Healthcare Industry: Aspects of Financing

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Table of Contents

Introduction
Analysis of the Financial Operations
Evaluation of Future Financial Viability
Establishing Purchase Price
Examining Tax Ramifications
Potential Funding Mechanisms
Conclusion
References

Introduction

Healthcare is a strategically important industry that determines the health status and quality of life of the population. Therefore, a large number of requirements and standards are imposed on the activities of branch institutions to ensure the proper quality of medical services performed. In market relations, the task falls on the heads of medical institutions to ensure the diversification of income channels, as an obligatory component of the effective functioning of a healthcare institution. In most cases, the source of increasing the results of economic activity is the search for internal reserves. However, in such conditions, it is reasonable to use the innovation and investment model of development to create a competitive institution.

The specific composition, creation, and use of certain types of reserves should be planned differently within the framework of a system of short-term, medium-term, and long-term plans. Following the reserves laid down for our private clinic, four main strategic directions of development can be distinguished. These are improving the organization of work and increasing the efficiency of the provision of services, as well as the quality of medical services. Important directions are the introduction of new paid services and the expansion of the volume of services; development in this area can be provided by the purchase of an imaging center. The implementation of the proposed system of directions will contribute to improving the efficiency of using the identified reserves of economic activity of medical organizations. The introduction of new types of medical activities and the implementation of projects aimed at expanding the provision of medical services can significantly increase the income of a private clinic. Thus, investing in the purchase of an imaging center is a far-sighted move in the strategy for further financial development.

Analysis of the Financial Operations

Below is a comparison of the key financial indicators of the imaging center, obtained during the analysis of financial operations, for 2020 with similar industry averages for 2020. The median value is used as the average indicator, the meaning of which is as follows: half (50%) of all organizations have an indicator above the median, and the other half – below (Yaduvanshi & Sharma, 2017). The indicators of 100 organizations with a revenue of $ 1,500,000 engaged in the type of activity “Visualization of medical images” are taken as the average industry indicators.

The indicator of the autonomy coefficient is 0.43, which is slightly worse than the industry average, at least half of similar enterprises have approximately the same share of their funds in the capital. The return on sales is 37.5%: the profit from sales in each dollar of revenue significantly exceeds the industry average. The net profit rate is 29%; it shows how many cents of net profit the organization receives in each dollar of revenue. This imaging center has a high net profit margin, this indicator is higher than at least 75% of similar organizations. The interest coverage ratio is 8.44: interest expenses are covered by profit before tax to a lesser extent than the industry average.

The return on assets is 43%, so the return on the use of all assets is higher than that of most comparable enterprises. The return on equity is 299%; in 2020, the return on equity in 2019 is much higher than the industry average. The number of days required to receive revenue equal to the average annual balance of current assets exceeds the indicators of a third of comparable organizations and amounts to 110 days. Depending on the hit of each value in the quartile, the indicators are assigned a score from -2 to +2 (Yaduvanshi & Sharma, 2017). The following indicators of the efficiency of financial operations were obtained: the return on sales and the net profit rate were estimated at +2, and the return on assets – was at +1. Thus, the financial operations of the organization are better than the industry average.

Evaluation of Future Financial Viability

Financial stability is a characteristic that allows one to assess the degree of stability of the organization’s position. In this case, it consists of the availability of financial reserves that allow the imaging center to carry out and maintain its activities. This is one of the fundamental indicators by which one can judge the stability of an enterprise. The purpose of this analysis is to assess the financial independence of the imaging center, and the adequacy of the available capital. Also, according to the results of the analysis, the ability to do without the use of attracted funds, and the dynamics of independence will be established.

The analysis was carried out using data from the financial statements of the imaging center, in particular, the balance sheet. The source of information was also management reporting. During the analysis, absolute and relative indicators were used, and the calculated values of the coefficients were compared with the basic (averaged and normative) values (“Financial viability self-check,” 2020). According to the value of the financial stability coefficient, it can be concluded that the financing of 0.7% of assets is carried out from reliable and stable sources. This indicator was calculated using the formula of the multiplicity of the amount of equity and long-term liabilities in the balance sheet currency. Reliable sources are those that have been used by the company for more than a year.

The coefficient value is higher than normal, the company is experiencing an increase in independence from borrowed funds, and the company successfully manages its funds and remains solvent. Next, the maneuverability coefficient was calculated using the formula of the multiplicity of equity and non-current assets to equity. According to the maneuverability coefficient, it was determined that the imaging center is independent in terms of having its working capital at its disposal.

The third criterion allowing for the evaluation of future financial viability was the degree of solvency, which is calculated by the formula of the multiplicity of equity to the sum of long-term and short-term liabilities. The degree of solvency is a coefficient that allows an organization to assess its ability to pay for existing obligations. The value of the indicator – 0.9 – fell within the range of the norm, thus, the degree to which the imaging center is dependent on creditors’ funds is low (“Financial viability self-check,” 2020). The values of the coefficients were compared with the basic ones, and the future financial viability of the imaging center was confirmed. Based on the results of the analysis, it can be seen that when developing management systems, it is possible not only to maintain but also to increase the level of financial stability.

