Q1) Explain the Public-Private Partnership form of Hospital organization. What are the advantages of it?

What precaution should be taken for successful working of PPP in hospitals? Ans: Contribution of Public and Private sector in Indian healthcare sector In India, the public sector accounts for only around 20 percent of the total healthcare expenditure, representing around 1 percent of the GDP among the lowest in the world. Indias public healthcare is under-funded and small in size to meet the current health needs of the country. Items like public health, hospitals, sanitation, etc. fall under the state government, while items having wider ramification at the national level (food and drugs, family planning, medical education, and vital statistics) come under the central government. It is mostly through national health programmes that the central government pumps in around 15 percent of the total funds in the healthcare sector. The Government Health Projects are implemented through the states, with the Department of Health facilitating access to external aid. The contribution of private sector in healthcare expenditure in India is around 80 percent and is one of the highest in the world. Almost 94 percent of this amount (which covers both financing and provision aspects) comprises of out-of-pocket expenditure on health. The remaining 6 percent is the expenditure on provision, which accounts for the private sector contribution to 60 percent of all in-patient care and 78 percent of total number of visits in outpatient care in India. In addition the private sector today provides 58 percent of the hospitals and 81 percent of the doctors in India. Adding to the challenge is also the changing demographics and lifestyles of the people. Dealing with these challenges requires the resources and expertise of public and private sector combined. Key stakeholders in Healthcare PPP There are five key stakeholders in any healthcare service system as shown below. Implementing a healthcare PPP will have an impact on all these stakeholders and the PPP itself can be structured along any of the roles where private sector participation is applicable.
1

Stakeholder Roles

In the roles of provider, payer and the area of IT infrastructure, there are significant advantages as well of areas of concern between the public and private sector as discussed below

The policy goal of PPP in healthcare would be to bring out the synergies in key stakeholder interests between the public and private sector and at the same time have a strong regulatory mechanism of maintaining quality along with equity in service. Any model of healthcare PPP that is implanted and the framework used in evaluating it will need to accommodate for the key concerns raised in the above discussion. PPP models will vary in design and implementation based on structural, regional and goal differences. Yet a framework for evaluating such models will try to ensure that the PPPs are setup for success rather than failure 2.3 Managing Stakeholder Interests The key to success in PPP initiatives lies in effective management of the public sector and private player interests across different stakeholder roles. PPP experience from different sectors indicate some key implementation aspects of PPP which need upfront clarity and have to be kept in mind by concerned parties before initiating PPP projects in healthcare 1 Defining and differentiating scope of free services at PPP hospitals Free service implies access to healthcare to the beneficiary free of charges. However, there is a cost to the service provider which has to be met either through a global budget or through cross subsidy out of revenue from paying patients. While the qualitative aspect of the core service of the patients medical care must be equitable irrespective of the socio economic background of the beneficiary, there could be difference in catering to the patients personal conveniences for those who are able to and willing to pay for such services. The quantitative aspect of free service can be determined on the

basis of the built up facilities with maximum capacity utilization, or alternatively on the basis of the actual service provided. In order to establish clarity of objectives upfront in any PPP project, it is recommended that the MoUs or SLAs define the complete scope of Free Services and include the following: Determination of Free Services to be provided at the PPP Hospital Definition of the scope of Free Services to be provided at the PPP Hospital Definition of the eligibility of patients to avail the Free Services The Quality charter of Free Services Differentiation of facilitys infrastructure for Free & Paid Services 2 Tariff Determination - It is essential that pricing strategies and service tariffs of the free services are determined on mutually agreeable platforms. The government is the third party payer covering the cost of services for the private sector service provider, on all free services. But the government generally does not have a mechanism to administer financing and provision of care through pre authorization of rendered services as is the case of insurance or employee benefits. Hence it is invariably a matter of conflict to estimate and compensate the quantitative aspect of care. Therefore in most successful PPP models, tariff determination actually works top downwards from a global budget based on built up capacity and capacity utilization. Global budget on utilization is also auditable and therefore fits into the public accountability. Based on mutual understanding this global budget figure can be determined, based on the cost of reimbursement or on a cost plus basis should there be an incentive provided in the PPP model. It can also lower than cost of operation if cross subsidy is part of agreement. The value of assets provided by the government could be considered as contribution in which the government can expect certain returns in he form of return on capital employed or dividend on equity. In general, the service tariffs should be determined on the basis of the following criterion while entering into the partnership agreement between government and private sector Inflation (current & projected) Project Operational Expense Project Capital Expense Project Profitability Public Sector partners obligation Periodicity of tariff change Agreeability by both partners

Role of advisors to the PPP In most PPP initiatives, the public sector partner identifies the management and financial consultants to advice on the projects. It is important that the appointed advisors should develop the contractual clauses after discussion and in mutual agreement of both the public and private sector interests. This would enable a better business projection and incentivize the bottom-line objectives of the project. 4 Regulatory Role in a PPP setup

