HO

Business in Health Care - Exam Preparation

Chapter Two: The Business Side of Health Care

Learning Objectives

  • Identify legal forms of business ownership.
  • Describe key business functions.
  • Identify the major components of the health care industry.
  • Describe how economic activity is defined and measured.
  • Identify key laws that influence the health care industry.
  • Describe how health care businesses can monitor and evaluate the external environment.

Introduction

  • Businesses make key decisions regarding the products they offer, the customers they target, and how they organize and manage their employees and operations.
  • As businesses develop plans and strategies, they must monitor the impacts of other businesses in their industry and changes in the external environment.
  • This chapter introduces basic business concepts, including:
    • Organizational forms.
    • Key business functions.
    • Components of the health care industry.

External Environments Influencing Health Care Businesses

  • Two primary external environments impact health care business design and operation:
    • Economic environment.
    • Political and legal environment.
  • These environments serve as a framework within which business decisions are made.
  • Strategy tools help businesses evaluate their decision-making processes in relation to external environments.

What is Business?

  • Business is broadly defined as providing a product or service to customers for profit.
  • Revenue Generation:
    • Revenue is generated from selling products or services.
    • Costs are incurred for materials, labor, and equipment.
    • Profit is what remains when costs are subtracted from revenue.
  • Distinction between Business Types:
    • For-Profit Businesses:
    • Objective: Generate profit (e.g., pharmaceutical companies).
    • Nonprofit Businesses:
    • Objective: Serve a purpose other than generating profit (e.g., nonprofit hospitals).
    • May run at a loss on certain services as long as total revenue covers costs (e.g., serving low-income patients).
  • Examples of Product and Customer Definitions in Health Care:
    • Physician's office: Service could be diagnosing illness or preventing illness.
    • Customer may be the patient or the insurance company paying for the service.

Forms of Business Ownership

  • In the U.S., three legal structures for operating a business:

    1. Sole Proprietorship:
    • One person owns the business.
    • Responsible for all decisions, risks, and rewards.
    • Example: Solo practices by dentists and ophthalmologists.
    • 2012 Economic Census: Almost 130,000 organizations were sole proprietorships.
    1. Partnership:
    • Two or more people share the business objectives.
    • Decision-making, risks, and rewards are shared.
    • Approximately 68,000 partnerships in 2012.
    1. Corporation:
    • Ownership is separated from management.
    • Shareholders own the business; management makes decisions.
    • Shareholders' risk is limited to their investment.
    • 167,000 healthcare businesses were corporations in 2012.
    • S Corporations:
      • Specialized form of corporations for smaller businesses.
      • Accounted for another 320,000 businesses in the same year.

  • Legal ownership forms and their implications:

    • State law influences the choice of ownership for health care providers, ensuring public safety and quality service.
    • Definitions of ownership forms:
    • Sole Proprietorship: A single owner operates the business.
    • Partnership: Involves at least two partners.
    • Corporation: Can involve multiple owners; ownership determined by shares held.

Business Functions

  • Regardless of legal form, businesses engage in key functions to deliver products and services to customers, detailed as follows:
    1. Management:
    • Involves planning, organizing, directing, and controlling business resources.
    • Planning: Define objectives and develop strategies.
    • Organizing: Create an organizational structure.
    • Directing: Focus on motivating human resources.
    • Controlling: Monitor and adjust to ensure goals are met.
    1. Marketing:
    • Focuses on the exchange process between business and customers.
    • Develops plans that cover product, pricing, promotion, and distribution.
    • Conducts research to understand customer needs.
    1. Accounting:
    • Tracks the flow of money into and out of the business.
    • Accounts Receivable: Money coming in from sales.
    • Accounts Payable: Money going out for expenses.
    1. Production:
    • Involves creating products or services.
    • Management analyzes processes for efficiency without sacrificing quality.
    1. Information Technology (IT):
    • Involves the use of technology to manage information.
    • Aids in storing, retrieving, and processing data.
    • With electronic health records, IT enables effective data management.

Economic Components of the Health Care Industry

  • The U.S. Census Bureau categorizes health care businesses under code 62 of the North American Industry Classification System (NAICS), further divided into:
    • Ambulatory health care services.
    • Hospitals.
    • Nursing and residential care facilities.
    • Social assistance services.
  • Economic activity in health care is tracked through metrics such as employee numbers, payroll sizes, and revenues.

The Role of the Economy in Business

  • The U.S. operates in a market economy (private or free enterprise system), characterized by competition.
  • Key economic concepts include:
    • Demand and Supply:
    • Demand increases as prices lower, while supply increases as prices rise.
    • Equilibrium Price:
    • A situation where supply equals demand (e.g., $3.59 per bottle of cough syrup).
  • Economic Indicators:
    • Indicators such as interest rates, inflation rates, and unemployment rates help assess economic health:
    • Interest Rates: Cost of borrowing money, influencing spending behavior.
    • Inflation: Increase in overall price levels affecting purchasing power.
    • Unemployment: Represents the lack of jobs, with healthcare generally having lower unemployment than the economy overall.

Business Cycle Stages

  • Four stages are identified in the business cycle:
    1. Prosperity:
    • GDP increases, low inflation, low unemployment.
    • Increased hiring and spending on healthcare services.
    1. Recession:
    • Slowdown in economic activity, rising inflation and interest rates.
    • Individuals seek only necessary healthcare services; healthcare providers may cut jobs and programs.
    1. Depression:
    • Severe economic downturn; spending is very low.
    • Government intervention may be needed to stimulate recovery.
    1. Recovery:
    • Economic improvement; businesses rehire and spend again.

Government Role in Health Care

  • The U.S. government plays three significant roles in healthcare:
    • Provider of Health Care Services:
    • Payer for Services: Many patients receive services funded by government programs.
    • Regulator of Health Care Providers: Enacts laws that influence health care delivery.

Regulatory Framework

  • Key regulations include:
    • Antitrust Laws: Prevent monopolistic practices, promote fair competition.
    • Sherman Antitrust Act (1890) and Clayton Act (1914) are pivotal legislation.
    • Health Insurance Portability and Accountability Act (HIPAA): Protects patient data and enhances security in electronic data exchanges.
    • The law's five titles address insurance portability, fraud, tax requirements, health plan requirements, and revenue offsets.

Conclusion

  • Health care businesses must monitor and assess economic conditions to align their strategies accordingly.
  • Managers use techniques like SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) to integrate business activities with the changing environment.
  • Networking security is crucial for efficient operations in healthcare, requiring skilled IT professionals to maintain technological infrastructure.