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9 Decision Making

Chapter Objectives

When you finish reading this chapter you will understand why

Richard has had it! There’s only so much longer he can go on watching TV on his tiny, antiquated set. It was bad enough trying to squint at The Walking Dead. The final straw was when he couldn’t tell the Titans from the Jaguars during an NFL football game. When he went next door to watch the second half on Mark’s home theater

9-1 The three categories of consumer decision making are cognitive, habitual, and affective. 9-2 A cognitive purchase decision is the outcome of a series of stages that results in the selection of one product over competing options. 9-3 We often rely on rules-of-thumb to make routine decisions. 9-4 The way information about a product choice is framed can prime a decision even when the consumer is unaware of this influence.

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setup, he finally realized what he was missing. Budget or not, it was time to act: A man has to have his priorities.

Where to start looking? The web, naturally. Richard checks out a few comparison-shopping websites, including pricegrabber.com/ and bizrate.com. After he narrows down his options, he ventures out to check on a few sets in person. He figures he’ll probably get a decent selection (and an affordable price) at one of those huge “big box” stores. Arriving at Zany Zack’s Appliance Emporium, Richard heads straight for the Video Zone in the back; he barely notices the rows of toasters, microwave ovens, and stereos on his way. Within minutes, a smiling salesperson in a cheap suit accosts him. Even though he could use some help, Richard tells the salesperson he’s only browsing. He figures these guys don’t know what they’re talking about, and they’re simply out to make a sale no matter what.

Source: Stefanocapra/Fotolia

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Richard examines some of the features on the 60-inch flatscreens. He knew his friend Evey had a set by Prime Wave that she really liked, and his sister Alex warned him to stay away from the Kamashita. Although Richard finds a Prime Wave model loaded to the max with features such as a sleep timer, on-screen programming menu, cable-compatible tuner, and picture-in-picture, he chooses the less expensive Precision 2000X because it has one feature that really catches his fancy: stereo broadcast reception.

Later that day, Richard is a happy man as he sits in his easy chair and watches Sheldon match wits with Leonard, Howard, and the others on The Big Bang Theory. If he’s going to be a couch potato, he’s going in style.

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What’s Your Problem?

Richard’s decision represented his response to a problem. In fact every consumer decision we make is a response to a problem. Of course, the type and scope of these problems varies enormously; our needs range from simple physiological priorities such as quenching thirst to whether we will spend our hard-earned money on a television to abstract intellectual or aesthetic quandaries such as choosing a college major—or perhaps what to wear to that upcoming Bruno Mars concert.

Because some purchase decisions are more important than others, the amount of effort we put into each differs. Sometimes the decision-making process is almost automatic; we seem to make snap judgments based on little information. At other times it resembles a full-time job. A person may literally spend days or weeks agonizing over an important purchase such as a new home, a car, or even an iPhone versus a Samsung Galaxy.

We make some decisions thoughtfully and rationally as we carefully weigh the pros and cons of different choices. In other cases we let our emotions guide us to one choice over another as we react to a problem with enthusiasm, joy, or even disgust. Still other actions actually contradict what those rational models predict. For example, purchase momentum occurs when our initial impulse purchases actually increase the likelihood

The three categories of consumer decision making are cognitive, habitual, and affective. OBJECTIVE 9-1

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that we will buy even more (instead of less as we satisfy our needs); it’s like we get “revved up” and plunge into a spending spree (we’ve all been there!).

Hyperchoice: Too Much of a Good Thing!

Given the range of problems we all confront in our lives, clearly it is difficult to apply a one-size-fits-all explanation to the complexities of consumer behavior. Things get even more complicated when we realize just how many choices we have to make in today’s information-rich environment. Ironically, for many of us one of our biggest problems is not having too few choices, but rather too many.

This condition of consumer hyperchoice forces us to make repeated decisions that may drain psychological energy while decreasing our abilities to make smart choices. A study conducted in a grocery store illustrates how having too much can handicap our thought processes. Shoppers tried samples of flavored fruit jams in two different conditions: in the “limited choice” condition they picked from six flavors, whereas those in the “extensive choice” group saw 24 flavors. Thirty percent of consumers in the limited group actually bought a jar of jam as a result, and a paltry 3 percent of those in the extensive group did.

Part of what we’re going to discuss in this chapter already is familiar ground to you. In Chapter 4 we reviewed approaches to learning that link options to outcomes, where over time we come to link certain choices to good or bad results. In Chapter 5 we talked about affective decision making; how our emotional responses drive many of our choices. And, in

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Chapter 8 we reviewed three hierarchies of effects, or the sequence of steps involving thinking, feeling, and eventually doing. These ideas really relate to types of decision making because they remind us that depending on the situation and the importance of what we’re dealing with, our choices can be dominated by “hot” emotions, “cold” information processing, or even “lukewarm” snap decisions. Figure 9.1 summarizes the three “buckets” of consumer decision making.

Figure 9.1 The Three “Buckets” of Consumer Decision Making

Researchers now realize that decision makers actually possess a repertoire of strategies. The perspective of constructive processing argues that we evaluate the effort we’ll need to make a particular choice and then tailor the amount of cognitive “effort” we expend to get the job done. When the task requires a well-thought-out, rational approach, we’ll invest the brainpower to do it. Otherwise, we look for shortcuts such as “just do what I usually do,” or perhaps we make “gut” decisions based on our emotional reactions. In some cases, we actually create a mental budget that helps us to estimate what we will consume over time so that we can regulate what we do in the present. If the dieter knows he will be chowing down at a big BBQ tomorrow, he may decide to skip that tempting candy bar today.

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Self-Regulation

Each of us fights a constant battle to control our desires, whether these involve splurging on expensive clothes or treating ourselves to fattening snacks. Many factors, both internal (for example, will-power) and external (for example, peer pressure), help to determine whether or when we give in. Even something as innocent as checking your Facebook page can make you lose control! Recent research implies that when you focus on what your close friends post, this makes you feel better. This momentary boost in self-esteem we get in turn prompts us to lose self-control and engage in impulsive behaviors such as binge eating and even reckless spending that lowers credit scores.

The buckets of decision making we just described don’t necessarily work independently of one another. Think for example about Orlando, a 28-year- old marketing manager who has decided to embark on a weight-loss program. The pressure is on to drop the pounds before he marries Amanda this summer. Orlando knows he needs a plan if he has any chance to succeed.

A person’s efforts to change or maintain his or her actions over time, whether these involve dieting, living on a budget, or training to run a marathon, involve careful planning that is a form of self-regulation . If we have a self-regulatory strategy, this means that we specify in advance how we want to respond in certain situations. These “if-then” plans or implementation intentions may dictate how much weight we give to different kinds of information (emotional or cognitive), a timetable to carry

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out a decision, or even how we will deal with disruptive influences that might interfere with our plans (like a bossy salesperson who tries to steer us to a different choice).

Orlando may engage in cognitive decision making as he carefully selects a diet and perhaps compiles a list of foods he will “ban” from his kitchen. In addition, he may have to recognize that he has a behavioral pattern of snacking on junk food in the mid-afternoon whether he’s really hungry or not. Simple, but powerful, behavioral cues in the environment like that Snickers bar sitting on his coworker Arya’s desk can lead us to quick and sometimes rash actions (how will Orlando explain the “disappearance” of that candy bar to Arya?) He may also have to recognize that some emotional “triggers” set him off so when his boss yells at him his first response is to reach for the sweets to cheer himself up.

Orlando may have to “argue” with himself as he weighs the long-term benefits of a successful diet against short-term temptations. In some cases, this involves some creative tinkering with the facts—for example, consumers engage in counteractive construal when they exaggerate the negative aspects of behaviors that will interfere with the ultimate goal. Orlando may inflate the number of calories in the snack to help him to resist its lure. He may even go public with his weight loss plan by posting his weekly weigh-in on a phone app like DietBet so that others can watch his progress—and even bet on his success or failure.

A recent study shed some light on why our efforts to self-regulation get stronger or weaker over time as we progress toward a goal – and especially why what starts out as an exciting quest turns into a painful slog even though we’re getting closer to the objective. The researchers distinguished between two types of motivation: (1) Promotion motivation encourages people to focus on hopes and aspirations, while (2) Prevention motivation instead focuses on responsibilities and duties

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as it prompts people to think about avoiding something negative. We referred to these strategies as “approach” and avoidance” when we talked about learning in Chapter 4 . As they predicted, individuals tend to be more promotion-motivated in earlier stages of goal pursuit and become more prevention-motivated as goal attainment draws near. The researchers speculate that when we are in the early stages of attaining a goal, we compare our progress with where we started, so we are optimistic. But after we reach the midpoint, we switch our reference to the end goal we’re striving for—and thus focus on our shortcomings instead. Their advice: In the early stages, focus on how attaining the goal will help you to achieve things you hope for (such as a healthy body). Then when you’re in the home stretch, focus on how getting to your goal will help you to fulfill your responsibilities. And, make a list of things “not to do” to stay on course. Finally, reward yourself with a break from something you don’t enjoy when you’re making progress so long as it doesn’t short-circuit your efforts (e.g., no congratulatory margaritas if you’re trying to get sober).

In recent years, researchers and marketers have become more aware of the role they can play in changing consumer behavior by helping people to regulate their own actions. This help may take the form of simple feedback like a phone app for dieters or perhaps a wearable computing device like the Fitbit that tells you how many steps you take in a day (and how many more you should take). These applications provide a feedback loop to help with self-regulation. The basic premise is amazingly simple: Provide people with information about their actions in real time, and then give them a chance to change those actions so that you push them to improve. A common feedback loop we increasingly see on highways comes from those “dynamic speed displays” that use a radar sensor to flash “Your Speed” when you pass one. This isn’t new information; all you have to do is look at your speedometer to know the same thing. Yet on average these displays result in a 10 percent reduction in driving speed among motorists for several miles following exposure to the feedback loop.

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The Tangled Web Does seeing “beach bodies” on Instagram lead people to make foolish purchases? In a study, overweight people who saw a thin person were more likely to purchase a more expensive product and take on credit card debt than were normal weight participants. The researchers explain that exposure to images like this reminded these people that they are not good at inhibiting their impulses—so this realization loosened the purse strings. To add insult to injury, the thin images didn’t have to be of people—even seeing pictures of thin Coke bottles made the subjects reach for pricier products!

Now, the bad news: As any frustrated dieter knows, self-regulation doesn’t necessarily work. Just because we devise a well-meaning strategy doesn’t mean we’ll follow it. Sometimes our best-laid intentions go awry literally because we’re too tired to fight temptation. Research shows that our ability to self-regulate declines as the day goes on. The Morning Morality Effect shows that people are more likely to cheat, lie, or even commit fraud in the afternoon than in the morning. Scientists know that the part of the brain they call the executive control center that we use for important decision making, including moral judgments, can be worn down or distracted even by simple tasks like memorizing numbers. As one researcher nicely put it, “To the extent that you’re cognitively tired, you’re more likely to give in to the devil on your shoulder.”

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Other studies show that, ironically the act of planning itself can undermine our ability to attain goals. When a person is not happy with his or her progress toward a goal like weight loss, the act of thinking about what he or she needs to do to improve performance can cause emotional distress. This angst in turn results in less self-control. And, when people are able to easily recall prior instances when they were able to exert self- control, they are more successful at the present task. On the other hand, when they recall times that resulted in failure, they’re more likely to indulge again.  As we saw in the last chapter’s discussion of attitudes and behavior, “the road to hell is paved with good intentions!”

