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 regulationso 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

PARTNERSHIPEach 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 :?

Firms

Investors• General Public

•Banks•Financial institutions

•Government• another company /

corporate

Shares / stocks & BondsMoney

TYPES OF FINANCIAL MARKET:1. MONEY MARKET - Short term Funds ( less than a year)

2. CAPITAL MARKET - Long term funds ( more than a year)

Firms

Investors• General Public

•Banks•Financial institutions

•Government• another company /

corporate

Shares / stocks & BondsMoney

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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)

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What are some financial intermediaries?

Commercial banks Savings & Loans, mutual savings banks,

and credit unions Life insurance companies Mutual funds Pension funds

Cash flowfrom firm (C)

The Firm and the Financial Markets

Tax

es (

D)

Government

Retained cash flows (F)

Investsin assets

(B)

Dividends anddebt payments (E)

Current assetsFixed assets

Short-term debt

Long-term debt

Equity shares

B. Firm Invest

This cashIn its assets

Cash flows into the Firm byissues securities (A) Financial

marketsPrimary

market Secondary

market

Stages of Financial Markets Functions:

Primary Market Second Market

Financial Markets Primary Market

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.

21

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)

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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

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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

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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.

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Electronic Communications Networks (ECNs)

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).

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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

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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