Problem Set #2
Chapter 8: General Principles of Accounting
Short Answer (provide a short answer to each posed question below)
1. List and describe the three categories of net assets.
2. What is an accounting entity?
3. What are the double-entry accounting system and the duality concept? How are they related?
4. What is an audit (in the context of financial accounting)?
Multiple Choice
5. Which of the following is not a “principle” of financial accounting?
A.
B.
C.
D.
E.
Historical cost
Revenue recognition
Continuity
Matching
Full disclosure
6. Accounts receivable (net) increased by $500,000 during the year. This increase has what effect
on cash flow?
A. Reduces it
B. Increases it
C. No effect
2
Problem Set #2 (continued)
CHAPTER 9: FINANCIAL STATEMENTS
Short Answer
1. What are the four basic financial statements?
2. What are some ways in which accounting for health care organizations, especially not-for-profit
ones, tends to differ from accounting in other industries?
True/False
3. Expense and expenditure may not be equivalent in any given period.
4. The Statement of Operations is similar to, but not identical to, the Income Statement.
Multiple Choice
5. A statement that reports inflows and outflows of cash during the accounting period in the
categories of operations, investing, and financing, is called a(an):
A.
B.
C.
D.
E.
Income statement
Statement of retained earnings
Balance sheet
Statement of cash flows
Report of management
6. The heading of every financial statement should contain the:
A.
B.
C.
D.
E.
name, title, and place of business
name, title, and specific date of statement
title, name, type of ownership, and unit of measurement
title of statement, name of entity, and unit of measurement
name, title, specific date of statement, and unit of measurement
3
Problem Set #2 (continued)
7. If an organization’s Board of Directors were to set aside assets to be used for replacement of
plant and equipment, where would this be reflected on the balance sheet?
A.
B.
C.
D.
E.
Assets Limited as to Use
Temporarily Restricted Net Assets
Permanently Restricted Net Assets
Liability
none of the above
8. Deferred revenues are:
A.
B.
C.
D.
E.
reported on the balance sheet as a liability
reported on the balance sheet as an asset
reported on the statement of operations as revenue
reported on the statement of operations as a deduction from revenue
not reported
Numeric Problems
9. Given below is a list of account balances for Currie Hospital as of December 31, 2017. Prepare
a balance sheet as of December 31, 2017, in proper form. (Hint: You will need to compute the
net assets account. Assume that all net assets at the beginning of the year are unrestricted.)
Account
Gross plant & equipment
Balance
$6,000,000
Accounts payable
130,000
Inventories
100,000
Other current liabilities
70,000
Net accounts receivable
650,000
Accrued expenses
100,000
Accumulated depreciation
200,000
Long-term debt
Cash
5,000,000
210,000
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ESSENTIALS OF
HEALTH CARE
FINANCE
EIGHTH EDITION
William O. Cleverley, PhD
Chairman and Founder
Cleverley & Associates
Worthington, Ohio
James O. Cleverley, MHA
President
Cleverley & Associates
Worthington, Ohio
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Description: Eighth edition. | Burlington, Massachusetts : Jones & Bartlett
Learning, [2018] | Includes bibliographical references and index.
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Contents
Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi
Content of the Book. . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii
Contributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Chapter 1? Financial Information and
the Decision-Making Process. . . . . . . 1
Information and Decision Making. . . . . . . . . . . . . . . . . . . 4
Uses and Users of Financial Information. . . . . . . . . . . . . 5
Financial Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Forms of Business Organization. . . . . . . . . . . . . . . . . . . . . 8
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Chapter 2? Billing and Coding for Health
Services. . . . . . . . . . . . . . . . . . . . . . . . 11
Generating Healthcare Claims . . . . . . . . . . . . . . . . . . . . .
Scheduling and Registration. . . . . . . . . . . . . . . . . . . . . . .
Provide Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medical Documentation and HIM/Medical Records. . .
Charge Entry and Charge Master. . . . . . . . . . . . . . . . . . .
Billing and Claims Preparation . . . . . . . . . . . . . . . . . . . . .
Claims Editing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Claim Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix 2-A Sample UB-04 Form and Sample
CMS-1500 Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
14
14
15
19
25
26
27
27
29
Chapter 3? Financial Environment of
Healthcare Organizations . . . . . . . . 31
Financial Viability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sources of Operating Revenue. . . . . . . . . . . . . . . . . . . . .
