Introduction to Financial
Management
 What is financial management?
 Applications of financial management
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Organizational effectiveness evaluations
Capital budgeting applications
Cost of capital/financing applications
Working capital management apps
Management of financial risk
Introduction to Financial
Management
 Managerial responsibilities
 Healthcare financial management
challenges (NFP’s and Third Party Payment)
 Sub-disciplines of financial management
• Accounting
• Corporate finance
Introduction to Financial
Management
 Historical evolution of financial
management within HSO’s
• Cost accounting era
• Contemporary financial management era
• The role of TEFRA/PPS
– Prospective payment methodologies
– Shifting financial risk to providers
– Lack of ability to shift risk by providers
– Increased need for financial management focus
Introduction to Financial
Management
 The Environment of Financial Management
• Organizational forms
– Proprietorships (advantages, disadvantages)
– Partnerships (advantages, disadvantages)
– Corporations (advantages, disadvantages)
– Hybrids (LLP, LLC, PC)
• Ownership forms
– For-profits (investor owned)
– Not-for-profits (community owned)
Introduction to Financial
Management
 For-profit organizations
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Who are they?
Vesting of ownership rights (stock)
Public vs. private ownership
Ownership “rights”
– Right to control operations
– Right to residual earnings
– Right to proceeds from liquidation (after creditors)
Introduction to Financial
Management
 Not-for-profit organizations
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Who are they?
Economic rationale for existence
Vesting of ownership rights
Characteristics
– Tax exempt
– Eligible for tax exempt financing (munis)
– Qualify for tax-exempt charitable contributions
Introduction to Financial
Management
 FP vs. NFP organizations
• Ownership does matter
– FP - shareholder wealth maximization
– NFP - accomplish charitable mission(s)
• Financial management approaches do not
differ appreciably between the two in reality
Introduction to Financial
Management
 Taxation Issues
• The imperative of death AND taxes
• Impact of taxation
– Organizational performance/value
– Financial management objectives
• Levels of taxation
– Proprietorships/partnerships -- ordinary income
and capital gains
– Corporations - ordinary income and capital gains
Introduction to Financial
Management
 Corporate taxation (cont’d)
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Operating income
Interest income from investments
Dividend income from investments
Capital gains income from investments
Not-for-profit taxation issues
– Tax exempt organizations - 501(c)(3)/501(c)(4)
– Unrelated business income (UBI)
Introduction to Financial
Management
 Not-for-profit taxation issues
• NFP investment sources of income
– Use of “temporary cash surpluses”
– Private inurement risks with excessive surplus
funds and/or longer term investments
 Miscellaneous taxation issues
• The use of financial leverage (debt)
• “Double taxation” of corporate dividends
Introduction to Financial
Management
 Miscellaneous taxation issues
• Carry-back/carry-forward provisions
– Tax benefits with each provision
 Reimbursement Issues
• Impact of reimbursement on organizational
financial performance
• The U.S. system of 3rd party payers
• Market power among 3rd party payers
Introduction to Financial
Management
 Reimbursement Issues
• Generic methods of 3rd party reimbursement
– Fee for service -- cost-based, charge-based,
prospective forms (DRG’s, APC’s)
– Capitation
– Non-payment
• Financial management implications with
different forms of 3rd party reimbursement
Introduction to Financial
Management
 Financial Management Implications of 3rd
party reimbursement
• Accounting for reimbursement revenues
• Elements of financial risk
• Provision of provider incentives
– Fee for service
– Capitation