reply to 2 discussions


1. A recent decision I made in which I weighed the marginal cost and marginal benefit would be volunteering for this deployment I’m currently on. The reason why it was a marginal cost was a lot. I had to leave my dog behind, which was really emotional for me. I also had to say goodbye to friends and family who helped me grow all of last year. Another marginal cost was missing out on life events during this time. From seeing my niece grow from afar to my nephew being born and not being there for him, missing out was a major setback for me.
However, there are just as many marginal benefits to this. I’ve made an abundance of friends during this time. A few of them are going into fields that I also want to pursue, so we saw this as professional networking. Moreover, the long-term marginal benefits also come into play. The military is known for its benefits, and one is their educational benefits. I wouldn’t have to take out any more student loans to finish my degree or even pursue a graduate degree. The phrase “distance makes the heart grow fonder” is also appropriate. Being away from home for nearly a year has allowed me to appreciate my friends and loved ones more than I ever have.
2. Every decision we make in life provides us with some benefit, known as marginal benefit, as well as some cost, known as marginal cost. The marginal cost is the cost of each additional increment or unit; if the marginal cost is greater than the marginal benefit, we must choose which decision to make in order to avoid higher costs and negative consequences.
My most recent decision as a college student has been to leave my original home country of Palestine and pursue a bachelor’s degree in law in the United States, where I was born. Choosing to study at Montclair State University rather than any university in Palestine in the major that interests me, law, will provide me with a higher marginal benefit than the cost marginal.I will have a better chance of getting into a top law school, which will increase my chances of finding a better job in the future. I will also benefit from studying law in the US. more pay. living stability, earning a living, language skills, and interpersonal relationships. On the other hand, if I studied law in my own country, the benefits would still be marginally outstanding, but the overall cost would be higher because my chances of receiving a scholarship to a top law school would be lower. As a result, my future and overall benefits would also be lower.


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Chapter 1 : Healthcare F inance Basics 11

is carried out under the direction of the organizations chief financial officer
and hence falls under the overall category of finance.

In general, finance activities include the following:

Planning and budgeting. First and foremost, healthcare finance
involves evaluating the financial effectiveness of current operations and
planning for the future. Budgets play an important role in this process.

Financial reporting. For a variety of reasons, it is important for
businesses to record and report to outsiders the results of operations
and current financial status. This is typically accomplished by a set of
financial statements.

Capital investment decisions. Although capital investment is typically
handled by senior management, managers at all levels must be concerned
with the capital investment decision-making process. Decisions that
result from this process, which are called capital budgeting decisions,
focus on the acquisition of land, buildings, and equipment. They are the
primary means by which businesses implement strategic plans, and hence
they play a key role in an organizations financial future.

Financing decisions. All organizations must raise capital to buy the
assets necessary to support operations. Such decisions involve the
choice between internal and external funds, the use of debt versus
equity capital, the use of long-term versus short-term debt, and the
use of lease versus conventional financing. Although senior managers
typically make financing decisions, these decisions have ramifications for
managers at all levels.

Revenue cycle and current accounts management. Revenue cycle
management includes the billing and collections function, while
current accounts management involves the organizations short-term
assets, such as cash and inventories, and short-term liabilities, such
as accounts payable and debt. Such functions and accounts must be
properly managed both to ensure operational effectiveness and to
reduce costs. Generally, managers at all levels are involved to some
extent in revenue cycle and current accounts management.

Contract management. In todays healthcare environment, health
services organizations must negotiate, sign, and monitor contracts with
managed care organizations and third-party payers. The financial staff
typically has primary responsibility for these tasks, but managers at all
levels are involved in these activities and must be aware of their effects
on operating decisions.

Financial risk management. Many financial transactions that take place to
support the operations of a business can themselves increase the businesss
risk. Thus, an important finance activity is to control financial risk.

