; Operating Indicator Analysis, 580; Limitations of Financial Ratio and Operating Indicator Analyses, 583; Economic Value Added (EVA), 584; Benchmarking, 585; Key Performance Indicators and Dashboards, 586 18 Lease Financing and Business Valuation. . . . . . . . . . . . . . . . . . . . . 597 Leasing Basics, 597; Tax Effects, 599; Financial Statement Effects, 601; Lease Evaluation, 603; Motivations for Leasing, 611; Business Valuation, 615 Glossary 627 Index 647 About the Author 659 BOOKCOMP, Inc. — Health Administration Press / Page xii / Printer proof Healthcare Finance 4th ed. / Gapenski [-12], (8) Lines: 367 to 369 ——— 0.0pt PgVar ——— Normal Page PgEnds: TEX [-12], (8) BOOKCOMP, Inc. — Health Administration Press / Page xiii / Printer proof Healthcare Finance 4th ed. / Gapenski [First Page] [-13], (1) Lines: 0 to 19 ——— 5.444pt PgVar ——— Normal Page PgEnds: TEX [-13], (1) PREFACE S ome 20 years ago, after years of teaching corporate finance and writing related textbooks and casebooks, I began teaching healthcare financial management in the University of Florida’s Master of Health Adminis- tration (MHA) program. The move prompted me to write my first healthcare finance textbook, Understanding Health Care Financial Management. The book was designed for use in health services administration financial manage- ment courses in which students had prerequisite courses in both accounting and corporate finance. In general, such courses are case courses, so this book served primarily as a reference tool when working healthcare finance cases. In recent years, I expanded my healthcare finance teaching to include other courses in traditional, nontraditional, and clinician-oriented programs in which students do not have a formal educational background in healthcare finance. Finance courses in these programs require a book that provides basic information on foundation topics. Furthermore, these courses often are part of programs that contain just one healthcare finance course, so the course must cover both accounting and financial management. In reviewing the books available for use in such courses, I found some that were strong in accounting and others that were strong in financial management; however, I could not find one that gave equal emphasis to both components of healthcare finance. This situation prompted me to write Healthcare Finance: An Introduction to Accounting and Financial Management. Concept of the Book My goal in writing this book was to create a text that introduces students to the most important principles and applications of healthcare finance, with roughly equal coverage of accounting and financial management. Further- more, because the book is intended for use primarily in clinical and health services administration programs, in which students are trained primarily for professional positions within healthcare providers, its focus is on healthcare finance as practiced within such organizations. The examples within the book are based on such organizations as hospitals, medical practices, clinics, home health agencies, nursing homes, and managed care organizations. xiii BOOKCOMP, Inc. — Health Administration Press / Page xiv / Printer proof Healthcare Finance 4th ed. / Gapenski xiv P r e f a c e [-14], (2) Lines: 19 to 30 ——— 0.0pt PgVar ——— Normal Page PgEnds: TEX [-14], (2) Another consideration in writing the book is that most readers would be seeing the material for the first time. Thus, it is very important that the material be explained as clearly and succinctly as possible. I have tried very hard to create a book that readers will find user-friendly—one that they will enjoy reading and can learn from on their own. If students don’t find a book interesting, understandable, and useful, they won’t read it. The book begins with an introduction to healthcare finance and a description of the current financial environment in which providers operate. From there, it takes students through the basics of financial and managerial accounting. Here, my goal is not to turn clinicians or generalist managers into accountants, but to present those accounting concepts that are most critical to managerial decision making. The book then discusses the basic foundations of financial management before progressing to demonstrate how healthcare managers can apply financial management theory and principles to help make better decisions, where better is defined as decisions that promote the financial well-being of the organization. Intended Market and Use The book is not targeted for specific types of educational programs. Rather, it is designed to teach students, in one course, the fundamental concepts of healthcare finance, including both accounting and financial management, with emphasis on provider organizations. Thus, the book can be used in a wide variety of settings: undergraduate and graduate programs, traditional and executive programs, on-campus and distance learning programs, and even independently for professional development. The key to the book’s usefulness is not the educational program but the focus of the course. If the course is a stand-alone course designed to cover both healthcare accounting and financial management, the book will fit. In fact, the book can be easily used across a two-course healthcare finance sequence, especially in modular programs where each course is two credit hours. Typically, such a sequence begins with an accounting course and ends with a financial management course. This book, supplemented by cases (and possibly readings), would work well in such a sequence. The ideal casebook for use here is Cases in Healthcare Finance by Louis C. Gapenski, which is part of Health Administration Press’s healthcare finance series. The casebook contains 30 cases that focus on the topics contained in this textbook, along with eight ethics mini-cases that can be used to highlight ethical issues in a healthcare finance setting. The book should also be useful to practicing healthcare professionals who, for one reason or another, must increase their understanding of health- care finance. Such professionals include clinicians who have some management responsibilities as well as line managers who now require additional finance skills. Finally, many members of financial staffs, especially those who work

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Most books are stored in the elastic cloud where traffic is expensive. For this reason, we have a limit on daily download.