INCOME PER BED AS A DETERMINANT OF HOSPITAL S FINANCIAL LIQUIDITY

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1 problems 124 INCOME PER BED AS A DETERMINANT OF HOSPITAL S FINANCIAL LIQUIDITY Agnieszka Bem Wroclaw University of Economics, Wrocław, Poland agnieszka.bem@ue.wroc.pl Paulina Ucieklak-Jeż Jan Dlugosz University in Czestocowa, Czestocowa, Poland p.ucieklak-jez@ajd.czest.pl Paweł Prędkiewicz Wroclaw University of Economics, Wrocław, Poland pawel.predkiewicz@ue.wroc.pl Abstract Hospitals financial condition is very important, in terms of availability and quality of inpatient ealt care services. Inpatient s services consume, in Poland, an important part (about 50%) of National Healt Fund resources, but financial situation of ospitals is difficult and many ospitals report problems wit liquidity and solvency. Te purpose of tis researc is to study te relationsip between te intensity of care, measured by te annual income per bed, and te static liquidity ratios (current ratio and quick ratio). Te researc as been conducted on te sample of 138 Polis ospitals, using data covering te period In order to test researc ypoteses, statistical tools ave been used (T-Student distribution). Te study as sown, tat, during analyzed period, liquidity ratios ave lowered and te level of financial liquidity is, in case of Polis ospitals, lower tan recommended in te literature. Te autors also confirmed te existence of te relationsip between annual income per bed and liquidity ratios. However, te most important finding is tat te relationsip between te ospital s income per bed and financial liquidity ratios is positive only up to a certain level, wic as been estimated at about 60,000-70,000 EUR per bed. Above tis level furter increase in income per bed decreases liquidity ratios. Tis finding seems to be extremely important for ealt care managers, wic usually strive for te income maximization. Key words: ospital, financial liquidity, financial management, CR, QR. Introduction Te ospital is a complex organization, aiming to maximize teir statutory goals, by providing a variety of services, wile taking into account te internal and external constraints, and demand for inpatient services. Tigter budgets and restructuring processes, taking place in almost every country, ave led to iger expectations from patients, te society, ealt professionals and payers (Minvielle et al, 2008). Hospitals do not form a omogeneous group. Hence, te financial situation of te individual units can be very diversified, depending strongly on te market processes (Gapenski, Vogel, Langland-Orban, 1993). Te factors, tat may, potentially, diversify te ospital s activity, and, as a result, financial condition, are as follows: form of te ownersip - limited liability company or joint-stock company, budgetary unit, independent public ealt care institution; te owner - a public or private body;

2 Agnieszka BEM, Paulina UCIEKLAK-JEŻ, Paweł PRĘDKIEWICZ. Income Per Bed as a Determinant of Hospital s Financial Liquidity te aim of activity non-profit, not-for-profit, for profit; te type of ospital surgical, general, etc.; and oter factors, related to a location (urban-rural areas), degree of specialization, linking medicinal and teacing functions (teacing ospitals). Regardless of factors, presented above, and adopted objectives (financial and medical), we sould accept, tat financial balance as a crucial importance for te continuation of a ospital s activity. Tis balance sould be analyzed in longer perspective, providing not only a possibility to cover current costs of te activity, but also investments needed to restore te equipment and fix assets. Te financial situation of te public ospitals in Poland as generally worsened, especially profitability ratios 1. Profitability cannot be judged as te only criterion for assessing te financial ealt of te ospital. Literature studies ave allowed us to extract, oters tan profitability, key areas, suc as: liquidity, solvency, debt management and assets management, activity (related to te efficiency of te management of enterprises on te market) (McKinney, 2004), (Gunter Lane, Longstret, Nixon, 2001), (Penner, 2013), (Zeller, Stanko, Cleverey, 1996), (Watkins, 2000), (Cleverley,Harvey, 1992), (Eret, 1994). One of te major concerns is current liabilities regulation liquidation, wic can disrupt te acieving of adopted medical objectives, and even bankruptcy or need for financial support from te owner. A specific consequence of bad financial situation, in case of Polis public ospitals, is forced transformation into te company (private or public), wic aims to increase te responsibility for financial management. Tis sort-term perspective, represented by liquidity ratio is especially important for ospitals, wic generally do not operate in teir long-run equilibrium and tend to over-invest in capacity and