# finance and accounting help!

Case Study Analysis Discussion—Controlling Costs

In this assignment, you will analyze the SMH data set to identify costs associated with specific clinical product lines and measure gross profit. This is an extension of the work you did in M3: Assignment 1. You will prepare a report that discusses where cost savings could be realized and what revenue centers within the hospital generate income.

Through this discussion, you will compare the results of your analysis and become familiar with activity-based costing and managed care contracting. The product lines included for this case are cardiology, orthopedic medicine, and other. For your analysis, you can use the SMH data file, which you had downloaded from the Doc Sharing area.

For the case study analysis, you will use the SMH data file to do the following:

• Calculate inpatient gross profit (GP) for each product line. Use the template in the SMH data file for this activity.
• Comment on the results of your inpatient GP calculations. What product line is most profitable by dollar amounts and GP percentage?
• Using your calculations, comment on the following factors. Is there value in separating product lines into more detail? What detail would you recommend? What is the value in separating revenue and expenses by physician? Surgery type? And others?

Write a 1- to 2-page paper in Word. All written assignments and responses should follow APA rules for attributing sources.

2

>SMH Introduction

0-bed metropolitan not-for-profit (NFP) hospital in a major city. The hospital competes with other hospitals for its patient base. Managed care is a significant part of its revenue stream and the hospital is not receiving competitive rates. This puts the hospital at a competitive disadvantage.
The hospital has been in existence for over

5 years and there is only a small mortgage on the building. This is an advantage for the hospital.
The hospital sold property and used the funds to build the infrastructure of the organization. While the hospital needs additional funding for major projects, it has no more property available for sale.
In addition, while the hospital has enjoyed the benefits of several significant contributors, these contributors are getting “contributor fatigue.” They are less interested in contributing because the hospital has not turned the corner on operation revenue and expenses. The hospital faces significant issues with the current economic crisis. The issues include a drop in

payments and a number of people in the community losing their insurance coverage.

 Sakasegawa Memorial Hospital (SMH) is a 6 5 7 Medicaid

## 2007 revenue expense data

8

,000.00

enue

08,800.00

Capitation Rev

rev – sale of asset

Rev

Source

\$340,900.00

\$0.00

.00

\$1,005,000.00

 Revenue Source Amount Net Patient revenue non- Medicare \$260, 1 3 ] Capitation Rev \$36,829,320.00 Patient Revenue – Medicare Medicaid \$188, 4 three items match line 1 Part 1 Unrelated business revenue Other \$5,492,700.00 Rent revenue \$450,000.00 dividends \$3,800,000.00 Investment Income \$1,892,925.00 Other rev – other \$5,290,000.00 Note – see detail Contributions \$7,722,580.00 Net assets released from restrictions Ttl Unrestricted \$510,069,325.00 Expenses Total Clinical Services management & General Fundraising Salaries Salaries Officers 25a Part II \$5,008,242.00 \$540,392.00 \$4,135,300.00 \$332,550.00 Other Salaries 26 Part II \$176,481,232.00 \$158,833,127.00 \$16,765,700.00 \$882,405.00 Pension 27 Part II \$17,942,172.00 \$16,147,964.00 \$1,704,508.00 \$89,700.00 Fringe Benefits 28 Part II \$23,783,424.00 \$21,406,424.00 \$2,259,000.00 \$118,000.00 Payroll Taxes 29 Part II \$13,336,000.00 \$12,002,000.00 \$1,266,000.00 \$68,000.00 Total Salaries & Benefits total \$236,551,070.00 \$208,929,907.00 \$26,130,508.00 \$1,490,655.00 Fundraising fees 30 Part II \$0.00 Accounting Fees 31 Part II \$340,900.00 Legal fees 32 Part II \$1,345,300.00 \$1,211,300.00 \$134,000.00 Supplies & Other 33 Part II \$226,106,126.00 \$225,600,500.00 rwmayer: rwmayer: See detail – Hospital costs \$500,210.00 \$5,416.00 Telephone 34 Part II \$1,049,247.00 \$944,400.00 \$99,600.00 \$5,247.00 Postage and shipping 35 part II \$339,584.00 \$305,626.00 \$32,260.00 \$1,698.00 Occupancy 36 Part II Equipment rental and maintenance 37 Part II \$8,967,852.00 \$8,071,152.00 \$896,700.00 Printing and publications 38 Part II \$177,000.00 \$159,200.00 \$16,800.00 \$1,000.00 Conference conventions and meetings 40 Part II \$78,500.00 \$70,000.00 \$8,000.00 \$500.00 Interest exp (net) 41 Part II \$9,601,800.00 \$8,551,800.00 \$1,000,000.00 \$50,000.00 Depreciation 42 Part II \$31,083,552.00 \$27,975,052 \$3,108,500.00 Provision for Bad debt 43a * \$1,005,000.00 Other expenses 43b-* Ttl exp \$516,645,931.00 \$482,823,937.00 \$32,267,478.00 \$1,554,516.00 Excess of rev over exp (\$6,576,606.00)

