Financial Management of Healthcare Organizations

The Healthcare industry is affected by a high level of dynamism. With the advent of technology and emergence of information science, it is facing drastic environmental changes. At the same there major policy changes that make the operation in the field all the more complex. Healthcare organizations have to deal with a variety of issues in face of this changing environment. To add to it, healthcare costs are on the rise and the reimbursements declining. Today, financial challenges are the top concern of majority of hospital CEOs.

Further there are raising concerns regarding reimbursements, bad debt losses, Medicare and Medicaid.

We know that financial management is a decision science. There has been evidence that there are well-developed financial indicators that can be used by boards and management, to improve the organizations' financial management. (research conducted by flexmonitoring)

The following indicators had been used for the research:

Financial viability indicators measure the ability to generate the financial resources required to replace assets and acquire new technology to meet increases in service demands.

Liquidity indicators measure the ability to meet cash obligations in a timely manner.

Capital indicators measure the ability to meet long-term debt obligations and how capital assets (equipment) are being maintained.

Efficiency indicators measure the ability to provide services at the expected cost and to minimize administrative costs.

Human resources indicators measure the effectiveness of human resource management and practices.

The results show that the organizations that made use of these indicators became more profitable, ensured increased utilization of beds and reduced their use of debt over time.

However, there are other difficulties and complexities that prevent the implementations of such proven methods to efficiency. Attempts to increase involvement of clinicians in finance management practices, budgeting, costing and cost management, have met with a constant reluctance. Moreover, majority of the healthcare organizations belong to the non-profit sector. There are limitations to incentive systems that present within the non-profit or government funded healthcare. Systems need to be tightened more so that loss-makers do not continue to operate. This will curb the recurrence of problems within the field. Implementing of better audits to diagnose past inefficiencies would ensure better future performance.

The marketplace for healthcare service is quite unusual with its third-party-payer system. This adds a profound complexity to the financial management of an organization. Attempts need to be made to standardize procedures and cut down the nonessentials. Government introduced third party payer system, Medicaid, Medicare and the policies regarding the same add to the inefficiency of healthcare organizations.

Healthcare organizations employ financial recording methods at will and this causes discord when it comes to budgeting and raising funds. The FASB has issued Accounting standards Update in order to make the financial records more simplified and easy to interpret and infer.

According to the most recent data by PricewaterhouseCoopers' Health Research Institute, the US spends $2.2 trillion on healthcare. Out of these around $500 billion can be saved from wastage. Doctors prescribe too many tests which are a complete waste of funds. Firms spend enormous amounts in claim forms, 'pre-certifications' etc. The incurred costs can be minimized by standardizing procedures and efficient use of technology. More often than not, the ER is used as the clinic. Data shows that a patient that can be treated for $70 in primary care, costs $700 for the same treatment in the ER. This needs to be corrected, both at the government policy level and internally within the organizations. The advent of technology and lack of efficient use of the same result in medical errors that are costing the industry $17 billion annually. Use of Information Technology and investing in proper training of professionals will lead to major savings for healthcare entities.

CFOs in healthcare entities can use significant research available to employ for their own firm and practice evidence based financial management. Studies show that using benchmarks and financial performance indicators can lead firms to operate at their highest level of performance. Watching out for key indicators such as cash flow margins, cash on hand will motivate to generate revenues. It will prevent reporting of deficits and overspends. Minimum and maximum limits should be set for debt service coverage and long-term debt capitalization. The Medicare output cost to charge ratio should be kept at minimal. These steps will prevent financial failure to a large extent.

Healthcare organizations should focus on improving the revenue cycle and on developing ways to access capital. Healthcare executives and managers need to utilize the power of accounting to make and mold appropriate financial behavior of firms.

It is true that accounting can be used to provide practical answers to increasing efficiency and decreasing failures for healthcare entities, whether it is a for-profit, not-for-profit or publicly-funded. It is also imperative that the design and operation of organizational control mechanisms in the healthcare field still needs considerable further development if effective financial management is to be achieved.