September 30, Year
Net accounts receivable
Total current assets
Gross plant, property, and equipment
(less accumulated depreciation)
Net plant, property, and equipment
September 30, Year
Total current liabilities
Total net assets
Total liabilities and net assets
Zelman, W. N., McCue, M. J., Glick, N. D., & Thomas, M. S. (2014). Financial
management of health care organizations: An introduction to fundamental tools,
concepts, and applications (4th ed.). San Francisco, CA: Jossey-Bass.
CHAPTER 1 THE CONTEXT OF HEALTH CARE FINANCIAL
• Identify key elements that are driving changes in health care delivery.
• Identify key approaches to controlling health care costs and resulting ethical issues.
• Identify key changes in reimbursement mechanisms to providers.
Never before have health care professionals faced such complex issues and practical
difficulties in trying to keep their organizations competitive and financially viable. With
disruptive changes taking place in health care legislation and in payment, delivery, and social
systems, health care professionals are faced with trying to meet their organizations' healthrelated missions in an environment of uncertainty and extreme cost pressures. These
circumstances are stimulating high-performing provider organizations to focus on innovation
to help lower costs and find creative ways to deliver services to a population whose members,
while aging, are more informed and more demanding of a voice in their care and value for
dollars spent than ever before.
The Patient Protection and Affordable Care Act (ACA) is the largest effort toward reform of
the health care system since the advent of government entitlement programs in the 1960s. The
goal of the ACA is to provide mechanisms to expand access to care, improve quality, and
But even before the enactment of the ACA in 2010, the Centers for Medicare and Medicaid
Services (CMS) had articulated a vision for health care quality: “the right care for every person
every time.” CMS's stated objective is to promote safe, effective, timely, patient-centered,
efficient, and equitable care.
CMS also needs to control the rising cost of care, which has become unsustainable. To
accomplish its objectives CMS has been working to replace its old financing system, which
basically rewarded the quantity of care, with value-based purchasing (VBP), a system that
improves the linkage between payment and the quality of care. The Deficit Reduction Act of
2005 authorized CMS to develop a plan for VBP for Medicare hospital services beginning in
fiscal year 2009. The ACA provided the implementation plan.
Many of these changes have been the source of controversy and lawsuits. Until President
Obama's reelection in 2012, state governments as well as many providers faced uncertainty
about whether the ACA provisions, even though found to be constitutional earlier in 2012,
would be repealed. Some hesitated to move forward with implementation plans.
Regardless of whether or not all parties agree about the legislative outcome, the goal of the
U.S. health care system remains to finance and deliver the highest possible quality to the most
people at the lowest cost (Exhibit 1.1). But responses to today's challenges have resulted in a
new business model that providers are embracing by controlling costs, developing new service
offerings, and implementing new information technology, thereby creating added value (see
Perspective 1.1 and Exhibit 1.2).
HEALTH SYSTEM GOALS REMAIN
To establish a context for the topics covered in this text, this chapter highlights key issues
affecting health care organizations. It is organized into three sections: (1) changing methods of
health care financing and delivery, (2) addressing the high cost of care, and (3) establishing
value-based payment mechanisms. Without question the health care industry is undergoing
rapid change (Exhibit 1.3). The providers who are open-minded and informed, embrace
change, and look for effective solutions will be the ones who thrive in this uncertain
HEALTH CARE SYSTEM IN REFORM
No matter what their political view is, people generally agree that the financial platform on
which the health care system rests cannot be sustained. There is a clear need to reduce the
proportion of the gross domestic product (GDP) spent on health care. Since the 1960s,
hospitals have experienced increases in utilization, accompanied by increases in payments
from government as well as from commercial payors. Medicare market basket updates have
increased an average of 3.2 percent annually since that time. Under Medicare's new payment
model, utilization and reimbursement are expected to decline over time, limiting market
basket and utilization increases to only 1.5 percent to 2 percent a year. In addition, the valuebased payment structure will reward those organizations with better quality while penalizing
those with poorer scores. Since Medicaid and commercial payors tend to follow Medicare
models, this effect will be magnified.