PPPs are looked upon as bringing the best of both public and private sector world practices and benefits together to provide better healthcare. At the same time, a strong control mechanism is also needed to ensure that the public and private players operate within their defined roles and do not transgress boundaries that may undermine that larger industry context. While self-regulatory mechanisms are an option for enforcing quality controls through professional associations, such a mechanism might still need some time to evolve in India. An independent regulatory watchdog is needed in dealing with dispute resolution to maintain the business viability of the PPP as much as it is needed to ensure equitable access to all sections of the population. Some of the areas where the regulator could contribute are: 1 Consumer Rights Protection - Ensuring that the poor are not worse off if PPPs are set up to serve remote areas of India. A clear policy on rights of consumers in a PPP-type of arrangement, and patient rights in case of a PPP failure are genuine concerns that need to be addressed in any policy framework and have to be employed by the regulator to manage PPPs. 2 Litigation issues - Litigation has been a source of concern to the private sector. One of the key instruments used by governments to encourage PPPs is subsidizing inputs (mainly land), and the common property element of such inputs makes them vulnerable to public scrutiny and litigation, which can be detrimental. While there is clearly a case for opening such decisions to public litigation, governments need to identify correct procedures and the regulator needs to ensure some amount of protection to the private partners so that they can be assured of the continuation of PPPs unhindered by the constant threat of litigation. Keeping these in mind, it is necessary that even at a contractual stage, a Scope of Protection of both the partners is clearly documented in the MoU of the PPP. The Scope of Protection of the partners and partnerships interests (both financial and brand image) need to be clearly specified in the agreement. Moreover, litigations arising out of public outcry need to be fundamentally cleared at inception to avoid any debate in the future. Specifically, the Scope of Protection should cover the following: Operational issues Manpower Planning in terms of issues like Local employment generation Outsourcing requirements, and Specialist requirements 3 Ensure timely decisions In some of the cases the delays in decision making from the side of the government has been a significant challenge in the successful execution of the PPP model. The regulatory body which looks into the PPP aspects should be well empowered to take decisions and act as a speedy channel to address the various issues. 4 Exit options for private providers - In deciding on a PPP, private providers not only look for attractive economic returns but also look for a hassle free exit strategy in case a partnership goes wrong. There is little evidence on what kinds of exit clauses have been included in PPP contracts

in India so far. Penalties and compensation issues must be clearly outlined in the MoU whether the public sector or the private party wants to exit the contract. MoUs must clearly and objectively define the necessary exit options that can be exercised by the partner along with the rights of the partner at the time of exercising such rights. The MoU should clearly provide for necessary exit clauses and exit events which can be exercised by the partners anytime after the expiry of the stipulated lock-in period. The exit clause should also clearly define the necessary conditions which will deem and affect the expiry of an existing partnership. The MoU should also provide scope, in case of any financial fall-outs, the rights of the partners, to seek regulatory intervention and to appoint an arbitrator towards resolution of issues and concerns before seeking legal recourse. In such cases, the role of a regulator becomes critical to ensure that the process is fair to both state and private sector, while the interests of the beneficiaries is not compromised To summarize, the role of the regulator is seen as a neutral operator between the public and private sectors whose primary interest is the benefit of the general public benefiting from the system, but is also aware and active in mitigating potential sources of conflict within PPP arrangements. 3 Key Thrust Areas for Healthcare PPP The scope of PPP initiatives in India has spanned disease surveillance, purchase and distribution of drugs in bulk, contracting specialists for high risk pregnancies, national disease control programs, social marketing, adoption and management of primary health centers; collocation of private facilities (blood banks, pharmacy), subsidies and duty exemptions, joint ventures, contracting out medical education and training, engaging private sector consultants, pay clinics, discount vouchers, self- regulation, R&D investments, telemedicine, health cooperatives, and accreditation. While these have been spread out in time and space and occurred on an ad-hoc basis, the idea of PPP as a scalable and long term solution to Indian Healthcare brings up some key thrust areas along which private sector participation will have the maximum impact. Opportunities for private player participation in PPP models in Indian healthcare system can be broadly classified along the following key thrust areas Infrastructure Development Management and Operations Capacity Building and Training Financing Mechanism IT infrastructure development for Networking and Data Transfer Materials Management

This section covers the background context and the private player role in each of these opportunities. Infrastructure Development The participation of private sector in healthcare infrastructure development is expected to bring innovation strategies thereby quickly bridging the resource gap in infrastructure for healthcare. The following are some areas where energies could be focused to extract workable solutions Planning, Design and Development of healthcare facilities in whole or speciality wise Owning and Operating diagnostic services for public health systems Own and operate other services like mobile clinics

For more than 90 percent of the population in India today, modern healthcare facilities are still unaffordable. As pricing is a direct function of the costs incurred there is an urgency to introduce measures to bring down the cost of providing healthcare. PPP could offer the solution for this problem if sound public policy initiatives are introduced by the government which would make private healthcare investments an attractive proposition. Some of the aspects that can be considered to provide affordable healthcare for the people would include Providing land at a subsidised rate for building healthcare infrastructure facilities to keep the overall project cost low. The land provided can be part of the equity provided by the government An other measure to keep the land prices in check would be to reduce the land registration charges and the other applicable duties specifically for the healthcare sector In case of financing, government can provide public institution finance at a reduced rate of interest. Government can also facilitate lending by commercial institutions by giving priority sector status to healthcare industry where, by reserve, a fraction of the overall lending is to fund healthcare development projects Provide budgetary grants for capital and operating expenses of the systems covered under the PPP where possible Ensure a non-compete policy within a predefined geographical limit where the PPP facilities operate to ensure growth and sustenance of the model Government can also consider providing duty exemptions on import of capital goods which are essential for providing quality healthcare 3.2 Management and Operations

The huge infrastructure of the Indian public health system lacks in realizing its complete potential partly due to inadequate expertise in managing the operations of the units, be it PHCs or large hospitals. In response to the situation, private sector has grown over a long period and gained significant experience in addressing the needs of the clients of the system. A case in point is that most outpatient primary care (about 60-70 percent) is now provided in private clinics and health centres in both rural and urban India. In this context, PPP can help in contracting-in models which involves the hiring of one or more agencies to provide a multitude of services like Infrastructure maintenance and upkeep Key service delivery of medical treatment Hospital Management including Housekeeping, Catering etc. Medicine store and inventory management Medical equipment purchase and maintenance Transportation Security Hiring medical staff and specialists for some days in a week could also be part of such arrangements. The fundamental aspects that the private party can bring in to the arrangement are Technical efficiency Operational economy Quality in delivery of healthcare

Government buy back schemes are the most viable way of structuring PPPs in India On financial structuring of PPPs, it is important to realize that any contract between the government and the private parties cannot be on individual line items like the American CPT system where cost of every x-ray, scan or other treatment procedures is fixed. Such a system cannot be adapted to the Indian context which has significant vagaries in quality of healthcare across regions and may attract non-serious operators whose quality credentials will be questionable. Such a scheme also inherently allows for over provision of services by the provider. Instead, a buy back arrangement on capacity (percentage of beds) or throughput (percentage of patients treated) must be considered in management and operations contracts where the government hands over a facility to private parties. The government must support such a capacity sharing arrangement through budgetary grants. The usage of these grants will be tracked and must be auditable by the government or any other third party. The incentive for private parties can be structured on any of the following lines for operating that share of total capacity which falls under the buy back arrangement from government:

 Government pays cost X per bed under buy back portion plus a defined margin on costs while the remaining capacity is operated by private parties at market rates Government pays costs X per bed under buy back portion while allowing the private party to operate the remaining capacity at market determined rates Government pays a percentage of costs X per bed under buy back portion which will be cross subsidized by the private parties using profits from the remaining capacity managed at market rates The public sector and private parties may decide on any of the above schemes at the time of structuring the PPP depending on factors like the region where the healthcare unit is setup and also based on the allied market demand in that region. To determine the cost X in any of the above schemes, an independent third party audit can be done to determine the total cost of operating a bed. Capacity Building and Training Comparative statistics of Indian healthcare sector (in terms of number of available medical staff per 1000 of population) with other countries as discussed in earlier sections highlights the magnitude of shortage India faces in skilled health care professionals. Although the governments initiative to increase the number of medical colleges in the country is commendable, there is a country wide issue in relation to sector skills gap and indicates an urgent need for augmenting the medical staff graduating from formal training programs. In this context, private players can play a key role in capacity building and training through PPP modes by working with the public sector to better utilize the infrastructure of government hospitals. Government district hospitals will be appropriate in terms of size and availability of clinical material (for in-patient and out-patient care), for providing training to nurses and other auxiliary medical staff. Such an arrangement integrates well with other PPP arrangements like on management and operations contracts to private parties, since private party offering management services will be able to tighly integrate the training program to the service delivery. Though such an integrated arrangement between management and training would not be mandatory, it would help in increasing the efficiency and quality of training. In addition to the formal training segment, there is also a large requirement for informal programs in the form of continuing healthcare education in India. There are a large number of registered medical practitioners (who may not be qualified), para-professional and auxiliary staff and other healthcare functionaries who need to be trained on a continuing basis to improve the quality of healthcare. Private players can contribute to this segment too, by utilizing the district hospital infrastructure of the state to run continuing education programs for the network of healthcare functionaries. Such training programs need not be only in medicine, but can be in allied technical fields too. In addition to these PPP models, the government can generate private sector interest through initiatives at a policy level as follows:

1 Provision of tax incentives to encourage private sector investment in healthcare capacity building, education and training. For example, the benefits accruing to a training institute in India under Section 10 (23C) of Income Tax Law, currently applying to not-for-profits could be expanded to for-profit private players also. 2 Allowing corporate entities to venture into healthcare education (which is currently restricted to trusts and societies in private sector), will generate private sector interest and have an immediate impact in increasing training capacity. 3 Increasing stipulated annual limits on student seats to a reasonable level for optimized use of resources. For example, a medical college with a 500 bed capacity could produce 150 students annually, instead of the 100 as per the current MCI norms

Among these frameworks, the one that is most likely to work in any Indian context is when there is a good balance of private and public sector interests. At an implementation level, any of these frameworks could be taken up and adopted at different levels of central or state government participation or across different regions in India, with suitable customization to suit all stakeholder interests. Evaluation Framework The proposed evaluation framework uses the following four considerations to assess the success of a Public Private Partnership model.

For a private player in such a PPP, it is important to adhere to the following cardinal rules for building a scalable and sustainable business model in healthcare: 1. Identifying the need for the project and establishing project objectives clearly 2. Identifying and sharing all risks associated with the PPP upfront and risk ownership roles clearly defined 3. Defining Performance Measurement metrics or Key Success Factors for evaluating the performance 4. Developing and communicating a clear strategy for growth and increasing scale 5. Maintaining clear and frequent communications to all stakeholders 6. Extensively using technology to plan, implement and communicate
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Within this PPP model, specific innovations can be achieved in the implementation leading to different models of building the healthcare industry in the country. Operationalization Next Steps While it is important to have a robust model for the PPP initiatives it is equally important to develop an execution framework. In most of the cases where the PPP models have failed the reason for failure has not been the model but it was more to do with the execution. In the Indian context for a health care PPP initiative to succeed some of the following aspects needs to be in place Private Sector participation in the PPP governing body The governing body in the Health Ministry with a mandate to oversee PPPs currently does not include private sector participation. For ensuring equitable representation of both private and public sector interests, it is necessary that the governing body includes members nominated from the private sector also. Identify priority sectors and regions Government should study the breadth of the healthcare landscape and benchmark the standards with other developing and developed countries and identify critical areas and gaps. These needs to be done keeping in mind the regional disparity that exists. The government can then look at involving private participation for addressing some of these gaps. Identify level of participation The PPP governing body needs to evaluate the PPP model recommendations and identify the right level of participation on areas like funding and equity stakes. There needs to be clarity on what each party would bring in and what controls each can exercise. Run pilot campaigns Pilot projects can be implemented to test the viability of the model before a full scale implementation. While this will enable to address any gaps in the model it will also help in translating the benefits of PPP in a tangible form. Adopt measures for scalability The models also need to be evaluated on the scalability dimension. To ensure scalability the following aspects can be looked at

1. Standardization of process should be achieved maybe through some form of accreditation mechanism. 2. The regulatory and government bottlenecks which exist in expanding across states needs to be addressed. 3. Provide for long term funding through options like creating a special reserve, project financing etc 4. Run national campaigns to educate the public and internal staff on the merits of PPP Advocacy Transparency and information flow on PPPs assume even more critical importance in India because of concerns about political patronage and favoritism, in addition to the general publics fear about PPPs being a faade for privatization. Because of the asymmetrical growth of the private sector in health in India, the ability of governments to direct the growth of PPPs for the larger public good is in doubt. The central and state governments must reassure the public about the PPP process. Information on subsidized inputs, the process and criteria of choosing partners, monitoring standards and consumer rights must be out there in the public domain. This will not only secure the trust of the public, but also establish a fair competing ground for private providers wanting to partner with the public sector.

