This is a sample of the instructor materials for Louis C. Gapenski and George H. Pink, Cases in
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instructor Excel models
PowerPoint slides for each case
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questions and solutions
PowerPoint slides
instructor’s Excel model
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Copyright 2014 Health Administration Press
Cases in Healthcare Finance, 5th Edition
Copyright © 2014 by FACHE
CASE 1 QUESTIONS
RIVER COMMUNITY HOSPITAL
Assessing Hospital Performance
1. Examine the hospital’s statement of cash flows. What information do they 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 2013 ROE change
from each of these strategies?
a. Vacant land is sold and total assets decreases by $2.0 million. Net income would not be affected
and the Board wants to maintain the 2013 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 & net assets would not change.
d. Whatever strategy Melissa chooses, she is under pressure from the Board to increase return on
equity 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 key performance indicators (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 the qualitative factors below when evaluating a
company. Answer the questions for River Community 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. Based on the limited amount of 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?
11/18/2013
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
CASE 1 SOLUTION
RIVER COMMUNITY HOSPITAL (A)
Assessing Hospital Performance
Case Information
Purpose
This case illustrates financial statement and operating indicator analyses as applied to a hospital. Although
the basic principles involved in such analyses are relatively simple, it is difficult to aggregate the information
into a concise overview of the hospital's financial and operating condition. In general, students will be able to
come up with the correct numbers—indeed, the model does the calculations—but they will have trouble
processing the information and developing judgments. This case provides an opportunity for students to first
interpret the numbers and then make and refine the necessary judgments. In addition, the case also
introduces the concepts of dashboards and economic value added (EVA).
Complexity
This case is relatively complex. Although each individual element of the case is not difficult, the overload of
information and the requirement to synthesize the data make the case very difficult.
Model Description
The model takes almost all of the busywork out of the case, so it enables students to spend more time on
interpretation and consolidation. Unlike most case models, this model does not require students to enter the
relevant input data. For the most part, the input data are the historical financial statements, and there is
nothing to be gained by requiring students to enter all that information. Thus, the student and instructor
models are essentially the same. Although the model contains a complete financial statement and operating
indicator ratio analysis, students may extend the model to include percentage change and common size
analyses, as well as graphical output. Because the Input Data section contains all the historical financial and
operating data, and because there is no Key Output section, it is not practical to show these sections here.
1/17/2014
Case 1 - 1
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
Case Solution
1. Examine the hospital’s statement of cash flows. What information do they provide regarding the
hospital’s sources and uses of cash over the past two years?
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
2012
2013
$ 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 than they would be if calculated
directly from the other financial statements because of asset revaluations.
The statements of cash flows give broad insights into the hospital's cash transactions over the period, and
hence they highlight trends in (1) basic operating profitability, (2) investment activities, and (3) financing
activities. In essence, this statement tells where an organization gets its cash and what it does with it.
Exhibit 1.3 in the case contains the hospital’s statements of cash flows for 2012 and 2013. The
interpretation follows:
Between 2012 and 2013, the hospital's net cash flow from operations increased from $3.302 to $3.357
million, an increase of only 1.7 percent. The hospital spent an average of [($7.686 + $4.328) / 2 =] $6.007
million per year on plant and equipment. Because the hospital had $35.966 million in net plant and
equipment at the end of 2011, this investment represents a significant increase ($12.014 / $35.966 = 33.4
percent) in plant and equipment. However, the hospital remained at 210 licensed beds throughout this
period, so the plant and equipment additions were probably an upgrade of existing inpatient facilities and/or
an upgrade or expansion of outpatient facilities. (The number of staffed beds actually declined from 193 to
178.) Regarding financing activities, the hospital increased its use of long-term debt on net by ($4.780 –
(–$1.303) = $3.477 million over the period, which is a modest amount considering its substantial investment
in fixed assets.
1/17/2014
Case 1 - 2
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
The end result was a decrease in the cash balance of ($5.069 – $2.795 =) $2.274 million, which accounts
for some of the funding of new plant and equipment. The remainder came from operating cash flows. Note,
however, that the change in the cash balance itself is not a critical piece of information, because it can be
controlled by financing actions.
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.)
