Efficiency of a healthcare business operation is assessed by the operating margin ratio that divides net income by total revenues. Explain why total revenues are used instead of gross medical service revenues.
What will be an ideal response?
Gross medical service revenues are of little value in estimating financial health because most healthcare payments come from third parties, and actual payments from third parties are much less than the full charges (that are used to calculate gross medical services revenues). Using the latter would increase the denominator, decrease the ratio, and make the business appear less efficient that it is.
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