Financial Distress in Hospitals

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Financial Distress in Hospitals
Frank Musmar. M.S., DBA, Member
The financial managers of a firm in financial distress do not have the financial ability to meet scheduled payments, due to cash flow problems caused by declining asset values (Sun et al., 2014). Carlson, Lewis, and Nelson (2014) Stated that firms in financial distress inquire an increase in operational cost, which will affect the firm's financial performance.
The consequences of financial distress can be business problems such as increased accounting risk, asset risk, liability, and strategic risk (Rosenberg & Ferlie, 2014). These consequences of financial distress are disastrous, since they may lead to discontinuity of operations, increase of legal costs, administrative expenses, as well as other indirect costs (Carlson et al., 2014). Mazumder and Miller (2014) explained that apart from the adverse effects of financial distress on corporations, financial markets also suffer. It is, therefore, necessary to assess financial conditions of the firm from time to time to evaluate its liquidity position. Predicting business failure will help the management take preventive measures, such as operational policy changes, reorganizing the firm's financial structure, voluntary liquidation, and adopting good corporate governance practices (Mazumder & Miller, 2014).

Hospital financial distress is a common problem in the health care industry. From 1995 to 2010, 15-30% of hospitals were considered financially distressed based on a negative total profit margin (Richards, 2014). Very few authors to date have assessed in studies the effect of hospital financial distress on quality of care indicators or patient outcomes. Richards (2014) conducted a comprehensive and systematic literature review to assess hospital financial distress and quality of care or patient outcomes. After conducting the systematic literature review, Richards (2014) stated that it was clear that very few studies ever assessed the relationship between hospital financial distress and patient outcomes, because of the various measures of hospital financial distress. Despite the limited research on this topic, Richards (2014) suggested there was a significant relationship between hospital financial distress and patient outcomes.



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