Healthcare Finance Discussion Task

Healthcare Finance Discussion Task

Healthcare Finance Discussion Task

Introduction to Healthcare Finance 1

C H A P T E R

THE HISTORY

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

After completing this chapter, you should be able to:

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.

P r o g r e s s N o t e s

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, rev- enues represent inflow and expenses represent outflow. Thus, “getting money in” repre- sents 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.

VIEWPOINTS

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.

1. The financial view. These managers generally work with finance on a daily basis. The reporting function is part of their responsibility. They usually perform much of the strategic planning for the organization.

2. The process view. These managers generally work with the system of the organization. They may be responsible for data accumulation. They are often affiliated with the in- formation system hierarchy in the organization.

3. The clinical view. These managers generally are responsible for service delivery. They have direct interaction with the patients and are responsible for clinical outcomes of the organization. Healthcare Finance Discussion Task.

4 CHAPTER 1 Introduction to Healthcare Finance

The Elements of Financial Management 5

Managers must, of necessity, interact with one another. Thus, managers holding different views will be required to work together. Their concerns will intersect to some degree, as illustrated by Figure 1-1. The nonfinancial manager who understands healthcare finance will be able to interpret and negotiate successfully such interactions between and among viewpoints.

In summary, financial management is a discipline with a long and respected history. Healthcare service delivery is a business, and the concept of financial management assists in balancing the inflows and outflows that are a part of the business.

WHY MANAGE?

Business does not run itself. It requires a variety of management activities in order to operate properly.

THE ELEMENTS OF FINANCIAL MANAGEMENT

There are four recognized elements of financial management: (1) planning, (2) control- ling, (3) organizing and directing, and (4) decision making. The four divisions are based on the purpose of each task. Some authorities stress only three elements (planning, con- trolling, and decision making) and consider organizing and directing as a part of the con- trolling element. This text recognizes organizing and directing as a separate element of financial management, primarily because such a large proportion of a manager’s time is taken up with performing these duties.

1. Planning. The financial manager identifies the steps that must be taken to accomplish the organization’s objectives. Thus, the purpose is to identify objectives and then to identify the steps required for accomplishing these objectives.

2. Controlling. The financial manager makes sure that each area of the organization is following the plans that have been established. One way to do this is to study current reports and compare them with reports from earlier periods. This comparison often shows where the organization may need attention because that area is not effective. The reports that the manager uses for this purpose are often called feedback. The purpose of controlling is to ensure that plans are being followed.

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3. Organizing and directing. When organizing, the financial manager decides how to use the resources of the organization to most effectively carry out the plans that have been established. When directing, the manager works on a day-to-day basis to keep the results of the organizing running efficiently. The purpose is to ensure effective re- source use and provide daily supervision. Healthcare Finance Discussion Task.

Financial

Clinical

Process