Fluent Essays

olve the following problems: Chapter 8: problems: 8.3(b);8.6a & b; Chapter 9: problems : 9 a,b,c, & d; 9.3; 9.4a & b Please show your calculations for these problems Kristin L. Reiter Paula H. Song HAP/AUPHA Editorial Board for Graduate Studies Stephen J. O’Connor, PhD, FACHE, Chairman University of Alabama at Birmingham Ellen Averett, PhD University of Kansas School of Medicine Kevin Broom, PhD University of Pittsburgh Erik L. Carlton, DrPH West Virginia University Lynn T. Downs, PhD, FACHE University of the Incarnate Word Laura Erskine, PhD UCLA Fielding School of Public Health Daniel Estrada, PhD University of Florida Edmond A. Hooker, MD, DrPH Xavier University LTC Alan Jones, PhD, FACHE US Army Christopher Louis, PhD Boston University Peggy J. Maddox, PhD George Mason University Donna Malvey, PhD University of Central Florida Olena Mazurenko, MD, PhD Indiana University Mary Ellen Wells, FACHE University of Minnesota James Zoller, PhD Medical University of South Carolina Health Administration Press, Chicago, Illinois Association of University Programs in Health Administration, Washington, DC Kristin L. Reiter Paula H. Song Your board, staff, or clients may also benefit from this book’s insight. For information on quantity discounts, contact the Health Administration Press Marketing Manager at (312) 424-9450. This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. It is sold, or otherwise provided, with the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. The statements and opinions contained in this book are strictly those of the authors and do not represent the official positions of the American College of Healthcare Executives, the Foundation of the American College of Healthcare Executives, or the Association of University Programs in Health Administration. Copyright © 2021 by the Foundation of the American College of Healthcare Executives. Printed in the United States of America. All rights reserved. This book or parts thereof may not be reproduced in any form without written permission of the publisher. 25 24 23 22 21 5 4 3 2 1 Library of Congress Cataloging-in-Publication Data Names: Reiter, Kristin L. (Kristin Leanne), author. | Song, Paula H., author. | Gapenski, Louis C. Healthcare finance. | Association of University Programs in Health Administration, issuing body. Title: Gapenski’s healthcare finance : an introduction to accounting and financial management / Kristin L. Reiter, Paula H. Song. Other titles: Healthcare finance Description: Seventh edition. | Chicago, Illinois : Health Administration Press ; Washington, DC : Association of University Programs in Health Administration, [2021] | Preceded by Healthcare finance / Louis C. Gapenski, Kristin L. Reiter. Sixth edition. 2016. | Includes bibliographical references and index. | Summary: “This best-selling textbook covers the essential concepts of accounting and financial management in healthcare”— Provided by publisher. Identifiers: LCCN 2020014150 (print) | LCCN 2020014151 (ebook) | ISBN 9781640551862 (hardcover ; alk. paper) | ISBN 9781640551886 (epub) | ISBN 9781640551893 (mobi) | ISBN 9781640551909 (xml) Subjects: MESH: Financial Management, Hospital | Health Facilities—economics | Accounting | Capital Financing Classification: LCC RA971.3 (print) | LCC RA971.3 (ebook) | NLM WX 157.1 | DDC 362.11068/1—dc23 LC record available at https://lccn.loc.gov/2020014150 LC ebook record available at https://lccn.loc.gov/2020014151 The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. ∞ ™ Acquisitions editor: Janet Davis; Manuscript editor: Deborah Ring; Project manager: Andrew Baumann; Cover designer: James Slate; Layout: PerfecType Found an error or a typo? We want to know! Please e-mail it to [email protected], mentioning the book’s title and putting “Book Error” in the subject line. For photocopying and copyright information, please contact Copyright Clearance Center at www. copyright.com or at (978) 750-8400. Health Administration Press Association of University Programs A division of the Foundation of the American in Health Administration College of Healthcare Executives 1730 M Street, NW 300 S. Riverside Plaza, Suite 1900 Suite 407 Chicago, IL 60606-6698 Washington, DC 20036 (312) 424-2800 (202) 763-7283 To Jack Wheeler and Dean Smith, for your guidance, mentorship, and support vii BRIEF CONTENTS Preface .....................................................................................................xix Part I The Healthcare Environment Chapter 1. Healthcare Finance Basics ................................................. 3 Chapter 2. Healthcare Insurance and Reimbursement Methodologies ................................................................ 37 Part II Financial Accounting Chapter 3. Financial Accounting Basics, the Income Statement, and the Statement of Changes in Equity ......................... 71 Chapter 4. The Balance Sheet and Statement of Cash Flows ........... 117 Part III Managerial Accounting Chapter 5. Cost Behavior, Organizational Costing, and Profit Analysis......................................................... 167 Chapter 6. Departmental Costing and Cost Allocation ................... 213 Chapter 7. Service Line Costing and Pricing ................................... 249 Chapter 8. Financial Planning and Budgeting ................................. 287 Part IV Basic Financial Management Concepts Chapter 9. Time Value Analysis ...................................................... 323 Chapter 10. Financial Risk and Required Return .............................. 367 B r i e f C o n t e n t sviii Part V Long-Term Financing Chapter 11. Long-Term Debt Financing .......................................... 409 Chapter 12. Equity Financing and Securities Markets ....................... 453 Chapter 13. Capital Structure and the Cost of Capital ...................... 493 Part VI Capital Investment Decisions Chapter 14. The Basics of Capital Budgeting .................................... 539 Chapter 15. Project Risk Analysis ..................................................... 585 Part VII Other Topics Chapter 16. Revenue Cycle and Current Accounts Management ...... 625 Chapter 17. Financial Condition Analysis ......................................... 669 Glossary ................................................................................................. 719 Index ..................................................................................................... 737 About the Authors .................................................................................. 785 ix DETAILED CONTENTS Preface .....................................................................................................xix Part I The Healthcare Environment Chapter 1. Healthcare Finance Basics ................................................. 3 Learning Objectives .......................................................... 3 Introduction ..................................................................... 3 Before You Begin .............................................................. 4 Defining Healthcare Finance ............................................. 8 The Concept of a Business ................................................ 9 The Role of Finance in Health Services Organizations .... 