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DETAILED CONTENTS
Preface…………………………………………………………………………………………xxi
Part I The Healthcare Environment
Chapter 1. Introduction to Healthcare Financial Management…………..3
Learning Objectives…………………………………………………..3
Introduction…………………………………………………………….3
How to Use This Book………………………………………………4
The Role of Financial Management in the
Health Services Industry…………………………………………6
Current Challenges……………………………………………………8
Organizational Goals………………………………………………….9
Tax Laws………………………………………………………………..13
Depreciation…………………………………………………………..21
Health Reform and Financial Management………………….25
Chapter Key Concepts……………………………………………..29
Chapter Models, Problems, and Mini-Cases…………………30
Selected Bibliography……………………………………………….31
Selected Websites…………………………………………………….32
Notes…………………………………………………………………….32
Supplement. Forms of Business Organization,
Ownership, and Structure………………………………………33
Supplement Learning Objectives………………………………..33
Forms of Business Organization…………………………………33
Alternative Forms of Ownership…………………………………38
Organizational Structures………………………………………….42
Supplement Key Concepts…………………………………………46
Supplement Bibliography………………………………………….47
Supplement Websites………………………………………………..47
Supplement Notes……………………………………………………47
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viii Detailed Contents
Chapter 2. Health Insurance……………………………………………………..49
Learning Objectives…………………………………………………49
Introduction…………………………………………………………..49
Insurance Concepts………………………………………………….50
Major Health Insurers (Third-Party Payers)…………………57
Private Insurers……………………………………………………….57
Public Insurers………………………………………………………..61
Development of Premium Rates…………………………………63
Consumer-Directed Health Plans……………………………….71
Value-Based Benefit and Insurance Design…………………..75
Health Reform and Health Insurance………………………….76
Chapter Key Concepts……………………………………………..79
Selected Case………………………………………………………….81
Selected Bibliography……………………………………………….81
Selected Websites…………………………………………………….81
Notes…………………………………………………………………….82
Chapter 3. Payments to Providers………………………………………………83
Learning Objectives…………………………………………………83
Introduction…………………………………………………………..83
Coding: The Foundation of Fee-for-Service
Reimbursement…………………………………………………..83
Generic Reimbursement Methods………………………………85
Financial Incentives to Providers………………………………..89
Financial Risks to Providers……………………………………….93
Reimbursement Methods Used by Medicare………………..95
Pay for Performance……………………………………………….100
Health Reform and Payments to Providers…………………109
Chapter Key Concepts……………………………………………112
Chapter Models, Problems, and Mini-Cases……………….114
Selected Case………………………………………………………..114
Selected Bibliography……………………………………………..115
Selected Websites…………………………………………………..116
Note……………………………………………………………………116
Supplement. Risk Sharing Under Capitation………………..117
Supplement Learning Objectives………………………………117
The Need for Risk Sharing………………………………………117
Primary Care Withhold: Single Risk Pool…………………..118
Primary Care and Referral Withholds:
Two Risk Pools…………………………………………………120
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Detai led Contents ix
Supplement Key Concept………………………………………..124
Supplement Case……………………………………………………124
Part II Basic Financial Management Concepts
Chapter 4. Time Value Analysis……………………………………………….127
Learning Objectives……………………………………………….127
Introduction…………………………………………………………127
Time Lines……………………………………………………………128
Future Value of a Lump Sum (Compounding)……………129
Present Value of a Lump Sum (Discounting)………………135
Opportunity Costs…………………………………………………139
Solving for Interest Rate and Time……………………………141
Annuities………………………………………………………………143
Perpetuities…………………………………………………………..148
Uneven Cash Flow Streams……………………………………..150
Using Time Value Analysis to Measure ROI……………….152
Semiannual and Other Compounding Periods…………….155
Amortized Loans…………………………………………………..159
A Review of Interest Rate Types……………………………….160
Chapter Key Concepts……………………………………………162
Chapter Models, Problems, and Mini-Cases……………….163
Selected Case………………………………………………………..164
Selected Resources…………………………………………………164
Selected Website…………………………………………………….164
Notes…………………………………………………………………..164
Integrative Application…………………………………………….166
The Problem…………………………………………………………166
