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Financial Management in Health Care

  • 10 Pages
  • Published On: 05-10-2023

Introduction

Whenever someone hears a term health care, the first thing that comes into the mind is something related to medical care solution and services. In the present era, several kinds of health care organizations are operating and making the entire health care system extremely complex. Due to complex human behaviour, the physical maintenance of facilities and science of health care, health care industry is considered as a laggard in relation to emerging best practices in comparison to most of the other industries. Same goes with financial and accounting requirements (Gapenski, 2012). This subject is also as complex as the health care industry. Historically, local government and non-profits institutions were in charge of controlling health care organizations. Further, due to reimbursement policies and lack of industry transparency that maintains the desired margins regardless of the cost involved, these institutions were less concerned about the performance and efficiency of the health care organizations. However, with the increasing intricacy, accounting, and financial management has become a vital part of health care organizations (Ward, 1994).

Earlier accounting and financial management were limited to finance department, but now the things have changed. In the current business environment nurse managers, pharmacy director, and operating room managers are all responsible for maintaining the financial position and health of the institution. The operating room manager is responsible for maintaining the rate of a patient in the operating room, the pharmacy director is responsible for financial decision making, and the nurse managers are responsible for maintaining financials of their respective units (Finkler, Ward and Calabrese, 2011). Nowadays it is mandatory for all the health care managers and executives to have a complete understanding of accounting and financial management. Although, role of health care professionals does not include duties of the chief financial officer, yet they make certain financial decisions on a daily basis, and thus are responsible to effectively communicate the same to the financial manager.

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Need of Financial Management in Health Care Organizations

The white paper "Working for Patients" published by Department of Health (1989) proposed quasi-market reforms to reconfigured the health sector and thus erected organizational boundaries between providers and purchasers of services. This has helped NHS to unify its system and now it has increased the accountability of providers and has greater control over the allocation of resources. However, many times health care organizations such as NHS have to deal with unpredictable situation such as infection that can put their budgets at risk. In such situations, hospitals have to absorb cost associated with such diseases. It is so because such costs are not covered by the contracts. Further, the additional diagnostic and therapeutic costs associated with the outbreak are to be borne by the health care organizations. (Crawshaw, Allen and Roberts, 2000).

In addition to above, if squeal of infection is not taken into care, it will not only affect the relationship between purchasers and providers, rather it will have its adverse impact on community services, nursing homes and individuals as well. In such situation it is essential to have a good infection control policy that can reduce the risk of infection. Such policies help the management to decide how much they should invest on infection control, so that it has minimal impact of the parties associated with the health care organizations. In this regards, there is immense need to integrating accounting with health care organizations (Zelman et. al. 2013).

Goals of Financial Management in Health Care Organizations

For most of the organizations, the ultimate goal of financial management is still just wealth maximization and profit maximization, as literally profit is the bottom line. However, in the case of health care organizations, they have many other goals, for example, delivering the best quality health care services, improving the well-being and health of the entire society, and minimizing mortality and morbidity (Berger, 2014). Thus, for health care organizations, profit making is not the ultimate goal, though they need to generate profit to ensure financial sustainability of the organization. Contrary to this, on the personal front, managers are more concerned regarding salary hike and other benefits. In the case of for-profit organizations, such maximization is related to maximization of return on equity (ROE), return on investment (ROI), return on asset (ROA) or return on net asset (RONA) (Kurunmaki and Miller, 2008).

From the financial management outlook, profitability and viability are the two overriding goals. Organizations want a perfect synchronization between profitability and sustainability. Many times, companies can reap profits, but they are unable to achieve sustainability. Thus, to achieve sustainability in the market, it is essential to attain profitability and viability (Penner, 2004).

