Career and Life Planning Guidebook for Medical Residents

SECTION I: T MINUS THREE YEARS R E A D : Profit and Not-for-Profit in Healthcare Many physicians cringe at the idea of profits in healthcare. If the goal of a healthcare organization is to provide exceptional care, why do you need to understand revenue, costs and profits? The answer is that every organization must be financially viable to continue in business and serve its larger mission. One comment I have heard frommedical students is that they plan to work for a not-for-profit healthcare organization and are not sure how important it is for them to understand business. Ken Carow, Professor of Finance at the Kelley School of Business states: A not-for-profit business does not have shareholders who benefit from the financial success of the organization. Rather, it has a mission to serve a group of current and future constituents, as laid out in the company’s mission statement. However, that does not mean that it doesn’t have to be managed as a business. A not-for-profit entity shares many characteristics with a for-profit business. As an example, imagine a community hospital whose mission is to serve the healthcare needs of a medium-size city. First, to build a hospital, the organization makes a sizable investment in land, buildings, and equipment. Equipment replacement and growth are financed through a combination of borrowing and investing net assets (similar to retained earnings in for-profit firms). As a result, the community hospital needs to run an operating profit each year to build net assets to replace equipment and grow the operations to servemore constituents. In addition, the needs of the community are likely growing. Due to population growth and demographic changes, the need for healthcare services in the community is growing at 4.8% per year. To continue to have the same level of impact in its community, the not-for-profit hospital has to grow its capacity and impact by this percentage every year. In addition, inflation will lead to higher costs for providing the same services each year. This requires ‘profits’ that are reinvested into new facilities, equipment and employees. CAREER AND LIFE PLANNING GUIDEBOOK FOR MEDICAL RESIDENTS 120