Conclusion There is an air of optimism surrounding PPPs in India. Used judiciously and fitted to local circumstances, they clearly have the potential to drastically change the healthcare landscape in India. PPPs will survive only if the interests of all stakeholders are taken into account. This means detailing specific roles, rights and responsibilities, establishing clear standards, providing training for public sector managers, active dissemination of information, and constantly refining the process to make the system more efficient. The public sector has to lead by example, and be willing to redefine itself and work with the private sector. The latter must in turn be willing to work with the public sector to improve mutual cooperation and understanding. 34

Q2) The finance manager is always faced with the dilemma of liquidity Vs profitability. How you will strike a balance between the two. Ans: Amongst many criteria of business success, there are two which are expressed infinancial terms, namely profitability and liquidity. Profit -is the excess of resources earned over resources expended or income less costs.Various profit figures (gross, net, pre-tax etc.) for the period can be read from the Profitand loss Account (US term "Income Statement"). Profitability- is the relationship between profits and capital (the "static" resources setaside to earn those profits). Measuring profitability means that you have to relate a profitfigure (from the Profit and Loss Account) to a resources figure (from the Balance Sheet).In short, profit is the measure of gain, and profitability the relation of this gain to thefirm's assets. If profitability exceeds the cost of the firm's capital, that is the interest rateat which it can borrow money, it can call itself successful.It is beneficial to society as a whole if less profitable businesses give up their resources tomore profitable, because the total profit earned will rise, other things being equal. For thisto hold true, private and public profit must be equivalent; this is not the case where, for example, profit earners cause there to be social costs, such as atmospheric pollution or noise. Liquidity-may be defined as the ability of a firm to meet its financial obligations as they fall due. The balance sheet (defined as "a structured statement of assets and liabilities") measures these resources and claims, and describes the liquidity of the firm i.e. the relationship between assets and liabilities see also LD10, Accounting Theory and the Purpose of Accounting). 2. Objectives, Profitability and Liquidity Profit may be seen as an end in itself (i.e. the "mission" - see LD02) but it is better viewed as a necessary means to an end, namely the survival and growth of the organization. Japanese companies and some others are reported as seeing profits as a cost of staying in business, which is an echo of the economists' view of normal profits as a cost of capital, with any excess or deficit being cleared over time as new firms move into ,or out of, the industry. Likewise, liquidity is a constraint which must be satisfied both directly, in that firms must settle their debts, and indirectly, in that they must also report an ability to continue to do so. If in the annual accounts, a firm reports poor liquidity, this may cause such a fall in confidence that its state becomes a self-fulfilling prophecy, as creditors demand immediate payment, the classic example being "a run on the bank"

Targets for Liquidity and Profitability A worthwhile target for the liquid ratio is 1:1. Companies with inventories which are easily realised, such as food retailers, can manage with significantly lower ratios, but there is no excuse of going much above unless, like GEC in 1983 and 1984, a company sees liquid investments as a sound home for its resources. The current ratio cannot be judged except in relation to the needs of a particular commercial situation. Anything between 1:1 and 4:1 could be acceptable. Comparison must be made with industry norms and those competitors whom one respects. In the absence of other data, 2:1 is not unreasonable .For profitability there is no sense of a target - the higher the better. Profitability isnormally unstable from year to year, so judgement is problematic. This instability is one reason why accounting practices which smooth reported results are so appealing to company executives that we have seen the rise and rise of "creative accounting" and" opinion-shopping."

The minimum acceptable is the cost of capital, as below this level, the owners of these funds could have done better elsewhere. The measurement of "capital" is problematic and subject to great uncertainty, the values for "equity interest" in the Balance Sheets being merely opening bids. Where the assets are highly specialised and the industry has poor prospects, such as in respect of a steelworks, the balance sheet values will generally exceed the cash realisable. Conversely inflation may mean that the values of land and buildings are grossly under-stated. These problems mean that bases of valuation based on actual and estimated cash flows are to be preferred. Judgements based on accounts are necessarily backward-looking, and even when you use projected accounts, their simplicity does not justify the loss in quality offered by cash flow methods. Detailed discussion is outside the scope of this digest. Consequences of low profitability

A profit ratio indicates how effectively management can wring profits from sales. It also indicates how much room a company has to withstand a downturn, fend off competition and make mistakes.6 Potential investors are interested in dividends and appreciation in market price of stock, so they focus on profitability ratios. Managers, on the other hand, are interested in measuring the operating performance in terms of profitability. Hence, a low profit margin would suggest ineffective management and investors would be hesitant to invest in the company. Thus, a financial manager has to ensure on one hand that the firm has adequate cash to pay for its bills, has sufficient cash to make unexpected large purchases and cash reserve to meet emergencies, while on the other hand, he has to ensure that the funds of the firm are used so as to yield the highest return.8