Healthcare Payment Systems . . . . . . . . . . . . . . . . . . . . . .
Medicare Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Medicare Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
34
36
40
41
52
Chapter 4? Legal and Regulatory
Environment . . . . . . . . . . . . . . . . . . . 97
Part I. Knowledge of the Law and Regulations
Is an Essential Part of Healthcare Financial
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Part II. Primary Regulatory Issues
Confronting Healthcare Organizations
Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Legal Audits and Investigations. . . . . . . . . . . . . . . . . . . 126
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Chapter 5? Measuring Community
Benefit . . . . . . . . . . . . . . . . . . . . . . . 131
Tax Exemption Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Community Benefit Areas. . . . . . . . . . . . . . . . . . . . . . . . .
The Community Value Index®. . . . . . . . . . . . . . . . . . . . .
Estimating Financial Benefits in Not-for-Profit
Healthcare Firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimating Financial Benefits Provided
by Not-for-Profit Healthcare Firms. . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix 5-A Schedule H Form. . . . . . . . . . . . . . . . . . .
132
133
135
139
142
144
147
Chapter 6? Revenue Determination. . . . . . . . . 151
Payment Methods and Their Relationship
to Price Setting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Methods for Controlling
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Generic Principles of Pricing . . . . . . . . . . . . . . . . . . . . . .
Price Setting for Healthcare
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Justifying Healthcare Firm Prices. . . . . . . . . . . . . . . . . .
Health Plan Contract Negotiation. . . . . . . . . . . . . . . . .
Health Plan Payment Schedules. . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
152
153
154
155
158
163
166
168
iii
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iv
Contents
Chapter 7? Health Insurance and
Managed Care . . . . . . . . . . . . . . . . . 171
Chapter 12? Financial Analysis of Alternative
Healthcare Firms. . . . . . . . . . . . . . 285
HMO and Managed-Care Development. . . . . . . . . . .
Integrated Delivery Systems . . . . . . . . . . . . . . . . . . . . . .
Paying Providers in a Managed-Care
Environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Setting Prices in Capitated Contracts. . . . . . . . . . . . . .
Medicare and Medicaid Risk Contracts. . . . . . . . . . . .
Legal and Regulatory Issues. . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Care Facilities and Nursing Homes. . . . .
Medical Groups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
172
177
181
183
188
189
190
Chapter 8? General Principles of
Accounting. . . . . . . . . . . . . . . . . . . . 195
Financial Versus Managerial Accounting . . . . . . . . . .
Principles of Accounting. . . . . . . . . . . . . . . . . . . . . . . . . .
Accrual Versus Cash Accounting . . . . . . . . . . . . . . . . . .
Fund Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conventions of Accounting. . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
196
197
203
206
207
207
Chapter 9? Financial Statements . . . . . . . . . . . 211
Organizational Structure. . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Operations (Revenues
and Expenses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement of Changes in Net Assets . . . . . . . . . . . . . .
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix 9-A Case Example Audited
Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
212
213
217
219
220
220
225
286
294
297
301
Chapter 13 Strategic Financial Planning. . . . 307
Strategic Planning Process. . . . . . . . . . . . . . . . . . . . . . . .
Developing the Financial Plan . . . . . . . . . . . . . . . . . . . .
Integration of the Financial Plan with
Management Control. . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
308
314
327
327
Chapter 14? Cost Concepts and Decision
Making . . . . . . . . . . . . . . . . . . . . . . 335
Concepts of Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost Measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Break-Even Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
336
343
348
354
Chapter 15 Product Costing. . . . . . . . . . . . . . . 361
Healthcare Cost Accounting. . . . . . . . . . . . . . . . . . . . . .
Relationship to Planning, Budgeting,
and Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Costing Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Two Required Systems for Healthcare Costing. . . . .
Relative Value Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
362
364
365
368
371
373
Chapter 10 Accounting for Inflation. . . . . . . . 243
Chapter 16? The Management Control
Process . . . . . . . . . . . . . . . . . . . . . . 377
Reporting Alternatives. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uses of Financial Report Information. . . . . . . . . . . . . .
