1. Health Care Finance

2. 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.

3. 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.

4. 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.

5. 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.

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

7. 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

8. 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

9. 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

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

11. 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

12. 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

13. 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……..

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

15. 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)

16. 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)

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

18. 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

19. Stages of Financial Markets Functions:
Primary Market
Second Market

20. 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.

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)

22. 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

23. 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

24. 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.

25. 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).

26. 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

27. 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