Healthcare Industry: An Investigation Into Financial Stability, Research Paper Example

Financial assessment of organizations in the healthcare industry provides the foundation for stability and growth. Evaluating and understanding the internal and external factors affecting the operations and creating internal controls are essential to the financial health of any organization. Decision making for long-term and short-term planning is directly related to financial planning. Analyzing outside funding sources should be performed to determine any available funding to support the operating structure of the organization.

Creating, achieving and maintaining financial stability will provide the structure for any organization to withstand and survive economic pressures. Legislative restrictions should be incorporated during the creating and planning stages to remain in legal compliance with laws and mandates. Keeping updated on technology, practice trends and overall management is difficult; however, a solid financial plan incorporating factors for variances will build up healthcare organizations for longevity.

Developing a strategic financial plan with the anticipation of varying factors such as growth or economic turbulence is important in the management of the organization. Strategic planning from a financial aspect with good investment practices require methodical exertion and innovation methods for successful practices to be implemented. Planning with an emphasis on accountability and quality control provides measures to support the overall goal of the organization.

Healthcare Companies

Financial assessment on two publically traded healthcare providers will include UnitedHealth Group (UHG) and Health Net, Incorporated (HNI). Both companies are in the top 10 largest managed care organizations. Both organizations are able to raise capital by sales of securities with fair market value at any time the company deems appropriate. The market capitalization is calculated by the number of share outstanding times the price per each share. UHG is estimated at approximately $20.2 billion and HNI is a smaller organization estimated at $3.8 billion (Health Plans, 2008).

UHG declares a social responsibility to help people live healthier lives (UnitedHealth Group, 2009). The organization considers their mission and business goals to align together to impact health and communities in positive ways. The environment is also a concern and this company has an active awareness of conserving energy and natural resources.

HNI is active in empowering patients to be healthy, secure and comfortable (HealthNet, 2009). The organization prides itself on employing leaders with expertise and high skill-sets in situation decision making, trust and the ability to identify needs in team environment. Honor and respect for all aspects of customers, employees and investors is important to the corporate climate and culture.

Internal Factors

“Internal factors or environment of a business consists of the organizations resources available to accomplish its goals” (Smith, R., 2008). The internal environment comprises several groups affecting the financial components of an organization. The amount of time the company has been in business and the histories of the financial picture are a few. Management, production and marketing competencies affect the organization. The organizations choice of strategies will determine some aspects of how financially healthy the organization can expect to achieve and maintain.

The overall organizational structure and ongoing strategy are internal factors affecting the financial structure and wellbeing. Current operational practices are internal factors directly affecting the balance sheet, cash flow and financial debt obligations. Forecasting future capital needs and current physical assets should also be included in a financial assessment. Andrew Cameron (2009) recommends consideration of the firm value of the business defined as:

Enterprise value = market value of equity + net debt

where:

net debt = short-term debt + long-term debt

(including current portion) + minority interest + preferred stock + capitalized leases – (cash + cash equivalents)

Organizations should construct and implement an ongoing planning process to review and critique financial matters of the company. Financial projections, accountability and performance metrics are an integral part of the organization and functional operations. “The firm must conduct an ongoing planning process that simultaneously and integratively considers strategic and financial issues” (Moseley, 2009, p 285).

External Factors

External factors affecting an organizations financial status include political, economic, social, and competition dynamics. Political conditions such as government taxes, trade quota, industry subsidies, investment incentives and trade agreements factor into the organizations operations (Manalastas, 2009). Politics are complicated and becoming proficient at monitoring developments is crucial to the organization’s financial planning.

Economic performance and trends is a critical facet of financial planning and assessment. Evaluating the national, regional and global conditions assists in understanding important factors to include the availability of credit, level of disposable income, interest and inflation rates, gross domestic product trends, unemployment trends, and services in various locations (Manalastas, 2009). Surviving during economic downfalls is a real threat to organizations and careful planning can help offset damage from distortions in the economy.

For organizations such as UHG and HNI political and economic factors are important points. Social factors are also critical points to consider. As the population shifts due to aging, baby boomers and influx of foreign nationalities, healthcare providers will be affected. “Decimation and degradation of America’s natural environment is the greatest threat to business and society, except for terrorism” (Manalastas, 2009, para10).