equipment (Smet, 2002). Literature studies ave sown, tat te level of liquidity ratio differs significantly between ospitals, and, generally, is lower, tan level recommended for enterprises (2.0). Empirical studies ave indicated average level of CR equaled to 1.1 (Pink, Daniel, McGillis Hall, Mckillop, 2007), 1.75, wile te average CR value for ospitals in te United States was At te same time, te level of CR in analyzed groups sowed great diversity ( ) (Draffin and Tucker LLP, 2011). Te purpose of tis researc is to study te relationsip between te annual income per bed and te static liquidity ratio. Autors ave decided to answer te question, weter te income per bed as an impact on te level of financial liquidity, measured using CR and QR ratio. Two researc ypoteses ave been formulated: H1: te income per bed, influences on te level of liquidity ratio; H2: te correlation between te income per bed is positive up to a certain (not known yet) level. Above tis level, te correlation is negative. H1 ypotesis assumes, tat te level of annual income per bed, wic sows intensity of care influences liquidity ratios. It can be supposed, tat ospitals aving iger income per bed, sould ave iger liquidity ratios, wat could be associated wit te effect of economies of scale, wic is related to more efficient use of equipment and uman resources. H2 ypotesis supposes tat te positive relationsip is true only up to a certain level, wic sould be empirically estimated. It can be assumed, tat above tis level economies of scale are too low to make up for te ig level of complexity (and cost), related to te most advanced procedures. problems 125 Metodology of Researc Financial liquidity can be measured using a number of indicators. Selection of indicator is, inter alia, derived from te structure of obtained data. Because of te simplicity of use and 1 tis is te conclusion coming from oter autors researc, wic asn t been publised yet.

3 problems 126 Agnieszka BEM, Paulina UCIEKLAK-JEŻ, Paweł PRĘDKIEWICZ. Income Per Bed as a Determinant of Hospital s Financial Liquidity te ability to compare te results obtained wit tose, obtained in oter studies, two liquidity ratios ave been cosen: current ratio (CR), described by formula: current ratio (CR) = (current assets)/ (current liabilities); quick liquidity ratio (QR), described by formula: quick ratio (QR) = (current assets inventories)/ (current liabilities). Liquidity ratios measure te ability to transform liquid assets into cas, in order to pay off current liabilities. Current ratio is te most commonly used measure of financial liquidity in te ealt care sector (Pink et.al., 2007), (McLean, 2002), (Briggs, Briggs, 2004, pp ), (Gunter et al., 2001).Current ratio includes, generally, less liquid assets, suc as inventories, in tis context, te quick ratio takes into account te assets of large liquidity (cas and equivalents, receivables, sort-term investments). In tis study, quick ratio as a complementary caracter. In tis study, te definition of a ospital as an enterprise as been adopted, wic as in its organizational structure at least two units: a ospital ward and admission unit, and as a code 1, according to te classification of medical enterprises. To tis researc, ospitals, owned by local public bodies, ave been qualified, irrespective legal form of activity (independent public ealt care institution SPZOZ, limited liability company or joint-stock company), on condition tat te most of te stock/sare is eld by units of local government (ospitals controlled by local government bodies). Psyciatric ospitals ave been excluded from te study, due to te nature of teir activity and financing. In Poland (2013) operate 440 ospitals, wic are under te control of te local government units (compared to all ospitals in Poland - 878) (Centrum Systemów Informacyjnyc Ocrony Zdrowia, 2012). In order to create te researc sample, a stratified sampling as been applied. Te sampling as been carried out independently in eac layer. Te number of layers as been set taking into account te diversity, wile maintaining proportionality, using te optimal Neyman s sceme: N S WS n = n = n l N S W S = 1 (1) were: n total strengt of te sample, N - strengt of te -layer in population, N W = N - fraction of observations from -layer in population, N total strengt of te population, S - standard deviation in -layer. Assuming, tat 440 ospitals constitute te wole analyzed population, te number of observations as been specified, so tat it as been possible to draw conclusions about te population, caracterized by a certain degree of certainty and precision. Te number of te sample as been determined, according to te formula (Xu, 1999): Z( p(1 p) n = 2 d (2) were: n strengt of te sample; Z Z-Statistic for desired confidence level; p te estimate of te expected proportion of te variable in te population; d- ½ of desired confidence level.