## 2007 asset liab data

Source

.00

Less Allowance

Unrestricted

\$573,833,500.00 \$591,414,000.00

 Beginning of year End of Year ASSETS 2005 2006 Cash line 45 Part IV \$6,787,000.00 \$2,210,000.00 Cash investments line 46 Part IV \$19,850,000.00 \$32,808,000.00 Accounts Receivable Line 47a Part IV \$117,500,000.00 Less Allowance Line 47b Part IV \$47,948,000.00 Net Accounts Receivable Line 47 Part IV \$63,330, 160 \$69,552,000.00 Pledges Receivable Line 48a Part IV \$4,700,900.00 Line 48b Part IV \$576,000.00 Net Pledges Receivable Line 48 Part IV \$6,123,000.00 \$4,124,900.00 Other Note receivables Line 451cPart IV \$13,378,061.00 \$22,606,100.00 Inventory Line 52 Part IV \$8,443,379.00 \$10,362,000.00 Prepaid expenses line 53 Part IV \$9,917,000.00 \$7,705,000.00 Investments (FMV) line 54a Part IV \$74,180,000.00 \$78,800,000.00 Land line 57a Part IV \$617,314,000.00 Accoumulated Depreciation line 57b Part IV \$328,568,000.00 Net Land line 57c Part IV \$290,824,900.00 \$288,746,000.00 Other Assets line 58 Part IV \$81,000,000.00 \$74,500,000.00 Total Assets \$573,833,500.00 \$591,414,000.00 Liabilities Accounts Payable line 60 Part IV \$83,829,885.00 \$87,118,742.00 Tax exempt bond line64a part IV \$139,233,400.00 \$136,451,800.00 Mortgage and Note Payable line 64b Part IV \$17,210,000.00 \$17,900,000.00 Other Liabilities line 65 Part IV \$122,683,500.00 \$133,556,958.00 Total Liabilbites \$362,956,785.00 \$375,027,500.00 Fund Balances line 67 Part IV \$155,132,000.00 \$158,866,000.00 Temporarily restricted line 68 Part IV \$38,523,000.00 \$40,208,000.00 Permanently restricted line 69 Part IV \$17,221,715.00 \$17,312,500.00 Fund balance \$210,876,715.00 \$216,386,500.00 Liabilities and Net Assets

## Detailed revenue

Medicare Medicaid

total

Cardiology

Orthopedic

160

Medicine

Other services

6%

2%

Cardiology Orthopedic Medicine Other

Inpatient Revenue

\$407,909,342.40

 Part III Form 990 Patient days Inpatient 164,972 Ambulatory service visits outpatient 148,617 Patient days distribution % distribution total days Cardiology 6% 9,145 Orthopedic 10% 15,959 Medicine 7 2% 119,246 Other services 13% 20,622 distribution of patient days Managed care/Insurance Private pay Column1 3658 457 4481 549 9145 5905 9097 798 15959 41736 9540 66778 1192 119246 9223 496 10401 502 20622 60522 10653 90756 3041 164972 % distribution Roger Mayer: Roger Mayer: use this allocation basis to allocate expenses between payers in Module 3 assignment 2. 37% 55% 100% Revenue Distribution Payer Column2 Total Revenue Inpatient Revenue Outpatient Revenue Medicare Revenue \$179,567,920.00 \$154,045,694.40 \$25,522,225.60 Medicaid Revenue \$16,840,880.00 \$14,956,792.00 \$1,884,088.00 Managed Care \$274,162,320.00 \$226,729,856.00 \$47,432,464.00 Private Pay \$14,850,000.00 \$12,177,000.00 \$2,673,000.00 \$485,421,120.00 \$407,909,342.40 \$77,511,777.60 Inpatient Revenue Distribution Totals \$39,612,365.72 \$41,460,795.08 \$284,847,513.80 \$41,988,667.80