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Cognitive Decision Making

Traditionally, consumer researchers approached decision making from a rational perspective . According to this view, people calmly and carefully integrate as much information as possible with what they already know about a product, painstakingly weigh the pluses and minuses of each alternative, and arrive at a satisfactory decision. This kind of careful, deliberate thinking is especially relevant to activities such as financial planning that call for a lot of attention to detail and many choices that impact a consumer’s quality of life. When marketing managers believe that their customers in fact do undergo this kind of planning, they should carefully study steps in decision making to understand just how consumers weigh information, form beliefs about options, and choose criteria they use to select one option over others. With these insights in hand, they can develop products and promotional strategies that supply the specific information people look for in the most effective formats.

A cognitive purchase decision is the outcome of a series of stages that results in the selection of one product over competing options.

OBJECTIVE 9-2

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Dynamic speed displays provide a feedback loop to help drivers regulate their speed. Source: cre250/Fotolia

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Steps in the Cognitive Decision-Making Process

Let’s think about Richard’s process of buying a new TV that we described at the beginning of the chapter. He didn’t suddenly wake up and crave a new flatscreen. Richard went through several steps between the time he felt the need to replace his TV and when he actually brought one home. We describe these steps as (1) problem recognition, (2) information search, (3) evaluation of alternatives, and (4) product choice. Of course, as we saw in Chapter 4 , after we make a decision, its outcome affects the final step in the process, in which learning occurs based on how well the choice worked out. This learning process in turn influences the likelihood that we’ll make the same choice the next time the need for a similar decision occurs. And so on and so on. Figure 9.2 provides an overview of this decision- making process. Let’s briefly look at each step.

Figure 9.2 Stages in Consumer Decision Making

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Step 1: Problem Recognition Ford’s plan to promote its Fusion hybrid model focused on people who aren’t thinking about buying a new car—at least not right now. Its TV commercials target what the auto industry terms the “upper funnel,” or potential buyers down the road. Ford’s research found that a large number

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of U.S. drivers are still unaware of the Fusion. The company is confident that it can close sales if and when customers decide to buy a new car. But, its weak spot is to get people into the frame of mind where they want to do that. To create desire where none yet exists, visitors to a special website entered to win a trip and a new Fusion. Ford publicized the sweepstakes on Twitter and Facebook; during the first two weeks of the promotion, almost 70,000 people requested more information about the car.

Problem recognition occurs at what Ford terms the upper funnel, when we experience a significant difference between our current state of affairs and some state we desire. As we noted at the beginning of the chapter, this problem requires a solution. A person who unexpectedly runs out of gas on the highway has a problem, as does the person who becomes dissatisfied with the image of his car, even though there is nothing mechanically wrong with it. Although the quality of Richard’s TV had not changed, he altered his standard of comparison, and as a result he had a new problem to solve: how to improve his viewing experience.

Figure 9.3 shows that a problem arises in one of two ways. The person who runs out of gas experiences a decline in the quality of his actual state (need recognition). In contrast, the person who craves a newer, flashier car moves his ideal state (opportunity recognition) upward. Either way, there is a gulf between the actual state and the ideal state. Richard perceived a problem because of opportunity recognition: He moved his ideal state upward in terms of the quality of TV reception he craved.

Figure 9.3 Problem Recognition: Shifts in Actual or Ideal States

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Step 2: Information Search Once a consumer recognizes a problem, he or she needs the 411 to solve it. Information search is the process by which we survey the environment for appropriate data to make a reasonable decision. You might recognize a need and then search the marketplace for specific information (a process we call prepurchase search). However, many of us, especially veteran shoppers, enjoy browsing just for the fun of it or because we like to stay up to date on what’s happening in the marketplace. Those shopaholics engage in ongoing search. As a general rule, we search more when the purchase is important, when we have more of a need to learn more about the purchase, or when it’s easy to obtain the relevant information.

Does knowing something about the product make it more or less likely that we will engage in research? The answer to this question isn’t as obvious as it first appears: Product experts and novices use different strategies when they make decisions. “Newbies” who know little about a product should be

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the most motivated to find out more about it. However, experts are more familiar with the product category, and thus they should be better able to understand the meaning of any new product information they might acquire.

So, who searches more? The answer is neither: Search tends to be greatest among those consumers who are moderately knowledgeable about the product. Typically we find an inverted-U relationship between knowledge and search effort, as Figure 9.4 shows. People with limited expertise may not feel they are competent to search extensively. In fact, they may not even know where to start. Richard, who did not spend a lot of time researching his purchase, is typical. He visited one store, and he looked only at brands with which he was already familiar. In addition, he focused on only a small number of product features.

Figure 9.4 The Relationship Between Amount of Information Search and Product Knowledge

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Because experts have a better sense of what information is relevant to the decision, they engage in selective search, which means their efforts are more focused and efficient. In contrast, novices are more likely to rely on the opinions of others and on “nonfunctional” attributes, such as brand name and price, to distinguish among alternatives. Finally, novice consumers may process information in a “top-down” rather than a “bottom- up” manner; they focus less on details than on the big picture. For instance, they may be more impressed by the sheer amount of technical information an ad presents than by the actual significance of the claims it makes.

Any trial lawyer will tell you never to ask a question of a witness unless you already know what he or she will answer. Consumers too like to consult reliable sources that tend to tell them what we want to hear. We can see that the search process isn’t perfect, so there’s always some bias in terms

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of what we get when we cast our nets. This is true whether we’re asking people we know for advice, or trolling online.

The internet puts an almost limitless supply of information at our fingertips —at least in theory. The reality often is quite different. Rather than taking advantage of many sources that may provide us with a range of opinions or options when we want to make a decision, sophisticated algorithms insure that we only access content that reinforces what we already think we know. A filter bubble occurs when the broadcast media, websites, and social media platforms we consult serve up answers based upon what they “think” we want to see. For example, we get personalized Google search results and a Facebook news stream that’s based upon sites we’ve clicked on in the past, our browsing history, and our physical location. This means we’re far less likely to be exposed to conflicting viewpoints, so we each live in a “bubble” of our own making. Conservatives who watch Fox News religiously will see stories that confirm their beliefs, while their liberal counterparts get the same assurance from MSNBC. Thus what starts as a search for the best information upon which to base our decisions may end in a self-fulfilling prophecy where we only read and see content that confirms what we thought all along.

Step 3: Evaluate Alternatives Much of the effort we put into a purchase decision occurs at the stage where we have to put the pedal to the metal and actually choose a product from several alternatives. This may not be easy; modern consumer society abounds with choices. In some cases, there may be literally hundreds of brands (as in cigarettes) or different variations of the same brand (as in shades of lipstick).

Ask a friend to name all the brands of perfume she can think of. The odds are she will reel off three to five names rather quickly, then stop and think

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awhile before she comes up with a few more. She’s probably familiar with the first set of brands, and in fact she probably wears one or more of these. Her list may also contain one or two brands that she doesn’t like; to the contrary, they come to mind because she thinks they smell nasty or are unsophisticated. Note also that there are many, many more brands on the market that she did not name at all.

If your friend goes to the store to buy perfume, it is likely that she will consider buying some or most of the brands she listed initially. She might also entertain a few more possibilities if these come to her attention while she’s at the fragrance counter (for example, if an employee “ambushes” her with a scent sample as she walks down the aisle).

We call the alternatives a consumer knows about the evoked set and the ones he or she seriously considers the consideration set . Recall that Richard did not know much about the technical aspects of television sets, and he had only a few major brands in mind. Of these, two were acceptable possibilities and one was not.

For obvious reasons, a marketer who finds that his brand is not in his target market’s evoked set has cause to worry. You often don’t get a second chance to make a good first impression; a consumer isn’t likely to place a product in his evoked set after he has already considered it and rejected it. Indeed, we’re more likely to add a new brand to the evoked set than one that we previously considered but passed over, even after a marketer has provided additional positive information about it. For marketers, a consumer’s reluctance to give a rejected product a second chance underscores the importance of ensuring that it performs well from the time the company introduces it.

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Net Profit As the old saying goes, “If it sounds too good to be true, it probably is.” When we check out online reviews of a product and they’re all glowing, we tend to be a bit suspicious. It’s actually more effective for a review to include some negative reviews—if shoppers think they’re irrelevant. Why? We usually assign a lot of weight to negative information because we expect it to be more diagnostic than sugar-coated comments. So, when we encounter bad stuff but we don’t feel it’s very helpful, we still feel that we have more complete information about the product, and thus we’re comfortable that we can make a wise choice.

Step 4: Product Choice Once we assemble and evaluate the relevant options in a category, eventually we have to choose one. Recall that the decision rules that guide our choices range from simple and quick strategies to complicated processes that require a lot of attention and cognitive processing. Our job isn’t getting any easier as companies overwhelm us with more and more features. We deal with 50-button remote controls, digital cameras with hundreds of mysterious features and book-length manuals, and cars with dashboard systems worthy of the space shuttle. Experts call this spiral of complexity feature creep . As evidence that the proliferation of gizmos is counterproductive, Philips Electronics found that at least half of the products buyers return have nothing wrong with them; consumers simply couldn’t understand how to use them! What’s worse, on average the

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buyer spent only 20 minutes trying to figure out how to use the product and then gave up.

Why don’t companies avoid this problem? One reason is that we often assume the more features the better. It’s only when we get the product home that we realize the virtue of simplicity. In one study, consumers chose among three models of a digital device that varied in terms of how complex each was. More than 60 percent chose the one with the most features. Then, when the participants got the chance to choose from up to 25 features to customize their product, the average person chose 20 of these add-ons. But when they actually used the devices, it turned out that the large number of options only frustrated them; they ended up being much happier with the simpler product. As the saying goes, “Be careful what you wish for.”30

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As feature creep becomes more of a problem, just providing clear instructions to users is a major “pain point” for many manufacturers. Source: supercavie/Shutterstock.

Marketing Pitfall Product labels assist us with problem solving, but some are more useful than others. Here are some examples of the not-so-helpful variety:

Instructions for folding up a portable baby carriage: “Step 1: Remove baby.” On a Conair Pro Style 1600 hair dryer: “WARNING: Do not use in shower. Never use while sleeping.” At a rest stop on a Wisconsin highway: “Do not eat urinal cakes.” On a bag of Fritos: “You could be a winner! No purchase necessary. Details inside.” On some Swanson frozen dinners: “Serving suggestion: Defrost.” On Tesco’s Tiramisu dessert (printed on bottom of box): “Do not turn upside down.” On Marks & Spencer bread pudding: “Product will be hot after heating.” On packaging for a Rowenta iron: “Do not iron clothes on body.” On Nytol sleeping aid: “Warning: May cause drowsiness.”

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Step 5: Postpurchase Evaluation Another old saying goes, “the proof of the pudding is in the eating.” In other words, the true test of our decision-making process is whether we are happy with the choice we made after we undergo all these stages. Postpurchase evaluation closes the loop; it occurs when we experience the product or service we selected and decide whether it meets (or maybe even exceeds) our expectations. We’ll take a closer look at that in the next chapter.

When all is said and done with the transaction, is the customer always right? Not anymore. Today, postpurchase evaluation is just starting to work both ways. In the process called social scoring , both customers and service providers increasingly rate one another’s performance. Have you ever written a negative review of your Uber driver or a server at a restaurant? A heads up: While we’re busily documenting our interactions with salespeople and other service providers, they’re returning the favor. People who work in small businesses have always been aware of problem customers who drop in periodically to torment them. But now, at least in theory, a salesperson or other service provider at any kind of organization large or small can grade your behavior. And the icing on the cake is that they can share these scores with others. It’s no longer only Santa who knows if you’ve been naughty or nice.