A detailed plan,
in dollar terms, of
how a business
and its subunits
will acquire and
use resources
during a specified
period of time.

prepared by
that convey the
financial status of
an organization.
The four primary
statements are the
income statement,
balance sheet,
statement of
changes in equity,
and statement of
cash flows.

capital budgeting
The process of
analyzing and
choosing new
long-term assets
such as land,
buildings, and

The funds raised
by a business that
will be invested
in assets, such as
land, buildings,
and equipment
that support the






























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Account: s4264928.main.eds

G apenski s Healthcare F inance12

These specific finance activities can be summarized by the four Cs:
costs, cash, capital, and control. The measurement and minimization of costs
is vital to the financial success of any business. Cash is the lubricant that
makes the wheels of a business run smoothlywithout it, the business grinds
to a halt. Capital represents the funds used to acquire land, buildings, and
equipment. Without capital, businesses would not have the physical resources
needed to provide goods and services. Finally, a business must have adequate
control mechanisms to ensure that its capital is being wisely employed and its
physical resources are protected for future use.

In times of high profitability and abundant financial resources, the
finance function tends to decline in importance. Thus, at the time when most
healthcare providers were reimbursed on the basis of costs incurred, the role
of finance was minimal. The most critical finance function was cost identifica-
tion because it was more important to account for costs than it was to control
them. In response to payer (primarily Medicare) requirements, providers
(primarily hospitals) churned out a multitude of reports both to comply with
regulations and to maximize revenues. The complexities of cost reimburse-
ment meant that a large amount of time had to be spent on cumbersome
accounting, billing, and collection procedures. Thus, instead of focusing on
value-adding activities, most finance work focused on bureaucratic functions.

Now, finance functions are typically much more strategic and sophisti-
cated in recognition of the changes that have occurred in the health services
sector. Although billing and collections remain important, to be of maximum
value to the enterprise today, the finance function must support a much broader
array of activities, including strategy development, cost containment efforts,
third-party payer contract negotiations, joint venture decisions, risk manage-
ment, and clinical integration. In essence, finance must help lead organizations
into the future rather than merely record what has happened in the past.

In this book, the emphasis is on the finance function, but there are no
unimportant functions in healthcare organizations. Senior executives must
understand a multitude of other functions, such as operations, marketing,
facilities management, quality improvement, and human resource manage-
ment, in addition to finance. Still, all business decisions have financial impli-
cations, so all managerswhether they are in finance or notmust know
enough about finance to properly incorporate any financial implications into
decisions made within their own specialized areas.

1. What is the role of finance in todays health services organizations?
2. How has this role changed over time?
3. What are the four Cs?


four Cs
A mnemonic for
the four basic
finance activities:
costs, cash,
capital, and

A resource use
associated with
providing or
supporting a
specific service.

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Chapter 1 : Healthcare F inance Basics 13

The Structure of the Finance Department

The size and structure of the finance department within health services
organizations depend on the type of provider and its size. Still, the finance
department within larger provider organizations generally follows the model
described here.

The head of the finance department holds the title chief financial
officer (CFO) or sometimes vice president of finance. This individual typi-
cally reports directly to the organizations chief executive officer (CEO) and is
responsible for all finance activities within the organization.

The CFO directs two senior managers who help manage finance activi-
ties. First is the comptroller (pronounced, and sometimes spelled, control-
ler), who is responsible for accounting and reporting activities such as routine
budgeting, preparation of financial statements, payables management, and
patient accounts management. For the most part, the comptroller is involved
in the activities covered in chapters 38 of this text. Second is the treasurer,
who is responsible for the acquisition and management of capital (funds).
The treasurers activities include the acquisition and employment of capital,
cash and debt management, lease financing, financial risk management, and
endowment fund management (within not-for-profits). In general, the trea-
surer is involved in the activities discussed in chapters 1117 of this text.

Of course, in larger organizations, the comptroller and treasurer
have managers with responsibility for specific functions, such as the patient
accounts manager, who reports to the comptroller, and the cash manager,
who reports to the treasurer.

In very small businesses, many of the finance responsibilities are com-
bined and assigned to just a few individuals. In the smallest health services
organizations, the entire finance function is managed by one person, often
called the business (practice) manager.

1. Briefly describe the typical structure of the finance department
within a health services organization.

2. How does the structure of the finance department differ between
small and large health services organizations?


Health Services Settings

Health services are provided in a variety of settings, including hospitals,
ambulatory care facilities, long-term care facilities, and even at home.