## Detailed costs

patient days

patient days

Depreciation \$27,975,052

patient days

patient days

square feet

totals Inpatient allocated expenses Allocation basis

Patient days

Patient days

Total

Totals

Allocation basis

100% to cardiology

100% to Orthopedic

pharmaceuticals

Patient days

Patient days

Patient days

Total

Totals

Allocation basis

Cardiology

100% to cardiology

Orthopedic

100% to Orthopedic

Medicine

Other services

Patient days

Total

total

Cardiology

Orthopedic

Medicine

Other services

Cardiology

Orthopedic

Medicine

Other services

total 100%
 Table I Personnel and other totals Inpatient allocated expenses Allocation basis Officers Salaries& Fringe \$708,424.15 \$566,739.32 Clinical Salaries & Fringes \$208,221,482.85 \$197,810,408.70 hours of service 41.6779152919 Other clinical expenses \$20,318,478 \$16,254,782 \$22,380,042 square feet Physician Fees \$14,850,673.89 \$11,880,539.11 Other supplies \$9,433,511.95 \$7,546,809.56 Utilities \$17,289,172.12 \$13,831,337.69 Total Personnel and other \$298,796,794.96 \$270,270,658.39 Table II Direct Patient Care Expenses Cardiology \$12,506,205.80 \$10,004,964.64 100% to cardiology Orthopedic \$12,339,125.41 \$9,871,300.33 100% to Orthopedic pharmaceuticals \$23,391,254.11 \$18,713,003.29 \$69,545,157.89 Ancillary (lab x-ray) \$63,540,193.25 \$50,832,154.60 \$111,776,778.57 \$89,421,422.85 Table III Indirect Patient Care expenses Inpatient Allocated expenses Cardiology medical supplies \$2,659,459.72 \$2,127,567.78 Orthopedic medical supplies \$2,393,513.75 \$1,914,811.00 \$5,318,919.44 \$4,255,135.55 \$31,913,516.65 general medical supplies \$21,275,677.77 \$17,020,542.21 ancillary expenses \$13,297,298.60 \$10,637,838.88 \$44,944,869.28 \$35,955,895.43 Table IV Malpractice Inpatient Allocated Expenses \$5,263,709.72 \$4,210,967.78 \$6,908,619.01 \$5,526,895.21 \$14,804,183.60 \$11,843,346.88 100% medicine \$328,981.86 \$263,185.49 \$27,305,494.19 \$21,844,395.35 Table V Clinical Salaries & Fringes – Inpatient Allocation 324,648 478,770 3,458,134 484,617 4,746,169 average rate per hour – \$41.68 Table VI Square feet allocation – Inpatient services 21% 26% 49% 4%

## Module 3 Asgn 1 Instructions

1

Inpatient Revenue Outpatient Revenue Total Revenue
2

3

4

5

6

7

 The SMH financial statement contains additional data that will allow you to conduct an analysis of revenue efficiency factors. In this assignment, you will calculate direct expenses including labor, supply, and drug costs. Assignment detail Tabs to reference: “Detailed Revenue” allocates revenue by inpatient and outpatient “Detailed Expenses” allocated direct expenses by inpatient and outpatient “2007 Revenue Expense Data” provides data on other income sources and indirect expenses. Create a table that shows gross profit (patient revenue – direct expenses) for inpatient and outpatient services. See example: Inpatient direct expenses Outpatient direct expenses Total Expenses IP Gross Profit OP Gross Profit Total Gross Profit Calculate Gross Profit (GP) margin for both services. Calculate GP per patient day and per operating theater (OT) procedure. Compare your expenses to your benchmark data. (Because some of the comparative data does not have sufficient detail this may be a high-level review.) Comment on the services from the perspective of expense and revenue distribution and explain why there are differences between gross profit margins Complete a table that includes other expenses and other revenue. The table should clearly distinguish between direct and indirect expenses Comment on why other income and contributions are critical to the survival of the organization. Does the reliance on investment income mean that the organization will take a higher risk in order to increase income?

## Module 3 Assgn 2 Instructions

Assignment detail
Tabs to reference:
“Detailed Revenue” allocates revenue by inpatient and outpatient
“Detailed Expenses” allocated direct expenses by inpatient and outpatient

1

Medicare Revenue Medicaid Revenue Managed Care Private Pay Totals

\$154,045,694.40 \$14,956,792.00 \$226,729,856.00 \$12,177,000.00 \$407,909,342.40

Expenses

Roger Mayer: Roger Mayer:
Allocate expenses based upon patient day distribution %.

