Incase01 CASE 24 RIVER COMMUNITY HOSPITAL (A): Assessing Hospital Performance Statements of Operations (Millions of Dollars): Revenues Net patient service revenue Other revenue Total revenues 2015 $ 28.796 1.237 $ 30.033 2016 $ 30.576 1.853 $ 32.429 2017 $ 34.582 1.834 $ 36.416 Expenses Salaries and wages Fringe benefits Interest expense Depreciation Medical supplies and drugs Professional liability Other Total expenses $ 12.245 1.830 1.181 2.350 0.622 0.140 9.036 $ 27.404 $ 12.468 2.408 1.598 2.658 0.655 0.201 10.339 $ 30.327 $ 13.994 2.568 1.776 2.778 0.776 0.218 11.848 $ 33.958 Net income $ 2.629 $ 2.102 $ 2.458 2015 $ 4.673 4.359 0.432 0.308 $ 9.772 $ 47.786 11.820 $ 35.966 2016 $ 5.069 5.674 0.523 0.703 $ 11.969 $ 55.333 14.338 $ 40.995 2017 $ 2.795 7.413 0.601 0.923 $ 11.732 $ 59.552 17.009 $ 42.543 $ 45.738 $ 52.964 $ 54.275 $ 0.928 1.460 0.110 $ 2.498 $ 15.673 $ 27.567 $ 1.253 1.503 1.341 $ 4.097 $ 19.222 $ 29.645 $ 1.760 1.176 1.465 $ 4.401 $ 17.795 $ 32.079 Balance Sheets (Millions of Dollars): Assets Cash and investments Accounts receivable (net) Inventories Other current assets Total current assets Gross plant and equipment Accumulated depreciation Net plant and equipment Total assets Liabilities and Net Assets Accounts payable Accruals Current portion of long-term debt Total current liabilities Long-term debt Net assets Page 1 Incase01 Total liabilities and net assets $ 45.738 $ 52.964 $ 54.275 Statements of Cash Flows (Millions of Dollars): Cash Flows from Operating Activities Net income Depreciation Change in accounts receivable Change in inventories Change in other current assets Change in accounts payable Change in accruals Net cash flow from operations 2016 2017 $ 2.102 $ 2.458 2.633 2.756 (1.315) (1.739) (0.091) (0.078) (0.395) (0.220) 0.325 0.507 0.043 (0.327) $ 3.302 $ 3.357 Cash Flows from Investing Activities Investment in plant and equipment $ (7.686) $ (4.328) Cash Flows from Financing Activities Change in long-term debt Change in current portion of long-term debt Net cash flow from financing $ 3.549 1.231 $ 4.780 $ (1.427) 0.124 $ (1.303) Net increase (decrease) in cash and investments Beginning cash and investments $ 0.396 4.673 $ (2.274) 5.069 Ending cash and investments $ 5.069 $ 2.795 Note: The depreciation and fixed asset acquisitions data in the statements of cash flows are somewhat different from what they would be if calculated directly from the other financial statements because of asset revaluations. Operating Revenue and Expense Allocation (Millions of Dollars): Operating revenue Gross inpatient service Gross outpatient service Gross patient service revenue Contractual allowances Bad debt and charity care Total revenue deductions 2015 2016 2017 $ 26.117 6.535 $ 32.652 $ 29.148 9.130 $ 38.278 $ 33.216 11.912 $ 45.128 $ 1.729 2.127 $ 3.856 $ 5.196 2.506 $ 7.702 $ 7.516 3.030 $ 10.546 Page 2 Incase01 Net patient service revenue Operating expenses Inpatient service Outpatient service Total operating expenses $ 28.796 $ 30.576 $ 34.582 $ 20.573 6.831 $ 27.404 $ 22.229 8.098 $ 30.327 $ 24.771 9.187 $ 33.958 2015 2,721 