Financial Management in hospital

Some observations for the present and the future

Interesting times ahead???

May you live in interesting times a old proverb is more a curse than a good wish!! We are facing interesting times which are unsettling, harsh and often unpleasant with deep recession

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Haves and Have nots

There is a widening gap between Have and Have Nots in healthcare organizations Haves do have the size, revenue diversity, generate cash flows and have balance sheet strength to raise capital to meet renewal and expansion
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Haves and Have nots

The other healthcare organizations including private hospitals struggle to meet critical capital needs They need to depend on their regular cash flows, bank lines of credits and joint efforts with NGOs and Government to set up the infrastructure
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The service providers

Government

NGO/Not for profit

Private

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Concepts for the service providers

Government Hospitals - Out of every dollar, 100 cents will be spent NGO/Not for Profit Hospitals Out of every dollar, 90 cents will be spent and 10 cents will be towards administration The trend now is to make surplus and plough back for maintaining and expanding the unit since donors are difficult to find
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Concepts for the service providers

For Profit Hospitals Out of every dollar, you spend only 70 cents, setting aside 30 cents towards return on investment or dividends

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Finance Management stages

Projects Operations Costing and cost control

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Project Funding Observations on bringing down the capital cost

Decide the cost at which you want to bring the product to the market Decide the cost of the project based on above More OPDs with advanced technology, shorter LOS and more day care will free up the space and bring down the cost of the project
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Project Funding Observations on bringing down the capital cost

Real estate participation by the realty owners Hospital and Physician partnership Relevant and affordable technology Medium size or small size OPD and Diagnostic Centers
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Project Funding Observations on bringing down the capital cost

Design has an impact capital cost per bed

Design follows function, faulty or bad design follows increased cost of function and higher levels of BEP

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Project Funding institutional reforms

Industry status- Institutional lending as a priority sector and classification of small and medium scale industries. Infrastructure Industry status: In other infrastructure projects like roads, bridges, Power, airports & hotels etc, utilization kicks in early. In hospitals it takes time. Hence access to capital and tax holidays at relevant periods are important.
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Project Funding institutional reforms

Tax break- Presently it is not adequate. Give a choice of block of years to claim the tax holiday

Free from all VAT, import duty and Service tax implications.

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Project Funding some trends

Public Private Partnership Medical collages ( both government and private colleges) opening pay wards or corporate wards Focus on selected verticals in specialties and partner with others for other verticals
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The focus is on now..

Capital cost per Bed since it takes about three to five years for a complete break even Size and stage wise expansion and break even at every stage

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Project Funding
Traditional funding Outsourcing as a method of reducing capital cost and getting economies of scale leads to a situation where in initial capital cost per bed is lower Equipment leasing
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Outsourcing as a means of finance

Outsourcing leads to conversion of fixed cost in to variable cost. This leads to availing of better rates based on economies of scale till the hospital achieves the economic scale. Brings down the upfront investment in equity and debt to begin with the project
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Outsourcing some criteria

Though one may want to own many of the major capital equipments, a tight outlay may lead to avoiding upfront investment in equipments An outsourcing partner will have employees who have been in leadership position in healthcare organizations.
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Outsourcing some criteria

They are able to understand the departments needs unique to the hospital. Evaluate the departments efficiency to improve revenue and reduce the costs Already has the infrastructure and experience in supporting number of units.

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Areas of outsourcing
House Keeping and waste disposal Bio medical equipment maintenance Laundry

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Areas of outsourcing
Food and Beverages CSSD Blood Bank

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Areas of outsourcing
Lab and Diagnostic Center Pharmacy Consignment purchases IT Both hardware and software
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Areas of outsourcing

Ideal for small & medium sized hospital with specialization in two or more verticals

Outsourcing certain areas of medical practice with equipment

Oncology Cardiology and CT Dental Ophthalmology IVF Centers
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Areas of outsourcing
Corporate and Insurance Bill Processing Payroll processing Security Maintenance Department Electronic Medical Records
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Equipment Leasing
Operational leasing for expanding hospitals Ideal for Single or dual vertical medical practice while establishing more centers

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Equipment Leasing
Suitable for medium sized multi specialty hospital expanding in certain specialties in other centers

Short term or seasonal trend management of increased load

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Unfunded liabilities
Pension Fund Obligations Gratuity Fund Encashment of leave benefits Medical Malpractice Claims
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Financing Operations
Factoring corporate and insurance patient bills U.S. Example of aggregation and buying Pharmacy bills Care Credit Card

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Participants in patient revenue

Insurance companies Corporate/Employers Self Paying patients Co Paying Patients
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Factoring patient bills ( Corporate and Insurance bills)

Pre authorized bills of corporate and insurance companies.

Bills backed by the corporate and insurance companies

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Factoring patient bills ( Corporate and Insurance bills)

Normal period for small and medium sized hospitals ranges from 45 to 90 days including processing of documents

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Factoring patient bills ( Corporate and Insurance bills)

Factoring company specializes in processing the bills and realizes the payments from corporate and insurance Recourse to the hospital when faced with disallowances
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Care Credit Cards

Specifically for healthcare treatments and procedures

Payment options under no interest option and extended payments options

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Care Credit Cards

Can be used for procedures generally not covered by health insurance programs
Under first option, payment is made in 3,6,12 and 18 months. The plan to pay under different pay periods is offered by the service provider
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Care Credit Cards

The extended payment option attracts interest on outstanding. The payment can be made in 24,36,48 & 60 months. Hospitals, nursing homes and doctors can participate as merchant establishments
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Costing and cost control

Costing is an important tool in management of finances Decision to outsource or not Decision on investment to start or set up new departments and buying new equipments
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Costing and cost control

Developing different pricing models for different patient segments Helps in evaluation and measuring performances Especially when outcome based payments are to be introduced
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Costing and cost control

Identify and economize use of materials Capacity utilization of wards, service departments and equipments.

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Some methods and techniques

Top Down Approach/Case Mix Approach

Bottom Up approach/Micro Costing or Activity Based Costing

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Some methods and techniques

Marginal costing very useful in pricing for generating additional patient load as a marketing strategy

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Thank you

S.Manivannan Director Parama Healthcare P Ltd smvchary@gmail.com

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