Question

• Explain why the healthcare industry’s payment structure is different from most industries. Please include one example of a healthcare financial transactions and include all of the parties involved.
• Explain why financial statements are important to managers and to outside parties.

Answer 1

Health care industry is different from most industries due to the following reasons:-

• Barriers for new entrants:- Special licenses are required for a new entrant in the healthcare industry.
• Highly regulated:- Almost every aspect of health care is highly regulated. Invention, manufacturing and sale of drugs, medical equipments, diagnostic tests are all regulated by governing bodies such as Food and Drug Administration.
• Multiple parties in a single transaction:- In healthcare , for a single activity there is involvement of various parties. For example- health insurer, patient, doctor, hospital.
• High amount of responsibility involved as people are dealing with precious lives
• Health services and health insurance products are differentiated and complex
• Doctors require fair remuneration for their valuable efforts.

Due to the above stated reasons the payment structure is also different in health care.The payment structure can be categorized into 4 types-

• Fee for service-Payment for every service/test based on usual and customary charges in an area.
• Discounted fee for service- -Payment for every service/test based on pre determined discounted rate based on usual and customary charges in an area.
• Capitation:-Payments are made at  a fixed amount per enrollee, not per service, on a monthly basis.
• Salary:- A weekly or monthly payment of a fixed amount not subject to the number of patients or services.

Example of a financial healthcare transaction- A patient goes to a hospital to undergo a surgery. For the purpose, parties involved are medical insurance provider, patient, doctors( will be more than one ,surgeon, anaesthetist, etc), hospital management.

Financial statements provide the information regarding financial health, performance and growth of a company.These statements are used by various users for interpretation of the data that influences decision making.

Importance of financial statements to managers:

Financial statements are used by the managers for the following reasons-

• To judge performance and growth of a concern.
• Analyze past and upcoming trends.
• Prepare  budgets
• For decision making andchalking out plans for day to day functioning in order to promote growth and achieve long term goals.
• Motivating teams and alignment of different departments as per need of the time.

Importance of financial statements to outsiders:
Financial statements are also very important for external users or outsiders. Various parties use the financial statements for the following reasons:

• Lenders: The providers of finance such as banks or financial institutions require financial statements at the very first level in order to decide whether to sanction a particular loan. By interpretation of the financial statements the financial health of a concern is checked and its credibility is measured.
• Creditors: Creditors keep a check on the performance of a concern through the disclosed financial statements to understand whether a company is eligible for credit or not.
• Regulators/ Government:   It is mandatory for almost all entities to submit a copy of annual financial statements to the concerned governing bodies. The regulators keep a check that the requisite amount of taxes are being paid (if liable to pay) by the entities and also to check the entity's activities are being conducted in a legal manner.
• Investors: Potential investors review financial statements to determine whether a firm is suitable for profiitable investment and that the money will be used in a legitimate manner.
• Unions: Unions review financial statements to see how a company manages its employees, and what new opportunities and packages it can create for its employees.