Lecture 1 – Introduction and value based healthcare
Financial management is the planning, organising, directing and controlling of the organisation’s
financial activities in an efficient and effective way such that the organisation’s objectives are met.
Managers in healthcare deal with financial management on a daily practice; invest in new equipment,
how many services and what type of services to provide, how are responsibilities assigned and who is
accountable for what? Those questions have consequences for the way healthcare is provided and the
way the organization’s operations and in turn financial activities.
Different organizations run at the risk of bankruptcy (Ijsselmeerziekenhuizen, MC Slotervaart etc.).
Financial management is not about making profit, it is about being financially healthy as organization.
Annually, Cambridge University Hospital receives €750 million for more than 1 million patient activities
(university hospital with clinical trials).
There is a product/service, and from the perspective of the customer it can
be assessed whether it has value or not. There are perceived benefits;
what is the gain of the product or service (not having pain). And there are
perceived sacrifices; what is given up to acquire the product or service
(time or co-payment). When the benefits are larger than the sacrifices, the
product or service has value/benefit from a customer perspective.
Healthcare is different from enjoyable services like Netflix or having a drink
with friends as healthcare may be needed and not be looking forward for
it. The assessment/evaluation is different with different types of care;
higher sacrifices may be accepted when the care is necessary (not able to postpone), furthermore not
all sacrifices are for the patient as some care is insured.
There is a product/service, and from the perspective of the organisation it
can be assessed whether it has financial value or not. There are costs
attached to providing the product; production costs. And there are
revenues; inflow. For the long term perspective, if the revenues are larger
than the costs, the product or service has financial value for the
organisation. When not providing financial value, the organisation might
declare bankruptcy.
Organisations want to meet the objective in creating value for customers
(patients). There is a relationship between the customers value and the
organisational revenue as when customers don’t perceive value from the
product, they won’t buy it. To produce the product, there are costs
involved > operating costs which are costs directly related to the product
or service development. For the service provision or product development
there is an operating margin (profit). Operating margin = revenue –
operating costs. An initial investment took place in order to deliver the
service or develop the product > assets that are used but may be reused for another service as well;
equipment, buildings, computer. Those investments may be small or large and includes all
investments, may be long term (fixed) or short term (working) liabilities. Investment capital = fixed
capital + working capital. When relating the operating margin to the invested capital, the return on
invested capital (ROIS) is the result which is an indication of financial value creation. Return on invested
capital = operating margin / invested capital * 100% > for every € invested, the result is obtained as
operating margin.
Definitions of Invested capital
- Working capital – current assets (accounts receivable, inventories and cash) less current
liabilities (primarily accounts payable and short-term debt). Measures the organisation‘s net
position in liquid assets.
- Fixed capital – portion of the total capital outlay that is invested in fixed assets (such as land,
buildings, vehicles, plant and equipment), that stay in the business almost permanently
Financial management is the planning, organising, directing and controlling of the organisation’s
financial activities in an efficient and effective way such that the organisation’s objectives are met.
Managers in healthcare deal with financial management on a daily practice; invest in new equipment,
how many services and what type of services to provide, how are responsibilities assigned and who is
accountable for what? Those questions have consequences for the way healthcare is provided and the
way the organization’s operations and in turn financial activities.
Different organizations run at the risk of bankruptcy (Ijsselmeerziekenhuizen, MC Slotervaart etc.).
Financial management is not about making profit, it is about being financially healthy as organization.
Annually, Cambridge University Hospital receives €750 million for more than 1 million patient activities
(university hospital with clinical trials).
There is a product/service, and from the perspective of the customer it can
be assessed whether it has value or not. There are perceived benefits;
what is the gain of the product or service (not having pain). And there are
perceived sacrifices; what is given up to acquire the product or service
(time or co-payment). When the benefits are larger than the sacrifices, the
product or service has value/benefit from a customer perspective.
Healthcare is different from enjoyable services like Netflix or having a drink
with friends as healthcare may be needed and not be looking forward for
it. The assessment/evaluation is different with different types of care;
higher sacrifices may be accepted when the care is necessary (not able to postpone), furthermore not
all sacrifices are for the patient as some care is insured.
There is a product/service, and from the perspective of the organisation it
can be assessed whether it has financial value or not. There are costs
attached to providing the product; production costs. And there are
revenues; inflow. For the long term perspective, if the revenues are larger
than the costs, the product or service has financial value for the
organisation. When not providing financial value, the organisation might
declare bankruptcy.
Organisations want to meet the objective in creating value for customers
(patients). There is a relationship between the customers value and the
organisational revenue as when customers don’t perceive value from the
product, they won’t buy it. To produce the product, there are costs
involved > operating costs which are costs directly related to the product
or service development. For the service provision or product development
there is an operating margin (profit). Operating margin = revenue –
operating costs. An initial investment took place in order to deliver the
service or develop the product > assets that are used but may be reused for another service as well;
equipment, buildings, computer. Those investments may be small or large and includes all
investments, may be long term (fixed) or short term (working) liabilities. Investment capital = fixed
capital + working capital. When relating the operating margin to the invested capital, the return on
invested capital (ROIS) is the result which is an indication of financial value creation. Return on invested
capital = operating margin / invested capital * 100% > for every € invested, the result is obtained as
operating margin.
Definitions of Invested capital
- Working capital – current assets (accounts receivable, inventories and cash) less current
liabilities (primarily accounts payable and short-term debt). Measures the organisation‘s net
position in liquid assets.
- Fixed capital – portion of the total capital outlay that is invested in fixed assets (such as land,
buildings, vehicles, plant and equipment), that stay in the business almost permanently
