Fundamentals of Health and Care Finance: Portfolio of Finance-Based Calculations

Outline the recent developments in the financial and regulatory environment of health and social care service delivery

Firstly, the British Chancellor Rachel Reeves has reduced the welfare budget concerning health and social care sector workers. This reduction is planned over the next four years and is worth £3 billion, with several sickness benefits being changed for employees (Mooney, 2024). The approach reflects the previous government's proposal to reform working capability rules within the health and social care delivery environment. However, the plan will also reassess 400,000 long-term benefit recipients to determine their readiness for employment by 2028–29 (Gov.UK, 2022).

Secondly, the Chancellor has also decided to increase taxes on vaping products, as children are at risk of misusing e-cigarettes across the UK. Data reported by the NHS showed that at least 25% of children aged 11–15 had used vaping products, increasing the risk of addiction in this community (Mooney, 2024). These taxes could allow the government to increase revenue by £445 million by 2028–29, particularly in relation to protecting minors (Mooney, 2024).

Thirdly, hospitals and health and social care facilities have asked ministers to raise at least £6 billion in equity funding. This funding was intended to cover a three-year period, allowing the Department of Health to consider higher allocations to address immediate risks (Mooney, 2024). However, the government has promised funding without confirming its final value, which could range between £3 billion and £5 billion (Gov.UK, 2022).

Fourthly, the NHS cost of clearing patient backlogs rose by 20% to £14 billion year on year (Gov.UK, 2022). Meanwhile, Central London trusts have addressed some deficits by meeting 10% of the demands required by the NHS (Humphries, 2015). These included organisations such as Imperial College Healthcare Trust and Guy's and St Thomas' NHS Foundation Trust.

Fifthly, the UK government announced a 3% pay rise for 1.1 million NHS workers, who provide services across health and social care facilities in the UK (Humphries, 2015). The government also accepted recommendations from the independent NHS Pay Review Body to consider additional remuneration for staff members, including porters and cleaners, who were expected to receive around £540–£1,000 a year (Gov.UK, 2022).

Consider the usefulness of three alternative funding options and conclude which form of funding would be most efficient for the health and social care sector

Raising medical testing funds while creating a cap: The Conservative Party's manifesto before the 2017 elections proposed funding for medical testing. The estimated costs for the UK government were around £5.5–£11.9 billion from 2021 to 2030. A cap-and-floor model could be applied to this figure to reduce financial pressure by approximately £4 billion (Watt et al., 2018). This would ensure that patients could use allocated funds within defined limits. The government could also raise funds by adding one percentage point to National Insurance contributions by 2030 (Watt et al., 2018). This approach may be sustainable because it would avoid cuts to other public healthcare services.

Introducing personal care provision through the NHS: The government could allocate funding through an increase in income tax, potentially beginning with four percentage points and rising over time. The proposal also considers increases of up to 14 percentage points by 2030–31 to support personal healthcare provision (Watt et al., 2018). Patients who meet specific eligibility criteria could receive free personal care plans, at an estimated cost of £7.9 billion (Watt et al., 2018).

Introducing wealth taxes as a progressive option: Under this approach, individuals with greater wealth would pay tax in proportion to their financial resources. The UK government could administer such a tax alongside its existing council tax framework to support improvements in health and social care across the country (Rocks and Boccarini, 2021).

Of these alternatives, income-tax-based funding for personal care may be the most suitable option because people in the UK have ongoing healthcare and check-up needs. Public spending funded through taxation reached £177 billion in 2019 and was projected to grow as a share of GDP by 2025 (Rocks and Boccarini, 2021). Therefore, income-tax funding could help meet the growing needs of patients, particularly if healthcare spending continues to increase (Rocks and Boccarini, 2021).

Task 2

Review the financial statements of Spire Healthcare Group Plc and determine the profitability of the business

Calculate and analyse return on equity (ROE) using Du Pont analysis for 2023 and 2022

Ratio	Formula	2022 (£m)	2023 (£m)
Return on equity	Net profit before tax / Revenue × Revenue / Average total assets × Average total assets / Average total equity	3.9 / 1,198.5 × 1,198.5 / 2,223.95 / 731.45 = 1.28%	34.6 / 1,359 × 1,359 / 2,223.95 / 731.45 = 11.38%

Explain how Du Pont analysis can support decision-making and assess whether the business is viable

The Du Pont analysis has several implications for decision-making at Spire Healthcare Group Plc, as outlined below.

