Gapenski’s Healthcare Finance: An Introduction to Accounting and Financial Management, Seventh Edition
By Kristin L. Reiter, Paula H. Song
Contents:
Preface…………………………………………………………………………………………xix
Part I The Healthcare Environment
Chapter 1. Healthcare Finance Basics…………………………………………..3
Learning Objectives…………………………………………………..3
Introduction…………………………………………………………….3
Before You Begin………………………………………………………4
Defining Healthcare Finance……………………………………….8
The Concept of a Business………………………………………….9
The Role of Finance in Health Services Organizations…..10
The Structure of the Finance Department……………………13
Health Services Settings……………………………………………13
Current Managerial Challenges………………………………….14
Legal Forms of Businesses…………………………………………15
Corporate Ownership……………………………………………….17
Organizational Goals………………………………………………..21
Healthcare Reform and Finance…………………………………24
Key Trends Following the Affordable Care Act…………….25
Key Programs of the Affordable Care Act…………………….27
Key Concepts………………………………………………………….30
Questions……………………………………………………………….32
Notes…………………………………………………………………….33
Resources……………………………………………………………….34
Chapter 2. Healthcare Insurance and Reimbursement
Methodologies………………………………………………………..37
Learning Objectives…………………………………………………37
Introduction…………………………………………………………..37
Insurance Concepts………………………………………………….38
Third-Party Payers…………………………………………………..42
Healthcare Reform and Insurance………………………………47
General Reimbursement Methodologies………………………50
Provider Incentives Under Alternative Reimbursement
Methodologies……………………………………………………53
Medical Coding: The Foundation of Fee-for-Service
Reimbursement…………………………………………………..56
Specific Reimbursement Methods……………………………….58
Healthcare Reform and Reimbursement Methods…………60
Key Concepts………………………………………………………….64
Questions……………………………………………………………….66
Selected Cases…………………………………………………………66
Notes…………………………………………………………………….67
Resources……………………………………………………………….67
Part II Financial Accounting
Chapter 3. Financial Accounting Basics, the Income Statement,
and the Statement of Changes in Equity………………………71
Learning Objectives…………………………………………………71
Introduction…………………………………………………………..71
Historical Foundations of Financial Accounting……………73
The Users of Financial Accounting Information……………74
Regulation and Standards in Financial Accounting………..76
Conceptual Framework of Financial Reporting……………..79
Accounting Methods: Cash Versus Accrual…………………..84
Income Statement Basics…………………………………………..86
Revenues………………………………………………………………..89
Expenses………………………………………………………………..93
Operating Income……………………………………………………96
Nonoperating Income………………………………………………98
Net Income……………………………………………………………99
Net Income Versus Cash Flow…………………………………100
Income Statements of Investor-Owned Businesses……….102
Statement of Changes in Equity……………………………….105
A Look Ahead: Using Income Statement Data
in Financial Statement Analysis…………………………….106
Key Concepts………………………………………………………..108
Questions……………………………………………………………..110
Problems………………………………………………………………112
Notes…………………………………………………………………..115
Resources……………………………………………………………..116
Chapter 4. The Balance Sheet and Statement of Cash Flows…………117
Learning Objectives……………………………………………….117
Introduction…………………………………………………………117
Assets…………………………………………………………………..121
Liabilities……………………………………………………………..128
Net Assets (Equity)………………………………………………..132
Fund Accounting…………………………………………………..136
Statement of Cash Flows…………………………………………138
Another Look Ahead: Using Balance Sheet Data in
Financial Statement Analysis………………………………..143
Key Concepts………………………………………………………..144
Questions……………………………………………………………..146
Problems………………………………………………………………147
Resources……………………………………………………………..152
Supplement. Recording and Compiling Financial
Accounting Data…………………………………………………153
The Accounting Cycle…………………………………………….153
The Double Entry Accounting System………………………156
Transactions………………………………………………………….158
Part III Managerial Accounting
Chapter 5. Cost Behavior, Organizational Costing,
and Profit Analysis…………………………………………………167