Selected Financial Ratios:
2011
Profitability Ratios
Total margin
Returnonassets
Returnonequity
Deductible ratio
Liquidity Ratios
Current ratio
Days cashonhand
Debt Management Ratios
Debt ratio
Debt to equity
Times interest earned
Cashflowcoverage
Asset Management Ratios
Fixed asset turnover
Total asset turnover
Current asset turnover
Days inpatient accounts receivable
Average payment period (days)
Other Ratios
Average age of plant (years)
1/17/2014
2012
2013
2013 Hospital
Performance
Compared to
2013 IndustryData (200-299 Beds) 2013 Industry
+Quartile Median -Quartile
Data
2012 Hospital
Performance
Compared to
2011 Hospital
Performance
2013 Hospital
Performance
Compared to
2012 Hospital
Performance
Better
Average
Average
Average
-2.27%
-1.78%
-2.45%
0.08
0.27%
0.56%
0.57%
0.03
Better
Better
-0.99
-1.21
-0.26
-34.15
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
3.48%
3.10%
6.01%
0.26
0.53%
0.40%
0.62%
0.18
3.91
68.08
2.92
66.87
2.67
32.72
2.53
32.35
1.99
15.89
1.48
6.24
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
48.40%
64.70%
2.23
3.22
35.20%
26.90%
1.14
1.76
Average
Average
Average
Average
4.30%
7.99%
-0.91
-1.24
-3.13%
-9.37%
0.07
-0.03
0.84
0.66
3.07
55.25
36.39
0.79
0.61
2.71
67.73
54.05
0.86
0.67
3.10
78.24
51.52
2.20
1.04
3.94
87.53
71.24
1.76
0.89
3.38
75.67
56.52
1.49
0.75
2.88
63.33
45.84
Worse
Worse
Average
Average
Average
-0.04
-0.04
-0.36
12.48
17.65
0.06
0.06
0.39
10.51
-2.53
5.03
5.39
6.12
8.86
7.39
6.14
Better
0.36
0.73
Case 1 - 3
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
Selected Operating Indicators:
2011
Profit Indicators
Profit per inpatient discharge
Profit per outpatient visit
2012
$280.03 $126.72
($33.07) ($24.49)
2013
2013 Hospital
Performance
Compared to
2013 IndustryData (200-299 Beds) 2013 Industry
+Quartile Median -Quartile
Data
$79.61
($1.60)
$89.04
$6.22
($21.30) ($120.08)
$0.66
($7.01)
2012 Hospital
Performance
Compared to
2011 Hospital
Performance
2013 Hospital
Performance
Compared to
2012 Hospital
Performance
Average
Average
-$153.30
$8.59
-$47.11
$22.89
Net Revenue Indicators
Net revenue per discharge
Net revenue per visit
Medicare revenue percentage
Bad debt / charitycare 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%
$3,411
$139
36.60%
4.76%
20.02%
21.03%
$2,815
$98
31.25%
2.97%
12.12%
17.44%
Average
Better
Average
Average
Average
Better
$176.99
$43.31
3.41%
0.03%
8.28%
3.84%
$168.90
$26.26
-2.42%
0.17%
3.08%
2.54%
Volume Indicators
Occupancyrate
Average dailycensus
62.58%
120.78
59.01%
116.26
61.66%
109.76
67.12%
173.23
58.10%
144.73
47.84%
114.39
Average
-3.57%
-4.52
2.65%
-6.50
5.02
3.90
5.10
3.93
4.67
3.55
6.80
6.48
6.07
5.36
5.41
4.52
0.08
0.03
-0.43
-0.38
Better
Better
Worse
$330.30
$236.84
$34.72
0.012
$216.01
$137.88
$3.37
0.017
3.77
4.68
Average
Worse
0.05
1.57
0.05
-0.20
$24,447 $22,517 $20,347
19.58% 17.04% 15.18%
$80.94
$42.05
$18.31
Average
Average
Average
-$124.18
4.37%
$8.23
$2,673.18
-0.96%
$1.26
Length of Stay Indicators
Average lengthof stay(days)
Adjusted lengthof stay
Expense Indicators
Expense per discharge
Expense per adjusted discharge
Expense per visit
All-payer Case MixIndex
Efficiency Indicators
FTEs per occupied bed
Labor hours/visit
Unit Cost Indicators
Salaryper FTE
Fringe benefits percentage
Liabilityexpense per discharge
$2,342
$1,820
$212
1.2869
4.04
7.88
$2,672
$2,057
$246
1.2993
4.10
9.44
$2,888
$2,195
$250
1.3161
4.15
9.24
$20,047 $19,923 $22,596
14.94% 19.31% 18.35%
$15.94
$24.16
$25.42
$3,937
$3,417
$202.23
1.2795
4.59
8.66
$3,392
$2,924
$141.97
1.1756
4.15
5.84
$2,972
$2,572
$111.53
1.0259
1)
Better than average liquidity
One of the first concerns of most managers is the firm's liquidity: Will the hospital firm be able to meet its
obligations as they become due? The current ratio and days cash on hand have been better than the 2013
average for the past three years. The hospital has had better than average ability to meet its cash
obligations. Perhaps River has relatively more cash and marketable securities than the average hospital.
