As Cleverley and Cleverley (2018) suggest,
If sustainable growth (equity growth that meets or exceeds asset growth) is an organization’s long-term financial goal, then there is no other financial objective that is more important than equity growth. Healthcare organizations that expect low rates of equity growth in the future most likely will not be able to provide the level of resources sufficient to meet their mission. (p. 262)
It should be clear that healthcare organizations’ primary financial interest must be in sustainable growth or return on equity (ROE).
You are the Chief Financial Officer (CFO) for Shady Valley’s 80-bed skilled nursing facility for long-term care. You will meet later this month with other C-suite officers to discuss the importance of financial objectives, the use of benchmarking data, the organization’s revenue and expenses, entrance fee funds, and deferred revenue and its effect on the long-term care organization’s financial objectives.
As you prepare your report, you must also provide cited content to back up/validate your thoughts and suggestions.
Note: Be sure you are not writing in first person. Check the First vs. Third PersonLinks to an external site. for guidance.
In your paper,
Explain the importance of financial objectives and how those objectives are defined in terms of the return on equity (ROE).
Describe comparative benchmarking data and why the data is important to a dashboard reporting system.
Discuss three types of revenue and expenses found in the long-term care-nursing home industry.
Define the terms entrance fee fund and deferred revenue and their relationship to an organization’s financial objectives.
Sample Answer
Healthcare organizations must prioritize sustainable growth to meet their mission. This is primarily achieved through a strong return on equity (ROE), which measures an organization’s profitability in relation to its owners’ equity. A high ROE indicates that an organization is effectively generating profits from its invested capital, allowing it to fund future services, infrastructure, and technology without accumulating excessive debt. For a skilled nursing facility, this is critical for ensuring the long-term provision of high-quality care.
The Importance of Financial Objectives and Return on Equity
Financial objectives serve as a roadmap for an organization's financial health, guiding strategic decisions and resource allocation. They are defined in terms of return on equity (ROE) because this metric directly assesses the organization's ability to grow equity. As a key indicator of profitability, ROE reflects how well management uses shareholder or owner funds to generate income. A strong ROE shows that the organization is not only profitable but also has the capacity to reinvest in its services and expand its mission. Without a focus on ROE, a healthcare facility may struggle to maintain financial stability, jeopardizing its ability to provide care and adapt to industry changes.
Comparative Benchmarking and its Importance
Comparative benchmarking is the process of comparing an organization's performance metrics against those of its competitors or industry averages. This data is vital for a dashboard reporting system, as it provides context for a facility's financial performance. A dashboard that displays key metrics like ROE, revenue per patient day, or expense ratios alongside industry benchmarks allows executives to quickly identify areas of strength and weakness. For example, if a facility's revenue per patient day is below the industry average, management can investigate the cause, such as pricing issues or low occupancy rates. Benchmarking helps set realistic performance targets, promotes continuous improvement, and supports evidence-based strategic planning.
Revenue and Expenses in Long-Term Care
Three key types of revenue and expenses in the long-term care industry are:
Patient Service Revenue: This is the primary source of income and includes payments from sources like Medicare, Medicaid, private insurance, and private-pay residents. The rates and regulations of these payers directly impact a facility's financial viability.
Operating Expenses: These are the costs associated with running the facility daily. They include salaries and wages for staff (often the largest expense), medical supplies, food services, and utilities. Managing these expenses is crucial for maintaining profitability.
Depreciation and Amortization: These are non-cash expenses that account for the decrease in value of long-term assets, such as buildings and equipment, over time. While not an immediate cash outlay, these expenses are important for accurate financial reporting and capital planning.
Entrance Fee Funds and Deferred Revenue
In some long-term care models, particularly Continuing Care Retirement Communities (CCRCs), residents pay a large entrance fee upon admission. This fee is often non-refundable or partially refundable and can be a significant source of capital for the organization. According to Cleverley and Cleverley (2018), these funds are considered a core financial resource.
Deferred revenue is the portion of this entrance fee that the organization receives in advance of providing services. It is an accounting term for money received that has not yet been earned. The revenue is "deferred" on the balance sheet and recognized as earned over the resident's stay. This relationship is crucial to financial objectives because how an organization manages these funds impacts its long-term financial health. The proper accounting for deferred revenue ensures that financial statements accurately reflect the organization's profitability and financial position, which is essential for attracting investors and securing loans for future growth.