Critical Points in Healthcare Financial Management for Practice Framework

Unique Features of Healthcare Finance Management

Capital budgeting practices of the healthcare industry have vital features directly contrasted to other sectors. Mukherjee et al. (2016) examined three main issues; the efficiency of For-Profit (FP) hospitals relative to Not-for-Profit (NFP) hospitals and found that FP operates at greater efficiency than NFP. For-Profit firms buying NFP’s are the primary reason for the growth in multi-hospital systems in the U.S., and the acquisitions themselves contribute to more efficient Capital Budgeting practices.
Working Capital and Profit. Again, cash flow is not profit. Waiting until after formalizing operating cash flow is not the time to implement your Capital Budgeting. The opposite needs to occur. Your project revenue, if performed accurately and truthfully, will indicate your cash flow and forecasting occurs in the development of your Capital Budgeting process. Not profitable is sometimes the purpose of an organization, specifically in NFP. Mukherjee et al. (2016) discovered that unique to healthcare are differences in Investor-Owned (IO) versus NFP entities or community municipality government organizations. They found the proportion favors NFP to FP 85% to 15% roughly. FP has a clear objective of increasing value to the organizational shareholder versus fulfilling its overall service mission. NFP is more complicated in that no dividends or capital gains are paid. As a result, NFP must manage the surplus to remain liquid and solvent. The decision-making required would differ and create differences in goals; this is suited more appropriately in managers and administrators.

More problematic are cash flow estimates, which can be difficult due to third-party reimbursement complications. The decision shifts more to cost-benefit, which can hide cash flow. Secondly, in managed care, with capitated reimbursement systems limiting cash inflow, firms could find themselves in deficits. Payne (2015) addressed this problem and believes the solution boils down to clearly defined roles for provider and manager. Managers in charge of revenue financing or using fixed-rate debt vehicles can help by mitigating the time value of money. Savvy managers can use swap debt or bond debt, which could be forward starting, in which the cash flow does not start until it is required.

Long-term and scale. Evaluation of the effects long-term is similar in healthcare; however, in the selection stage, looking at NPV (or IRR), healthcare typically prefers Discounted Cash Flow (DCF). Interestingly, Mukherjee et al. (2016) concluded choosing computations which consider the time value of money and determining the cash flows showing payback in less than the life expectancy of the project can give useful information, however; not knowing the payback time may be an essential determinant which should not be missing. The concern is that Practitioners may not be aware of this information. The authors also described the selection stage reveals how dominant the medical staff is in the decision-making of budgeting. A typical mistake is to see your practice a smaller scale to large healthcare organizations (Mukherjee et al., 2016). Although this is true concerning the volume of revenue, it is no different concerning planning for the success in Capital budget planning.

Healthcare Financial Managers. Another unique feature in healthcare is the reliance on qualitative factors for capital budgeting decisions, and if not on qualitative, then based on the availability of funds and need. The managers are the decision-makers, and looking at top factors are facility needs, physician demand, employee safety, community needs, and enhanced marketability. Providers who have a central role in decision making, may not be looking at the hurdle rate or the IRR. Using the required rate of return solely, may not associate all the risks involved. Mukherjee et al. (2016) showed a 68% of firms are not looking at risk for decisions.
When medical staff participates in decision-making, it could be considered akin to the production and sales staff of a corporation making those decisions rather than the manager. This custom takes away a hospital admin and manager office as an authority, which is typical and intrinsic to comparable industry roles. Hospitals have two ways to respond, which are with a vertical merger, or diversification of non-hospital healthcare model purchase, and horizontal mergers such as multi-hospital systems. Mostly FP acquired NFP and grew at a 0.95% compound rate annually. Both vertical and horizontal mergers are likely to increase the financial decision-making with their efficient acquisitions (Mukherjee et al., 2016).