Introduction to Managing Health Care Finance
The role of finance is imperative for every business as it manages and control the operations of firm in an appropriate manner. In health care firms, management of finance is an essential task this is because the health care providers like large physicians practices and hospital needs to decide on offering expanded tests or treatments by making purchase of new medical equipments (Cleverley, Cleverley and Song, 2010). In the procedure of financial management efforts are made by health care firms to make evaluation of sources of funds in accordance with their cost and risk.
The present report entails to understand the analysis of financial risk for the purpose of assessing accurate risk of information in management decision with respect acquisition of funds. The study includes evaluation of financial issues that are being experienced by small voluntary organization of UK. Based upon the issues strategy is determined by local council for ensuring sustainability of business through supporters and investors.
Health Station Business Case
The present study is on small voluntary organization that was funded as part of urban development fund for three years by regulatory authority in UK. This is for managing the effects of long term unemployment with urban deprivation. The case study presents that there are several issues that are being faced by health stations. These are in form of financial crisis as well as lack of funds. Due to this local council has to take decision regarding whether to transfer business to local NHS bodies. The business case is comprised of various stages that are enumerated below:
Stage 1 Strategic context in relation to business case
The main aim is to create strategic context is to investigate clear reason in relation to need for finance of specific project. This provide assistance to management in making sure about various operations that can be conducted in future. The procedure of developing strategic context for business case includes assessing of affordability as well as reliability of proposal (Courtney, B. and Briggs, 2004). The current position of health station is not sound. This is because of lack of efficient sources of funds. With this firm is not able to manage its operations in appropriate way so as to offer services to individuals belonging to several nationality. In order to enhance efficiency of business it is essential for management to take into account sources of funds that can be used to grant superior health care services to culturally diversified patents that are sensitively associated with maternity and child care. Considering this, decision has been taken by local council which state that there is no need of transferring operations of firm to NHS. Thus the functioning remains in control of management. With the assistance of strategic as well as effective decisions, financial crisis can be managed by health care units (Enthoven, 2014).
Stage 2 Determining the objectives and evaluating benefit criteria
After assessment of strategic context, management needs to determine the criteria for benefit and objectives. With this, business case can be developed in an appropriate way. The measurement of objectives as well as advantages of services can be conducted based upon the needs of patients and people (Fan and Savedoff, 2014). Thus the objectives of business case is determined in form of facilitation of superior health care services that uses modern technologies and equipments. This assist in preventing scenario such as transferring operations to local NHS by making arrangements of suitable sources of funds.
The health care unit determines the objectives on the basis of requirements of patients and other people who belongs to different culture. Large population area is covered by health care station and it makes development of vision for improving maternity care as well as child care services with the assistance of late clinic facilities (Ezeoha, 2011). It also includes granting health education and developing sickle cell awareness Programme. For the purpose of meeting need for funds, it is important for management to determine the sources of finances that are suitable.
Evaluation of benefit criteria
The criteria for benefit is being derived based upon the objectives of services that assist in making selection of option along with suitable source of funds. Three elements needs to be considered in the process of of assessing criteria of benefits. These factors are in form of advantages that can be measured in quantitative form, benefits that cannot be quantified financially and also the benefits that are be quantified with ease (Karanikolos and et.al., 2013). Based upon such criteria organization can effectively determine the benefits criteria.
The procedure of Developing business case is directly and indirectly depends on the selection of benefit criteria. With respect to present case the criteria for benefit can be taken in form of improvising the service quality, preventing situation regarding financial adequacy, and fulfilling customer need. Such goals of business case can be investigated by keeping track on the requirement of patients along with sustainability of organization. The major aim of making selection of appropriate sources is to enhance financial condition of business. In the procedure of determining the benefit criteria it is essential for management to take into account vision and goals of business (Gapenski, 2012). Based upon the case, organization of health care needs to take several decisions in relation to sources of funds otherwise health station might have to close its operations.
Stage 3 Assessing general options of funding sources
The primary aim of this part is to determine several options of finance that can assist the business in meeting its goal and gaining benefits such as management of business and rendering of superior health care services (Ludwick and Doucette, 2009). There is existence of suitable sources of finance that can be offered to health care in order to manage situation of financial crisis. Some common sources of funds are enumerated below:
Bank loan: It is the most essential source of finance that can help in meeting financial needs of health care business. Under this business can take loan from financial institutions by making comparison of interest rates. Through loan business can improvise its liquidity position which can help in managing the situation of financial crisis (Kavaler, 2012). But this enhances the expenses as firm needs to make payment of high interest on amount taken as loan. Moreover the repayment of loan amount has to be made within specific time interval. In present report the financial position of health care station is weak thus business cannot enhance its expenses in form of interest and also management cannot enhance liabilities of company.