At platforms like Airbnb and Uber, users get a rating each time they patronize the service. It’s no surprise that according to Lyft and Uber drivers, failure to leave a tip is a sure-fire road to a dismal evaluation. For your future reference, these are some other behaviors that will make or break a five-star rating straight from the mouths of operators:

“Don’t puke in or ruin the car.”

Introduction: Stakeholders

Describes the stakeholders of the organization using the healthcare marketing framework

Describes the stakeholders of the organization using the healthcare marketing framework in a manner that is unclear, incomplete, or inaccurate

Does not describe the stakeholders of the organization using the healthcare marketing framework

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Introduction: Service Aligns With

Organization

Evaluates how the current state of services align with the mission statement, vision statement, and goals of the organization

Evaluates how the current state of services align with the mission statement, vision statement, and goals of the organization, but response is unclear or incomplete

Does not evaluate how the current state of services align with the mission statement, vision statement, and goals of the organization

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Introduction: Target Market

Describes the current target market this service focuses on, including geographies, demographics, psychographics, and behaviors

Describes the current target market this service focuses on, but explanation is incomplete or unclear

Does not describe the current target market this service focuses on

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Articulation of Response

Submission has no major errors related to citations, grammar, spelling, syntax, or organization

Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas

Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas

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FINANCE FIFTH EDITION

JUDITH J. BAKER, PhD, CPA

R.W. BAKER, JD

NEIL R. DWORKIN, PhD

Basic Tools For Nonfinancial Managers

HEALTH CARE

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New to This Edition……………………………………………………………………………………………….xvii

Preface ……………………………………………………………………………………………………………….. xix

Acknowledgments ………………………………………………………………………………………………… xxi

About the Authors ………………………………………………………………………………………………. xxiii

PART I—HEALTHCARE FINANCE OVERVIEW…………………………………………………………. 1

Chapter 1 Introduction to Healthcare Finance …………………………………………………….. 3 The History ……………………………………………………………………………………………. 3 The Concept ………………………………………………………………………………………….. 4 How Does Finance Work in the Healthcare Business? ……………………………….. 4 Viewpoints……………………………………………………………………………………………… 4 Why Manage? …………………………………………………………………………………………. 5 The Elements of Financial Management ………………………………………………….. 5 The Organization’s Structure ………………………………………………………………….. 5 Two Types of Accounting ………………………………………………………………………… 7 Information Checkpoint …………………………………………………………………………. 9 Key Terms ………………………………………………………………………………………………. 9 Discussion Questions ………………………………………………………………………………. 9 Notes …………………………………………………………………………………………………….. 9

Chapter 2 Four Things the Healthcare Manager Needs to Know About Financial Management Systems ………………………………………………………11

What Does the Manager Need to Know? …………………………………………………. 11 How the System Works in Health Care ……………………………………………………. 11 The Information Flow …………………………………………………………………………… 12 Basic System Elements…………………………………………………………………………… 14 The Annual Management Cycle …………………………………………………………….. 18 Communicating Financial Information to Others …………………………………… 20 Information Checkpoint ……………………………………………………………………….. 20 Key Terms …………………………………………………………………………………………….. 20 Discussion Questions …………………………………………………………………………….. 20 Notes …………………………………………………………………………………………………… 21

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Chapter 3 The Digital Age: Changing the Landscape of Healthcare Finance ………………………………………………………………………………………23

High-Tech and High-Touch Approaches ………………………………………………… 23 Patient Engagement ……………………………………………………………………………… 23 Social Media …………………………………………………………………………………………. 24 Resource Allocation ……………………………………………………………………………… 25 Changes in Health Information Technology …………………………………………… 25 Population Health and the Digital Age: Crossing at

the Intersection ………………………………………………………………………………… 26 Additional Trends and Complexities: Other Delivery Systems ………………….. 27 Summary …………………………………………………………………………………………….. 27 Information Checkpoint ……………………………………………………………………….. 28 Key Terms …………………………………………………………………………………………….. 28 Other Acronymns …………………………………………………………………………………. 28 Discussion Questions …………………………………………………………………………….. 28 Notes …………………………………………………………………………………………………… 28

PART II—RECORD FINANCIAL OPERATIONS ………………………………………………………..31

Chapter 4 Assets, Liabilities, and Net Worth………………………………………………………..33 Overview ……………………………………………………………………………………………… 33 What Are Examples of Assets? ……………………………………………………………….. 34 What Are Examples of Liabilities? ………………………………………………………….. 35 What Are the Different Forms of Net Worth? ………………………………………….. 35 Information Checkpoint ……………………………………………………………………….. 36 Key Terms …………………………………………………………………………………………….. 36 Discussion Questions …………………………………………………………………………….. 36

Chapter 5 Revenues (Inflow) ……………………………………………………………………………37 Overview ……………………………………………………………………………………………… 37 Receiving Revenue for Services ……………………………………………………………… 37 Sources of Healthcare Revenue ……………………………………………………………… 39 Grouping Revenue for Planning and Control …………………………………………. 42 Information Checkpoint ……………………………………………………………………….. 45 Key Terms …………………………………………………………………………………………….. 45 Discussion Questions …………………………………………………………………………….. 45 Notes …………………………………………………………………………………………………… 46

Chapter 6 Expenses (Outflow) ………………………………………………………………………….47 Overview ……………………………………………………………………………………………… 47 Disbursements for Services ……………………………………………………………………. 48 Grouping Expenses for Planning and Control ………………………………………… 48 Cost Reports as Influencers of Expense Formats ……………………………………… 52 Information Checkpoint ……………………………………………………………………….. 53 Key Terms …………………………………………………………………………………………….. 54 Discussion Questions …………………………………………………………………………….. 54 Notes …………………………………………………………………………………………………… 54

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Chapter 7 Cost Classifications ………………………………………………………………………….55 Distinction Between Direct and Indirect Costs ………………………………………… 55 Examples of Direct Cost and Indirect Cost ……………………………………………… 56 Responsibility Centers …………………………………………………………………………… 57 Distinction Between Product and Period Costs ……………………………………….. 60 Information Checkpoint ……………………………………………………………………….. 61 Key Terms …………………………………………………………………………………………….. 61 Discussion Questions …………………………………………………………………………….. 61 Notes …………………………………………………………………………………………………… 61

PART III—TOOLS TO ANALYZE AND UNDERSTAND FINANCIAL OPERATIONS ………63

Chapter 8 Cost Behavior and Break-Even Analysis ……………………………………………….65 Distinctions Among Fixed, Variable, and Semivariable Costs ……………………. 65 Examples of Variable and Fixed Costs …………………………………………………….. 69 Analyzing Mixed Costs ………………………………………………………………………….. 71 Contribution Margin, Cost-Volume-Profit, and Profit-Volume Ratios ………… 73 Information Checkpoint ……………………………………………………………………….. 78 Key Terms …………………………………………………………………………………………….. 78 Discussion Questions …………………………………………………………………………….. 78 Notes …………………………………………………………………………………………………… 79

Chapter 9 Understanding Inventory and Depreciation Concepts ……………………………81 Overview: The Inventory Concept ………………………………………………………….. 81 Inventory and Cost of Goods Sold (“Goods” Such as Drugs) ……………………. 82 Inventory Methods ……………………………………………………………………………….. 83 Inventory Tracking ……………………………………………………………………………….. 84 Inventory Distribution Systems ………………………………………………………………. 86 Calculating Inventory Turnover …………………………………………………………….. 87 Overview: The Depreciation Concept …………………………………………………….. 88 Book Value of a Fixed Asset and the Reserve for Depreciation …………………. 88 Computing Tax Depreciation ………………………………………………………………… 92 Information Checkpoint ……………………………………………………………………….. 93 Key Terms …………………………………………………………………………………………….. 93 Discussion Questions …………………………………………………………………………….. 93 Notes …………………………………………………………………………………………………… 93 Appendix 9-A A Further Discussion of Accelerated and

Units of Service Depreciation Computations ………………………………………. 95 Accelerated Book Depreciation Methods ……………………………………………….. 95

Chapter 10 Staffing: Methods, Operations, and Regulations ………………………………….103 Staffing Requirements ………………………………………………………………………… 103 FTEs for Annualizing Positions ……………………………………………………………. 103 Number of Employees Required to Fill a Position: Another Way to

Calculate FTEs ……………………………………………………………………………….. 106 Regulatory Requirements Regarding Staffing ……………………………………….. 111

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Summary ……………………………………………………………………………………………. 113 Information Checkpoint ……………………………………………………………………… 114 Key Terms …………………………………………………………………………………………… 114 Discussion Questions …………………………………………………………………………… 114 Notes …………………………………………………………………………………………………. 114

PART IV—REPORT AND MEASURE FINANCIAL RESULTS ……………………………………..117

Chapter 11 Reporting as a Tool ………………………………………………………………………..119 Understanding the Major Reports ……………………………………………………….. 119 Balance Sheet …………………………………………………………………………………….. 119 Statement of Revenue and Expense ……………………………………………………… 120 Statement of Changes in Fund Balance/Net Worth ………………………………. 122 Statement of Cash Flows ……………………………………………………………………… 123 Subsidiary Reports ………………………………………………………………………………. 124 Summary ……………………………………………………………………………………………. 125 Information Checkpoint ……………………………………………………………………… 125 Key Terms …………………………………………………………………………………………… 126 Discussion Questions …………………………………………………………………………… 126 Notes …………………………………………………………………………………………………. 126

Chapter 12 Financial and Operating Ratios as Performance Measures …………………………………………………………………………………..127

The Importance of Ratios ……………………………………………………………………. 127 Liquidity Ratios …………………………………………………………………………………… 129 Solvency Ratios …………………………………………………………………………………… 130 Profitability Ratios ………………………………………………………………………………. 132 Information Checkpoint ……………………………………………………………………… 134 Key Terms …………………………………………………………………………………………… 134 Discussion Questions …………………………………………………………………………… 134

Chapter 13 The Time Value of Money ……………………………………………………………….135 Purpose ……………………………………………………………………………………………… 135 Unadjusted Rate of Return ………………………………………………………………….. 135 Present-Value Analysis …………………………………………………………………………. 136 Internal Rate of Return ……………………………………………………………………….. 137 Payback Period …………………………………………………………………………………… 137 Evaluations …………………………………………………………………………………………. 138 Resources …………………………………………………………………………………………… 139 Information Checkpoint ……………………………………………………………………… 139 Key Terms …………………………………………………………………………………………… 139 Discussion Questions …………………………………………………………………………… 139 Note …………………………………………………………………………………………………… 140 Appendix 13-A Present-Value Table

(The Present Value of $1.00) …………………………………………………………… 141

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Appendix 13-B Compound Interest Table: Compound Interest of $1.00 (The Future Amount of $1.00) ……………………………………………. 143

Appendix 13-C Present Value of an Annuity of $1.00…………………………… 145

PART V—TOOLS TO REVIEW AND MANAGE COMPARATIVE DATA ……………………….147

Chapter 14 Trend Analysis, Common Sizing, and Forecasted Data …………………………149 Common Sizing ………………………………………………………………………………….. 149 Trend Analysis…………………………………………………………………………………….. 150 Analyzing Operating Data ……………………………………………………………………. 151 Importance of Forecasts ………………………………………………………………………. 152 Operating Revenue Forecasts ………………………………………………………………. 153 Staffing Forecasts ……………………………………………………………………………….. 156 Capacity Level Issues in Forecasting ……………………………………………………… 158 Summary ……………………………………………………………………………………………. 160 Information Checkpoint ……………………………………………………………………… 160 Key Terms …………………………………………………………………………………………… 160 Discussion Questions …………………………………………………………………………… 160 Notes …………………………………………………………………………………………………. 160

