Recent turmoil in the capital markets underscored for hospital leaders the negative impact of various liability-side risks. What are several types of financial risks that a health care organization could take in the course of operations? Cite at least two outside resources. Purchase the answer to view it Purchase the answer to view it Purchase the answer to view it
Introduction
In recent years, hospital leaders have increasingly become aware of the negative impact that various financial risks can have on their organizations. The turmoil in the capital markets has served as a stark reminder of the potential risks that health care organizations may face in their day-to-day operations. This paper will discuss several types of financial risks that a health care organization may encounter and analyze their implications. To ensure accuracy and credibility, this discussion will draw upon the findings and insights of two relevant outside resources.
Types of Financial Risks in Health Care Organizations
1. Interest Rate Risk
Interest rate risk refers to the potential impact of fluctuations in interest rates on the financial performance of a health care organization. Health care organizations often rely on external sources of financing, such as bank loans, to fund their operations and capital projects. Changes in interest rates can affect the cost of borrowing, which can have a significant impact on the financial health of an organization. An increase in interest rates can lead to higher borrowing costs, resulting in increased interest expense and reduced profitability. Conversely, a decrease in interest rates can lower borrowing costs, resulting in potential cost savings and improved financial performance.
The study conducted by Johnson (2017) focused on the impact of interest rate risk on non-profit hospitals, highlighting the importance of assessing and managing this risk. The author found that hospitals with higher debt levels and exposure to variable interest rates were more susceptible to interest rate risk. The study emphasized the need for health care organizations to proactively manage interest rate risk by evaluating potential strategies, such as interest rate swaps, to mitigate the impact of changes in interest rates.
2. Credit Risk
Credit risk refers to the potential loss that a health care organization may face if a borrower defaults on a loan or other financial obligation. Health care organizations often extend credit to patients through patient payment plans or have relationships with payers and government agencies that involve payment terms. An increase in default rates or delays in payment from patients or payers can negatively impact the organization’s cash flow and financial stability.
A report by Standard & Poor’s (2019) highlighted the credit risk faced by health care providers, particularly in the context of Medicaid expansion and reimbursement uncertainties. The report emphasized the importance of monitoring credit risk exposure, particularly for organizations operating in regions where the Medicaid program was being expanded. It also highlighted the need for health care organizations to maintain strong relationships with payers, manage accounts receivable effectively, and evaluate the creditworthiness of patients to mitigate credit risk.
3. Foreign Exchange Risk
Foreign exchange risk refers to the potential impact of fluctuations in foreign currency exchange rates on the financial performance of a health care organization operating internationally. Health care organizations that have international operations or engage in international trade may be exposed to foreign exchange risk. Fluctuations in currency exchange rates can affect the cost of imported goods and services, as well as the value of revenues generated from foreign operations. Changes in exchange rates can impact the financial performance and competitiveness of the organization.
A study by Sameni, Esmaeili, and Sahraei (2018) examined the impact of foreign exchange risk on the financial performance of Iranian hospitals. The authors found that exchange rate fluctuations had a significant impact on the financial performance of the hospitals, particularly in terms of profitability and cash flows. The study highlighted the need for health care organizations operating internationally to develop appropriate hedging strategies to mitigate foreign exchange risk.
Conclusion
Financial risks such as interest rate risk, credit risk, and foreign exchange risk can have a significant impact on the financial performance and stability of health care organizations. It is crucial for hospital leaders to understand these risks and proactively manage them to safeguard the organization’s financial health. By assessing risk exposures, implementing risk mitigation strategies, and monitoring market conditions, health care organizations can navigate through various liability-side risks and ensure long-term sustainability.
References:
Johnson, D. (2017). Interest rate risk and U.S. non-profit hospitals. Journal of Healthcare Finance, 44(1), 43-53.
Sameni, K., Esmaeili, A., & Sahraei, F. (2018). The influence of exchange rate fluctuations on financial performance of hospitals. Management Science Letters, 8(10), 979-988.
Standard & Poor’s. (2019). Credit risk for U.S. not-for-profit healthcare and higher education sectors. Retrieved from https://www.spglobal.com/_assets/documents/marketintelligence/research/
healthcare/cmuh_2019-2-7.pdf