WEEK 1 MHC6305 LECTURE 1 Introduction to Healthcare Finance



WEEK 1 MHC6305 LECTURE 1

Introduction to Healthcare Finance

Working in HCOs in the United States inevitably requires an understanding of the rudiments of finance, particularly as they relate to healthcare. All business leaders are faced with the need to understand simple concepts, such as net present value, and more complex issues, such as hurdle rate, used in selecting project alternatives. Project alternatives may range from a new magnetic resonance imaging (MRI) machine costing $2 million to building a new hospital, which might cost $2 billion. Understanding the concepts of finance allows managers to make effective decisions on a scale at which a mistake could cause the failure of the organization. It may seem obvious that a budget is important in more than one instance. How important is it though? Note that simple budgeting skills have allowed the turnaround of multibillion-dollar trust funds that enable more than 150 indigent healthcare programs to survive and have taken a hospital district from a debt of $10 million to a surplus of $4,000,000 in just six years. Though this course will not specifically cover many programs in healthcare finance, a healthcare leader should know about programs such as Upper Price Limit (UPL) or Disproportionate Care (Dispro) that greatly aid hospitals in low-income areas. Any of these programs may become important to a healthcare manager’s job. A basic knowledge of the concepts of healthcare finance, as explored in this course, gives the foundation for understanding and working within these programs.

In this lecture you were introduced to the value of an effective HCO and the role of financial management in healthcare. It will discuss how to offer healthcare, from both the financial and operative perspectives, while maintaining a focus on reimbursements of healthcare services. It will also highlight the usefulness of patients’ medical records that contain information on services provided and of detailed billing processes used to trigger payments and to submit patient-related information to payers under various reimbursement models.

How Healthcare Is Financed

Healthcare is financed in the U.S. by a combination of the following:

1. The US government using tax money to pay for certain groups that require healthcare, such as people who are elderly or disabled;

2. Private insurance created by large organizations, such as International Business Machines Corporation (IBM) and General Electric (GE), or even by smaller companies;

3. Commercial insurance companies that sell healthcare insurance to companies that do not wish to have their own insurance or to individuals who do not have insurance through their employers;

4. Private payers who pay for healthcare out of their own pockets;

5. Uninsured healthcare that is paid for by all of the above through surcharges in their care.

The government generally pays nearly 50 percent of the approximately $2.7 trillion cost of healthcare in the U.S. through the Medicare and Medicaid programs. These programs are funded by payroll taxes on all employed citizens of the United States. These programs are often referred to as entitlement programs. For example, Medicare coverage begins at the age of sixty-five years, which is the defined retirement age in the U.S. The Medicaid program, which was originally meant for disabled people, has grown and now covers many more categories of people who need help. Coverage for patients with end-stage renal disease is one of these expansions. The government covers another less visible area of healthcare, which is research. While most universities sponsor research, the National Institutes of Health (NIH), sponsored by government tax funding, have extensive programs researching cures in many phases of healthcare.

You were introduced to Medicare and Medicaid programs. These programs are funded by payroll taxes on all employed citizens of the United States. These programs are often referred to as entitlement programs. Next you will review cost drives in healthcare

Cost Drivers of Healthcare Concerns Chronic Disease

One of the cost drivers of healthcare concerns chronic disease. Chronic diseases seem to be rising in the U.S. Heron et al. (2009) tell us that, as of 2006, seven out of ten deaths each year in the U.S. are caused by heart disease, cancer, or stroke along with diabetes, asthma, and chronic obstructive pulmonary disease (COPD). Chronic diseases are a major driver in the cost of healthcare, and a good deal of the cost of care can be reduced through proper primary care and self-care. Diseases seem to be fighting back! Methicillin-resistant Staphylococcus aureus (MRSA) and influenza are creating challenges for conventional treatment that are expensive. Even as medical science appears to be getting a handle on human immunodeficiency virus infection/acquired immunodeficiency syndrome (HIV/AIDS), nature has added new and perhaps even more lethal diseases. Labor is a major component in healthcare. At present, there are not enough doctors or nurses to handle the volumes of patients that present with health issues. This tends to be a cost driver; the supply of doctors is low, and the demand is high, pushing up the price of doctors, as Adam Smith predicted. The same reasoning holds for other healthcare professionals. Technology has enabled great advances in the ability of doctors to treat healthcare issues that were simply too difficult to treat in the past, but the technology is very expensive and tends to be an upward cost driver. An example is the robotics used in very complex surgery, which was simply not possible previously. The pharmaceutical industry creates new drugs that increase doctors’ ability to treat disease faster and more effectively. Unfortunately, each new drug is ever more difficult to invent and is ever more expensive than the last. The low-hanging fruit is gone.

In this lecture you leaned that one of the cost drivers of healthcare concerns chronic disease. Chronic diseases are a major driver in the cost of healthcare, and a good deal of the cost of care can be reduced through proper primary care and self-care. In the next week you will review. A healthcare manager in or aspiring for a leadership position should focus on concepts in finance, keep current with the trends in healthcare, and improve skills in research to be able to keep up with the legal aspects of healthcare.

 Resources:

Heron, M., Hoyert, D. L., Murphy, S. L., Xu, J., Kochanek, K. D., & Tejada-Vera, B. (2009). Deaths: Final data for 2006. National Vital Statistics Reports57(14). Retrieved from http://www.cdc.gov/nchs/data/nvsr/nvsr57/nvsr57_14.pdf


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