Establishing Purchase Price

The cost was affected by the area of the premises, its location, the availability of equipment, and the availability of necessary licenses, as well as the demand for procedures. In addition, data obtained during the analysis of financial transactions, such as net profit and payback, were used to generate value (Baker et al., 2012). The value of the area and the total area of the building, and premises, defined in square meters rounded to 0.1 square meters, was 150 meters square. The imaging center has 12 pieces of medical hardware used in various imaging technologies. Since the center is the only one in the district, its services are in high demand; all the necessary resources have been received by the institution. Thus, based on all the factors considered, the minimum purchase price of the imaging center starts from $ 55,000 and above.

Examining Tax Ramifications

The imaging center, like all private medical organizations, is charged with standard taxpayer obligations. Their volume is determined by the current taxation regime. The taxation regime determines the complexity and volume of tax accounting. The center operates on a general taxation system, therefore, payments for income, property, and value-added taxes are taken into account separately. A separate topic is salaried tax accounting in the medical center. Regardless of the applicable regime, the center, being a tax agent, is obliged to calculate, withhold, and pay income tax to the budget. Mandatory insurance premiums should also be added to the expense item.

However, since this imaging center is a private medical enterprise, it is possible to switch from a general taxation system to a simplified taxation system. At the same time, a single tax is calculated and paid; the method of its calculation is determined when switching to this tax regime. In the case of a simplified system, it is advantageous to use the “income minus expenses” taxation scheme (Martel et al., 2018). The use of the “income” object is more profitable since the expenses of the imaging center account for less than 60% of income.

Potential Funding Mechanisms

Both external and internal sources of financing can be used in a combined method. In the first case, the funds of the clinic and its founders are meant, in the second — those that come from third-party structures. With combined financing, both types of sources are used; the subjects of internal financing are people who are interested in the company continuing its activities and developing. This category includes, among others, the founders of the company.

The advantages of internal sources are that they increase the firm’s stability by quickly attracting the right amount of money. In addition, this type of source makes it easy to make decisions about business development and monitor the implementation of new ideas. Also, the positive aspects of external financing include a reduction in the volume of external debt, the possibility of saving on taxes, as well as the absence of the need to find investors.

The subjects of external financing are investors or companies that provide loans on different terms. Since this business is small and the only private clinic in the area, the clinic can count on the help of the state. Federal or regional programs are being developed, under the terms of which companies can apply for subsidies. External sources have advantages such as the ability to attract the required amount of money. It will be possible to expand even in the absence of its reserves, while the clinic’s money will remain in circulation, and the profitability and profitability of the business will increase.

Depreciation charges can be used for self-financing. At the same time, part of the income is accumulated in a separate fund, from which the costs of buying or repairing equipment are covered. Over time, the equipment wears out, and its book value decreases. Therefore, part of the depreciation fund can be directed to the development of the company. The clinic’s profit also can be used. If the company deducts all expenses from total income, an amount of money will be left, part of which can be spent on business development.

To finance the purchase of the imaging center, sustainable liabilities can be used – part of the money that the clinic should spend on current needs shortly. Stable liabilities include prepayment for ordered medicines, social contributions, and employee salaries (“Types of funding mechanisms,” 2021). The instrument is considered short-term since funds need to be returned to the account quickly. As a third-party financing, various types of loans can be used, attracting third-party investors. A bank loan is the main way to finance an enterprise. Lending has advantages: so, the clinic can get a loan for any purpose quickly and relatively easily. The lender can be one organization, which simplifies the service. The most reliable way is to combine external and internal methods: in this way, it will be possible to ensure the stable development of the clinic, in which the profit covers the debts.

Conclusion

To ensure the systematic development of a private clinic, it is necessary not only for the effective use of internal resources but also for the involvement of external ones. The offer for business development through the purchase of the imaging center is aimed at efforts to attract customers because customers are the basis of any company. If the processes occurring within the company are properly optimized, it will be possible to carry out the development of the company. The imaging center will help attract new customers by expanding its market share and entering a new market for medical imaging. A customer retention strategy is also an obvious way to attract new customers to a medical center. The purchase of the imaging center allows you to keep customers from considering alternative offers if another company becomes the buyer of the center.

A more stable tactic in the long term for multiple increases in medical income, as a strategy for the development of a medical center, is to increase customer satisfaction. The patient’s satisfaction with the medical care received is also affected by the introduction of new services that will appear in the case of the acquisition of the imaging center. The most effective option for financial optimization of a private clinic, in this case, will be expansion. The development of new directions in the service sector will require significant financial investments. However, as the financial analysis shows, the cost of buying the center will quickly pay off and bring significant profit. Revenue extraction and fast payback, as well as the lack of competition, reduce financial risks, contributing to the purchase decision.

References

Baker, J. J., Baker, R. W., & Dworkin, N. R. (2015). Health care finance: Basic tools for nonfinancial managers. Burlington, MA: Jones & Bartlett Learning.

Financial viability self-check: H2020 Online Manual. (2020). Web.

Martel, M. L., Imdieke, B. H., Holm, K. M., Poplau, S., Heegaard, W. G., Pryor, G. L., & Linzer, M. (2018). Developing a medical scribe program at an academic hospital: The Hennepin county medical center experience. The Joint Commission Journal on Quality and Patient Safety, 44(5), 238-249.

Types of funding mechanisms: Activity codes. (2021). Web.

Yaduvanshi, D., & Sharma, A. (2017). Lean six sigma in health operations: Challenges and opportunities— ‘Nirvana for operational efficiency in hospitals in a resource limited settings’. Journal of Health Management, 19(2), 203-213.

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