Chapter 15 Using Comparative Data ………………………………………………………………….161 Overview ……………………………………………………………………………………………. 161 Comparability Requirements ……………………………………………………………….. 161 A Manager’s View of Comparative Data ………………………………………………… 162 Uses of Comparative Data ……………………………………………………………………. 163 Making Data Comparable ……………………………………………………………………. 168 Constructing Charts to Show the Data ………………………………………………….. 171 Information Checkpoint ……………………………………………………………………… 173 Key Terms …………………………………………………………………………………………… 173 Discussion Questions …………………………………………………………………………… 174 Note …………………………………………………………………………………………………… 174

PART VI—CONSTRUCT AND EVALUATE BUDGETS ……………………………………………..175

Chapter 16 Operating Budgets …………………………………………………………………………177 Overview ……………………………………………………………………………………………. 177 Budget Viewpoints ………………………………………………………………………………. 178 Budget Basics: A Review ………………………………………………………………………. 179 Building an Operating Budget: Preparation …………………………………………. 180 Building an Operating Budget: Construction ……………………………………….. 181 Working with Static Budgets and Flexible Budgets ………………………………… 183 Budget Construction Summary ……………………………………………………………. 186 Budget Review ……………………………………………………………………………………. 186 Information Checkpoint ……………………………………………………………………… 187 Key Terms …………………………………………………………………………………………… 187

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Discussion Questions …………………………………………………………………………… 187 Notes …………………………………………………………………………………………………. 188 Appendix 16-A Creating a DRG Budget for Respiratory Care:

The Resource Consumption Approach …………………………………………….. 189 Background ……………………………………………………………………………………….. 189 A DRG Budget for Respiratory Care …………………………………………………….. 190 Notes …………………………………………………………………………………………………. 193 Appendix 16-B Reviewing a Comparative Operating Budget

Report ……………………………………………………………………………………………. 195 The Comparative Report to Review ………………………………………………………. 195 Checklist Questions and Answers for the Comparative Budget

Review ……………………………………………………………………………………………. 196

Chapter 17 Capital Expenditure Budgets ……………………………………………………………197 Overview ……………………………………………………………………………………………. 197 Creating the Capital Expenditure Budget …………………………………………….. 197 Budget Construction Tools ………………………………………………………………….. 198 Funding Requests ……………………………………………………………………………….. 200 Evaluating Capital Expenditure Proposals…………………………………………….. 202 Information Checkpoint ……………………………………………………………………… 203 Key Terms …………………………………………………………………………………………… 203 Discussion Questions …………………………………………………………………………… 204 Note …………………………………………………………………………………………………… 204 Appendix 17-A A Further Discussion of Capital Budgeting

Methods …………………………………………………………………………………………. 205 Assumptions ……………………………………………………………………………………….. 205 Payback Method …………………………………………………………………………………. 205 Unadjusted Rate of Return (AKA Accountant’s Rate of Return) …………….. 206 Net Present Value ……………………………………………………………………………….. 207 Internal Rate of Return ……………………………………………………………………….. 207

PART VII—TOOLS TO PLAN, MONITOR, AND CONTROL FINANCIAL STATUS ……..209

Chapter 18 Variance Analysis and Sensitivity Analysis ……………………………………………211 Variance Analysis Overview ………………………………………………………………….. 211 Three Types of Flexible Budget Variance ……………………………………………… 211 Two-Variance Analysis and Three-Variance Analysis Compared ………………. 212 Three Examples of Variance Analysis ……………………………………………………. 214 Summary ……………………………………………………………………………………………. 218 Sensitivity Analysis Overview ………………………………………………………………… 218 Sensitivity Analysis Tools ……………………………………………………………………… 218 Summary ……………………………………………………………………………………………. 222 Information Checkpoint ……………………………………………………………………… 222 Key Terms …………………………………………………………………………………………… 222 Discussion Questions …………………………………………………………………………… 222 Note …………………………………………………………………………………………………… 222

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Chapter 19 Estimates, Benchmarking, and Other Measurement Tools …………………….223 Estimates Overview ……………………………………………………………………………… 223 Common Uses of Estimates …………………………………………………………………. 223 Example: Estimating the Ending Pharmacy Inventory …………………………… 224 Example: Estimated Economic Impact of a New Specialty in a

Physician Practice …………………………………………………………………………… 225 Other Estimates ………………………………………………………………………………….. 226 Importance of a Variety of Performance Measures ………………………………… 226 Adjusted Performance Measures Over Time …………………………………………. 227 Benchmarking ……………………………………………………………………………………. 227 Economic Measures ……………………………………………………………………………. 229 Measurement Tools …………………………………………………………………………….. 229 Information Checkpoint ……………………………………………………………………… 231 Key Terms …………………………………………………………………………………………… 231 Discussion Questions …………………………………………………………………………… 232 Note …………………………………………………………………………………………………… 232

Chapter 20 Understanding the Impact of Data Analytics and Big Data …………………….233 Introduction ………………………………………………………………………………………. 233 Defining Data Analytics ……………………………………………………………………….. 233 Two Basic Approaches to Data Analytics ……………………………………………….. 235 Data Analytics and Healthcare Analytics Serve Many Purposes ……………….. 236 Data Mining ……………………………………………………………………………………….. 237 Impacts of Healthcare Analytics ………………………………………………………….. 238 Challenges for Healthcare Analytics …………………………………………………….. 239 Information Checkpoint ……………………………………………………………………… 239 Key Terms …………………………………………………………………………………………… 239 Discussion Questions …………………………………………………………………………… 240 Notes …………………………………………………………………………………………………. 240

PART VIII—FINANCIAL TERMS, COSTS, AND CHOICES ……………………………………….243

Chapter 21 Understanding Investment and Statistical Terms Used in Finance ……………..245 Investment Overview …………………………………………………………………………… 245 Cash Equivalents …………………………………………………………………………………. 245 Governmental Guarantor: The FDIC ……………………………………………………. 246 Long-Term Investments in Bonds…………………………………………………………. 246 Investments in Stocks ………………………………………………………………………….. 248 Privately Held Companies Versus Public Companies ……………………………… 248 Investment Indicators …………………………………………………………………………. 249 Statistics Overview ………………………………………………………………………………. 250 Commonly Used Statistical and Other Mathematical Terms …………………… 251 Information Checkpoint ……………………………………………………………………… 254 Key Terms …………………………………………………………………………………………… 254 Discussion Questions …………………………………………………………………………… 255 Notes …………………………………………………………………………………………………. 255

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Chapter 22 Business Loans and Financing Costs ………………………………………………….257 Overview of Capital Structure ………………………………………………………………. 257 Sources of Capital ……………………………………………………………………………….. 257 The Costs of Financing ……………………………………………………………………….. 258 Management Considerations About Real Estate Financing …………………….. 259 Management Decisions About Business Loans ………………………………………. 260 Information Checkpoint ……………………………………………………………………… 260 Key Terms …………………………………………………………………………………………… 260 Discussion Questions …………………………………………………………………………… 260 Appendix 22-A Sample Amortization Schedule ……………………………………. 261

Chapter 23 Choices: Owning Versus Leasing Equipment ……………………………………….263 Purchasing Equipment ……………………………………………………………………….. 263 Leasing Equipment …………………………………………………………………………….. 263 Buy-or-Lease Management Decisions ……………………………………………………. 264 Accounting Principles Regarding Leases ………………………………………………. 268 Information Checkpoint ……………………………………………………………………… 269 Key Terms …………………………………………………………………………………………… 269 Discussion Questions …………………………………………………………………………… 269 Note …………………………………………………………………………………………………… 269

PART IX—STRATEGIC PLANNING: A POWERFUL TOOL ………………………………………271

Chapter 24 Strategic Planning and the Healthcare Financial Manager ……………………..273 Major Components of the

Strategic Plan: Overview ………………………………………………………………….. 273 Introduction ………………………………………………………………………………………. 273 Six Major Components ……………………………………………………………………….. 273 Varied Approaches to Strategic Planning ……………………………………………… 275 Examples of Mission, Vision, and Value Statements ……………………………….. 276 Recognizing a Special Status or Focus Within the Statements ………………… 276 Financial Emphasis Within the Statements ……………………………………………. 278 Relaying the Message ………………………………………………………………………….. 279 The Strategic Planning Cycle and Its Process Flow ………………………………… 281 Process Flow for Creating Goals, Objectives,

and Action Plans …………………………………………………………………………….. 281 Process Flow for Creating Action Plans and Their

Performance Measures ……………………………………………………………………. 282 The Planning Cycle Over Time ……………………………………………………………. 283 Managers’ Responsibilities ………………………………………………………………….. 284 Federal Governmental Agencies Must Prepare Strategic Plans ………………. 285 Why are Federal Planning Requirements Important to Us? ……………………. 285 Introduction: Requirements, Plans, and Performance …………………………… 285 An Example: The VA Office of Information Technology IT Strategic

Planning Cycle ……………………………………………………………………………….. 288 Introduction ………………………………………………………………………………………. 288

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The VA Office of Information Technology IT Strategic Planning Cycle: An Example …………………………………………………………………………………… 288

The VA Planning Cycle’s Process Flow ………………………………………………….. 288 Planning Cycle Definitions for this Example …………………………………………. 290 Management Responsibilities Within the Planning Cycle ………………………. 291 Tools for Strategic Planning: Situational Analysis

and Financial Projections ………………………………………………………………… 292 Situational Analysis ……………………………………………………………………………… 293 Financial Projections for Strategic Planning …………………………………………. 294 Case Study: Strategic Financial Planning in Long-Term Care …………………. 296 Appendix 24-A: Sample SWOT Worksheets and Question Guides …………… 296 Information Checkpoint ……………………………………………………………………… 296 Key Terms …………………………………………………………………………………………… 297 Discussion Questions …………………………………………………………………………… 297 Notes …………………………………………………………………………………………………. 297 Appendix 24-A Sample SWOT Worksheets and Question Guides …………. 299 Introduction ………………………………………………………………………………………. 299 Scoring Summary Sheet for EHR Adoption and Implementation …………… 299 Three Internal Worksheets for Strengths and Weaknesses ……………………… 299 Internal Worksheet for EHR Information

Technology (IT) Staff …………………………………………………………………….. 300 Internal Worksheet for Other Staff Involved in EHR ……………………………… 302 Internal Worksheet for Technology and Capital Funding ………………………. 302 External Worksheet for Opportunities and Threats……………………………….. 304

Chapter 25 Putting It All Together: Creating a Business Plan That Is Strategic ………….309 Overview ……………………………………………………………………………………………. 309 Elements of the Business Plan ……………………………………………………………… 309 Preparing to Construct the Business Plan ……………………………………………… 310 The Service or Equipment Description ………………………………………………… 310 The Organization Segment …………………………………………………………………. 310 The Marketing Segment ……………………………………………………………………… 311 The Financial Analysis Segment …………………………………………………………… 311 The “Knowledgeable Reader” Approach to Your Business Plan ………………. 313 The Executive Summary ……………………………………………………………………… 314 Assembling the Business Plan ………………………………………………………………. 314 Presenting the Business Plan ……………………………………………………………….. 314 Strategic Aspects of Your Business Plan…………………………………………………. 315 Information Checkpoint ……………………………………………………………………… 315 Key Terms …………………………………………………………………………………………… 316 Discussion Questions …………………………………………………………………………… 316

Chapter 26 Understanding Strategic Relationships: Health Delivery Systems, Finance, and Reimbursement ………………………………………………………317

