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Write an essay explaining the forms of business organization and discuss how each one differs from the other.Requirements: 500 – 750 words; APA-compliant.Everything ori

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Healthcare Finance and Budgeting
Belhaven University
Unit 1
Financial Information and the Decision Making Process
Financial Environment of Healthcare Organizations
Welcome to Healthcare Finance and
This course emphasizes financial
administration and financial operations theory,
principles, and concepts as they relate to health
care financial decision-making. Finance and
budgeting methods are reviewed as well as
Format for Unit Sessions

Class Topics

Financial Information and the Decision Making
Financial Environment of Healthcare
The Legal and Regulatory Environment
Health Insurance and Managed Care
Billing and Coding for Health Services
Measuring Community Benefit
Format for Unit Sessions, cont.

Revenue Determination
Financial Statements/Analyzing Financial Position

Financial Analysis of Alternative Healthcare

Strategic Financial Planning
Cost Concepts and Decision Making
Product Costing/Management Control Process
Cost Variance Analysis
Working Capital and Cash Management
Developing a Cash Budget
Learning Tools

Class lectures


Individual homework

Hearing and seeing
Discussion forum

Completing all
components is very
important to
accomplish the
objectives of the
Applying and examining
Online Learning


Online learners must
be highly selfmotivated.
Online learners must
have high responsibility
for assignments and


Online learning is not
easier than traditional
classroom learning.
Learners must meet
It’s easy to think we’re
anonymous because
there’s no face time.
Tips for Success

Course Page


Weekly discussions


Individual homework
Discussion forum

Handouts & links
Class lectures

Be attentive to
The week (unit)
begins on Sunday
and ends on

Observe Sabbath
Manage your time
Tips For Success, cont.

Do not

It’s easy to get behind
in an asynchronous
False security that
there is time to catch
Each week builds on
the previous week.

Set your schedule.

Assigned readings
View Lecture
Initial post to
discussion boards
Written assignment/
Final response to
the discussion
Class Objectives

In this course, we will:

Demonstrate an understanding of the healthcare
marketplace in the United States and integrate a
Christian worldview.
Analyze the revenue cycle for healthcare
Determine the relationship between financial
planning and strategic planning.
Define the budget process and analyze
managerial use of a budget.
Class Objectives, cont.

Demonstrate an understanding of financial
statements, and variance analysis and how
management uses them.
Comprehend how to prepare a cash budget and
relationship with working capital.
Biblical Foundation
“For wisdom will enter your heart, and
knowledge will fill you with joy. Wise choices
will watch over you, understanding will keep
you safe.”
(Proverbs 2:10-11 New Living Translation)
Who are Healthcare Decision Makers?

Radiation Therapists
Any many others
Their specialized education most likely did
not include courses in accounting & finance.
Effectiveness of Financial Management

Dependent on many factors such as:

Environmental conditions
Personnel capabilities
Information quality
Much of this activity is carried out through
the accounting process.
Information and Decision Making

A good information system should

List possible courses of action
List events that might affect the expected results
Indicate the probability that those events will occur
Estimate the results accurately, given an actionevent combination.
Uses and Users of Financial Information

There are five uses of financial information
that are important in decision making:

Evaluating the financial condition of an entity
Evaluating stewardship within an entity
Assessing the efficiency of operations
Assessing the effectiveness of operations
Determining the compliance of operation with
Financial Condition

Most common use of financial information
Equated with the organization’s viability or
capacity to continue to pursue its goals
Most business decisions are directly or
indirectly based on perceived financial
Short-run and long-run effects are

Historically, stewardship was the most
important use of accounting and financial
information systems.
Designed to prevent the loss of assets or
resources through employees’ malfeasance
Well-designed accounting systems prevent
the occurrence of employee fraud and

Is becoming increasingly important in
healthcare operations
The ratio of outputs to inputs
The lowest possible cost of production
Adequate assessment implies the availability
of standards against which actual costs may
be compared.

Concerned with the attainment of objectives
through production of outputs
More difficult to measure than efficiency
because objectives or goals are typically not
stated quantitatively
More emphasis is placed on efficiency than
May result in unnecessary services at an
efficient cost

Financial information may be used to
determine whether compliance with directives
has taken place.
Internal directives: keeping within budget
External directives: rate setting, regulatory
Financial reporting is required to ensure
Financial Organization

Financial Executives International
categorizes financial management functions
as either:

Controllership or
The separation of duties is important to the
understanding of financial management.
Controllership Duties

Planning for control
Reporting and interpreting
Evaluating and consulting
Administrating taxes
Reporting to government
Protecting assets
Appraising economic health
Treasurership Duties

Providing capital
Maintaining investor relations (for profit firms)
Providing short-term financing
Providing banking and custody
Overseeing credit and collections
Choosing investments
Providing insurance
Forms of Business Organization

According to the American Institute of
Certified Public Accountants, there are four
main types of organizations in healthcare:

Not-for-profit, business-oriented
For-profit healthcare entities
Government HCOs
Non-governmental, nonprofit HCOs
These types differ in terms of ownership
Not-for-Profit, Business Oriented

Owned by the entire community rather than
investor owned
Primary goal: to serve the community by
providing health services
Run as a business to ensure long-term
financial viability; organized as 501(c)(3)
Expected to provide community benefit
Exempt from federal income taxes and
property taxes
For-Profit Healthcare Entities

Main objective: earn profits for investors
Management must balance their fiduciary
responsibilities between the owners and their
mission of providing healthcare services.
Have a wide variety of organization and
ownership structures
Publically traded companies may raise equity
capital through the sale of stocks.
May also be privately held
For-Profit Healthcare Entities, cont.