Bank overdraft: It is the facility that is offered by bank under which the individual can withdraw more amount than balance in the account. In the present case overdraft facility can be appropriate source of finance. With the assistance of this health care station can tackle the situation related to financial crisis (Mason, 2007). In addition to this large amount of funds can be obtained by the business. Further with this health care unit can assess immense amount of data for specific time duration. This can assist in offering superior treatment and services to the patients. But for this high interest rate is charged by the bank. This can create major issue as due to lack of poor financial position business in not able to manage its expenses. Therefore firm needs to examine the benefits and drawback of sources of funding while making selection of an appropriate one.
Trade credit: This is an essential source that assist in managing adverse situation as well as financial crisis that are being experienced by health care organization. This is short term finance under which the firm can make payment to supplier within specific term in future. For the purpose of managing operations related to health care firm needs to make purchase of several items such as medicines and equipments (Zelman and et.al., 2009). Thus with this business can manage situation of weak financial condition by paying late rather than on time. In order to obtain such, firm has to build healthy relationship with suppliers. This source of finance does not posses any major draw back in comparison to other sources. Thus business can fulfill the need for funds in an effective way.
Sale of unused assets: For the process of satisfying financial needs, health care organization can sell assets that are unproductive and outdated. It is most cheapest source of finance for health station as organization need not to make payment of interest in acquiring finds through this (Woolhandler, Campbell and Himmelstein, 2003). It facilitates the business in improving its financial health within shorter time span and lesser efforts. Along with this business need to develop stronger base of assets that can facilitate management in dealing with poor financial condition and in fulfilling the future need.
Donations: Health care business can obtain funds in form of donation. There is existence of different private firms that give their part of profit for charity in order to fulfill corporate responsibilities (Sedevich-Fons, 2014). This source saves expenses of business as there is no need to make payment of interest under this. It is the cheapest source of raising funds in condition of financial crisis. There is no drawback of donation. By making arrangements of private firms as donors health care unit can solve issue regarding availability of funds.
Stage 4 Measurement of benefits
In another section of business case, several non financial benefits of business case are investigated. This assist health care firms in managing fiscal challenges. The advantages determined are evaluated with the option cost. It has major role in ranking the various options of funding. Its major benefits is that it can be quantified financially. Further it can be utilized for cost benefit analysis in different business case aspects. With the assistance of benefit criteria advantages of different funding options are determined (Nilsson and Furåker, 2012). Thus this stage will rank all the alternatives associated with sources of finance for assessing information in relation to advantages of each source that can be utilized by business. Thus various sources of funds available with business including bank loan, trade credit, sale of unproductive assets as well as donation can be measured by scoring them from 1 to 10.
Thus the score reflects the effectiveness as well as importance of funding options. Further it represents the advantages and drawback of different sources of the business. Based on the scoring health care unit can select donation, trade credit as well as sale of unproductive assets as a source of funding.
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Stage 5 Assessing and quantifying cost of business
With the assistance of this stage, business case can measure as well as assess the total and net cost of the alternatives that can be selected. Under this estimation is done with respect to capital cost of the new investment and alteration cost in the organization (Mohsin, 2013). It facilitate the management for purpose of determining expenditures made by business on each activity in addition to selection of best alternatives from the available options. Within assessment project, operational expenditures are also taken into account by management.
Costing: It is referred to as systematic procedure of quantifying various amount of resources that are needed by health care firms in the process of providing several kinds of services to the patients and general public. By making evaluation of cost of every activity in advance, assessment of entire expenditure for certain time period can be assessed by health care unit to offer distinct services (McCoy, Chand and Sridhar, 2009). The concept provide assistance to managers in offering information associated with expenditure that is incurred in granting facilities to culturally sensitive people. The expenses incurred are in form of medicine and staff expenses.
Capital cost:It is comprised of all the expenditures that are incurred by firm on acquiring medical equipments and other assets. This includes hardware, vehicles, land and building, equipments and fees (Courtney and Briggs, 2004). Along with this, entire capital cost can be covered by the business by adding certain portion in price of services and service cost.
Incremental cost:It examines additional cost that is incurred by increasing the level of quantity. It is on the basis of marginal cost.
Cost center and cost codes:Cost centre is examined as place in the business where entire costs are investigated. Further cost code are utilized in order to keep business transactions in systematic database (Harper, 2014). It facilitates manager in segregating information in two parts. The first one is related to determination of cost centre for specific transaction. Another demonstrate kind of expenditure.