This poses a dilemma of maintaining liquidity or profitability as indicated in the figure below: The liquidity and profitability goals conflict in most decisions which the finance manager makes. For example, if higher inventories are kept in anticipation of increase in prices of raw materials, profitability goal is approached, but the liquidity of the firm is endangered. Similarly, the firm by following a liberal credit policy, may be in a position to push up its sales, but its liquidity decreases.8 Similarly, there is a direct relationship between higher risk and higher return. A company taking higher risk could endanger its liquidity position.8 However, if a company has a higher return it will increase its profitability. The liquidity and profitability ratios of four pharmaceutical companies-Cipla, Divi's Laboratories, Bafna Pharmaceuticals, and SMS Pharmaceuticals-over a four year period were analysed to understand the relationship between liquidity and profitability. (See Box) The liquidity and profitability ratios of the above four pharma companies indicate that liquidity and profitability could go hand in hand. Except the year 2008, there is a positive correlation between the movement in the profitability ratios and the liquidity ratios. Despite the limited scope of this study, the observations would suggest that a company while planning working capital need not maintain a trade off between the two as is usually felt. In the light of the above, financial managers would need to reflect on the implications of each decision that usually involves a trade-off between liquidity and profitability. It would also be useful to assess the effect of one decision involving this trade-off vis--vis another, so that an overall view can be taken. The present economic scenario has its implications on liquidity and profitability. 'Recession means a general slowdown in economic activity over a period of time. Production, employment, investment spending, capacity utilization, household incomes, business profits and inflation fall during recessions; while bankruptcies and the unemployment rate rise.10 Because of this, companies are reverting inwards. In order to survive during these times, frugal measures need to be adopted. 'Frugal basically means prudent, not wasteful, wise in expenditures, and inexpensive'. Being frugal would involve measures such as:11 1. Decreasing the size of sales force and concentrating on highly trained sales reps that have already established relationships with physicians. This reduces the amount of liquid cash needed to be kept to pay salaries to sales reps; thereby increasing the liquidity position.11 2. Focusing on already established relationships rather than trying to build new ones reduces the amount of money needed to be spent in order to acquire new customers.11 3. Embracing technology,such as use of e-detailing programs, can reduce expenses incurred by the company, and hence enhance the liquidity position of the firm.11

Achieving Adequate Profitability and Liquidity The achievement of adequate profitability is specific to each situation and outside the scope of this digest. The problem of liquidity is less dependent on particular circumstance and it is easier to make useful generalizations. In my opinion there are two distinct requirements for liquidity, firstly, profitability and secondly, care and thoroughness in administration. It is only if a firm is profitable that in the long run it will receive in cash more than it paysout. This is most clearly imaginable in the case of a trading business which buys and sells exclusively on a cash basis. If such a firm makes losses it is paying out in cash more than it coming in from sales. It can only sustain its cash balances by injections of capital or by selling off its assets, processes which cannot be continued indefinitely. Profitability may be necessary but it is not sufficient. A firm must be careful to ensure that it does not commit itself to payments that it cannot cover. Thus detailed records require to be kept, ideally on a "real time" basis, of cash in hand and expected and cash to be paid. The accounting statement showing this detail is the cash budget (see LD11).Every item will be tracked in terms of the time of flow, and the whole managed so that there is never a time when payments cannot be made when due. This requires the steady exercise of the bureaucratic virtues of thoroughness, reliability and accuracy, together with contingency planning to cope with uncertainties. Whatever the immediate situation, profitability and liquidity also need to be seen in their strategic context i.e. in the light of market growth, market share and progress through the product and industry life cycles

Q3)Explain the objectives of cost accounting. How you will choice cost reduction with help of cost accounting in Hospital Administration?

Ans: Cost accounting is the process of determining and accumulating the cost of product or activity. It is a process of accounting for the incurrence and the control of cost. It also covers classification, analysis, and interpretation of cost. In other words, it is a system of accounting, which provides the information about the ascertainment, and control of costs of products, or services. It measures the operating efficiency of the enterprise. It is an internal aspect of the organisation. Cost Accounting is accounting for cost aimed at providing cost data, statement and reports for the purpose of managerial decision making. The Institute of Cost and Management Accounting, London defines Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In the widest usage, it embraces the preparation of statistical data, application of cost control methods and the ascertainment of profitability of activities carried out or planned. Costing includes the techniques and processes of ascertaining costs. The Technique refers to principles which are applied for ascertaining costs of products, jobs, processes and services. The `process refers to day to day routine of determining costs within the method of costing adopted by a business enterprise. Costing involves the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services; the relation of these costs to sales value; and the ascertainment of profitability. Scope of Cost Accounting The terms costing and cost accounting are many times used interchangeably. However, the scope of cost accounting is broader than that of costing. Following functional activities are included in the scope of cost accounting: 1. Cost book-keeping: It involves maintaining complete record of all costs incurred from their incurrence to their charge to departments, products and services. Such recording is preferably done on the basis of double entry system. 2. Cost system: Systems and procedures are devised for proper accounting for costs. 3. Cost ascertainment: Ascertaining cost of products, processes, jobs, services, etc., is the important function of cost accounting. Cost ascertainment becomes the basis of managerial decision making such as pricing, planning and control. 4. Cost Analysis: It involves the process of finding out the causal factors of actual costs varying from the budgeted costs and fixation of responsibility for cost increases.

5. Cost comparisons: Cost accounting also includes comparisons between cost from alternative courses of action such as use of technology for production, cost of making different products and activities, and cost of same product/ service over a period of time. 6. Cost Control: Cost accounting is the utilisation of cost information for exercising control. It involves a detailed examination of each cost in the light of benefit derived from the incurrence of the cost. Thus, we can state that cost is analysed to know whether the current level of costs is satisfactory in the light of standards set in advance. 7. Cost Reports: Presentation of cost is the ultimate function of cost accounting. These reports are primarily for use by the management at different levels. Cost Reports form the basis for planning and control, performance appraisal and managerial decision making. Objectives of cost accounting There is a relationship among information needs of management, cost accounting objectives, and techniques and tools used for analysis in cost accounting. Cost accounting has the following main objectives to serve: 1. Determining selling price, 2. Controlling cost 3. Providing information for decision-making 4. Ascertaining costing profit 5. Facilitating preparation of financial and other statements. 1. Determining selling price

The objective of determining the cost of products is of main importance in cost accounting. The total product cost and cost per unit of product are important in deciding selling price of product. Cost accounting provides information regarding the cost to make and sell product or services. Other factors such as the quality of product, the condition of the market, the area of distribution, the quantity which can be supplied etc., are also to be given consideration by the management before deciding the selling price, but the cost of product plays a major role. 2. Controlling cost Cost accounting helps in attaining aim of controlling cost by using various techniques such as Budgetary Control, Standard costing, and inventory control. Each item of cost [viz. material, labour, and expense] is budgeted at the beginning of the period and actual expenses incurred are compared with the budget. This increases the efficiency of the enterprise. 3. Providing information for decision-making Cost accounting helps the management in providing information for managerial decisions for formulating operative policies. These policies relate to the following matters:

(i) Determination of cost-volume-profit relationship. (ii) Make or bpuy a component (iii) Shut down or continue operation at a loss (iv) Continuing with the existing machinery or replacing them by improved and economical machines. 4. Ascertaining costing profit

Cost accounting helps in ascertaining the costing profit or loss of any activity on an objective basis by matching cost with the revenue of the activity. 5. Facilitating preparation of financial and other statements

Cost accounting helps to produce statements at short intervals as the management may require. The financial statements are prepared generally once a year or half year to meet the needs of the management. In order to operate the business at high efficiency, it is essential for management to have a review of production, sales and operating results. Cost accounting provides daily, weekly or monthly statements of units produced, accumulated cost with analysis. Cost accounting system provides immediate information regarding stock of raw material, semifinished and finished goods. This helps in preparation of financial statements. COST REDUCTION: In recent months, our industry has experienced unforeseen financial pressures as a result of the economic downturn impacting our patient volumes, operating income and investment income. The proper response is to lower our operating expenses. This is not likely a transitory situation, and ultimately we need to learn how to operate profitably under our Medicare reimbursement. The lack of a well planned and executed expense reduction plan may well result in catastrophic financial and operational difficulties. What to do? Consider these perspectives: 1) Transparency: Share your financial data routinely with your management, staff, physicians and the community, and not just your board. Include state and national comparative data. Most of your constituents are likely not aware of industry trends. 2) Lead by Example: Executive management should reduce their expenses first before asking others to do so, and need to publicize your reductions. 3) Phased and Flexible Approach: Since we do not know, and can not anticipate, what the future may hold, a multi-phased approach communicated in advance will prove to be much more effective.

It also will allow the organization to know what may occur next as they understand the ongoing financial performance. 4) Incentives: Consider an incentive plan for associates and management if your cost reduction plan goals are reached. Front load your incentive plan for associates rather than management to boost staff morale. Use a sliding scale incentive based on reaching the stated goals for expense reduction. Build in the incentive plan cost as part of your expense reduction plan. 5) Communicate, Communicate, Communicate: Develop a comprehensive ongoing plan for your Board, physicians, staff, and community. Clearly state the why, what, where and how you plan to reduce your expenses. 6) Minimize the impact on your staff: To the extent possible, avoid layoffs and wage reductions. Utilize wage delays or freezes, minimize overtime, evaluate open positions, rethink your benefits and variable staff departments presently not obligated to do so. 7) Explore creative ways to reduce expenses: Review and reduce the expenses in all of your contracts. Demand price reductions, especially with physician preference items. Reconsider departments that have outsourced to third parties. Cut the hours for your medical directors. Consider physician extenders in your hospitalist program. Evaluate your community benefit expenses if your operating income is below your budget. Reduce operating hours for outpatient services. Look at and consider everything. 8) Revenue enhancement: It is easy and more fun to raise revenue than to cut costs. Look at raising prices if feasible. Check on your physician loyalty for additional referrals. Market the high margin services. Consider and evaluate initiating new services and closing non-profitable services

OUTSOURCING: Hospitals work 24X7 and this continuous operation requires uninterrupted energy/power supply for suitable functioning. Energy costs involve a high per cent of overall operating costs of a hospital and many times this expenditure is overlooked or there are no systems or processes to monitor the efficiency. Heres reviewing some aspects to save energy.

Healthcare is the second largest sector after retailing, in fact healthcare is one of the fastest growing sectors in India. The healthcare spending is set to double every five years till 2020. As per the Ministry of Power, Government of India, there is a huge potential of energy savings in hospitals and health care institutions. Hospitals generate a large amount of waste as well as indulge in wasteful use of energy, and therefore it is important to understand the energy/power spend per bed per day. If energy conservation measures are adopted then there are possibilities of contributing to the bottom-line of the hospital. Therefore, sthere is a lot of awareness in the world about green hospitals and many new hospital buildings are incorporating such aspects. Green hospitals/buildings provide better day lighting and access of views of good landscape; good indoor thermal comfort and good interior quality help in faster recovery of patients and also boost the working environment for the staff. It also helps the hospital in brand building. Focus factors The problem is with the old hospitals that are not designed in an energy efficient manner, and in such hospitals power and water costs can be significant. Management that focusses on all aspects such as patient care, patient delight, hospital brand, happy and motivated workforce culminating in to the top line and bottom-line also need to understand the importance of energy management. Hospitals worldwide are under mounting pressure to do more with less to provide superior patient delight while controlling costs and eliminating waste. Escalating energy, infrastructure and manpower cost is a great concern for every hospital. The role of energy-dependent technology is growing each day. Hence, healthcare managers must take new and creative steps for sustainable business goals. With the initiatives mentioned above, it should be possible to reduce a minimum of 10 per cent in electricity/energy consumption. Challenges faced by hospitals

Availability of reliable power, ie, if there is load shedding it should be at known times, not at any uncertain time of the day so that the hospitals can be prepared There are two types of energy loads: Peak & non peak loads. The former is when all the large energy consumption systems are operating at the same time; for example, AC, OT, CT

/MRI machines, incinerators, etc. Non peak is when only some of these systems are working. Options to use gas fired boiler/solar heater need to be explored to reduce the load and costs Stringent Indoor Air Quality (IAQ) levels must be maintained in Operating Rooms (Ors), Emergency Rooms (ERs), Intensive Care Units (ICUs) and laboratories. These rooms require 20-30 air changes per hour. IAQ must be strictly regulated for temperature, humidity and quality. This increases the need for proper heating, cooling and fresh air intake High Efficiency Particulate Air (HEPA) filtration is required to prevent the spread of diseases (also known as nosocomial infection) in the ventilation system. HEPA filters that achieve 99.7 per cent efficiency place greater electric demand on fans for proper air circulation Certain types of rooms have special HVAC pressurisation requirements. ORs, ERs and ICUs, generally run over pressure for protective isolation from airborne infection. Quarantine rooms require negative pressure (UV lights) for infectious isolation and the control of diseases Domestic hot water is required to be heated to 130 F to kill legionella bacteria. The water temperature has to be lowered to 105 F before use Laundry facilities and kitchens can consume 10-15 per cent of the buildings energy, increasing the need to more closely monitor hours of peak demand from these sources Some rooms require climate control set at 60 F to accommodate the adhesive cement used for orthopaedics, which tend to set too quickly in warmer temperatures

