Financial Environment of Health Care

Financial Environment

A non-for-profit entity has a financial structure based on assets and liabilities solely. Such an entity does not have equity. The main source of financing for a non-profit entity is donations. A non-profit entity is, other than a few fixed assets, a flow-through entity. This means that donations come into the organization, and are then rendered out in the form of services. There is a high emphasis on expenses. Most charities will have some current assets, but usually these are things likely to be converted to cash. Otherwise, the assets tend to be equipment or buildings, likely depreciable. The balance sheet is known as the statement of financial position, outlining the assets and liabilities. These are not necessarily balanced, which is why the term balance sheet is not used (Foley, 2015). Spending in a non-profit is almost entirely discretionary in nature, technically, though there may be ongoing programs.

A for profit entity has a financial environment characterized by equity, debt and assets. Owners can invest in the firm and receive equity. The equity is the net value of the assets less whatever liabilities that the company has incurred.

A government is structured more like a not-for-profit entity. It receives income, in the form of taxes and fees, and then it spends that money on services and assets. There will be a lot more assets than would be normal for a non-profit because of the varied and substantial ongoing operations of government. Unlike with the non-profit, the outflows represent a mixture of mandatory and discretionary spending. A key difference is the use of debt. In this a government is more like a corporation in that both entities have the ability to take on debt, and this ability and cost is dictated by the market. In both cases, debt can be permanent in nature, continually rolled over upon expiry. The federal government is unique among governments is that it technically can print money, which affects its credit and the role that debt plays in its financial environment.

Unique Policies

There are some unique policies for each type of entity. All three have entirely different sources of cash that they use for their operations. There are different types of not-for-profit entities. A charity may rely primarily on donations for its inflows. Other forms of not-for-profits, such as hospitals, universities or trade organizations, might have users fees, member dues or tuition as their means of generating revenue. Such organizations would be expected to be self-funded, which is different from a charity.

A corporation also has fees because it sells goods and services to acquire revenues. The difference between this an those not-for-profits that rely on fees for services, is that the corporation exists to take a profit on the transaction while the not-for-profit entity does not. Governments earn revenues through taxes and user fees. Governments have sole taxation rates in any society, and there are usually strict guidelines about which taxes can be levied by which government.

There are also uniquenesses with respect to how monies are dispersed by each of these entities. A not for profit entity will usually see its monies flow through in the form of services to whatever target group is has. For a charity, one of the key metrics that stakeholders use to evaluate a charity is the percentage of donations that are spent on administration -- the lower than number is the better as far as most donors are concerned (CharityWatch.org, 2015). For other types of not-for-profits, such ratios are less important but there is still a need for the organization to avoid taking on debt. For their part, corporations and governments routinely utilize debt as part of their capital structures, and it is often considered desirable that they do so.

A unique element of corporations is that they are under no obligation to provide any sort of benefit. Their existence is to earn profits for shareholders -- thus a corporation only exists to generate profits (Friedman, 1970). There has been a push for corporations to take into account other objectives, because of the substantial role that they play within our global economy, but at this point there is no specific mandate to do anything other than earn profits. By contrast, not-for-profits and governments both have specific spending mandates to deliver benefits to stakeholders, rather than to shareholders.

Financial Management Practices

In the financial environment, all financial management practices are relevant, by definition. Financial managers must understand the unique environment of their organization when setting out the financial plan. Things like working capital management and capital structure management can differ dramatically between these types of entities.

Effective Financial Management in Health Care

Arguably, financial management in health care should be just as effective as anywhere else, but there are definitely challenges. Regardless of whether an organization is for profit or not, health care has a lot of variables that make it difficult to predict costs and revenues. The larger the organization, the easier this should be because statistical analysis of past results will have more data points, but this is never going to be easy in health care. There are different types of payers, and these have their own unique characteristics -- for example there is the issue of default among private payers, but complicated when a patient presents as having insurance and then the insurance bails on the coverage. There is not always the sort of revenue certainty than a corporation might have.

Costs are another wild card that can be difficult to predict. Again, the more data points there are, the more predictable costs are, but the service provided is unique to each client. As an example of this layer of unpredictability, if a patient presents with a particular ailment, the treatment will be different even with the same diagnosis because of all of the other variables -- age, gender, other conditions and the intensity of the condition. Thus, what may be a low cost treatment for one patient could be a very high cost treatment for the next patient. This represents a problem for statistical analysis, because the standard deviations of the costs can be very high. Furthermore, when a patient has multiple conditions, it can be difficult to classify treatments for those. All of which means that normal statistical analysis might not have much predictive power with respect to costs for a health care organization.