Profitability

As stated above, most of the health care organizations do not have profit maximization as their sole goal, yet profits are desired by these organizations to achieve their other objectives. For both types of health care organizations, for-profit and not-for-profit, making a profit is essential for expansion (McLean, 2002). To have a wider access to health care, they need to expand and for this, they need to realize profits from their operations. In addition to this, they need to earn profits for some of their patients who are not capable of bearing medical treatment cost and need medical services at subsidized rates. Further, health care organizations need to be up-to-date with the latest technological advancements to deliver quality services (Courtney et. al. 2004). Moreover, health care organizations need to remain prepare for any emergency situations. Thus for such unforeseen situations also, they require generating profits. Finally, profits are also needed by for-profit and not-for-profit health care organizations for renovation and replacement of equipment and building, so that they can cover some of those higher costs (Cleverly, 1989).

This shows that profits are one of the major goals of health care organizations, but it is not their ultimate goal. Their eventual goal is to deliver high-quality health care services. Still it should be kept it mind that profits are required to achieve the final objective. Further, profit levels are linked with the risk associated with the investment. Higher the risk, higher is the profit and vice versa. However, in the case of health care organizations, if two projects are yielding same health benefits, the project with higher profit or lower risk will be selected. Contrary to this, if the health benefits are not same, then through decision-making tools, such as capital budgeting, management decides on which project it should invest (Chua and Preston, 1994).

Viability

None of the health care organization desires to go insolvent. Therefore, it can be said that financial viability is one of the crucial goals of financial management, and the most effective tool to measure this objective is by evaluating solvency and liquidity. Liquidity can be measured as a number of liquid assets, that is, cash available for an organization to meet its obligations in near future. It also includes those assets that can be easily converted into cash by the organization. Thus, if an organization has sufficient cash to meet all its obligations in the short-term, generally one year or less, the organization is said to be liquid (Ahadiat, 2002).

On the other hand, solvency is a similar concept to viability, but from long term perspective, that is more than one year. It considers whether the organization is capable enough to generate cash over the next 5 to 10 years to meet all the cash requirements of the firm. In the case of health care organization, it is essential for them to plan for proper solvency well in advance as they will require an enormous amount of cash in future and it will need a long period for cash generation. Most of the times it has been seen that whenever any organization experiences liquidity crises, the root cause of the crises come out to be inadequate long-term solvency planning in early years of its operations (Kantola, 2014).

Thus, on the basis if above discussion on can say that maximizing solvency and liquidity should be a good strategy for the firms. However, it is not completely true. It depends on company to company. There is a trade-off between profitability and viability. In case, if manager aims for higher profit, he will invest most of the cash in projects yielding a higher return, rather investing in T-bills, money market funds, riskless securities. This will increase the profitability of the company, but at the same time, the organization is more prone to liquidity crises. On the other hand, maintaining a higher amount of liquidity will reduce the profitability of the organization (Arnold et. al. 1994).

In the case of health care organization, there is similar kind of trade-off between viability and providing health care services. That is, if the patient is not able to pay for any health care service, it might not be always possible for the health care organization to provide all health care services. Though health care organizations are expected to provide charity care, it should be in limits (Wilson, 2008). If a health care organization does not consider for financial implications and continues to provide unlimited charity care, it will significantly affect its viability or continued existence. If a health care organization wants to continue its operations for a longer period, it has to temper its desire for charity care. Greater amount of charity care has more negatives than positives for the patients. Thus, organizations need to maintain the trade-off between charity care and viability (Rivers and Glover, 2000).