Recognizing the external factors of rival firms is important in planning for financial stability. Manalastas (2009) recommends identifying and ascertaining their strengths, weaknesses, capabilities, opportunities, threats, objectives and strategies. In the healthcare industry UGH and HNI have options such as implementing a competitive intelligence program which benchmarks other organizations for better decision making and planning.

Financial Opportunities

UnitedHealth Group sponsors an annual investor conference to provide information to interested investors. Senior leaders present on the company’s performance, review current trends in healthcare and give updated information on the company’s forecast. UHG can also gain insight to the interested investor’s positions as they provide information to UHG regarding their background and expertise. UHG third quarter results as reported through iStock Analyst reflect the following data:

Health Net, Inc. offers interactive web sites for investors to provide financial and management information. The annual report is embedded in the web site for current investors and potential investors to review (Thomson Mobular, Inc., 2009). Cash flow for HNI for nine months ending September, 2009 is demonstrated in the annual report as detailed in figure 1 (Health Net, Inc., 2009). The Board of Directors is involved in investor relations and adheres to the Corporate Governance Guidelines to comply with legal and moral responsibilities. There are four board committees charged with reviewing and enforcing the guidelines and consists of an audit, compensation, finance and governance committees.

Investors will look for more than just the financial stability of an organization. Compliance with laws and regulations, high moral and ethical standards and integrity are behaviors necessary to create financial permanence. Standards of conduct and professional ethics must flow from management, leadership, staff, and financial accountability. Maintaining accurate books and records for financial accountability is a requirement of being a public company. Both organizations are required to perform at the highest accuracy and integrity of their chosen accounting systems. Employees in the finance department must behave fairly, honestly, timely and adhere to high moral and ethical standards.

Options for Financial Stability

Healthcare provider organizations are in a competitive market and developing methods to achieve financial stability can be tedious and challenging. Having investors is just one element to financial stability. Providing quality services is also vital to remaining solid in the industry. UHG and HNI are among the top organizations, however, maintaining a position in the top group requires continual review and improvement of operational processes, services provided and management integrity.

The internet is a vehicle healthcare providers can use to advertize, provide information and solicit business and investors. “With 60 to 70 million people regularly logging on for healthcare information, there is a huge demand for better and more information” (Sammer, J., 2000). Patients want to be involved in their own personal healthcare and use the internet to research medical conditions, diagnosis and treatments. Having well educated patients who manage their own personal care when possible creates smarter consumers; producing a more efficient market.

Internet innovations provide the potential to reduce the costs of healthcare. Companies are looking to the internet as an enabler of shifting to a defined contribution approach; employees receiving a fixed amount of money from the employer to use to purchase their own healthcare (Sammer, J., 2000, para. 5). Healthcare providers such as UHG and HNI could consider working with employers to provide this type of service to remove employers from the healthcare business and enter into e-Commerce.

Traditionally employees were not aware of the actual cost of healthcare; they were given plan options for reimbursement. Under a contribution service the employees would be empowered to compare costs and acquire knowledge of healthcare benefits. “This way, if they manage their own healthcare and all of its costs appropriately, they will reap the financial benefits” (Sammer, J., 2000, para. 12).

Financial Risk Reduction

To ensure financial stability UHG and HNI should calculate valuation with capital asset pricing model (CAPM). This formula uses varying discount rate to compensate for investment risks. The CAPM formula is:

K_c = R_f + beta x (K_m – R_f)

where:

K_c is the risk-adjusted discount rate (Cost of Capital);

R_f is the rate of a “risk-free” investment (i.e., cash)

K_m is the return rate of a market benchmark

Caution should be used when evaluating risk. “If you get creative enough with the discount rate and long-term growth expectations, you can come up with some wildly unrealistic valuations” (CAPM Calculator, 2009).

The profitability of a company is relative to total assets. Return on assets (ROA) provides an indicator on how efficient assets are used to generate earnings. The formula is basic; division of the company’s annual earnings by total assets. Assets of a company include debt and equity. It demonstrates to potential investors a general idea of how the company is exchanging money for investing into net income. Investors will look for higher ROA numbers; demonstrating the company is earning more money with less investments.