The Analysis………………………………………………………….166
The Decision…………………………………………………………168
Chapter 5. Financial Risk and Required Return…………………………..169
Learning Objectives……………………………………………….169
Introduction…………………………………………………………169
The Many Faces of Financial Risk……………………………..170
Introduction to Financial Risk………………………………….171
Risk Aversion………………………………………………………..173
Probability Distributions…………………………………………173
Expected and Realized Rates of Return……………………..175
Stand-Alone Risk…………………………………………………..177
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x Detailed Contents
Portfolio Risk and Return……………………………………….180
Portfolio Risk of Business Investments………………………190
Portfolio Risk of Stocks (Entire Businesses)………………..196
Portfolio Betas………………………………………………………197
Relevance of the Risk Measures………………………………..198
Interpretation of the Risk Measures…………………………..200
The Relationship Between Risk and Return………………..201
Some Thoughts About Beta and the CAPM……………….204
Chapter Key Concepts……………………………………………205
Chapter Models, Problems, and Mini-Cases……………….207
Selected Case………………………………………………………..207
Selected Bibliography……………………………………………..207
Selected Websites…………………………………………………..208
Notes…………………………………………………………………..208
Integrative Application…………………………………………….210
The Problem…………………………………………………………210
The Analysis………………………………………………………….210
The Decision…………………………………………………………211
Part III Capital Acquisition
Chapter 6. Debt Financing………………………………………………………215
Learning Objectives……………………………………………….215
Introduction…………………………………………………………215
The Cost of Money………………………………………………..216
Long-Term Debt…………………………………………………..217
Term Loans…………………………………………………………..217
Bonds………………………………………………………………….219
Short-Term Debt…………………………………………………..223
Credit Ratings……………………………………………………….224
Interest Rate Components………………………………………227
Term Structure of Interest Rates………………………………232
Advantages and Disadvantages of Debt Financing……….234
Securities Valuation………………………………………………..235
The General Valuation Model………………………………….236
Debt Valuation………………………………………………………238
Chapter Key Concepts……………………………………………251
Chapter Models, Problems, and Mini-Cases……………….253
Selected Cases……………………………………………………….253
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Detai led Contents xi
Selected Bibliography……………………………………………..254
Selected Websites…………………………………………………..254
Notes…………………………………………………………………..255
Integrative Application…………………………………………….256
The Problem…………………………………………………………256
The Analysis………………………………………………………….256
The Decision…………………………………………………………258
Supplement. Interest Rate Levels, Types of Short-
Term Debt, Debt Contracts, Bond Insurance, Debt
Refunding, and Economic Factors That Influence
Interest Rate Levels…………………………………………….259
Supplement Learning Objectives………………………………259
Interest Rate Levels………………………………………………..259
Types of Short-Term Debt………………………………………261
Debt Contracts……………………………………………………..266
Bond Insurance……………………………………………………..268
Debt Refunding…………………………………………………….269
Economic Factors That Influence Interest
Rate Levels……………………………………………………….275
Supplement Key Concepts……………………………………….276
Chapter 7. Equity Financing…………………………………………………….279
Learning Objectives……………………………………………….279
Introduction…………………………………………………………279
Rights and Privileges of Common Stockholders………….280
Selling New Common Stock……………………………………283
The Market for Common Stock……………………………….286
The Decision to Go Public………………………………………288
Advantages and Disadvantages of Common
Stock Financing…………………………………………………291
Equity in Not-for-Profit Corporations……………………….292
Common Stock Valuation……………………………………….294
Security Market Equilibrium……………………………………306
Informational Efficiency………………………………………….307
The Risk/Return Trade-Off…………………………………….311
Chapter Key Concepts……………………………………………312
Chapter Models, Problems, and Mini-Cases……………….313
Selected Case………………………………………………………..313
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xii Detailed Contents
Selected Bibliography……………………………………………..313
Selected Websites…………………………………………………..314
Notes…………………………………………………………………..314
Integrative Application…………………………………………….316
The Problem…………………………………………………………316
The Analysis………………………………………………………….316
The Decision…………………………………………………………317
Supplement. Classified Stock, Preferred Stock, Securities
