PREFACE

This book offers an introduction to the most used tools and techniques of health care financial management. It contains numerous examples from a variety of providers, including health maintenance organizations, hospitals, physician practices, home health agencies, nursing units, surgical centers, and integrated health care systems. The book avoids complicated formulas and uses numerous spreadsheet examples so that these examples can be adapted to problems in the workplace. For those desiring to go beyond the fundamentals, many chapters offer additional information in appendices. Each chapter begins with a detailed outline and concludes with a detailed summary, followed by a set of questions and problems. Answers to the questions and problems are available for download to instructors at www.josseybass.com/go/zelman5e. Finally, a number of perspectives are included in every chapter. Perspectives-examples from the real world-are intended to provide additional insight into a topic. In some cases these are abstracted from professional journals and in other cases they are statements from practitioners-in their own words.

The book begins with an overview in Chapter 1 of some of the key factors affecting the financial management of health care organizations in today's environment. Chapters 2, 3, and 4 focus on the financial statements of health care organizations. Chapter 2 presents an introduction to these financial statements. Financial statements are (perhaps along with the budget) the most important financial documents of a health care organization, and the bulk of this chapter is designed to help readers understand these statements, how they are created, and how they link together.

Chapter 3 provides an introduction to health care financial accounting. This chapter focuses on the relationship between the actions of health care providers and administrators and the financial condition of the organization, examining how the numbers on the financial statements are derived, and the distinction between cash and accrual bases of accounting. By the time students have completed Chapters 2 and 3, they will have been introduced to a large portion of the terms used in health care financial management.

Building on Chapters 2 and 3, Chapter 4 focuses on interpreting the financial statements of health care organizations. Three approaches to analyzing statements are presented: horizontal, vertical, and ratio analysis. Great care has been taken to show how the ratios are computed and how to summarize the results.

Chapter 5 focuses on the management of working capital: current assets and current liabilities. This chapter emphasizes the importance of cash management and provides many practical techniques for managing the inflows and outflows of funds through an organization, including managing the billing and collections cycle and paying off short-term liabilities.

Chapter 6 introduces one of the most important concepts in long-term decision making: the time value of money. Chapter 7 builds on this concept, incorporating it into the investment decision by presenting several techniques for analyzing investment decisions: the payback method, net present value, and internal rate of return. Examples are given for both not-for-profit and for-profit organizations.

Once an investment has been decided on, it is important to determine how this asset will be financed, and this is the focus of Chapter 8. Whereas Chapter 5 deals with issues of short-term financing, Chapter 8 focuses on long-term financing, with a particular emphasis on issuing bonds.

Chapters 9-12 introduce topics typically covered in a managerial accounting course. Chapter 9 focuses on the concept of cost and on using cost information-including fixed cost, variable cost, and break-even analysis-for short-term decision-making. In addition to covering the key concepts, this chapter offers a set of rules to guide decision-makers in making financial decisions. Chapter 10 explores budget models and the budgeting process. Several budget models are introduced, including program, performance, and zero-based budgeting. The chapter ends with an example of how to prepare each of the five main budgets: statistics budget, revenue budget, expense budget, cash budget, and capital budget. It also includes examples for various types of payors, including those with flat fee and capitation plans.

Chapter 11 deals with responsibility accounting. It discusses the different types of responsibility centers and focuses on performance measurement in general and budget variance analysis in particular. Chapter 12 discusses methods used by health care providers to determine their costs, primarily focusing on the step-down method and activity-based costing. This book concludes with Chapter 13, "Provider Payment Systems." This chapter, parts of which were combined with Chapter 12 in the first edition, describes the evolution of the payment system in the United States, especially under health reform, as well as the specifics of various approaches to managing care and paying providers.

Major Changes in the Fifth Edition

As noted below, the major changes from the fourth edition involve:

• New sections to reflect changes in accounting reporting and the health care environment.
• Updated data used in examples.
• Updated data used in problems.
• New problems.
• New perspectives.

Chapter 1: The Context of Health Care Financial Management

Changes to Chapter 1, the introductory chapter, provide an updated and current view of today's health care setting. Much has evolved in the industry with the advent of value-based payment systems, population-based approaches to care, the Patient Protection and Affordable Care Act (ACA), and recent changes in health policy. Updated sections are on patient-centered medical homes, accountable care organizations (ACOs), and overall changes within the hospital industry.

Enhancements include updated statistics in the chapter text and all the pertinent exhibits. All perspectives have been replaced to focus on more recent events.

Chapter 2: Health Care Financial Statements

Chapter 2 has been updated to include recent presentation changes issued by the Financial Accounting Standards Board (FASB). These changes address new presentation standards in the balance sheet with respect to the number of net asset classes, reducing them from three (unrestricted, temporarily restricted, and permanently restricted) to two ("with donor restrictions" and "without donor restrictions"). Another update is the new disclosure requirement related to the hospital's management of liquid resources or assets. The purpose of this change is to improve an organization's transparency in reporting what financial assets are available to meet its cash needs within one year. In addition, entities are required to disclose their liquidity management plans. The final major change relates to the new five-step principles-based approach to recognizing revenue. The new approach places the provision for bad debts back in the operating expense section of the statement of operations. All perspectives and problems have been updated. There are also new key terms.

Chapter 3: Principles and Practices of Health Care Accounting

In Chapter 3, the chapter addresses the previously mentioned accounting statement changes as noted in Chapter 2. The perspectives have been replaced and problems have been changed and updated.

Chapter 4: Financial Statement Analysis

Chapter 4 has been updated to include the latest hospital benchmark ratios from the 2018 Almanac of Hospital Financial and Operating Indicators (a reference work from Optum Inc.).

Chapter perspectives have been replaced, and problems have been updated as well to provide a better picture of what each ratio analyzed means, beyond its being above or below the relevant benchmark.

Chapter 5: Working Capital Management

Chapter 5 has new sections on improving the revenue cycle management process and on fraud and abuse. All perspectives and problems have been revised and updated.

Chapter 6: The Time Value of Money

Chapter 6 includes perspectives illustrating time value of money concepts in use, and all the problem sets have been updated.

Chapter 7: The Investment Decision

Chapter 7 now offers an expanded discussion of tax law changes in the hospital industry. In addition, all perspectives have been updated, and problems have been changed and updated.

Chapter 8: Capital Financing for Health Care Providers

Chapter 8 now includes new accounting reporting for lease financing, which provides greater transparency about a hospital's leasing activities, as well as tax law changes on debt financing. All the problems on lease financing and bond valuation have been revised and updated.

Chapter 9: Using Cost Information to Make Special Decisions

In Chapter 9, the conceptual diagram and the related explanation for understanding break even have been substantially revised, and all perspectives have been replaced...