2)
Substantial reduction in debt burden
The extent to which a firm uses debt financing has three important implications. (1) By raising funds through
debt, owners can maintain control of the firm with a limited investment. For not-for-profit firms, debt financing
allows the organization to provide more services than it could if it were solely financed with fund capital. (2)
Creditors look to owner-supplied funds (or fund capital) to provide a margin of safety. If the owners (or
community) have provided only a small proportion of total financing, then the risks of the enterprise are
borne mainly by its creditors. (3) If the firm earns more on investments financed with borrowed funds than it
pays in interest, then the return on the owners' (fund) capital is magnified or "leveraged."
Two different types of debt management ratios are used: (1) capitalization ratios measure the extent to
which borrowed funds have been used to finance assets; and (2) coverage ratios measure the number of
times that fixed financial charges are covered by operating profits. The two sets of ratios are
complementary, and most analysts use both types.
The times interest earned ratio shows the ability of the hospital to meet its principal and interest payments.
This ratio was relatively high in 2011 (3.23), but then it fell to 2.32 in 2012 and rebounded slightly in 2013
(2.38). At first glance, it would appear that River's position has weakened, but this is not necessarily the
case. The balance sheet shows that the hospital retired $1.341 million and $1.465 million in long-term debt
in 2012 and 2013, respectively. These large principal repayments adversely affected the TIE for those
1/17/2014
Case 1 - 4
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
years. However, the reduction in debt has reduced both the debt ratio and the debt to equity ratio, two ratios
that lenders closely examine when considering additional debt.
3)
Relatively new plant
The average age of plant ratio indicates that River's facilities increased only about one year in age over a
five-year period. Thus, the hospital has been adding a significant amount of new fixed assets and confirms
other indicators of new plant additions.
4)
Positive trend in outpatient profitability
The indicators show an upward trend in profit per visit and net revenue per visit. The trend in outpatient
profitability is encouraging, especially when coupled with the fact that the hospital is expanding its outpatient
services while shrinking its inpatient services. Note, however, that cost allocations between inpatient and
outpatient services can often be quite arbitrary, so any indicators that have costs as a component are
subject to accounting distortions. Furthermore, the case assumes that the same deduction percentage for
bad debt/charity care and allowances applies to both inpatient and outpatient care. If this assumption is
invalid, then the net price per discharge and net price per visit indicators are biased, and one should be
higher and the other lower. Increasing proportion of outpatient services bodes well for the future.
5)
Lower than average inpatient charges
Although net revenue per discharge has increased, it is still relatively low in comparison to the industry
average. Since River's bad debt/charity and contractual allowances are slightly less than average, the low
net revenue per discharge stems from low charges. In addition, the hospital's case mix index is in the upper
quartile, indicating a higher-than-average inpatient intensity of services. Both of these suggest that the
hospital may be able to raise its charges and increase its margin. If Medicare reimbursement is lower than
reimbursement from other payers, then a low Medicare payment percentage is also good news.
6)
Better than average control of inpatient costs
Expense per discharge and expense per adjusted discharge are both better than average.
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.)
1)
Rapidly increasing deductibles
The deductible ratio has dramatically increased in the last two years. Although bad debt and charity care
have increased somewhat, the real culprit is contractual allowances which has increased from 5.30 percent
of gross patient service revenue in 2011 to 16.65 percent in 2013, a threefold increase. This may mean an
increase in managed care penetration. As a not-for-profit hospital, River should be willing to provide
services to truly indigent patients, but must be aggressive in collecting from those self-paying patients that
have the capability to pay.
2)
Negative trend in liquidity
Both the current ratio and days cash on hand have declined in the past two years. The 34.15 decline in days
cash on hand is particularly worrisome.
3)
Not using plant up to capacity
Asset management ratios are designed to measure how effectively the firm is managing its assets. These
ratios help to answer this question: Does the total amount of each type of asset as reported on the balance
sheet seem reasonable, too high, or too low in view of current operating levels? River and other hospitals
must borrow or raise equity capital to acquire assets. If they have too many assets, then their interest
expenses will be too high and their profits will be depressed. On the other hand, if assets are too low, then
profitable sales may be lost or vital services may not be offered.
1/17/2014
Case 1 - 5
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
All turnover ratios indicate that River is not able to utilize its assets as efficiently as the average hospital. The
problem is particularly acute when fixed assets are considered. These ratios basically confirm the fact that
River is staffing only 178 out of 210 licensed beds. Furthermore, the hospital's occupancy rate on staffed
beds is only 61.66 percent, which translates into 53 percent occupancy on licensed beds. Clearly, the fixed
assets on the books are not doing a good job of generating revenues.
The recent fixed asset additions would tend to create a high book value of fixed assets compared to
hospitals whose assets are older, and these additions create a downward bias in River's fixed asset
turnover. The bulk of the fixed asset additions probably were for outpatient versus inpatient services.