Regulation, and the Investment Banking Process……..318
Supplement Learning Objectives………………………………318
Classified Stock……………………………………………………..318
Preferred Stock……………………………………………………..319
Securities Regulation………………………………………………323
The Investment Banking Process………………………………325
Supplement Key Concepts……………………………………….330
Supplement Websites………………………………………………331
Chapter 8. Lease Financing…………………………………………………….333
Learning Objective…………………………………………………333
Introduction…………………………………………………………333
Lease Parties and Types…………………………………………..333
Per Procedure Versus Fixed Payment Leases……………….335
Tax Effects……………………………………………………………336
Balance Sheet Effects……………………………………………..339
Evaluation by the Lessee…………………………………………342
Evaluation by the Lessor…………………………………………351
Lease Analysis Symmetry…………………………………………353
Setting the Lease Payment………………………………………354
Leveraged Leases……………………………………………………354
Motivations for Leasing…………………………………………..356
Chapter Key Concepts……………………………………………361
Chapter Models, Problems, and Mini-Cases……………….362
Selected Case………………………………………………………..362
Selected Bibliography……………………………………………..362
Selected Websites…………………………………………………..363
Notes…………………………………………………………………..363
Integrative Application…………………………………………….364
The Problem…………………………………………………………364
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Detai led Contents xiii
The Analysis………………………………………………………….364
The Decision…………………………………………………………365
Part IV Cost of Capital and Capital Structure
Chapter 9. Cost of Capital……………………………………………………….369
Learning Objectives……………………………………………….369
Introduction…………………………………………………………369
Overview of the Cost-of-Capital Estimation Process…….369
Estimating the Cost of Debt……………………………………371
Estimating the Cost of Equity to Large Investor-
Owned Businesses……………………………………………..374
Estimating the Cost of Equity to Not-for-Profit
Businesses…………………………………………………………389
Estimating the Corporate Cost of Capital…………………..392
An Economic Interpretation of the Corporate Cost
of Capital…………………………………………………………394
Flotation Costs………………………………………………………397
Divisional Costs of Capital………………………………………398
Warning! Warning! Warning!……………………………………399
Cost-of-Capital Estimation for Small Businesses………….400
Factors That Influence a Business’s Cost of Capital……..403
Chapter Key Concepts……………………………………………404
Chapter Models, Problems, and Mini-Cases……………….406
Selected Case………………………………………………………..406
Selected Bibliography……………………………………………..407
Selected Websites…………………………………………………..407
Notes…………………………………………………………………..408
Integrative Application…………………………………………….410
The Problem…………………………………………………………410
The Analysis………………………………………………………….410
The Decision…………………………………………………………411
Supplement. Measuring the Cost of Fund Capital………….412
Supplement Learning Objectives………………………………412
Measuring the Cost of Fund Capital………………………….412
Supplement Key Concepts……………………………………….415
Chapter 10. Capital Structure……………………………………………………417
Learning Objectives……………………………………………….417
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xiv Detailed Contents
Introduction…………………………………………………………417
Impact of Debt Financing on Risk and Return……………418
Business and Financial Risk……………………………………..422
Capital Structure Theory…………………………………………426
The Miller Model…………………………………………………..433
Criticisms of the MM and Miller Models……………………436
Financial Distress Costs…………………………………………..437
Trade-Off Models………………………………………………….438
Asymmetric Information Model of Capital Structure……441
Summary of the Capital Structure Models………………….443
Application of Capital Structure Theory to
Not-for-Profit Firms…………………………………………..446
Making the Capital Structure Decision………………………448
Capital Structure Decisions for Small Investor-
Owned Businesses……………………………………………..451
Chapter Key Concepts……………………………………………453
Chapter Models, Problems, and Mini-Cases……………….454
Selected Case………………………………………………………..454
Selected Bibliography……………………………………………..455
Selected Websites…………………………………………………..455
Notes…………………………………………………………………..455
Integrative Application…………………………………………….458
The Problem…………………………………………………………458
The Analysis………………………………………………………….459
The Decision…………………………………………………………460
Supplement. The Debt Maturity Decision…………………….461
Supplement Learning Objectives………………………………461
The Concept of Temporary and Permanent Assets………461
