Financial Management for Hospital Administration GR Kulkarni, P Satyashankar, Libert Anil Gomes
INDEX
A
Accounting 24
bank reconciliation 32
basic books 30
capital and revenue expenditure 34
columnar books 30
concepts 25
conventions 26
documentation 29
finalization 32
personal 26
principle of double entry 28
accrual basis 29
book-keeping 28
cash vs. accrual 28
quality of accounting system 35
types 26
impersonal 26
income, revenues, receipts 27
personal 26
Accounting controls 213
assets 224
balance sheet 222
capital expenditure 225
cash and bank balance
cash disbursements 223
cash receipts 223
internal control check lists 217
internal controls 213
investment income 219
dietary services 221
employees expences 220
income from sale of scrap 220
maintenance 221
operating manual 216
Advertising 253
Average cost 107
B
Bad debts 66
Balance sheet 222
Balance sheet budget 78
Budgeting 40
assets 80
current assets 81
current liabilities 82
fixed assets 80
investments 81
loans, advances and deposits 82
balance sheet budget 78
bed charges 62
benefits 41
budget administration 44
budget calendar 45
budget committee 44
budget officer 45
budget period 46
budget revision 46
master budget 46
budget manual 43
budgetary control 86
cash planning 82
budgeting for inflation 85
cash and bank balance 83
departmental budgets 86
dietary services 87
laundry service 89
nursing training school 90
research 86
functional budgets 46
income 58
forecasting income 59
liabilities 79
balances from income and expenditure 80
capital 79
specific funds 80
term loans 80
long range planning 55
mechanics of budget preparation 56
operating expenses 75
administration 78
depreciation charges 78
interest charges paid 78
marketing 77
other hospital services 63
other receipts 64
bad debts 66
deductions from income 66
donations 64
expenses 67
grants 65
interest/dividend income 65
negative income/deductions 66
payment to doctors 67
pattern of expenses 67
fringe benefits 71
maintenance/plant engineering 76
materials budget 67
overtime 74
personnel budget 69
purchase budget 69
unit rate for charging labor 74
postaudit of investment projects 91
problems in budgeting 91
types of budget
flexible budgets 52
negotiated budget 54
programme/performance budget 53
zero-based budget 54
C
Capital expenditure 34, 182, 225
activities relating to planning 187
benefits 184
budget 183
budget formulation procedure 185
capital expenditure appraisal 188
capital expenditure manual 197
computation of financial viability 190
estimating project cost 189
justification 182
methods of financial appraisal 192
accounting rate of return 194
internal rate of return 196
net present value 196
payback period 192
present value method 194
persons involved in the exercise 185
problems in budgeting 188
review of capital expenditure budget 198
risk analysis in capital budgeting 188
times frame 184
chart of accounts 255
accounts code 257
balance sheet 256
income and expenditure statement 256
computerization 229
applications or areas to be covered 231
benefits 229
accuracy and timeliness 230
speed 230
clear organization structure and management 231
computer literacy 231
cost saving 230
development of positive attitudes 231
greater analysis 230
the sequencing of various applications 231
accounts billing 232
financial accounting 232
inventory 233
payroll 232
reception area 232
Cost accounting 92
activity-based costing 117
analysis of cost 95
breakeven analysis 112
computation of unit cost 97
contribution margin 111
cost assignment/apportionment 99
cost behaviour
fixed cost 105
semi-variable expenses 106
variable cost 105
cost reduction 124
cost volume profit relationship 108
departmentalization 98
effective use of resources 123
full cost and marginal cost 106
average cost 107
differential cost 108
marginal cost 108
indirect and general overheads 97
limiting factor 127
measuring hospital output 101
objectives 94
other cost concepts 114
activity-based costing 117
committed costs 114
controllable costs 114
discretionary costs 114
estimated costs 115
historical costs 115
opportunity cost 117
responsibility costing 115
shutdown costs 115
sunk costs 115
prime cost 95
direct expenses 96
direct labor 96
prime cost 96
procedures 94
prime cost
direct material 95
direct labor 96
direct expense 96
special cost studies 125
standard cost accounting 120
standard time 103
systems of cost accumulation
job order costing 113
process costing 113
variance analysis 122
D
Debt: equity ratio 160
Differential cost 108
Documentation 29
Donation 64
E
Elasticity of demand 138
F
Funds 27
Funds of hospital 169
nature 169
organization structure 170
debentures 176
donations and grants 172
hire-purchase 176
leasing 176
loan funds 173
other avenues for funds 179
promoters' capital 170
reserve and surplus 172
retained profit 172
share capital 171
short-term funds 177
G
Grants 65
H
Health care providers
distinctive features
changing profile of new hospitals 8
high cost 9
labor intensive 8
lifestyle diseases 7
making health care financially viable 10
outsourcing of services 8
predominance of medical profession 8
role of general practitioner 8
vast range of services 7
financial management
managerial accounting 14, 16, 20
Health care providers 1
distinctive features 7
various units 1
biomedical research organizations 2
drugs/alcohol rehabilitation centres 2
hospitals 1
medical and nursing colleges 2
medical practitioners 2
nursing homes 1
private health care 5
public health and management training institutions 2
public health dispensers 3
Hospital information system
features of information 152
daily reports 153
monthly reports 155
inter-hospital comparison 164
liquidity ratios 159
current ratio 159
days cash on hand 160
quick or acid test ratio 160
solvency ratios 160
operating ratios 162
profitability ratios 161
ratio analysis 157
turnover ratios 161
types of information
external information 151
internal information 151
Hospital management 10
control 12
