Sources of Funds in Hospitals

Sources of Funds in Hospitals

Introduction

·       Hospitals, being capital-intensive organizations, require substantial financial resources to establish, operate, and expand their services.

·       The sources of funds in hospitals can be internal (surpluses, donations, depreciation funds) or external (loans, bank finance, grants).

·       Efficient management of these funds is essential to ensure financial stability, maintain quality care, and support growth through investments in infrastructure, technology, and human resources.

Nature of Funds

• Definition: Funds are the financial resources that hospitals mobilize and utilize to establish, operate, and expand their services.
• Characteristics:
• Hospitals require both short-term (working capital) and long-term (capital investment) funds.
• Sources may be internal (generated by hospital operations) or external (borrowed or raised from outside).
• Funds are deployed to cover operating expenses, capital investments, and contingencies.
• Broad Categories:

1.               Internal Sources – surplus from operations, depreciation funds, donations, grants, retained earnings.

2.               External Sources – equity, long-term loans, bonds, bank finance, venture funding (rare in hospitals).

Loan Funds

• Hospitals often borrow money to meet capital-intensive requirements like construction, purchase of medical equipment, or infrastructure development.
• Sources of Loan Funds:
• Commercial Banks – provide term loans for buildings, machinery, and expansion.
• Financial Institutions – Industrial Development Bank of India (IDBI), Housing & Urban Development Corporation (HUDCO), etc., offer soft loans.
• Government Schemes – concessional loans for setting up rural/charitable hospitals.
• Debentures/Bonds – issued by large corporate hospitals to raise long-term funds.
• Advantages:
• Immediate availability of capital.
• Interest is tax-deductible.
• Limitations:
• Creates repayment liability.
• Burden of fixed interest even during low occupancy or financial downturns.

Short-Term Funds

• Required to maintain working capital and meet day-to-day operational expenses.
• Sources:
• Bank Overdrafts – short-term borrowing against security.
• Trade Credit – delayed payment terms to suppliers of drugs, consumables, or equipment.
• Short-term Loans – repayable within a year.
• Advance Payments – from patients or insurance companies for treatment packages.
• Uses:
• Salary payments, utility bills, consumables purchase, emergency procurements.

Other Revenues for Funds

• Patient Service Revenue – outpatient charges, inpatient charges, diagnostics, surgery, ICU, pharmacy.
• Non-patient Revenues:
• Government Grants – for public/charitable hospitals.
• Donations/Philanthropy – often for infrastructure or free patient care.
• Endowments – funds invested permanently; interest/dividend used for hospital needs.
• Research Grants – from government or international bodies.
• Training and Education Fees – from medical/nursing/paramedical colleges attached to hospitals.

Investment Planning

• Hospitals must plan investments carefully due to the capital-intensive nature of healthcare.
• Principles:
• Align investments with the mission and vision of the hospital.
• Evaluate cost vs. benefit of each investment.
• Ensure liquidity and solvency are not compromised.
• Areas of Investment:
• Land and building (infrastructure).
• High-value medical equipment (MRI, CT, robotic surgery).
• Information systems (HIS, EMR).
• Research and development.

Types of Capital Expenditure

• Definition: Expenditure on acquiring or improving fixed assets that provide long-term benefits.
• Types:
1. New Capital Projects – building new hospitals or facilities.
2. Replacement Expenditure – replacing old medical equipment with advanced technology.
3. Expansion Expenditure – adding new departments (e.g., cardiology wing, cancer center).
4. Modernization Expenditure – upgrading infrastructure, IT systems, or green energy systems.

Capital Expenditure Budget

• Definition: A financial plan that estimates the cost of acquiring or upgrading capital assets.
• Process:
• Departments submit requests for capital expenditure.
• Requests are screened by hospital finance and management committees.
• Prioritization is done based on strategic importance, urgency, and financial viability.
• Contents:
• Estimated cost.
• Expected benefits.
• Source of funds (internal vs. external).
• Timeline for implementation.

Appraisal

• Before approving capital projects, hospitals undertake project appraisal.
• Dimensions of Appraisal:
• Technical Appraisal – feasibility of equipment, infrastructure, and technology.
• Financial Appraisal – expected cost vs. revenue, payback, and ROI.
• Social Appraisal – benefits to the community, charity, accessibility.
• Operational Appraisal – availability of skilled staff and maintenance support.

Estimating Project Cost

• Components include:
• Land & Building Costs (purchase or lease, construction, permits).
• Plant & Equipment Costs (medical equipment, IT systems, furniture).
• Preoperative Expenses (legal fees, project consultancy, licensing).
• Working Capital Margin (initial operating cash).
• Contingency Allowance (5–10% of project cost).

Computation of Financial Ability

• Determines the hospital’s capacity to raise and service funds.
• Key Considerations:
• Debt-equity ratio.
• Interest coverage ratio.
• Cash flow projections.
• Hospital’s past performance and occupancy rates.
• Revenue from insurance schemes (Ayushman Bharat, private TPAs).

Methods of Financial Appraisal

1. Payback Period – time required to recover investment.
2. Average Rate of Return (ARR) – accounting profit as a % of investment.
3. Net Present Value (NPV) – present value of cash inflows minus outflows.
4. Internal Rate of Return (IRR) – discount rate at which NPV = 0.
5. Benefit-Cost Ratio (BCR) – ratio of benefits to costs.
6. Sensitivity Analysis – assesses how project outcomes change under different scenarios (occupancy fluctuations, price hikes).

Capital Expenditure Manual

• A formal document guiding hospital management on capital investment procedures.
• Contents:
• Objectives and principles of capital expenditure.
• Guidelines for proposal submission by departments.
• Standard format for project reports.
• Methods of financial appraisal to be applied.
• Approval hierarchy (department head → finance committee → board of management).
• Monitoring and post-audit mechanisms.
• Purpose:
• Ensures consistency and accountability in capital expenditure.
• Provides a systematic framework for decision-making.
• Minimizes risk of wasteful expenditure.

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