Financial Management in Healthcare: Role & Functions

Financial Management in Healthcare: Role & Functions
Financial Management in Healthcare: Role & Functions

Have ever wondered how hospitals bills get processed or how they pay for their equipment? The financial system of healthcare organizations operates the same as any other business and relies on strong financial management. In this lesson, we have discussed the role and functions of financial management in healthcare organizations. Let’s begin!

What is Healthcare Financial Management?

Healthcare finance is defined as finances that include both financial management specialty and accounting specialty within the healthcare industry. There are many parties involved in healthcare financial management, such as healthcare providers, pharmaceutical companies, health insurance companies, research-based organizations, and medical equipment companies. 

What is The Financial Management Size and Structure of the Healthcare Organizations?

The size and structure of the healthcare finance department vary by the nature and size of the organization. However, the general model is that the chief financial officer is responsible for managing treasury and other accounting tasks under his direction. 

The Objective of Financial Management in the Healthcare Sector 

  • Profit maximization. 
  • Wealth maximization.
  • Proper mobilization.
  • Proper estimation of financial requirements.
  • Proper utilization of finance.
  • Survival of company.
  • Maintaining proper cash flow.
  • Creating reserves.

What Is The Role Of Financial Management In Healthcare?

When we talk about the finance department of any organization, we would think that paying bills and collecting payments is all that a department does. But there is a long list of the responsibilities of this department. Since the Affordable Care Act comes into existence, finance departments in healthcare sectors have experienced major changes.

Not only the finance team fulfills general bookkeeping duties, fulfilling purchase orders, finalizing sales, maintaining receipts, and managing payments, running payroll, but does a lot more. They negotiate contracts with contractors and service providers and maintaining cash reserves for future expenses. They retain these records electronically as well as manually. 

In short, the primary role is to manage money and financial risk in a way that coincides with the financial goals of the organization. After all, if a healthcare organization has strong financial management plans, only then they’re able to provide the best healthcare treatments to all their patients.

What are Financial Management Functions?

From evaluation and planning, treasury, financing decisions, long-term investment decisions, contract management, working capital management, to financial risk management, all include in financial management functions of healthcare organizations. 

Read about these in greater detail given below. 

1. Evaluation and Planning

Evaluation of the financial effectiveness and planning overall operations accordingly allows the healthcare organization to work better in the future. For example, a hospital evaluates the budget of an emergency room and discovers that they’re losing patients because of smaller space. In response to this evaluation, the management then decides to plan for an expansion of ER. 

2. Treasury

Treasurers work alongside other teams. They keep the check and balance of an organization’s cash. Moreover, they are responsible for evaluating that there are always enough funds available to meet the organization’s immediate needs. The treasury team can forecast the future needs of the organizations and also advise in making long-term investment decisions to ensure a constant stream of revenue.

3. Long-Term Investment Decisions

Investment decisions involve analyzing current strategies and determining how investments will affect the financial future of the organization. The financial team comprises both top and middle-level managers who share their ideas when it comes to big investments. Taking the example mentioned above, the financial team at the hospital must consider the cost of an emergency room expansion–––to decide if it is a good investment or not.

4. Financing

Raising funds for expenditures is not an easy task. It involves things like using internal funds, fundraising, grants, or loans. The financial team will look at the cost vs. benefits approach of the investment and the amount of debt that they will incur. In the case of the ER expansion example, the senior manager will make the final decision and would ask the financial management team to initiate actions. The team will bring someone in to estimate the renovation cost and how long it would take to complete. At first, they may decide to use organization’s internal funds and then would apply for a small loan to cover the expenses. 

5. Working Capital Management

Working capital=current assets minus current liabilities. Current Assets might include cash, receivables, inventories, and marketable securities. The financial management team is responsible for managing the working capital of healthcare, for lowering the cost of an organization. 

For example, in the renovation of the hospital’s emergency room, the team will determine which assets are reusable and in which there’s a need to invest. Here the financial team will use the working capital of the hospital to make these purchases.   

6. Investor Relations

Financial management in healthcare also takes care of investor relations. They deal with shareholders and other stakeholders of the organization who have an interest in finances and stability. Moreover, they provide investors with financial reports on current business performance or expected future changes.

Communication among finance team 

Oftentimes, lower and middle-level managers in the finance department meet with the CEO of a healthcare organization to discuss the books. In this meeting, they talk about the current financial statement, earnings to date, and balance sheets. 

The CEO will use this information for future strategic planning that involves budgeting, evaluating various sector’s performances, making long-term investment decisions, and determining if working capital is enough for the upcoming year.

Challenges Financial department in Healthcare May Face

  • Managing finances in a capital-constrained environment––Handling the pressure to cut costs. 
  • Accessing technological transformation––Replacing an outdated IT structure with new medical technology. 
  • Adapting to market forces––Acquisitions and Mergers are a significant part of the healthcare sector. 
  • Meeting rules and regulations––Healthcare and hospitals have to comply with several regulations and compliance. 

Last words

Every day, it becomes more challenging for the financial department to manage to survive in the current healthcare climate. They work hard to find alternative sources of fund while staying afloat.

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