10 The Structure of the Finance Department ....................... 13 Health Services Settings .................................................. 13 Current Managerial Challenges ....................................... 14 Legal Forms of Businesses ............................................... 15 Corporate Ownership ...................................................... 17 Organizational Goals ....................................................... 21 Healthcare Reform and Finance ...................................... 24 Key Trends Following the Affordable Care Act ............... 25 Key Programs of the Affordable Care Act ........................ 27 Key Concepts .................................................................. 30 Questions ........................................................................ 32 Notes .............................................................................. 33 Resources ........................................................................ 34 Chapter 2. Healthcare Insurance and Reimbursement Methodologies ................................................................ 37 Learning Objectives ........................................................ 37 Introduction ................................................................... 37 Insurance Concepts ......................................................... 38 Third-Party Payers .......................................................... 42 Healthcare Reform and Insurance ................................... 47 General Reimbursement Methodologies .......................... 50 D e t a i l e d C o n t e n t sx Provider Incentives Under Alternative Reimbursement Methodologies ........................................................... 53 Medical Coding: The Foundation of Fee-for-Service Reimbursement .......................................................... 56 Specific Reimbursement Methods .................................... 58 Healthcare Reform and Reimbursement Methods ........... 60 Key Concepts .................................................................. 64 Questions ........................................................................ 66 Selected Cases ................................................................. 66 Notes .............................................................................. 67 Resources ........................................................................ 67 Part II Financial Accounting Chapter 3. Financial Accounting Basics, the Income Statement, and the Statement of Changes in Equity .......................... 71 Learning Objectives ........................................................ 71 Introduction ................................................................... 71 Historical Foundations of Financial Accounting .............. 73 The Users of Financial Accounting Information .............. 74 Regulation and Standards in Financial Accounting .......... 76 Conceptual Framework of Financial Reporting ................ 79 Accounting Methods: Cash Versus Accrual ...................... 84 Income Statement Basics ................................................. 86 Revenues ......................................................................... 89 Expenses ......................................................................... 93 Operating Income ........................................................... 96 Nonoperating Income ..................................................... 98 Net Income..................................................................... 99 Net Income Versus Cash Flow ...................................... 100 Income Statements of Investor-Owned Businesses ......... 102 Statement of Changes in Equity .................................... 105 A Look Ahead: Using Income Statement Data in Financial Statement Analysis ................................. 106 Key Concepts ................................................................ 108 Questions ...................................................................... 110 Problems ....................................................................... 112 Notes ............................................................................ 115 Resources ...................................................................... 116 D e t a i l e d C o n t e n t s xi Chapter 4. The Balance Sheet and Statement of Cash Flows ........... 117 Learning Objectives ...................................................... 117 Introduction ................................................................. 117 Assets ............................................................................ 121 Liabilities ...................................................................... 128 Net Assets (Equity) ....................................................... 132 Fund Accounting .......................................................... 136 Statement of Cash Flows ............................................... 138 Another Look Ahead: Using Balance Sheet Data in Financial Statement Analysis ..................................... 143 Key Concepts ................................................................ 144 Questions ...................................................................... 146 Problems ....................................................................... 147 Resources ...................................................................... 152 Supplement. Recording and Compiling Financial Accounting Data ........................................................ 153 The Accounting Cycle ................................................... 153 The Double Entry Accounting System .......................... 156 Transactions .................................................................. 158 Part III Managerial Accounting Chapter 5. Cost Behavior, Organizational Costing, and Profit Analysis ........................................................ 167 Learning Objectives ...................................................... 167 Introduction ................................................................. 167 The Basics of Managerial Accounting ............................ 167 Cost Behavior: Fixed Versus Variable Costs ................... 169 Underlying Cost Structure ............................................ 171 Profit Analysis ............................................................... 174 Breakeven Analysis ........................................................ 180 Profit Analysis in a Discounted Fee-for-Service Environment ............................................................ 184 Profit Analysis in a Capitated Environment ................... 189 The Impact of Cost Structure on Financial Risk ............ 196 Key Concepts ................................................................ 198 Questions ...................................................................... 199 Problems ....................................................................... 200 Selected Cases ............................................................... 204 Resources ...................................................................... 204 D e t a i l e d C o n t e n t sxii Supplement. Semi-fixed Costs and Operating Leverage .... 207 Semi-fixed Costs ........................................................... 