How to overcome these challenges? Invest in energy use assessment. Energy management firms have software / analysis tools that will help hospitals to understand what their energy consumption patterns are. Work with an energy management specialist company to install metering and energy management systems; Schneider Electric is one such company. These companies will ascertain the energy usage pattern, benchmark with the world standard, and identify the saving potential. Do not waste much time with the finance team to do such cost-cutting measures since that is not their forte. Unfortunately, many a times hospitals focus too much on clinical management, financial management and do not give much importance to marketing, branding and also energy management. However, there are exceptions where the hospital management is able to have a balanced score card on all the fronts. Outsourcing has become a $4 trillion-a-year business, according to Dun and Bradstreet. Outsourcing potentially enables businesses to reduce costs and concentrate on core competencies while transferring noncore business processes, thereby providing more effective goods and services elsewhere. But is it a boon or a boondoggle? Many healthcare organizations are finding that diverse functions can be outsourced without affecting the core competency of health care. Although outsourcing was once primarily used to provide noncore services such as dietary, housekeeping, and security, it has extended to top executive jobs, clinical areas (e.g., nurse and physician staffing), and a growing number of business functions,

including coding and billing. Functional outsourcing involves a single function that solves one problem in a facility, such as outsourcing transcription or coding. Departmental outsourcing is much broader in scope and may include reengineering of a department, such as the health information management department or the payroll department. Strategic outsourcing involves more than one department, such as the human resources division (including payroll, benefits, hiring, and firing) or the business office (including chargemaster, insurance, admissions, and collections). There is no general consensus on the optimal mix of in-house and outsourced functions. Each organization should assess its own needs and determine for which functions benefits outweigh the concerns discussed below. Benefits of Outsourcing Outsourcing offers many potential benefits to healthcare organizations. One major benefit is providing enough staff to operate the facility. Altoona Hospital in Altoona, Pa., for example, successfully outsourced some of its radiology readings to India. Outsourcing routine X-rays and scans helped to stabilize the heavy workload for the hospital's in-house physicians. The number of nighttime radiology calls was swamping the seven on-call radiologists at the hospital. In addition, transferring routine paperwork off-site allowed in-house staff to concentrate on core competencies, such as improved patient care, and to spend more time practicing medicine. Another major benefit is the cost savings resulting from reducing the in-house full-time and/or temporary staff and the training associated with that staff. In addition, healthcare organizations can invest capital in new medical equipment and supplies rather than in staff and/or technology to complete core business processes such as billing and coding. For example, an Evanston Northeastern Healthcare executive in Highland Park, III., estimates that the organization's outsourcing contract will save it about $400,000 annually. By outsourcing coding, Hennepin County Medical Center in Minneapolis reduced its discharged not final billed due to uncoded records from $13 million to $4 million. Its outpatient unbilled encounters also improved from more than $2 million to less than $800,000. Concerns Regarding Outsourcing Outsourcing does carry risks. Several hospitals have been stripped of their tax-exempt status due to the extensive use of outsourcing, that is, having for-profit entities operating inside a tax-exempt facility. Provena Covenant Medical Center in Urbana, Ill., received a $1.1 million property tax bill after its status changed. Another concern is potential declining employee morale and the loss of community support due to layoffs associated with outsourcing, especially when unemployment is high in the United States. A healthcare organization considering outsourcing must be assured that the vendor can provide credentialed, knowledgeable, properly trained staff. Liability must also be addressed. No one knows if liability is going to fall on the healthcare organization that is doing the outsourcing, the referred physician, or the third-party provider. Other factors at issue include cultural barriers, differing

management styles, potential political instability, time zone differences, and labor pool quality that may add real costs through resulting management inefficiencies. A key ethical consideration is whether a healthcare organization should inform its patients that their information is being outsourced. Most healthcare organizations do not tell their patients that some services are outsourced. Other professions have dealt with this issue by requiring such notification. In late 2004, the American Institute of Certified Public Accountants issued several ethics rulings, one of which requires its members to inform clients, preferably in writing, of the transfer of personal information to a third-party supplier before the transfer takes place (see www.aicpa.org/download/ethics/ 2004_1028_outsourcing.pdf). However, the rule does not require a member to inform a client when he or she uses a third-party service provider to provide administrative support services, such as record storage or software application hosting services, to the member. Confidentiality and security of the information being transferred to the outsourcing firm is of great significance. Even with strong security measures, risks such as identity theft can occur. The information transferred is highly private, including name, address, and Social Security number. Many argue that the risk of potential mishandling of a client's personal information is far too great even though the benefits of cost savings and turnaround time are substantial. The Health Insurance Portability and Accountability Act of 1996 was enacted to improve the productivity of the American healthcare system and to provide federal regulations for the security and confidentiality of health information. HIPAA requires entities that provide services to healthcare organizations, such as outsourcing vendors, to keep confidential the information they receive. These entities, which are considered business associates, include vendors who process insurance claims, service copier machines, transcribe medical dictation as contract work, repair biometric devices, or provide equipment or supplies. HIPAA's privacy regulation requires that contracts with business associates contain specific provisions, such as what disclosures of information and permitted uses of the information the business associate may make. Contracts must also require that the business associate does not further disclose the information unless permitted by law. If a business associate uses a subcontractor, the subcontractor must abide by the same provisions as the original business associate. The contract should also specify that if a breach occurs, the contract will be terminated. In addition to meeting HIPAA requirements, contracts with vendors should address indemnification, which can protect providers from lawsuits by third parties who allege injury from the misuse of the information. Providers should also insist upon some internal oversight so that they can monitor the work of the vendor. Despite precautions, breaches can occur. In 2003, the University of California-San Francisco Medical Center forwarded a portion of its transcription to its vendor, which has 15 subcontractors nationwide. UCSF had been working with the vendor for more than two decades without any problems. In this case, however, the work allegedly was subcontracted twice more, finally going out of the country. A payment dispute among the subcontractors led to a threat--never carried out--to expose patient records. No breach of patient privacy occurred, although the situation illustrates the

