-: Hi everyone, and welcome back to module three.
In this lecture, I'm going to be presenting an overview
of the financial management of healthcare organizations.
Last week, we looked at macro level considerations
of the global and global environments in which healthcare
organizations operate,
and this week we'll be building upon those lessons
to look at micro level decisions unique
to the financial decisions
of healthcare managers when their organizations operate
within complex, often multinational environments.
In this lecture, we'll be discussing long-term financial
planning, major financial decision making tools,
market entry strategies, access to investment capital,
and short-term financial considerations.
Key concepts include the revenue cycle,
common payment methods, capitation and global budgets,
and value based payments.
The revenue cycle refers to the timeframe
between the delivery of care and the receipt of payment.
The majority of revenue for healthcare delivery comes
through some combination of the following
eight basic payment methods.
Per time period,
per beneficiary, per recipient, per episode, per day,
per service, per dollar of cost, and per dollar of charges.
The per dollar of cost method is rarely used.
There are also newer, more innovative methods related
to the value-based payments discussed last week.
In these systems, providers can be incentivized
to provide high quality care.
Many managed care organizations use an inverted revenue
cycle in which payments,
payment comes before the delivery of healthcare.
Per time period and per beneficiary payment methods
provide examples of a capitation in global budget systems.
In these methods, the payments cover patients over
a predefined timeframe.
Capitation refers to the payment of a fixed amount
for a predefined set of services for a predefined population
for a specific time period.
Budget development is a key aspect of the strategic
and financial planning process.
Strategic management is the ongoing process
by which a healthcare organization assesses
the environment in which it operates.
Appraises its current direction and market position,
determines the most appropriate
strategic direction going forward, and then develops
and influence goals, objectives,
and action plans to accomplish this strategy.
Strategy should always drive structure.
Financial metrics can be used
to gauge the ongoing accomplishments of financial
and strategic objectives
and can be measured with a balanced scorecard.
Most organizations have a periodic budget cycle in
which budgets are developed.
This budget cycle can be yearly, monthly, bi-yearly,
bi-annually, et cetera.
Next, I like this flow chart of strategic
and financial planning because it really gets at the steps
that one needs to take in order to build a strategic plan.
So is you begin by looking at
to see what are the vision and mission of an organization,
and then what strategies can be developed
to fulfill the goals
and objectives of an organization that are in line
with its vision mission.
After building these strategies,
you assess their financial viability.
Are they financially viable?
If yes, then proceed to budget development.
If not, return back to the strategic planning side
of the flow chart and try again to develop a, a program
or service that meets your goals and objectives
and is financially viable.
Next, this diagram provides an excellent illustration
of the budget development process.
The first months begin with strategic assessment
and guidance from senior leadership, clarification of goals
and objectives for the upcoming budget year,
analysis of historical workload and expenditures
and development of the initial draft
of the proposed budget for the upcoming year.
These plans are then sent to managers to learn about
how they will influence resource requirements
and workload expectations.
As the planning year continues,
lower level input is incorporated into the proposed budget.
The key to budget development is
that budget should not be developed in isolation.
Next, let's look at capital project analysis.
So far, we've largely been discussing short-term
financial management issues.
Now we're going to pivot
to discussing strategies managers use in shaping
the long-term future directions of organizations.
Capital project analysis is the most important long-term
financial decision making tool
for healthcare managers to understand.
It is a formal process that involves the assessment
of all the costs and benefits of a potential investment
that is large enough to significantly expand the scale
or scope of an organization.
Examples of capital projects include acquisitions
of other healthcare organizations,
construction of new healthcare facilities,
major expansion of the scale of operations,
purchases of major pieces of equipment, et cetera.
The goal of capital project analysis is
to determine whether the project serves the best
interest of your stakeholders.
For the case of for-profit businesses,
that should involve
or that should be based on maximizing the wealth
of major stakeholder groups, primarily the owners.
In a government organization
that involves maximizing the net benefit
to the public at large,
and in a non-profit, non-governmental organization,
the goal should be to maximize the net benefit
to the organization's community of focus,
whatever that community might be.
Next, we turn to the steps in capital project analysis.
The first step is determining which projects align
with the strategic direction of an organization.
Projects that do not serve the long-term interests
of the organization tend
to be rejected at this early stage without expending further
time and energy on a more thorough analysis.
The next stage involves estimating the projected cash flows
associated with the project.
Cash flows are broken into cash outflows and cash inflows.
Next, it is important to calculate many financial metrics
that are designed to provide key leaders
with information about the overall
profitability of the project.
After determining the profitability of an investment,
the final steps are to compete for funding
and implement the project or investment.
Common metrics used in capital project
analysis include the following.
The payback period is a metric that indicates the length
of time needed for a project to break even
by bringing in sufficient funding
to pay back the initial investment.
The discounted payback period is a closely related metric
that takes into account the buying power
of future cash inflows when adjusted
for the time value of money.