Several disruptive trends are changing the competitive landscape. Where commercial and
not-for-profit providers had distinct differences, now they are both heavily focused on cost,
quality, market share, and how quickly they can get innovative products to market. For
example, Duke University Health System, a not-for-profit health system, and LifePoint
Hospitals, Inc., a commercial health system, formed a joint venture, Duke LifePoint
Healthcare, to provide community hospitals and regional medical centers with innovative
means of enhancing services, recruiting and retaining physicians, and developing new service
lines. Insurers such as Humana and private equity groups have acquired health systems.
Certain integrated health care organizations, such as the Mayo Clinic and Geisinger Health
System, are directed by physicians. New technologies like mobile apps provide mid-level
providers and consumers with the latest evidence-based guidance to aid in diagnosis and
management of health issues. And hospitals are consolidating, taking the view that big is
good, bigger is better, and biggest is better still.
Source: Adapted from K. Kaufman and M. E. Grube, The transformation of America's
hospitals: economics drives a new business model, in Kaufman, Hall, & Associates,
Futurescan 2012: Healthcare Trends and Implications, 2012–2017 (Health Administration
Changing Methods of Health Care Financing and Delivery
The push toward health care reform began back in the early 1990s during the Clinton
administration. However, it did not make significant inroads until President Obama signed
the ACA into law in early 2010, though the ACA is complex and has numerous provisions.
The provisions that are expected to have the most significant impact on the delivery and
financing of care are noted in the following list and discussed in the remainder of this
KEY ELEMENTS OF HEALTH CARE
BUSINESS MODEL CHANGE
Source: Kaufman, Hall, & Associates, published in Futurescan 2012: Healthcare Trends
and Implications, 2012–2017, Society for Healthcare Strategy and Market Development
of the American Hospital Association and the American College of Healthcare
• Requirement that almost all individuals have insurance coverage. This individual
mandate lies at the heart of the legislation.
• Requirement that states create insurance exchanges where individuals and small
businesses can obtain coverage. The ACA contains requirements for an essential benefits
package and provides for changes to the tax law that include penalties for individuals who
choose not to have insurance.
EXHIBIT 1.3 SELECTED FACTORS CONTRIBUTING TO
HEALTH CARE INDUSTRY UNCERTAINTY
• Provisions for expansion of Medicaid coverage to all eligible individuals under age sixtyfive. Since adults represent only 25 percent of those covered presently by Medicaid, this
will be a significant expansion to include entire families. Federal funds will be made
available for the expansion at a decreasing rate, down to 90 percent in 2020. This
expansion is a state option and remains controversial as states realize that they will need to
be equipped to shoulder the expense as the federal subsidies decrease.
• Provisions for medical loss ratio and premium rate reviews for health plans. Rebates will
be paid to health plan enrollees by health plans that do not meet a required minimum level
of spending on medical care.
• Establishment of payment mechanisms for bundled payments and a value-based
purchasing system along with the restructuring of certain aspects of the Medicare payment
• Provisions for providers organized as accountable care organizations (ACOs) to share in
cost savings that they achieve for the Medicare program.
Health Insurance Exchanges
Between 2001 and 2010, the number of uninsured rose from 36 million to 50 million
people, before decreasing slightly (Exhibit 1.4). This rise is due to several factors,
including (1) health insurance and out-of-pocket costs becoming too costly for many
individuals, even when they are working; (2) individuals being screened out by insurance
underwriters because of preexisting conditions; (3) employers either scaling back
employees' benefits or eliminating them altogether by hiring part-time workers; (4) state
governments tightening Medicaid eligibility criteria; and (5) individuals voluntarily
deciding not to purchase insurance for a variety of financial and nonfinancial reasons,
including the assumption that they will not need care or that they will be taken care of by
the “system” anyway. As a result, uncompensated care costs have doubled over the past
decade (Exhibit 1.5), which has placed a tremendous burden on health care facilities,
especially community hospitals.