Role of Accounting and Financial Management in Health Care

Organizations

  • Evaluation and Planning: The first and foremost role of financial management is determining the efficiency of current activities and planning for future. It is essential for all the organizations to measure the effectiveness of its operations so as to decide whether to continue with the existing plans or devise new strategies. This can be done with the help of ratio analysis. On the basis of this, management and investors can compare the financial position of the organizations and can corrective measure if required (Crawshaw, Allen and Roberts, 2000).
  • Long Term Investment Decision: Decisions related to capital investment are more important from the senior level perspective. Although, it is the senior management that takes decisions related to investing in any projects, managers at all levels must also give important to it. Investment decision can be related to the acquisition of new equipment, facilities, and land. In this regards, capital budgeting proves to be effective tools for the health care organizations as through it management can select between the two projects and can determine the feasibility and viability of the project (River, 2001).
  • Finance Decisions: Health care organizations need to invest frequently in new equipment and modern technologies. For this purpose, they need to raise funds for supporting their operations. Thus, they need to determine whether to make use of internal funds or should borrow funds from outside. Thus, organizations need to make decisions on the basis of their debt and equity capital and capital structure (Gapenski, 2012).
  • Working Capital Management: To ensure operational effectiveness and to reduce the cost of operations, it is essential for the health care organizations to manage their short-term assets such as cash, inventories, receivables, securities and so on. This can be achieved by the management by determining the liquidity of the organization (Frosheiser and Kleiner, 1992).
  • Contract Management: it is necessary for the health care organizations to monitor, sign and negotiate contracts with third-party players and managed care organizations. Although, this is the responsibility of the manager of the finance department, yet managers of all the levels must also involve in such activities so as to implement effective operating decisions (Chua and Preston, 1994).
  • Financial Risk Management: Any transaction that involves the transfer of money part to other is prone to several kinds of risks. Thus, financial management plays a significant role in managing such risks in health care organizations.

Difference between Non-Profit and For-Profit Accounting

As the names suggest, non-profit and for-profit organizations differ on the basis of their ultimate goals. For-profit organization's ultimate goal is profit maximization and passing those benefits to the company owners and shareholders in the form of profits and dividends, on the other hand, it is not the case with a non-profit organization. In the case of a non-profit organization, since the organization does not have any owner it does not go for profit maximization; rather its ultimate goal is maximizing revenues while minimizing costs. Thus, non-profit organizations ensure greater revenue than costs. This ensures that, by maximizing revenue, they can achieve their major objective of serving the society needs (Kurunmaki and Miller, 2008).

Tax Exemption

In the case of a for-profit organization, management needs to pay taxes out of their net income; however, it is not the case for the non-profit organizations. They are exempted from it. Since non-profit health care organization works with an aim of providing better facilities to the society at a lower price, it brings a difference in the accounting practice of the two types of organizations (Dong, 2015).

Balance Sheet

All for-profit health care organizations need to prepare a balance sheet showing owners equity, assets, and liabilities. However, it is not so for the non-profit organizations as they do not have any owner. Their balance sheet only consists of assets and liabilities section (Rivers and Glover, 2000).

Income Statement

Like balance sheet, a for-profit health care organization needs to prepare its income statement stating revenues, gains, expenses, and losses. It is done with an aim to evaluate the financial performance of the organization. This directly has its impact on the share price of the stock and company valuation. On the other hand, non-profit health care organizations do not need to prepare such statement. Instead of preparing a list of revenues, gains, expenses, and losses, non-profit organizations prepare a statement of activities performed in each year.

Challenges faced by Health Care Finance

  • Current organizations are finding it difficult to develop a long-term business plan for the integration of their physician
  • Organizations are not able to effectively implementing substantial and sustainable cost-containment strategies (Arnold et. al. 1994).
  • To prepare a clear strategy for recruitment, retention, and training
  • To align IT with alteration in care delivery structure and payment
  • In redesigning its delivery system and care, process to bring sync between facility components of care and professionals
  • Difficulties in micro financing approach, regional health initiatives and employer relationships
  • To deliver online care services to the consumers (Kantola, 2014).
  • To deliver better services and resources outside the traditional hospital settings
  • Difficulty in seeking merger partners to increase size, improve efficiency and access to capital

Key to Success

  • Software Application: Advanced accounting software must be use which has improved cost data integrity, minimize ongoing maintenance, wide access, and use
  • Implementation Approach: Implementing accounting solution is an art. It must be flexible.
  • Personnel: For successful implementation of accounting into health care organization, experience, and knowledge are essential for successful execution (Cleverly, 1989).
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Conclusion

From the above discussion it can be concluded that for most of the organizations, the ultimate goal of financial management is still just wealth maximization and profit maximization. However, for health care organizations, profit making is not the ultimate goal, though they need to generate profit to ensure financial sustainability of the organization. Further, it can also be said that for both, for-profit health care organizations and non-profit organizations, there is a need for different accounting practice. This is because of the difference in their working. Finally, health care organizations are finding it bit difficult to implement accounting and financial management in all the aspects. However, proper knowledge and experience will help the management in overcoming this challenge.

