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Financial Management of Hospitals and Healthcare Organizations

[By Perry D’Alessio CPA]

[By David Edward Marcinko MBA CMP]

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Introduction

Dr.  Malcolm T. MacEachern, Director of Hospital Activities for the American College of Surgeons, presciently observed that … our hospitals are now involved in the worst financial crisis they have ever   experienced. It is absolutely necessary to all of us to put our heads together and try to find some solution. If we are to have effective results we must have concerted and coordinated immediate action … Repeated adjustments of expenses to income have been made. Never before has there been such a careful analysis of hospital accounting and study of financial policies. It is entirely possible for us to inaugurate improvements in business methods which will lead to greater ways and means of financing   hospitals in the future … It is true that all hospitals have already trimmed their sales to better meet the financial conditions of their respective communities. This has been chiefly through economies of administration. There has been more or less universal reduction in personnel   and salaries; many economies have been effected. Everything possible has been done to reduce expenditures but this has not been sufficient to bring about immediate relief in the majority of instances. The continuance of the present economic conditions will force hospitals generally to further action. The time has come when this problem must be given even greater thought, both from its community and from its national aspect. [1]

Many health administration and endowment managers would agree that Dr. MacEachern accurately describes today’s healthcare funding environment. Although they might be startled to learn that Dr. MacEachern made these observations in 1932, there is the old truism that there is nothing new under the sun.

Current healthcare statistics after the November 7th, 2012 presidential election and Patient Protection-Affordable Care Act confirmation, suggest that the financial crises are much the same for today’s hospitals as they were for hospitals during the Great Depression.

The AHA

The American Hospital Association (AHA) recently reported a number of gloomy statistics for hospitals: [2]

  • Hospitals provided $39 billion in uncompensated   care to patients in 2010 representing 5.8% of their expenses.
  • Technology costs are soaring as traditional technologies such as X-Ray machines, for   $175,000, are being replaced by contemporary technologies such as CAT Scanners at $1 million, that are in turn being replaced by CT Functional Imaging with PET Scans costing $2.3 million. Even such a “simple” instrument as a scalpel that costs $20, is being replaced by equipment for electrocautery costing $12,000, that is then being replaced by harmonic   scalpels costing $30,000.

Daunting Numbers

A further review added more daunting numbers:[3]

  • In 2010, 22.4% of hospitals reported a negative total margin.
  • From 1997 through 2009, hospitals saw a small net surplus from government payments from sources such as Medicare and Medicaid deteriorate into a deficit approaching $35 billion.
  • Emergency departments in 47% of all hospitals report operating at, or over, capacity partially reflecting an approximate 10% decline in the number of emergency departments since 1991.
  • The average age of hospital plants has increased 22.5% from 8.0 years to 9.8 years in just fifteen years.
  • From 2003 through September 2007, hospital bond downgrades have outpaced hospital bond upgrades by 19%.

In a time when so much seems different yet so much seems the same, hospitals are increasingly viewing their endowments as a source of help. But what is an endowment? The same Latin words that give rise to the word “dowry” also give rise to the word endowment [4].

Interestingly, the concepts of a dowry and an endowment are in many ways similar. Both are typically viewed as gifts for continuing support or maintenance. With respect to the healthcare entity, an endowment is generally used to smooth variations in operating results and to fund extra programs or  plant purchases. Any entity that enjoys the support of an endowment also encounters the conflicting objectives between current income and future growth.

Assessment

Dean William Inge, a 19th century cleric and author, aptly noted that: “Worry is interest paid on trouble before it is due.”

When managing an endowment, it is important that the institution focus its attention on those items that it can control rather than worrying about those it cannot control. Successful endowment managers seem to agree that there are at least two major areas   subject to the endowment’s control: asset allocation (also known as investment policy) and payout policy.

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Notes:

[1]   MacEachern, M.T., MD. “Some Economic Problems Affecting Hospitals Today and Suggestions for Their Solution.” The Bulletin of the American Hospital Association. July 1932.

[2]   Steinberg, C. Overview of the U.S. Healthcare System.  American Hospital Association (2003). Carline Steinburg is Vice President, Health Trends Analysis, for AHA.

[3]   “Trends Affecting Hospitals and Health Systems.”  TrendWatch Chartbook 2010.  American Hospital Association (2010).

[4]   Merriam-Webster Online.

Conclusion

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