Personnel and other \$270,270,658.39
Direct Patient Care Expenses \$89,421,422.85
Indirect Patient Care expenses \$35,955,895.43
Malpractice \$21,844,395.35

Total Gross Profit

100%

2

3

4

5

6

7

 You will use the information from M3: Assignment 1, develop a gross profit analysis for managed care payers to develop a strategic plan for a managed care contract negotiation. Calculate inpatient gross profit for the major payers at the hospital. gross profit (patient revenue-direct expenses) Inpatient analysis Patient Revenue Roger Mayer: Roger Mayer: use revenue distribution table Total Direct Expenses \$417,492,372.03 Gross profit percentage by Payer Calculate gross profit and gross profit percentage by payer. Comment on the results of your GP calculations. In this example we assumed that patients from each payer incurred costs at the same rate. Is this assumption correct? What level of detail of cost identification should the Hospital attempt to obtain? Based on your understanding of your costs, you will develop a plan for contract negotiations with a managed care provider. In your plan, outline a strategy for contract negotiation. Based upon your analysis of the other organizations are you in a better or worse position when it comes for contract negotiations? Payers always want to move procedures from the Inpatient setting to an Outpatient setting. How does this affect the hospital strategy?

## Module 4 Assgn 1 Instructions

Assignment detail
Tabs to reference:
“Detailed Revenue” allocates revenue by inpatient and outpatient
“Detailed Expenses” allocated direct expenses by inpatient and outpatient

1

Cardiology Orthopedic Medicine Other Totals
Inpatient Revenue

Expenses

Officers Salaries& Fringe
Clinical Salaries & Fringes
Other clinical expenses
Depreciation
Physician Fees
Other supplies
Utilities
Direct Patient Care Expenses
Indirect Patient Care expenses
Malpractice
Total Direct Expenses
2

3

 You will analyze the SMH Data Set to identify costs associated with specific clinical product lines and measure gross profit. You will compare results your analysis and become familiar with activity based costing and managed care contracting in this study. The “Detailed Cost” tab provides inpatient costs and the allocation basis for each cost. You will put this information into a model and a model that analyzes costs by product line. In this case we have for product lines including Cardiology, Orthopedic Medicine, and Other. Calculate inpatient gross profit for each product line. The template that students can use is as follows: Note: Allocate revenue based upon patient day distribution between product lines Gross profit by Product Line Comment on the results of your inpatient GP calculations. What product line is most profitable by dollar amounts and gross profit percentage? Is there value in separating product lines into more detail? What detail would you recommend? For example, what is the value in separating revenue and expenses by physician? Surgery type? And others?

## Module 4 Assgn 2 Instructions

Assignment detail
Tabs to reference:
“Detailed Revenue” allocates revenue by inpatient and outpatient
“Detailed Expenses” allocated direct expenses by inpatient and outpatient

1

Revenue

Expenses

Clinical Salaries & Fringes
Other clinical expenses
Physician Fees
Other supplies
Direct Patient Care Expenses
Indirect Patient Care expenses

Officers Salaries& Fringe

Depreciation

Utilities
Malpractice

Total Direct Expenses

2

3

4

5

6

 In this assignment, students will carry out a profit analysis for a specific product line. We are using the example of Cardiology. However, students can use another product line Students will develop a Cost-Volume-Profit template to help measure costs and changes to variable and indirect costs using SMH data. “Module 4 Assgn 1 Instructions” for baseline cost information Develop a template of costs. You should separate expenses between variable and fixed expenses. To assist, the template provides some guidance: Inpatient Cardiology Cardiology total Patient days Per patient day Variable Total Variable Expenses Fixed Roger Mayer: Roger Mayer: do not calculate fixed costs on a per patient day basis. Total Fixed Expenses Gross profit for Inpatient Cardiology Calculate the break even point in patient days Note: Break even point Total Fixed cost / (per patient day revenue – per patient day variable expenses) Calculate the break even point assuming a 5 percent increase in clinical salaries and a 4 percent increase in officer salaries. A physician wants to add a new procedure that will increase direct patient care expense by \$200 per day. What is the impact on gross profit and the breakeven point? The hospital is considering hiring a physician. This will increase annual costs by \$250,000. However, with the addition of this physician it is anticipated that patient days will increase by 6 percent. Is this a good move for the Hospital? Many times it is difficult to determine if a cost is variable or fixed. In addition, costs may be variable, but only in a relevant range. Do you agree with the categorization of costs as they are presented on this template? Would you recommend changes? What additional information would help you analyze the data?