The ACA authorizes a competitive insurance marketplace at the state level and provides for
two types of exchanges, an individual exchange and a small business exchange. The
individual exchange provides a mechanism for implementing the individual mandate for
those who either do not have access to health insurance through an employer plan or who
are uninsured for other reasons. The small business exchange provides access for small
businesses, enabling them to improve the quality of health insurance for their employees by
pooling their buying power and providing multiple health insurance options.
NUMBER OF UNINSURED, 2001–2011
Source: Data from U.S. Census Bureau, Current Population Survey, 2012 Annual
Social and Economic Supplement.
EXHIBIT 1.5 UNCOMPENSATED CARE COSTS FOR
THE UNINSURED, 2001–2011
Source: Data from Health Forum, American Hospital Association Annual Survey Data,
1980–2011 (January 2013).
States have the ability to choose whether they want to operate their exchanges themselves.
For those that do not want to develop and manage their exchanges, the federal government
will do it for them. These exchanges begin operation in 2014.
The ACA provides for a minimum benefits package; however, participants will be able to
shop for health insurance from among an array of commercial health insurance products
with varying levels of deductibles, coinsurance, and additional benefits over and above the
minimum. The benefit packages are referred to as bronze, silver, gold, and platinum,
depending on how much participants choose to pay.
Tax credits are available to low-income consumers, phasing out at 400 percent of the
federal poverty level. In addition, consumers will not need to worry about denial of
coverage because of any preexisting conditions they may have. The exchanges should
promote transparency, to assist the participants in making an informed decision.
The health insurance exchanges, along with other ACA provisions, are expected to make
coverage available to 32 million previously uninsured people by 2019. If this works as
intended, it should reduce the amount of charity care currently being provided by providers,
especially hospitals. However, because the rules providing for a tax penalty for individual
noncompliance with the insurance mandate have some exceptions, it is possible that the
benefit to providers will not be as effective as originally forecast.
Accountable Care Organizations
An ACO is a voluntary group of health care providers who come together to provide
coordinated care to a patient population in order to improve quality and reduce costs by
keeping patients healthy and by reducing unnecessary service duplication. This mechanism
was initially created to serve Medicare beneficiaries but has now expanded into the nonMedicare population.
Participation is open to networks of primary care doctors, specialists, hospitals, and home
health care services in which the network members agree to work together to better
coordinate their patients' care. In June 2012, there were 221 ACOs in the United States.
The majority were sponsored by hospital systems (118), followed by physician groups (70),
insurers (29), and community-based organizations (4), and were located primarily in urban
settings with relatively dense populations. By January 2013, there were more than 250
ACOs. As will be more fully discussed in Chapter Thirteen, ACOs are rewarded for
reducing the cost of care while maintaining or improving quality under a variety of riskbased or risk-sharing mechanisms now being tested. Although certain medical groups, such
as the Permanente Medical Group, Mayo Clinic, Intermountain Health Care, and Geisinger
Health System, have shown positive correlations between practice organization and better
performance, the ACO mechanism is too new to conclude that it will ultimately show the
savings and quality improvements it was designed to achieve.2
Patient-Centered Medical Home
A partnership between primary care providers (PCPs), patients, and patients' families to
deliver comprehensive care over the long term in a variety of settings.
Patient-Centered Medical Home
The patient-centered medical home (PCMH) is a partnership between primary care
providers (PCPs), patients, and their families to deliver a coordinated and comprehensive
range of services in the most appropriate settings. The PCP takes full responsibility for the
overall care of the patient over an extended period of time, including preventive care, acute
and chronic care, and end-of-life support. The PCMH is a patient-centered model using
evidence-based medicine, care pathways, updated information technology, and voluntary
reporting of performance results. In 2011, the National Commission on Quality Assurance
created a program that recognizes providers as PCMHs on one of three levels, based on
meeting certain administrative standards and achieving a degree of quality reporting.