Healthcare provider organizations should also regularly calculate and monitor weighted average cost of capital (WACC). This is the rate a company can expect to pay, on average, to creditors to finance assets. This formula is fairly complex and incorporates several components such as straight debt, common equity, warrants, stock options, etc. The relative weight of each component is calculated to determine if an investment is advisable.  The basic formula is outlined below:

WACC = E/V +Re + D/V * Rd * (1-Tc)

Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

On a basic level, assets of an organization use either debt or equity for financing. Using WACC can determine the interest organizations would be paying for each dollar financed. This is used to compare projects to determine if the investment, project or purchase would be advantageous to undertake. WACC is expressed in percentages.

Conclusion

Financial assessments in the healthcare industry are vital to the continued financial success of the company; evaluating internal and external factors and how they affect the organization’s day-to-day operations. Financial planning cannot be accurate without careful consideration of the internal and external factors. Healthcare providers must create innovate options for strategic planning; management and financial.  One without the other will not be efficient and effective. Careful review and record keeping of cash flow, balance sheets and evaluating profit and loss, and cost of capital are functions which need to be entrenched and deeply rooted in the organization’s structure and culture. Long-term and short-term financial planning and periodic assessments will benefit organizations for developing capital, providing funding, maintaining expense levels while remaining within the legal guidelines for continued organizational operations.

UnitedHealth Group and Health Net, Incorporated have demonstrated successful business practices and financial achievement through best practices and ongoing financial management. Creating innovative methods for corporate functioning, financial planning and sound decision-making are components of an organization dedicated to the investors, members, customers, and community.

References

Cameron, A.E. 2009. Essentials of Health Care Finance. Retrieved from Google Books at http://books.google.com/books?id=_laIaC-TrkUC&pg=PA424&lpg=PA424&dq=internal+factors+affecting+financials&source=bl&ots=91nBvMnU9p&sig=7F9p19rrVvBe91eceGiRQBXdlOI&hl=en&ei=6Hv8SpCYD4bDngfDjP2DBw&sa=X&oi=book_result&ct=result&resnum=8&ved=0CB8Q6AEwBw#v=onepage&q=&f=false

CAPM Calculator. (2009). Money Chimp. Retrieved from http://www.moneychimp.com/articles/valuation/capm.htm

iStock Analyst. (2009). UnitedHealth Group reports third quarter results. Retrieved from http://www.istockanalyst.com/article/viewiStockNews/articleid/3563931

Health Plans. (2008). Health Plans: A channel on AIS Health. Retrieved from http://www.aishealth.com/ManagedCare/CompanyIntel/TenLargest.html

Health Net, Inc. (2009). Health Net: A better decision. Retrieved from http://investor.health.net/phoenix.zhtml?c=70296&p=irol-irhome

Manalastas, R.C. (2009). External factors in business affecting success. Retrieved from http://www.associatedcontent.com/article/2155491/external_factors_in_business_affecting.html?cat=3

Moseley, G.B., (2009) Managing health care business strategy. Jones and Bartlett Publishers, LLC. Retrieved from Google Books at http://books.google.com/books?id=4eYz0zR961AC&pg=PA285&lpg=PA285&dq=internal+factors+affecting+financials&source=bl&ots=Aqma0G2ZmM&sig=xQLmGgF-CoCDq0_qcoU6RW9iQhQ&hl=en&ei=6Hv8SpCYD4bDngfDjP2DBw&sa=X&oi=book_result&ct=result&resnum=2&ved=0CA8Q6AEwAQ#v=onepage&q=&f=false

Sammer, J. (2000). Healthcare consumerism heats up.  Business Finance. Retrieved from http://businessfinancemag.com/article/health-care-consumerism-heats-0901

Smith, Robert. (2008). The External and Internal Factors Affecting Vermont Teddy Bear Co., Inc. Retrieved from http://www.articleclick.com/Article/The-External-and-Internal-Factors-Affecting-Vermont-Teddy-bear-Co.Inc.-/986353

Thomas Mobular, Inc. (2009). Health Net Annual Report. Retrieved from http://thomson.mobular.net/thomson/7/2940/3920

UnitedHealth Group. (2009). Social responsibility. Retrieved from http://www.unitedhealthgroup.com/main/SocialResponsibility.aspx