major risks related to contracting out work without diligence in determining who has access to the information. Eager to satisfy security fears, foreign outsourcers are turning to their governments to provide some assurance to potential customers. The Ministry of Information Technology and National Association of Software and Service Companies in India are drafting a data protection law to respond to privacy concerns of offshore clients. Pakistan has drafted the Foreign Data Security and Protection Act of 2004, aimed at providing protection and safety of foreign data that are processed in Pakistan.

TPA: advantages &disadvantages: A Third Party Administrator (TPA) is an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity.[1] This can be viewed as "outsourcing" the administration of the claims processing, since the TPA is performing a task traditionally handled by the company providing the insurance or the company itself. Often, in the case of insurance claims, a TPA handles the claims processing for an employer that self-insures its employees. Thus, the employer is acting as an insurance company and underwrites the risk. The risk of loss remains with the employer, and not with the TPA. An insurance company may also use a TPA to manage its claims processing, provider networks, utilization review, or membership functions. While some third-party administrators may operate as units of insurance companies, they are often independent. Third party administrators also handle many aspects of other employee benefit plans such as the processing of retirement plans and flexible spending accounts. Many employee benefit plans have highly technical aspects and difficult administration that can make using a specialized entity such as a TPA more cost effective than doing the same processing in house Third party administrators are prominent players in the managed care industry and have the expertise and capability to administer all or a portion of the claims process. They are normally contracted by a health insurer or self-insuring companies to administer services, including claims administration, premium collection, enrollment and other administrative activities. A hospital or provider organization desiring to set up its own health plan will often outsource certain responsibilities to a TPA. For example, an employer may choose to help finance the health care costs of its employees by contracting with a TPA to administer many aspects of a self-funded health care plan. TPA benefits include:

Web based system. Work at the office, at home, or on the road if need be. Updates are automatic. You always have the latest version. Office network and software problems are eliminated. Quick search feature allows you to switch between employees of different clients fast and easily. The superadmin.com system is a rule based system allowing you to customize each plan to fit the needs of the client. Automated reimbursement process - build the reimbursement schedule for each plan and the system automatically runs when it is scheduled to (daily, weekly, bi-weekly semi-monthly or monthly). Employer's receive an email notice when reimbursements require their funding approval automatically. The system is customized with your logo as well as any client logo's you wish to upload. Employer's have 24/7 access to reports. Employee's can follow claims from start to finish.

Integrated TSYS debit card offers hands free real time claim processing. The Insurance industry in India has experienced a sea change since emergence of private participation. Health insurance is a mechanism to finance the health care needs of the people. To manage the problems arising out of increasing health care costs, the health insurance industry had assumed a new dimension of professionalism with TPA. The core service of a TPA is to ensure better services to policyholders. Their basic function is to act as an intermediary between the insurer and the insured and facilitate cash less service at the time of hospitalization. Introduction of TPA benefits both the insured and the insurer in the healthcare industry. While the insured benefits from the 24 x 7 service, the insurer is benefited by reduction in administration cost. Policy holders welcome introduction of TPA since they receive enhanced facilities at same cost. Once the policy has been issued: All the records are passed on to the TPA and all the correspondence of the insured remains with the TPA. TPA issues identity cards with unique identification numbers to policy holders and handles all issues related to their claim settlements. TPA runs a 24-hour toll-free number, which can be accessed from anywhere in the country. They have full-time medical practitioners under their employment who take decision whether the ailment is covered under the policy or not. From the perspective of the insurance companies, the TPA benefits them by: Bringing down their claim ratio by reducing false claims as well as standardizing treatment cost. Playing a role in availing data for actuarial calculations, because they are the recipients of morbidity data that are linked with individual characteristics such as age. One of the disadvantages of cashless facility is that it increases the capacity of insured to incur higher costs at the time of illness, and therefore there is a tendency to inflate the cost of treatment. This has been limited to a certain extent with the presence of co-payments in which 10 percent of the expenses are paid by insured and 90 percent are paid by the insurance company. The reason why insurance premiums may go up in near future would be the inability of TPAs to make enough profits, owing to the low percentage of commission.

The Insurance Regulatory and Development Authority of India (IRDA) and the ministry of health should jointly ensure that the TPA plays an active role in community health insurance schemes as well as the universal health scheme. The need for cashless facilities for communities is more significant than corporate or ordinary households, but there is as yet only a limited use of TPA in such schemes. Today the insurance industry across globe is facing challenges of dwindling premium receipts and rising operating costs. Increased cost per member/policy holder and higher loss ratios has resulted in making it extremely important for the insurance carriers and the third party administrators to look for cost-containment options to improve the diminishing bottom-line and operational efficiencies. Benefits of TPA to the insurance world include: Faster and focused claims management Lower overhead cost and reduced cost of claim management Immediate access to highly trained claim administrators Improved control over claims outcomes Provision of cashless services at much ease Safeguarding of customer relationships Protection of brand reputation. Control of possible frauds by the private healthcare providers DISADVANTAGES: 1. Risk assumption. The employer assumes the risk between the expected claim level and the Stop Loss coverage level. 2. Provision of services. The employer must provide for the services an insurance carrier would normally provide. This is accomplished by contracting with a TPA. 3. Asset exposure. The employer's assets are exposed to any liability as a result of legal action against the self-funded plan. 4. Claim fluctuation. Monthly claim costs can vary, verses fixed monthly premiums on a fully insured case.