Summer 2013 Master of Business Administration in Healthcare Services Management - Semester 3 MH0054 Finance, Economics and Materials Management

t in Healthcare Services- 4 Credits (Book ID: B1215) Q1. What are the different types of budgets? Explain the budgeting process for healthcare services. Answer: Types of Budget The budgets can be classified into the following categories: 1. Production budget The preparation of the production budget is mainly dependent on the sales budget. The production budget is a statement of goods, how much should be produced. It may be in terms of quantities, Kilograms in monetary terms and so on. Purpose of the production budget The ultimate aim of the production budget is to find out the volume of production to be made during the year based on the sale volume. The production and sales volume should hand-inhand with each other, otherwise the firm would require to face the acute problem on holding unnecessary excessive stock or inadequate stock to meet the needs of the buyers in time; which will disrepute in the supply of goods in time to them as already agreed upon. Units to be produced = Budgeted Sales + Closing Stock Opening Stock 2. Materials/Purchase budget This budget takes place only after identifying the number of finished products expected to produce to the tune of production budget, in meeting the needs and demands of the customers and consumers during the season. In order to produce to the tune of production budget to meet the market demands, the raw materials for the production should be maintained sufficient to supply them without any interruption. To have uninterrupted flow of production, the firm should go for the immediate procurement of raw materials through the multiplication of raw material required to produce for a single product with number of units expected to produce. 3. Sales budget Sales Budget is an estimate of anticipation of sales in the near future prepared by the responsible person for the sale of a product by considering the various factors of influence. Sales budget is usually prepared in terms of quantity and value. The following factors are normally considered for the preparation of sales budget of a firm: Yester sales figures Estimates of the salesmen who is frequently operating in the market, known much greater than anybody in the market Capacity of the plant and machinery to produce Funds availability 4. Sales overhead budget It is one of the important sub functional budgets, prepared by the sales manager who is responsible for the sales volume of the enterprise to increase through various devices/tools of sales promotion. 5. Cash budget Cash budget is nothing but an estimation of cash receipts and cash payments for specified period. It is prepared by the head of the accounts department i.e. chief accounts officer. The utility of the cash budget is as follows: To meet the revenue and capital expenditures with adequate funds It should highlight the additional requirement cash whenever the need arises Keeping of excessive funds available in the business firm would not fetch any return to the enterprise but this estimate of future cash needs and resources will guide the firm to plan for

an effective investment out of the surplus funds estimated; enhances the wealth of the investors through proper investment planning out of the future funds available. 6. Fixed budget It is a budget known as constant budget, never registers the changes in the preparation of a budget, being prepared for irrespective level of output or production. This budget is mainly meant for the fixed overheads of the firm which are constant in volume irrespective level of production. The ultimate utility of the budget is to control the cost as a cost controlling measure, but the fixed budget is meaningless in having comparison with the actual performance. 7. Flexible budget Flexible budget is prepared for any level of production as an estimate of statement of all expenses i.e. the expenses are classified into three categories viz. variable, semi-variable and fixed expenses. 8. Master budget Immediately after the completion of functional or departmental level budgets, the major responsibility of the budget officer is to consolidate the various budgets together, which is detailed report of all operations of the firm for a definite period. Q2. Explain the concept of demand and supply in healthcare. Answer : Concept of demand in healthcare : Now we will discuss the concept of demand, with the help of an example related to healthcare services. Say, what will influence, how much of private treatment (in private clinics/hospitals, generally for regular check ups or general ailments) are you willing and able to buy at any particular time. Perhaps, the most important factor that will influence your decision will be the price of the treatment. As the treatment gets more expensive, all other factors remaining constant, you are likely to buy less of the treatment (may be you choose to go for treatment in public clinics or hospitals or less expensive private clinic). This is also referred to as Law of Demand. In general terms, law of demand can be defined as a law that states that consumers buy more of a good when its price decreases and less when its price increases. When we react to the price rise, we are taking both relative price changes and real income changes into account. The change in relative price means that private treatment in Clinic A is now more expensive compared to that in Clinic B. Now how would you react? Economists assume that people always look for maximum satisfaction. This means that you will try to gain as much satisfaction as possible from our consumption of goods and services. So you react to the fact that treatment in Clinic A is now relatively more expensive by choosing to use less of its services and more of Clinic Bs services. (Substitution effect). The increase in the price of private treatment also reduces your real income you can now buy less than before with your money income. The way which we react to this change in real income depends on the kind of good or service. Private treatment, apart from other factors also depends on your income so an increase in income leads to an increase in demand and vice versa. So a fall in real income will further reduce the amount of treatment bought (income effect). Supply is referred to the total amount of healthcare service (or healthcare) available at a particular point of time at a specific price or total amount of healthcare services (or healthcare) that the healthcare manufacturers are willing to supply at a particular price. The sellers in this market are the private clinics and hospitals. Law of supply states that all other factors being equal, as the price of a good or service increases, the quantity of goods or services offered by suppliers increases and vice versa. This concept will be made clear in following paragraphs. We assume that these private clinics want to maximise their profits. What are profits and how can they be maximised? Private clinics earn money (revenue) by selling their services e.g. by advising clients on health issues. Out of this revenue they need to pay for the factors they use to produce the treatment (costs) e.g. pay their doctors (if the clinic is not run by an