Introduction ………………………………………………………………………………………. 317 Defining Health Delivery Systems ……………………………………………………….. 317

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Defining the Area of Healthcare Finance ……………………………………………… 319 Defining the Area of Healthcare Reimbursement …………………………………. 320 Strategic Relationship Between the Healthcare Delivery System and

Finance ………………………………………………………………………………………….. 321 The Strategic Relationship Between Finance and Reimbursement …………. 323 Third-Party Reimbursement and Government Expenditures: Another

Strategic Relationship ……………………………………………………………………… 325 A New Focus on the Relationship Between Finance and Healthcare

Delivery………………………………………………………………………………………….. 327 Reimbursement and Physicians: An Ongoing Strategic Challenge ………….. 327 Information Checkpoint ……………………………………………………………………… 328 Key Terms …………………………………………………………………………………………… 329 Other Acronyms …………………………………………………………………………………. 329 Discussion Questions …………………………………………………………………………… 329 Notes …………………………………………………………………………………………………. 330

PART X—INFORMATION TECHNOLOGY AS A FINANCIAL AND STRATEGIC TOOL …..331

Chapter 27 Understanding Value-Based Health Care and Its Financial and Digital Outcomes………………………………………………………………………………….333

The Value-Based Concept: Introduction ………………………………………………. 333 Value-Based Progress in the Private Sector ……………………………………………. 334 Value-Based Progress in the Public Sector …………………………………………….. 335 Value-Based Education Efforts ……………………………………………………………… 337 Value-Based Legislative Reform ……………………………………………………………. 338 Quality Measurement: The Concept …………………………………………………….. 341 Value-Based Public Reporting in the Private Sector ……………………………….. 343 Value-Based Public Reporting in the Public Sector ……………………………….. 344 Financial Outcomes ……………………………………………………………………………. 346 Digital Outcomes ………………………………………………………………………………… 347 Value-Based Strategic Planning by the Private Sector …………………………….. 349 Value-Based Strategic Planning by the Public Sector ……………………………… 350 Conclusion: The Future ………………………………………………………………………. 354 Information Checkpoint ……………………………………………………………………… 354 Key Terms …………………………………………………………………………………………… 355 Other Acronyms …………………………………………………………………………………. 355 Discussion Questions …………………………………………………………………………… 355 Notes …………………………………………………………………………………………………. 355

Chapter 28 New Payment Methods and Measures: MIPS and APMs for Eligible Professionals …………………………………….361

Introduction ………………………………………………………………………………………. 361 Legislative Reform and MACRA: An Overview ………………………………………. 362 Payment Choices: MIPS Versus APMs …………………………………………………… 363 MIPS Incentives ………………………………………………………………………………….. 363 How Are MIPS Physicians and Other Eligible Professionals Paid? …………… 366

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MIPS Composite Performance Score ……………………………………………………. 367 MIPS Performance Categories …………………………………………………………….. 368 How MIPS Scoring Works ……………………………………………………………………. 370 MIPS Required Reporting Affects Payment ………………………………………….. 373 Data Submission …………………………………………………………………………………. 374 APM Incentives—(Choice #2) ……………………………………………………………… 375 Eligible Professionals Within APMs ………………………………………………………. 376 How Are Advanced APM EPs Paid? ………………………………………………………. 378 How Significant Participation Works…………………………………………………….. 380 Advanced APM Participation Standards ………………………………………………. 380 Scoring Standard for APMs ………………………………………………………………….. 381 Creating Physician-Focused Payment Models (PFPMS) …………………………. 382 Building the Measurement Development Plan for MIPS and APMs:

Developing New Quality Measures …………………………………………………… 382 Timelines for Developing Quality Measures ………………………………………….. 383 A Framework for MACRA Quality Measurement …………………………………… 384 Conclusion: Benefits and Costs of the Quality Payment Program ……………. 388 Three Incentive Programs as They Existed Before MIPS: A Reference ……. 389 Alternative Payment Models: A Reference …………………………………………….. 390 Information Checkpoint ……………………………………………………………………… 392 Key Terms …………………………………………………………………………………………… 392 Discussion Questions …………………………………………………………………………… 393 Notes …………………………………………………………………………………………………. 393 Appendix 28-A Meaningful Use: Modified and Streamlined with

a New Name …………………………………………………………………………………… 397 How Meaningful Use Has Evolved ……………………………………………………….. 397 Changes to Allowable MU Stages …………………………………………………………. 398 Changes to Meaningful Use Requirements ………………………………………….. 400 Conclusion: Advancing Care Information Becomes

the New Meaningful Use …………………………………………………………………. 401 Acronyms …………………………………………………………………………………………… 403 Notes …………………………………………………………………………………………………. 403

Chapter 29 Standardizing Measures and Payment in Post-Acute Care: New Requirements ……………………………………………………………………………405

The Impact Act: New Directions for Post-Acute Care …………………………….. 405 Why Focus Attention on Post-Acute Care? ……………………………………………. 407 A New Alternative Payment Model for Four Care Settings ……………………… 408 Standardized Data and Interoperability: The Keys to PAC Reform ………….. 410 Standardizing Assessment and Measure Domains for PAC Providers ………. 411 Electronic Reporting Timelines for PAC Providers ………………………………… 413 Public Reporting: Impact Act Requirements …………………………………………. 414 Impact Act Benefits and Costs: A Summary …………………………………………… 415 Meeting Strategic Goals ………………………………………………………………………. 415 Conclusion: Innovation in the Digital Age ……………………………………………. 416 The Future: Change Is Inevitable …………………………………………………………. 418

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Information Checkpoint ……………………………………………………………………… 418 Key Terms …………………………………………………………………………………………… 419 Other Acronyms …………………………………………………………………………………. 419 Discussion Questions …………………………………………………………………………… 419 Notes …………………………………………………………………………………………………. 419

Chapter 30 ICD-10 Implementation Continues: Finance and Strategic Challenges for the Manager …………………………………………………………………………421

ICD-10 E-Records Overview and Impact ……………………………………………….. 421 Overview of the ICD-10 Coding System ………………………………………………… 421 ICD-10-CM and ICD-10-PCS Codes ………………………………………………………. 421 E-Record Standards and the ICD-10 Transition……………………………………… 422 ICD-10 Benefits and Costs ……………………………………………………………………. 423 ICD-10 Implementation: Systems Affected and Technology Issues ………….. 425 Understand Technology Issues and Problems ………………………………………. 426 An Example: Comparison of Old and New Angioplasty Codes ……………….. 428 ICD-10 Implementation: Training and Lost Productivity Costs ………………. 428 Who Gets Trained on ICD-10? ……………………………………………………………… 428 Costs of Training ………………………………………………………………………………… 429 Costs of Lost Productivity ……………………………………………………………………. 430 Introduction: About ICD-10 Key Performance Indicators ……………………… 430 Key Performance Indicators to Assess ICD-10 Progress ………………………….. 431 Using KPIs to Track ICD-10 Implementation Progress ………………………….. 432 Reviewing KPI Results …………………………………………………………………………. 434 Creating Action Plans to Deal with Problems ………………………………………… 435 Building Specific Action Plans to Correct Deficiencies…………………………… 435 ICD-10 Implementation: Situational Analysis ………………………………………… 437 Implementation Planning Recommendations ………………………………………. 437 Situational Analysis Recommendations ………………………………………………… 438 Commencing an Information Technology SWOT Matrix for ICD-10 ……… 440 Summary ……………………………………………………………………………………………. 441 Information Checkpoint ……………………………………………………………………… 441 Key Terms …………………………………………………………………………………………… 441 Discussion Questions …………………………………………………………………………… 442 Notes …………………………………………………………………………………………………. 442 Appendix 30-A ICD-10 Conversion Costs for a Midwestern

Community Hospital……………………………………………………………………….. 445 Authors’ Note …………………………………………………………………………………….. 445 Introduction ………………………………………………………………………………………. 445 The Scenario ………………………………………………………………………………………. 445 Note …………………………………………………………………………………………………… 446

PART XI—CASE STUDIES …………………………………………………………………………………….447

Chapter 31 Case Study: The Doctor’s Dilemma …………………………………………………..449 The Offer: “Sell Your Practice to Us” …………………………………………………….. 449

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Seeking to Understand Healthcare Finance Reform ……………………………… 449 Researching Acquisition Viewpoints and Industry Trends ……………………… 450 Considering Other Physicians’ Reactions ……………………………………………… 451 What Will Dr. Matthews Decide? …………………………………………………………… 451 Notes …………………………………………………………………………………………………. 451

Chapter 32 Case Study: Strategic Financial Planning in Long-Term Care …………………453 Background ……………………………………………………………………………………….. 453 Framework of the Board’s Mandate ……………………………………………………… 453 Industry Profile …………………………………………………………………………………… 454 Feasibility Determination …………………………………………………………………….. 454 Notes …………………………………………………………………………………………………. 457

Chapter 33 Case Study: Metropolis Health System ……………………………………………….459 Background ……………………………………………………………………………………….. 459 MHS Case Study …………………………………………………………………………………. 461 Appendix 33-A Metropolis Health System’s Financial Statements

and Excerpts from Notes …………………………………………………………………. 471 Excerpts from Metropolis Health System Notes to Financial

Statements …………………………………………………………………………………….. 477 Appendix 33-B Comparative Analysis Using Financial Ratios and

Benchmarking Helps Turn Around a Hospital in the Metropolis Health System ………………………………………………………………………………………. 483

Appendix 33-C Proposal to Add a Retail Pharmacy to a Hospital in the Metropolis Health System …………………… 489

PART XII—MINI-CASE STUDIES …………………………………………………………………………..495

Chapter 34 Mini-Case Study 1: The Economic Significance of Resource Misallocation: Client Flow Through the Women, Infants, and Children Public Health Program……………………………………………..497

Confronting the Operational Problem …………………………………………………. 497 The Environment ……………………………………………………………………………….. 497 The Peak-Load Problem ……………………………………………………………………… 498 Method ………………………………………………………………………………………………. 499 Results ……………………………………………………………………………………………….. 499

Chapter 35 Mini-Case Study 2: Technology in Health Care: Automating Admission Processes …………………………………………………………………..503

Assess Admissions Process ……………………………………………………………………. 503 Areas to Automate ………………………………………………………………………………. 504 Fax and Document Management …………………………………………………………. 504 Communication Is Important ………………………………………………………………. 504 Referral Tracking and Approval …………………………………………………………… 505 Analyzing Referral Activity ………………………………………………………………….. 505 Hours Saved ……………………………………………………………………………………….. 505

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Appendix A Checklists ……………………………………………………………………………………..507

Glossary ………………………………………………………………………………………………………………511

Examples and Exercises, Supplemental Materials, and Solutions …………………………………..525

Examples and Exercises ………………………………………………………………………………………… 525

Supplementary Materials: The Mechanics of Percentage Computations …………………… 578

Solutions to Practice Exercises ………………………………………………………………………………. 578

Index ………………………………………………………………………………………………………………….591

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New to This Edition

The Fifth Edition continues to provide practical information, with examples taken from real life in the healthcare finance world. For example, we have added the following:

NEW MATERIAL IN THE 5TH EDITION:

• Chapter 3 “The Digital Age: Changing the Landscape of Healthcare Finance”—This new chapter is about understanding the impact of data analytics and big data, along with other important trends in the chang- ing landscape of healthcare finance. It is important to recognize that digital advancements in health care are the drivers that enable innovation.

