Introduction to Financial Management b What is financial management? b Applications of financial management Organizational effectiveness evaluationsOrganizational effectiveness evaluations Capital budgeting applicationsCapital budgeting applications Cost of capital/financing applicationsCost of capital/financing applications Working capital management appsWorking capital management apps Management of financial riskManagement of financial risk

Introduction to Financial Management b Managerial responsibilities b Healthcare financial management challenges (NFP’s and Third Party Payment) b Sub-disciplines of financial management AccountingAccounting Corporate financeCorporate finance

Introduction to Financial Management b Historical evolution of financial management within HSO’s Cost accounting eraCost accounting era Contemporary financial management eraContemporary financial management era The role of TEFRA/PPSThe role of TEFRA/PPS –Prospective payment methodologies –Shifting financial risk to providers –Lack of ability to shift risk by providers –Increased need for financial management focus

Introduction to Financial Management b The Environment of Financial Management Organizational formsOrganizational forms –Proprietorships (advantages, disadvantages) –Partnerships (advantages, disadvantages) –Corporations (advantages, disadvantages) –Hybrids (LLP, LLC, PC) Ownership formsOwnership forms –For-profits (investor owned) –Not-for-profits (community owned)

Introduction to Financial Management b For-profit organizations Who are they?Who are they? Vesting of ownership rights (stock)Vesting of ownership rights (stock) Public vs. private ownershipPublic vs. private ownership Ownership “rights”Ownership “rights” –Right to control operations –Right to residual earnings –Right to proceeds from liquidation (after creditors)

Introduction to Financial Management b Not-for-profit organizations Who are they?Who are they? Economic rationale for existenceEconomic rationale for existence Vesting of ownership rightsVesting of ownership rights CharacteristicsCharacteristics –Tax exempt –Eligible for tax exempt financing (munis) –Qualify for tax-exempt charitable contributions

Introduction to Financial Management b FP vs. NFP organizations Ownership does matterOwnership does matter –FP - shareholder wealth maximization –NFP - accomplish charitable mission(s) Financial management approaches do not differ appreciably between the two in realityFinancial management approaches do not differ appreciably between the two in reality

Introduction to Financial Management b Taxation Issues The imperative of death AND taxesThe imperative of death AND taxes Impact of taxationImpact of taxation –Organizational performance/value –Financial management objectives Levels of taxationLevels of taxation –Proprietorships/partnerships -- ordinary income and capital gains –Corporations - ordinary income and capital gains

Introduction to Financial Management b Corporate taxation (cont’d) Operating incomeOperating income Interest income from investmentsInterest income from investments Dividend income from investmentsDividend income from investments Capital gains income from investmentsCapital gains income from investments Not-for-profit taxation issuesNot-for-profit taxation issues –Tax exempt organizations - 501(c)(3)/501(c)(4) –Unrelated business income (UBI)

Introduction to Financial Management b Not-for-profit taxation issues NFP investment sources of incomeNFP investment sources of income –Use of “temporary cash surpluses” –Private inurement risks with excessive surplus funds and/or longer term investments b Miscellaneous taxation issues The use of financial leverage (debt)The use of financial leverage (debt) “Double taxation” of corporate dividends“Double taxation” of corporate dividends

Introduction to Financial Management b Miscellaneous taxation issues Carry-back/carry-forward provisionsCarry-back/carry-forward provisions –Tax benefits with each provision b Reimbursement Issues Impact of reimbursement on organizational financial performanceImpact of reimbursement on organizational financial performance The U.S. system of 3rd party payersThe U.S. system of 3rd party payers Market power among 3rd party payersMarket power among 3rd party payers

Introduction to Financial Management b Reimbursement Issues Generic methods of 3rd party reimbursementGeneric methods of 3rd party reimbursement –Fee for service -- cost-based, charge-based, prospective forms (DRG’s, APC’s) –Capitation –Non-payment Financial management implications with different forms of 3rd party reimbursementFinancial management implications with different forms of 3rd party reimbursement

Introduction to Financial Management b Financial Management Implications of 3rd party reimbursement Accounting for reimbursement revenuesAccounting for reimbursement revenues Elements of financial riskElements of financial risk Provision of provider incentivesProvision of provider incentives –Fee for service –Capitation