individual doctor), pay the rent or pay for a new ultrasound machine. Profit is the excess of revenue over costs. These private clinics seek to maximize their profits which leads each of these clinics to sell more treatments at higher prices. There is a consistent and expected positive relationship between price and quantity supplied. Formally, supply is defined as the quantity of a good or service that sellers are willing and able to sell at every possible price. Q3. Define health insurance. Explain the barriers in implementing a social health insurance scheme in India? Answer: Health insurance: Health insurance can be defined as an individual or group purchasing health care coverage in advance by paying a fee called premium. On a broader level, it can also be discussed to be an arrangement that helps to defer, delay, reduce or altogether avoid payment for health care incurred by individuals. Health insurance is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be provided through a governmentsponsored social insurance program, or from private insurance companies. It may be purchased on a group basis, for example, by a firm to cover its employees or purchased by an individual. In each case, the covered groups or individuals pay premiums or taxes to help protect themselves from unexpected healthcare expenses. Given the situation, there are few issues of concern or barriers towards implementing a social health insurance scheme in India. These are enumerated below along with the possible way ahead. India is a low-income country with 26% population living below the poverty line, and 35% illiterate population with skewed health risks. Insurance is limited to only a small proportion of people in the organized sector covering less than 10% of the total population. Much of the focus of the existing schemes is on hospital expenses. Health insurance per se, suffers from problems like adverse selection, moral hazard, cream-skimming and high administrative costs. This is coupled with the fact that in the absence of any costing mechanisms, there is difficulty in calculating the premium. Q4. Discuss the applications of health economics. Answer: Some of the applications are discussed as follows: Burden of disease A sound knowledge in health economics can help the doctors and hospitals in setting priorities in eliminating community diseases. For example, before granting foreign aid to a country, it is useful for the funding agency to know the seriousness and pattern of the disease in the area, and to estimate the economic costs in providing the service on a long term basis. This is of utmost importance for developing countries; though the epidemic of AIDS is of similar significance for developed countries. Prevention The cost-benefits associated with various preventive programmes (or the cost-effectiveness of different programmes) like immunization, skin care, dental health, etc. could be derived by health economic studies. For example, with only limited funding, it may be more profitable for an underdeveloped country to put the money in pest control which can improve the health of the whole population, than using the same amount in buying X-ray machines which only benefit a limited number of patients. Diagnosis This is demonstrated by making a comparison of the relative costs and effectiveness of alternative methods of diagnosis. The study by Barlett et al on the brain scanner is a good example. By analyzing the demands for various neuro-diagnostic equipments (angiography, airencephalography), the authors were able to exemplify the cost-economical aspects of