207 Operating Leverage ....................................................... 209 Chapter 6. Departmental Costing and Cost Allocation ..................... 213 Learning Objectives ...................................................... 213 Introduction ................................................................. 213 Direct Versus Indirect (Overhead) Costs ....................... 214 Introduction to Cost Allocation .................................... 215 Cost Allocation Basics ................................................... 216 Cost Allocation Methods ............................................... 220 Direct Method Illustration ............................................ 223 Cost Allocation and Departmental Profitability ............ 230 Changing to a More Effective Cost Driver .................... 232 Final Thoughts on Cost Allocation ................................ 235 Key Concepts ................................................................ 236 Questions ...................................................................... 238 Problems ....................................................................... 238 Selected Cases ............................................................... 242 Resources ...................................................................... 242 Supplement. Step-Down Method Illustration ................... 245 Chapter 7. Service Line Costing and Pricing .................................... 249 Learning Objectives ...................................................... 249 Introduction ................................................................. 249 Service Line Costing ..................................................... 250 Healthcare Providers and the Power to Set Prices .......... 260 Price-Setting Strategies .................................................. 262 Price-Taking Strategies .................................................. 264 Setting Fee-for-Service Prices on Individual Services ..... 265 Setting Prices Under Capitation .................................... 267 Key Concepts ................................................................ 272 Questions ...................................................................... 273 Problems ...................................................................... 274 Selected Case ................................................................ 279 Resources ...................................................................... 279 Supplement. Making Service Decisions ........................... 281 Chapter 8. Financial Planning and Budgeting ................................. 287 Learning Objectives ...................................................... 287 Introduction ................................................................. 287 D e t a i l e d C o n t e n t s xiii Strategic and Operational Planning ............................... 288 Financial Planning ......................................................... 289 Introduction to Budgeting ............................................ 292 Initial Budgeting Decisions ........................................... 293 Budget Types ................................................................ 295 Constructing a Simple Operating Budget ...................... 298 Variance Analysis ........................................................... 301 Key Concepts ................................................................ 311 Questions ...................................................................... 313 Problems ....................................................................... 313 Selected Case ................................................................ 319 Resources ...................................................................... 319 Part IV Basic Financial Management Concepts Chapter 9. Time Value Analysis ...................................................... 323 Learning Objectives ...................................................... 323 Introduction ................................................................. 323 Time Lines .................................................................... 324 Future Value of a Lump Sum: Compounding ................ 325 Present Value of a Lump Sum: Discounting .................. 330 Opportunity Costs ........................................................ 333 Annuities ....................................................................... 336 Perpetuities ................................................................... 341 Uneven Cash Flow Streams ........................................... 343 Using Time Value Analysis to Measure Return on Investment ............................................................... 345 Semiannual and Other Compounding Periods ............... 349 Key Concepts ................................................................ 354 Questions ...................................................................... 354 Problems ....................................................................... 355 Selected Case ................................................................ 359 Notes ............................................................................ 359 Resources ...................................................................... 359 Supplement. Interest Rate and Time Calculations and Amortization ............................................................. 361 Solving for Interest Rate and Time ................................ 361 Amortized Loans .......................................................... 363 Chapter 10. Financial Risk and Required Return ............................... 367 Learning Objectives ...................................................... 367 D e t a i l e d C o n t e n t sxiv Introduction ................................................................. 367 The Many Faces of Financial Risk .................................. 368 Returns on Investments................................................. 369 Risk Aversion ................................................................ 372 Probability Distributions ............................................... 372 Expected and Realized Rates of Return ......................... 374 Stand-Alone Risk........................................................... 376 Portfolio Risk and Return ............................................. 378 The Relevant Risk of a Stock ......................................... 388 Estimating Beta ............................................................. 390 The Relationship Between Risk and Return and the Capital Asset Pricing Model ......................... 392 Required Return and Changes in Expected Inflation or Risk Aversion ....................................................... 396 Comparison of Required Return to Expected Return .... 397 Some Final Thoughts About Beta and the Capital Asset Pricing Model .................................................. 398 Key Concepts ................................................................ 399 Questions ...................................................................... 401 Problems ....................................................................... 402 Selected Case ................................................................ 405 Notes ............................................................................ 