4)
Increasing collection period
Days in patient accounts receivable has risen dramatically since 2011 and is now slightly above average.
Some of the increase may be due to payers taking longer to pay, and there may be little that can be done in
this regard. However, perhaps the hospital hasn’t invested sufficiently in electronic payment systems and
other revenue cycle activities that might speed up collections, reduce collection expenses, or both.
5)
Declining inpatient profitability
Profit per inpatient discharge has declined for the past two years, although the rate of decline may be
slowing.
6)
Negative outpatient profitability
Although the profit indicators show an upward trend in profit per visit, outpatient profitability remains well
below that of an average hospital. In fact, outpatient services are showing a loss. One possible explanation
is the way that River allocates overhead costs between inpatient and outpatient services. Another
explanation could be that the new plant added over the past few years is primarily devoted to outpatient
services, and hence the depreciation allocated to those services is extraordinarily high.
7)
Declining inpatient volume
The volume indicators that focus on inpatient activity reiterate the fact that the hospital's fixed asset
investment in inpatient care is being underutilized, although it is not out of line with the industry.
8)
Negative trend in expenses
Expense per discharge, expense per adjusted discharge, and expense per visit have all increased during
the past two years. Some of this is due to labor expense—salary per FTE increased substantially between
2012 and 2013, although the average salary is still within the industry average.
Another possible reason for the negative trend in expenses could be a recent reduction in length of stay.
This could mean that patients are being discharged "quicker and sicker," but it could also mean that the
hospital's patient clientele is somewhat younger or otherwise healthier than average (as evidenced by the
below average Medicare percentage) or that the hospital is doing a good job of utilization management. In
either case, shorter length of stay often means a reduction in cheaper days toward the end of an inpatient
stay, and an increase in average expense per day and total expenses as a result. This is also suggested by
the hospital's case mix index that indicates a higher-than-average inpatient intensity of services. When
reimbursement is on a per discharge (or admission) basis as with Medicare, a short LOS is good. However,
if reimbursement is on a per diem basis, a short LOS is bad.
9)
Negative trend in efficiency indicators
The FTEs per occupied bed have increased in both of the previous years. Labor hours per visit took a large
increase in 2012, but declined a small amount in 2013. Personnel hours per visit for outpatient services is
well above average. One possible explanation is that River recently opened a new outpatient facility that
requires fixed assets and staffing for, say, 50,000 visits a year, but it will take several more years to achieve
this volume. Thus, current excess capacity results in low profitability for outpatient care, but the hospital is
positioned well for continued growth in outpatient services.
1/17/2014
Case 1 - 6
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
10)
Negative trend in liability expenses
This increase in this expense may reflect claims experience in the industry and thus not within the control of
hospital management.
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 2013 ROE change
from each of these strategies?
a. Vacant land is sold and total assets decreases by $2.0 million. Net income would not be affected and
the board wants to maintain the 2013 debt ratio.
The actual 2013 total assets is $54.275 million, so the new total assets would be $54.275 – $2.0 = $52.275
million. Melissa wants to maintain the 2013 debt ratio of 40.9 percent. Therefore, the new total debt would
be 40.9% x $52.275 = $21.378 million and the new net assets would be $52.275 – $21.378 = $30.897
million. Net income doesn’t change so, at this level of net assets, the new return on equity would be $2.458 /
$30.897 = 7.96%, and increase of 0.29 percent over the actual 2013 ROE. Under this strategy, the hospital
would be producing the same net income with a lesser amount of net assets, so the return on equity would
increase.
Total assets
Net income
Debt ratio
Actual
New
2013
2013 Change
$ 54.275 $ 52.275 $ (2.000)
$ 2.458 $ 2.458 $ 40.90% 40.90% $ -
Total debt
Net assets
Return on equity
$ 22.196 $ 21.378 $ (0.818)
$ 32.079 $ 30.897 $ (1.182)
7.66%
7.96%
0.29%
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.
The actual 2013 total assets is $54.275 million and this wouldn’t change. Melissa wants to increase the debt
ratio from the 2013 value of 40.9 percent to 48 percent. Therefore, the new total debt would be 48% x
$54.275 = $26.052 million, and the new net assets would be $54.275 – $26.052 = $28.223 million. Net
income doesn’t change, so at this level of net assets, the new return on equity would be $2.458 / $28.223 =
8.71%, and increase of 1.05 percent over the actual 2013 ROE. Under this strategy, the hospital would be
producing the same net income with a lesser amount of net assets, so the return on equity would increase.