Learning Objectives……………………………………………….167
Introduction…………………………………………………………167
The Basics of Managerial Accounting………………………..167
Cost Behavior: Fixed Versus Variable Costs………………..169
Underlying Cost Structure………………………………………171
Profit Analysis……………………………………………………….174
Breakeven Analysis…………………………………………………180
Profit Analysis in a Discounted Fee-for-Service
Environment…………………………………………………….184
Profit Analysis in a Capitated Environment………………..189
The Impact of Cost Structure on Financial Risk………….196
Key Concepts………………………………………………………..198
Questions……………………………………………………………..199
Problems………………………………………………………………200
Selected Cases……………………………………………………….204
Resources……………………………………………………………..204
Supplement. Semi-fixed Costs and Operating Leverage…..207
Semi-fixed Costs……………………………………………………207
Operating Leverage………………………………………………..209
Chapter 6. Departmental Costing and Cost Allocation………………….213
Learning Objectives……………………………………………….213
Introduction…………………………………………………………213
Direct Versus Indirect (Overhead) Costs……………………214
Introduction to Cost Allocation……………………………….215
Cost Allocation Basics…………………………………………….216
Cost Allocation Methods…………………………………………220
Direct Method Illustration………………………………………223
Cost Allocation and Departmental Profitability ………….230
Changing to a More Effective Cost Driver…………………232
Final Thoughts on Cost Allocation……………………………235
Key Concepts………………………………………………………..236
Questions……………………………………………………………..238
Problems………………………………………………………………238
Selected Cases……………………………………………………….242
Resources……………………………………………………………..242
Supplement. Step-Down Method Illustration………………..245
Chapter 7. Service Line Costing and Pricing……………………………….249
Learning Objectives……………………………………………….249
Introduction…………………………………………………………249
Service Line Costing………………………………………………250
Healthcare Providers and the Power to Set Prices………..260
Price-Setting Strategies……………………………………………262
Price-Taking Strategies……………………………………………264
Setting Fee-for-Service Prices on Individual Services……265
Setting Prices Under Capitation……………………………….267
Key Concepts………………………………………………………..272
Questions……………………………………………………………..273
Problems ……………………………………………………………..274
Selected Case………………………………………………………..279
Resources……………………………………………………………..279
Supplement. Making Service Decisions……………………….281
Chapter 8. Financial Planning and Budgeting…………………………….287
Learning Objectives……………………………………………….287
Introduction…………………………………………………………287
Strategic and Operational Planning…………………………..288
Financial Planning………………………………………………….289
Introduction to Budgeting………………………………………292
Initial Budgeting Decisions……………………………………..293
Budget Types………………………………………………………..295
Constructing a Simple Operating Budget…………………..298
Variance Analysis……………………………………………………301
Key Concepts………………………………………………………..311
Questions……………………………………………………………..313
Problems………………………………………………………………313
Selected Case………………………………………………………..319
Resources……………………………………………………………..319
Part IV Basic Financial Management Concepts
Chapter 9. Time Value Analysis……………………………………………….323
Learning Objectives……………………………………………….323
Introduction…………………………………………………………323
Time Lines……………………………………………………………324
Future Value of a Lump Sum: Compounding……………..325
Present Value of a Lump Sum: Discounting……………….330
Opportunity Costs…………………………………………………333
Annuities………………………………………………………………336
Perpetuities…………………………………………………………..341
Uneven Cash Flow Streams……………………………………..343
Using Time Value Analysis to Measure Return on
Investment……………………………………………………….345
Semiannual and Other Compounding Periods…………….349
Key Concepts………………………………………………………..354
Questions……………………………………………………………..354
Problems………………………………………………………………355
Selected Case………………………………………………………..359
Notes…………………………………………………………………..359
Resources……………………………………………………………..359
Supplement. Interest Rate and Time Calculations and
Amortization……………………………………………………..361
Solving for Interest Rate and Time……………………………361
Amortized Loans…………………………………………………..363
Chapter 10. Financial Risk and Required Return…………………………..367
