Health Care Finance
Health Care Finance
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 from 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. Health Care Finance
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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 effectiveness.
This text’s goal is to provide the keys to unlock the secrets
of financial management for nonfinancial managers. Health Care Finance
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, revenues represent inflow and expenses represent outflow. Thus, “getting money in” represents 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 text 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 Health Care Finance
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 information 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 Health Care Finance
organization.
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. Health Care Finance