Firstly, the different drivers of return on equity can be isolated and analysed through Du Pont analysis (Olayinka, 2022). This can help stakeholders at Spire Healthcare Group Plc understand the contributions of assets, equity, profitability, and revenue (Olayinka, 2022). As a result, the company can identify areas for improving efficiency by focusing on the components affecting return on equity (Palepu et al., 2013, p. 275).

Secondly, the calculated ROE for Spire Healthcare Group Plc indicates growth in 2023 compared with 2022. However, the reported figures and calculations should be checked for consistency before drawing a firm conclusion. Earnings before interest and taxation increased by £30.7 million in 2023, while revenue increased by £160.5 million. These changes may indicate improved operating performance and the effective use of assets, although other expenses and financing costs should also be considered (Palepu et al., 2013, pp. 265, 395). A comparison with the stated industry average of 5.70% would suggest a stronger return if the 11.38% ROE is calculated using consistent inputs. ROE alone, however, does not establish that the company's debt ratio is below the industry average or confirm its ability to meet all obligations.

Thirdly, Du Pont analysis can help inform investors (Yanto et al., 2021). By examining the factors that contribute to return on equity, investors can assess how effectively the company uses capital and whether its performance supports an investment decision (Yanto et al., 2021).

Evaluate investment options using net present value and internal rate of return

Year	Project A net cash flow (£)	Project B net cash flow (£)	Discount factor at 10%	Project A present value (£)	Project B present value (£)
0	530,000	410,000	—	—	—
1	125,000	100,000	0.909	113,625	90,900
2	145,000	120,000	0.826	119,770	99,120
3	170,000	125,000	0.751	127,670	93,875
4	200,000	150,000	0.683	136,600	102,450
5	210,000	180,000	0.621	130,410	111,780
Total present value				628,075	498,125

Net present value (NPV) = Total present value − Initial investment

Project A: £628,075 − £530,000 = £98,075.

Project B: £498,125 − £410,000 = £88,125.

Internal rate of return (IRR): IRR is the discount rate at which the net present value of a project's cash flows equals zero. It should be calculated from the initial outlay and each period's cash flow; it is not correctly calculated by simply applying the compound-growth formula to total present value.

Explain the meaning of the values and recommend which project the company should invest in

Firstly, net present value measures the present value of expected future cash flows minus the initial investment (Siziba and Hall, 2020). Based on the figures in the table, Project A has an NPV of £98,075, which is £9,950 higher than Project B's NPV of £88,125 (Magni and Marchioni, 2020). If the cash-flow estimates and 10% discount rate are appropriate, Project A is expected to create more value in present-value terms (Siziba and Hall, 2020). A positive NPV for both projects indicates that each may be financially worthwhile under the stated assumptions.

Secondly, the internal rate of return estimates the discount rate at which a project's NPV becomes zero. The IRR figures in the original calculations should be recalculated from the full cash-flow series before comparing the projects. A higher IRR does not automatically mean a project creates more value in absolute terms, particularly when the initial investments differ (Magni and Marchioni, 2020). Based on the NPVs currently shown, Project A is the preliminary recommendation, subject to verifying the cash flows, discount factors, and IRR calculations.

Task 4

Brief report to the board of directors of Spire Healthcare Group Plc

Explain the process for preparing financial statements

Financial statement preparation begins with recording and summarising transactions. These transactions are checked against the ledger accounts and trial balance before being used to prepare the income statement. The income statement considers direct costs, indirect costs, overheads, and non-operating expenses. These costs are deducted from revenue to calculate profit measures. Financial statements are generally prepared using accrual accounting and the matching principle, so income and expenses are recognised in the relevant accounting period. Net profit is calculated after accounting for interest and taxation (Penman, 2013, p. 264).

After profitability has been determined, the balance sheet, also known as the statement of financial position, is prepared. It records assets, liabilities, and equity at the reporting date. Current assets can include trade receivables, cash and bank balances, inventories, and prepaid expenses (Penman, 2013, p. 395). Current liabilities may include trade payables and accrued expenses. Non-current assets include items such as buildings, land, and property (Penman, 2013, p. 325). The statement must satisfy the accounting equation: assets equal liabilities plus equity. Equity includes share capital and relevant reserves.

