If you don't have an adequate financial strategy, sooner or later you will have trouble meeting your mission and strategic objectives. No matter what your mission is, whether it is non-profit or for-profit, whether it is publicly or privately owned, every hospital will benefit from an adequate financial strategy to support its mission.
What does change, depending on hospital ownership, is the focus of that strategy. While for a private for-profit hospital profitability is key, and for a private not-for-profit hospital sustainability and perhaps growth are important, for a public hospital its problem is primarily one of financial planning.
In the case of the private hospital, the financial strategy is vital to ensure sustained growth. Let us take an example from the ranking of hospitals in Latin America (mostly private) published annually by the magazine América Economía.
According to this publication, the average hospital participating in the ranking had a return on equity (ROE) of 7% and a return on assets (ROA) of 5.1%. In other words, it had a leverage of 1.37 times. This means that for every dollar invested in its equity, it had 37 cents of Debt. In the last year it grew 10.9%, investing US$4.2 million in technology, while its debt decreased by 1.4%.
These numbers tell us that unless our average hospital has access to fresh capital, it will have trouble sustaining that growth for the foreseeable future. If management efficiency does not improve, 11% growth requires assets to increase by a similar proportion. Sooner or later it will be necessary to invest in fixed assets and this investment will in turn have to be financed by a combination of internal and external resources.
Our average hospital, therefore, requires a financial strategy focused on three essential pillars:
The case of a public hospital differs in many respects. Whether it is a university or not, the financial problem is not comparable to that of its private counterparts. To begin with, the public hospital is rarely in a position to set its fees for services. On the contrary, it is very likely that it does not charge the patient, but receives its budget from the national or regional governments.
Therefore, from the perspective of the public hospital, the key is to strike the right balance between the quality of the service provided and its cost; particularly if - as seems to be the norm in the allocation of resources by the State - it is unable to keep pace with the growth in demand.
While this also appears to be a growth problem, the public nature of the hospital changes the focus of the financial strategy. As it cannot receive income from patients, nor is it financed by third party resources, it desperately needs to ensure the correct and efficient use of allocated resources. In this context the financial strategy must focus on:
In conclusion, our average private hospital grows more than it financially can. Our typical public hospital needs to manage the gap between available resources and those needed to meet its strategic objectives.
This is why the financial strategy is so important for both. It will allow them to improve their operational management, increasing internal resource generation and partially closing the identified gaps. And it will guide them in the investments needed to support their mission in a sustainable way.
Excerpt from the article "Why should a hospital have a financial strategy?", published in the magazine INCAE Business Review, seventh edition.
