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Understanding the Definition of “Essentiality”
[By Calvin W. Wiese CPA MBA]
An important component of hospital credit analysis is essentiality. Hospitals are unusual businesses that many times possess some form of essentiality to their communities. Healthcare is important to the economic vitality of every community. Many hospitals have served their communities for many years; it is not uncommon to find hospitals that have been continuously operating for more than 100 years in the same community.
Not for Profit Entities
Most hospitals are not-for-profit. In not-for-profit hospitals, no private party actually “owns” the hospital; control is vested in various boards, but no one explicitly “owns” a not-for-profit hospital. In a broad sense, communities own not-for-profit hospitals. They are considered “charities” with a “charitable purpose.” Though a not-for profit hospital may not have owners, it has many” stakeholders,” parties that have vested interests in the continuing success of the hospital.
Stakeholder Webs
Many hospitals have broad and vast webs of stakeholders. Stakeholders are why hospitals rarely close or are shut down. Too many stakeholders have interests in the continuing successful operation of hospitals.
Hospital stakeholder relationships need to be considered in the analysis of essentiality. How strong are these relations? How many are there? How important is the continuing success of this hospital to these stakeholders?
Service Analysis
Another dimension of the essentiality analysis is service analysis. How significant are the hospital’s services? If the hospital shuts down, what population segments would suffer? How significant is the population that would suffer? How much would they suffer?
Assessment
Analysis of hospital’s stakeholders and services should provide a credible view of the degree of essentiality associated with a hospital. Higher degrees of essentiality suggest higher likelihoods that hospitals, one way or another, will meet their commitments, particularly their payment commitments.
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Filed under: Glossary Terms, Health Economics | Tagged: Calvin W. Wiese CPA MBA, hospital credit analysis, hospital essentiality |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Calvin,
Many thanks for the above post. Current healthcare statistics suggest that the current hospital financial crisis is indeed severe.
For example, The American Hospital Association (AHA) recently reported a number of gloomy statistics for hospitals:
• 30 percent of hospitals had negative total margins thru 2009.
• Hospitals provided approximately $175 billion of uncompensated care since 1997.
• Uncompensated care increased 16 percent annually since 1997.
• Emergency departments in 62 percent of all hospitals report operating at, or over, capacity.
• 33% of hospitals reported liability premium increases of more than 100 percent, since 2002.
• The average hospital facility age has increased 21%, from 7.9 to 9.6 years in just a decade.
• Hospital bond downgrades outpaced bond upgrades by 5 to 1 since 2006.
• Costs are soaring as traditional technology like X-rays are replaced by CT and PET scanners.
Dr. David Edward Marcinko MBA
[Editor-in-Chief]
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