Financial Analysis in Healthcare
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Introduction
A nonprofit hospital is an organization recognized by the law whose main aim is to promote public healthcare and not make profits. The profits gained by practicing the business activities or donations go back into operating the organization and furthering its purpose. The nonprofit hospital makes its financial and running data public to enable donors to observe how their contribution is being used. Internal revenue service qualifies nonprofit organizations for tax-exempt status because its goals and missions promote social interest and public aid (Price, 2018).
A for-profit hospital is one that works to make profits. The business owners, shareholders, and investors get paid from the profits of the for-profit organization. The for-profit organizations grow and expand by continuously reducing expenses and increasing income hence maximizing profits. This paper analyses the considerations that a nonprofit hospital has in considering converting to a for-profit hospital to form a joint venture.
There are differences in the characteristics of nonprofit and for-profit healthcare firms. For-profit healthcare mainly runs to earn owners’ profits; hence, they are motivated by the organization’s earnings. The nonprofit medical center’s operation is to serve the whole society and is inspired by its service to the community (Cheney, 2016). The management of profitable hospitals includes strong partnerships, joint venture, and sole proprietor, while in nonprofit firms, the managing board consists of the committees, bodies governing, and trustees. Profitable organizations acquire their revenue from selling products and services and the amount of contribution from the owners and investors. The nonprofit healthcare organizations get their income from government grants, fees of membership, subscriptions, and donations. The other distinction is that nonprofit medical organizations use the money from the earnings to expand their services. At the same time, for-profit the income is given to the owners who decide to spend it on business, keep the money, or share among employee compensation plans (Moon et al., 2020).
There are characteristics which nonprofit hospital organization need to constant to maintain their status. These features include focus: for nonprofit healthcare to remain successful, it needs to concentrate on the mission daily. The organizations should understand that donors play critical functions in ensuring it succeeds as a failure to know hinders their operation. The nonprofits have different funding sources, such as donation of individuals, government grants, fees for membership, and selling of services and products. There is a need for corporate structure to shift for environmental survival, such as net safety and responsibilities. The requirement includes health care reforms, health plan administration, and planning of public health (Lohr and Donaldson, 1994).
An outright merger is a collaborative, legally binding contract between more than two organizations that pursue mutually beneficial goals. In contrast, they remain entirely different entities. In the process of dating their goal sharing, also resources can be shared. The for-profit and no-profit health facilities can combine their information, experience, channels of distribution, and aids in achieving their aims. A joint venture is the same critical group of an entity, with one main argument; the for-profit and nonprofit medical companies can come together and sign the agreement in a contract to develop a third-party firm that is owned jointly. The operations of the third company are a separate entity that shares losses and profits. There is a great promise when two different organizations come together and offer goods or services that are the same, hence enhancing each other, leading to consumer appreciation of the alliance. The potential partner’s strategic objectives should be complimentary to ensure the success of the venture. The venture allows introducing a new strategy or goods that are difficult and ineffective in raising by one organization, through the experience, new opportunities, and new product with the companies entering the venture. There is a cost reduction as both organizations share operational costs.
Payer mix is the patient’s percentage with insurance coverage that is private, and it is crucial in determining the financial health of healthcare firms. Payer mix is essential because it the financial status of an organization determines the quality of services and outcome of patients. Most patients who are ensured to private insurance companies prefer to get medication from for-profit organizations compared to nonprofit healthcare facilities. Nonprofit hospitals provide higher quality services and goods to their customers as their mission is to promote the community culture in delivering services. The calculation of financial health is by use of the Dupont system. Dupont system contains three essential ratios in reflecting financial health aspects: current ratio, gross operating margin, and returns on assets. The current ratio is the ability of a company to meet the short-term financial obligation. The gross active score is the capacity to generate profits for a healthcare facility. And the power of a medical center to effectively use its assets is the return on assets (Manary et al., 2015). The for-profit organization has higher financial health than nonprofit healthcare firms.
Uncompensated care is the healthcare goods or services given by a medical center that does not get the payment. Most uncompensated care occurs when individuals do not have insurance and cannot provide the service cost. There is a likelihood that they need expensive treatment later. For-profit healthcare centers face the problem of uncompensated care, which leads them to make losses. Expansion of Medicaid helps cover for uncompensated care to for-profit hospitals by providing at least partial payments.
The non-profitable and for-profit organizations should enter joint ventures to achieve their goals as the advantages of experiences outweigh limitations. The joint venture aims to operate in a way that does not destroy nonprofit organizations’ exempt status. Research shows that both sides involved in the incidents enjoy financial benefits and an increase in corporate opportunities. The joint venture’s projected profit will be likely to increase as the parties join together with specific and mutual goals. The parties connected to the joint venture can combine their capital to fund a project that cannot be accomplished by one. The involving parties in the joint venture divide the risks and costs and financial responsibilities of running the organization and capitalizing (Al-Mazroei et al. 2020).
Conclusion
In summary, a nonprofit organization needs to view when conversing with a joint venture with a for-profit company. There are distinctions in nonprofit and for-profit firms’ characteristics in their motivation, management, use of profits, and source of their capital. Evaluation of payer mix and financial benchmarking of for-profit and nonprofit hospitals considering the uncompensated care burden in for-profit hospitals. And the reason why nonprofit healthcare should joint venture with for-profit hospitals, as shown above.