Short-term financial management and long-term financial performance: What is the link between revenue cycle management, profitability and not-for-profit hospitals' ability to grow equity?

Hospitals' profitability and ability to grow equity represent key factors when it comes to hiring well-trained staff, maintaining up-to-date facilities, and providing high-quality patient care. Unlike for-profit hospitals, which can grow equity by issuing shares, not-for-profit hospitals rely mainly on retained earnings and thus on the effective management of their day-to-day operations to build equity. Both the corporate finance and the health services literature, however, have long neglected the importance of hospitals' short-term financial management for their long-term financial viability. This study attempts to fill this gap by exploring the relationship between one aspect of short-term financial management — revenue cycle management, i.e., all administrative and clinical functions that contribute to the generation and collection of patient revenue — and hospitals' profitability and ability to grow equity.

Hospitals' profitability and ability to grow equity are modeled as functions of their performance at managing the revenue cycle and a set of controls. Profitability is measured in terms of total and operating profit margins as well as free cash flows; changes in hospitals' equity are assessed using both accounting based residual income and finance based discounted cash flow valuation techniques. I examine my models, which include hospital-level fixed effects, using panel data from audited financial statements for all bond-issuing, not-for-profit U.S. hospitals for the years 2000–2007.

The results suggest that effective revenue cycle management improves not-for-profit hospitals' profitability and ability to grow equity. More patient revenue and faster collection periods are associated with improved total and operating profit margins, free cash flows, and increases in hospitals' equity values. For hospital managers, these findings represent good news. They suggest that successful day-to-day management of the hospital's revenue cycle plays an important role in their efforts to achieve profitability, build equity, and thus remain financially viable in the long term.