• Chapter 26 “Understanding Strategic Relationships: Health Delivery Systems, Finance and Reimbursement”—This new chapter focuses upon describing the strategic relationships between and among health delivery systems, finance, and reimbursement. This chapter assists a manager in recogniz- ing both differences and interrelationships and in applying this recognition to their own organization’s structure.

• Chapter 27 “Understanding Value-Based Health Care and Its Financial and Digital Outcomes”—Value- based performance, the subject of this new chapter, is particularly important because it is the key to both improving patient care and reforming payment systems. Healthcare organizations should define what value means and make sure that definition is shared across the entire entity.

• Chapter 28 “New Payment Methods and Measures: MIPS and APMs for Eligible Professionals”—This new chapter highlights significant legislation and regulations that change payment methods and performance measures for physicians and other eligible professionals. The new payment method for physicians hinges upon proper reporting of new performance measures. The new system is a true reform, as it replaces a physician payment system that has been in effect for decades.

• Appendix 28-A “Meaningful Use: Modified and Streamlined with a New Name”—This new appendix de- scribes the evolution of meaningful use before and after its transition into the new physician performance measures that are described in Chapter 28.

• Chapter 29 “Standardizing Measures and Payment in Post-Acute Care: New Requirements”—This new chapter is about important legislation and regulations that standardize measures and require studies about payment reform for post-acute care. This means performance measures for skilled nursing facilities, home health agencies, inpatient rehabilitation facilities, and long-term care hospitals are being standardized. Models for a patient-centered payment system that cuts across all four care settings are also being created.

• Chapter 30 “ICD-10 Implementation Continues: Finance and Strategic Challenges for the Manager”—This updated chapter focuses upon challenges for the manager within ICD-10 implementation. An all-new section introduces useful Key Performance Indicators that are used to assess an organization’s ICD-10 implementation progress.

Other new material in this edition includes the following:

• Chapter 9 “Understanding Inventory and Depreciation Concepts”—A new section about drug distribu- tion systems in use in hospitals has been added to this chapter.

• Chapter 10 “Staffing: Methods, Operations, and Regulation”—A new section has been added describing legislation that requires reporting “verifiable and auditable” payroll information for the “Nursing Com- pare” website, along with information about existing Certificate of Need regulations.

xviii New to This Edition

• Appendix 16-A “Creating A DRG Budget for Respiratory Care: The Resource Consumption Approach”—This new appendix sets out a step-by-step DRG budget methodology.

• Appendix 16-B “Reviewing a Comparative Operating Budget Report”—This new appendix describes the review of a section from an actual operating budget report.

• Chapter 21 “Understanding Investment and Statistical Terms Used in Finance”—This chapter was origi- nally only about investment terms; it now has a new section about understanding statistical terms.

• Chapter 31 “Case Study: The Doctor’s Dilemma”—This new case study is about a physician deciding whether or not to sell his practice to a health delivery system.

MATERIAL OMITTED FROM THIS EDITION

• Two Fourth Edition chapters and a Fourth Edition appendix have been omitted because they are becoming outdated. This includes the following: Chapter 24 “Information Technology and EHR: Adoption Require- ments, Initiatives, and Management Decisions” has been replaced with the new value-based chapter.

• Appendix 24-A Accordingly, the e-Prescribing (eRx) appendix has also been omitted because the incen- tive program is ending.

• Chapter 25 “Electronic Health Records Framework: Incentives, Standards, Measures, and Meaningful Use” has been omitted because the incentives are ending.

• Relevant additions and deletions have been made to the “Examples and Exercises” section.

To summarize: A fundamental theme in the Fifth Edition is that healthcare financing is embracing the digital age. This is manifested by its coverage of electronic health records (EHRs), data analytics, value-based health care, and social media, among other topics. In this era of population health and the resulting need for clinical integration, data-driven collaboration has the potential to improve outcomes and lower costs, as well as more effectively engage the patient. The upshot: Everything is connected.

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© LFor/Shutterstock

Preface

Our world of work is divided into three parts: the healthcare consultant, the instructor, and the writer. Over the years, we have taught managers in seminars, academic settings, and corporate conference rooms. Most of the managers were mid-career adults, working in all types of healthcare disciplines. We taught them and they taught us. One of the things they taught us was this: A nonfinancial manager pushed into dealing with the world of finance often feels a dislocation and a change of perspective, and that experience can be both difficult and exciting. We have listened to their questions and concerns as these managers grapple with this new world. This book is the result of their experiences, and ours.

The book is designed for use by a manager (or future manager) who does not have an educational back- ground in financial management. It has long been our philosophy that if you can truly understand how a thing works—whatever it is—then you own it. This book is created around that philosophy. In other words, we intend to make financial management transparent by showing how it works and how a manager can use it.

USING THE BOOK

All our examples are drawn from the healthcare industry. Thus users will find examples and exercises covering many types of healthcare settings and providers, including hospitals, clinics, physician practices, long-term care facilities, and home health agencies.

Standard Elements

Each chapter within these parts contains the following four elements:

• “Progress Notes” set out learning objectives at the beginning of each chapter. • An “Information Checkpoint” segment at the end of each chapter tells the user three things: information

needed, where this information can be obtained, and how this information can be used. • A “Key Terms” section follows the “Information Checkpoint.” Every Key Term is defined in the Glossary;

it is also bold faced the first time it appears in the text. • The “Discussion Questions” segment inquires about practical uses of chapter material and encourages

responses based upon experience.

Structure and Topics

The book is structured in 12 parts, as follows.

Part I: Healthcare Finance Overview [Three chapters; one is new] Part II: Record Financial Operations [Four chapters] Part III: Tools To Analyze and Understand Financial Operations [Three chapters plus appendix; new

THIRD EDITION

Introduction to Health Care Management

Edited by

Sharon B. Buchbinder, RN, PhD Professor and Program Coordinator

MS in Healthcare Management Program School of Graduate and Professional Studies

Stevenson University Owings Mills, Maryland

Nancy H. Shanks, PhD Professor Emeritus

Department of Health Professions Health Care Management Program

Metropolitan State University of Denver Denver, Colorado

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There may be images in this book that feature models; these models do not necessarily endorse, represent, or participate in the activities represented in the images. Any screenshots in this product are for educational and instructive purposes only. Any individuals and scenarios featured in the case studies throughout this product may be real or fictitious, but are used for instructional purposes only.

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Production Credits VP, Executive Publisher: David D. Cella Publisher: Michael Brown Associate Editor: Lindsey Mawhiney Sousa Associate Editor: Nicholas Alakel Associate Production Editor: Rebekah Linga Senior Marketing Manager: Sophie Fleck Teague Manufacturing and Inventory Control Supervisor: Amy Bacus Composition: Integra Software Services Pvt. Ltd. Cover Design: Kristin E. Parker Rights & Media Specialist: Merideth Tumasz Media Development Editor: Shannon Sheehan Cover and Title Page Image: © Yegor Korzh/ShutterStock, Inc. Printing and Binding: Edwards Brothers Malloy Cover Printing: Edwards Brothers Malloy

10950-4

Library of Congress Cataloging-in-Publication Data Names: Buchbinder, Sharon Bell, editor. | Shanks, Nancy H., editor. Title: Introduction to health care management / [edited by] Sharon B.

Buchbinder and Nancy H. Shanks. Description: Third edition. | Burlington, Massachusetts : Jones & Bartlett

Learning, [2015] | Includes bibliographical references and index. Identifiers: LCCN 2015040132 | ISBN 9781284081015 (paper) Subjects: | MESH: Health Services Administration. | Efficiency, Organizational. | Health

Care Costs. | Leadership. Classification: LCC RA971 | NLM W 84.1 | DDC 362.1–dc23 LC record available at

http://lccn.loc.gov/2015040132

6048

Printed in the United States of America 20 19 18 17 16 10 9 8 7 6 5 4 3 2 1

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We dedicate this book to our loving husbands, Dale Buchbinder and Rick Shanks—

Who coached, collaborated, and coerced us to “FINISH THE THIRD EDITION!”

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Contents

FOREWORD PREFACE ACKNOWLEDGMENTS ABOUT THE EDITORS CONTRIBUTORS

CHAPTER 1 An Overview of Health Care Management Jon M. Thompson, Sharon B. Buchbinder, and Nancy H. Shanks

Introduction The Need for Managers and Their Perspectives Management: Definition, Functions, and Competencies Management Positions: The Control in the Organizational

Heirarchy Focus of Management: Self, Unit/Team, and Organization Role of the Manager in Establishing and Maintaining

Organizational Culture Role of the Manager in Talent Management Role of the Manager in Ensuring High Performance Role of the Manager in Leadership Development and

Succession Planning Role of the Manager in Innovation and Change

Management Role of the Manager in Health Care Policy Research in Health Care Management Chapter Summary

CHAPTER 2 Leadership Louis Rubino

Leadership vs. Management

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History of Leadership in the U.S. Contemporary Models Leadership Styles Leadership Competencies Leadership Protocols Governance Barriers and Challenges Ethical Responsibility Important New Initiatives Leaders Looking to the Future Special Research Issues Conclusion

CHAPTER 3 Management and Motivation Nancy H. Shanks and Amy Dore

Introduction Motivation—The Concept History of Motivation Theories of Motivation A Bit More About Incentives and Rewards Why Motivation Matters Motivated vs. Engaged—Are the Terms the Same? Measuring Engagement Misconceptions About Motivation and Employee

Satisfaction Motivational and Engagement Strategies Motivating Across Generations Managing Across Generations Research Opportunities in Management and Motivation Conclusion

CHAPTER 4 Organizational Behavior and Management Thinking Sheila K. McGinnis

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Introduction The Field of Organizational Behavior Organizational Behavior’s Contribution to Management Key Topics in Organizational Behavior Organizational Behavior Issues in Health Organizations Thinking: The “Inner Game” of Organizational Behavior The Four Key Features of Thinking Mental Representation: The Infrastucture of Thinking Processing Information: Fundamental Thinking Habits Decision Making, Problem Solving, and Biased Thinking

Habits Social Cognition and Socio-Emotional Intelligence Research Opportunities in Organizational Behavior and

Management Thinking Conclusion

CHAPTER 5 Strategic Planning Susan Casciani

Introduction Purpose and Importance of Strategic Planning The Planning Process SWOT Analysis Strategy Identification and Selection Rollout and Implementation Outcomes Monitoring and Control Strategy Execution Strategic Planning and Execution: The Role of the Health

Care Manager Opportunities for Research in Strategic Planning Conclusion

CHAPTER 6 Healthcare Marketing Nancy K. Sayre

Introduction

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What Is Marketing? A Brief History of Marketing in Health Care The Strategic Marketing Process Understanding Marketing Management Health Care Buyer Behavior Marketing Mix Marketing Plan Ethics and Social Responsibility Opportunities for Research in Health Care Marketing Conclusion

CHAPTER 7 Quality Improvement Basics Eric S. Williams, Grant T. Savage, and Patricia A. Patrician

Introduction Defining Quality in Health Care Why Is Quality Important? The Relevance of Health Information Technology in

Quality Improvement Quality Improvement Comes (Back) to America Leaders of the Quality Movement Baldrige Award Criteria: A Strategic Framework for Quality

Improvement Common Elements of Quality Improvement Three Approaches to Quality Improvement Quality Improvement Tools Opportunities for Research in Health Care Quality Conclusion

CHAPTER 8 Information Technology Nancy H. Shanks and Sharon B. Buchbinder

Introduction Information Systems Used by Managers The Electronic Medical Record (EMR)

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The Challenges to Clinical System Adoption The Future of Health Care Information Technology The Impact of Information Technology on the Health Care