8,784 32,285 210 193 44,085 1.2869 610.8 2016 2,860 8,318 32,878 210 197 42,434 1.2993 625.8 2017 2,741 8,576 36,796 210 178 40,062 1.3161 619.3 2015 2016 2017 Selected Operating Data: Medicare discharges Total discharges Outpatient visits Licensed beds Staffed beds Patient days All-payer case-mix index Full-time equivalents Selected Financial Ratios: Profitability Ratios Total margin Return on assets Return on equity Deductible ratio Liquidity Ratios Current ratio Days cash on hand Debt Management Ratios Debt ratio Debt to equity Times interest earned Cash flow coverage Asset Management Ratios Fixed asset turnover Total asset turnover 2017 Industry Data (200-29 +Quartile 8.75% 5.75% 9.54% 0.12 6.48% 3.97% 7.09% 0.20 6.75% 4.53% 7.66% 0.23 5.58% 5.80% 15.66% 0.34 3.91 68.08 2.92 66.87 2.67 32.72 2.53 32.35 39.73% 56.85% 3.23 5.22 44.03% 64.84% 2.32 3.98 40.90% 55.47% 2.38 3.95 62.90% 127.00% 4.29 5.32 0.84 0.66 0.79 0.61 0.86 0.67 2.20 1.04 Page 3 Incase01 Current asset turnover Days in patient accounts receivable Average payment period (days) Other Ratios Average age of plant (years) 3.07 55.25 36.39 2.71 67.73 54.05 3.10 78.24 51.52 3.94 87.53 71.24 5.03 5.39 6.12 8.86 Selected Operating Indicators: 2015 Profit Indicators Profit per inpatient discharge Profit per outpatient visit 2016 $280.03 $126.72 ($33.07) ($24.49) 2017 2017 Industry Data (200-29 +Quartile $79.61 ($1.60) $89.04 $6.22 Net Revenue Indicators Net revenue per discharge Net revenue per visit Medicare revenue percentage Bad debt / charity care percentage Contractual allowance percentage Outpatient revenue percentage $2,622 $179 30.98% 6.51% 5.30% 20.01% $2,799 $222 34.38% 6.55% 13.57% 23.85% $2,968 $248 31.96% 6.71% 16.65% 26.40% $4,091 $201 43.47% 7.89% 25.27% 25.26% Volume Indicators Occupancy rate Average daily census 62.58% 120.78 59.01% 116.26 61.66% 109.76 67.12% 173.23 5.02 3.90 5.10 3.93 4.67 3.55 6.80 6.48 Length of Stay Indicators Average length of stay (days) Adjusted length of stay Expense Indicators Expense per discharge Expense per adjusted discharge Expense per visit All-payer case-mix index Efficiency Indicators FTEs per occupied bed Labor hours/visit Unit Cost Indicators Salary per FTE Fringe benefits percentage Liability expense per discharge $2,342 $1,820 $212 1.2869 4.04 7.88 $2,672 $2,057 $246 1.2993 $3,937 $3,417 $202.23 1.2795 4.15 9.24 4.59 8.66 $20,047 $19,923 $22,596 14.94% 19.31% 18.35% $15.94 $24.16 $25.42 $24,447 19.58% $80.94 Page 4 4.10 9.44 $2,888 $2,195 $250 1.3161 Incase01 Note: The quartile values are based on the upper and lower numerical values regardless of whether that value is good or bad. The interpretation is left to the analyst. Page 5 Incase01 Page 6 Incase01 Page 7 Incase01 2017 Industry Data (200-299 Beds) Median -Quartile 3.48% 3.10% 6.01% 0.26 0.53% 0.40% 0.62% 0.18 1.99 15.89 1.48 6.24 48.40% 64.70% 2.23 3.22 35.20% 26.90% 1.14 1.76 1.76 0.89 1.49 0.75 Page 8 Incase01 3.38 75.67 56.52 2.88 63.33 45.84 7.39 6.14 2017 Industry Data (200-299 Beds) Median -Quartile ($21.30) ($120.08) $0.66 ($7.01) $3,411 $139 36.60% 4.76% 20.02% 21.03% $2,815 $98 31.25% 2.97% 12.12% 17.44% 58.10% 144.73 47.84% 114.39 6.07 5.36 5.41 4.52 $3,392 $2,924 $141.97 1.1756 4.15 5.84 $2,972 $2,572 $111.53 1.0259 3.77 4.68 $22,517 $20,347 17.04% 15.18% $42.05 $18.31 Page 9 Incase01 Page 10 CASE 25 RIVER COMMUNITY HOSPITAL (B): Financial Forecasting INPUT DATA: Debt interest rate KEY OUTPUT: 5.0% 2017 Total Margin 6.7% ROA 4.5% Debt ratio 40.9% ROE 7.7% Current ratio 2.67 Cumulative external funds = (in millions) 2018 6.9% 4.7% 40.3% 7.9% 2.67 2022 7.4% 5.5% 37.4% 8.7% 2.67 $14.516 Statements of Operations: (Millions of Dollars) REVENUES Net patient service revenue Other revenue Total revenues 2015 2016 2017 $28.796 $30.576 $34.584 1.237 1.853 1.834 $30.033 $32.429 $36.418 EXPENSES Salaries and wages Fringe benefits Interest expense Depreciation Medical supplies and drugs Professional liability Other Total expenses $12.245 1.830 1.181 2.350 0.622 0.140 9.036 $27.404 $12.468 2.408 1.598 2.658 0.655 0.201 10.339 $30.327 $13.994 2.568 1.776 2.778 0.776 0.218 11.848 $33.958 $2.629 $2.102 $2.458 Excess of revenues over expenses Balance Sheets: 2015 ASSETS Cash and investments Accounts receivable (net) Inventories Other current assets Total current assets Gross plant and equipment Accumulated depreciation Net plant and equipment $4.673 4.359 0.432 0.308 $9.772 $47.786 11.820 $35.966 2016 $5.069 5.674 0.523 0.703 $11.969 $55.333 14.338 $40.995 2017 $2.795 7.413 0.601 0.923 $11.732 $59.552 17.009 $42.543 Total assets LIABILITIES AND FUND BALANCE Accounts payable Accrued expenses Current portion of long-term debt Total current liabilities Long-term debt Net assets Total liabilities and net assets $45.738 $52.964 $54.275 $0.928 1.460 0.110 $2.498 $15.673 27.567 $1.253 1.503 1.341 $4.097 $19.222 29.645 $1.760 1.176 1.465 $4.401 $17.795 32.079 $45.738 $52.964 $54.275 External funds needed Additional LT debt Added interest exp Cumulative external fund Statements of Cash Flows: (Millions of Dollars) 2016 2017 CASH FLOWS FROM OPERATING ACTIVITIES Net income Depreciation and noncash expenses Change in accounts receivable Change in inventories Change in other current assets Change in accounts payable Change in accrued expenses Net cash flow from operations $2.102 2.633 (1.315) (0.091) (0.395) 0.325 0.043 $3.302 $2.458 2.756 (1.739) (0.078) (0.220) 0.507 (0.327) $3.357 CASH FLOWS FROM INVESTING ACTIVITIES Investment in plant and equipment ($7.686) ($4.328) CASH FLOWS FROM FINANCING ACTIVITIES Change in long-term debt Change in current portion of long-term debt Net cash flow from financing 3.549 1.231 $4.780 (1.427) 0.124 ($1.303) NET INCREASE (DECREASE) IN CASH BEGINNING CASH/INVESTMENTS $0.396 4.673 ($2.274) 5.069 ENDING CASH/INVESTMENTS $5.069 $2.795 Cash account check Note: "Depreciation and noncash expenses" and "Investment in plant and equipment" data in the stateme somewhat different than they would be if calculated directly from the other financial statements be Financial Statement Analysis: Du Pont Analysis Total margin Total asset turnover ROA = TM x TATO Equity multiplier 2015 8.75% 0.66 5.75% 1.66 2016 6.48% 0.61 3.97% 1.79 