Case Example: Williams Convalescent
Center. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Essential Elements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Budgeting Process . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zero-Base Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benchmarking at the Departmental Level. . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
244
246
247
254
378
382
391
392
393
Chapter 11? Analyzing Financial Position. . . . 259
Chapter 17 Cost Variance Analysis . . . . . . . . . 401
Developing an Effective Financial Reporting
System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
Case Example: Harris Memorial Hospital. . . . . . . . . . . 264
Summary: Harris Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
Cost Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investigation of Variances. . . . . . . . . . . . . . . . . . . . . . . . .
Variance Analysis Calculations . . . . . . . . . . . . . . . . . . . .
Variance Analysis in Budgetary Settings. . . . . . . . . . .
402
403
406
410
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Contents
Variance Analysis in Managed-Care or Bundled
Payment Settings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
Chapter 18 Financial Mathematics. . . . . . . . . 425
Single-Sum Problems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426
Annuity Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
Chapter 19 Capital Project Analysis . . . . . . . . 439
Participants in the Analytical Process. . . . . . . . . . . . . .
Classification of Capital Expenditures . . . . . . . . . . . . .
The Capital Project
Decision-Making Process . . . . . . . . . . . . . . . . . . . . . . .
Justification of Capital Expenditures. . . . . . . . . . . . . . .
Discounted Cash-Flow Methods. . . . . . . . . . . . . . . . . .
Selection of the Discount Rate. . . . . . . . . . . . . . . . . . . .
Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
440
443
445
447
448
452
453
453
Chapter 20 Consolidations and Mergers . . . . 457
Defining the Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
M&A Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of Theories of M&A Activity. . . . . . . . . . . . .
Factors Affecting M&A Activity. . . . . . . . . . . . . . . . . . . .
Why Do Mergers Succeed or Fail?. . . . . . . . . . . . . . . . .
Valuations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
458
459
462
463
463
464
470
v
Chapter 21 Capital Formation. . . . . . . . . . . . . 475
Equity Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-Term Debt Financing . . . . . . . . . . . . . . . . . . . . . . .
Alternative Debt Financing Sources. . . . . . . . . . . . . . .
More Recent Developments. . . . . . . . . . . . . . . . . . . . . .
Early Retirement of Debt. . . . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
477
480
485
490
493
495
Chapter 22? Working Capital and Cash
Management. . . . . . . . . . . . . . . . . 503
Cash and Investment Management
Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management of Working Capital. . . . . . . . . . . . . . . . . .
Short-Term Bank Financing . . . . . . . . . . . . . . . . . . . . . . .
Investment of Cash Surpluses. . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
505
507
513
514
515
Chapter 23? Developing the Cash
Budget . . . . . . . . . . . . . . . . . . . . . . 519
Determining Required Cash and Investment
Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sources and Uses of Cash. . . . . . . . . . . . . . . . . . . . . . . . .
Preparing the Cash Budget . . . . . . . . . . . . . . . . . . . . . . .
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
520
522
523
526
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 557
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Preface
This book represents the eighth edition of a book published originally in 1978, entitled Essentials of Hospital
Finance. The text has evolved from a book containing
seven chapters that dealt largely with understanding
and interpreting hospital financial statements into
a comprehensive financial text. The Eighth Edition
has 23 chapters that cover most of the major areas of
financial decision making that healthcare executives
deal with on a daily basis.
This book has been widely used over the years for
many reasons. No other textbook so fully melds the
best of current financial theory with the tools needed
in day-to-day practice by healthcare managers. The
textbook also encompasses virtually the whole spectrum of the healthcare industry, including hospitals, pharmaceutical companies, health maintenance
organizations, home health agencies, skilled nursing
facilities, surgical centers, physician practices, hospital departments, and integrated healthcare systems.
Building on the strong foundation of the previous editions, the Eighth Edition introduces a number
of enhancements. We have continued the inclusion of
learning objectives at the beginning of each chapter.
The learning objectives orient students to the material
in the chapter and highlight some particular concepts
and skills they should acquire by studying the chapter.
