215130 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?

Monday, November 8, 2010

Simone Rauscher, PhD , Department of Health Systems Administration, Georgetown University, Washington, DC
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 20002007.

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.

Learning Areas:
Administration, management, leadership

Learning Objectives:
Define key financial benefits of effective hospital revenue cycle management Assess hospitals' equity values using both accounting based residual income valuation models and financed based discounted cash flow valuation models Describe the link between hospitals' performance at managing the revenue cycle, their profitability, and their ability to grow their equity capital

Keywords: Hospitals, Financing

Presenting author's disclosure statement:

Qualified on the content I am responsible for because: I have completed a PhD in health services organization and policy with a focus on health care finance.
Any relevant financial relationships? No

I agree to comply with the American Public Health Association Conflict of Interest and Commercial Support Guidelines, and to disclose to the participants any off-label or experimental uses of a commercial product or service discussed in my presentation.