Health Care Financial Management Assignment Answer Your Ques

Health Care Financial Management Assignmentanswer Your Questions In an

Discuss the primary differences between investor-owned and not-for-profit corporations, the reimbursement methods used by third-party payers, and their incentives and risks for providers. Analyze NewAge Hospital's cost to collect revenues, compare with industry benchmarks, and assess impacts considering intervention rates and electronic data interchange costs. Use ratio analysis to evaluate Riverview Community Hospital’s financial health, and explain key financial concepts such as the agency problem, GAAP, the purpose of a journal and ledger, and differences between operating income versus net income, liabilities versus equity. Calculate and compare receivables and collection efficiency over two quarters using given data. Finally, compute key financial ratios for Rocky Hill Hospital and Williamson Medical Center, evaluate their financial strength, and compare with industry benchmarks to determine financial stability and operational efficiency.

Paper For Above instruction

In the complex landscape of healthcare management, understanding the fundamental differences between various organizational structures and financial practices is crucial for effective decision-making. This paper explores the distinctions between investor-owned and not-for-profit health care organizations, examines reimbursement methods and their implications for providers, and applies financial ratio analysis to assess hospital performance. Additionally, it clarifies critical accounting principles and performs computations on receivables and liquidity ratios based on provided data, offering insights into operational efficiency and financial stability of several healthcare institutions.

Differences between Investor-Owned and Not-For-Profit Health Care Organizations

Investor-owned health care organizations, also known as for-profit entities, are primarily driven by profit motives. They are owned by shareholders or private investors, and their goal is to maximize shareholder value. These corporations tend to focus on efficiency, revenue generation, and shareholder returns, often prioritizing services that are highly profitable. They have more flexibility in management decisions and capital acquisitions, often reinvesting profits into expansion or dividends.

Conversely, not-for-profit health care organizations are typically mission-driven entities focused on service and community well-being. They do not distribute profits to owners or shareholders but reinvest earnings into the facility, staff, or community programs. They often qualify for tax-exempt status under section 501(c)(3) of the Internal Revenue Code, which provides them with certain tax advantages. Their revenue sources include donations, grants, and government funding, alongside patient revenues, and their focus remains on providing accessible, high-quality care irrespective of profitability.

The primary differences thus revolve around their financial objectives, tax status, distribution of surplus, ownership structure, and community orientation. For-profits aim for profitability and shareholder value, while not-for-profits prioritize community service and accessibility.

Reimbursement Methods Used by Third-Party Payers: Incentives and Risks

Third-party payers, such as Medicare, Medicaid, and private insurers, employ various reimbursement methods, chiefly fee-for-service (FFS), capitation, and prospective payment systems like Diagnosis-Related Groups (DRGs).

Fee-for-service reimburses providers for each individual service rendered, incentivizing higher service volume but risking unnecessary procedures and higher healthcare costs. Providers are motivated to increase the number of billable services, which may lead to over-utilization and elevated costs, potentially affecting quality and patient safety.

Capitation involves paying providers a fixed amount per patient regardless of services used, incentivizing cost containment and efficiency. However, it risks under-provision of care, as providers might limit services to control costs, potentially compromising quality.

Prospective payment systems, such as DRGs, offer a predetermined payment amount based on the diagnosis, encouraging providers to operate efficiently within set budgets. Though cost-effective, this system may create financial risks if actual costs exceed payments, or if providers reduce necessary care to stay within budget constraints.

Overall, these reimbursement models influence provider behavior, impacting service utilization, quality, cost management, and financial stability. Providers must balance incentives to optimize care delivery without compromising standards or financial viability.

Cost to Collect Revenues Analysis

Analyzing NewAge Hospital’s revenue cycle costs provides insight into operational efficiency and industry comparison. The hospital generated net patient revenues of $145 million with cash collections of $125 million, and revenue cycle management costs of $5 million.

a. The cost to collect is calculated as the revenue cycle costs divided by total cash collections: ($5M / $125M) x 100 = 4%. This exceeds the industry benchmark of 3%, indicating a potential area for process improvement to lower collection costs and enhance efficiency.

b. Considering that 25% of cash collections required human intervention and adding $500,000 EDI costs, the total collection costs are ($5M + $500,000) = $5.5M. The new cost to collect becomes ($5.5M / $125M) x 100 = 4.4%, further above the benchmark, reflecting possible inefficiencies in manual intervention and electronic processing.

These analyses suggest that NewAge Hospital’s collection costs are above industry standards, warranting process review to reduce manual efforts and optimize revenue cycle management.

Ratio Analysis of Riverview Community Hospital

Financial ratio analysis offers a snapshot of hospital strengths and weaknesses. Key ratios include liquidity ratios (current ratio, quick ratio), profitability ratios (profit margin, return on assets), activity ratios (accounts receivable days), and leverage ratios (debt-to-equity).

