Question

Reference Needed. 200 word if possible.

Discuss sources of healthcare revenue, assets, liabilities, and net worth.

Reference Needed. 200 word if possible.

Answer 1

The Three Sources of Health Care Revenue are:-

a.Patient services revenue - revenue from the provision of healthcare services to patients.
b. Other revenue - revenue generated from normal day-to-day operations not directly related to patient care, such as cafeteria sales, educational programs, gift shop, etc.
c. Non-operating revenue - resulting from peripheral or incidental transactions such as contributions or investments

Health Care Assets and Liabilities:-

Financing for the current and long-lived assets owned by a health care provider can be obtained from the following sources:

• philanthropy (or an endowment set up from philanthropic funds received in the past)
• grants or other appropriated money from government
• funds accumulated from past operations
• the sale of short-term and long-term debt instruments
• the sale of ownership certificates (stock).

One other source available in some instances is funds from the sale of assets already owned.

Both assets and liabilities are classified as short or long term. Short-term assets are cash, those that can be immediately converted to cash, or those, such as accounts receivable, which the hospital expects to have in hand within the next 12 months. Short-term liabilities are those that must be paid within a 12-month period, such as money due to vendors for goods and services received but not yet paid for. Measures of whether a hospital can meet its short-term liabilities are said to determine the hospital's liquidity.

Long-term assets include physical plant and long-term investments. Long-term liabilities are those that will not be paid within the next year but are due after that, such as loans or bonds that will be paid over several years. Whether a hospital can meet its long-term liabilities is said to be a good measure of the institution's solvency.

Capital costs can be accounted for in two ways. One is by measuring the cash spent to pay for the capital, or the schedule of payments. The second is by measuring depreciation, which is an estimate of the wear and tear or proportion of useful life of the asset that has been consumed. The two sets of charges need not match over time. For example, if a piece of equipment has a useful life of 10 years and is bought with cash, the equipment will be entered as an asset at its full price, and the cash used to purchase the equipment will be drawn down from the cash on the balance sheet. If the hospital depreciates equipment using straight line accounting methods, each year for 10 years it will record one-tenth of the price as a depreciation charge on its revenue and expense statement, and reduce the asset's value on its balance sheet by one-tenth of the purchase price. After 10 years, the asset will have no balance sheet value, even if the hospital continues to use it. In this case, the cash outflow and the charges for the equipment on the revenue and expense statement do not match, with the cash outlay preceding the depreciation charges of the equipment on the revenue and expense statement.

If the hospital borrows the money to pay for the equipment, with one-tenth of the principal due each year, the cash out will match the depreciation. If the hospital takes a loan that defers the principal payments to later years, the depreciation will be higher than the actual cash outlays in the early years and lower in the later years. Level payment loans, in which the payment is fixed for the entire loan period, with interest payments higher and principal payments lower in the early years, lead to depreciation being higher than actual cash outlays for principal in those early years, and are a common form of loan for large equipment and physical plant.

Because depreciation and cash outlays for capital need not match over time, it is critical to consider both depreciation-based measures and cash or cashflow-based measures in examining the institution's financial health. A hospital with large level-payment loans will have more cash coming in and larger margins on a cash flow basis than it appears on its revenue and expense statement. At the same time, it will have long-term liabilities to repay principal that will be larger than later depreciation charges, and a depreciation-based projection may underestimate the hospital's cash needs. If the institution treats the cash coming in early in this cycle as discretionary income, it may be short of funds to fully pay the loan in later years.

Net worth is the difference between the assets and liabilities of a person or business. The concept is defined somewhat differently, depending upon whether the term applies to a business or an individual. The definitions are:

• Net worth for a business. This is the total amount of all assets minus all liabilities, as stated in the balance sheet. The information in the balance sheet may be stated at the original price of the asset or liability, which may differ from the amount at which it could potentially be disposed of. The asset and liability components of net worth typically include:
  • Assets: Cash
  • Assets: Marketable securities
  • Assets: Accounts receivable
  • Assets: Inventory
  • Assets: Prepaid expenses
  • Assets: Fixed assets
  • Liabilities: Accounts payable
  • Liabilities: Accrued liabilities
  • Liabilities: Debt