Healthcare Finance Overview
Introduction to Healthcare Finance
After completing this chapter, you should be able to
Financial management has a long and distinguished history. Consider, for example, that Socrates wrote about the universal function of management in human endeavors in 400 B.C. and that Plato developed the concept of specialization for efficiency in 350 B.C. Evidence of sophisticated financial management exists for much earlier times: the Chinese produced a planning and control system in 1100 B.C., a minimum-wage system was developed by Hammurabi in 1800 B.C., and the Egyptians and Sumerians developed planning and record-keeping systems in 4000 B.C.1 Many managers in early history discovered and rediscovered managerial principles while attempting to reach their goals. Because the idea of management thought as a discipline had not yet evolved, they formulated principles of management because certain goals had to be accomplished. As management thought became codified over time, however, the building of techniques for management became more organized. Management as a discipline for educational purposes began in the United States in 1881. In that year, Joseph Wharton created the Wharton School, offering college courses in business management at the University of Pennsylvania. It was the only such school until 1898, when the Universities of Chicago and California established their business schools. Thirteen years later, in 1911, 30 such schools were in operation in the United States.2 Over the long span of history, managers have all sought how to make organizations work more effectively. Financial management is a vital part of organizational
1. Discuss the three viewpoints of
managers in organizations. 2. Identify the four elements of financial management. 3. Understand the differences between the two types of accounting. 4. Identify the types of organizations. 5. Understand the composition and purpose of an organization chart.
CHAPTER 1 Introduction to Healthcare Finance
effectiveness. This book’s goal is to provide the keys to unlock the secrets of financial management for nonfinancial managers.
THE CONCEPT A Method of Getting Money in and out of the Business One of our colleagues, a nurse, talks about the area of healthcare finance as “a method of getting money in and out of the business.” It is not a bad description. As we shall see, revenues represent inflow and expenses represent outflow. Thus, “getting money in” represents the inflow (revenues), whereas “getting money out” (expenses) represents the outflow. The successful manager, through planning, organizing, controlling, and decision making, is able to adjust the inflow and outflow to achieve the most beneficial outcome for the organization.
HOW DOES FINANCE WORK IN THE HEALTHCARE BUSINESS?
The purpose of this book is to show how the various elements of finance fit together: in other words, how finance works in the healthcare business. The real key to understanding finance is understanding the various pieces and their relationship to each other. If you, the manager, truly see how the elements work, then they are yours. They become your tools to achieve management success. The healthcare industry is a service industry. It is not in the business of manufacturing, say, widgets. Instead, its essential business is the delivery of healthcare services. It may have inventories of medical supplies and drugs, but those inventories are necessary to service delivery, not to manufacturing functions. Because the business of health care is service, the explanations and illustrations within this book focus on the practice of financial management in the service industries.
The managers within a healthcare organization will generally have one of three views: (1) financial, (2) process, or (3) clinical. The way they manage will be influenced by which view they hold....