Following the learning objectives, each chapter has a
real-world scenario, which places the material in the
chapter into the context of how the concepts and tools
are used in practice. As with previous editions, each
chapter concludes with a summary, followed by a large
number of problems with related solutions. We believe
the application of finance theory to real-world financial
vi
problems is the best way to accomplish learning. One
of the primary enhancements of the Eighth Edition is
the addition and updating of supporting data tables that
provide tangible benchmarking information for students and practitioners in a larger number of areas. In
summary, the chapters are designed to provide a framework for understanding healthcare financial issues as
well as resources for implementing appropriate operational strategies.
Before discussing the coverage of this book,
it is important to understand the objective, which
has not changed in more than 30 years. This text is
intended to provide a relevant and readable resource
for healthcare management students and executives.
This is important to understand because Essentials of
Health Care Finance is neither a traditional financial
textbook nor a traditional management or financial
accounting textbook. It attempts to blend the topics of
both accounting and finance that have become part of
the everyday life of most healthcare executives. This
textbook does not provide as much coverage of cost
of capital, capital structure, and capital budgeting topics as is present in most financial management textbooks. Essentials of Health Care Finance likewise does
not provide major coverage of management control
and budgeting systems that are present in most cost
accounting and management accounting textbooks.
Instead, this text tries to cover those types of financial
decisions with which healthcare executives are most
likely to be involved and provides the necessary materials to help them understand the conceptual basis and
mechanics of financial analysis and decision making
as they pertain to the healthcare industry sector.
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Content of the Book
The general basis of financial decision making in
any business is almost always built on understanding
three critical elements. First, most financial decisions
are based on the use of accounting information. It is
difficult to make intelligent decisions without having
at least a basic understanding of accounting information. The user does not need to be a CPA, but it
is essential to have a little understanding of what
accounting is and is not. Second, all business units
operate within an industry. The healthcare industry is
a huge, complex industry that in many areas is unlike
any other industry. Unless the student has an appreciation for these critical differences, major mistakes
can be made. Finally, both accounting and finance are,
in many ways, subsets of economics. The principles
of economics form the conceptual basis upon which
many types of business decisions are made.
Chapter 1 provides an introduction to the role
of information in decision making. Chapter 2, “Billing and Coding for Health Services,” recognizes the
increasing importance that billing and coding play in
financial decision making. Chapter 3 provides detailed
information about the economic environment of
healthcare firms. Specific coverage of payment methods for all types of providers, from hospitals to physicians, is included. Much of Chapter 3 was rewritten
for this edition because payment rules are constantly
changing. This edition covers current Medicare prospective payment systems for outpatient, home health,
and skilled nursing facilities. Chapter 4 provides coverage of the numerous legal and regulatory provisions
that affect today’s healthcare manager.
Chapter 5, “Measuring Community Benefit,” provides expanded coverage of a topic that has gained
more attention with the recent passage of healthcare
reform. Nonprofit healthcare providers increasingly
are being asked to document the community benefits they provide to their communities. Chapter 6,
“Revenue Determination,” devotes specific attention
to pricing and managed-care contract negotiations.
Extensive coverage of managed care, its definition,
concepts, organizational structures, and its financial implications is included in Chapter 7 and woven
throughout the remainder of the text. Managed-care
contracting is covered extensively in this edition along
with coverage of “bundled payments.”
Chapters 8, 9, and 10 cover financial reporting for
healthcare firms. Specific discussions of accounting
jargon are included. Perhaps of more importance, the
accounting terms are related to healthcare issues, such
as self-insurance of professional liability.
Chapters 11, 12, and 13 cover financial analysis
and financial planning. Chapter 11 has been thoroughly revised to reflect the best analytical tools and
techniques available for financial statement analysis.
Chapter 12 provides specific coverage of healthcare
firms other than hospitals. Comparative financial and
operating benchmark values are included for hospitals, and benchmark values are included for hospitals,
health maintenance organizations, nursing homes,
and medical groups. These benchmark values are used
later to evaluate the financial position of a number of
different kinds of healthcare firms.
Chapters 14 through 16 cover cost finding, pricing, break-even analysis, and budgeting, and other
managerial-care examples and concepts have been
added in this edition. This edition also features more
extensive coverage of relative value units. Chapter 17
includes material on the application of variance analysis techniques to both healthcare providers and payers.