1/17/2014
Case 1 - 7
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
Total assets
Net income
Debt ratio
Actual
New
2013
2013 Change
$ 54.275 $ 54.275 $ $ 2.458 $ 2.458 $ 40.90% 48.00%
7.10%
Total debt
Net assets
Return on equity
$ 22.196 $ 26.052 $ 3.856
$ 32.079 $ 28.223 $ (3.856)
7.66%
8.71%
1.05%
c.
LEAN management is implemented and total expenses decrease by $0.5 million. Total revenue, total
assets, and total liabilities & net assets would not change.
The actual 2013 net income is $2.458 million, so the new net income would be $2.458 + $0.5 = $2.958
million. Net assets doesn’t change so, at this level of net assets, the new return on equity would be $2.958 /
$32.079 = 9.22%, and increase of 1.56 percent over the actual 2013 ROE. Under this strategy, the hospital
would be producing greater net income with the same amount of net assets, so the return on equity would
increase.
Total assets
Net income
Debt ratio
Actual
New
2013
2013 Change
$ 54.275 $ 54.275 $ $ 2.458 $ 2.958 $ 0.500
40.90% 40.90%
0.00%
Total debt
Net assets
Return on equity
$ 22.196 $ 22.196 $ $ 32.079 $ 32.079 $ 7.66%
9.22%
1.56%
d. Whatever strategy Melissa chooses, she is under pressure from the board to increase return on equity
to at least 10 percent. What total margin would be needed to achieve the 10% ROE, holding everything
else constant?
The actual 2013 net assets is $32.079 million. At this level of net assets, a return on equity of 10 percent
would require net income of $32.079 x 10% = $3.208 million. The actual 2013 total revenue is $36.416
million. At this level of total revenue, the new total margin would be $3.208 / $36.416 = 8.81%, an increase
of 2.06 percent over the actual 2013 total margin.
Net assets
Total revenue
Net income
Total margin
Return on equity
1/17/2014
Actual
New
2013 Change
2013
$ 32.079 $ 32.079 $
$ 36.416 $ 36.416 $
$ 2.458 $ 3.208 $ 0.750
6.75%
8.81%
2.06%
7.66% 10.00%
2.34%
Case 1 - 8
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
5. What additional financial information would be useful in the analysis?
(1) Three years of industry data, so that River's trends could be better interpreted.
(2) Common size industry data.
(3) A complete breakdown of the "other" operating expense category.
(4) Some insights as to direct costs of inpatient and outpatient services and how overhead is allocated
to the two services
(5) Breakdown of bad debt/charity care and contractual allowances between inpatient and outpatient
care.
6. Select five financial and five operating key performance indicators (KPIs) to be presented at future
board meetings.
Here, the students can be very creative and the best answer is in the eyes of the beholder. In essence, a
key performance indicator (KPI) should measure a critical area of performance, while a dashboard is a
means of presenting the measures that facilitates interpretation. Many dashboards contain KPIs related to
patient satisfaction and other factors beyond financial and operating performance, but the intent in the case
is to focus solely on financial and operating measures.
Here is one set of suggestions for five KPIs that measure financial performance and five that measure
operating performance. Note that these are often presented as gauges on a dashboard. Also, it is common
to have benchmark data presented simultaneously along with a simple assessment for each measure such
as number of stars, where 5 stars represents doing extremely well in that measure and 0 stars means doing
terribly. Finally, the lists given below were restricted to the financial statement and operating indicators
provided in the case.
Financial KPIs:
Days cash on hand
Total margin (or better yet, operating margin)
Days in patient accounts receivable
Debt ratio
Total asset turnover
Operating KPIs:
Profit per inpatient discharge
Profit per outpatient visit
Occupancy rate
FTEs per occupied bed
Outpatient labor hours per visit
1/17/2014
Case 1 - 9
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
7. Sound financial analysis involves more than just calculating numbers. The American Association of
Individual Investors suggests that investors consider the qualitative factors below when evaluating a
company. Answer the questions for River Community 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.
a. Are the company’s revenues tied to one key customer?
A significant portion of the hospital’s net patient service revenue was generated by patients who are covered
by Medicare, Medicaid, other government programs, or by various private plans, including managed care
plans. Therefore, the hospital’s revenue is not tied to one key customer.
b.
To what extent are the company’s revenues tied to one key product?
There is not a lot of information provided about the service mix and product lines of the hospital other than
inpatient and outpatient services. Other information is necessary to assess the hospital’s dependence on a
few key products. For example, does the hospital provide medical and surgical services only or does it also
provide obstetrics, pediatrics, mental health, and rehabilitation services? Hospitals that rely on a few
services may be more efficient and focused, but a lack of diversification increases risk. Therefore, it would
be important to assess the range of inpatient and outpatient services.
c.
To what extent does the company rely on a single supplier?
There is no information provided about the medical staff of the hospital. If it consisted of physicians from one
group practice only, they could be at risk of the practice leaving the hospital to join a competitor. If the
medical staff didn’t include important specialties, this could also make the hospital financially vulnerable.
