|Type of paper:||Essay|
|Categories:||Business Healthcare Healthcare policy|
Business-oriented and nonprofit healthcare organizations vary significantly in terms of their structure and ownership.
Nonprofit hospitals have no individual owners, and they exist primarily to address the healthcare needs of society. As such, they are community-oriented institutions since they do not serve the interests of individuals.
On the other hand, for-profit healthcare facilities have shareholders who double as the owners of the organization.
While for-profit hospitals aim at addressing society's healthcare needs, they also exist to maximize returns to the owners or shareholders.
Thus, business-oriented hospitals pay taxes, while not-for-profit ones are tax-exempt since they focus on providing community benefits.
The main stakeholders for the nonprofit hospitals are managers, the board of trustees, patients, creditors, employees, and so on (Gapenski, 2005). For-profit healthcare facilities have the same set of stakeholders, but it would also include stockholders (Gapenski, 2005).
However, the two categories of healthcare organizations are similar in that both exist to improve society's health. Also, they must follow the guidelines from the US Department of Health on the provision of care services.
Another similarity is that manager’s primary goals in the two healthcare organizations focus on improving consumer satisfaction and the quality of health outcomes.
Ownership impacts managers ' operational decision making since it influences the sources of revenue. As an example, the primary sources of revenue for nonprofit hospitals are donations and grants, while in for-profit organizations, they are patient's fees.
Differences in financial data affect operational decision making. For example, nonprofit hospitals would focus on increasing revenues to enhance operating efficiency, while for-profit organization's short-term decisions aim at generating maximum revenues and profits.
Financial reports of for-profit hospitals are prepared to enable managers to design strategies that would allow their organizations to minimize costs while maximizing revenues.
Who We Serve
On average, not-for-profit healthcare organizations tend to provide uncompensated care than for-profit healthcare facilities do.
Investor-owned hospitals are apt to offer their services to low-income populations, unlike nonprofits that mostly provide their services to communities with higher incomes, less poverty, and a lower proportion of uninsured patients (Horwitz, 2005).
Research has demonstrated that two-thirds of healthcare facilities in the country’s urban areas are nonprofit (Horwitz, 2005). This aspect shows that nonprofit hospitals mostly serve high-income populations in towns and cities.
Populations that these hospitals serve in their locations impact their financial statements. However, their populations are similar in that they have almost the same medical conditions. Cram et al. (2007) found that for-profit specialty hospitals tend to admit low-risk patients than nonprofits.
Differences in patient populations served impact financial data. For instance, revenue items in financial statements of for-profits come from insurers. The reason is that a significant proportion of their populations are well-insured Horwitz, 2005).
As such, managers of business-oriented hospitals would are more likely to focus on providing medical services that are covered by insurers as a strategy to maximize returns.
Conversely, manager's operational decision-making in nonprofit hospitals is more likely to focus on reaching to organizations and institutions that can provide donations to boost revenues, improve service delivery, and the quality of care services.
Nonprofit hospitals prepare the statement of activities that act as a snapshot of their revenues and income at a specific date. Since Blackstone Hospital is a nonprofit organization, it will be preparing this type of financial statement.
Nonprofit healthcare facilities do not prepare profit and loss statements, which are also called income statements because they do not exist to make profits.
Conversely, for-profit hospitals make a profit and loss statement that outlines revenue from the business and operating expenses that the facility incurs in a specific period. Accordingly, financial reports of for-profit institutions indicate whether the hospital is making profits while that of nonprofits shows the proportion of revenue to operating expenses.
Financial data of the two types of healthcare organizations are similar in that they outline key line items, specifically concerning the hospital's revenues and costs.
Grants and donations are the primary sources of revenues for not-for-profit hospitals, while nonprofits rely on revenue from patient services that they offer to their societies.
However, nonprofit's donations and grants are restricted. This aspect suggests that a hospital can only utilize them for specific purposes. In this view, this aspect will impact the operations and financial performance of Blackstone Hospital because it is a nonprofit healthcare facility.
