An organization’s financial structure is the mix of debt and capital employed by the management for purposes of financing its activities. In the healthcare sector, there are three main categories of organizations that provide health services. These categories are for profit, not-for-profit and government organizations. The categorization is based on organizational ownership and motive. Each type of organization has its own unique financial structure which is attributable to the financial environment it operates in. This paper examines three specific organizations, one in each category, and describes the financial structure, practices and policies unique to the category.
For-profit organizations include all health institutions that are operated with an intention of making profits. These institutions make money directly by providing healthcare services and selling medicine. These organizations are subject to the same health regulations like other health organizations and also standard reporting regulations for corporations. There is, however, a risk of a mismatch between profit maximization and health orientation. One theory explaining how private hospitals make money proposes that private hospitals maximize their profits by choosing a location that is closer to a neighborhood where more patients are covered by health insurance. This implies that private hospitals target service provision to a clientele which will guarantee profit. Horwitz (2005) proposes that private hospitals not only decide on their clientele but they also decide which services to provide based on how profitable they are.
The Ronald Reagan UCLA Medical Center is an example of a private health center. It is one of the five medical centers owned by the University of California. This medical center is located in Los Angeles and is the busiest of all five centers by daily patient visits. The five centers prepare one report with a breakdown of financial indicators, actual revenues, expenses, assets and liabilities for each center. The quarterly report for nine months up to 31st March, 2013 indicates that the center had total net assets worth $1,882,954,000. The center recorded an operating profit of $121,614,000. Part of its operating revenue comes from supplemental funds from government programs such as Medicare by the Federal Government and Medi-Cal by the State of California.
The center has a very high debt service coverage ratio, at 5.9. The debt to assets ratio of the center is also favorable, at 39.8%. This indicates a risk-averse capital structure which is meant to ensure financial stability, perhaps informed by the need for stakeholders to ensure that the center is stable enough to sustain itself and make profits. The center also enters into reimbursement agreements with third party payers, some of whom include insurance companies paying for bills of covered patients. The center also records changes in assets resulting from exchange of funds between the University and Health Systems Support. The comparative presentation of income between the current year and the previous year also indicates a focus of stakeholders on profitability of the entity.
The not-for-profit organizations are also known as non-governmental organizations (NGOs). They operate with a motive of providing charity services to the community. Their main focus is not profit, but provision of services that are not provided by either the for-profit organizations or the government. This charity focus makes non-profit institutions enjoy a tax exemption. There has, however, been a concern on the genuineness of the charity focus of some organizations. This has resulted in debates in congress which have led to the introduction of a revised version of form 990 which ensures better accountability of NGOs.
The Cleveland Clinic is a not-for-profit academic medical center located in Cleveland, Ohio. The Clinic has specialists in various fields. The clinic is a system of eleven hospitals, eighteen family health centers and several other specialized institutions. It provides charity care to those who are not able to pay for health services. The clinic receives its funding from various sources, including Medicare, Medicaid, commercial services and revenue from patients who can pay.
The audited financial statements for the financial year 2012 indicate that the clinic had total assets worth $10,205,403,000 and total liabilities worth $5,203,023,000. The debt to asset ratio is therefore 50.9%. This indicates a higher proportion of debt to assets than UCLA Medical Center. This means that Cleveland Clinic is willing to take more financial risk because of its extra source of income, Medicaid, which a for-profit organization such as UCLA does not have access to. The total increase in net assets is $50,043,000 while the total principal debt plus interest paid on debt for 2012 was $49,940,000. The debt service coverage ratio for Cleveland Clinic is therefore 1.002, which means that the clinic makes a surplus that is just enough to service its debts. This confirms that Cleveland Clinic is not focused on profit making, but rather financial sustainability of the organization.
Government health entities are owned and operated by the government or by government agencies. They are established for purposes of providing services that can not be provided by either the for-profit organizations or NGOs. As a result, government health service entities are usually concerned with provision of services that are considered not profitable. Government health institutions receive their funding from budgetary allocations given by treasury the US Department of Health and Human Services which further channel the funds to specific operating divisions such as Centers for Medicare and Medicaid Services (CMS). These divisions then implement government policy through programs such as Medicare, Medicaid and Children Health Insurance Program.
Medicaid is a program that involves the cooperation between Federal and State governments that ensures that certain low-income earners benefit from free healthcare. The program was instituted in 1965 as optional, but currently all US states and territories implement it. These jurisdictions have the authority to determine eligibility standards for Medicaid. The program derives its mandate and regulations from the Affordable Care Act. It is administered by CMS, which prepares its annual financial statements as a separate entity. Medicaid is not a separate entity, so no separate financial statements are prepared for the program. The program is, however, reviewed annually by the Office of the Actuary, an office under CMS, for purposes of ensuring that it is financially viable and beneficial to the intended parties (Truffer et al, 2012).
CMS’s financial statements for 2012 indicate that CMS had total assets amounting to $484,832,000,000 which are composed mainly of Investments, balances with treasury and accounts receivable. The total liabilities amount to $80,559,000,000 and are composed mainly of entitlement benefits, contingencies and other liabilities. The total asset to debt ratio is therefore 16.62%. This indicates a very high financial stability compared to UCLA and Cleveland Clinic. The only interest accruing debt that CMS has is a $150 million loan from treasury for which it paid $3 Million in interest. Based on the asset value, it is safe to assume that the loan can be paid in the next financial year. The total expected cash outflow from loan payment will therefore $153 Million. The increase in net assets for the year was $7,530,000,000 . The debt service coverage ratio is therefore 50.2, which is much higher than that of both UCLA and Cleveland Clinic. Since CMS is focused on providing financial assistance through government programs, it must be comparatively more financially stable than the organizations it supports.
Financial management in the health care industry is more complicated than other industries. There are two main reasons for this. The first reason is that finance decisions have a direct impact on the health and even lives of patients. Finance managers must therefore be careful in the decisions they make because human welfare is involved. The other reason is because the healthcare sector has many complicated financial transactions. These transactions include Medicare, Medicaid and insurance cover payments, refunds and periodic offsets. Each stakeholder also requires their own reports from the health institution on how their money has been spent. There are also specific application guidelines for each contribution. This requires a highly competent and experience finance manager, more accounting and finance staff and a complex financial management and reporting system.
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