Learning Objectives……………………………………………….367
Introduction…………………………………………………………367
The Many Faces of Financial Risk……………………………..368
Returns on Investments………………………………………….369
Risk Aversion………………………………………………………..372
Probability Distributions…………………………………………372
Expected and Realized Rates of Return……………………..374
Stand-Alone Risk…………………………………………………..376
Portfolio Risk and Return……………………………………….378
The Relevant Risk of a Stock……………………………………388
Estimating Beta……………………………………………………..390
The Relationship Between Risk and Return
and the Capital Asset Pricing Model……………………..392
Required Return and Changes in Expected Inflation
or Risk Aversion………………………………………………..396
Comparison of Required Return to Expected Return…..397
Some Final Thoughts About Beta and the Capital
Asset Pricing Model……………………………………………398
Key Concepts………………………………………………………..399
Questions……………………………………………………………..401
Problems………………………………………………………………402
Selected Case………………………………………………………..405
Notes…………………………………………………………………..405
Resources……………………………………………………………..405
Part V Long-Term Financing
Chapter 11. Long-Term Debt Financing……………………………………….409
Learning Objectives……………………………………………….409
Introduction…………………………………………………………409
The Cost of Money………………………………………………..410
Common Long-Term Debt Instruments……………………411
Debt Contracts……………………………………………………..418
Credit Ratings……………………………………………………….420
Interest Rate Components………………………………………422
Debt Valuation………………………………………………………426
Key Concepts………………………………………………………..439
Questions……………………………………………………………..441
Problems………………………………………………………………442
Selected Cases……………………………………………………….444
Notes…………………………………………………………………..444
Resources……………………………………………………………..445
Supplement. Credit Enhancement, Term Structure
of Interest Rates, and Economic Factors that
Influence Interest Rate Levels……………………………….447
Credit Enhancement………………………………………………447
The Term Structure of Interest Rates………………………..448
Economic Factors That Influence Interest Rate Levels…..451
Chapter 12. Equity Financing and Securities Markets……………………453
Learning Objectives……………………………………………….453
Introduction…………………………………………………………453
Equity in For-Profit Businesses…………………………………454
Types of Common Stock…………………………………………458
Procedures for Selling New Common Stock……………….458
Equity in Not-for-Profit Corporations……………………….461
Common Stock Valuation……………………………………….463
Security Market Equilibrium……………………………………472
Informational Efficiency………………………………………….473
The Risk/Return Trade-Off…………………………………….477
Key Concepts………………………………………………………..479
Questions……………………………………………………………..480
Problems………………………………………………………………481
Selected Case………………………………………………………..483
Notes…………………………………………………………………..483
Resources……………………………………………………………..484
Supplement. The Market for Common Stock,
Securities Markets Regulation, and the Investment
Banking Process…………………………………………………485
The Market for Common Stock……………………………….485
Securities Market Regulation……………………………………487
The Investment Banking Process………………………………489
Chapter 13. Capital Structure and the Cost of Capital……………………493
Learning Objectives……………………………………………….493
Introduction…………………………………………………………493
Capital Structure Basics…………………………………………..494
Impact of Debt Financing on Accounting Risk
and Return……………………………………………………….494
Capital Structure Theory…………………………………………498
Identifying the Optimal Capital Structure in Practice…..501
Not-for-Profit Businesses…………………………………………504
Using the Target Capital Structure……………………………505
Cost-of-Capital Basics…………………………………………….506
Cost of Debt Capital………………………………………………508
Cost of Equity Capital…………………………………………….510
Corporate Cost of Capital……………………………………….521
Cost-of-Capital Estimation for Small Businesses………….523
An Economic Interpretation of the Corporate
Cost of Capital………………………………………………….526
Key Concepts………………………………………………………..529
Questions……………………………………………………………..531
Problems………………………………………………………………532
Selected Cases……………………………………………………….535
Notes…………………………………………………………………..535
Resources……………………………………………………………..535
