Healthcare Finance: Cost Analysis and Inventory Presentation

This presentation provides a detailed overview of healthcare finance, covering key concepts from chapters 6, 7, and 8 of the textbook "Healthcare Finance" by Judith F. Baker and R.W. Baker, along with an analysis of an article by Shepard, Hodgkin, and Anthony. Chapter 6 delves into cost classifications, differentiating between direct and indirect costs, as well as product and period costs. Chapter 7 explores cost behavior, including fixed, variable, and semivariable costs, and introduces break-even analysis. Chapter 8 focuses on inventory management, including FIFO and LIFO methods, and depreciation concepts, covering various depreciation methods. The presentation emphasizes the importance of financial knowledge for healthcare practitioners to make informed financial decisions and manage costs effectively. The article provides a managerial perspective on hospital cost analysis.

Healthcare Finance
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Introduction
In the medical field, there are different critical financial decisions which are supposed to be
made by the medical practitioners working in the field for proper management of the funds in the
field. This means that the medical practitioners need to have some basic financial knowledge and
skills which can help them to manage the funds in the medical field appropriately. This will help
them to avoid incurring some unnecessary costs or some avoidable expense which end up causing
great losses to the medical organizations. This presentation aims to discuss different financial
concepts encountered in the medical field as discussed in chapters 6, 7, and 8 of the book
“Healthcare Finance” written by Judith F. Baker and R.W. Baker.

Chapter 6: Cost Classifications
This chapter mainly discusses different types of costs incurred in healthcare
organizations. The chapter classifies the costs into different categories depending on how
they are spent in healthcare organizations. This classification is very important as it helps
the readers of the chapter to understand different types of costs and how they are
applicable in healthcare organizations, and so, when working in the medical field, the
readers will be in a better position to understand and control different types of costs which
they may be required to spend in various projects.

Firstly, the costs can be classified as indirect costs or direct costs. Direct costs can
be described as the costs which are associated with a specific or a particular unit,
department, or patient. These costs are normally associated directly to the cost object(s)
involved in the spending of the costs. Direct costs include managed care marketing
expenses, clinic telephone expenses, emergency room medical supplies expenses, among
other expenses (costs). Unlike the direct costs, indirect costs are the costs which can’t be
attributed to any particular or specific unit, department, or patient. Indirect costs include
real estate taxes, liability insurance expenses, utilities for different medical facilities
expenses, among other expenses or costs (Baker & Baker, 2015).

Direct costs are normally meant to benefit a particular department (unit) and can easily
be traced while the indirect costs are usually meant to benefit the whole operation
(organization) and not any particular unit. These costs have to be fairly allocated to different
units. These two types of costs can be represented by the diagram shown below:

The other main classification of costs is where the costs are classified as period costs and
product costs. The product costs are the costs attached to products after the manufacturing
process and the products are placed into an inventory as they wait to be sold. After the selling of
the products, they are normally removed from the inventory list, matched with the revenue
generated, and then recognized as some special costs referred to as the product costs. Unlike the
product costs, period costs are normally not associated or connected to the manufacturing
process. The costs are normally matched with the revenue based on the period when the costs are
incurred, and that’s the main reason why they are known as period costs (Baker & Baker, 2015).

Chapter 7: Cost Behavior and Break-Even Analysis
This chapter discusses different types of costs, the cost behavior, and covers the basics of
break-even analysis. It’s important for healthcare professionals to understand different types of
costs and cost behaviors as this knowledge is an important tool required in achieving effective and
efficient financial management in the medical field. The main types of costs incurred in healthcare
organizations are the variable costs, fixed costs, and semivariable costs. To start with fixed costs,
they can be defined as the costs which don’t vary in total when the volumes or activity levels of
operations vary (change). Variable costs can be described as the costs which vary in direct
proportion with the variation of activity levels or volumes as operations change. Semivariable
costs are the costs which vary when the activity levels of volumes of operations change, but their
variation is normally not in direct proportion with that of the activity levels (volumes). The most
common variation pattern in semivariable costs is the step pattern (Baker & Baker, 2015).

Mixed costs are costs contain two or more of the types of costs discussed above. Mixed
costs are very common in organizations, and so, it’s highly recommended that all managers
should understand them and know how to analyze them. There are two simple methods which
are used to analyze mixed costs. These methods are the step method and the predominant
characteristics method. In the predominant characteristics method, the managers normally
judge whether the cost is more of variable or fixed cost while in the step method, the managers
normally examine the steps which occur in the step pattern and decide whether the patterns
appear to be more variable or fixed. These two methods are just judgmental and entirely
depend on the managers’ judgments or decisions (Baker & Baker, 2015).

Contribution margin is another important aspect related to costs behaviors and can be
described as the margin or the difference between the variable cost and the net values. It’s
normally computed or calculated by deducting the variable cost from the net values.
Contribution margin normally contributes to fixed costs and profits. The breakeven point
also referred to as the cost-volume-profit (CVP) is another important term encountered
when studying costs and cost behaviors. The breakeven point is the common point where
the contribution margin is normally equal to the fixed costs. At this point, point loss equals
loss, more equals profit, and thus, a breakeven point (Baker & Baker, 2015). A CVP chart
for a Wellness Clinic shown below can be used to illustrate this:

Chapter 8: Understanding Inventory & Depreciation Concepts
Inventory and depreciation are very important financial concepts which should be clearly
understood by the healthcare managers and other healthcare practitioners for them to manage
their finances appropriately. Inventory can be described as a detailed list which contains all the
items (goods) which organizations intend to sell in the course of their operations. Depreciation
can be described as the reduction of value of goods (commodities) which occur with time due
to different factors such as wear and tear, varying market conditions, among other factors (Del
Giudice, Manganelli, & De Paola, 2016). When intending to sell different goods, organizations
must always be keen to sell the goods as fast as possible to avoid facing heavy depreciation
losses.

To start with inventory, as already stated above, it’s a list which contains the goods
which organizations intend to sell in the course of its operations, and these goods are
normally placed as current assets in the balance sheets. In most cases, the goods listed in
the inventory are normally expected to be sold out within the 12-months period of
operation. When a good listed in the inventory is sold, it’s normally moved from the
inventory in the company’s balance sheet to ‘cost of goods sold’ in company’s income
statement. The whole process of recording inventories in the accounting cycle can be
represented by the diagram below: