HM 06 Introduction to Hospital Financial Mangement

1. HM 06 Introduction to Hospital Financial Mangement Introduction , Planning Investment, Financing activities , Planning Operations

3. Introduction The important resources that need to administer hospitals ? • Infrastructure management – facility management • Human Resource – HRM • Supplies – Material Management • Equipment – Equipment management • Money - Financial Management • Quality – quality management • Information – Management information systems MIS/ HIS • Methods- Systems management – Systems ,Policies and protocols- • Organizational culture – Organizational Behavior Management

5. Introduction • http://www.youtube.com/watch?v=fwYYae_U1OI

6. Importance of Financial management • Capital intensive - infrastructure , equipments • High Labour intensive – high cost • Obedience of Doctors for finance policies & other relation with suppliers • Part time HR & its effects • Lack of qualified Medical administrators • Equipments • Depreciation of equipments in 3 to 5 years • Rarely reach break even level • High obsolescence rate • New regulations • High risk in the service levels • Unpredictability in the demand levels

7. The stake holders • Major players • Minor players • Regulators • Other important stake holders • The presentation ….The Healthcare Sector Report - CBSL.pdf • Finance department

8. The challenges in the sector • Government is the Major player – slow growth , low capital infusion • Poor regulation of the sector & political interference • Trade union influence • Return on assets and investment is slow • Break even for operation and equipments is longer • Urban area development & effects of referral systems • Cost of operations are high and controlling them is a challenge HR, Supplies, equipments, Infrastructure 8. Social services mindset of the consumer and regulators

9. End is profit • Profit is the end result of long chain of management process • Profit is a rate of return to the investor • Profit is the essence of many financial transactions • It should be clearly planned , implemented and monitored and evaluated • In true sense of a market economy profit can make organization healthy and but should not draw “Sick “ to the “Graveyard “

10. Key Variables in Hospital finance • Planning Investment • Financing activities • Planning Operations

11. A. Planning Investment Choice of the project / market study/ project preparation / estimating the investment • Proper feasibility study • Location , catchment and the market segment and size • Demographical, epidemiological , economic, social and health service data , development projects and regulations, financial concessions • The medical plan • Services to be offered and what level & size with schedule • Competitor analysis • Government & private

12. A. Planning Investment 4. Technological input • hospital planner , hospital administrator , equipment planner , Financial consultant , project manager , HR Manager, Supply chain manager, Nursing specialist , Para medical Specialist 5. Size of the project • bed Capacity • Capital investment 6. Manpower – availability & cost

13. A. Planning Investment 7. Land cost • Leasing & buying options 8. Project operational schedule • In phases or once 9.Fee structure of the existing hospitals • each department 10. Cost structure of the existing hospitals • Each department and strategies to reduce them

14. A. Planning Investment 7. Land cost • Leasing & buying options 8. Project operational schedule • In phases or once 9.Fee structure of the existing hospitals • each department , fixed cost & variable cost 10. Cost structure of the existing hospitals • Each department and strategies to reduce them

15. A. Planning Investment 11. Financial Feasibility • Length of break even • Methods to reduce depreciation • Long term investment • Ratio of variable cost : fixed costs 12. Project completion time 13. Management of the hospital 14. Local government incentives 15 Project report

16. B. Financing activities Gathering the financials for the project • Stages of the project • Financial planning • Sources of finance 1. Stages of the project – important to set clear goals each stage • Gestation - project construction to operations • Operational – initiation of operations by selling products and services • Expansion – hospital adds additional capacity

17. Gestational phase • Also called as project / project development phase • Set clear objectives to : • Complete the project on time, with saving money & at the right quality according to the regularity and market strategies • Keep debt at minimum

18. Operational phase • Make sure the operation cycle runs smoothly • Input / output/ Sale / collection/ payment • Input – use of resources • HR / Supplies/ Cash/ other services - efficient & effective use • Out put – services • Sale & out put &collection / payments & short term liabilities

19. Operational phase • Working capital management • Proper planning of Current assets /arrangement of funds from various sources and its distribution and payments • Maintain liquidity while keeping costs low All these will contribute to Long term success & attainment of profit goals

20. Financial Planning • Policies needed to formulate to : • Capital requirement in each stage • Sources of funding in each stage • Ratio of mix of different sources • Target cost of capital • Appropriation of profit in operational phase • Grant of credit & collection of receivables

21. Sources of Finance • Procure funds form various sources, at a minimum rate possible. • Available sources • will depend on the hospital ownership • Single proprietor own • Partnership • Private limited company • Public limited company

22. The ownership • Single proprietor own • From own funds or relations or friends • Limited funds from banks • Small scale • Partnership • Many investors • Medium scale • Private limited company (PVT limited) • Limitation on share holders to max. 50 hence the funds • Public limited company (PLC) • Best form of funding , no restriction on the number of share holders • liability of the owners are limited

23. The sources • Equity share capital • Retention of earnings • Debt Capital • Debentures & Bonds • Long term loans ( Term loans)

24. 1. Equity share capital • Easier to access • Permanent capital • Contributors are called share holders • Shows the commitment for future profitability • No guarantee of the rate of returns • Return depends on the success of the operations • Riskiest form of investment for the owner and best source for the firm in bad times • This could be form of Public issues or private placement • Mix - Debt : equity ratio ( norm min of 30% from the owners)

25. 2. Retention of Earnings • Profits an internal sources of finance • Cheaper form • Ideal for development !