4 Agnieszka BEM, Paulina UCIEKLAK-JEŻ, Paweł PRĘDKIEWICZ. Income Per Bed as a Determinant of Hospital s Financial Liquidity For te confidence level of 95%, Z-Statistic equal 1.96 and for confidence level of 99% Adopting p = 0.10 and d = 0.05, te strengt of te sample as been estimated as follows (Rószkiewicz, 2002): problems n = 2 (0.1(1 0.1) 0.05 = (3) According to tat, finally, 138 ospitals ave been selected. Te study as required creating te database. We ave analyzed financial data coming from 138 public ospitals in Poland. Financial data on revenues, assets and liabilities, coming from Amadeus Database, ave been supplemented by organizational information, concerning, for example, te number and structure of beds, wic as been obtained from te Registry of Medical Entities (ttp://rpwdl.csioz.gov.pl/). Analysis as covered data from te years Hypoteses, formulated during initial stages of researc, ave required te appraisal of te relationsip between annual income per one bed and te level of current liquidity (CR) and quick liquidity (QR) ratios. Te strengt and te direction of te relationsip ave been measured using te Pearson correlation coefficient, using te formula: n 1 ( xi x) ( yi y) n i=1 rx y = sx s y (4) Ten, te statistical significance of obtained correlation coefficients as been tested, assuming te following construction of researc ypotesis: H0: te correlation coefficient is insignificant statistically (null ypotesis); H1: te correlation coefficient is statistically significant; For wic te test is statistic: te = r 2 1 r n 2 (5) tat, assuming te validity of H0 ypotesis as te T-Student distribution wit n-2 degrees of freedom. Results of Researc In order to estimate te extent of te problem, descriptive statistic for te wole sample as been calculated (Table 1). Te average value of CR as lowered relevantly during analyzed period and in 2011 reaced te level equaled During te overall period QR ratio as received lower values tan te CR and also as lowered during years. Table 1. Descriptive statistic for current ratio, wole sample, years CR QR Mean Min. Max. Standard deviation Mean Min. Max. Standard deviation Source: own study

5 problems 128 Agnieszka BEM, Paulina UCIEKLAK-JEŻ, Paweł PRĘDKIEWICZ. Income Per Bed as a Determinant of Hospital s Financial Liquidity Analysis of te relationsip between indicators of liquidity (bot CR and QR) and annual income on te bed as indicated, tat tere is a positive correlation between tese variables. Te correlation is of average strengt, but igly statistically significant (Table 2). On te significance level α<0.01 te H1 ypotesis can be accepted, provided tat tis relationsip asn t occurred in 2009, wat sows te need for furter researc. Table 2. Correlation between financial liquidity ratios and annual income per bed. Year CR QR R xy p R xy p *** *** *** *** * significance level α = 0.1, ** significance level α = 0.05*** significance level α = 0.01 Source: own study In order to prove te H2 ypotesis, ospitals ave been split into 3 groups, according to te level of annual income per 1 bed. Tere can be observed te positive relationsip between liquidity ratio (bot CR and QR) and income per bed in ospitals wit small and average income per bed and negative relationsip for ospitals wit igest intensity of care (Table 3). Tat allows to accept, on te significance level α<0.05, te H2 ypotesis. Table 3. Correlation between financial liquidity ratios and annual income per bed, ospital split into groups. Year Annual income per bed (tousands of PLN) CR QR R xy p R xy p up to * * ** * iger tan ** ** up to ** ** ** ** iger tan ** * up to ** * ** ** iger tan ** ** * significance level α = 0.1, ** significance level α = 0.05*** significance level α = 0.01 Source: own study

