Module 1: Introduction to health care finance Student notes

Introduction to the US health care system

Describe common characteristics of the US health care system 3 major issues Access, cost, quality Access = Limited by insurance Cost Grows faster than inflation; spend more $ than any other nation Spending (2015 estimates) Quality = Racial and economic disparities

Continued More integrated delivery systems Private/public payer mix Medical bills due to bankruptcy High number of malpractice lawsuits Paradox of excess and deprivation

The business of health care

How do we know health care is a business A business needs to have sufficient revenue to pay all the costs associated with creating and selling its goods or services

Understand the similarities and differences in health care to other businesses Enough revenue to cover expenses (Revenue – expenses = profit) CEOs make a lot of money

Understand cont. Different Abundance of agency relationship Mixture of government, NFP, FP Highly regulatory environment

Understand continued Different Wider range of financing options Revenue mainly comes from 3rd party payers Rapidly growing Many organizations are NFP

Understand the common ownership forms of HCO, be able to list examples in the local area, discuss advantages of each, disadvantages of each (Lecture)

Understand ownership/examples in local area Public vs. Private Public = owned by the public (people) ran by the government Private = owned/ran by a non-government entity

Ownership NFP vs. FP Do NFP make a lot of residuals? Revenue – Expenses = Profit Do NFP make a lot of residuals? Government will never be classified as for-profit

Understand ownership Public-held vs. Private-held Multiple types within one organization Terminology Shareholder/Stockholder = owns company through stock Stakeholder = interested in the company but may not have any financial ties (Patients, community, nurses, doctors)

Advantages of each NFP = Tax-exempt status FP = Get equity Private = Avoid bureaucracy Public = Financial security through the government Private-held = Maintain ownership Public-held = Get money from stocks

Disadvantages of each NFP = Restrictions on what you can and cannot do FP = Answering to owners and their needs Private = Limitations on funding Public = Government controls you (Bureaucracy) Private-held = Can’t issue stock for $$ Public-held = Major changes have to be sent to stockholders

Understand the NFP organization and explain the importance of community benefits of tax-exempt status Describe NFP IRS form 1099 501(c) = 1-29 = most common in HCO = 3 (other kinds as well 501(d) Exempt from paying taxes Have to provide some community benefits (importance)

Continued New rules under the ACA Community health needs assessment Financial assistance Limitation on charges Billing and collecting

Continued Type of hospitals Hospitals in 2011, received 24.6 billion in tax breaks due to NFP status Most think that’s charity care

Understand how health care is different from a charity Health care is NOT a charity.   Charity - Type of NFP (sells goods/services).   NFP/FP oftentimes have charities within the organization (charity care)  Pure charity = does not sell goods or services ($ = soliciting contributions).   Non-operating charity = Grants to others Operating charity = some type of services  Other Rely heavily on volunteers Availability vs. a defined need 

Introduction to health care finance

What is financial management Why do I need to study finance? Because everyone is involved Most decisions you make involve $$

Continued What is financial management (how it different from accounting?) Accounting and financial functions Accountants = gives us the information Finances = understand the information

Continued What is health care finance = plan for, acquire, and use resources to maximize the efficiency and value of the enterprise within a healthcare organization What does a financial manager do Get $$ from financial markets Decide how to use the $$ to run the organization Manage revenue

3b. Describe 4 C’s of finance The measurement and minimization of costs are vital activities to the financial success of all healthcare organizations. A business might be profitable but still face a crisis because of a shortage of cash. Capital represents the funds (money) used to acquire land, buildings, and equipment. Finally, a business must control its financial and physical resources to ensure that they are being wisely employed and protected for future use - conservation.

Key positions in finance CFO Comptroller Treasurer CIO Auditor = internal/independent Board of directors

Describe the 5 pillars of financial practice Understanding of Cash flows Recognition Maximizing behavior Risk aversion = degree to which a person is willing or unwilling to take on a risky venture  Time-value-of-money Control of Opportunity cost

Reimbursement mechanisms

Understand common reimbursement mechanisms/risk/incentives Retrospective payment = Third-party payers making payments after the provider has rendered a service, based on what the provider charges for the service rendered.  Prospective payment = Method for reimbursing based on a predetermined rate for the treatment of specific illnesses

Continued Capitation payment = It pays a physician or group of physicians a set amount for each enrolled person assigned to them, per period of time, whether or not that person seeks care. Discounted payment = Pays based on an discounts through a pre-established contract with a provider