installing a scanner. By making a comparison of the various options of installing the scanners (whether more scanners, or more centralisation of service, etc.), they were able to suggest the most cost-effective way of providing such a service. Treatment and rehabilitation In healthcare, there are usually a number of remedial measures for a particular disorder. By comparing the costs of various treatment methods or care, one may find the optimal way (not necessarily the one which saves more money) in therapy. Examples are the importance of early discharge of elective surgery cases, or the balance of care for the elderly. However, this area of application is most controversial, for there are many individual differences or needs which cannot be generalized. For instance, a patient may be allergic to one type of drug, and some other form of treatment (usually more costly) has to be used. Location of care This decision involves the care of patients in different settings such as hospitals, clinics, halfway houses or even at home. There is an increasing emphasis on community care in cities like Hong Kong and many other cities around the globe, especially for chronic diseases and the care of the elderly. Wright et al, for example, compared the costs of care of the elderly patients in long stay hospital wards, local authority residential care and their own homes in the community. It was found that many elderly persons were placed in residential homes which accounted for higher costs much higher than community care. In particular, the authors recommended that help (financial or otherwise) could be given to those families supporting elderly at home, as this would save the community resources. Health service organization The organizing and delivering of clinical and non-clinical services are increasingly being studied. Health economic evaluations can provide sound advice on the management of clinical or support services, the use of supplies, and the substitution of different providers of health services. For example, Spitzer found that the introduction of nurse practitioners in Canada had adversely affected the family practices which participated in the programme, as the substitute therapists could not generate enough revenue to cover their salary. Q5. Explain the need and scope of financial management in hospitals. Answer: Need for Financial Management in Hospitals Traditionally, healthcare organisations have been established by people who have excellent skills in the field and are well known for their expertise, but have little expertise in financial management. Though these organisations may be successful, the directors/owners often lack answers to several important questions like: If the profit they get from running the organization is as good as that which they could derive from investing somewhere else? (opportunity cost concept) Is the organization being compensated good enough for serving the community and offering the quality services with value added facilities? Are they as stakeholders being compensated enough for being in business, and for the time and skills they are applying? It is only by the sound knowledge of financial management, that management of healthcare organisations can answer such questions. Infact, various stakeholders need sound knowledge of financial management in order to: Obtain the financial statements needed to measure company success, meet government requirements, and gather information to use in making management decisions. Perform analyses to find profitable directions and eliminate unprofitable ones. Handle company finances to maximize profits and maintain liquidity and financial stability, with or without increased sales. Protect company assets. Plan financially to achieve company and personal goals, including non-financial company goals such as having the best place to work or offering the best quality products, and owner goals such as security, retirement, or leisure activities.

Prepare financially for unknown developments such as new technology, new or improved competition, changes in patient needs, shifts in the economy, or changes in legislation Scope of financial management and can be used in hospitals for: Inventory Management: Inventory cost accounting methods are seldom used by medical practitioners. After all, doctors and healthcare organizations provide a service, and generally do not sell things. However, inventory is playing an increasingly important role in the financial viability of procedurally based medical practitioners, clinics, and hospitals. Knowledge of financial management helps its staff to manage various cost volumes of inventory being and to be procured in/for the short term as well as the long term operations. Credit Management: Credit management involves collections and accounts receivables management agency that is dedicated to accelerating cash flow. The knowledge of financial management provides the managers of hospitals with optimum service through expertise, knowledge, technology and open communication. Cash Management: Efficient cash management processes are prerequisites to execute payments, collect receivables and manage liquidity. Managing the channels of collections, payments and accounting information efficiently becomes imperative with growth in business transaction volumes. This includes enabling greater connectivity to internal corporate systems, expanding the scope of cash management services to include full-cycle processes via ecommerce, or cash management services targeted at the needs of specific customer segments. Investments: Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument. Without the knowledge of finance you cannot work on investment management for the organization might be working for. Capital Budgeting Decisions: Capital budgeting is vital in marketing decisions. Decisions on investment, which take time to mature, have to be based on the returns which that investment will make. Unless the project is for social reasons only, if the investment is unprofitable in the long run, it is unwise to invest in it now. Often, it would be good to know what the present value of the future investment is, or how long it will take to mature (give returns). It could be much more profitable putting the planned investment money in the bank and earning interest, or investing in an alternative project. Q6. List the important health expert committees in India. Discuss the origin and functions of these committees. Answer : Health expert committee in India : 1. Bhore committee. 1946 2. Mudaliar committee , 1962 3. Chadha committee , 1963 4. Mukherjee committee , 1965 5. Mukherjee committee , 1966

Origin
Sir Joseph Bhore Committee or Health Survey and Development Committee was the first healthcare expert committee that was constituted in 1946. It was guided by lofty principals as nobody should be denied access to health services for his inability to pay and that the focus should be on rural areas. Following the acceptance of report of Bhore Committee by rulers of newly independent country, a start was made in 1952 to setup primary health centers to provide integrated promotive, preventive, curative and rehabilitative services to entire rural population, as an integral component of wider Community Development Programme. In 1952, India was the first country to launch a national programme emphasizing family

planning to stabilize the population at a level consistent with the requirement of national economy. Functions: The major functions of these committees are: 1. To develop and provide to the ministry, and subsequently to governments and the community, evidence-based guidelines or other forms of advice on a range of matters, especially in population health, including, but not limited to: (a) health promotion and illness prevention; (b) diagnosis and treatment of disease; (c) health systems and service delivery, including methods of diagnosis and treatment; (d) the quality and safety of care; and (e) health outcomes and processes. 2. To consult with the community, population health and health care professionals, and all levels of government in identifying emerging issues and in carrying out above function. 3. To develop and maintain standards for the development of health advice, including population health and clinical practice guidelines. 4. To consider and, where appropriate, recommend for approval to the Ministry of Health clinical practice guidelines developed in accordance with Ministry of Health standards. 5. To identify gaps in knowledge.