Hospital Finance is like any other business finance. Like all businesses even hospitals have to organize their budget and keep a track of their hospital expenditures so that they do not outplace their revenues. But Hospitals have to balance themselves carefully between their primary raison d'étre of servicing and providing care to patients, regardless of their ability to pay while simultaneously keep generating revenues and sustain themselves as financially healthy Organizations.
Hospitals are primarily organized as:
1) Public Hospitals: Public hospitals provide substantial services to very poor patients. These hospitals are partly funded by a city, district or state.
2) Private / Not For Profit Hospitals: These Hospitals are Non-Governmental Organizations whose sole aim is providing Health Care. In return of these charitable services, these hospitals receive numerous benefits like exemption from Income, Property and Sales Taxes.
3) Investor Owned/Share Holder Owned Hospitals: These hospitals benefit from profits generated by the Hospital. These are for-profit generated by the Hospital. These are For-Profit Hospitals (though most of them also provide charitable services) and they must also pay taxes.
a) Physicians: General Physicians or Specialized Physicians are by Managed Care Organizations (PVT Payers) or Hospitals while others have their Pvt. Practices in the community.
b) Other Professionals: Professionals like Physiotherapists, Psychotherapists, Occupational Speech Therapists render services in return of payment.
c) Skilled Nurses: Skilled Nurses provide mainly Sub-acute In-patient Skilled Nursed Care and Rehabilitation Services in Hospitals
d) Long Term Care Providers: These entities provide long term health care services to patients suffering from chronic illness.
e) Home Care Services: These entities provide for Nursing, Nutritional, Therapeutic Services, Rental and Sale of Medical Equipment.
Hospital Revenue generally comes from:
a) Patient Care Services (In-Patient and Out-Patient)
b) Non Patient Care Services
c) Investment Income
d) Grants and Donations
The Hospitals then categorize this revenue into 3 Categories:
a) Operating Revenue : Operating Revenue is the income earned by delivering Patient Care Services (both In-patient and Out-patient). Patient Care Services include Boarding and Rooms for Patients, Medications, X-Ray, Physiotherapy and other diagnostic and support services. Reimbursement of these services is the primary source of revenue for Hospitals. Approximately 85-95% of the hospital's Net Revenue comes from Patient Care Services and a Hospital whose Operating Revenue makes the maximum part of its Total Revenue, such a Hospital is said to be a financially healthy hospital. Operating Revenue is further organized as :
I. Gross Patient Service Revenue (GPSR): The GPSR is evaluated by calculating the total Amount of money hospitals would make if they were paid in full i.e. the non-discounted rate for all their health care services which means Total In-patient and Out-patient revenues before deduction.
ii. Net Patient Care Service (NPSR): The NPSR is the amount collected by the hospital by reimbursement of the total health care services after the deduction of charity care, discounts and contractual adjustments. (GPSR - Free Care) - Negotiated Discounts = NPSR
Normally, not at all patients pay the entire expense of their treatment from their pocket. Instead, an entity supports them by providing them Health Insurance etc. These entities are known as Payers.
i. Public Payers: The Public Payers provide a Government aided Health Insurance for specific sections of society who cannot afford to pay for their treatment.
ii. Private Payers: The Private Insurance is provided by the employee or purchased directly by an Individual. When the employer purchases Pvt. Insurance for his employee, he jointly shares the premium with him on the other hand when an individual directly purchases Insurance, he pays the entire Premium on his own
iii. Un-Insured/ Self Payers: Self Payers are not backed by any Public or Private payers and finance their medical expenditure out of their own pockets. Since self payers are uninsured, the hospital's potential self-pay revenue ends up as uncompensated care.
b) Non-Operating Revenue: Hospitals also make money by rendering Non-Patient Care Services through Cafeteria sales, Gift Shop sales, Parking Garage fee, Space or Rental Equipment rentals, Research grants etc. These services bring in significant and continuous funds. The revenue generated from these activities called Non-Operating Revenue.
c) Gains or Losses: Hospitals can either gain profit or face losses on peripheral transactions to the regular activities of the Hospitals. Such instances result in Non-Co-operating Gains or Losses. Non-Cooperating Gains/Losses include:
Investment Income: Investment Income is another significant revenue generator. Hospital have an investment strategy based on which they either invest in stocks other securities that provide higher return at greater risks or invest in more conservative fixed rate return instruments such as bonds and money market funds.
Donations and Grants: Hospitals generally receive monetary gifts from individuals and organizations that wish to support the hospital's mission. This is a good source of revenue for the hospital though not constant and reliable one.