Health Care

Healthcare Financial Concepts
Student’s Name
Institutional Affiliation
Summary
The article provides a critical review of several financial ratios that are necessary for determining the financial well-being of hospitals. The authors reveal that the analysis of financial statements plays a crucial role in reducing the funding strain imposed on hospitals and the health care system (Curtis & Roupas, 2009). The article examines the use of financial ratios in determining the liquidity and profitability of hospitals. The authors also reveal the application of financial ratios in forecasting corporate bankruptcy and performing competitor analysis. The five dimensions of the financial health of healthcare organizations reflected in the ratios include liquidity, profitability, debt structure, utilization of assets, and cash flow management. Cash flow management, debt structure, and liquidity determine risk whereas the use of assets determines the profitability of the hospital.
Therefore, the article reveals that a combination of risk and profitability reflects the value of the healthcare organization as indicated by Nicolăescu et al. (2015). In the article, it is evident that ensuring the survival of the hospital and keeping the stakeholders happy depends on the proper utilization of financial ratios to to make appropriate management decisions (Curtis & Roupas, 2009). The authors also reveal that the configuration of hospital assets portrays it as capital intensive whereas its daily operations represent it as labor intensive.

The economic viability of the hospital depends on the effectiveness of the utilization of its assets. The revenues received per patient, the hospitalization period of each patient, and the total number of available beds utilized on a daily basis determines the revenues of a hospital. In essence, the authors reveal that the financial soundness of the health care or hospital system determines the viability of the system.
Financial Concepts used in the Article
The Effective Use of Resources
In determining the effective use of resources in the hospital, the authors use the formula:
Effective Use of Resources=Number of PatientsHospitalization Days×Hospitalization DaysNumber of Beds ×365×Revenues Number of PatientsReturn on Assets
In calculating the return on assets (ROA) applied to the health care system, the article uses the formula:
ROA=Net ProfitsSales×SalesTotal CapitalReturn on Equity (ROE)
The authors use the following formula to calculate the return on equity
ROE=ROA×RevenuesEquity CapitalROE provides a measure of the performance of the hospital’s management. In essence, the measure is used to benchmark the performance of the hospital or healthcare system by revealing the effectiveness of the management in using the internal resources, competencies, and capabilities to generate revenue.
The Composite Indicator
The authors also identified the following composite indicator used to analyze financial statements in healthcare institutions
Net Profit Margin-4.04.0+Cash-5050+Debt Financing%-5050+Average Age of Hospitals-9.09.0The indicator provides a measure of efficiency using sales, and other measures for liquidity, capital structure, and the age or duration of the fixed assets used by the hospital. When the sum of the three measures exceeds 3, the performance of the hospital is excellent. The performance of the hospital is good when the sum of the three measures ranges between 0 and 3. When the sum of the measures ranges from 0 to -2, the performance of the hospital is considered bearable. Finally, the performance of the institution is considered bad when the sum of the three measures is less than -2. Understanding the different areas of operation is crucial in determining the “core competencies” of the hospital thus identifying ways of creating a sustainable competitive advantage.
The article also mentions the use of the ratio of the staff to the number of beds to determine the quality of the healthcare services offered within a hospital. The ratio also reflects the capacity of the hospital.
In order to control the overall expenses incurred by the hospital, the article identifies the following ratio
Drug ExpensesTotal ExpensesTo determine the liquidity of the hospital, the article uses the following ratio
Accounts and notes receivablesCurrent LiabilitiesApplication of the Financial Concepts to John Hopkins Hospital
In applying the Effective Use of Resources formula at John Hopkins Hospital, the hospital can determine the revenues by determining the product of the revenues received per patient, the number of beds used in the hospital on a daily basis, and the average duration that a patient spends in the hospital. Even though reductions in the duration of patient stay at the hospital could indicate declines in the revenues generated by the hospital, it also indicates the increase in the hospital’s capacity thus allowing the facility to admit more patients. In addition, reductions in the duration of patient stay at the hospital are an indicator of improved quality of services. This can strengthen client satisfaction thereby allowing the hospital to charge higher prices for its services.
John Hopkins Hospital can also apply the composite indicator to determine whether its performance is excellent, good, bearable, or bad. The ratio of staffs to the number of beds is also relevant in measuring the quality of services rendered by the facility as well as the utilization of the human factor in rendering the services. In order to attain operational effectiveness, the institution could maximize the revenues generated per employee by looking at the number of patients served by each doctor. Finally, the facility can use the drug expenses to total expenses ratio in controlling the expenses that it incurs in purchasing drugs in reference to the total expenses.
References
Curtis, P., & Roupas, T. A. (2009). Health care finance, the performance of public hospitals and financial statement analysis. European Research Studies, 12(4), 199.
Nicolăescu, E., Alpopi, C., & Zaharia, C. (2015). Measuring corporate sustainability performance. Sustainability, 7(1), 851-865.