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G apenski s Healthcare F inance14

Before the 1980s, most health services organizations were independent
and not formally linked with other organizations. Those that were linked
tended to be part of horizontally integrated systems that controlled a
single type of healthcare facility, such as hospitals or nursing homes. Over
time, however, many health services organizations have diversified and
become vertically integrated through either direct ownership or contractual

Most readers of this text are familiar with health services settings either
through previous courses or work in the field. For readers who have not
had exposure to health services settings, the chapter 1 supplement, available
online at, provides additional information.

1. Name a few settings in which health services are provided.
2. Briefly describe horizontal and vertical integration.


Current Managerial Challenges

In recent years, the American College of Healthcare Executives has surveyed
CEOs regarding the most critical concerns of healthcare managers. Finan-
cial concerns have headed the list of challenges every year since the survey
began in 2002. When asked to rank their specific financial concerns, in 2018,
CEOs put costs for staff, supplies, and other expenses; Medicaid reimburse-
ment; and operating costs at the forefront.1 (Reimbursement is discussed in

In a survey of senior healthcare executives conducted by the Advisory
Board in 2019, respondents reported that their most pressing issues were
revenue growth, population health, and accountable care organization strat-
egy and cost containment.2 Finally, a survey conducted by the Healthcare
Financial Management Association identified improving the accuracy of clini-
cal documentation as a key revenue cycle (billing and collecting on a timely
basis) concern.3

Taken together, the results of these surveys confirm that finance is of
primary importance to todays healthcare managers. The remainder of this
book is dedicated to helping you confront and solve these issues.

1. What are some important issues facing healthcare managers today?

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Chapter 1 : Healthcare F inance Basics 15

Legal Forms of Businesses

Throughout this book, the focus is on business financethat is, the prac-
tice of accounting and financial management within business organizations.
There are three primary legal forms of business organization: proprietorship,
partnership, and corporation. In addition, there are several hybrid forms.
Because most health services managers work for corporations, and because
not-for-profit businesses are organized as corporations, this form of organiza-
tion is emphasized. However, some medical practices are organized as propri-
etorships, and partnerships and hybrid forms are common in group practices
and joint ventures, so health services managers must be familiar with all forms
of business organization.

A proprietorship, sometimes called a sole proprietorship, is a business owned
by one individual. Going into business as a proprietor is easythe owner
simply begins business operations. However, most cities require even the
smallest businesses to be licensed, and state licensure is required for most
healthcare professionals.

A partnership is formed when two or more people associate to conduct a
business that is not incorporated. Partnerships may operate under different
degrees of formality, ranging from informal oral understandings to formal
agreements filed with the state in which the partnership does business. Both
the proprietorship and partnership forms of organization are easily and inex-
pensively formed, are subject to few government regulations, and pay no
corporate income taxes. All earnings of the business, whether reinvested in
the business or withdrawn by the owner(s), are taxed as personal income to
the proprietor or partner.

Proprietorships and partnerships have several disadvantages, including
the following:

Selling their interest in the business is difficult for the owners.
The owners have unlimited personal liability for the debts of the

business, which can result in losses greater than the amount invested in
the business. In a proprietorship, unlimited liability means that the owner
is personally responsible for the debts of the business. In a partnership,
it means that if any partner is unable to meet his or her obligation in
the event of bankruptcy, the remaining partners are responsible for the
unsatisfied claims and must draw on their personal assets if necessary.

A simple form of
business owned by
a single individual;
also called sole

A nonincorporated
business entity
that is created
by two or more

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G apenski s Healthcare F inance16

The life of the business is limited to the life of the owners.
It is difficult for proprietorships and partnerships to raise large amounts

of capital. This is generally not a problem when the business is very
small or when the owners are very wealthy; however, the difficulty of
attracting capital becomes a real handicap if the business needs to grow
substantially to take advantage of market opportunities.

A corporation is a legal entity that is separate and distinct from its owners
and managers. The creation of a separate business entity gives these primary

A corporation has an unlimited life and can continue in existence after
its original owners and managers have died or left the company.

It is easy to transfer ownership in a corporation because ownership is
divided into shares of stock that can be sold.

