Introduction to Financial Management in Healthcare

Hello and welcome to today's lecture about financial management in healthcare. Of course we are going to be trying to focus on the most important concepts that are related to the subject of financial management, specifically within healthcare organizations. So financial management actually provides the theory, concepts, frameworks, and tools that are needed to assist managers and leaders make better financial decisions. Healthcare and health services industry in general is really unique as we are generally in a context of a complex industry, not-for-profit organizations, third-party payer systems, third-party payer systems, operations with high urgency and usually high governmental involvement. Healthcare managers and more specifically financial managers have the primary responsibility of producing, reviewing, evaluating, and reporting monetary statements for the organization or for a subdivision of the organization. They rely on different techniques and tools to conduct data analysis so that they can advise the senior management and the executives on effective strategies to improve revenue and optimize investments and spending. Healthcare budgets are growing and finance management is vital to ensure each dollar is actually used responsibly. So this is why it's important to learn about the role of finance and finance management in healthcare and how to make the most of your budget. The primary responsibility of the finance department is to strategically plan for, acquire, and effectively utilize resources in order to maximize the efficiency and create maximum value for the organization. The finance team is instrumental in ensuring that company resources are allocated effectively to achieve long-term goals and optimize organizational value. There are different activities that fit under the umbrella of finance activities within healthcare organizations and of course elsewhere. Activities and functions like long-term investment decisions, evaluation and planning, financing and budgeting decisions, working capital management, contracts management, and financial risk management. Human resources management or HR management is generally a separate function in most of the organizations worldwide and it's not considered as a financial management activity. When it comes to organizational goals, there are many differences between investor-owned corporations and not-for-profit organizations. Indeed, in proprietorships and partnerships, owners and managers are the same individuals and hence have the same goals. The fundamental goal of investor-owned corporations is shareholder wealth maximization. Shareholder's wealth maximization is considered to be the most appropriate and sustainable objective for a business concern. In this context, a business concern should only take into account the decisions that maximize the market value of the share or the shareholder's wealth. So the market value of share is treated as an indicator of efficiency and effectiveness for the organization. On the other hand, the primary goal of not-for-profit corporations is generally given by a mission statement and often in terms of service to the community. Within organizations, an agency relationship happens whenever a principal hires an agent to act on their behalf. Managers are naturally prone to act in their own best interests, therefore an agency problem arises. The so-called agency problem is considered to be a prominent obstacle to shareholder wealth and stock price maximization. Factors like managerial incentives and bonuses, the impending threat of firing, and other threats such as a threat of takeover tend to mitigate and lessen and alleviate the problem in for-profit corporations in general. If we consider the legal forms of businesses, there are four major categories of business organizations, proprietorship, partnership, corporation, and hybrid forms. Another important and rising concept is value-based purchasing, VBP. Healthcare costs are actually skyrocketing and of course we need to keep those costs at bay, we need actually to be sure that these costs are going to be affordable for everyone who needs them and of course currently we are not seeing any sort of change inside, so this is a global truth that we should not forget about. In most cases, the current system is unsustainable, leaving healthcare providers and patients alike feeling frustrated and helpless. No one should be left guessing whether their healthcare provider is delivering high-quality cost-effective care or not. Value-based purchasing actually offers a solution to this crisis. Indeed, value-based purchasing links provider payments to improved performance by healthcare providers, ensuring that they are held accountable for both the cost and quality of care they are actually providing. This form of payment rewards high-performing providers while encouraging appropriate quality of services. Value-based purchasing relies on the selection of several performance measures like patient satisfaction and dissatisfaction measures. One of the major changes in healthcare resulting from health reform has been the introduction of health insurance and health insurance exchanges. The provision of healthcare services takes place in a very special and unique way. First of all, payment to providers is not normally made by users of the services but by a third party payer which are the insurance companies and the insurers. Healthcare providers must also be aware of the regulations about how they interact with patients who are covered by health insurance plans. For insurance to work, it must have a few basic characteristics like pooling and merging of losses from one individual to a group of individuals, payment only for random losses, risk transfer and indemnification and reimbursement. However, there are two problems or challenges that often arise and appear in the context of insurance policies and programs. We have adverse selection and moral hazard. Adverse selection means those with greater risk are more likely to purchase insurance. These are going to be for example older people and people with chronic diseases. The problem actually exists because of asymmetric information. Information asymmetry means that decisions in transactions are taken while one party has more or better information than the other party. For instance, insurance applicants and patients have better knowledge of their own health status than insurance companies do. In the past, insurers