BRIEF CONTENTS
Preface
I The Healthcare Environment
1 Introduction to Healthcare Finance
2 The Financial Environment
II Financial Accounting
3 The Income Statement and Statement of Changes in Equity
4 The Balance Sheet and Statement of Cash Flows
III Managerial Accounting
5 Cost Behavior and Profit Analysis
6 Cost Allocation
7 Pricing and Service Decisions
8 Planning and Budgeting
IV Basic Financial Management Concepts
9 Time Value Analysis
10 Financial Risk and Required Return
V Long-Term Financing
11 Long-Term Debt Financing
12 Equity Financing and Securities Markets
13 Capital Structure and the Cost of Capital
VI Capital Investment Decisions
14 The Basics of Capital Budgeting
15 Project Risk Analysis
VII Other Topics
16 Current Asset Management and Financing
17 Financial Condition Analysis
18 Lease Financing and Business Valuation
Glossary
Index
About the Author
DETAILED CONTENTS
Preface xiii
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
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
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
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
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
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
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
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
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
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