Manager Opportunities for Research on Health Care Professionals Conclusion

CHAPTER 9 Financing Health Care and Health Insurance Nancy H. Shanks

Introduction Introduction to Health Insurance Brief History of Health Insurance Characteristics of Health Insurance Private Health Insurance Coverage The Evolution of Social Insurance Major “Players” in the Social Insurance Arena Statistics on Health Insurance Coverage and Costs Those Not Covered—The Uninsured Opportunities for Research on Emerging Issues Conclusion

CHAPTER 10 Managing Costs and Revenues Kevin D. Zeiler

Introduction What Is Financial Management and Why Is It Important? Tax Status of Health Care Organizations Financial Governance and Responsibility Structure Managing Reimbursements from Third-Party Payers Coding in Health Care Controlling Costs and Cost Accounting Setting Charges Managing Working Capital Managing Accounts Receivable

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Managing Materials and Inventory Managing Budgets Opportunities for Research on Managing Costs and

Revenues Conclusion

CHAPTER 11 Managing Health Care Professionals Sharon B. Buchbinder and Dale Buchbinder

Introduction Physicians Registered Nurses Licensed Practical Nurses/Licensed Vocational Nurses Nursing Assistants and Orderlies Home Health Aides Midlevel Practitioners Allied Health Professionals Opportunities for Research on Health Care Professionals Conclusion

CHAPTER 12 The Strategic Management of Human Resources Jon M. Thompson

Introduction Environmental Forces Affecting Human Resources

Management Understanding Employees as Drivers of Organizational

Performance Key Functions of Human Resources Management Workforce Planning/Recruitment Employee Retention Research in Human Resources Management Conclusion

CHAPTER 13 Teamwork Sharon B. Buchbinder and Jon M. Thompson

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Introduction What Is a Team? The Challenge of Teamwork in Health Care Organizations The Benefits of Effective Health Care Teams The Costs of Teamwork Electronic Tools and Remote and Virtual Teams Face to Face Versus Virtual Teams Real-World Problems and Teamwork Who’s on the Team? Emotions and Teamwork Team Communication Methods of Managing Teams of Health Care Professionals Opportunities for Research on Emerging Issues Conclusion

CHAPTER 14 Addressing Health Disparities: Cultural Proficiency Nancy K. Sayre

Introduction Changing U.S. Demographics and Patient Populations Addressing Health Disparities by Fostering Cultural

Competence in Health Care Organizations Best Practices Addressing Health Disparities by Enhancing Public Policy Opportunities for Research on Health Disparities and

Cultural Proficiency Conclusion

CHAPTER 15 Ethics and Law Kevin D. Zeiler

Introduction Legal Concepts Tort Law Malpractice

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Contract Law Ethical Concepts Patient and Provider Rights and Responsibilities Legal/Ethical Concerns in Managed Care Biomedical Concerns Beginning- and End-of-Life Care Opportunities for Research in Health Care Ethics and Law Conclusion

CHAPTER 16 Fraud and Abuse Kevin D. Zeiler

Introduction What Is Fraud and Abuse? History The Social Security Act and the Criminal-Disclosure

Provision The Emergency Medical Treatment and Active Labor Act Antitrust Issues Physician Self-Referral/Anti-Kickback/Safe Harbor Laws Management Responsibility for Compliance and Internal

Controls Corporate Compliance Programs Opportunities for Research in Fraud and Abuse Conclusion

CHAPTER 17 Special Topics and Emerging Issues in Health Care Management Sharon B. Buchbinder and Nancy H. Shanks

Introduction Re-Emerging Outbreaks, Vaccine Preventable Diseases,

and Deaths Bioterrorism in Health Care Settings Human Trafficking Violence in Health Care Settings

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Medical Tourism Consumer-Directed Health Care Opportunities for Research on Emerging Issues

CHAPTER 18 Health Care Management Case Studies and Guidelines Sharon B. Buchbinder, Donna M. Cox, and Susan Casciani

Introduction Case Study Analysis Case Study Write-Up Team Structure and Process for Completion

CASE STUDIES* Metro Renal—Case for Chapters 12 and 2 United Physician Group—Case for Chapters 5, 9, 11, and 15 Piecework—Case for Chapters 9 and 10 Building a Better MIS-Trap—Case for Chapter 8 Death by Measles—Case for Chapters 17, 11, and 15 Full Moon or Bad Planning?—Case for Chapters 17, 11, and

15 How Do We Handle a Girl Like Maria?—Case for Chapters

17 and 4 The Condescending Dental Hygienist—Case for Chapters

7, 12, 15, and 4 The “Easy” Software Upgrade at Delmar Ortho—Case for

Chapters 8 and 13 The Brawler—Case for Chapters 11, 12, and 17 I Love You…Forever—Case for Chapters 17, 12, and 11 Managing Health Care Professionals—Mini-Case Studies

for Chapter 11 Problems with the Pre-Admission Call Center—Case for

Chapters 13 and 10 Such a Nice Young Man—Case for Chapters 17, 11, and 12 Sundowner or Victim?—Case for Chapters 15 and 17 Last Chance Hospital—Case for Chapters 5 and 6

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The Magic Is Gone—Case for Chapters 3, 12, and 13 Set Up for Failure?—Case for Chapter 3 Sustaining an Academic Food Science and Nutrition Center

Through Management Improvement—Case for Chapters 2 and 12

Giving Feedback—Empathy or Attributions?—Case for Chapter 4

Socio-Emotional Intelligence Exercise: Understanding and Anticipating Major Change—Case for Chapter 4

Madison Community Hospital Addresses Infection Prevention—Case for Chapters 7 and 13

Trouble with the Pharmacy—Case for Chapter 7 Emotional Intelligence in Labor and Delivery—Case for

Chapters 2, 12, and 13 Communication of Patient Information During Transitions

in Care—Case for Chapters 7 and 12 Multidrug-Resistant Organism (MDRO) in a Transitional

Care Unit—Case for Chapters 7 and 12 Are We Culturally Aware or Not?—Case for Chapters 14

and 5 Patients “Like” Social Media—Case for Chapters 6 and 5 Where Do You Live? Health Disparities Across the United

States—Case for Chapter 14 My Parents Are Turning 65 and Need Help Signing Up for

Medicare—Case for Chapter 9 Newby Health Systems Needs Health Insurance—Case for

Chapter 9 To Partner or Not to Partner with a Retail Company—Case

for Chapters 17, 5, and 6 Wellness Tourism: An Option for Your Organization?—

Case for Chapters 17 and 5 Conflict in the Capital Budgeting Process at University

Medical Center: Let’s All Just Get Along—Case for Chapter 10

The New Toy at City Medical Center—Case for Chapters

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11 and 13 Recruitment Challenge for the Middle Manager—Case for

Chapters 2 and 12 I Want to Be a Medical Coder—Case for Chapter 10 Managing Costs and Revenues at Feel Better Pharmacy—

Case for Chapter 10 Who You Gonna Call?—Case for Chapter 16 You Will Do What You Are Told—Case for Chapter 15

GLOSSARY INDEX

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Foreword

In the U.S., health care is the largest industry and the second-largest employer, with more than 11 million jobs. This continuous growth trend is a result of many consequences, including: the large, aging Baby Boomer population, whose members are remaining active later in life, contributing to an increase in the demand for medical services; the rapidly changing financial structure and increasingly complex regulatory environment of health care; the integration of health care delivery systems, restructuring of work, and an increased focus on preventive care; and the ubiquitous technological innovations, requiring unceasing educational training and monitoring.

Given this tremendous growth and the aforementioned causes of it, it is not surprising that among the fastest-growing disciplines, according to federal statistics, is health care management, which is projected to grow 23% in the next decade. Supporting this growth are the increasing numbers of undergraduate programs in health care management, health services administration, and health planning and policy—with over 300 programs in operation nationwide today.

The health care manager’s job description is constantly evolving to adapt to this hyper-turbulent environment. Health care managers will be called on to improve efficiency in health care facilities and the quality of the care provided; to manage, direct, and coordinate health services in a variety of settings, from long-term care facilities and hospitals to medical group practices; and to minimize costs and maximize efficiencies, while also ensuring that the services provided are the best possible.

As the person in charge of a health care facility, a health care administrator’s duties can be varied and complex. Handling such responsibilities requires a mix of business administration skills and knowledge of health services, as well as the federal and state laws and regulations that govern the industry.

Written by leading scholars in the field, this compendium provides future and current health care managers with the foundational knowledge needed to succeed. Drs. Buchbinder and Shanks, with their many years of clinical, practitioner, administration, and academic experience, have assembled experts in all aspects of health care management to share their knowledge and experiences. These unique viewpoints, shared in both the content and case studies accompanying each chapter, provide valuable insight into the health care industry and delve into the

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core competencies required of today’s health care managers: leadership, critical thinking, strategic planning, finance and accounting, managing human resources and professionals, ethical and legal concerns, and information and technology management. Contributing authors include clinicians, administrators, professors, and students, allowing for a variety of perspectives.

Faculty will also benefit from the depth and breadth of content coverage spanning all classes in an undergraduate health care management curriculum. Its most appropriate utility may be found in introductory management courses; however, the vast array of cases would bring value to courses in health care ethics, managerial finance, quality management, and organizational behavior.

This text will serve as a cornerstone document for students in health management educational programs and provide them with the insight necessary to be effective health care managers. Students will find this textbook an indispensable resource to utilize both during their academic programs, as well as when they enter the field of health care management. It is already on its way to becoming one of the “classics” in the field!

Dawn Oetjen, PhD Associate Dean, Administration and Faculty Affairs

College of Health and Public Affairs University of Central Florida

Orlando, FL

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Preface

The third edition of Introduction to Health Care Management is driven by our continuing desire to have an excellent textbook that meets the needs of the health care management field, health care management educators, and students enrolled in health care management programs around the world. The inspiration for the first edition of this book came over a good cup of coffee and a deep-seated unhappiness with the texts available in 2004. This edition builds on the strengths of the first two editions and is based on an ongoing conversation with end users— instructors and students—from all types of higher education institutions and all types of delivery modalities. Whether your institution is a traditional “bricks and mortar” school or a fully online one, this book and its ancillary materials are formatted for your ease of use and adoption.

For this edition, many of the same master teachers and researchers with expertise in each topic revised and updated their chapters. Several new contributors stepped forward and wrote completely new cases for this text because we listened to you, our readers and users. With a track record of more than eight years in the field, we learned exactly what did or did not work in the classrooms and online, so we further enhanced and refined our student- and professor- friendly textbook. We are grateful to all our authors for their insightful, well- written chapters and our abundant, realistic case studies.

As before, this textbook will be useful to a wide variety of students and programs. Undergraduate students in health care management, nursing, public health, nutrition, athletic training, and allied health programs will find the writing to be engaging. In addition, students in graduate programs in discipline-specific areas, such as business administration, nursing, pharmacy, occupational therapy, public administration, and public health, will find the materials both theory-based and readily applicable to real-world settings. With four decades of experience in higher education, we know first and foremost that teaching and learning are not solo sports, but a team effort—a contact sport. There must be a give-and-take between the students and the instructors for deep learning to take place. This text uses active learning methods to achieve this goal. Along with lively writing and content critical for a foundation in health care management, this third edition continues to provide realistic information that can be applied immediately to the real world of health care management. In addition to revised and updated chapters

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from the second edition, there are learning objectives, discussion questions, and case studies included for each chapter, with additional instructors’ resources online and Instructor’s Guides for all of the case studies. PowerPoint slides, Test Bank items, and research sources are also included for each chapter, as well as a glossary. A sample syllabus is also provided. Specifically, the third edition contains:

Significantly revised chapters on organizational behavior and management thinking, quality improvement, and information technology.

