Kerala’s charitable trust hospitals: How to avoid wrong decisions

Strategies for Kerala's charitable trust hospitals – Part 1

This is the best time for charitable trust hospitals in Kerala to do extremely well as more and more people are having financial problems, thus making them look for cheaper options for healthcare treatment.

Normally this would mean a rush towards government-run hospitals. But there is a severe fund crunch there.

Since government-run hospitals are unable to buy medicines, renovate buildings and repair machines, the number of medical procedures and treatments being done there have been reduced significantly.

Thus, patients have started looking at other alternatives, and charitable trust hospitals are the best alternative due to their low cost.

How are charitable trust hospitals able to charge lower costs when compared to the private for-profit hospitals?

I will explain how this is possible using an example.

Renovation of infrastructure

The key to a successful hospital is proper and continuous investment in renovation of infrastructure like buildings and replacement and upgradation of medical equipment.

To do this, every hospital must set aside a reasonable amount of its profits for such reinvestment.

There are two major differences between charitable trust hospitals and private for-profit hospitals when calculating funds for reinvestment – income tax and dividends.

While private for-profit hospitals have income tax and need to pay dividends to shareholders, charitable trust hospitals have neither.

In fact, the profits of charitable trust hospitals cannot be taken out of the trust and must be invested in the hospital.

Comparison

As can be seen in Figure 1, when a private for-profit hospital makes a profit before tax of Rs 100, they need to pay income tax of around Rs 20, leaving a profit after tax of Rs 80.

Figure 1 – Financial advantage of charitable trust hospitals

Item	Code	Private For-Profit Hospital	Charitable Trust Hospital
Profit Before Tax	A	100	30
Tax	B	20	0
Profit After Tax	C=A-B	80	30
Depreciation	D	20	20
Free Cash Flow	E=C+D	100	50
Renovation/Replacement	F	50	50
Dividend	G=E-F	50	0

 

If depreciation is Rs 20, the private for-profit hospital will have a free cash flow of Rs 100.

Assuming they need to reinvest Rs 50 for renovation and replacement, private for-profit hospitals will be able to pay a dividend of Rs 50.

For a charitable trust hospital to match a comparable private for-profit hospital, it needs to invest the same amount in renovation and replacement.

In this example, a comparable charitable trust hospital would need to invest Rs 50 for renovation and replacement to match the private for-profit hospital shown in this example.

Since there is no income tax or dividend, a charitable trust hospital would need a profit before tax of Rs 30, compared to the Rs 100 for a private for-profit hospital to invest Rs 50 for renovation and replacement.

This gives a significant cost advantage to a charitable trust hospital allowing it price significantly lower than private for-profit hospitals.

Thus, charitable trust hospitals have a huge advantage over private for-profit hospitals.

Unfortunately, we see many charitable trust hospitals being forced to increase their prices to near those of private for-profit hospitals due to wrong decisions.

I will examine some of the wrong decisions taken by charitable trust hospitals, that force them to increase their prices in my subsequent articles.            
                                                                                                                (To be continued)

The author is the Founder and CEO of Results Consulting Group. He is a recognized thought leader on helping entrepreneurs build and implement significant and lasting competitive edges in India and the GCC. The views expressed are personal. email: [email protected] website: www.we-deliver-results.com