26. 3. Debt capital • Difficult to get • Also called as Loan capital • Fixed rate of returns irrespective of good or bad times • During bad time company will get a bad hit! • During good times risk free for the share holder • In the event of liquidation , finance company will get preference claim to assets

27. 4. Debentures and bonds • Most popular in Asia • Debt instruments • Promissory notes issues by the companies to the investors for the amount burrowed • Common denominators are Rs 100,500. 1000 • Rate of interest generally 18% • Long term method of finance • Ex: Treasury bonds

28. 5. Long term loans • Preferably investment banks • Project finance • Refinance • Suppliers line of credit • Leasing • Deferred payments for fixed asset purchase • Subsidies from the government

29. C. Operational Activities • Operational activities of a hospital when carrying out the Medical plan- hence the services • Out door / indoor / investigation/ rehabilitation/ ambulatory • Smooth functioning of the day to day activities needed : • Demand forecast • Budgets – purpose, quantity & timing • Responsibility holding for receiving , spending & achieving

30. C. Operational Activities • Long term investment • General rule for profits – 05 years • Operational activities of a hospital when carrying out the Medical plan- hence the services • Out door / indoor / investigation/ rehabilitation/ ambulatory • Smooth functioning of the day to day activities needed : • Demand forecast s • Budgets – purpose, quantity & timing • Responsibility holding for receiving , spending & achieving

31. C. Operational Activities • Slow growth & long term returns • Equipments • Highly expensive equipments • Mostly don’t achieve break even level of volume • Rarely reach capacity

32. The key operational measure NET PROFIT = (REVENUES – EXPENSES )– TAXES • Profit or loss is the end result due to long chain of management process • Profits are affected by : • Current costs & revenues • Past capital expenditure written off • Interest paid on the past financial transactions • Generally majority are uncontrollable

33. Methods to improve profits • Increase revenue • Reduce expenses • Managing current assets • Managing current liabilities

34. 1. Increase Revenues • Increase volume / rate of charge • Increasing volume by • Attracting popular consultants • Strategic promotions • Creating bonds • Increase in rate / price charged • it is price minus cost rather than cost plus profits

35. 2. Reduce expenditure • Medicines , consumables, salaries , supplies, rents , rates, depreciation, administration, marketing • Material -30% • Salaries – 40% • Pareto principle - 80 : 20 rule • Effort to control these two costs

36. 3. Managing current assets • Need to monitor the size of each assets and maintaining their quality • Assets • Reversible's • Inventory • Cash

37. Reversible's • Amount of credit sales that are yet to be realized • Size : Number of days & amount of credit granted • Cost of credit and Profit of sales • Hospitals tires to get more business by organizing a liberal credit policy • Liberal credit policy could only produce when the cost of credit is lower than profit of such sales

38. Inventory • Need to monitor constantly • This avoids the “production stoppage” & “ stock out losses” • Perishable nurture of stocks • Stock holding cost • Planning and maintaining effective inventory is an essential part of the hospital finance

39. Cash • Cash in hand • Bank balance • Cash management is maintaining a healthy cash balance • How to maintain pay back the transactions and the interest components

40. 4. Managing current liabilities • This is short term liabilities in the current financial year • Bank balance creditors for suppliers, outstanding expenses , short term loans

41. Important financial measurements of the hospitals

42. Important financial measurements of the hospitals • Financial objectives are achieved through • Increase revenue • Reduce current expenses • Managing current assets • Managing current liabilities • Monitoring the achievement is essential though the financial measurement of the hospital

43. Financial measurements of the hospitals • Occupancy • Days sales outstanding • Inventory turnover • Current ratio • Profitability ratio • Pre-tax profit to sales • Pre- tax profit to investment • Average length of stay • Age of the plant • Bad debts • Case mix • Free patient ratio • Competition • Debt utilization • Intensive care index • Ownership • Labor yield

44. 1. Average Length of Stay • Revenue of proportional to the average number the patient stay in the hospital • High revenue in first 48 hours and gradually decline • End up in just a room rent • Faster turnover of patients = efficient asset utilization • Ideal ALS = 3 days max. 06 days

45. 2. Age of the plant • Older equipments / hospital – lower depreciation – lower operating costs – higher profitability compared to a new hospital • Dominate market with low cost structure • But older equipments/ hospitals needed replacement , servicing , frequent breakdown and higher maintenance cost

46. 3. Bad debts • Sound credit policy to avoid : • Investment cost of funding • Overdue of payment of loans • Cost of bad receivables • Average length of the receivables

47. 4. Case Mix Index • Case mix index ( CMI) • Ratio of High value cases / low value cases • Profitability may vary even with 100% occupied hospital Therefore the most important indicator is the CMI Compare CMI / ALS/ OCCUPANCY RATE with Financial Results

48. 4. Case Mix Index • Average revenue per patient day • Average revenue per bed day • Average profitability per patient or bed day • All these will differed with case mix • Cardiac / Maternity / General surgical / medical / Pediatric/ Eye / ENT /

49. 4. Competition • Hospitals making profits can do many things to upgrade its market share , hence to dominate in the competition • Opening a cardiac centre in a nursing home • Hospital at breakeven state and working below breakeven level are very vulnerable to competition • Therefore new hospital should establish in areas where other competitors are at Break even stage or below

50. 5. Debt Utilization • Higher the debt / equity ratio , higher the risk for the hospital • Young hospitals debt is a killer in the first few years, due increase operational cost in first few years • Hospital working above break even stage should go debt for expansion