Alternative Debt Maturity Policies…………………………….462
Conclusions Regarding Debt Maturities…………………….464
Supplement Key Concepts……………………………………….465
Part V Capital Allocation
Chapter 11. Capital Budgeting………………………………………………….469
Learning Objectives……………………………………………….469
Introduction…………………………………………………………469
Project Classifications……………………………………………..470
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Detai led Contents xv
The Role of Financial Analysis in Health Services
Capital Budgeting………………………………………………472
Overview of Capital Budgeting Financial Analysis……….472
Cash Flow Estimation…………………………………………….473
Cash Flow Estimation Example………………………………..482
Breakeven Analysis…………………………………………………489
Return on Investment Analysis…………………………………492
Some Final Thoughts on Breakeven and Profitability
Analysis……………………………………………………………498
Evaluating Projects with Unequal Lives……………………..499
Economic Life Versus Physical Life
(Abandonment Value)………………………………………..503
Capital Budgeting in Not-for-Profit Businesses……………505
The Post-Audit……………………………………………………..508
Using Capital Budgeting Techniques in
Other Contexts…………………………………………………510
Chapter Key Concepts……………………………………………511
Chapter Models, Problems, and Mini-Cases……………….513
Selected Case………………………………………………………..513
Selected Bibliography……………………………………………..514
Selected Website…………………………………………………….514
Notes…………………………………………………………………..515
Integrative Application…………………………………………….516
The Problem…………………………………………………………516
The Analysis………………………………………………………….516
The Decision…………………………………………………………517
Chapter 12. Project Risk Analysis………………………………………………519
Learning Objectives……………………………………………….519
Introduction…………………………………………………………519
Types of Project Risk……………………………………………..520
Relationships Among Stand-Alone, Corporate, and
Market Risks……………………………………………………..522
Risk Analysis Illustration…………………………………………523
Sensitivity Analysis………………………………………………….525
Scenario Analysis……………………………………………………528
Monte Carlo Simulation………………………………………….531
Qualitative Risk Assessment……………………………………..534
Incorporating Risk into the Decision Process……………..536
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xvi Detailed Contents
Final Risk Assessment and Incorporation for the
MRI Project……………………………………………………..539
Incorporating Debt Capacity into the
Decision Process………………………………………………..541
Adjusting Cash Outflows for Risk…………………………….542
Real (Managerial) Options………………………………………544
The Real Option of Abandonment……………………………548
An Overview of the Capital Budgeting
Decision Process………………………………………………..551
Capital Rationing…………………………………………………..553
Chapter Key Concepts……………………………………………555
Chapter Models, Problems, and Mini-Cases……………….557
Selected Cases……………………………………………………….557
Selected Bibliography……………………………………………..558
Selected Websites…………………………………………………..558
Notes…………………………………………………………………..558
Integrative Application…………………………………………….560
The Problem…………………………………………………………560
The Analysis………………………………………………………….560
The Decision…………………………………………………………562
Part VI Financial Condition Analysis and Forecasting
Chapter 13. Financial Condition Analysis…………………………………….565
Learning Objectives……………………………………………….565
Introduction…………………………………………………………565
Financial Reporting in the Health Services Industry…….566
Financial Statement Analysis…………………………………….572
Ratio Analysis………………………………………………………..573
Tying the Ratios Together: Du Pont Analysis……………..586
Operating Indicator Analysis……………………………………588
Limitations of Financial Statement and
Operating Indicator Analyses……………………………….593
Economic Value Added…………………………………………..595
Benchmarking……………………………………………………….597
Key Performance Indicators and Dashboards………………598
Chapter Key Concepts……………………………………………599
Chapter Models, Problems, and Mini-Cases……………….601
Selected Cases……………………………………………………….601
Selected Bibliography……………………………………………..601
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Detai led Contents xvii
Selected Websites…………………………………………………..602
Notes…………………………………………………………………..603
Integrative Application…………………………………………….604
The Problem…………………………………………………………604
The Analysis………………………………………………………….604
The Decision…………………………………………………………605
Supplement. Market Value Ratios, Common Size Analysis,
and Percentage Change Analysis…………………………..606