Therefore, it would be important to assess the size, composition, and affiliation of the medical staff.
There is no information provided about the nursing staff of the hospital. If the nurses are unionized, the
hospital could face a greater likelihood of interruption of service from strikes and perhaps higher nursing
wage rates.
d.
What about the competition?
Competition among the four hospitals in River’s service area has been keen but friendly. However, a large
for-profit chain recently purchased the for-profit hospital, which has resulted in some anxiety among the
managers of the other three hospitals because of the chain’s reputation for aggressively increasing market
share in the markets they serve. Therefore, it would be important to consider both the likely actions of the
current competition and the likelihood of new competitors in the future.
e.
What are the company’s future prospects?
There is not a lot of information provided about the future prospects of the hospital. In 2008, the board made
the decision to significantly expand the hospital’s outpatient services because many procedures that
1/17/2014
Case 1 - 10
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
historically were done on an inpatient basis were now being done in an outpatient setting, and if River did
not offer such services it would lose the patients to other providers. Other than this information not much is
known. Therefore, it would be important to assess whether the hospital is innovative, is able to respond to
changing community needs, has up-to-date technology, has the necessary human resources, and the vision
to succeed in the future.
f.
How does the legal and regulatory environment affect the company?
It is crucial to factor in the effects of proposed regulations and pending or likely lawsuits. The hospital is
currently involved in eight suits involving claims of various amounts that could ultimately be tried before
juries. Although it is impossible to determine the exact potential liability in these claims, management does
not believe that the settlement of these cases would have a material effect on the hospital’s financial
position.
There is no information provided about the regulatory environment. For example, how will health reform
affect the hospital and the other providers in the community? Is the hospital located in a Certificate of Need
(CON) state? Therefore, it would be important to assess the potential impact of imminent regulatory
changes.
8. Based on the limited amount of information provided in the case, what are your top three or four
recommendations to the board?
1)
Stabilize inpatient expenses.
Salaries and fringe benefits do not appear to be the source of the problem, but these areas must be
continuously monitored. A detailed examination of "other" operating expenses must be undertaken to
ascertain precisely what these expenses are, and what can be done to control them. If there is no hope of
increasing inpatient volume, perhaps some of these assets can be converted to other, more productive,
uses.
2)
Examine negotiation policy with third party payers.
Does River have to give up so much in contractual allowances, or have they been poor negotiators in the
past? Although raising charges has been the traditional approach to increasing revenues, the current highly
competitive environment coupled with managed care organizations' ability to extract discounts and
emphasis on keeping patients out of hospitals makes it exceedingly difficult to increase charges and at the
same time maintain, or even increase, volume. Still, River’s greater intensity of services might provide
justification for higher charges.
3)
Increase outpatient volume.
The hospital must increase the utilization of its fixed assets. If, indeed, new outpatient facilities have come
on line that are grossly underutilized, the hospital must reconsider its outpatient marketing plan. Perhaps the
hospital can get more involved in the workers' compensation program or other similar endeavors to bring in
more outpatients. Perhaps the hospital does not have a sufficient number of physicians with staff privileges.
4)
Analyze revenue cycle activities.
The ability to make timely collections reduces the need for other financing, and hence increases profitability.
The hospital needs to take a hard look at its revenue cycle management and take actions to speed up
collections and reduce collection expenses. This should include examining the entire range of business
activities and information processing involved in the billing and collection of revenues for services provided.
Perhaps there is a need for training of coding staff, hiring of additional billing staff, revision of credit policies,
or improved patient financial counseling. The hospital may want to consider hiring a consulting firm that
specializes in revenue cycle improvement.
1/17/2014
Case 1 - 11
Cases in Healthcare Finance, 5th Edition
Copyright 2014 Health Administration Press
9. In your opinion, what are three key learning points from this case?
(1) Information overload can be a problem. Too much data can be as problematic as too little data.
The real challenge in a financial condition analysis is to rationally interpret the data to create
concise judgments about a business’s financial condition.
(2) The statement of cash flows provides a lot of information. Cash flow from operations
decreased significantly, a sizeable amount of fixed assets were added, and use of long-term debt
increased. All of this information is gleaned from one statement.
(3) Operating indicator analysis is essential. Financial ratio analysis tells what the current condition
is, but not why. Operating indicator analysis shows that inpatient prices probably too low, outpatient
volume probably too low, and outpatient costs are too high, mostly due to staffing levels as opposed
to compensation.
1/17/2014
Case 1 - 12
CASE 1
RIVER COMMUNITY
HOSPITAL (A)
(Assessing Hospital Performance)
Introduction
3 Key Learning Points (KLPs)
Introduction
• This case illustrates financial statement and
operating indicator analyses of a large hospital.