Horwitz (2005) found that business-oriented hospitals to provide relatively profitable healthcare services. The study further indicated that government healthcare facilities have higher chances of providing unprofitable services (Horwitz, 2005). Nonprofit hospitals tend to provide medical services that fall in the middle.
For-profit hospitals have provisions for bad debts as one of its financial data, while nonprofits do not have. In terms of the source of revenue, the two types of hospitals are similar because they generate their income from patient services.
Regarding expenses, a comparison of financial statements shows that the two hospitals incur significant money on general administration. However, their cost items differ because nonprofits have fundraising expenses that do not exist in business-oriented hospitals. Instead of fundraising, for-profits have marketing expenses.
Differences in expenses and revenue items affect the manager's decisions. Managers in for-profits would focus on marketing strategies that minimize costs. As an example, investor-owned hospitals may use technology or digital marketing techniques to reduce costs. For nonprofits, operational decision-makers may focus on growing donor base and leveraging volunteers to minimize fundraising expenses.
Ratios are essential tools used to evaluate key financial aspects of healthcare organizations.
Managers and any other person can assess the financial performance of a hospital by comparing its ratios with industry standards or against its competitors. Also, they can determine trends of an organization's financial ratios for subsequent years or quarters to know whether there is a meaningful improvement.
The three commonly used ratios in healthcare are the current ratio, revenue per client, and operating margin. The current ratio measures the availability of liquid assets such as cash, to cover near-term financial obligations.
Revenue per client is an indicator of a health facility's capacity over a specific time or relative to other organizations in the industry (Suarez et al., 2011).
Operating margin predicts the ability of a health organization to generate surplus revenue to expand and sustain its future operation and healthcare services (Suarez et al., 2011).
Financial reporting in the healthcare industry is essential since it is a way to communicate to external and internal stakeholders about the financial situation of an organization. Managers of a hospital can utilize this information to make informed decisions based on the situations prevailing in the organization.
Nonprofit and business-oriented healthcare organizations must follow the guidelines of Generally Accepted Accounting Principles (GAAPs) when processing their financial reports. GAAP aim at standardizing financial reporting in the industry besides promoting transparency.
One of the requirements that differentiate the two types of hospitals is about reporting taxes. For-profit healthcare organizations should report local, state, and federal tax payments in their books of accounts, but nonprofits do not.
In reporting revenues, nonprofits are required to prepare the statement of activities, while business-oriented hospitals make income statements.
Legally, for-profits must publish their financial reports. However, there is no legal requirement that compels nonprofits to do so, but they have to publish them because of the added value.
Healthcare managers use GAAPs in preparing financial statements. Specifically, they use GAAPs to ensure there is full disclosure of information in financial statements and even to recognize revenue.
Moreover, healthcare managers follow these guidelines to ensure their financial reports are relevant, reliable, and consistent.
Nonprofit hospitals should meet all accounting regulations and guidelines to enhance transparency and accountability in their financial reporting. More importantly, it allows organizations to communicate financial reports that meet the common interests of its members and donors, which in turn will encourage more well-wishers to support their activities.
Similarly, it is necessary for business-oriented hospitals to follow financial reporting guidelines to place them in a better position to make informed decisions. Also, it allows them to know the financial position of the organization, to meet legal requirements, and enhance confidence among stockholders and other stakeholders.
Cram, P., Vaughan-Sarrazin, M. S., & Rosenthal, G. E. (2007). Hospital characteristics and patient populations served by physician-owned and non-physician-owned orthopedic specialty hospitals. BMC Health Services Research, 7(1). https://doi.org/10.1186/1472-6963-7-155
Gapenski, L. C. (2005). Healthcare finance: An introduction to accounting and financial
management. Foundation of the American College of Healthcare Executives.
Horwitz, J. R. (2005). Making profits and providing care: Comparing nonprofit, for-profit, and government hospitals. Health Affairs, 24(3), 790-801. https://doi.org/10.1377/hlthaff.24.3.790
Suarez, V., Lesneski, C., & Denison, D. (2011). Making a case for using financial indicators in local public health agencies. American Journal of Public Health, 101(3), 419-425. https://doi.org/10.2105/ajph.2010.194555
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