For-Profit Healthcare Entities may be:

Investor owned
Professional corporations/professional
Sole proprietorships
Limited partnerships
Limited liability partnerships/limited liability
Investor Owned Entities

May be either publicly traded or privately held
Managers are expected to maximize wealth.
Can raise funding through risk-based equity
Limited liability
Earnings taxed at the corporate level and
shareholder level (double taxation)
Professional Corporation

Also called Professional Associations
Corporate form for professionals who want
the benefit of incorporation
Does not shield its owners from professional
Widely used by physicians and other
healthcare professionals
Sole Proprietorships

Unincorporated businesses owned by a
single individual
Easy and inexpensive to set up and dissolve
No sharing of profits
Sole proprietor has total control
Few government regulations
No special income taxes
Disadvantages: unlimited liability and limited
access to capital

Unincorporated businesses with two or more
Easy to form
Subject to few government regulations
Not subject to double taxation
Disadvantages: difficult to dissolve, potential
conflict among partners
Limited Partnerships

One general partner has unlimited liability for
the partnership’s debts and obligations.
Offer limited liability to the limited partners
along with tax flow-through treatment
Disadvantage: the requirement to have a
general partner liable for their debts and
Limited Liability Partnerships

Also called Limited Liability Companies
Combines the tax flow-through treatment
characteristics of a partnership with the
liability protection of a corporation
The liability of the general partner is limited.
Permit owners to structure allocations of
income and losses any way they desire as
long as partnership tax allocation rules are
Governmental HCOs

Public corporations owned by state or local
Operated to benefit the communities they
Assets and accumulated earnings belong to
the public or charitable beneficiaries.
Can raise additional revenue through taxes
Exempt from income and property taxes
Non-governmental, Nonprofit

Also called Voluntary Health and Welfare
Perform voluntary services in their
Tax exempt
Rely primarily on public donations for funds
Financial statements and management differ
from that of business-oriented firms
Financial Viability

Financial viability is the ability of the HCO to
meet its financial obligations to its suppliers
including employees, equipment suppliers,
service contractors, vendors of consumable
supplies, and lenders.
HCOs Receive Money From:

Patients (the greatest proportion)

Third-party payers

Blue Cross and Blue Shield
Commercial insurance, including managed care
Self-insured employers
HCOs Receive Money From:


Tax Support
Healthcare Industry Segments

The top five industry segments according to
expenditures are:

Hospitals (31%)
Physicians (21%)
Prescription drugs (10%)
Administration of private health insurance (7%)
Nursing homes (5%)
Sources of Operating Revenue

The four largest segments of operating funds

Prescription drugs
Nursing homes
Funding in the Hospital Industry

Funding sources by percentage:

Public sources (more than 50%)

Private insurance (36%)

Blue Cross and other commercial insurance carriers
Managed care organizations
Self-insured employers
Direct payments by patients (3%)
Funding in the Physician Marketplace

Different from hospitals
A large portion of funding comes from direct
payments from patients (10%).
Private insurance makes up about 49%.
Public sources make up about 35%.
Funding for Prescription Drugs

42% comes from private insurance sources.
Medicare covers about 30%.
Medicaid covers over 8%.
Funding for Nursing Homes

Nursing homes receive almost no funding
from private insurance.
The major source of funding in Medicaid, not
The federal government pays over 50% of all
Medicaid expenditures.
While Medicare payments are restricted to
skilled nursing care, Medicaid payments are
for intermediate-level (custodial) care.
Healthcare Payment Systems

The various types of payments have a
different effect on the organization’s financial
position and may affect its business strategy.
Payments may be based on:

Historical cost reimbursement
Specific services
Capitated rates
Bundled services
Historical Cost Reimbursement

Was the predominant form of payment for
most institutional providers until the 1980s
Payments based on “reasonable” historic
Apportionment means the way costs are
assigned or allocated to specific payers.
Specific Services

Healthcare organizations have a master price
list. (May be called a charge master)
Prices have no relationship to amounts
actually paid.
Charges reported to CMS on a 1450 or
Uniform Bill 2004 (also called a UB-40);
consolidates individual charges.
Current Procedural Terminology (CPT) codes
Capitated Rates

A group of providers agree to provide
healthcare services for enrollees during a
specified period of time. (usually limited)
Global capitalization means the provider will
provide all medical services for enrollees.
Capitation agreements were popular in the
mid-1990s and are now on the decline.
Bundled Services

Used in today’s healthcare environment
Have two key features:

Payment is grouped into a mutually exclusive set
of service categories.
Service arrangements have a fixed fee schedule.
Medicare payment schedule used as a basis
for other health plans.
Medicare Benefits

Medicare benefits have three parts:

Part A: Hospital insurance

Covers hospital, SNF, hospice, and some home health
Provided free to all beneficiaries with 40 or more
covered quarters of Medicare employment
Requires a deductible
Medicare Benefits, cont.

Part B: Medical insurance

Covers doctor’s fees, outpatient services, lab tests,
durable medical equipment, and many preventative
Requires a monthly payment by the beneficiary
Requires a deductible
Part D: Prescription drug benefit

Beneficiaries can choose between:

A prescription plan covering drugs only or
Medicare Advantage covering medical services and drugs
Supplemental Insurance

Some Medicare beneficiaries purchase extra
insurance from private insurance firms to
cover deductibles and coinsurance amounts
Also called Medigap coverage
What’s next?

Complete the reading assignments.
Complete the writing assignments.
Answer the discussion questions.
Complete the unit quiz.
Centers for Disease Control.(2014). National
health expenditures. Retrieved from:
Cleverly, W.O., Song, P.H., Cleverly, J.O.
(2011). Essentials of health care finance
(7th ed.). Sudbury, MA: Jones and Bartlett

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