2017 6.75% 0.67 4.53% 1.69 ROE = ROA x Equity multiplier 9.54% 7.09% 7.66% Check ROE (Excess/Net equity) 9.54% 7.09% 7.66% 2015 2016 2017 Profitability Ratios: Total margin Return on assets Return equity 8.75% 5.75% 9.54% 6.48% 3.97% 7.09% 6.75% 4.53% 7.66% Liquidity Ratios: Current ratio Days cash on hand 3.91 68.08 2.92 66.87 2.67 32.72 Debt Management Ratios: Debt ratio LT debt to equity Times interest earned Fixed charge coverage Cash flow coverage 39.73% 56.85% 3.23 2.95 4.66 44.03% 64.84% 2.32 1.26 3.53 40.90% 55.47% 2.38 1.31 3.52 Asset Management Ratios: Inventory turnover Current asset turnover Fixed asset turnover Total asset turnover Avg collection period Average payment period 66.66 2.95 0.80 0.63 55.25 36.39 58.46 2.55 0.75 0.58 67.73 54.05 57.54 2.95 0.81 0.64 78.24 51.52 Financial Statement Analysis: Ratios Other Ratios: Average age of plant 5.03 5.39 6.12 Growth Rate Forecast 10.0% 10.0% NA Initial 2018 $38.042 $2.017 $40.060 Final 2018 $38.042 $2.017 $40.060 Initial 2019 $41.847 $2.219 $44.066 Final 2019 $41.847 $2.219 $44.066 Initial 2020 $46.031 $2.441 $48.472 10.0% 10.0% NA 10.0% 10.0% 10.0% 10.0% NA $15.393 2.825 1.776 3.056 0.854 0.240 13.033 $37.176 $15.393 2.825 1.900 3.056 0.854 0.240 13.033 $37.300 $16.933 3.107 1.900 3.361 0.939 0.264 14.336 $40.840 $16.933 3.107 2.034 3.361 0.939 0.264 14.336 $40.974 $18.626 3.418 2.034 3.698 1.033 0.290 15.770 $44.868 NA $2.884 $2.759 $3.225 $3.091 $3.604 Growth Rate Forecast NA 10.0% 10.0% 10.0% NA 10.0% NA NA Initial 2018 $3.075 8.154 0.661 1.015 $12.905 $65.507 20.065 $45.442 Final 2018 $3.075 8.154 0.661 1.015 $12.905 $65.507 20.065 $45.442 Initial 2019 $3.382 8.970 0.727 1.117 $14.196 $72.058 23.426 $48.632 Final 2019 $3.382 8.970 0.727 1.117 $14.196 $72.058 23.426 $48.632 Initial 2020 $3.720 9.867 0.800 1.229 $15.615 $79.264 27.124 $52.140 NA $58.348 $58.348 $62.827 $62.827 $67.755 10.0% 10.0% 10.0% NA NA NA $1.936 1.294 1.612 $4.841 $16.184 34.963 $1.936 1.294 1.612 $4.841 $18.668 34.838 $2.130 1.423 1.773 $5.325 $16.895 38.064 $2.130 1.423 1.773 $5.325 $19.572 37.930 $2.343 1.565 1.950 $5.858 $17.622 41.534 NA $55.987 $58.348 $60.284 $62.827 $65.014 $2.360 $2.360 $0.118 $2.485 $2.485 $0.124 $14.516 $2.543 $2.543 $0.127 $2.677 $2.677 $0.134 $2.741 $2.741 $0.137 External funds needed Additional LT debt Added interest exp Cumulative external funds = 2018 2019 2020 2021 2022 $2.759 3.056 (0.741) (0.060) (0.092) 0.176 0.118 $5.215 $3.091 3.361 (0.815) (0.066) (0.102) 0.194 0.129 $5.793 $3.460 3.698 (0.897) (0.073) (0.112) 0.213 0.142 $6.431 $3.868 4.067 (0.987) (0.080) (0.123) 0.234 0.157 $7.137 $4.320 4.474 (1.085) (0.088) (0.135) 0.258 0.172 $7.916 ($5.955) ($6.551) ($7.206) ($7.926) ($8.719) $0.873 0.147 $1.020 $0.904 0.161 $1.065 $0.936 0.177 $1.113 $0.967 0.195 $1.162 $0.998 0.214 $1.213 $0.279 2.795 $0.307 3.075 $0.338 3.382 $0.372 3.720 $0.409 4.092 $3.074 $3.382 $3.720 $4.092 $4.501 $3.075 $3.382 $3.720 $4.092 $4.501 ment" data in the statements of cash flows are r financial statements because of asset revaluations. Industry Median 3.48% 0.89 3.10% 1.94 2018 6.89% 0.69 4.73% 