Finally, the cash flow statement explains a company's cash inflows and outflows during the financial year. It helps the enterprise assess its ability to meet immediate obligations and fund operating activities (Fridson and Alvarez, 2022, p. 310). Cash flows are classified into operating, investing, and financing activities. Operating cash flows include receipts from customers and payments to employees and suppliers. Investing cash flows include purchases and disposals of long-term assets and investments. Financing cash flows include share issues, borrowings, debt repayments, and share repurchases. Together, these categories explain changes in the company's cash and cash equivalents during the reporting period (Fridson and Alvarez, 2022, p. 425).

Determine the debt ratio and comment on the company's solvency position

Ratio	Formula	2022 (£m)	2023 (£m)
Debt ratio	Total debt / Total assets	1,434.7 / 2,159.8 = 66.4%	1,550.3 / 2,288.1 = 67.8%

The solvency position of Spire Healthcare Group Plc can be considered using the debt-ratio results.

Firstly, using the figures supplied, the debt ratio was approximately 66.4% in 2022 and 67.8% in 2023. This indicates that debt represented a substantial proportion of the company's assets and that the ratio increased over the period. The figures should be compared with a verified industry benchmark and the company's debt definitions before concluding that its position is vulnerable. Lenders may consider leverage alongside interest cover, cash flow, liquidity, and the terms of existing borrowing (Pattiruhu and Paais, 2020).

Secondly, a higher debt ratio may limit a company's ability to obtain additional borrowing on favourable terms, depending on its cash generation and repayment capacity (Pattiruhu and Paais, 2020). Spire Healthcare Group Plc should therefore monitor its debt commitments and maintain sufficient cash flow to meet them.

Thirdly, the debt ratio may influence perceptions of the company's creditworthiness. A ratio of this level warrants further assessment, but it does not by itself prove that lenders will refuse finance or that the company cannot meet its obligations (Palmer, 2021, p. 450). Interest coverage, maturity profiles, liquidity, and operating cash flows should also be reviewed.

Critically appraise the role of the traditional finance function in healthcare organisations

Firstly, the UK healthcare and life sciences sector benefits from collaboration between the NHS, academic institutions, and industry stakeholders (great.gov.uk, 2024). Such collaboration can support new forms of care, medical facilities, medicines, testing environments, and other health-related initiatives (PwC, 2024). The sector continues to invest in assets and facilities, but finance teams must assess whether these investments are being used effectively and deliver value for money.

Secondly, digital finance providers and banking institutions are changing how healthcare organisations and patients access payment services and financial support. However, eligibility requirements and income-based lending criteria may prevent some patients from accessing loans or payment options (Tink, 2024). Traditional finance functions remain important for budgeting, financial controls, cash-flow management, and assessing affordability, while organisations must also consider patient access and financial inclusion.

Thirdly, international partnerships can support the development of healthcare services and facilities. For example, partnerships between UK health bodies and institutions in India have been reported as a way to establish new facilities and share expertise (Bagcchi, 2015). Finance teams have a role in evaluating the costs, funding arrangements, risks, and expected benefits of such partnerships.

Finally, healthcare treatment costs can vary according to the type of treatment and the services provided. Finance functions should support transparent costing, resource allocation, and value-for-money assessments so that organisations can understand expenditure and make informed decisions (Tink, 2024).

Conclusion

This portfolio examined developments in the financial and regulatory environment of the health and social care sector and considered alternative funding sources. It then assessed Spire Healthcare Group Plc using Du Pont analysis and return on equity to explore profitability and the use of assets and equity. Investment appraisal techniques were applied to compare two projects, with Project A showing the higher net present value based on the figures presented. The debt ratio was also reviewed to consider the company's solvency, followed by an assessment of financial statement preparation and the traditional finance function in healthcare organisations. The calculations and source data should be verified before final conclusions are drawn.

References

Bagcchi, S. (2015). Partnership with UK health bodies is to bring 11 new institutes to India. BMJ, 351, p. h6264. Available at: https://doi.org/10.1136/bmj.h6264.

Clark, L. (2024). NHS drops another billion on tech in the hope of finally going digital. The Register. Available at: https://www.theregister.com/2024/09/23/nhs_tech_procurement/ (Accessed: 9 October 2024).

Fridson, M.S. and Alvarez, F. (2022). Financial Statement Analysis Workbook: A Practitioner's Guide. Hoboken, New Jersey: Wiley.