• The primary goals of this case are to give you
the opportunity to:
– Assess a hospital’s financial condition.
– Make judgments as to why that condition exists.
– Make recommendations as to what must be done to
correct any deficiencies noted.
Copyright 2014 Health Administration Press
Spreadsheet Model
• The case has a complete spreadsheet model.
(No input data must be entered.)
• The key to a good case analysis is the
synthesis, interpretation, and presentation of
the results rather than the creation of the
numerical output.
Copyright 2014 Health Administration Press
KLP 1: Information overload can be a
problem
• Too much data can be as problematic as too
little data.
• The real challenge in a financial condition
analysis is to rationally interpret the data to
create concise judgments about a business’s
financial condition.
Copyright 2014 Health Administration Press
KLP 2: Statement of Cash Flows provides a
lot of information
•
Cash flow from operations decreased
significantly.
Sizeable amount of fixed assets added.
• Use of long-term debt increased.
• All of this information is gleaned from one
statement.
•
Copyright 2014 Health Administration Press
KLP 3: Operating indicator analysis is
essential
• Financial ratio analysis tells what the current
condition is, but not why.
• Operating indicator analysis shows that:
– Inpatient
prices probably too low.
– Outpatient volume probably too low.
– Outpatient costs are too high, mostly due to staffing
levels as opposed to compensation.
Copyright 2014 Health Administration Press
Incase01
CASE 1
1/17/2014
Instructor Version
Copyright 2014 Health
Administration Press
RIVER COMMUNITY HOSPITAL (A)
Assessing Hospital Performance
Case 1 presents the opportunity to conduct an extensive financial statement and operating
indicator analysis on a 210-bed not-for-profit hospital. The case includes statement of cash
flows analyses, Du Pont analyses, ratio analyses, and economic value added analyses.
The student version of the model is the same as this model. The key to student success in
this case lies in interpretation of the data presented rather than number crunching.
However, there is ample opportunity for students to extend the model to include percentage
change analysis and common size analysis, as well as to create graphs (charts) as needed
to present their findings.
Note that the industry data used in this case are for instructional use only, and do
not represent actual industry data for the time period of the case.
Statements of Operations (Millions of Dollars):
Revenues
Net patient service revenue
Other revenue
Total revenue
2011
$ 28.796
1.237
$ 30.033
2012
$ 30.576
1.853
$ 32.429
2013
$ 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
Balance Sheets (Millions of Dollars):
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Incase01
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
Total liabilities and net assets
2011
$ 4.673
4.359
0.432
0.308
$ 9.772
$ 47.786
11.820
$ 35.966
2012
$ 5.069
5.674
0.523
0.703
$ 11.969
$ 55.333
14.338
$ 40.995
2013
$ 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
$ 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
2012
2013
$ 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
$ 3.549
1.231
$ (1.427)
0.124
Page 2
Incase01
Net cash flow from financing
$ 4.780
$ (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 than 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
Net patient service revenue
Operating expenses
Inpatient service
Outpatient service
Total operating expenses
2011
2012
2013
$ 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
$ 28.796
$ 30.576
$ 34.582
$ 20.573
6.831
$ 27.404
$ 22.229
8.098
$ 30.327
$ 24.771
9.187
$ 33.958
2011
2,721
8,784
32,285
210
193
44,085
2012
2,860
8,318
32,878
210
197
42,434
2013
2,741
8,576
36,796
210
178
40,062
Selected Operating Data:
Medicare discharges
Total discharges
Outpatient visits
Licensed beds
Staffed beds
Patient days
Page 3
Incase01
All-payer Case Mix Index
Full-time equivalents
1.2869
610.8
1.2993
625.8
1.3161
619.3
Selected Financial Ratios:
2011
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