1.67 2019 7.02% 0.70 4.92% 1.66 2020 7.14% 0.72 5.11% 1.64 2021 7.25% 0.73 5.29% 1.62 2022 7.37% 0.74 5.46% 1.60 6.01% 7.92% 8.15% 8.36% 8.55% 8.71% 7.92% 8.15% 8.36% 8.55% 8.71% Industry Median 2018 2019 2020 2021 2022 3.48% 3.10% 6.01% 6.89% 4.73% 7.92% 7.02% 4.92% 8.15% 7.14% 5.11% 8.36% 7.25% 5.29% 8.55% 7.37% 5.46% 8.71% 1.99 15.89 2.67 32.77 2.67 32.82 2.67 32.87 2.67 32.91 2.67 32.95 48.40% 64.70% 2.23 1.35 3.22 40.29% 53.58% 2.45 1.33 3.61 39.63% 51.60% 2.52 1.35 3.69 38.91% 49.55% 2.59 1.37 3.78 38.15% 47.45% 2.66 1.38 3.87 37.35% 45.33% 2.73 1.40 3.96 63.95 3.38 1.76 0.89 75.67 56.52 57.54 2.95 0.84 0.65 78.24 51.60 57.54 2.95 0.86 0.67 78.24 51.68 57.54 2.95 0.88 0.68 78.24 51.75 57.54 2.95 0.90 0.69 78.24 51.82 57.54 2.95 0.92 0.70 78.24 51.89 7.39 6.57 6.97 7.34 7.67 7.97 Final 2020 $46.031 $2.441 $48.472 Initial 2021 $50.634 $2.685 $53.320 Final 2021 $50.634 $2.685 $53.320 Initial 2022 $55.698 $2.954 $58.652 Final 2022 $55.698 $2.954 $58.652 $18.626 3.418 2.178 3.698 1.033 0.290 15.770 $45.013 $20.489 3.760 2.178 4.067 1.136 0.319 17.347 $49.296 $20.489 3.760 2.334 4.067 1.136 0.319 17.347 $49.452 $22.537 4.136 2.334 4.474 1.250 0.351 19.081 $54.163 $22.537 4.136 2.502 4.474 1.250 0.351 19.081 $54.331 $3.460 $4.024 $3.868 $4.488 $4.320 Final 2020 $3.720 9.867 0.800 1.229 $15.615 $79.264 27.124 $52.140 Initial 2021 $4.092 10.853 0.880 1.351 $17.177 $87.190 31.191 $55.999 Final 2021 $4.092 10.853 0.880 1.351 $17.177 $87.190 31.191 $55.999 Initial 2022 $4.501 11.939 0.968 1.487 $18.895 $95.909 35.665 $60.244 Final 2022 $4.501 11.939 0.968 1.487 $18.895 $95.909 35.665 $60.244 $67.755 $73.176 $73.176 $79.139 $79.139 $2.343 1.565 1.950 $5.858 $20.508 41.390 $2.577 1.722 2.145 $6.444 $18.363 45.413 $2.577 1.722 2.145 $6.444 $21.475 45.258 $2.834 1.894 2.359 $7.088 $19.115 49.746 $2.834 1.894 2.359 $7.088 $22.473 49.578 $67.755 $70.220 $73.176 $75.949 $79.139 $2.885 $2.885 $0.144 $2.956 $2.956 $0.148 $3.112 $3.112 $0.156 $3.190 $3.190 $0.159 $3.357 $3.357 $0.168 END Cases 24 and 25: River Community Hospital Finance Concepts: Assessing Performance and Forecasting Case 24: 1. Examine the River Community Hospital’s statements of cash flows. What information do the statements provide regarding the hospital’s sources and uses of cash over the past two years? 2. List five or more financial strengths of the hospital? (Hint: Do not provide a list of ratios. Make a statement and then justify it with information from the financial statements and ratios.) 3. List five or more financial weaknesses of the hospital? (Hint: Do not provide a list of ratios. Make a statement and then justify it with information from the financial statements and ratios.) 