Gov.UK (2022). Build Back Better: Our Plan for Health and Social Care. Available at: https://www.gov.uk/government/publications/build-back-better-our-plan-for-health-and-social-care/build-back-better-our-plan-for-health-and-social-care (Accessed: 9 October 2024).

great.gov.uk (2024). Healthcare and life sciences – great.gov.uk international. Available at: https://www.great.gov.uk/international/content/investment/sectors/healthcare-and-life-sciences/ (Accessed: 9 October 2024).

Humphries, R. (2015). Integrated health and social care in England – Progress and prospects. Health Policy, 119(7), pp. 856–859. Available at: https://doi.org/10.1016/j.healthpol.2015.04.010.

Jacob, Z. (2023). A Comparative Analysis of the US and UK Health Care Systems. Michigan Journal of Economics. Available at: https://sites.lsa.umich.edu/mje/2023/05/26/a-comparative-analysis-of-the-us-and-uk-health-care-systems/ (Accessed: 9 October 2024).

Kooshkebaghi, M., Emamgholipour, S. and Dargahi, H. (2022). Explaining specific taxes management and use in the health sector: a qualitative study. BMC Health Services Research, 22(1), pp. 1–17. Available at: https://doi.org/10.1186/s12913-022-08556-4.

Magni, C.A. and Marchioni, A. (2020). Average rates of return, working capital, and NPV-consistency in project appraisal: A sensitivity analysis approach. International Journal of Production Economics, 229, p. 107769. Available at: https://doi.org/10.1016/j.ijpe.2020.107769.

Mooney, H. (2024). Health and care sector latest developments. NHS Confederation. Available at: https://www.nhsconfed.org/articles/health-care-sector-latest-developments (Accessed: 9 October 2024).

Olayinka, A.A. (2022). Financial Statement Analysis as a Tool for Investment Decisions and Assessment of Companies’ Performance. International Journal of Financial, Accounting, and Management, 4(1), pp. 49–66. Available at: https://doi.org/10.35912/ijfam.v4i1.852.

Palepu, K.G., Healy, P.M. and Peek, E. (2013). Business Analysis and Valuation: Text & Cases. Andover, Hampshire: Cengage Learning.

Palmer, J.E. (2021). Financial Ratio Analysis. New York, NY: American Institute of Certified Public Accountants.

Pattiruhu, J.R. and Paais, M. (2020). Effect of Liquidity, Profitability, Leverage, and Firm Size on Dividend Policy. The Journal of Asian Finance, Economics and Business, 7(10), pp. 35–42. Available at: https://doi.org/10.13106/jafeb.2020.vol7.no10.035.

Penman, S.H. (2013). Financial Statement Analysis and Security Valuation. New York: McGraw-Hill.

PwC (2024). The UK's life sciences sector contributes £43.3 billion to GVA as it enters a new supercharged era of innovation and breakthrough science. Available at: https://www.pwc.co.uk/press-room/press-releases/uk-life-sciences-sector-contributes-43-3-billion-in-gva.html (Accessed: 9 October 2024).

Rocks, S. and Boccarini, G. (2021). Taxes and health care funding: how does the UK compare? The Health Foundation. Available at: https://www.health.org.uk/news-and-comment/charts-and-infographics/taxes-and-health-care-funding-how-does-the-uk-compare (Accessed: 9 October 2024).

Siziba, S. and Hall, J.H. (2020). The evolution of the application of capital budgeting techniques in enterprises. Global Finance Journal, 47, p. 100504. Available at: https://doi.org/10.1016/j.gfj.2019.100504.

Tink (2024). Lending in the cost-of-living crisis. Available at: https://tink.com/blog/news/lending-open-banking-2023-research/ (Accessed: 9 October 2024).

Watt, T., Varrow, M., Roberts, A. and Charlesworth, A. (2018). Social Care Funding Options: How Much and Where From? The Health Foundation. Available at: https://www.health.org.uk/sites/default/files/Social-care-funding-options-May-2018.pdf (Accessed: 9 October 2024).

Yanto, E., Christy, I. and Adi Cakranegara, P. (2021). The Influences of Return on Asset, Return on Equity, Net Profit Margin, Debt Equity Ratio and Current Ratio Toward Stock Price. International Journal of Science, Technology & Management, 2(1), pp. 300–312. Available at: https://doi.org/10.46729/ijstm.v2i1.155.