Chapters 18 through 21 include coverage of
capital budgeting, consolidations, valuation, and
­capital formation topics as they pertain to healthcare
firms. Special attention is given to capital formation
in both taxable and voluntary nonprofit situations.
Chapter 20 covers the increasingly important ­topics
of consolidations, mergers, and acquisitions. In
that chapter we offer detailed coverage of several
­valuation techniques. Chapter 21 includes extensive
coverage of sources of capital used by healthcare
providers, especially tax-exempt revenue bonds.
Chapters 22 and 23 cover the topics of working capital management and cash budgeting.
Building from the practical educational approach
of prior editions, we believe that the enhancements
made to the text will provide students and practitioners
with a greater understanding of financial application in
the complex and changing healthcare industry.
vii
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About the Authors
William O. Cleverley, PhD, is the chairman and
founder of Cleverley & Associates, which was
started in January 2000. Before forming Cleverley
& ­Associates, Dr. Cleverley was the president and
founder of CHIPS (Center for Healthcare Industry
Performance Studies). United Healthcare acquired
the firm in March 1998, and Dr. Cleverley remained
on staff as a part-time employee until December
1999. Dr. Cleverley is also professor emeritus at The
Ohio State University where he taught courses in
healthcare finance starting in 1973.
Dr. Cleverley was the original author of Essentials of Healthcare Finance in 1978. In addition, he
has authored over 250 articles on healthcare financial
issues in a wide variety of both academic and professional journals.
James O. Cleverley, MHA, is the president of
Cleverley & Associates, where he has worked since
viii
September 2003. Mr. Cleverley consults with hospital and healthcare organizations to identify financial
and operating opportunities, as well as related strategies for performance improvement. Before joining the
firm, he directed a statewide health services program
for a medical association.
Mr. Cleverley has authored over 50 books and
articles dealing with healthcare financial analysis
and application, including the annual Community
Value Index® hospital survey, the State of the Hospital Industry, and Essentials of Health Care Finance.
He is a two-time recipient of the Healthcare Financial
Management Association’s Yerger/Seawell Best Article
award.
Mr. Cleverley received his master of health administration from The Ohio State University in 2004. He
received his bachelor of science in business administration from The Ohio State University in 1999.
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Contributor
Peter A. Pavarini, Esq.
Squire, Sanders & Dempsey, LLP
Columbus, Ohio
ix
CHAPTER 1
Financial Information and the
Decision-Making Process
LEARNING OBJECTIVES
After studying this chapter, you should be able to do the following:
1.
2.
3.
4.
5.
Describe the importance of financial information in healthcare organizations.
Discuss the uses of financial information.
List the users of financial information and their uses for it.
Describe the financial functions within an organization.
Discuss the common ownership forms of healthcare organizations, along with their advantages and
disadvantages.
REAL-WORLD SCENARIO
In 1946, a small band of hospital accountants formed the American Association of Hospital Accountants (AAHA).
They were interested in sharing information and experiences in their industry, which was beginning to show signs
of growth. First published in 1947, a small educational journal was created in an attempt to disseminate information of interest to their members. Ten years later, in 1956, the AAHA’s membership had grown to over 2,600
members. The real growth, however, was still to come with the advent of Medicare financing in 1965.
With the dramatic growth of hospital revenues came an escalation in both the number and functions delegated
to the hospital accountant. Hospital finance had become much more than just billing patients and paying invoices.
Hospitals were becoming big businesses with complex and varied financial functions. They had to arrange funding
of major capital programs, which could no longer be supported through charitable campaigns. Cost accounting
and management control were important functions for the continued financial viability of their firms. Hospital
accountants soon evolved into hospital financial managers, and so in 1968 the AAHA changed its name to the
Hospital Financial Management Association (HFMA).
The hospital industry continued to boom through the late 1960s and 1970s. Third-party insurance became the
norm for most of the American population. Patients either received insurance through governmental programs
Opener image: © A1Stock/Shutterstock
1
2
Chapter 1 Financial Information and the Decision-Making Process
such as Medicare and Medicaid or obtained it as part of the benefit program at their place of employment. Hospitals were clearly no longer quite as charitable as they once were. There was money, and plenty of it, to finance
the growth required through increased demand and the new evolving medical technology. By 1980, HFMA was
a large association with 19,000 members. Primary offices were located in Chicago, but