coordination 12
financial management 13
planning 11
Hospital services 38
measuring output of in-patient care 38
measuring output of outpatient department 39
I
Income 58
Interest/dividend income 65
Investment decisions 181
L
Liquidity ratios 159
M
Management information system 150
Marginal cost 108
Marketing 250
advertising 253
branding 253
historical background 251
hospital marketing 252
marketing functions 254
need for marketing 251
Medical tourism 245
benefits 246
disadvantages 247
foreign tie-up 246
O
Opportunity cost 117
P
Patient days 39
Pricing 129
competition oriented prices 137
contribution pricing 138
elasticity of demand 138
cost oriented prices 131
demand oriented pricing
price discrimination 136
price subsidy 137
full cost pricing 133
other issues
other income 140
pricing strategy 143
rates revision 141
rationalization of rate structure 142
role of GPS 140
pricing and revenue pattern in indian hospitals 148
pricing exercise in a charitable hospital 145
rate of return policy 135
cross subsidy 136
direct cost plus method 136
standardised prices 144
Private health care 5
Productivity 234
benchmarking 244
levels 236
macro 236
micro 239
measurement 235
standards 236
Public health dispensers 3
R
Rate of return 194, 196
Ratio analysis 157
S
Sensitivity analysis 178
Standard cost accounting 122
Standard time 103
T
Third party administration 227
present status 228
scope 228
W
Working capital 200
ABC analysis 208
availability of bank finance 212
cash management 209
inventory control 202
costs associated with inventory management 204
first-in first-out 206
purchase 203
standard rate 206
valuation of inventory 206
investment 210
receivables – patients' dues 208
size 201
sundry creditors 210
working capital management 211
working capital manual 211
Z
Zero-based budget 54
×
Chapter Notes

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1Financial Management for Hospital Administration2
Disclaimer
This book is primarily addressed to those who are pursuing various courses relating to hospital administration or who are part of a hospital management team. In the book, the authors have shared their knowledge and expertise with readers. It may be useful to medical personnel also who would like to widen their know-how beyond health matters to include financial viability, costs and efficiency.
The book contains information, statements, opinions, statistics and other material that have been obtained from sources believed to be reliable and the Authors/Publishers have made best efforts to avoid any errors/omissions. However, the Authors/Publishers make no guarantees/warranties of whatsoever expressed or implied regarding the timeliness, completeness, accuracy, adequacy, fullness, functionality and reliability of the information, statistics, statements, opinions and other material contained in and/or expressed in the book or of the results obtained directly or consequential from use of such information/materials from the book. Authors and Publishers neither certify nor endorse the information to the readers.
The work is published with the understanding that Authors/Publishers are supplying information, and the contents of the book are not intended to serve as professional advice. Authors/Publishers take no responsibility or liability expressed or implied whatsoever for any decisions made or taken by readers of the publication based on its contents. Readers are strongly advised to verify the contents before taking any decision based on the contents of the publication. This publication is meant for general reading purposes only and not to serve as professional guide. Readers should exercise due caution and/or seek independent professional advice before entering into any commercial or business relationship or making any decision/entering into any financial obligation based on information contained in the publication. Readers may refer to professional consultants for any further information they would like to acquire on topics covered by the book.
3Financial Management for Hospital Administration
GR Kulkarni Dip MA FICWA Cost Accountant Mumbai, Maharashtra, India P Satyashankar MD Medical Superintendent SDM College of Medical Sciences and Hospital Dharwad, Karnataka, India Libert Anil Gomes MD Associate Professor Department of Hospital Administration Kasturba Medical College and Hospital Manipal, Karnataka, India
4Published by
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Financial Management for Hospital Administration
© 2009, Jaypee Brothers Medical Publishers
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First Edition: 2009
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5Preface
This book is written keeping in mind the requirements of hospital administrators and management staff who are entrusted with the responsibility of administering the institutions managed by them as financially viable units. The objective is not to make their accountants better book keepers. In 1990s, when the work on this book was first initiated, hospitals were regarded more as a part of welfare activity, owned and managed by the Government/States or by Charitable Trusts and other NGOs. They were mostly run on no-profit no-loss basis. The book was titled Management Accounting for Hospitals and the contents of the book were focused on Cost Accounting. During subsequent decade, several of the non-Government hospitals transformed themselves into commercial ventures. If not done so already, they are in the process of doing so. On their drawing board, they will be planning chains of hospitals which will include some speciality hospitals. Their geographical spread covers several States and include towns, with no particular locational advantage. Rarely one heard or read of these ventures having financial problems. The title of this version of the book has been changed to Financial Management for Hospital Administration to reflect the changing scenario.
