Evaluation of the factors affecting financial risk of not-for-profit hospitals

Over the last few decades, hospitals have been trying to keep their organizations financially viable, despite such complex issues and practical difficulties in their economic and institutional environments. One of the critical attributes of a successful management in today's environment is the ability to detect exposures to financial risk, identify the sources of risk, and to implement necessary controls to ensure organizational survival.

The objective of this study is to examine the market, operational and organizational factors that are associated with the level of financial risk in hospitals.

This study uses a sample of not-for-profit hospitals that operated during the fiscal year 1998 and 2002. Data sources include the American Hospital Association (AHA) Annual Survey, Area Resource Files (ARF), and Centers for Medicare and Medicaid Services (CMS) Medicare Cost Report.

In order to assess the financial risk, a composite measure which combines the profitability, cash flow and capital structure is developed. Based on the literature regarding health care organization closures, bankruptcy, and financial distress, several independent variables including competition, market share, system affiliation, bed size, occupancy rate, geographical location, expenses per discharges, and payer mix are selected and tested.

A multivariate regression model with pooled cross-sectional time-series data is used to identify specific characteristics that are associated with higher financial risk for hospitals, and the results can be used as a guideline for managerial decision.