Evaluating U.S. Hospital Liquidity with Current and Quick Ratios

Introduction

Purpose: Evaluate the financial health of U.S. hospitals using current and quick ratios as indicators of liquidity.

Liquidity: Ability of a business to cover its debts with readily available assets.
Importance for Hospitals: With decreased revenues and low operating margins, hospitals must have enough liquid assets to meet payment obligations.

Medicare Cost Report: Used along with Definitive Healthcare calculations to analyze over 5,600 hospitals via the HospitalView product.

Definition: Measures a company's ability to pay short-term debts, calculated as:

[ \text{Hospital Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}} ]
U.S. Hospital Averages:
- Average: 2.79
- Median: 1.70
Industry Benchmarks: Ratios close to or above the average indicate adequate performance. Lower ratios may indicate higher risk.
Size Variance:
- Hospitals with ≤25 beds: Highest current ratio at 3.55.
- Hospitals with 101-250 beds: Lowest current ratio at 2.09.

Definition: A short-term liquidity measure that excludes inventory from current assets:

[ \text{Hospital Quick Ratio} = \frac{\text{Total Current Assets} - \text{Inventory}}{\text{Total Current Liabilities}} ]
U.S. Hospital Averages:
- Average: 2.65
- Median: 1.70
Size Variance:
- Hospitals with ≤25 beds: Highest quick ratio at 3.37.
- Hospitals with 101-250 beds: Quick ratio at 1.97.

Inventory Exclusion: Quick ratio excludes inventory as it may not be easily converted to cash, unlike current ratio.

The evaluation of current and quick ratios provides insights into the liquidity and financial health of hospitals, helping stakeholders understand the capacity to meet short-term obligations.
Hospitals with fewer beds tend to have higher liquidity ratios, likely due to lower median operating margins and higher expense increases.