In the past, a hospital was culmination of successful career of a renowned doctor or funded by religious or charitable trust. For the last few decades, initiative for starting private hospitals was taken by members from medical profession who could tap their families’ accumulated wealth. Recently, other companies in their group, business associates, public investors and international capital venture funds made additional contributions. Consequently, they are less dependent on the State or private charities for funds. They look upon the State more for a large track of land at strategic locations at below the market rates. Their activities are conducted on business lines. They focus on long-term growth in economic value, rather than on short-term financial viability. Their promoters do not hesitate to spend large sums on infrastructure, payments to medical specialists and vast range of services they provide. They prefer their medical staff interacting with foreign consultants and ordering latest state-of-the-art equipment which would take several years to break even.
Currently, significant changes are taking place in the field of health care domain. Many superspeciality hospitals have already started functioning. One is not sure of the quantum of capital employed in the industry and the extent of their utilization. One may take satisfaction that the health care business is in sound hands and the capabilities of doctors and nurses are unchallenged and considered one of the best in the world. Health care in private sector is now termed as a sunrise industry with 6enormous potential for growth in spite of limited support from health insurance. It is considered recession-proof, a sick person has to be given medical care, recession or no-recession. Technological advances have provided opportunities to medical service providers to offer clinical process support to US and other advanced countries in the West. It is now possible for US hospitals to send X-ray, ultrasound, computerized tomography, magnetic resonance, fusion and 3D images to the global and technology supported centres, for reading the images, and sending back diagnosis thereof to the respective hospitals. Globalization, introduction of technology, provision of international quality standards and facilities comparable to the Western countries are going to benefit the patients as well.
Loans have replaced grants, scholarships and charities as primary source of capital funds. In future, interest payment would be a major cost. Hospitals in economically advanced countries depend more on grants, charities and endowments for their requirements of capital funds. These have no obvious costs. The general purpose hospitals have lost their attraction. In spite of availability of huge infrastructure in the form of district, panchayat and ESIC hospitals, the storehouse of medical talent, and latent unfulfilled demand, the existing per capita expenditure on health care incurred is more in private domain rather than public system. The Government is looking to private corporate sector and NGOs to take additional interest in public health.
Some features are unique to hospitals, which justify a book on Hospital Administration. This book is addressed to all categories of hospitals— whether owned and managed by the Government, public authorities, voluntary private organizations or corporate bodies; looking for profit or operating on no-profit no-loss basis; small nursing homes with 10–20 beds and managed by wife and husband doctors’ team or high-tech hospitals. Government funding of health care has not kept pace with inflation, technological upgradation and need for research. The capital and operating expenses of newer facilities are disproportionately high and continue to rise at a faster rate than per capita income of an average citizen. Medical personnel play leading role in the management of modern hospitals. Other professions such as personnel, engineering, finance and general management are also active. Executive authority is wielded by bureaucrats and politicians whose interest in health care institutions is limited to personal gain. Concepts and techniques whose use would enable hospitals to improve their overall performance and operating efficiency are low down in their priority.
To enable maximum number of persons connected with health care make use of the book, minimum use of accounting jargon has been made. The emphasis is on management rather than on accounting, applications rather than on theory. With management support, cooperation from operating personnel and some additional inputs, the book will enable the hospital authorities to:7
  1. Prepare a plan of action for immediate future period in quantitative and financial terms, with departmental managers, they contribute to this exercise, by making their own projections regarding activity levels, resource requirements, income and costs.
  2. Understand financial implications of their decisions and actions on costs and revenues.
  3. Establish costs for various services rendered by the hospital and derive unit rates which are equitable, rational, cost based and easily understood by the patients.
  4. Design a management information reporting system which enables management at various levels to learn about their current performance. Its comparison with what was planned in an analytical manner facilitates corrective action.
  5. Institute a system of investment appraisal. One needs to be careful that these measures do not result in unmanageable strain on its financial, managerial and manpower resources.
  6. Ensure proper management of capital as well as working capital funds.
Though strictly not a part of the subject Managerial Accounting, the book will also help:
  1. Understanding of accounting controls to ensure proper safeguard of the assets owned by the hospital; and expenditure is incurred genuinely for running the hospital and income that is generated is promptly and correctly brought into accounting books.
  2. Suggest cost-effective computerization of accounting records to provide better service to patients; reduce clerical effort, and generate management information avoiding usual but avoidable pitfalls.
  3. Provide a chart of accounts to facilitate a meaningful analysis of costs and income for better control and facilitate inter-hospital comparisons.
We could not do justice to the techniques of Activity-based Costing and Zero-based Costing for want of live data. Though these techniques help establish theoretically more accurate cost, their utility in assisting management for taking decisions where alternatives need to be evaluated are not significant.
GR Kulkarni
P Satyashankar
Libert Anil Gomes