There are many issues that Chief Executive Officers (CEOs) of the hospitals were facing in 2018. According to the American College of Healthcare Executives’ (ACHE) annual report, financial challenges, governmental mandates, and personnel shortages are ranked as the top concerns confronting hospitals, respectively (“Top Issues Confronting Hospitals in 2018”, 2021). Finance is based on six principles, with five of them being related to a person’s economic behavior and one is dependent on ethical behavior. The principles help executives in making decisions and finding ways of reducing misappropriation of funds. The financial problems being at the top among the three main issues, the CEOs should give it enough consideration.
The first principle is the time value of money that states that cash present at hand is more worth than the same amount promised in the future since the sum available now can be invested and grow with time. The principle affects the personal economic decisions made by the executives for the hospitals. For instance, research done by ACHE shows that 68% of the respondents had issues with Medicaid reimbursement, including its timeliness of payment, bring the timing challenge (“Top Issues Confronting Hospitals in 2018”, 2021). This principle affects the decision on when and what amount to use during a given period.
Second, there is risk versus returns that stands for the presence of both risks and expected returns in all financial investments. Risk refers to the uncertainty on the outcomes of the economic decisions made by the CEOs. Bad debt, one of the unexpected returns, is raised by 56% of the respondents in the study (“Top Issues Confronting Hospitals in 2018”, 2021). Corruption is one of the problems that hinder the returns on funds given to institutions such as hospitals. Risk/return analysis is essential for the executives before they make financial decisions.
Diversification of investments for risk reduction is essential in making financial decisions. Not all investment risks are the same, even if more risking turns to higher yields. Some risks can be avoided by having investments in different assets. Competitors can affect the amount of returns an institution gets, with 50% of the respondents agreeing that other providers affect the hospitals’ finances (“Top Issues Confronting Hospitals in 2018”, 2021). Another economic behavior-related principle states that financial markets are efficient. People seek to get overvalued or undervalued investment opportunities and try to venture in after accessing the risk against return trade-off framework. These factors raise the volume to value challenge in the financial section of the hospital. The principle also leads to increased allocation of money in the emergency department. The survey shows that 31% of respondents believe that the funds are overused (“Top Issues Confronting Hospitals in 2018”, 2021). The hospitals should seek to increase the number of services they offer to ensure that returns are maximized.
The manager and stockholder having different objectives is the fifth principle. It highlights the divergence in the goals of management and shareholders. The owners will want to maximize profits, while managers may need to emphasize the size of the organization’s assets or sales. This conflict can lead to inadequate funding for capital improvements, raised by 37% of the surveyed (“Top Issues Confronting Hospitals in 2018”, 2021). The last principle of finance, called reputation matters, deals with the ethical standards of an institution or organization. For instance, increasing labor costs, something said by 70% of the questioned people to have been the cause of financial challenges in the hospital, can be considered ethical (“Top Issues Confronting Hospitals in 2018”, 2021). Ethical issues affect all stakeholders and are among the most important aspects to focus on when making financial decisions.
In conclusion, the six finance principles are fundamental pillars in the decision-making process that provide solutions to financial challenges in any institution. When risks occur and reduce returns on capital, they always drive institutions into crises. For the executives of hospitals facing money difficulties, it is essential to apply the principles. A well-structured financial plan entailing all the aspects will reduce the challenges faced by the medical institutions.