Over the years, healthcare organizations have been struggling with the high medical expenses. Since the incorporation of financial information in health care organizations reinstates the significance of financial and cost criteria in the sector’s decision making processes, the proceeding sections highlights its use and applicability in determining effectiveness, efficiency, stewardship, compliance and financial conditions of the institutions.
First, financial information is used to evaluate effectiveness of operations in the healthcare organizations. For instance, with the widening scope of healthcare coverage, most insurers tend to avoid higher costs by listing drugs and services that they are willing to pay for. Consequently such restrictions determine the kind of prescribed drugs and the quality of health care delivery in general ( Cleverley & Cleverley 2018). Since effectiveness is majorly concerned with the achievement of objectives through production of outputs and not the output-cost relationship, effective decision making in such instances requires concerned parties to accurately interpret healthcare information.
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Secondly healthcare information focuses on the assessment of efficiency in healthcare organization. Efficiency in health care is mainly determined by the comparison of system outputs and inputs. As a broad concept, efficiency constitutes various subtypes which include allocative, scale, economic, technical and management. For instance, Jaafaripooyan Emamgholipour & Raei (2017) indicate that economic efficiency focuses on the output through performance, productivity, profit and quality with minimum input through the reduction of costs and output. Financial information entails measurement of efficiency which provides standards for comparing actual costs within the budgetary process. Therefore, such standards act as benchmarks for evaluative relative efficiency in various health care units.
Thirdly, the use of financial information systems in evaluating stewardship is a fundamental role that has been known historically. Initially, most of the financial information systems were developed to prevent resource and asset loss through curb employees’ malpractice and malfeasance (White, 2018). The use is still valid and important since financial information systems are among the common tools that are used in deterring embezzlement and fraud within healthcare organizations.
Also, financial information is commonly used to evaluate the financial condition of healthcare organization. Particularly for the non-profit entities, assessment of financial condition is relatively crucial in determining the organization’s viability. Besides, assessment of funding not only focuses on health organizations as whole units but also assesses the existing subdivisions. Therefore, by analyzing both the short-run and the long-run effects, financial condition determines the scope of activities and is essential for efficient and smooth operation in the healthcare organizations.
Lastly healthcare information may be applied in evaluating compliance to the stipulated directives. Within the healthcare organization, the budget forms part of the internal directives that offer guidelines for resource management. Similarly, integration of directives from external parties such as regulation bodies necessitates the use of financial information within financial reports to evaluate compliance to set rules.
Financial Statement Analysis as a method of Solving Financial Issues in health Care Organizations
Financial statements paint a picture of the financial position, performance and cash flow of any business. Since healthcare is a multifaceted sector, creditors, lenders, the investment community, the management among other stakeholders relies on the financial statements to evaluate financial issues in healthcare organizations (Dong, 2015). With income statement, balance sheet, statement of cash flow and statement of changes in equity as the common financial statements, the subsequent assessment includes vertical, horizontal and financial ratio analysis (Gitman, Juchau, & Flanagan, 2015). In general financial analysis entails indicators that determine performance of healthcare organization by increasing profits, reducing costs and continuing operation.
To begin with horizontal analysis entails a two-year comparison of financial indictors with other time frames. In essence, the comparison of percentages and currency terms brings forth insights into factors that might substantially contribute to the profitability and the financial condition of any given health care organization through performance indicator reports. Dong (2015) indicates that performance indicator reports provide operating measures that can be compared with the income from continuing operation in profit making healthcare organization. Additionally, the indicators facilitate the comparison of performance across health care organization with varying organizational forms.
Moreover, analyzing and tracking financial ratios is a crucial practice for healthcare organizations. Similarly to the horizontal approach, the ratios offer a baseline for evaluating profitability besides helping in cash flow management and showing where operating costs are moving (Gitman, Juchau, & Flanagan, 2015). For instance debt ratios highlight the strength and long-term value of a given healthcare organization (Dong, 2015).Therefore, the management relies on this ratio to identify opportunities for debt and cost reduction, capital expansions and asset management that increases the organization’s potential for long-term profit making and sustainability.
Also, financial statement analysis is used as a method of evaluating cash flow management in healthcare organizations. Notably, the operational success of the health care industry majorly relies on excellent cash flow management (Gitman, Juchau, & Flanagan, 2015). The latter address the long billing cycles that entails reimbursement methods from different healthcare insurances. An update on the ratio of available cash against operational costs is essential in ensuring that daily activities in the healthcare organizations are met despite the complicated billing issues.
To sum it all, a wide array of reasons underlies the reliance on financial analysis by decision makers in healthcare organization. Performance accountability is one of them. Also, the creditworthiness of healthcare in issuing debts, determining reimbursement methods, assessing the quality of health care services requires the use of financial statement analysis (Gitman, Juchau, & Flanagan, 2015). Although financial statement analysis in healthcare is complex, competency in analysis the process is critical for key decision makers in ensuring realization of performance measures and overall operations in healthcare organizations.
References
Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance. Burlington, MA: Jones & Bartlett Learning.
Dong, G. N. (2015). Performing well in financial management and quality of care: evidence from hospital process measures for treatment of cardiovascular disease. BMC health services research , 15 (1), 45.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance . Pearson Higher Education AU.
Jaafaripooyan, E., Emamgholipour, S., & Raei, B. (2017). Efficiency measurement of health care organizations: What models are used?. Medical journal of the Islamic Republic of Iran , 31 , 86.
White, S. E. (2018). Principles of finance for health information and informatics professionals Chicago: American Health Information Management Association.