6 Agnieszka BEM, Paulina UCIEKLAK-JEŻ, Paweł PRĘDKIEWICZ. Income Per Bed as a Determinant of Hospital s Financial Liquidity Discussion problems 129 Te literature review suggests, tat te recommended level of current liquidity ratio for ospitals, sould be about 2.0. Tis means, tat it does not diverge from te level of liquidity recommended for commercial companies. Tis observation coincidence wit results of researc, carried out in American ospitals, for wic te average level of te CR index equaled to Te analysis as sown tat Polis ospitals are caracterized by generally lower (according to oter studies) level of liquidity. Wat is important, liquidity ratios, during analyzed period, as lowered, bot in case of CR and QR ratio.te average level of te CR in 2009 was 1.327, wile in In te case of QR it was and 1.220, respectively. Liquidity is not only low but also decreased in te subsequent years tested (49% for CR and 53% for QR). It sould be pointed out, tat tere is relatively little difference between te value of te CR and te QR ratio. Tat suggests, tat stocks (inventories) do not play a significant role as a component of te ospital s current asset - inventories relate primarily to drugs and disposable materials, and tey are subject to considerable rotation. Te study as proved te statistically significant relationsip between te annual revenue per one bed and te level of liquidity (measured bot by CR and QR). Tis means, tat te increase in te intensity of care influences positively on te level of financial liquidity. Te strengt of tis relationsip increases in subsequent years, togeter wit a decrease in te average level of liquidity. Tis observed relationsip is generally true for ospitals of small and medium intensity care, wit annual income per one bed lower tan te 60,000 70,000 EUR. In te case of ospitals wit te lowest income per 1 bed (less tan 30,000 EUR) te strengt of tis positive relationsip is iger tan in te case of ospitals wit an average income per bed (30,000-60,000 EUR). So, for ospitals caracterized by small and medium income per bed, increasing revenue improves liquidity indicators. Tere as also been observed, tat wit te increase in te average liquidity, te strengt of te relationsip grows (increasing correlation coefficients).in te case of ospital, caracterized by ig income per one bed (iger tan 60,000-70,000 EUR), furter increase in income decreases, bot CR and QR, ratios. Te interpretation s limitation, in tis case, is related to te fact, tat tis relationsip asn t been observed in 2009, and obtained correlation coefficients are of moderate strengt, despite of te very ig statistical significance. A limitation of te analysis is related to te different income ranges in every analyzed year. For tis reason, te study sould be carried out again using a larger sample. Results presented above are difficult to compare to oter studies, because literature review doesn t provide a clear evidence in tis area. Previous studies, conducted primarily in te United States, focused on te analysis of profitability or te ospital s optimum size, from te point of view of profitability. Tis indicates te need for broader comparative researc, because liquidity may affect ospital s performance even more tan profitability, wic, on te oter and, can always be seen as te primary aim of activity. Conclusions Te intensity of care, wic can be expressed as te volume of te annual revenue generated by one bed, is a very important indicator in te assessment of te ospital s activity. Usually, it is assumed, tat te iger te income per one bed is, te better is te financial condition of te ospital. It is also believed, tat tis is due to te better exploitation of beds (for example sorter average lengt of stay) or providing more advanced procedures. Tat s wy, te primary aim of eac ealt care manager is, to increase te revenues generated by one ospital bed. Tis researc supports, to some extent, tis assertion, because it seems, tat increase in revenue per bed improves liquidity.