Current asset turnover
Days in patient accounts receivable
Average payment period (days)
Other Ratios
Average age of plant (years)
Selected Operating Indicators:
2012
2013
2013 Hospital
Performance
Compared to
2013 Industry Data (200-299 Beds) 2013 Industry
+Quartile
Median -Quartile
Data
2012 Hospital
Performance
Compared to
2011 Hospital
Performance
2013 Hospital
Performance
Compared to
2012 Hospital
Performance
Better
Average
Average
Average
-2.27%
-1.78%
-2.45%
0.08
0.27%
0.56%
0.57%
0.03
Better
Better
-0.99
-1.21
-0.26
-34.15
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
3.48%
3.10%
6.01%
0.26
0.53%
0.40%
0.62%
0.18
3.91
68.08
2.92
66.87
2.67
32.72
2.53
32.35
1.99
15.89
1.48
6.24
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
48.40%
64.70%
2.23
3.22
35.20%
26.90%
1.14
1.76
Average
Average
Average
Average
4.30%
7.99%
-0.91
-1.24
-3.13%
-9.37%
0.07
-0.03
0.84
0.66
3.07
55.25
36.39
0.79
0.61
2.71
67.73
54.05
0.86
0.67
3.10
78.24
51.52
2.20
1.04
3.94
87.53
71.24
1.76
0.89
3.38
75.67
56.52
1.49
0.75
2.88
63.33
45.84
Worse
Worse
Average
Average
Average
-0.04
-0.04
-0.36
12.48
17.65
0.06
0.06
0.39
10.51
-2.53
5.03
5.39
6.12
8.86
7.39
6.14
Better
0.36
0.73
2012 Hospital
Performance
Compared to
2011 Hospital
2013 Hospital
Performance
Compared to
2012 Hospital
2013 Hospital
Performance
Compared to
2013 Industry Data (200-299 Beds) 2013 Industry
Page 4
Incase01
2011
Profit Indicators
Profit per inpatient discharge
Profit per outpatient visit
2012
$280.03 $126.72
($33.07) ($24.49)
2013
+Quartile
Median -Quartile
Data
Performance Performance
$79.61
($1.60)
$89.04
$6.22
($21.30) ($120.08)
$0.66
($7.01)
Average
Average
-$153.30
$8.59
-$47.11
$22.89
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%
$3,411
$139
36.60%
4.76%
20.02%
21.03%
$2,815
$98
31.25%
2.97%
12.12%
17.44%
Average
Better
Average
Average
Average
Better
$176.99
$43.31
3.41%
0.03%
8.28%
3.84%
$168.90
$26.26
-2.42%
0.17%
3.08%
2.54%
Volume Indicators
Occupancy rate
Average daily census
62.58%
120.78
59.01%
116.26
61.66%
109.76
67.12%
173.23
58.10%
144.73
47.84%
114.39
Average
-3.57%
-4.52
2.65%
-6.50
5.02
3.90
5.10
3.93
4.67
3.55
6.80
6.48
6.07
5.36
5.41
4.52
0.08
0.03
-0.43
-0.38
Better
Better
Worse
$330.30
$236.84
$34.72
0.012
$216.01
$137.88
$3.37
0.017
3.77
4.68
Average
Worse
0.05
1.57
0.05
-0.20
$24,447 $22,517 $20,347
19.58% 17.04% 15.18%
$80.94
$42.05
$18.31
Average
Average
Average
-$124.18
4.37%
$8.23
$2,673.18
-0.96%
$1.26
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
4.10
9.44
$2,888
$2,195
$250
1.3161
$3,937
$3,417
$202.23
1.2795
4.15
9.24
$20,047 $19,923 $22,596
14.94% 19.31% 18.35%
$15.94
$24.16
$25.42
4.59
8.66
$3,392
$2,924
$141.97
1.1756
4.15
5.84
$2,972
$2,572
$111.53
1.0259
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
ROE Strategies:
Page 5
Incase01
Vacant land is sold and total assets are reduced by $2.0 million:
Total assets
Net income
Debt ratio
Actual
New
2013
2013 Change
$ 54.275 $ 52.275 $ (2.000)
$ 2.458 $ 2.458 $ 40.90% 40.90% $ -
Total debt
Net assets
Return on equity
$ 22.196 $ 21.378 $ (0.818)
$ 32.079 $ 30.897 $ (1.182)
7.66%
7.96%
0.29%
Debt is substituted for equity and the debt ratio increases to 48 percent:
Total assets
Net income
Debt ratio
Actual
New
2013 Change
2013
$ 54.275 $ 54.275 $ $ 2.458 $ 2.458 $ 40.90% 48.00%
7.10%
Total debt
Net assets
Return on equity
$ 22.196 $ 26.052 $ 3.856
$ 32.079 $ 28.223 $ (3.856)
7.66%
8.71%
1.05%
LEAN management is implemented and total expenses decrease by $0.5 million:
Total assets
Net income
Debt ratio
Actual
New
2013 Change
2013
$ 54.275 $ 54.275 $ $ 2.458 $ 2.958 $ 0.500
40.90% 40.90%
0.00%
Total debt
Net assets
Return on equity
$ 22.196 $ 22.196 $ $ 32.079 $ 32.079 $ 7.66%
9.22%
1.56%
Total margin increase to provide a return on equity of 10 percent:
Actual
2013
New
2013
Change
Page 6
Incase01
Net assets
Total revenue
Net income
Total margin
Return on equity
$ 32.079 $ 32.079 $
$ 36.416 $ 36.416 $
$ 2.458 $ 3.208 $ 0.750
6.75%
8.81%
2.06%
7.66% 10.00%
2.34%
Page 7
Purchase answer to see full
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