Supplement Learning Objectives………………………………606
Market Value Ratios……………………………………………….606
Common Size Analysis……………………………………………607
Percentage Change Analysis…………………………………….609
Supplement Key Concepts……………………………………….611
Chapter 14. Financial Forecasting………………………………………………613
Learning Objectives……………………………………………….613
Introduction…………………………………………………………613
Strategic Planning………………………………………………….613
Operational Planning……………………………………………..616
Financial Planning………………………………………………….617
Revenue Forecasts………………………………………………….619
Creating Forecasted Financial Statements…………………..623
Constant Growth Forecasting………………………………….623
Factors That Influence the External Financing
Requirement……………………………………………………..630
Problems with the Constant Growth Method……………..633
Real-World Forecasting…………………………………………..634
Computerized Financial Forecasting Models………………638
Financial Controls………………………………………………….640
Chapter Key Concepts……………………………………………641
Chapter Models, Problems, and Mini-Cases……………….642
Selected Cases……………………………………………………….643
Selected Bibliography……………………………………………..643
Selected Websites…………………………………………………..644
Notes…………………………………………………………………..644
Integrative Application…………………………………………….645
The Problem…………………………………………………………645
The Analysis………………………………………………………….646
The Decision…………………………………………………………648
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xviii Detai led Contents
Part VII Other Topics
Chapter 15. Revenue Cycle and Current Accounts Management……….651
Learning Objectives……………………………………………….651
Introduction…………………………………………………………651
Cash Management…………………………………………………652
Marketable Securities Management…………………………..661
Revenue Cycle Management……………………………………662
Supply Chain Management……………………………………..671
Current Liability Management…………………………………673
Chapter Key Concepts……………………………………………677
Chapter Models, Problems, and Mini-Cases……………….678
Selected Cases……………………………………………………….679
Selected Bibliography……………………………………………..679
Selected Websites…………………………………………………..681
Notes…………………………………………………………………..681
Integrative Application…………………………………………….683
The Problem…………………………………………………………683
The Analysis………………………………………………………….683
The Decision…………………………………………………………684
Supplement. Long-Term Securities Management,
Credit Policy, and the EOQ Model…………………………..686
Supplement Learning Objectives………………………………686
Long-Term Securities Management…………………………..686
Credit Policy…………………………………………………………687
The Economic Ordering Quantity Model………………….691
Supplement Key Concepts……………………………………….697
Chapter 16. Business Combinations and Valuation……………………….699
Learning Objectives……………………………………………….699
Introduction…………………………………………………………699
Level of Merger Activity………………………………………….700
Motives for Mergers: The Good, the Bad,
and the Ugly…………………………………………………….702
Types of Mergers…………………………………………………..706
Hostile Versus Friendly Takeovers…………………………….707
Mergers Involving Not-for-Profit Businesses………………708
Business Valuation………………………………………………….710
Unique Problems in Valuing Small Businesses…………….718
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Detai led Contents xix
Setting the Bid Price………………………………………………719
Structuring the Takeover Bid…………………………………..722
Due Diligence Analysis……………………………………………723
Corporate Alliances………………………………………………..724
Goodwill………………………………………………………………726
Chapter Key Concepts……………………………………………727
Chapter Models, Problems, and Mini-Cases……………….728
Selected Cases……………………………………………………….729
Selected Bibliography……………………………………………..729
Selected Websites…………………………………………………..730
Notes…………………………………………………………………..730
Integrative Application…………………………………………….731
The Problem…………………………………………………………731
The Analysis………………………………………………………….732
The Decision…………………………………………………………733
Supplement. Merger Regulation, the Role of Investment
Bankers, and Who Wins? The Empirical Evidence………734
Supplement Learning Objectives………………………………734
Merger Regulation…………………………………………………734
The Role of Investment Bankers………………………………739
Who Wins? The Empirical Evidence………………………….741
Supplement Key Concepts……………………………………….743
Glossary……………………………………………………………………………………..745
Appendix: Key Formulas in Chapters……………………………………………….771
Index…………………………………………………………………………………………785
About the Authors………………………………………………………………………..817
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