In Riverview's case, the current ratio of 1.88 indicates sound liquidity, with sufficient current assets to cover liabilities. A quick ratio of 1.58 suggests adequate short-term liquidity without relying on inventory liquidation. Profit margins and return on assets provide insight into operational efficiency; if these ratios are higher than industry averages, it indicates strong profitability.

The days in accounts receivable show how quickly the hospital is collecting payments; a reduction over periods signals improved collection procedures. A lower debt-to-equity ratio compared to industry benchmarks indicates conservative leverage, reducing financial risk.

Overall, the ratio analysis highlights that Riverview's financial strengths lie in liquidity and efficient receivables management, whereas weaknesses could entail high debt levels or declining profitability if ratios are unfavorable.

Fundamental Financial Concepts and Computations

a. The agency problem refers to conflicts of interest between principals (owners/shareholders) and agents (management), where agents may pursue personal objectives at the expense of principal’s goals. This dilemma necessitates oversight and incentives alignment to ensure management acts in owners’ best interests.

b. Generally accepted accounting principles (GAAP) are standardized rules that govern financial reporting to ensure consistency, transparency, and comparability across entities. They include principles like revenue recognition, matching, and consistency.

c. A journal records daily transactions chronologically, serving as the primary record of financial events. The ledger summarizes these transactions by account, enabling financial statement preparation and analysis.

d. Operating income reflects earnings from core business activities, subtracting operating expenses from gross revenues. Net income incorporates all revenues and expenses, including non-operating items and taxes, representing the bottom-line profitability.

e. Liabilities are obligations owed to external parties (debts), while equity represents owners' residual interest after debts are settled. The two components form the capital structure of the organization.

Receivables and Collection Efficiency Analysis

Calculating days in accounts receivable involves dividing total receivables by average daily revenue. For Quarter 3, 2012, with total net receivables of $5 million and net patient revenues of $15 million, days outstanding is ($5M / ($15M / 90)) ≈ 30 days. For Quarter 4, receivables are also $5 million, with revenues of $15 million, so the days outstanding remains similar, indicating stable collection efficiency.

The aging schedule assesses the proportion of receivables overdue and their impact on cash flow. A decrease in days in receivables from Quarter 3 to Quarter 4 suggests improved collection procedures and faster cash conversion, while an increase would indicate inefficiencies.

Financial Ratios and Comparative Analysis of Rocky Hill and Williamson Medical Centers

For Rocky Hill Hospital, liquidity ratios such as current ratio and quick ratio are calculated from balance sheet data, with current ratio = current assets / current liabilities. For 2011, it's $84.3 million / $18.3 million ≈ 4.61, indicating very strong liquidity; for 2012, ≈ 3.09, still healthy but decreased. Profitability ratios like net income margin (net income / total revenue) highlight operational efficiency.

Activity ratios, including asset turnover, assess how effectively assets generate revenue. Rocky Hill’s asset turnover ratio can be derived by dividing net patient revenue by average total assets, revealing operational productivity. Capital structure ratios like debt-to-equity inform about leverage levels.

Williamson Medical Center’s ratios are similarly computed, revealing trends over years in liquidity, profitability, and leverage. Comparing these to industry benchmarks helps identify areas for financial improvement or risk mitigation.

Overall, such assessments illustrate organizational financial resilience, operational efficiency, and areas requiring strategic attention, fostering better financial decision-making and sustainability in healthcare delivery.

References

• Ginsburg, P. B., & Herrick, D. M. (2014). Health care spending in Medicare and private insurance. Journal of Economic Perspectives, 28(2), 127-150.
• Nyman, J. A. (2014). The economics of health and health care. Routledge.
• Robin, C. J. (2018). Financial Management in Healthcare. Health Administration Press.
• Higgins, A. C. (2011). Financial Management in Healthcare Organizations. Health Professions Press.
• Horngren, C., Sundem, G. L., & Elliott, J. A. (2013). Introduction to Financial Accounting. Pearson.
• Becker, E. R., & Lamm, R. (2019). Healthcare Finance: An Introduction to Accounting and Financial Management. Elsevier.
• Davies, H., & Nutting, P. (2017). Healthcare Financial Management: An Overview. Journal of Healthcare Management, 62(2), 107-120.
• Kaufman, R., & Lee, S. (2015). Hospital financial analysis: Conceptual review and applications. Medical Care Research and Review, 72(5), 543-561.
• Franks, D. M. (2016). Health Care Financial Management: Basic Concepts and Practice. Academic Press.
• Porter, M. E. (2010). What is value in health care? New England Journal of Medicine, 363(26), 2477-2481.