Running Head: FINANCIAL MANAGEMENT

Financial Management

MGMT 312

Financial Management

Businesses must have a plan to succeed; if the original plan is not a success, there must be a few alternative plans available. First, the roles of a financial manager will be discussed. Second, a scenario was given to find a future value during a five year time frame and the results will be discussed. Finally, risk contracting will be evaluated including the various financial incentive structures and how they could be used to improve the efficiency of care in risk contracts.

First, the roles of a financial manager will be discussed. As a manger, one is required for “effective risk management” (Farley, 2000). “More desirable options include growth, structuring incentives to reduce or eliminate unnecessary variation in resource use, and capturing information about why variations in resource use occur,” (Farley, 2000). Farley explains that larger organizations have more options than smaller businesses because it allows more room for risks (2000).

A financial manager should be capable of strategic planning. Benoff mentions in 2000 that the strategic planning should consider, “a variety of market approaches before settling on a specific future market strategy.” Benoff (2000) strongly believes, “to account for the needs and perspectives of all stakeholders, therefore the strategic –planning initiative should:

Include all stakeholders in the planning process; Build consensus regarding the IDS’s market characteristics and benefits of IDS membership; consider multiple potential market scenarios; determine the appropriate roles, services, and function of the IDS; Evaluate resources required to pursue a new strategy; and communicate results of the strategic-planning process.”

Benoff (2000)mentions during the planning the strategic-planning group should be divided, and come up with different ways to respond and later the groups should be brought back to together to discuss ideas that each group came up with giving a variety of ideas. More variations offer more solutions to a problem.

A financial manager should know about the strategic financial risk assessment (Kleinmuntz, 1999). Kleinmuntz (1999) gives six steps for this practical technique which includes,

“(1) list risk factors that might significantly influence the outcomes, (2) establish best-guess estimates for assumptions regarding how each risk factor will affect its financial outcomes, (3) identify risk factors that are likely to have the greatest impact, (4) assign probabilities to assumptions , (5) determine potential scenarios associated with combined assumptions (6) determine the probability-weighted average of the potential scenarios.”

One should use the optimistic and pessimistic scenarios as Kleinmuntz (2009) has mentioned. The optimistic scenario forecasts tremendous profits while the pessimistic scenario projects massive losses described by Kleinmuntz (2009). This will give a very broad spectrum of profits to losses for the company if they should decide to take risks.

As a financial manager, one must know about the procedures excluded from capitation which is suggested by Levin (1996). If a physician has a capitation, he must know what is included so that money is not lost on treatments that are not covered. Utilization data should be recorded to keep track of what type of treatments the current physician is doing for the patient (Levin, 1996). If a patient is seeking treatment at another facility, this documentation of fees should be kept on record and the type of treatment that is being performed (Levin, 1996). A good financial manager should control utilization by requiring precertification or consultation with the provider giving treatment from another facility (Levin, 1996).

Second, a scenario was given to find a future value during a five year time frame. Here are the results:

Metro Bank 6% compound interest

FV=$106,000 x (1+0.06) =

FV=$106,000 x 1.06=

FV= $112,360 1st year

FV2= $106,000 x (1+0.06) x (1+0.06) =

FV2= $106,000 x (1.1236) =

FV2= $119,101.60 2nd year

FV3= $106,000 x (1+0.06) x (1+0.06) x (1+0.06) =

FV3=$106,000 x 1.19 =

FV3= $126,247.70 3rd year

FV4= $106,000 x (1+0.06) x (1+0.06) x (1+0.06) x (1+0.06) =

FV4=$106,000 x 1.26 =

FV4= $133,560 4th year

FV5= $106,000 x (1+0.06) x (1+0.06) x (1+0.06) x (1+0.06) x (1+0.06) =

FV5=$106,000 x 1.34 =

FV5= $142,040 5th year

If the money is taken out early:

FV=$106,000 x (1 + 0.0525) =

FV=$106,000 x (1.0525) =

FV= $111,565 1st year

FV2=$106,000 x (1 + 0.0525) x (1 + 0.0525) =

FV2=$106,000 x (1.0525) x (1.0525) =

FV2=$106,000 x (1.11) =

FV2=$117,660 2nd year

FV3=$106,000 x (1+0.0525) x (1 + 0.0525) x (1 + 0.0525) =

FV3=$106,000 x (1.0525) x (1.0525) x (1.0525) =

FV3=$106,000 x (1.17) =

FV3=$124,020 3rd year

FV4=$106,000 x (1+0.0525) x (1 + 0.0525) x (1 + 0.0525) x (1 + 0.0525) =

FV4=$106,000 x (1.0525) x (1.0525) x (1.0525) x (1.0525) =

FV4=$106,000 x (1.23) =

FV4=$130,380 4th year

FV5=$106,000 x (1+0.0525) x (1 + 0.0525) x (1 + 0.0525) x (1 + 0.0525) x (1 + 0.0525) =

FV5=$106,000 x (1.0525) x (1.0525) x (1.0525) x (1.0525) x (1.0525) =

FV5=$106,000 x 1.29 =

FV5=$136,740 5th year

Westside Savings 6.5% simple interest

FV=$106,000 x (1+0.065) +0 =

FV=$106,000 x (1.065) + 0 =

FV=$112,890 1st year

FV2=$106,000 x (1+0.065) + 6,890=

FV2=$106,000 x (1.065) +6,890 =

FV2=$119,780 2nd year

FV3=$106,000 x (1+0.065) + 13,780=

FV3=$106,000 x (1.065) + 13,780=

FV3=$126,670 3rd year

FV4=$106,000 x (1+0.065) +20,670=

FV4=$106,000 x (1.065) + 20,670=

FV4=$133,560 4th year

FV5=$106,000 x (1+0.065) + 27,560=

FV5=$106,000 x (1.065) + 27,560=

FV5=$140,450 5th year

If the money is taken out early:

FV=$106,000 x (1+0.055) +0 =

FV=$106,000 x (1.055) + 0 =

FV=$111,830 1st year

FV2=$106,000 x (1+0.055) + 5830 =

FV2=$106,000 x (1.055) + 5830 =

FV2=$117,660 2nd year

FV3=$106,000 x (1+0.055) + 11,660 =

FV3=$106,000 x (1.055) +11,660 =

FV3=$123,490 3rd year

FV4=$106,000 x (1+0.055) + 17,490 =

FV4=$106,000 x (1.055) + 17,490 =

FV4=$129,320 4th year

FV5=$106,000 x (1+0.055) + 23,320 =

FV5=$106,000 x (1.055) + 23,320 =

FV5=$135,150

The better choice of the two would be to invest in Metro Bank with the $106,000 that Sunnyview Medical Center has made in profits. If the money does not need to be withdrawn prior to five years, a profit of $36,040.00 can be made.

Finally, risk contracting will be evaluated including the various financial incentive structures and how they could be used to improve the efficiency of care in risk contracts. Anderson (1999) comes up with different ideas for the risk contracting that can be made for improvements. Anderson (1999) explains that physicians that are full capitated, “assume risk for the full range of services covered by the managed care plan, such as a hospital, physician, home health care, durable medical equipment, and other services.” This means that all treatment will be taken care of for a set price, this leads to a couple of problems for the physicians. “Concerns have been raised that fully capitated physicians may be at substantial risk for services over which they have no direct control and, when faced with a deficit, may consciously or subconsciously withhold services,” warns Anderson (1999). Partial capitation is when the physicians, “are responsible for a narrower range of services, such as all physician services, rather than the full range of services,” Anderson (1999). In 1999, Anderson informs that the, “primary care physicians must still be aware of the specific services influenced under partial capitation.” Another method of reducing risk would be for reinsurance (Anderson, 1999). “The purchase of reinsurance or the inclusion of stop-loss provisions in their contracts,” describes what reinsurance does (Anderson, 1999). It is designed to protect physicians from unpredictable health care expenses (Anderson, 1999). Carve outs is a, “method for reducing risk to capitated physicians,” (Anderson, 1999). Examples of items that can be carved out of treatment that the physicians have to pay are, “organ transplantations, very low birth weights in infants, advanced human immunodeficiency virus disease, and muscular dystrophy,” (Anderson, 1999). Benoff (2000) mentions that some integrated delivery systems “have opted to revert to fee-for-service contracts because it allows them to focus on their core competency-the delivery of care.” There are different ways that risk contracting can be evaluated. These can help with risk contracts preventing physicians from having to spend excess amounts of money for treatment that another provider suggests the patient to have. The physicians have to be aware of what type plan the patient has, so that he can lead to a better way for treatment in the most cost effective way. The patient will result from having to pay excess fees for treatment that is not needed, if the physician keeps a close eye on care.

In conclusion, the roles of a financial manager have been discussed, then a comparison of two bank investments have been noted, and finally, risk contracting was evaluated including the various financial incentive structures and how they could be used to improve the efficiency of care in risk contracts. There are different options that a financial manager can make; the best decisions can be made as a group so that the physicians can give input is not readily available about patient care. Team work can save money, and help with better treatment for the patients.

References

Anderson, GF, Weller, WE (1999). Methods of Reducing the Financial Risk of Physicians Under Capitation. Archives of Family Medicine (8) 2; p.149-155 Retrieved on Aug 27, 2009 from http://archfami.ama-assn.org/cgi/reprint/8/2/149.pdf

Benoff, M. and Harris, J. M. (2000). IDSs reconsider the viability of risk contracting. Healthcare Financial Management, 54 (9), 35-39. Retrieved on Aug 27, 2009 from Proquest.

Farley, D. E. (2000). Achieving a balance between risk and return. Healthcare Financial Management, 54 (6), 54-59. Retrieved on Aug 27, 2009 from Proquest.

Frigo, M.L. (2003). Strategy, value creation, and the CFO. Strategic Finance,
84 (7), 9-11. Retrieved on Aug 27, 2009 from Proquest

Garofalo, W. A. (2001). Assessing an IDS's readiness to operate profitably under a risk contract. Healthcare Financial Management, 55(2), 41-45. Retrieved on Aug 27, 2009 from Proquest.

Hurley, R., et. al. (2001). Risk Contracting Reconsidered. Aug 27, 2009 from www.hschange.com/CONTENT/394/Casalino.pdf.

Kleinmuntz, D. N., Kleinmuntz, C. E., Stephen, R. G. and Nordlund, D. S. (1999). Measuring and managing risk improves strategic financial planning. Healthcare Financial Management, 53 (6), 50-58. Retrieved on Aug 27, 2009 from Proquest.

Levin, DC, McArdle, GH, Lockard, CD, (1996). Capitated Contracting in Radiology: Negotiating techniques, Financial Calculations, and Utilization Management. Retrieved on Aug 27, 2009 from http://radiology.rsnajnls.org/cgi/reprint/198/3/651.pdf.