The most common metric for capital project analysis
is the net present value or the NPV.
This represents the overall dollar value
of the project to the organization
considering all cash flows over the life of the project.
The internal rate of return
or the closely related modified internal rate
of return refers to the percentage rate
that the project earns over the course
of its life.
The rate of return is compared to the investor's rate
of return when they provide investment capital
through the capital markets.
And finally, the profitability index refers to the ratio
between the present value of future cash flows,
and the initial investment.
Now after deciding to enter a new market,
how can an organization do this?
There are five common strategies.
Exporting goods and services,
licensing or franchising agreements,
foreign production of goods and services,
strategic alliances and partnerships and joint ventures.
The exports of goods
and services primarily occurs with the sale
of pharmaceuticals and the manufacturing of pharmaceuticals
and durable medical equipment.
Licensing and franchising referment
or licensing and franchising agreements refer to
what happens when a home organization
grants a foreign organization
the rights use its intellectual property in the case
of a license or its business model.
In the case of a franchising agreement
for a prescribed period
in exchange for a predetermined fee
or a share of the profits.
These models outsource most of their financial risk
onto external participants in the new market.
The other three strategies we'll discuss take on a lot
of the financial risk.
Foreign production of goods
and services, for example,
occurs when a health organization chooses
to directly establish
and manage new operations in a foreign country.
Next, strategic alliances
or partnerships occur when organizations collaborate,
but remain separate entities.
One example of this is the public,
public-private partnership.
And lastly, joint ventures describe what happens when two
or more organizations come together
to establish a new entity that is jointly owned
and controlled by pooling resources and expertise.
Next, let's talk a little bit about risk.
Major sources of risk in global health
include the following.
Regulatory or legal risk,
which is largely a factor of the level
of government involvement in private industry.
Political risk related to a country's political stability,
and it's important to note
that political instability can lead
to increased government surveillance
or even expropriation
or the government taking of assets.
The currency or exchange rate risk.
This describes the fact
that any cash flows resulting from operations within
a country will be affected by the stability
of the country's currency.
So when an organization repatriates foreign currency
to its own home country,
the company must convert those earnings
to its home currency, which is directly tied
to exchange rates.
So for example, a US-based corporation
that's doing work in Cameroon and earning Cameroonian francs
or Central African francs would then have
to convert those francs to United States dollars
before bringing them back to its home by the home country.
Finally, capital access.
Organizations may choose to transfer investment capital
from their home country to a foreign country,
or they may seek investment capital in the foreign setting.
Different countries have different capital markets,
and we'll talk about this a little bit more in
a couple of slides.
This chart shows the average long-term lending rates across
countries with varying levels of economic development.
The chart shows that higher income countries provide
healthcare organizations with lower interest rates
and therefore lower borrowing costs.
This figure depicts the distribution
of corporate tax rates around the world.
You'll see the majority of countries have tax rates
between 20 and 30%, though there are some countries
that have rates as high as 40 to 50%.
This chart provides information about the prevalence
of stock exchanges around the world.
Note that most companies list their stock on a primary
exchange and once listed the stock trades on other exchanges
that have trading relationships with the main exchange.
These additional exchanges provide investors
with additional liquidity for their shares.
Next, as I mentioned, this is the depiction
of the total market capitalization of all
countries listed within the world regions.
By far, most of the equity market depth is concentrated
within the high income regions of North America,
Asia, and Europe.
Organizations in lower income countries face significant
constraints to equity investment and access to capital
because of the severe lack of market depth.
Finally, let's look at some of the short-term considerations
that are key to the success of an organization.
Cash management in global context requires the holding
of cash balances in multiple countries to pay
for day-to-day business expenditures while dealing
with the constraints of multiple legal and tax systems.
Another critical aspect
of cash management is the cash concentration system,
which combines funds from separate accounts
into a single account for more efficient management.
Related to cash management is managing exposure
to exchange rate differences.
There are three main kinds of risk.
Transaction exposure refers to the fluctuation
of exchange rates between the time
that a transaction's agreed to
and the time to payment.
Translation exposure occurs when a company reports overseas
exposures on its balance sheet.
One way to solve this is to offset the value
of a firm's assets in a particular currency
with the equal value of liabilities in the same currency.
And thirdly, economic exposure refers
to changes in exchange rates influencing the value
of future cash flows from long-term transactions.
One solution is to use a flexible sourcing
to offset expected cash flows.
There are also numerous strategies to manage financial risk.
One of these is hedging for the purchasing
of a financial investment for the purpose
of reducing the risk of adverse price
movements in another asset.
Another is transfer pricing
or establishing the price at which one unit
of an organization transfers a good
to another unit of an organization.
Finally, another key responsibility of managers is
to raise short-term financing.
In the US his is commonly done through commercial paper,
bank loans, and secured short-term debt.
Commercial paper is debt issued by firms
and sold to investors.
Finally, here are the conclusions for this module.
I hope you enjoyed this lecture.