Applying Altman Z-score Analysis for Assessing the Financial Strength, and the Risk of Insolvency of Bulgarian Hospitals

Abstract

The financial stability of the hospitals is an essential prerequisite for their sustainable development and a warrant for the continuous execution of their socially significant role. Thus, research aimed at assessing hospitals' financial strength could drive well-informed preventive policy measures to increase our health system's resilience.

In this study, we apply a modified Altman Z-score model to assess the degree of financial stability of thirty-one state-owned hospitals. The sample includes the hospitals that have generated the highest income from contracts with the NHIF in 2020.

The hospitals with Altman Z-score over 3, we define as ones in good financial condition. Hospitals with a value between 1.81 and 3 are classified as relatively stable financially or fall into the so-called "grey area" of financial stability. Those with a Z-score below 1.8 are classified as having a problematic financial condition or experiencing financial distress. We also applied two other applicable methods for assessing the financial condition of hospitals to affirm the results from the application of the Z-score model.

The results show that only 42% (n=13) of the hospitals in the sample are in stable financial condition. 29% (n=9) of hospitals fall into the grey area and have relatively stable financial conditions, and 29% (n=9) are in difficult financial conditions and are experiencing financial distress. These results essentially correspond to the control models, which concludes that the modified Altman Z-score model is applicable as an integral indicator for assessing the financial stability of hospitals in Bulgaria. The results suggest that less than 50% of the biggest by revenue, state-owned hospitals are robust financially, raising our concern. This indicates the need for additional research to thoroughly assess Bulgarian hospitals' financial condition.