Fixed and variable cost: Fixed cost is comprised of expenditure that do not change with the alteration in the output level (Elements of Cost, 2010). They remain constant. It involves depreciation on building, cost of insurance and salary paid. On the contrary variable cost is affected by the kind of activity that is being performed. It includes cost of computer system, medical expenses and other consumables.
Unit cost:It demonstrates the cost incurred by health care organization for providing services to single patient. This is consist of fixed and variable cost.
Opportunity cost:Such cost is considered as value of factor in next best alternatives use. For instance in case health care station need to select one project from two investment proposal. Then rejection of one is the opportunity cost.
Stage 6 Identifying sensitivity of risk
Assessment of sensitivity is an important aspect of the investment appraisal process that assist in determining the feasibility as well as reliability of investment proposal. In the present case scenario there are various options available with health care organization to make selection of best source of finance.
Financial risk: It examines the risk associated with obtaining finance through different sources. Presently, various financial issues are being faced by health station. In this regard it is important to assess financial risk while carrying out the process of investment appraisal. By following the steps below organization can easily determine the sensitivity of risk:
The initial stage examines the sources of risk exposure under which sources of risk are categorized into three parts (Enthoven, 2014). This includes not measurable, unknown and known risk but such cannot be measured, measurable as well as known.
At this step various models are utilized that includes cost benefit analysis for the purpose of identifying exposure to risk (Karanikolos and et.al., 2013). It provide assistance to managers in estimating the real benefit that can be acquired by health care organization from various sources of funds.
Under the third stage efforts are made by the firm for assessing the influence of exposure on several practices of management as well as on overall efficiency of health care organization in addition with quality of services.
In last part management makes evaluation of firm capability of whether or not it would be able to repay the amount obtained from various financial sources. But the financial condition in the present business case is poor. Thus it is essential for the business to make execution of such strategies that can improvise entire efficiency of the facilities (Gapenski, 2012).
Therefore by adopting efficient strategies of risk management, business can effectively manage financial risk. This is conducted for the purpose of enhancing the overall financial performance of the enterprise.
Stage 7 Identifying the options preferred
Based upon assessment of different sources of funds the most preferred option in health care unit is sale of unproductive and outdated assets, donations and trade credit. With the assistance of such health care business can effectively manage different organizational practice (Kavaler, 2012). Further there is no requirement for transferring its management to NHS trust.
Stage 8 Determining the outline business case
The major objective lies under outlining business case is on determining the viability as well as reliability of the funds that have been acquired through suitable sources. It also demonstrates strategic aspect of business.
Stage 9 Creating preferred option
Under this section, management determines the overall business case. This provides assistance in making selection of most preferred option. By analyzing the merits and demerits of each source this has been examined that effective source for health care organization can be trade credit as well as donations. This is due to reason that business can obtain funds through bank loan as it will enhance the expenses of business (Nilsson and Furåker, 2012). For the purpose of evaluating business performance method of score card and total quality management can be used in an effective manner.
Balance score card assist health care station in implementing various strategies. Further it facilitate organization in developing correlation among vision of firm and organizational plan. It assist in implementing proposal of raising monetary sources (Mohsin, 2013). On the contrary total quality management helps managers in enhancing quality of facilities offered by health care firms.
It is essential for firm to examine the appropriate source by examining the cost involved and benefit gained through it. This is important in order to meet the requirement of health station in an effective manner. The aspect of management financial is an important aspect for health care firms. This is because it affects the efficiency of health care services directly and indirectly. It has been inferred that financial crisis in health care firm has negative impact of the quality if services to a significant level. Further this has been identified that business can recover from financial crisis with the assistance of trade credit, donation and sales of unproductive assets.
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- Courtney, B. and Briggs, A., 2004. Health Care Financial Management. Elsevier Australia.
- Enthoven, A. C., 2014. Theory and practice of managed competition in health care finance. Elsevier.
- Ezeoha, E. A., 2011. Firm versus industry financing structures in Nigeria. African Journal of Economic and Management Studies. 2(1).pp. 42 – 55.
- Fan, V. Y. and Savedoff, W. D., 2014. The health financing transition: A conceptual framework and empirical evidence. Social Science & Medicine. 105. pp.112-121.
- Gapenski, C. L., 2012. Healthcare Finance: An Introduction to Accounting and Financial Management. 5th ed. Health Administration Press.
- Karanikolos, M. and et.al., 2013. Financial crisis, austerity, and health in Europe. The Lancet, 381(9874). pp.1323-1331.
- Kavaler, F., 2012. Risk management in health care institutions. Jones & Bartlett Publishers.