What accounting leaves out of hospital financial management

As PPS and other fixed-price initiatives replace cost-based reimbursement in the hospital industry, the burden of assuming the risk for business success or failure shifts from the payor to the hospital. As a consequence, theories of risk to the business firm which have found application in other industries now deserve attention by hospital management. Incorporating such risk concepts into hospital strategies and actions requires a view of financial management that goes beyond the generally accepted accounting principles of managing and assigning costs for maximum revenue and profitability. This article examines the financial theory of risk in business firms, illustrates the various components of risk as they apply to a hospital business, and discusses how the hospital management strategies of cost-reduction, marketing, diversification, and multiorganizational affiliation can alter the risk characteristics of a hospital business.