Your assignment for this week is to solve the following problems: 
Chapter 10: problems:  10.1(a &b) 10.4(a); 10.5(a).
Chapter 11: problems : 11.1(a); 11.3 (a and b); 11.9
Chapter 12:  problems:12.1;12.3 (a, b, & c);  12.9 (a, b &c) 
Please show your calculations for these problems.
Kristin L. Reiter
Paula H. Song
HAP/AUPHA Editorial Board for Graduate Studies
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West Virginia University
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UCLA Fielding School of Public Health
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University of Florida
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US Army
Christopher Louis, PhD
Boston University
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George Mason University
Donna Malvey, PhD
University of Central Florida
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Indiana University
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University of Minnesota
James Zoller, PhD
Medical University of South Carolina
Health Administration Press, Chicago, Illinois
Association of University Programs in Health Administration, Washington, DC
Kristin L. Reiter
Paula H. Song
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Library of Congress Cataloging-in-Publication Data
Names: Reiter, Kristin L. (Kristin Leanne), author. | Song, Paula H., author. | Gapenski, Louis C.
Healthcare finance. | Association of University Programs in Health Administration, issuing body.
Title: Gapenski’s healthcare finance : an introduction to accounting and financial management /
Kristin L. Reiter, Paula H. Song.
Other titles: Healthcare finance
Description: Seventh edition. | Chicago, Illinois : Health Administration Press ; Washington, DC
: Association of University Programs in Health Administration, [2021] | Preceded by Healthcare
finance / Louis C. Gapenski, Kristin L. Reiter. Sixth edition. 2016. | Includes bibliographical
references and index. | Summary: “This best-selling textbook covers the essential concepts of
accounting and financial management in healthcare”— Provided by publisher.
Identifiers: LCCN 2020014150 (print) | LCCN 2020014151 (ebook) | ISBN 9781640551862
(hardcover ; alk. paper) | ISBN 9781640551886 (epub) | ISBN 9781640551893 (mobi) | ISBN
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Subjects: MESH: Financial Management, Hospital | Health Facilities—economics | Accounting |
Capital Financing
Classification: LCC RA971.3 (print) | LCC RA971.3 (ebook) | NLM WX 157.1 | DDC
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To Jack Wheeler and Dean Smith,
for your guidance, mentorship, and support
vii
BRIEF CONTENTS
Preface ………………………………………………………………………………………..xix
Part I The Healthcare Environment
Chapter 1. Healthcare Finance Basics …………………………………………. 3
Chapter 2. Healthcare Insurance and Reimbursement
Methodologies ………………………………………………………. 37
Part II Financial Accounting
Chapter 3. Financial Accounting Basics, the Income Statement,
and the Statement of Changes in Equity ……………………. 71
Chapter 4. The Balance Sheet and Statement of Cash Flows ……….. 117
Part III Managerial Accounting
Chapter 5. Cost Behavior, Organizational Costing,
and Profit Analysis………………………………………………… 167
Chapter 6. Departmental Costing and Cost Allocation ………………. 213
Chapter 7. Service Line Costing and Pricing …………………………….. 249
Chapter 8. Financial Planning and Budgeting …………………………… 287
Part IV Basic Financial Management Concepts
Chapter 9. Time Value Analysis ……………………………………………… 323
Chapter 10. Financial Risk and Required Return ………………………… 367
B r i e f C o n t e n t sviii
Part V Long-Term Financing
Chapter 11. Long-Term Debt Financing …………………………………… 409
Chapter 12. Equity Financing and Securities Markets ………………….. 453
Chapter 13. Capital Structure and the Cost of Capital …………………. 493
Part VI Capital Investment Decisions
Chapter 14. The Basics of Capital Budgeting ……………………………… 539
Chapter 15. Project Risk Analysis …………………………………………….. 585
Part VII Other Topics
Chapter 16. Revenue Cycle and Current Accounts Management …… 625
Chapter 17. Financial Condition Analysis ………………………………….. 669
Glossary ……………………………………………………………………………………. 719
Index ……………………………………………………………………………………….. 737
About the Authors ………………………………………………………………………. 785
ix
DETAILED CONTENTS
Preface ………………………………………………………………………………………..xix
Part I The Healthcare Environment
Chapter 1. Healthcare Finance Basics …………………………………………. 3
Learning Objectives …………………………………………………. 3
Introduction …………………………………………………………… 3
