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Strategic Financial Management: Distinction Between Not-For-Profit and Investor-Owned Hospitals

 
 
Research Domain: 
Health Economics & Policy
Health Care Management
 
Community Partner: 
Arizona State University
 
Student Researchers: 
Lissette Guerrero and Ashley-Jones Wilkerson
 
Faculty Mentor: 
William Riley
 
Abstract: 

Background
An extensive amount of research has been conducted regarding financial operating differences between not-for-profit (NFP) health systems, and investor-owned (IO) health systems. However, no studies have specifically explored return on equity (ROE) and its determinants. Objective: The objective of this project is to examine the performance differences of investor-owned vs. not-for-profit healthcare systems in the U.S. and the major determinants through an exploration of the financial management strategies.

Methods
The health care systems were chosen based on a list of top organizations set by Modern Healthcare in 2009. This final analysis included 9 investor-owned and 10 not-for-profit organizations were used due to mergers and acquisitions. The consolidated financial statements for each health care organization between the years 2008 through 2014 were obtained and data were extracted for analysis. Three classifications were created: capital structure, asset composition and financial performance. Calculations were formulated for profit margin, total asset turnover, equity multiplier, return on equity, operating margin, and non-operating margin. Results: The analysis between NFP and IO organizations using the four performance metrics, was split between the two ownership types. For profit/surplus margin, NFP is performing 1.92 times better than IO. For return on equity, NFP is performing 1.23 times better than IO. In contrast, for equity multiplier, IO is performing 2.62 times better than NFP. In total asset turnover, IO is performing 1.2 times better than NFP. Also, the 8-year trend analysis indicates important changes and patterns over time.

Conclusion
The IO organizations are performing better in terms of total asset turnover and equity multiplier while NFP are performing better in profit/surplus margin and return on equity. Return on equity has been the top performance metric used for IO organizations, however, over the last six years NFP have consistently outperformed IO on this important metric. Recommendations: Despite less favorable capital structure and asset composition, strategies of the largest NFP health systems have substantially better financial performance than the largest IO health systems and the gap is growing. Our recommendation is for IO health systems to explore ways to match the performance of NFP health systems.