The document outlines key methodologies for financial management in healthcare organizations, emphasizing the importance of financial statement analysis, break-even analysis, and capital management. It discusses how healthcare funding is primarily sourced from private insurance, Medicare, and Medicaid, while stressing the need for organizations to maintain profitability regardless of their operational status. Additionally, it highlights the critical role of financial statements in assessing an organization's financial health over time.

1. 1
1. Describe key methodologies for the practical application of
financial management in healthcare
organizations.
Reading Assignment
Chapter 15:
Financial Statement Analysis
Chapter 16:
Financial Condition Analysis
Unit Lesson
The focus of Unit VIII is on providing a general framework for
financial statement analysis to gain insight into
the financial status of an organization. The basic framework
provided is to:
g
reading the auditor’s opinion letter and
considering the information in that letter.
organization over time, other specific similar
organizations, and the industry as a whole.

2. organization, taking all of the available
information into account.
This unit will address the notes that accompany the financial
statements. This includes significant accounting
policies that you need to understand and apply. There will be a
review of the summary of the notes provided.
The unit will also explore ratio analysis and making
comparisons within the major classes of ratios.
Key Learning
This is a good time to look back and reflect on your key
learning from this course. Hopefully, you have a
better understanding now in terms of how healthcare finance
actually works, how it gets reported, and how it
gets audited. As we conclude this unit, let’s look back at your
key learning from this course.
Healthcare spending: Earlier in this course, we talked about
healthcare spending; where does the money
come from, and where does it go? That is definitely a key
concept from the course. You learned that private
insurance is the number one source of funding for healthcare in
America, representing 32% of total healthcare
dollars. Even with so many Americans currently uninsured,
health insurance is the number one source of
funding. Next comes Medicare at 20% and then Medicaid at
15%. Government programs overall make up
35% of spending. That may shed some light on why government
has so much influence in our field. In terms
of out-of-pocket expenditures, they truly make up a small
portion of healthcare spending in America, just 12%
of total healthcare spending (Finkler, Purtell, Calabrese, &
Smith, 2013).

3. Where does the money go? Well, hospitals clearly get the
largest piece of the healthcare dollar, receiving
31% of total medical spending each year. Doctors and clinics
come next at 20%, and prescription medications
are next at 10%. Several other areas receive smaller amounts,
about 5-7% each. Such areas include dental
services, health insurance administration cost, and nursing care
(Finkler et al., 2013).
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The big problem, as you likely recall, is that in America, we
spend two to three times as much on healthcare
as any other developed nation around the planet, and we do not
have better health outcomes as a result of all
that spending!
Costs in healthcare organizations: Another key concept of our
course is understanding how costs change
as service volumes change, and that brings up the whole topic
of break-even analysis. The relationship
between costs and volume has a dramatic impact on the
profitability of a healthcare facility. Healthcare
organizations must find a way to generate black ink on the
income statement in order to survive. It makes no
difference whether the organization is officially for-profit or
officially not-for-profit, it must show black ink on the
income statement or it will be in financial trouble very soon.
The job of management, which at times is

4. challenging, is to find a way to provide services for our patients
with a margin of revenues over expenses.
Break-even analysis is crucial in healthcare. Managers who
understand the relationship between costs and
service volumes can apply the break-even analysis technique, a
tool that assists in determining the required
volume level for a program to be financially self-sufficient.
Break-even analysis is crucial for effective
healthcare management. Patients and doctors will request many
services that they would like to have
available in the community, but we need to be realistic about
which ones will have sufficient volume to be
financially viable for the organization.
Capital purchases: Also very important in this course, is the
concept of managing capital. Capital purchases
for the facility will always get special attention from the board
of directors because (1) the initial cost is large,
making a poor choice costly; (2) the items are generally kept a
long time, so the organization often lives with
any poor choices for a long time; (3) we can only understand
the financial impact if we evaluate the entire
lifetime of the assets; and (4) since we often pay for the asset
early and receive payments as we use it later,
the time value of money must be considered.
Financial statements: This course also taught you about the key
financial statements. These apply to every
type of business, but there are certain aspects which are unique
to healthcare. The statement of financial
position, commonly referred to as the balance sheet, is the first
of the financial statements. The balance sheet
reports the financial position of the organization at a moment in
time, typically the end of a month, a quarter or
the end of the fiscal year.

5. Balance sheets provide readers with information about a variety
of different types of assets and liabilities of
the entry. Some of the asset categories explored in this course
are cash, marketable securities, accounts
receivable, inventory, prepaid expense, and fixed assets. A
variety of liability categories are also discussed,
including both short-term payables and long-term debt. The
residual value of the entity when liabilities are
subtracted from assets represents the ownership or equity value
of the entity. This may be called net worth,
owner’s equity, net assets, fund balance, or a variety of other
names that convey the equity concept, as
appropriate for the specific type of entry.
We also discussed the results of operations. This is shown by
generating an activity statement (also known as
income statement) and statement of cash flows. Unlike the
balance sheet, these statements report on what
has happened over a period of time, rather than just disclosing
the financial position of the organization at one
specific point in time. The activity statement compares the
entity’s revenues and other support with its
expenses for a period of time, such as a fiscal year.
The activity statement, probably more than any other document
which reaches the board of directors, gets
intense scrutiny. It is the activity statement which shows us
whether the organization has black ink for the
period under consideration, meaning that it generated a profit,
or whether it generated red ink showing a loss.
The cash flow statement is also very important; it looks at
where the organization obtained its cash and where
it spent cash during a particular period of time, a month, a
quarter or a year. The focus is not only on how that

6. much cash came and went, but also on the sources and uses of
cash. The financial statements, when
analyzed together, provide a clear picture of the organization’s
financial health.
Conclusion
Much learning in this course, a diversity of topics has presented
here, all of them important for your success
as a healthcare leader. The course has also provided many case
studies and problems, enabling you to test
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your skills and understanding of these key course concepts.
Hopefully you have enjoyed the learning, and
you now come away from this course with a stronger
appreciation for medical finance.
Reference
Finkler, S. A., Purtell, R. M., Calabrese, T. D., & Smith, D. L.
(2013). Financial management for public, health,
and not-for-profit organizations (4th ed.). Upper Saddle River,
NJ: Prentice Hall.