Before You Begin …………………………………………………….. 4
Defining Healthcare Finance ……………………………………… 8
The Concept of a Business ………………………………………… 9
The Role of Finance in Health Services Organizations …. 10
The Structure of the Finance Department ………………….. 13
Health Services Settings ………………………………………….. 13
Current Managerial Challenges ………………………………… 14
Legal Forms of Businesses ……………………………………….. 15
Corporate Ownership ……………………………………………… 17
Organizational Goals ………………………………………………. 21
Healthcare Reform and Finance ……………………………….. 24
Key Trends Following the Affordable Care Act …………… 25
Key Programs of the Affordable Care Act …………………… 27
Key Concepts ………………………………………………………… 30
Questions ……………………………………………………………… 32
Notes …………………………………………………………………… 33
Resources ……………………………………………………………… 34
Chapter 2. Healthcare Insurance and Reimbursement
Methodologies ………………………………………………………. 37
Learning Objectives ……………………………………………….. 37
Introduction …………………………………………………………. 37
Insurance Concepts ………………………………………………… 38
Third-Party Payers …………………………………………………. 42
Healthcare Reform and Insurance …………………………….. 47
General Reimbursement Methodologies …………………….. 50
D e t a i l e d C o n t e n t sx
Provider Incentives Under Alternative Reimbursement
Methodologies ………………………………………………….. 53
Medical Coding: The Foundation of Fee-for-Service
Reimbursement …………………………………………………. 56
Specific Reimbursement Methods ……………………………… 58
Healthcare Reform and Reimbursement Methods ……….. 60
Key Concepts ………………………………………………………… 64
Questions ……………………………………………………………… 66
Selected Cases ……………………………………………………….. 66
Notes …………………………………………………………………… 67
Resources ……………………………………………………………… 67
Part II Financial Accounting
Chapter 3. Financial Accounting Basics, the Income Statement,
and the Statement of Changes in Equity …………………….. 71
Learning Objectives ……………………………………………….. 71
Introduction …………………………………………………………. 71
Historical Foundations of Financial Accounting ………….. 73
The Users of Financial Accounting Information ………….. 74
Regulation and Standards in Financial Accounting ………. 76
Conceptual Framework of Financial Reporting ……………. 79
Accounting Methods: Cash Versus Accrual …………………. 84
Income Statement Basics …………………………………………. 86
Revenues ………………………………………………………………. 89
Expenses ………………………………………………………………. 93
Operating Income ………………………………………………….. 96
Nonoperating Income …………………………………………….. 98
Net Income…………………………………………………………… 99
Net Income Versus Cash Flow ……………………………….. 100
Income Statements of Investor-Owned Businesses ……… 102
Statement of Changes in Equity ……………………………… 105
A Look Ahead: Using Income Statement Data
in Financial Statement Analysis …………………………… 106
Key Concepts ………………………………………………………. 108
Questions ……………………………………………………………. 110
Problems …………………………………………………………….. 112
Notes …………………………………………………………………. 115
Resources ……………………………………………………………. 116
D e t a i l e d C o n t e n t s xi
Chapter 4. The Balance Sheet and Statement of Cash Flows ……….. 117
Learning Objectives ……………………………………………… 117
Introduction ……………………………………………………….. 117
Assets …………………………………………………………………. 121
Liabilities ……………………………………………………………. 128
Net Assets (Equity) ………………………………………………. 132
Fund Accounting …………………………………………………. 136
Statement of Cash Flows ……………………………………….. 138
Another Look Ahead: Using Balance Sheet Data in
Financial Statement Analysis ………………………………. 143
Key Concepts ………………………………………………………. 144
Questions ……………………………………………………………. 146
Problems …………………………………………………………….. 147
Resources ……………………………………………………………. 152
Supplement. Recording and Compiling Financial
Accounting Data ……………………………………………….. 153
The Accounting Cycle …………………………………………… 153
The Double Entry Accounting System …………………….. 156
Transactions ………………………………………………………… 158
Part III Managerial Accounting
Chapter 5. Cost Behavior, Organizational Costing,
and Profit Analysis ……………………………………………….. 167
Learning Objectives ……………………………………………… 167
Introduction ……………………………………………………….. 167
The Basics of Managerial Accounting ………………………. 167
Cost Behavior: Fixed Versus Variable Costs ………………. 169
Underlying Cost Structure …………………………………….. 171
Profit Analysis ……………………………………………………… 174
Breakeven Analysis ……………………………………………….. 180
Profit Analysis in a Discounted Fee-for-Service
Environment …………………………………………………… 184
Profit Analysis in a Capitated Environment ………………. 189
The Impact of Cost Structure on Financial Risk ………… 196
Key Concepts ………………………………………………………. 198
Questions ……………………………………………………………. 199
Problems …………………………………………………………….. 200
Selected Cases ……………………………………………………… 204
Resources ……………………………………………………………. 204