Part VI Capital Investment Decisions
Chapter 14. The Basics of Capital Budgeting……………………………….539
Learning Objectives……………………………………………….539
Introduction…………………………………………………………539
Project Classifications……………………………………………..540
The Role of Financial Analysis in Healthcare Capital
Budgeting………………………………………………………..541
Overview of Capital Budgeting Financial Analysis……….542
Cash Flow Estimation…………………………………………….543
Cash Flow Estimation Example………………………………..550
Breakeven Analysis…………………………………………………558
Return on Investment (Profitability) Analysis……………..560
Some Final Thoughts on Breakeven and Profitability
Analyses……………………………………………………………566
Capital Budgeting in Not-for-Profit Businesses……………567
The Post-audit………………………………………………………571
Using Capital Budgeting Techniques in
Other Contexts…………………………………………………572
Key Concepts………………………………………………………..573
Questions……………………………………………………………..575
Problems………………………………………………………………576
Selected Case………………………………………………………..582
Notes…………………………………………………………………..582
Resources……………………………………………………………..583
Chapter 15. Project Risk Analysis………………………………………………585
Learning Objectives……………………………………………….585
Introduction…………………………………………………………585
Types of Project Risk……………………………………………..586
Relationships Among Stand-Alone, Corporate,
and Market Risk………………………………………………..588
Risk Analysis Illustration…………………………………………589
Sensitivity Analysis………………………………………………….591
Scenario Analysis……………………………………………………594
Monte Carlo Simulation………………………………………….597
Qualitative Risk Assessment……………………………………..601
Incorporating Risk into the Decision Process……………..602
Making the Final Decision………………………………………605
Adjusting Cash Outflows for Risk…………………………….607
Divisional Costs of Capital………………………………………609
An Overview of the Capital Budgeting
Decision Process………………………………………………..611
Capital Rationing…………………………………………………..613
Key Concepts………………………………………………………..614
Questions……………………………………………………………..616
Problems………………………………………………………………617
Selected Cases……………………………………………………….621
Notes…………………………………………………………………..621
Resources……………………………………………………………..622
Part VII Other Topics
Chapter 16. Revenue Cycle and Current Accounts Management……….625
Learning Objectives……………………………………………….625
Introduction…………………………………………………………625
An Overview of Current Accounts Management…………626
Cash Management…………………………………………………628
The Cash Budget…………………………………………………..632
Marketable Securities Management…………………………..637
Revenue Cycle Management……………………………………638
Supply Chain Management……………………………………..648
Current Liability Management…………………………………651
Key Concepts………………………………………………………..659
Questions……………………………………………………………..661
Problems………………………………………………………………662
Selected Cases……………………………………………………….665
Notes…………………………………………………………………..665
Resources……………………………………………………………..666
Chapter 17. Financial Condition Analysis…………………………………….669
Learning Objectives……………………………………………….669
Introduction…………………………………………………………669
Financial Statement Analysis…………………………………….670
Financial Ratio Analysis…………………………………………..673
Tying the Financial Ratios Together:
Du Pont Analysis……………………………………………….687
Other Analytical Techniques…………………………………….690
Operating Indicator Analysis……………………………………690
Limitations of Financial Ratio and Operating
Indicator Analyses………………………………………………695
Benchmarking……………………………………………………….696
Key Performance Indicators and Dashboards………………698
Key Concepts………………………………………………………..699
Questions……………………………………………………………..700
Problems………………………………………………………………701
Selected Cases……………………………………………………….708
Note……………………………………………………………………708
Resources……………………………………………………………..708
Supplement. Market Value Ratios, Common Size
Analysis, Percentage Change Analysis,
and Economic Value Added…………………………………..711
Market Value Ratios……………………………………………….711
Common Size Analysis……………………………………………712
Percentage Change Analysis…………………………………….714
Economic Value Added…………………………………………..716
Glossary……………………………………………………………………………………..719
Index…………………………………………………………………………………………737
About the Authors………………………………………………………………………..785