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Lecture notes Financial Management in Healthcare Organizations
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Financial Management in Health Care OrganizationsLecture 1: The context of health care financial management
Non-profit or not for profit organizations are not financially economic independent,
they depend on collective financing.
In the context of health care financial management, there is a triad containing cost,
access, and quality.
Financial management: an instrument to deliver high quality at the lowest cost,
decision science, decisions based on proper financial information.
Financial management is important to healthcare managers because they are
responsible for the finances in his business unit and the manager must be able to
discuss finances with the controller, accountant, and head of economic and
administrative service.
There are 4 steps in managing an organization:
1. Mission, vision, strategy: mission -> create ground-breaking sports innovations,
make our products sustainable, build a creative and diverse global team, and
make a positive impact in communities where we live and work. Vision -> bring
inspiration and innovation to every athlete in the world.
2. Planning: Decisions -> investment decisions, operational decisions, financial
decisions.
3. Control: soft controls -> cultural factors influencing behaviour in the
organization, hard controls -> responsibility centres, budgeting departments,
transfer prices.
4. Accounting
Between mission/vision/strategy and planning there are risks, while between
planning and control there is behaviour.
Lecture 2: Budgeting and responsibility accounting
Budgeting is an interactive process in which activities and hereby related means are
expressed in quantitative, mostly financial terms for specific period. Duration of
budgeting in healthcare 6-9 months on average.
SWOT-analysis -> strengths, weaknesses, opportunities, threats. For strategic
planning purposes: assessment of internal (strengths + weaknesses) and external
(opportunities + threats) environments.
Internal environment: company culture, operational capacity & efficiency, financial
resources, and organisation structure.
External environment: society, customers & suppliers, competitors, regulations, and
market trends.
Goals of budgeting: planning -> enforcing decision-making, control -> comparing
actuals to budget and enactment. Authorization to spending money, coordination &
communication, and motivation.
Key budgeting dimensions:
1. Level of participation (authoritarian vs participatory): authoritarian -> top-down,
few people involved, participatory -> bottom-up, many people involved.
2. Budget model (incremental/decremental vs zero-based): in-/decremental ->
plus/minus/equal as compared to former periods or alternatives, relative
relevance, indirect link to strategy and tactical decision making, ‘regular’ labour
, intense, top-down, or bottom-up. Zero-based -> budgeting per line item starting
from scratch each time, absolute relevance, strong direct link to strategy and
tactical decision making, very labour-intensive process, bottom-up.
3. Budget detail (line item–program–performance)
4. Budget forecast (annual vs multiyear, static vs flexible): time span of budget,
adjustability of the budget to actual volumes of output, rolling budgets ->
frequency of updating and extending.
5. Budget modifications (controlled vs latitude): determinants -> amount of room
to manoeuvre (monetary levels, segregation of duties), tightness of rules and
procedures, level of board involvement.
Participatory budgeting pros -> shared understanding, cooperation & competition,
clarified roles and responsibilities, motivation, and cost awareness.
Participatory budgeting cons -> loss of control, time-consuming, high resource use,
and potential disappointment.
Budget types:
1. Statistics budget: first budget to be prepared: the amount of service that will be
provided. Categorized per payor type (charge, cost, flat fee, capitated) per
period. Number of weighted visits: weight of the visit based on resources used.
RVU: Relative Value Units.
2. Operating budget: compounded from revenue budget and expense budget,
bottom line -> net income.
3. Cash budget: expected cashflow (in/out), bottom line -> amount of cash
available.
4. Capital budget: expected upcoming purchases, above predetermined amount of
money.
Decentralization: the degree of dispersion of responsibility within an organization ->
responsibility centres.
Starting point: a responsibility centre can only be held accountable for those things
over which it has control.
Responsibility centre: organizational entity given a formal responsibility of a certain
task or outcome. Types:
1. Service centres: no budgetary control (nursing, patient transport)
2. Cost centres: conducting activities given the amount of money allocated.
Responsible for cost control. Subdivision: clinical cost centres -> laboratory,
pharmacy, nursing, administrative cost centres -> IT-department, QC, security.
3. Profit centres: responsible for controlling costs and revenues, subdivision based
on payor characteristics: traditional profit centres -> fee for service, flat fee
(DTC), capitated profit centres -> lumpsum per patient (capitation),
administrative profit centres -> internally: IT-department or facility
management, externally oriented: marketing, parking, gifts/food.
4. Investment centres: responsible for predetermined return on investment (ROI)
Variances: performance measure based on difference budgeted vs actual results,
favourable/unfavourable.
Lecture 3: Cost accounting
Cost accounting is the art and science of recording, classifying, summarizing, and
analysing costs to help management make prudent special business decisions.
, Purposes of cost accounting: cost measurement -> measure the amount of costs,
cost control -> figure out how to control the cost, cost reduction -> figure out how to
reduce the costs.
Costs are generally measured in monetary terms; cost is the amount of expenditure
(actual or notional) incurred on or attributable to, a specified thing or activity. Cost
elements -> materials, labour, other expenses.
Direct labour -> people that are treating the patients, indirect labour -> staff
function, cleaning, etc.
Different costs for different purposes:
1. Making special decisions: made on an as needed basis as opposed to a standard
schedule, nonfinancial criteria may outweigh financial criteria, tools help make
these decisions -> break even analysis, role of fixed and variable costs, break
even chart, contribution margin,
2. Predicting cost behaviour in response to changes in activity:
3. Assigning costs to cost objects:
4. Preparing external financial statements:
Fixed cost: cost that does not change with an increase or decrease in the amount of
goods or services produced or sold. Fixed costs are expenses that must be paid by a
company, independent of any specific business activities. When the volume
increases, the fixed costs will decrease per unit.
Relevant range: the range of activity over which fixed costs or per unit variable costs
do not vary.
Variable cost: cost is a corporate expense that changes in proportion to production
output. Variable costs increase or decrease
Semi variable cost: gas, water prices, or the change in a nurse’s salary.
High low method and regression method -> techniques for estimating costs.
High low method: variable cost per unit (ß) = Y2-Y1/X2-X1, with Y2 -> cost at highest
activity level, Y1 -> cost at lowest activity level, X2 -> units at highest activity level, X1 -
> units at lowest activity level. Fixed costs: Y2 – (ß*X2)
Break-even analysis: a technique to analyse the relationship among revenues, costs,
and volume. Also called Cost-volume-profit (CVP) analysis -> studies relationship,
approach can determine price, charges, and reimbursement. Can be used to find
price, quantity, fixed cost, or variable cost per unit
Total revenues = total costs
Price * volume = total costs
Price * volume = fixed costs + variable costs
Price * volume = fixed costs + (variable cost per unit * volume) + profit (optional)
Direct cost -> cost that can be traced to full saleable products or services that are
being costed.
Indirect cost -> costs that are related to a particular cost object but cannot be traced
to it in an economically feasible (cost-effective) way. Indirect costs are allocated to
the cost object using a cost-allocation method.
Product margin used in special decision making, such as make or buy, adding or
dropping a service, expanding or reducing a service. Product-margin = total
contribution margin – avoidable fixed costs.
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