7 problems 130 Agnieszka BEM, Paulina UCIEKLAK-JEŻ, Paweł PRĘDKIEWICZ. Income Per Bed as a Determinant of Hospital s Financial Liquidity However, te most important conclusion of te study is, tat above a certain level, increase in revenue is negatively correlated wit financial liquidity. Tis finding is of particular importance for ospitals tat provide igly specialized procedures. Due to some limitation, mentioned above, conclusions sould be considered preliminary, and certainly tey require retesting, conducted on a larger sample. References Centrum Systemów Informacyjnyc Ocrony Zdrowia. (2012). Biuletyn Statystyczny Ministerstwa Zdrowia za 2011 rok.warszawa. Cleverley, W. Harvey, R. (1992). Does ospital financial performance measure up? Healtcare Financial Management, 46 (5), Draffin and Tucker LLP. (2011). Executive Summary. Critical Access Hospital Financial Analyses. Retrieved from ttps://dc.georgia.gov/sites/dc.georgia.gov/files/imported/vgn/images/ portal/cit_1210/45/59/ executive_summary_critical_access_hospital_financial_ Analyses_2012.pdf, Eret, J. L. (1994). Te development and evaluation of ospital performance measures for policy analysis. Medical Care, 6, Gapenski, L., Vogel, W., Langland-Orban, B. (1993). Te determinants of ospital profitability. Hospital and Healt Services Administration, 1, Gunter Lane, S., Longstret, E., Nixon, V. (2001). A community leader s guide to ospital finance. Evaluating ow a ospital gets and spends its money. Boston: Harvard Scool of Public Healt. McKinney, J. B. (2004). Effective financial management in public and nonprofit agencies. Greenwood Publising Group. Minvielle, E., Sicotte, C., Campagne, F., Contandriopoulos, A., Jeantet, M., Preaubert, N. (2008). Hospital performance: Competing or sared values? Healt Policy, 87, Penner, S. J. (2013). Economics and financial management for nurses and nurse leaders: Second Edition. New York: Springer Publising Company. Pink, G. H., Daniel, I., McGillis Hall, L., Mckillop, I. (2007). Selection of key financial indicators: A literature, panel and survey approac. Healtcare Quarterly, 1, Rószkiewicz, M. (2002). Metody ilościowe wbadaniac marketingowyc. Wydawnictwo Naukowe PWN. Warszawa. Smet, M. (2002). Cost caracteristics of ospitals. Social Science & Medicine, 6, Watkins, A. L. (2000). Hospital financial ratio classification patterns revisited: Upon considering nonfinancial information. Policy, Journal of Accounting and Public, 1, Xu, G. (1999). Estimating sample size for a descriptive study in quantitative researc. Quirk s Marketing Researc Review, 1, 13-`17. Zeller, T. L., Stanko, B. B., Cleverey, W. O. (1996). A revised classification pattern of ospital financial ratios. Journal of Accounting and Public Policy, 2, Advised by Judita Stankutė, SMC Scientia Educologica, Lituania Received: May 09, 2014 Accepted: July 08, 2014

8 Agnieszka BEM, Paulina UCIEKLAK-JEŻ, Paweł PRĘDKIEWICZ. Income Per Bed as a Determinant of Hospital s Financial Liquidity problems 131 Agnieszka Bem P.D., Assistant Professor, Wroclaw University of Economics, International and Public Finance Department, Komandorska 118/120, Wrocław, Poland. agnieszka.bem@ue.wroc.pl Paulina Ucieklak-Jeż P.D., Assistant Professor, Jan Dlugosz University in Czestocowa, Faculty of Social Science, Waszyngtona 4/8, Częstocowa, Poland. p.ucieklak-jez@ajd.czest.pl Paweł Prędkiewicz P.D., Assistant Professor, Wroclaw University of Economics, Department of Finance, Komandorska 118/120, Wrocław, Poland. pawel.predkiewicz@ue.wroc.pl