D e t a i l e d C o n t e n t sxii
Supplement. Semi-fixed Costs and Operating Leverage …. 207
Semi-fixed Costs ………………………………………………….. 207
Operating Leverage ………………………………………………. 209
Chapter 6. Departmental Costing and Cost Allocation ………………… 213
Learning Objectives ……………………………………………… 213
Introduction ……………………………………………………….. 213
Direct Versus Indirect (Overhead) Costs ………………….. 214
Introduction to Cost Allocation ……………………………… 215
Cost Allocation Basics …………………………………………… 216
Cost Allocation Methods ……………………………………….. 220
Direct Method Illustration …………………………………….. 223
Cost Allocation and Departmental Profitability ………… 230
Changing to a More Effective Cost Driver ……………….. 232
Final Thoughts on Cost Allocation ………………………….. 235
Key Concepts ………………………………………………………. 236
Questions ……………………………………………………………. 238
Problems …………………………………………………………….. 238
Selected Cases ……………………………………………………… 242
Resources ……………………………………………………………. 242
Supplement. Step-Down Method Illustration ………………. 245
Chapter 7. Service Line Costing and Pricing ……………………………… 249
Learning Objectives ……………………………………………… 249
Introduction ……………………………………………………….. 249
Service Line Costing …………………………………………….. 250
Healthcare Providers and the Power to Set Prices ………. 260
Price-Setting Strategies ………………………………………….. 262
Price-Taking Strategies ………………………………………….. 264
Setting Fee-for-Service Prices on Individual Services ….. 265
Setting Prices Under Capitation ……………………………… 267
Key Concepts ………………………………………………………. 272
Questions ……………………………………………………………. 273
Problems ……………………………………………………………. 274
Selected Case ………………………………………………………. 279
Resources ……………………………………………………………. 279
Supplement. Making Service Decisions ……………………… 281
Chapter 8. Financial Planning and Budgeting …………………………… 287
Learning Objectives ……………………………………………… 287
Introduction ……………………………………………………….. 287
D e t a i l e d C o n t e n t s xiii
Strategic and Operational Planning …………………………. 288
Financial Planning ………………………………………………… 289
Introduction to Budgeting …………………………………….. 292
Initial Budgeting Decisions ……………………………………. 293
Budget Types ………………………………………………………. 295
Constructing a Simple Operating Budget …………………. 298
Variance Analysis ………………………………………………….. 301
Key Concepts ………………………………………………………. 311
Questions ……………………………………………………………. 313
Problems …………………………………………………………….. 313
Selected Case ………………………………………………………. 319
Resources ……………………………………………………………. 319
Part IV Basic Financial Management Concepts
Chapter 9. Time Value Analysis ……………………………………………… 323
Learning Objectives ……………………………………………… 323
Introduction ……………………………………………………….. 323
Time Lines ………………………………………………………….. 324
Future Value of a Lump Sum: Compounding ……………. 325
Present Value of a Lump Sum: Discounting ……………… 330
Opportunity Costs ……………………………………………….. 333
Annuities …………………………………………………………….. 336
Perpetuities …………………………………………………………. 341
Uneven Cash Flow Streams ……………………………………. 343
Using Time Value Analysis to Measure Return on
Investment ……………………………………………………… 345
Semiannual and Other Compounding Periods …………… 349
Key Concepts ………………………………………………………. 354
Questions ……………………………………………………………. 354
Problems …………………………………………………………….. 355
Selected Case ………………………………………………………. 359
Notes …………………………………………………………………. 359
Resources ……………………………………………………………. 359
Supplement. Interest Rate and Time Calculations and
Amortization ……………………………………………………. 361
Solving for Interest Rate and Time ………………………….. 361
Amortized Loans …………………………………………………. 363
Chapter 10. Financial Risk and Required Return …………………………. 367
Learning Objectives ……………………………………………… 367
D e t a i l e d C o n t e n t sxiv
Introduction ……………………………………………………….. 367
The Many Faces of Financial Risk ……………………………. 368
Returns on Investments…………………………………………. 369
Risk Aversion ………………………………………………………. 372
Probability Distributions ……………………………………….. 372
Expected and Realized Rates of Return ……………………. 374
Stand-Alone Risk………………………………………………….. 376
Portfolio Risk and Return ……………………………………… 378
The Relevant Risk of a Stock ………………………………….. 388
Estimating Beta ……………………………………………………. 390
The Relationship Between Risk and Return
and the Capital Asset Pricing Model ……………………. 392
Required Return and Changes in Expected Inflation
or Risk Aversion ………………………………………………. 396
Comparison of Required Return to Expected Return …. 397
Some Final Thoughts About Beta and the Capital
Asset Pricing Model ………………………………………….. 398
Key Concepts ………………………………………………………. 399
Questions ……………………………………………………………. 401
Problems …………………………………………………………….. 402
Selected Case ………………………………………………………. 405