The owners of a corporation have limited liability.

To illustrate limited liability, suppose that an individual made an
investment of $10,000 in a partnership that subsequently went bankrupt,
owing $100,000. Because the partners are liable for the debts of the partner-
ship, that partner could be assessed for a share of the partnerships debt in
addition to the loss of his or her initial $10,000 contribution. In fact, if the
other partners were unable to pay their shares of the indebtedness, one part-
ner would be held liable for the entire $100,000. However, if the $10,000
had been invested in a corporation that went bankrupt, the potential loss for
the investor would be limited to the $10,000 initial investment. (However,
in the case of small, financially weak corporations, the limited liability feature
of ownership is often fictitious because bankers and other lenders will require
personal guarantees from the stockholders.) Because of these three factors
unlimited life, ease of ownership transfer, and limited liabilitycorporations
can more easily raise money in the financial markets than can sole proprietor-
ships or partnerships.

The corporate form of organization has two primary disadvantages.
First, corporate earnings of taxable entities are subject to double taxation
once at the corporate level and then again at the personal level. Second, set-
ting up a corporation, and then filing the required periodic state and federal
reports, is more costly and time-consuming than what is required to establish
a proprietorship or partnership.

Setting up a corporation requires that the founders, or their attor-
ney, prepare a charter and a set of bylaws. Today, attorneys have standard

A legal business
entity that is
separate and
distinct from
its owners (or
community) and

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Chapter 1 : Healthcare F inance Basics 17

templates for charters and bylaws, so they can set up a no-frills corporation
with modest effort. In addition, several companies offer online services that
help with the incorporation process. Still, setting up a corporation remains
relatively difficult compared with a proprietorship or partnership, and it is
even more difficult if the corporation has nonstandard features, such as mul-
tiple classes of stock.

Hybrid Forms of Organization
Although the three basic forms of organizationproprietorship, partnership,
and corporationhistorically have dominated the business scene, several
hybrid forms of organization have become quite popular in recent years.

In general, the hybrid forms are designed to limit owners liability
without having to fully incorporate. For example, in a limited liability part-
nership (LLP), the partners have joint liability for all actions of the partner-
ship, including personal injuries and indebtedness. However, all partners
enjoy limited liability regarding professional malpractice because partners
are only liable for their own individual malpractice actions, not those of the
other partners. In spite of limited malpractice liability, the partners are jointly
liable for the partnerships debts. Other hybrid forms of organization include
limited liability companies (LLCs), professional corporations (PCs), and pro-
fessional associations (PAs).

1. What are the three primary forms of business organization, and
how do they differ?

2. What is the purpose of hybrid forms of business organization?


Corporate Ownership

In the previous section, we discussed the different legal forms of businesses.
Now, we turn our attention to the two ownership forms of corporations:
for-profit and not-for-profit. Unlike other sectors in the economy, not-
for-profit corporations play a major role in the healthcare sector, especially
among providers. For example, about 56 percent of the community hos-
pitals in the United States are private, not-for-profit hospitals. Only 25
percent of all community hospitals are investor owned; the remaining 19
percent are government hospitals.4 Furthermore, not-for-profit ownership is
common in the nursing home, home health care, hospice, and health insur-
ance industries.

limited liability
partnership (LLP)
A partnership form
of organization
that limits the
liability of its

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G apenski s Healthcare F inance18

Investor-Owned Corporations
When you think of a corporation, an investor-owned, or for-profit, cor-
poration likely comes to mind. For example, Ford (, IBM
(, and Microsoft ( are investor-owned
corporations. In health services, corporations such as HCA Healthcare
( and Community Health Systems (www.chs.
net) are examples of large for-profit hospital systems; Kindred Health-
care ( and Brookdale Senior Living (www.
brookdale. com) are examples of long-term care providers; Select Medical
( medical .com) and Encompass Health (www.encompasshealth.
com) offer rehabilitation services; and MEDNAX ( offers
pediatric services. Individuals become owners of for-profit corporations by
buying shares of common stock in the company. The stockholders (also called
shareholders) are the owners of investor-owned corporations. As owners, they
have two basic rights:

The right of control. Common stockholders have the right to vote
for the corporations board of directors, which oversees the management
of the company. Each year, a companys stockholders receive a proxy
ballot, which they use to vote for directors and to vote on other
issues that are proposed by management or stockholders. In this way,
stockholders exercise control over the corporation. In the voting
process, stockholders cast one vote for each common share held.