used underwriting provisions to minimize and diminish adverse selection. Underwriting is the process by which insurance firms assess the risks of the insured and actually try to decide whether or not the risk posed by an organization or a person is acceptable to them or not. So the cost of insurance coverage will be established if the risk is acceptable. Since insurance entails a person transferring his risk to the insurer in exchange for a premium, underwriting is a fundamental component of all types of insurance. Previously, insurance included pre-existing condition clauses, but these are now largely banned almost everywhere. Moral hazard, on the other hand, is extensively used to illustrate the concept that insurance coverage, by lowering the marginal cost of the care to the individual, might actually increase healthcare use, leading to the overuse of health services or the overlooking of prevention, because the insured does not have to pay for the full cost of the consequences. So the insurance company or the insurer will cover at least a percentage, if not the totality of these costs, which is making patients behave differently. One of the most significant characteristics of an organization is its financial condition. Several techniques are used to determine the financial condition of organizations. We can cite economic value-added analysis focusing on evaluating and assessing managerial performance, financial statement analysis, which is concentrating on the information in an financial statement with the goal of evaluating and valuing the organizational financial condition, and also operating indicator analysis, which focuses on operating data with the goal of explaining financial performance. The operating indicator analysis actually investigates internal data to clarify the factors that contribute to the financial status of the company. These indicators are employed by the leadership of the organization to identify and guide financial strategies for the future in order to improve the financial condition and status of the organization as a whole. Another important technique to introduce is the ratio analysis, which is a method used in both financial statement and operating indicator analysis. It actually combines values from the financial statements to generate single figures that possess easily interpretable economic significance and that can facilitate and simplify comparisons. Therefore, two techniques are used to help interpret the numbers. We have trend analysis, which is also called time series analysis, and comparative analysis, also called cross-sectional analysis. The comparative analysis is particularly useful as it actually examines ratios of the organization and compares it against average ratios from the industry. In the context of investment, there are a few points to consider too. Healthcare organizations can rely on financial management strategies built by financial experts to manage their financial operations that can continue to deliver high-quality patient care, that they can invest in critical improvements, and be able to develop new revenue streams. There are certain factors that can influence the rate at which investments and money in general compounds in an account. The first is interest rate earned on the investment, and a higher interest rate will, of course, contribute to a stronger rate of compounding. The second is the length of time that money can be left to compound. You have to keep in mind that the primary investment is increased when interest is paid on an investment within the initial period of time. Interest is paid on both the original principle and the interest accrued during the second term during the second period. The amount of interest that is periodically added to the principle will vary depending on changes in the interest rate, while variations in the number of periods of time will affect how frequently this procedure takes place. Moreover, time-value analysis is essential because money has time-value. This is an ongoing happening, and we all know that a dollar in hand today is worth more than a dollar to be received in the future. Within the balance sheet items, and unlike accounts payable, accrued expenses, notes payable, and long-term debt, short-term investments are not e-liability. They are disclosed on the assets side of the balance sheet. These are typically held with the intent to gain quick returns, and assessing financial risk is always going to be important for short-term or long-term investments. Indeed, financial risk is present whenever there is some chances of earning a return on an investment that is less than the anticipated amount. If you consider the attitudes and mindsets towards investment risks, investors can be risk-neutral, so they are in different risk, they can be risk-averse, very hesitant to take any risk, and risk-seeking, meaning that they are taking higher risks. Practically and virtually, almost all investors are risk-averse. Stand-alone risk is the risk of an individual investment when it's held in isolation. Diversifiable risk is that part of the stand-alone risk that can be eliminated or at least alleviated by diversification. Market risk, on the other hand, is that part of the stand-alone risk that cannot be eliminated simply by implementing diversification. Stand-alone risk actually equals diversifiable risk plus market risk. Creating, constantly improving, efficient and effective financial management systems is always a crucial, important goal in healthcare. It's paramount, actually. To accomplish this purpose, specific actions must be carried out in order to build and enhance superior financial management systems. These actions and tasks can be organizational, informational, managerial, financial, legal, production, political, social, etc. And information technology must be actually implemented and used to enhance managerial decision-making in finance in order to be competitive and successful on the market to boost profitability and efficiency in order to be able to respond promptly to outside variables and to adapt and evolve in accordance with modern standards. This is true for healthcare and other industries, of course. Artificial intelligence and its panoply of tools is bringing a lot of interesting solutions to most of the challenges faced in this context. This is it for today. I want to thank you for your time and I hope that this lecture is helping you understand some important concepts about financial management in healthcare. Thank you.