References

  • Ahadiat, N. 2002. Demand for college graduates and attributes health care organizations seek in accounting recruits. Career Development International. 7 (3). pp.134-141.
  • Arnold, J. P. et. al. 1994. The Contemporary Discourse on Health Care Cost: Conflicting Meanings and Meaningful Conflicts. Accounting, Auditing & Accountability Journal. 7 (3). pp.50-67.
  • Berger, S. 2014. Fundamentals of Health Care Financial Management: A Practical Guide to Fiscal Issues and Activities. John Wiley & Sons.
  • Chua, F. W. and Preston, A. 1994. Worrying about Accounting in Health Care. Accounting, Auditing & Accountability Journal. 7(3). pp.4 -17.
  • Cleverly, O. W. 1989. Handbook of Health Care Accounting and Finance. Jones & Bartlett Publishers.
  • Courtney, M. et. al. 2004. Health Care Financial Management. Elsevier Australia.
  • Crawshaw, S. C. Allen, P. and Roberts, J. A. 2000. Managing the risk of infectious disease: the context of organisational accountability. Health, Risk & Society. 2. pp.125-141.
  • Dong, N. G. 2015. Rising Labor Costs, Earnings Management, and Financial Performance of Health Care Providers around the World. International Best Practices in Health Care Management. 17. pp.117-135.
  • Finkler, A. S. Ward, M. D. and Calabrese, T. 2011. Accounting Fundamentals for Health Care Management. Jones & Bartlett Publishers.
  • Frosheiser, J. T. and Kleiner, H. B. 1992. Effective Health Care Financial Management: A Home Health Care Perspective. International Journal of Health Care Quality Assurance. 5 (1).
  • Gapenski, C. L. 2012. Healthcare Finance: An Introduction to Accounting and Financial Management. Health Administration Press.
  • Kantola, H. 2014. Harmonization of management accounting in health care. Journal of Accounting & Organizational Change. 10(3). pp.338-354.
  • Kurunmaki, L. and Miller, P. 2008. Counting the costs: The risks of regulating and accounting for health care provision. Health, Risk and Society. 10. pp.9-21.
  • McLean, R. 2002. Financial Management in Health Care Organizations. Cengage Learning.
  • Penner, J. S. 2004. Introduction to Health Care Economics & Financial Management: Fundamental Concepts with Practical Applications. Lippincott Williams & Wilkins.
  • River, A. P. 2001. Managing costs and managing care. International Journal of Health Care Quality Assurance. 14 (7) pp.302-307.
  • Rivers, A. P. and Glover, H. S. 2000. Quality in finance of health care: the unaddressed imperative. International Journal of Health Care Quality Assurance. 13 (3). pp.134-139.
  • Ward, J. W. 1994. Health Care Budgeting and Financial Management for Non-financial Managers. Greenwood Publishing Group.
  • Wilson, L. A. 2008. Financial Management for Health-System Pharmacists. ASHP.
  • Zelman, N. W. et. al. 2013. Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications. John Wiley & Sons.

With the help of above discussion, I could mention that the patient within the health and social care not only face the physical problems but sometimes the mental and psychological level problems are also associated with them. It could create troubles for both patients and service providers. In such situation the fear and stress level of both the parties could be increased. To deal with such circumstances, the support is required from the nursing staff. The implementation of proper strategies could help immensely in eradicating the psychological problems. Overall this report is helpful in gaining the intellect related to managing the complex situations in health and social care.

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