A claim on the residual earnings of the firm. A corporation sells
products or services and realizes revenues from the sales. To produce
these revenues, the corporation must incur expenses for materials,
labor, insurance, debt capital, and so on. Any excess of revenues
over expensesthe residual earningsbelongs to the shareholders
of the business. Often, a portion of these earnings is paid out in
the form of dividends, which are cash payments to stockholders, or
stock repurchases, in which the company buys back shares held by
stockholders. However, management typically elects to reinvest some
(or all) of the residual earnings in the business, which presumably will
produce even higher payouts to stockholders in the future.

Compared with not-for-profit corporations (discussed next), three
key features make investor-owned corporations different. First, the owners
(stockholders) of the corporation are well defined and exercise control of the
business by voting for directors. Second, the residual earnings of the business
belong to the owners, so management is responsible only to the stockhold-
ers for the profitability of the firm. Finally, investor-owned corporations are
subject to various forms of taxation at the local, state, and federal levels.

A corporation
that is owned by
shareholders who
furnish capital and
expect to earn a
return on their

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Chapter 1 : Healthcare F inance Basics 19

Not-for-Profit Corporations
If an organization meets a set of stringent requirements, it can qualify for
incorporation as a tax-exempt, or not-for-profit, corporation. Tax-exempt
corporations are sometimes called nonprofit corporations. Because nonprofit
businesses (as opposed to pure charities such as United Way) need profits to
sustain operations, and because it is hard to explain why nonprofit corpora-
tions should earn profits, the term not-for-profit better describes such health
services corporations. Examples of not-for-profit health services corporations
include Kaiser Permanente (, Catholic
Health Initiatives (, and the Mayo Clinic
Health System (

Tax-exempt status is granted to corporations that meet the tax defini-
tion of a charitable organization as defined by Internal Revenue Service (IRS)
tax code section 501(c)(3) or 501(c)(4). Hence, such corporations are also
known as 501(c)(3) or 501(c)(4) corporations. The tax code defines a charita-
ble organization as any corporation, community chest, fund, or foundation
that is organized and operated exclusively for religious, charitable, scientific,
public safety, literary, or educational purposes. Because the promotion of
health is commonly considered a charitable activity, a corporation that pro-
vides healthcare services can qualify for tax-exempt status, provided that it
meets other requirements.

In addition to the charitable purpose, a not-for-profit corporation
must be organized and run so that it operates exclusively for the public,
rather than private, interest. Thus, no profits can be used for private gain,
and no direct political activity can be conducted. Also, if the corporation is
liquidated or sold to an investor-owned business, the proceeds from the liqui-
dation or sale must be used for charitable purposes. Because individuals can-
not benefit from the profits of not-for-profit corporations, such organizations
cannot pay dividends. However, the prohibition of private gain from profits
does not prevent parties, such as managers and physicians, from benefiting
through salaries, perquisites, contracts, and so on.

Not-for-profit corporations differ significantly from investor-owned
corporations. Because not-for-profit firms have no shareholders, no single
body of individuals has ownership rights to the firms residual earnings or
exercises control of the firm. Rather, control is exercised by a board of trustees
that is not constrained by outside oversight, as is the board of directors of
a for-profit corporation, which must answer to stockholders. Also, not-for-
profit corporations are generally exempt from taxation, including both prop-
erty and income taxes, and have the right to issue tax-exempt debt (municipal
bonds). Finally, individual contributions to not-for-profit organizations can
be deducted from taxable income by the donor, so not-for-profit firms have
access to tax-subsidized contribution capital.