Notes …………………………………………………………………. 405
Resources ……………………………………………………………. 405
Part V Long-Term Financing
Chapter 11. Long-Term Debt Financing ……………………………………… 409
Learning Objectives ……………………………………………… 409
Introduction ……………………………………………………….. 409
The Cost of Money ………………………………………………. 410
Common Long-Term Debt Instruments ………………….. 411
Debt Contracts ……………………………………………………. 418
Credit Ratings ……………………………………………………… 420
Interest Rate Components …………………………………….. 422
Debt Valuation …………………………………………………….. 426
Key Concepts ………………………………………………………. 439
Questions ……………………………………………………………. 441
Problems …………………………………………………………….. 442
Selected Cases ……………………………………………………… 444
D e t a i l e d C o n t e n t s xv
Notes …………………………………………………………………. 444
Resources ……………………………………………………………. 445
Supplement. Credit Enhancement, Term Structure
of Interest Rates, and Economic Factors that
Influence Interest Rate Levels ……………………………… 447
Credit Enhancement …………………………………………….. 447
The Term Structure of Interest Rates ………………………. 448
Economic Factors That Influence Interest Rate Levels …. 451
Chapter 12. Equity Financing and Securities Markets ………………….. 453
Learning Objectives ……………………………………………… 453
Introduction ……………………………………………………….. 453
Equity in For-Profit Businesses ……………………………….. 454
Types of Common Stock ……………………………………….. 458
Procedures for Selling New Common Stock ……………… 458
Equity in Not-for-Profit Corporations ……………………… 461
Common Stock Valuation ……………………………………… 463
Security Market Equilibrium ………………………………….. 472
Informational Efficiency ………………………………………… 473
The Risk/Return Trade-Off …………………………………… 477
Key Concepts ………………………………………………………. 479
Questions ……………………………………………………………. 480
Problems …………………………………………………………….. 481
Selected Case ………………………………………………………. 483
Notes …………………………………………………………………. 483
Resources ……………………………………………………………. 484
Supplement. The Market for Common Stock,
Securities Markets Regulation, and the Investment
Banking Process ……………………………………………….. 485
The Market for Common Stock ……………………………… 485
Securities Market Regulation ………………………………….. 487
The Investment Banking Process …………………………….. 489
Chapter 13. Capital Structure and the Cost of Capital ………………….. 493
Learning Objectives ……………………………………………… 493
Introduction ……………………………………………………….. 493
Capital Structure Basics …………………………………………. 494
Impact of Debt Financing on Accounting Risk
and Return ……………………………………………………… 494
D e t a i l e d C o n t e n t sxvi
Capital Structure Theory ……………………………………….. 498
Identifying the Optimal Capital Structure in Practice …. 501
Not-for-Profit Businesses ……………………………………….. 504
Using the Target Capital Structure ………………………….. 505
Cost-of-Capital Basics …………………………………………… 506
Cost of Debt Capital …………………………………………….. 508
Cost of Equity Capital …………………………………………… 510
Corporate Cost of Capital ……………………………………… 521
Cost-of-Capital Estimation for Small Businesses ………… 523
An Economic Interpretation of the Corporate
Cost of Capital ………………………………………………… 526
Key Concepts ………………………………………………………. 529
Questions ……………………………………………………………. 531
Problems …………………………………………………………….. 532
Selected Cases ……………………………………………………… 535
Notes …………………………………………………………………. 535
Resources ……………………………………………………………. 535
Part VI Capital Investment Decisions
Chapter 14. The Basics of Capital Budgeting ……………………………… 539
Learning Objectives ……………………………………………… 539
Introduction ……………………………………………………….. 539
Project Classifications ……………………………………………. 540
The Role of Financial Analysis in Healthcare Capital
Budgeting ………………………………………………………. 541
Overview of Capital Budgeting Financial Analysis ……… 542
Cash Flow Estimation …………………………………………… 543
Cash Flow Estimation Example ………………………………. 550
Breakeven Analysis ……………………………………………….. 558
Return on Investment (Profitability) Analysis ……………. 560
Some Final Thoughts on Breakeven and Profitability
Analyses ………………………………………………………….. 566
Capital Budgeting in Not-for-Profit Businesses ………….. 567
The Post-audit …………………………………………………….. 571
Using Capital Budgeting Techniques in
Other Contexts ……………………………………………….. 572
Key Concepts ………………………………………………………. 573
Questions ……………………………………………………………. 575
Problems …………………………………………………………….. 576
D e t a i l e d C o n t e n t s xvii
Selected Case ………………………………………………………. 582
Notes …………………………………………………………………. 582
Resources ……………………………………………………………. 583
Chapter 15. Project Risk Analysis …………………………………………….. 585
Learning Objectives ……………………………………………… 585
Introduction ……………………………………………………….. 585
Types of Project Risk ……………………………………………. …




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