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Through real-world cases, it provides the opportunity to bridge the gap between learning concepts in a lecture setting and applying those concepts on the job. Like its predecessors, this book introduces readers to the basic concepts of healthcare finance, including accounting and financial management. ∞ ™ Acquisitions editor: Janet Davis; Project manager: Amy Carlton; Typesetting: Scott Miller Cover illustration by Anne Lo Casio. Health Administration Press A division of the Foundation of the American College of Healthcare Executives One North Franklin Street, Suite 1700 Chicago, IL 60606–3529 (312) 424–2800 Association of University Programs in Health Administration 2000 North 14th Street Suite 780 Arlington, VA 22201 (703) 894–0940 BRIEF CONTENTS Preface . Adjusted betas recognize the fact that true betas tend to move toward 1.0 over time. The purpose of these projects generally is to lower costs or to provide more clinically effective services.

Be better prepared to deal with the multitude of issues that arise in the practice of healthcare finance. Gapenski, Ph D One North Franklin Street, Suite 1700 Chicago, Illinois 60606-3529 Phone: (301) 362-6905, Fax: (240) 396-5907 Order No: 2192 FIFTH EDITION GAPENSKI Also available from Health Administration Press Understanding Healthcare Financial Management, sixth edition by Louis C. Pink, Ph D HEALTHCARE FINANCE Healthcare Finance: An Introduction to Accounting and Financial Management, fifth edition, is the latest book from the most trusted name in healthcare finance, Dr. AUPHA/HAP Editorial Board for Graduate Studies Andrea W. Therefore, one can begin with a firm’s pure historical statistical beta, make an adjustment for the expected future movement toward 1.0, and produce an adjusted beta that on average will be a better predictor of the future beta than would the unadjusted historical beta. Because Category 2 projects are not mandatory, a more detailed decision process is generally required to support the expenditure than that needed for Category 1 projects.

Healthcare finance: an introduction to accounting and financial management / Louis C. Cleverley, F “Return on Equity in the Hospital Industry: Requirement or Windfall? The primary determinant of how Category 6 projects are evaluated is the amount of funds required.


Unformatted text preview: Fifth Edition Features • New or expanded coverage of • The impact of taxes and depreciation on for-profit providers • Medical coding • Monte Carlo simulation • Form 990 • Fund accounting • � ecent information on healthcare reform, including coverage of accountable care R organizations (ACOs) and medical homes with updated real-world examples • � pdated financial accounting coverage that conforms to the latest AICPA formats U • � ew learning aids, including on-page definitions, For Your Consideration scenarios, N and Key Equations quick-reference tools Companion Website Go online to access additional learning tools, including • Bonus chapter on distributions to owners of for-profit businesses • Bonus chapter that covers capitation, rate setting, and risk sharing • � ppendixes that provide lists of financial and operating indicator ratios A and their definitions The companion website can be accessed at Please e-mail it to [email protected], and put “Book Error” in the subject line. If preferred stock is used as a source of permanent financing, it should be included in the cost of capital estimate, and its cost would be estimated using procedures similar to those discussed for the cost of debt. � ee Ibbotson SBBI 2011 Classic Yearbook: Market Results for Stocks, Bonds, S Bills and Inflation: 1926-2010 (Chicago: Morningstar, 2011). � ecause historical betas may not be good predictors of future risk, research B ers have sought ways to improve them. Category 1 consists of expenditures necessary to replace worn-out or damaged equipment necessary to the operations of the hospital.

Companion casebook Cases in Healthcare Finance, also published by Health Administration Press, is an ideal supplement to this text. G3695 2011 362.1068’1—dc23 2011023563 The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984. For photocopying and copyright information, please contact Copyright Clearance Center at at (978) 750–8400. This has led to the development of two other types of betas: adjusted betas and fundamental betas. “Practice Financing Strategies Should Match Investors’ Objectives.” Healthcare Financial Management (May): 72–76. Because these expenditures are mandatory, they are usually made with only limited analyses and decision processes. This category includes expenditures needed to replace serviceable but obsolete equipment.

White, Ph D, Chairman Medical University of South Carolina William Aaronson, Ph D Temple University Claudia Campbell, Ph D Tulane University M. Meacham Medical University of South Carolina Lydia Middleton AUPHA Bernardo Ramirez, MD University of Central Florida Lesly Wilson, Ph D University of South Carolina LT Suzanne J. Fundamental betas extend the adjustment process to include such fundamental risk variables as the use of debt financing, sales volatility, and the like. • Category 3: Expansion of existing services or markets.

Nicholas Coppola, Ph D, FACHE Texas Tech University Julia Costich, JD, Ph D University of Kentucky Diana W. Wood, Ph D, FACHE Army-Baylor University Health Administration Press, Chicago, Illinois AUPHA, Washington, DC Your board, staff, or clients may also benefit from this book’s insight. These betas are constantly adjusted to reflect changes in a firm’s operations and capital structure, whereas with historical betas (including adjusted ones) such changes might not be fully reflected until several years after the company’s “true” beta has changed. � he retention growth method is another method for estimating the growth T rate in dividends: E(g) = Retention ratio × E(ROE). “Squeezing the Funding You Need from Today’s Capital Sources.” Healthcare Financial Management (April): 47–55. Expenditures to increase capacity, or to expand within markets currently being served by the hospital, are included here.

It is sold, or otherwise provided, with the understanding that the publisher is not engaged in rendering professional services. In addition, the firm’s dividend payout ratio has averaged 0.45 over the past 10 years, so its retention ratio has averaged 1.0 – 0.45 = 0.55. These are projects necessary to provide new services or to expand into geographic areas not currently being served.If professional advice or other expert assistance is required, the services of a competent professional should be sought. Using these data, the retention growth method gives an E(g) estimate of 7.7 percent: E(g) = 0.55 × 14% = 7.7%. � or one of the classic works on this topic, see Douglas A. Such projects involve strategic decisions that could change the fundamental nature of the hospital, and they normally require the expenditure of large sums of money over long periods of time.


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