A corporation that
has a charitable
purpose, is tax
exempt, and has
no owners; also
called nonprofit

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G apenski s Healthcare F inance20

For-profit corporations must file annual income tax returns with the
IRS. The equivalent filing for not-for-profit corporations is IRS Form 990,
titled Return of Organization Exempt from Income Tax. Its purpose is to
provide both the IRS and the public with financial information about not-for-
profit organizations, and it is often the only source of such information. It is
also used by government agencies to prevent organizations from abusing their
tax-exempt status. Form 990 requires significant disclosures related to gover-
nance and boards of trustees. In addition, hospitals are required to file Sched-
ule H to Form 990, which includes financial information on the amount and
type of community benefit (primarily charity care) provided, bad debt losses,
Medicaid patients, and collection practices. IRS regulations require not-for-
profit organizations to provide copies of their three most recent Form 990s to
anyone who requests them, whether in person or by mail, fax, or email. Form
990s are also available to the public through several online services.

The financial problems facing most federal, state, and local govern-
ments have prompted politicians to take a closer look at the tax subsidies pro-
vided to not-for-profit hospitals. The Patient Protection and Affordable Care
Act (ACA) of 2010 added four requirements that must be met for hospitals
to maintain their tax-exempt status: (1) conducting a community health needs

assessment every three years and develop-
ing plans for implementation; (2) establish-
ing a written financial assistance policy; (3)
charging patients who qualify for financial
assistance amounts similar to what insured
patients are charged; and (4) not engag-
ing in aggressive collection efforts before
making an effort to determine whether a
patient is eligible for financial assistance.5

Likewise, officials in several states
have proposed or enacted legislation man-
dating the minimum amount of charity
care to be provided by not-for-profit hospi-
tals and the types of billing and collections
procedures that can be applied to the unin-
sured.6 For example, Texas has established
minimum requirements for charity care
that hold not-for-profit hospitals account-
able to the public for the tax exemptions
they receive. The Texas law specifies four
tests, and each hospital must meet at least
one of them. The test that most hospitals
use to comply with the law requires that at

Form 990
A form filed by
with the Internal
Revenue Service
that reports
on governance
and charitable

Schedule H
An attachment
to Form 990 filed
by not-for-profit
hospitals that
gives additional
on charitable

For Your Consideration
Making Not-for-Profit Hospitals Do Good

Many people have criticized not-for-profit hos-
pitals for not earning their charitable exemp-
tions. In a 2010 court ruling, the Illinois Supreme
Court concluded that Provena Covenant hospital,
located in Urbana, Illinois, was not a charitable
institution for property tax purposes. The courts
opinion reasoned that the primary use of the
hospital property was to provide medical services
for a fee, whereas charity means providing a gift
to the community. The opinion further pointed
out that (1) the charity care being provided was
subsidized by payments from other patients; (2)
many patients granted partial charity care still
paid enough to cover costs; and (3) the hospitals
community benefit activities, such as a residency
program and an education program for emergency
responders, also benefited the hospital and thus
were not truly gifts to the community. Thus, the
hospital property was not in charitable use.


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Chapter 1 : Healthcare F inance Basics 21

least 4 percent of net patient service rev-
enue be spent on charity care.

Finally, municipalities in several
states have attacked the property tax
exemptions of not-for-profit hospitals that
have neglected their charitable mis-
sions. For example, in 2015, a tax court in
New Jersey canceled a not-for-profit hos-
pitals property tax exemption because it
was found to have substantial for-profit
elements and characteristics that made it
ineligible for the exemption.7 According
to one estimate, if all not-for-profit hos-
pitals had to pay taxes comparable to their
investor-owned counterparts, local, state,
and federal governments would receive an
additional $17.9 billion in tax revenues.8
This estimate explains why tax authorities
in many jurisdictions are pursuing not-
for-profit hospitals as a source of revenue.

The inherent differences between investor-owned and not-for-profit
organizations have profound implications for many elements of healthcare
financial management, including organizational goals, financing decisions
(i.e., the choice between debt and equity financing and the types of securities
issued), and capital investment decisions. Ownerships effect on the applica-
tion of healthcare financial management theory and concepts is addressed
throughout the text.

1. What are the major differences between investor-owned and not-
for-profit corporations?

2. What types of requirements have been placed on not-for-profit
hospitals to ensure that they meet their charitable mission?

3. What are the purpose and content of IRS Form 990?


Organizational Goals

Healthcare finance is not practiced in a vacu


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