4. The board chair has asked management to develop some strategies to improve profitability and estimate the impact of the strategies on the hospital’s ROE. By how much would the 2017 ROE change from each of these strategies? a. Vacant land is sold, and total assets decrease by $2.0 million. Net income would not be affected, and the board wants to maintain the 2017 debt ratio. b. Debt is substituted for equity, and the debt ratio increases to 48 percent. Total assets would not be affected. Interest expense would increase but better cost controls would offset the higher interest expense, and thus net income would not change. c. Lean management is implemented, and total expenses decrease by $0.5 million. Total revenue, total assets, and total liabilities and net assets would not change. d. Whatever strategy Melissa chooses, she is under pressure from the board to increase ROE to at least 10 percent. What total margin would be needed to achieve the 10% ROE, holding everything else constant? 5. What additional financial information would be useful in the analysis? 6. Select five financial and five operating KPIs to be presented at future board meetings. 7. Sound financial analysis involves more than just calculating numbers. The American Association of Individual Investors suggests that investors consider qualitative factors (as seen in the following questions) when evaluating a company. Answer the following questions for the hospital. When there is insufficient information in the case to answer a question, briefly speculate about why the question might be relevant to the hospital. • Are the company’s revenues tied to one key customer? • To what extent are the company’s revenues tied to one key product? • To what extent does the company rely on a single supplier? (Hint: Physicians and nurses are key suppliers of labor to a hospital.) • What about the competition? • What are the company’s future prospects? • How does the legal and regulatory environment affect the company? 8. Guided by the limited information provided in the case, what are your top three or four recommendations to the board? 9. In your opinion, what are three key learning points from this case? Case 25: 1. Review the spreadsheet model, paying particular attention to (1) what assumptions are currently embedded in the model, (2) how the financial forecasts are developed, and (3) how financing feedbacks are handled. Briefly describe the model and its assumptions. 2. Disregard the forecasting results supplied with the model. a. Use your own assumptions to develop the hospital's forecasted financial statements. Be sure to analyze your results from the perspectives of both accounting consistency and financial feasibility. b. Use the current industry comparative data given in case 1 to help assess the hospital’s projected financial condition. Summarize your results in a table that shows key financial ratios, retained earnings, and external financing requirements (if required) for each year, along with five-year totals for earnings and financing. 3. In general, what effect do the profitability, capital intensity, and growth rate of a firm have on its external financing requirement? 4. Discuss what changes would have to be made to the forecast if the hospital were investorowned? 5. Which of the notes to the financial statements given in case 24 could have a material effect on your forecast? Explain. 6. In your opinion, what are three key learning points from this case? 
Purchase answer to see full attachment