Practices with robust information technology, which includes electronic record keeping,
electronic disease registries, internet communication with patients, and electronic
prescribing, are the ones most likely to achieve level 3 status.
The PCMH is a good way for a primary care provider to distinguish itself as a quality
practice. Until recently there has been little payment advantage associated with being a
PCMH; however, programs run by various Blue Cross Blue Shield plans and other insurers
are demonstrating that the concept pays off. For example, in late 2012, Horizon Blue Cross
Blue Shield of New Jersey identified savings due to reduced emergency department use
(26%) and reduced hospital readmissions (26%). At the same time, CMS announced that
500 practices with over 2,000 total physicians will participate in the comprehensive
primary care initiative. WellPoint is expanding its program after announcing that it earned
$2.50 to $4.50 for every dollar invested in its PMCH program.3
Addressing the High Cost of Care
Over the last decade health care costs have increased faster than has general inflation
(Exhibit 1.6). The cost to keep people healthy has approximately doubled from 2001 to 2011
(Exhibit 1.7), although the average life expectancy of the general population has risen by
only approximately five years since 1980. Even though the increases in the medical inflation
rate are higher than those for the Consumer Price Index, the rate of growth has slowed,
declining from approximately 5 percent at the turn of the century to 3.5 percent a decade
later. However, looking ahead, forecasters are uncertain of what will happen. Certain factors
tend to increase costs and others tend to lower them (see Exhibit 1.8).
Factors That Could Contribute to an Increase in Costs
• The population is continuing to age. As a person ages, the care he or she requires
becomes significantly more costly. By the year 2035, 20 percent of the population is
expected to be sixty-five or older. However, research also supports the notion that the many
baby boomers are demanding wellness and life enhancement services in order to be able to
continue to work into their seventies or eighties, which may help. Nevertheless, as people
live longer, their medical issues become more complex and costly.
EXHIBIT 1.6 CONSUMER PRICE INDEX VERSUS
MEDICAL CARE INFLATION, 2001–2012
Source: Data from U.S. Labor Department, Bureau of Labor Statistics (January 2013).
EXHIBIT 1.7 ANNUAL HEALTH CARE EXPENDITURES
IN THE UNITED STATES, 2001–2011
Source: Data from Centers for Medicare and Medicaid Services, Office of the Actuary,
FACTORS AFFECTING THE COST OF
• New consumers will enter or reenter the marketplace. Once fully implemented, the ACA
will bring millions of newly insured people into the system. As they obtain services, their
needs will likely raise total health care costs. The expectation is that receiving the
appropriate care in the appropriate setting at the appropriate time will, in the end, reduce
• The medical technology industry continues to develop new systems. Some of these
advances, such as the positron-emission tomography (PET) scan, proton beam therapy for
prostate cancer, and defibrillator implants, may improve outcomes for some patients, but
not all. And more and more hospitals are performing robotic surgery, which may be highly
effective. But all this use of advanced technology comes at a high cost.
• Chronic disease contributes to the high cost of care. Many chronic conditions, such as
heart disease, are associated with the elderly, but long-term issues affect younger
populations as well. A 2011 article in Academic Pediatrics stated that 43 percent of
children have a chronic disease.4 The top five chronic diseases reported in 2011 for adults
were arthritis, cardiovascular disease, diabetes, asthma, and obesity,5 and the effect and
expense of chronic disease are compounded when multiple diseases are present. Chronic
disease often requires costly drugs and monitoring over the span of a person's entire life.
Higher rates of chronic disease also lead to higher rates of organ failure, and transplants
have become one of the most expensive medical procedures. AIDS and mental health
issues are also very costly chronic illnesses.
Factors That Could Contribute to a Decrease in Costs
• Certain behaviors have begun to change, spurred in large part by employers who can no
longer afford to pay for employee health care the way they have in the past. Employers are
shifting health care costs to their employees through changes in benefit plan design. Some
larger companies offer workplace wellness centers, while others build wellness programs
into insurance options that have incentives behind them. For example, to help reduce the
cost of medical care associated with employees who smoke, are obe ...
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