Revisions and updates to all chapters, including current data and recent additions to the literature.

A new emphasis on research that is ongoing in each of the areas of health care.

A new chapter on a diverse group of emerging issues in health care management including: re-emerging outbreaks, vaccine-preventable diseases, and deaths; bioterrorism in health care settings; human trafficking; violence in health care settings; medical tourism; and consumer-directed health care.

Forty cases in the last chapter, 26 of which are new or totally revised for this edition. They cover a wide variety of settings and an assortment of health care management topics. At the end of each chapter, at least one specific case study is identified and linked to the content of that chapter. Many chapters have multiple cases.

Guides for all 40 cases provided with online materials. These will be beneficial to instructors as they evaluate student performance and will enable professors at every level of experience to hit the ground running on that first day of classes.

Totally revised test banks for each chapter, providing larger pools of questions and addressing our concerns that answers to the previous test banks could be purchased online.

Never underestimate the power of a good cup of joe. We hope you enjoy this book as much as we enjoyed revising it. May your classroom and online discussions be filled with active learning experiences, may your teaching be filled with good humor and fun, and may your coffee cup always be full.

Sharon B. Buchbinder, RN, PhD Stevenson University

Nancy H. Shanks, PhD

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Metropolitan State University of Denver

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Acknowledgments

This third edition is the result of what has now been a 10-year process involving many of the leaders in excellence in undergraduate health care management education. We continue to be deeply grateful to the Association of University Programs in Health Administration (AUPHA) faculty, members, and staff for all the support, both in time and expertise, in developing the proposal for this textbook and for providing us with excellent feedback for each edition.

More than 20 authors have made this contributed text a one-of-a-kind book. Not only are our authors expert teachers and practitioners in their disciplines and research niches, they are also practiced teachers and mentors. As we read each chapter and case study, we could hear the voices of each author. It has been a privilege and honor to work with each and every one of them: Mohamad Ali, Dale Buchbinder, Susan Casciani, Donna Cox, Amy Dore, Brenda Freshman, Callie Heyne, Ritamarie Little, Sheila McGinnis, Mike Moran, Patricia Patrician, Lou Rubino, Sharon Saracino, Grant Savage, Nancy Sayre, Windsor Sherrill, Jon Thompson, Eric Williams, and Kevin Zeiler.

And, finally, and never too often, we thank our husbands, Dale Buchbinder and Rick Shanks, who listened to long telephone conversations about the book’s revisions, trailed us to meetings and dinners, and served us wine with our whines. We love you and could not have done this without you.

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About the Editors

Sharon B. Buchbinder, RN, PhD, is currently Professor and Program Coordinator of the MS in Healthcare Management Program at Stevenson University in Owings Mills, Maryland. Prior to this, she was Professor and Chair of the Department of Health Science at Towson University and President of the American Hospital Management Group Corporation, MASA Healthcare Co., a health care management education and health care delivery organization based in Owings Mills, Maryland. For more than four decades, Dr. Buchbinder has worked in many aspects of health care as a clinician, researcher, association executive, and academic. With a PhD in public health from the University of Illinois School of Public Health, she brings this blend of real-world experience and theoretical constructs to undergraduate and graduate face-to-face and online classrooms, where she is constantly reminded of how important good teaching really is. She is past chair of the Board of the Association of University Programs in Health Administration (AUPHA) and coauthor of the Bugbee Falk Award–winning Career Opportunities in Health Care Management: Perspectives from the Field. Dr. Buchbinder also coauthors Cases in Health Care Management with Nancy Shanks and Dale Buchbinder.

Nancy H. Shanks, PhD, has extensive experience in the health care field. For 12 years, she worked as a health services researcher and health policy analyst and later served as the executive director of a grant-making, fund-raising foundation that was associated with a large multihospital system in Denver. During the last 20 years, Dr. Shanks has been a health care administration educator at Metropolitan State University of Denver, where she has taught a variety of undergraduate courses in health services management, organization, research, human resources management, strategic management, and law. She is currently an Emeritus Professor of Health Care Management and an affiliate faculty member, after having served as Chair of the Department of Health Professions for seven years. Dr. Shanks’s research interests have focused on health policy issues, such as providing access to health care for the uninsured.

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Contributors

Mohamad A. Ali, MBA, MHA, CBM Healthcare Strategy Consultant MASA Healthcare, LLC Washington, DC

Dale Buchbinder, MD, FACS Chairman, Department of Surgery and Clinical Professor of Surgery The University of Maryland Medical School Good Samaritan Hospital Baltimore, MD

Susan Casciani, MSHA, MBA, FACHE Adjunct Professor Stevenson University Owings Mills, MD

Donna M. Cox, PhD Professor and Director Alcohol, Tobacco, and Other Drugs Prevention Center Department of Health Science Towson University Towson, MD

Amy Dore, DHA Associate Professor, Health Care Management Program Department of Health Professions Metropolitan State University of Denver Denver, CO

Brenda Freshman, PhD Associate Professor Health Administration Program

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California State University, Long Beach Long Beach, CA

Callie E. Heyne, BS Research Associate Clemson University Clemson, SC

Ritamarie Little, MS, RD Associate Director Marilyn Magaram Center for Food Science, Nutrition, & Dietetics California State University, Northridge Northridge, CA

Sheila K. McGinnis, PhD Healthcare Transformation Director City College Montana State University, Billings Billings, MT

Michael Moran, DHA Adjunct Faculty School of Business University of Colorado, Denver Denver, CO

Patricia A. Patrician, PhD, RN, FAAN Colonel, U.S. Army (Retired) Donna Brown Banton Endowed Professor School of Nursing University of Alabama, Birmingham Birmingham, AL

Louis Rubino, PhD, FACHE Professor & Program Director Health Administration Program

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Health Sciences Department California State University, Northridge Northridge, CA

Sharon Saracino, RN, CRRN Patient Safety Officer Nursing Department Allied Services Integrated Health Care System–Heinz Rehab Wilkes-Barre, PA

Grant T. Savage, PhD Professor of Management Management, Information Systems, & Quantitative Methods Department University of Alabama, Birmingham Birmingham, AL

Nancy K. Sayre, DHEd, PA, MHS Department Chair Department of Health Professions Coordinator, Health Care Management Program Assistant Professor, Health Care Management Program Metropolitan State University of Denver Denver, CO

Windsor Westbrook Sherrill, PhD Professor of Public Health Sciences Associate Vice President for Health Research Clemson University Clemson, SC

Jon M. Thompson, PhD Professor, Health Services Administration Director, Health Services Administration Program James Madison University Harrisonburg, VA

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Eric S. Williams, PhD Associate Dean of Assessment and Continuous Improvement Professor of Health Care Management Minnie Miles Research Professor Culverhouse College of Commerce University of Alabama Tuscaloosa, AL

Kevin D. Zeiler, JD, MBA, EMT-P Associate Professor, Health Care Management Program Department of Health Professions Metropolitan State University of Denver Denver, CO

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CHAPTER 1

An Overview of Health Care Management

Jon M. Thompson, Sharon B. Buchbinder, and Nancy H. Shanks

LEARNING OBJECTIVES By the end of this chapter, the student will be able to:

Define healthcare management and the role of the health care manager; Differentiate among the functions, roles, and responsibilities of health care managers;

Compare and contrast the key competencies of health care managers; and Identify current areas of research in health care management.

INTRODUCTION Any introductory text in health care management must clearly define the profession of health care management and discuss the major functions, roles, responsibilities, and competencies for health care managers. These topics are the focus of this chapter. Health care management is a growing profession with increasing opportunities in both direct care and non–direct care settings. As defined by Buchbinder and Thompson (2010, pp. 33–34), direct care settings are “those organizations that provide care directly to a patient, resident or client who seeks services from the organization.” Non-direct care settings are not directly involved in providing care to persons needing health services, but rather support the care of individuals through products and services made available to direct care settings. The Bureau of Labor Statistics (BLS, 2014) indicates health care

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management is one of the fastest-growing occupations, due to the expansion and diversification of the health care industry. The BLS projects that employment of medical and health services managers is expected to grow 23% from 2012 to 2022, faster than the average for all occupations (see Figure 1-1).

These managers are expected to be needed in both inpatient and outpatient care facilities, with the greatest growth in managerial positions occurring in outpatient centers, clinics, and physician practices. Hospitals, too, will experience a large number of managerial jobs because of the hospital sector’s large size. Moreover, these estimates do not reflect the significant growth in managerial positions in non–direct care settings, such as consulting firms, pharmaceutical companies, associations, and medical equipment companies. These non–direct care settings provide significant assistance to direct care organizations, and since the number of direct care managerial positions is expected to increase significantly, it is expected that growth will also occur in managerial positions in non–direct care settings.

Health care management is the profession that provides leadership and direction to organizations that deliver personal health services and to divisions, departments, units, or services within those organizations. Health care management provides significant rewards and personal satisfaction for those who want to make a difference in the lives of others. This chapter gives a comprehensive overview of health care management as a profession. Understanding the roles, responsibilities, and functions carried out by health care managers is important for those individuals considering the field to make informed decisions about the “fit.” This chapter provides a discussion of key management roles, responsibilities, and functions, as well as management positions at different levels within health care organizations. In addition, descriptions of supervisory level, mid-level, and senior management positions within different organizations are provided.

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FIGURE 1-1 Occupations with the Most New Jobs in Hospitals, Projected 2012– 2022. Employment and Median Annual Wages, May 2013

Source: U.S. Bureau of Labor Statistics, Employment Projections program (projected new jobs, 2012–2022) and Occupational Employment Statistics Survey (employment and median annual wages, May 2013).

THE NEED FOR MANAGERS AND THEIR PERSPECTIVES Health care organizations are complex and dynamic. The nature of organizations requires that managers provide leadership, as well as the supervision and coordination of employees. Organizations were created to achieve goals beyond the capacity of any single individual. In health care organizations, the scope and complexity of tasks carried out in provision of services are so great that individual staff operating on their own could not get the job done. Moreover, the necessary tasks in producing services in health care organizations require the coordination of many highly specialized disciplines that must work together seamlessly. Managers are needed to ensure organizational tasks are carried out in the best way possible to achieve organizational goals and that appropriate resources, including financial

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and human resources, are adequate to support the organization. Health care managers are appointed to positions of authority, where they shape

the organization by making important decisions. Such decisions relate, for example, to recruitment and development of staff, acquisition of technology, service additions and reductions, and allocation and spending of financial resources. Decisions made by health care managers not only focus on ensuring that the patient receives the most appropriate, timely, and effective services possible, but also address achievement of performance targets that are desired by the manager. Ultimately, decisions made by an individual manager impact the organization’s overall performance.

Managers must consider two domains as they carry out various tasks and make decisions (Thompson, 2007). These domains are termed external and internal domains (see Table 1-1). The external domain refers to the influences, resources, and activities that exist outside the boundary of the organization but that significantly affect the organization. These factors include community needs, population characteristics, and reimbursement from commercial insurers, as well as government plans, such as the Children’s Health Insurance Plans (CHIP), Medicare, and Medicaid. The internal domain refers to those areas of focus that managers need to address on a daily basis, such as ensuring the appropriate number and types of staff, financial performance, and quality of care. These internal areas reflect the operation of the organization where the manager has the most control. Keeping the dual perspective requires significant balance and effort on the part of management in order to make good decisions.

MANAGEMENT: DEFINITION, FUNCTIONS, AND

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COMPETENCIES As discussed earlier, management is needed to support and coordinate the services provided within health care organ