Health Financial Management - Assignment Example

Running header: HSFM Student’s name: Instructor’s name Subject code: Date of submission: 1. Therehave been numerous changes in the health sector in many countries that has impacted on the financial management of health sector organization. One such country is Australia where the public sector’s financial management has really changed affecting even how hospitals are managed. Ten years ago, the Manly hospital adopted accrual based accounting as opposed to cash based accounting (Daniel, 2014). According to the management, this has resulted in a more reliable and better allocation of resources which has resulted in better pricing of its services thus giving improved value for tax payers’ money. 2. The statement that health care is a business whether public or private is true to a great extent. The private sector is mainly interested in profit and hence has to use principles of business management in managing health care. On the other hand, although the public sector is not in the business of profit making, it also has to prudently use the resources allocated to it. It should be noted that funds allocated to the public health sector are tax payers money and which are also limited. As such, the tax payer has to get value for their money. In addition, prudent use of resources will ensure more people access health care. As such, the business management practices should also be adopted for the public sector healthcare system. This implies that health care is business whether public or private. 3. New public management mainly implies the government policies since the 1980s that aimed at modernizing and hence making the public sector more efficient just as the private sector. New public management is based on six principles including; i) Reorganization of the public sector into more autonomous, corporatized units ii) Introduction of market elements, with contract based competitive provision iii) Cooperation with the private sector and privatization iv) Private sector styles of management practice v) Explicit use of measurable standards and measures of performance vi) Greater emphasis on outcomes The health sector in France has adopted the new public management practices in its operations so as to make the public health sector better (Johannes, 2010). 4. Expenses of managing the clinics for people with mental illness are: a) Direct Costs- These include costs that are incurred directly in the delivery of services to the people with mental illness. This would include the cost of buying drugs (Pharmaceuticals) as well as the salaries used to pay the nurses who attend to the patients or the nursing time. The costs are controlled centrally. Based on the above reasons, PRH’s direct costs include; i) The cost of supplies such as medicine bought centrally and distributed to the various clinics ii) The salaries paid to the clinical psychologists and mental health nurses who work at the clinical level b) Indirect These include the cost of services that are centrally provided and which indirectly support patient care. In the case of PRH, indirect costs include the costs of hiring the three staff members who are centrally located at the hospital but though their services support all the clinics. The cost of the services they offer to the clinic as well as any costs that may be used in hiring the central facility is indirect cost. c) Overhead They include the costs of inputs that are consumed by corporate and administrative activities. In the case of PRH, these include the costs of hiring the director and the assistant director as well as those of hiring the staff located at the hospital since these costs are administrative and are also consumed centrally but not buy specific clinics. d) Fixed- They are the costs that do not vary with the level of services provided in the short run. These include all the salaries paid to the directors, the three staff members at the hospital as well as the clinicalpsychologists and mental health nurses at the clinic level (Naim, 2008). This is because these salaries remain fixed in the short run regardless of the number of patients treated. In addition, any rent paid for the facilities is also fixed cost. e) Variable- these incudes the costs that vary depending on the level of services provided. In other words, when more patients are served, the costs increase. In the case of PRH, these costs include the cost of supplies such as medicine as well as the costs associated with delivering them. In addition, the costs that the directors may incur in managing the clinics are also variable since at times, they may make more visits to the hospitals thus incurring more fuel costs as well as allowances. 5. a) Dollar allocation using services revenue i) Adult services department Allocation formula = (adult service revenue/total service revenue) total direct costs = ($3,000,000/$5,000,000)$100,000 =$60,000 ii) Pediatric services department Allocation formula = (Pediatric services revenue/total service revenue) total direct costs = ($1,500,000/$500,000) $100,000 =$30,000 iii) Other services = Allocation formula = (other services revenue/total service revenue) total direct costs = ($500,000/$500,000)/$100,000 =$10,000 b) Allocation using Housekeeping hours i) Adult services Allocation formula = (Adult services housekeeping hours/total housekeeping hours) total direct costs = (1,500/5,000) $100,000 = $30,000 ii) Pediatric services Allocation formula = (Pediatric services housekeeping hours/total housekeeping hours) total direct total direct costs = (3,000/5,000) $100,000 = $60,000 iii) Other services Allocation formula = (other services housekeeping hours/total housekeeping hours) total direct total direct costs = (500/500,000)/$100,000 =$10,000 c) The difference in the allocation to each department between the two cost bases/drivers/allocation rates Department Allocation by revenue Allocation by housekeeping hours Difference Adult services $60,000 $30,000 $30,000 Pediatric services $30,000 $60,000 $30,000 Other services $10,000 $10,000 0 d) Of the two cost bases, I think Housekeeping hours is a better allocation base. This is because it is based on an expense that is related to housekeeping. In other words, the more the house keeping hours, the more expenses the department is likely to spend in housekeeping. This means that a department can generate more revenue yet incur less direct expenses while another department can generate less revenue yet incur more direct expenses. 