Health Care Finance

Need for Healthcare Finance vital that managers at all levels understand the basic concepts of healthcare finance and how these concepts are used to enhance the financial well-being of the organization.

Role “health care finance”! The primary role of finance in health services organizations, as in all businesses, is to plan for, acquire, and utilize resources to maximize the efficiency and value of the enterprise.

finance activities include: Planning and budgeting. evaluating the financial effectiveness of current operations and planning for the future. Eg. Budgets Financial reporting - it is important for businesses to record and report to outsiders the results of operations and current financial status through a set of financial statements. Capital investment decisions- focus on the acquisition of land,buildings, and equipment.

Financing decisions. All organizations must raise capital to buy the assets Working capital management. Managing funds for day-to-day activities eg. cash, inventories Contract management. Health services organizations must negotiate, sign, and monitor contracts with managed care organizations and third-party payers. Financial risk management. control financial risk.  

Forms of Business Organization Proprietorship Partnership Corporation Hospitals are classified by ownership as private, not-for-profit, investor owned, and governmental.

Forms of Business Organization Proprietorship - business owned by one individual Advantages - Easily and inexpensively formed Income not subjected to corporate taxation subjected to few government regulations Limitations - difficult to obtain large capital unlimited liability on debts/borrowings limited life of the organisation

PARTNERSHIP Where two or more persons (partners) associate to conduct a business the partners enter into a partnership agreement Advantages Ease of formation Limitations Each partner is liable for business debts Unlimited liability Limited life Difficulty in raising large amounts of capital

PARTNERSHIP Each partner is liable for business debts this limitation has given rise to new forms of organisation: HYBRID FORMS OF ORGANISATION Limited Partnership General Partners & Limited Partners General Partner - > unlimited liability Limited Partner - > limited liability Limited Liability Partnership – all partners enjoy limited liability Limited Liability company Professional Corporation – dispensaries, private nursing homes formed by doctors

CORPORATION Where two or more persons (partners) Advantages Unlimited Life Easy transferability of ownership interest Limited liability Limitations Double taxation Setting up the corporation

Alternate Forms of Ownership Investor Owned Corporations - investor owned or profit corporations Eg. IBM, TOYOTA, DELL - owned by investors like shareholders, lenders, financial institutions…. Not-for-profit Organisation - tax exempt or not-for-profit corporations Eg. Charitable Institutions – promoted for religious, charitable, scientific, public or educational purpose Health care is considered as a charitable activity hence it is a not-for-profit form of organisation and gets tax-exemption

Not-for-Profit No shareholders, No single body of individuals to own Controlled by a Board of Trustees, managed by managers, employees, physicians, creditors, suppliers ….. Financial managers aim at . Maintaining financial viability . Generate sufficient profits for future ventures

Source of Funds & Types of Financial Instruments BASIC TYPES OF FINANCIAL INSTRUMENTS/SECURITIES Debt - corporate borrowing with pre-specified repayment schedule and maturity Equity - Preference Shares Commercial Papers Certificate of Deposits Derivatives……..

TRANSFER OF FUNDS / CAPITAL :? Investors General Public Banks Financial institutions Government another company / corporate Shares / stocks & Bonds Firms Money

FINANCIAL MARKET Investors General Public Banks Financial institutions Government another company / corporate Shares / stocks & Bonds Firms Money TYPES OF FINANCIAL MARKET: 1. MONEY MARKET - Short term Funds ( less than a year) 2. CAPITAL MARKET - Long term funds ( more than a year)

Transfer Capital from Savers to Borrowers Direct transfer (e.g., corporation issues commercial paper to insurance company) Through an investment banking house (e.g., IPO, seasoned equity offering, or debt placement) Through a financial intermediary (e.g., individual deposits money in bank, bank makes commercial loan to a company)

What are some financial intermediaries? Commercial banks Savings & Loans, mutual savings banks, and credit unions Life insurance companies Mutual funds Pension funds

The Firm and the Financial Markets B. Firm Invest This cash In its assets Financial markets Primary market Secondary market Cash flows into the Firm by issues securities (A) Invests in assets (B) Retained cash flows (F) Cash flow from firm (C) Dividends and debt payments (E) Short-term debt Long-term debt Equity shares Current assets Fixed assets It is important to remind students that net income is NOT cash flow. Taxes (D) Government

Stages of Financial Markets Functions: Primary Market Second Market

Financial Markets Primary Market Secondary Markets Issuance of a security ( shares / debt) for the first time directly by the company Also termed as IPO market (Initial Public Offering) Subsequent issues (shares / debt ) to the investors are termed Seasoned Equity Offering Secondary Markets Buying and selling of previously issued securities ( shares / bonds) Is a means of transfering ownership of securities. This slide contains hyperlinks to the NYSE and NASDAQ.

How are secondary markets organized? By “location” Physical location exchanges Computer/telephone networks By the way that orders from buyers and sellers are matched Open outcry auction Dealers (i.e., market makers) Electronic communications networks (ECNs)

Physical Location vs. Computer/telephone Networks Physical location exchanges: e.g., NYSE, AMEX, CBOT, Tokyo Stock Exchange, Saudi Stock Exchange (TADAWUL INDEX) , Dubai Stock Exchange….. Computer/telephone: e.g., Nasdaq, government bond markets, foreign exchange markets

Auction Markets NYSE and AMEX are the two largest auction markets for stocks. Participants have a seat on the exchange, meet face-to-face, and place orders for themselves or for their clients

Dealer Markets “Dealers” keep an inventory of the stock (or other financial asset) and place bid and ask “advertisements,” which are prices at which they are willing to buy and sell. Computerized quotation system keeps track of bid and ask prices, but does not automatically match buyers and sellers. Examples: Nasdaq National Market, Nasdaq SmallCap Market, London SEAQ, German Neuer Markt.

Electronic Communications Networks (ECNs) Computerized system matches orders from buyers and sellers and automatically executes transaction. Examples: Instinet (US, stocks), Eurex (Swiss-German, futures contracts), SETS (London, stocks).

Over the Counter (OTC) Markets In the old days, securities were kept in a safe behind the counter, and passed “over the counter” when they were sold. Now the OTC market is the equivalent of a computer bulletin board, which allows potential buyers and sellers to post an offer. No dealers Very poor liquidity

What do we call the price, or cost, of debt capital? The interest rate What do we call the price, or cost, of shares / equity capital? Required return = dividend yield + capital gain