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This is a sample of the instructor materials for Louis C. Gapenski and George H. Pink, Cases in Healthcare Finance, fifth edition. The complete materials include      case questions and solutions instructor Excel models PowerPoint slides for each case student spreadsheets a transition guide to the new edition This sample contains the following materials for Case 1:    questions and solutions PowerPoint slides instructor’s Excel model If you adopt this text, you will be given access to the complete materials. To obtain access, email your request to hapbooks@ache.org and include the following information in your message:       Book title Your name and institution name Title of the course for which the book was adopted and the season the course is taught Course level (graduate, undergraduate, or continuing education) and expected enrollment The use of the text (primary, supplemental, or recommended reading) A contact name and phone number/e-mail address we can use to verify your employment as an instructor You will receive an e-mail containing access information after we have verified your instructor status. Thank you for your interest in this text and the accompanying instructor resources. *** PLEASE NOTE: This book is also available in e-book format at CourseSmart, CafeScribe, and Kno. Rental access is available at CourseSmart and Kno for 50% off the print list price. Perpetual access is available at CafeScribe and Kno at list price. For more information, please visit one of these preferred partners or contact us at hapbooks@ache.org. 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): Page 1 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
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Copyright 2014 Health Administration Press

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?

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.

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):
Operating activities cash flows
Net income
Depreciation
2.756
Change in accounts receivable
(1.739) Change in inventories
(0.078) Change in other current assets
(0.220) Change in accounts payable
0.507
Change in accruals
(0.327)
Net cash flow from
operations
Cash Flows from Investing
Activities
Investment in plant and
equipment
Cash Flows from Financing
Activities

2012
2013
$ 2.102 $ 2.458
2.633
(1.315)
(0.091)
(0.395)
0.325
0.043
$ 3.302 $ 3.357
$ (7.686) $ (4.328)

$ 3.549 $ (1.427)

Change in long-term debt
Change in current portion of long-term debt
1.231
0.124
Net cash flow from
$ 4.780 $ (1.303)
financing
Net increase (decrease) in cash and
$ 0.396 $ (2.274)
investments
starting cash and investments
4.673
5.069
Ending cash and
$ 5.069 $ 2.795
investments
Note: In the statement of cash flows, depreciation and fixed asset
acquisition turn out different when calculated from financial
statements, probably due to the asset re-evaluation.
The cash flow statement is an end tunnel where financial transaction can be traced and monitored
throughout a certain period. This instrument of tracking transactions is rooted to three aspects of basic
operating profitability, investment activities, and financing activities. Practically, this is a simple way of
telling the sources of funds and how they are spent by the organization. Below is the interpretation of
the hospitals 2012-2013 statements of cash flow as depicted in Exhibit 1.3 in the case.
The hospitals cash flow recorded between 2012 and 2013 increased from $3.302 to $3.357 million, a
mere increase of approximately 1.7%. On spending, the hospital incurred [($7.686 + $4.328) / 2 =]
$6.007 million per year on plant and equipment alone. Owing the hospital had with them a net of $35.966
million in plant and equipment as of 2011, the figure is a significant plus from the previous financial year
which stood at ($12.014 / $35.966 = 33.4 percent) in plant and equipment. Nevertheless, despite the
recorded growth in assets, the hospital remained a 210 bed facility throughout the period, meaning that
the growth of assets and equipment was rather an upgrade to the existing facilities, or expansions to the
outpatient units. The number of staffed beds actually declined from 193 to178. The hospital saw an

increase in the use of long-term debts ($4.780 – (–$1.303) = $3.477) which was quite modest
considering how substantially the hospital invested in fixed assets.

What the end result indicates is a decrease in cash balance ($5.069 – $2.795 =) $2.274 million, as the
hospital funded a new plant and equipment. The remaining funds come from operating cash flows.
However, it would ideal to understand that a change in the statement cash flow is not a significant piece of
information, as such can be controlled by numerous financial 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...


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