6. Minimum break even cost per participant Expenses: Engagement fee $750 Venue $600 Lunch flat fee $400 Total fixed expenses $1750 Expected participants 250 Fixed cost per participant = total fixed cost/number of participants =$1750/250 =$7 Variable cost per participant =$20 Add fixed cost per participant = $7 Minimum break even cost per participant $27 7. The fee schedule for the services Services Variable cost per service ($) Annual direct fixed costs($) Annual number of visits Total variable costs Total costs Price per service Basic examination 5 50,000 3,000 $15,000 $65,000 $21.67 Advanced examination 7 30,000 1,500 $10,500 $40,500 $27 Therapy session 10 40,000 500 $5,000 $45,000 $90 NB// Price per service = total costs for each service/number of visits for each service b) Allocation of overheads using the number of visits Allocation formula = (number of visits for a service/total visits) total overheads i) Basic examination = (3,000/5,000)$50,000 =$30,000 Total cost = direct costs + overheads = $65,000 + $30,000 = $95,000 Price = total costs / number of visits = $95,000/3,000 = $31.67 per visit ii) Advanced examination = (1500/5000)$50,000 =$15,000 Total cost = $40,500+ $15,000 =$55,500 Price =$55,500/1500 =$ 37 per visit iii) Therapy session = (500/5000)50,000= $5,000 Total cost = $45,000+$5,000 Price = $50,000/500 =$100 per visit c) Allocation of profits using number of visits Allocation formula = (Number of visits for a service/total visits) expected total profits) i) Basic examination = (3,000/5,000)$25,000 =$15,000 Price =( total cost +expected profit )/Number of visits = $95,000+$15,000 = $110,000/3,000 =$36.67 per visit ii) Advanced examination =(1500/5000)25000 =$7,500 Price = $55,500+$7,500 =$63,000/1500 = $42 per visit iii) Therapy session =(500/5000)25,000 = $2,500 Price = $50,000+ $2,500 =$52,500/500 =$105 per session 8. How and why multinational pharmaceutical companies and companies that manufacture generic drugs differ in their pricing strategies The multinationals pharmaceutical companies and the companies that manufacture generic drugs differ in their pricing strategies in that while the multinationals use target return pricing, the pharmaceutical companies that manufacture generic drugs use cost plus pricing strategies. The differences in strategies arise because of the different pricing objectives pursued. While companies manufacturing generic drugs may only have a profit motif, the multinational companies have to recover the cost incurred in developing new drugs which is usually very high and can sometimes it cannot be recovered within the patent period. Then there is the premium on their name which makes their drugs even more expensive. For generic drugs however, the main aim is to increase amount of sales and hence profits. This explains the differences in pricing strategies adopted by the two types of firms. 9. Budgets are only half used if they serve only as a planning device. It is true that budgets serve as an important planning tool for the management. Given the scarcity of resources, the management has to plan on how it will use the resources it will generate to meet various expenses while ensuring that the organization generates some profits. However, budgets cannot fully serve their purpose if they are only used as a planning tool. Budgets should also be used as a tool of performance management tool. In this regard, where budgets are not met or are exceeded (variance), the management ought to identify the causes and thus put in place measures that will help the organization perform better (George, 2014). Through the use of budgets, health services managers shouldalso be able to identify key areas of performance risk hence developing strategies of countering risk. In addition, budgets should beused formotivational purposes thus leading to better organizational performance. When line managers have achieved operational budgets, they feel motivated to even perform better. Thus, budgets do not only serve as a planning tool and if they only become a planning tool, then they will only be half used. 10. Rate/price variance = actual quantity* actual rate – Actual quantity *standard rate =(4,180* $26) –(4,180*$25) =$4,180 Quantity variance =Actual quantity* actual rate – Budgeted quantity * actual rate = (4,180*26)-(4,000*26) = $4,680 Volume variance = actual quantity*actual rate*actual volume-actual quantity*actual rate* budgeted volume =(4180*26*110)-(4180*26*100) =$1,086,800 Total variance = total cost-budgeted cost =$11,954,800- $10,000,000 = $1,954,800 References: Daniel, S2014, Assessment of new public management in health care: the French case, Health research policy and systems, vol. 3, no.193, pp. 16-37. Naim, K2008, New public management: Theory, Ideology and Practice, London, Rutledge. Johannes, B2010, Financial management reforms in the health sector, London, Rutledge. George, B2014, Advanced financial accounting, New York, John Wiley & Sons. Read More