405 Resources ...................................................................... 405 Part V Long-Term Financing Chapter 11. Long-Term Debt Financing ............................................. 409 Learning Objectives ...................................................... 409 Introduction ................................................................. 409 The Cost of Money ....................................................... 410 Common Long-Term Debt Instruments ....................... 411 Debt Contracts ............................................................. 418 Credit Ratings ............................................................... 420 Interest Rate Components ............................................ 422 Debt Valuation .............................................................. 426 Key Concepts ................................................................ 439 Questions ...................................................................... 441 Problems ....................................................................... 442 Selected Cases ............................................................... 444 D e t a i l e d C o n t e n t s xv Notes ............................................................................ 444 Resources ...................................................................... 445 Supplement. Credit Enhancement, Term Structure of Interest Rates, and Economic Factors that Influence Interest Rate Levels .................................... 447 Credit Enhancement ..................................................... 447 The Term Structure of Interest Rates ............................ 448 Economic Factors That Influence Interest Rate Levels .... 451 Chapter 12. Equity Financing and Securities Markets ....................... 453 Learning Objectives ...................................................... 453 Introduction ................................................................. 453 Equity in For-Profit Businesses ...................................... 454 Types of Common Stock ............................................... 458 Procedures for Selling New Common Stock .................. 458 Equity in Not-for-Profit Corporations ........................... 461 Common Stock Valuation ............................................. 463 Security Market Equilibrium ......................................... 472 Informational Efficiency ................................................ 473 The Risk/Return Trade-Off .......................................... 477 Key Concepts ................................................................ 479 Questions ...................................................................... 480 Problems ....................................................................... 481 Selected Case ................................................................ 483 Notes ............................................................................ 483 Resources ...................................................................... 484 Supplement. The Market for Common Stock, Securities Markets Regulation, and the Investment Banking Process ........................................................ 485 The Market for Common Stock .................................... 485 Securities Market Regulation ......................................... 487 The Investment Banking Process ................................... 489 Chapter 13. Capital Structure and the Cost of Capital ....................... 493 Learning Objectives ...................................................... 493 Introduction ................................................................. 493 Capital Structure Basics ................................................. 494 Impact of Debt Financing on Accounting Risk and Return ............................................................... 494 D e t a i l e d C o n t e n t sxvi Capital Structure Theory ............................................... 498 Identifying the Optimal Capital Structure in Practice .... 501 Not-for-Profit Businesses ............................................... 504 Using the Target Capital Structure ................................ 505 Cost-of-Capital Basics ................................................... 506 Cost of Debt Capital ..................................................... 508 Cost of Equity Capital ................................................... 510 Corporate Cost of Capital ............................................. 521 Cost-of-Capital Estimation for Small Businesses ............ 523 An Economic Interpretation of the Corporate Cost of Capital ......................................................... 526 Key Concepts ................................................................ 529 Questions ...................................................................... 531 Problems ....................................................................... 532 Selected Cases ............................................................... 535 Notes ............................................................................ 535 Resources ...................................................................... 535 Part VI Capital Investment Decisions Chapter 14. The Basics of Capital Budgeting .................................... 539 Learning Objectives ...................................................... 539 Introduction ................................................................. 539 Project Classifications .................................................... 540 The Role of Financial Analysis in Healthcare Capital Budgeting ................................................................ 541 Overview of Capital Budgeting Financial Analysis ......... 542 Cash Flow Estimation ................................................... 543 Cash Flow Estimation Example ..................................... 550 Breakeven Analysis ........................................................ 558 Return on Investment (Profitability) Analysis ................ 560 Some Final Thoughts on Breakeven and Profitability Analyses .................................................................... 566 Capital Budgeting in Not-for-Profit Businesses .............. 567 The Post-audit .............................................................. 571 Using Capital Budgeting Techniques in Other Contexts ........................................................ 572 Key Concepts ................................................................ 573 Questions ...................................................................... 575 Problems ....................................................................... 576 D e t a i l e d C o n t e n t s xvii Selected Case ................................................................ 582 Notes ............................................................................ 582 Resources ...................................................................... 583 Chapter 15. Project Risk Analysis ..................................................... 585 Learning Objectives ...................................................... 585 Introduction ................................................................. 585 Types of Project Risk .................................................... …