project review

Course Project—Peer Review

Your facilitator will assign you the reports of two classmates. Evaluate the presentation based on the following criteria and add any other comments you may have.

Use the following questions to guide your peer review:

• Do the tables tie into and support the conclusions?
• Does the paper flow properly from problems to strategic solutions?
• Does the paper show the importance of cost management?
• Has the writer clearly outlined a strategic plan that matches the organization’s mission?
• Is the paper written for the appropriate audience?
• Are tables properly formatted?
• Are references and citations written in APA style?

Write a 3-page peer review in Word format. All written assignments and responses should follow APA rules for attributing sources.

COMPARISON OF THREE HOSPITALS
5

M6A2

A Comparison Analysis of Two Non-Profit

and

One For-Profit Hospital Systems

Margo L. Enos

6501 Accounting & Finance for Healthcare Managers

Instructor: Adamavi Ahyee

April 13, 2013

Introduction

Sakeseagawa Memorial Hospital (SMH) is facing financial difficulties. One of the ways the board chose to evaluate the current situation is to commission a study of two other hospitals for comparison. It is one thing to have a financial analysis of SMH, but the board reasoned that they would have a clearer picture of SMH if they had an idea of how other hospitals were performing as well. It was decided further that instead of the obvious selection of similar hospitals for comparison, two very different hospitals would be selected to broaden the analysis. A smaller hospital, also a non-profit located in Florida, Doctors Memorial Hospital (DMH) was chosen to represent the lower end of the size spectrum. At the other end of the spectrum a large hospital chain was chosen, Hospital Corporation of America (HCA), which has 168 hospitals in the US.

Data gathering for comparison proceeded with publically available information. In the case of HCA the 10-K reports from the Security and Exchange Commission were obtained. Since DMH is non-profit no 10-K is available, tax form 990 and an auditor’s report were the sources of information.

SMH Income

SMH is running a deficit of -$6,576,606, from revenues of $510,069,325 and expenses of $516,645,931. Of the total revenue, $485,421,120 (95%) was due to patient care, the balance, or 5% was due to investments, rentals, property sale and donations. Without the property sale patient care is 96% of revenues, which is likely the case for the coming year. This is not performance for the long term. One obvious conclusion is that SMH must seek ways to broaden its revenue stream. As a non-profit that is so dependent on patient revenue, this hospital is vulnerable to variation in patient mix, paying versus non-paying, and in number of patients.

Ratio Analysis

An issue is whether SMH is able to service the debts that exist, how well management is employing assets and whether expenses can be trimmed and where. A ready snapshot of the SMH current situation is in the Liquidity Ratios that reveal what assets are available to handle obligations.

Table 1, shows the current ratio, acid test and working capital over sales for the years 2006, and 2005. The current ratio is a gross measure of the ability of an organization to meet debt obligations within a year. SMH shows current assets 42% greater than current liabilities for the year 2006. This is enough for immediate obligations and it is higher than for 2005 at 27% over current liabilities. The trend is positive for SMH. The same holds true for the acid test which measures the ability to pay down current liabilities more stringently by removing inventory from current assets.

Table 1, Liquidity Ratios for SMH

Current Liabilities

Liquidity										2006			2005
Current Ratio	Current Assets	1.42	1.27
	Current Liabilities
Acid Test	Current Assets – Inventory	1.21	1.13
Working Capital/ Sales	Current Assets – Current Liability Sales	0.09				NA

Without the contribution of inventory we see that SMH has 21% more in current assets than in current liabilities. They are still able to meet obligations, however it is shown that inventory, which is not a liquid asset is a large part of the current assets and so the acid test may be a better measure in this case. With 21% margin of liquidity over liabilities, there does not appear to be much room for contingencies. Indeed this is borne out by looking at working capital as a part of sales. We find that only 9% of sales resulted in working capital. There seems to be large expenses eating at the financial strength of SMH.

The extent to which management employs the assets it has fits under the heading of operating performance. The ratios included here all measure net profit against some other components of assets or debt. As a group the operating performance ratios measure the efficiency of capital used. In other words given the pile of money at its disposal does management use it to make more – or less? Table 2 tells the tale with four operating performance ratios. In this case a year to year comparison is not available because prior year revenue was not available or reported.

Table 2. Operating Performance Measures for SMH

 

2006

2005

Net Income

NA

NA

-0.05

NA

Operating Performance
Return on Assets		Net Income		-0.05	NA
	Total Assets
Return on Equity	-0.14
Net Assets
Operating Profit Margin	EBIT	-0.06
Revenue
Return on Capital Employed (ROCE)	EBIT Debt + Net Assets

The most salient fact of these ratios is that they are all negative. As a snapshot this is not a good place to be for SMH. Without prior year income and cost data it is not possible to know if the numbers are trending in a positive way or negatively. However it is a fact, that given the assets of the hospital for the year 2006, SMH management is unable to clear a profit. Again, expenses are excessive relative to revenue, whether this means revenue is suppressed or expenses are bloated is not clear. When an entity is not able to make a profit it often increases debt in the short term to meet short term obligations leaving tomorrow to take care of it. The long term debt of SMH is $270,008,758. Relative to other measures of assets and expenses the liquidity ratios will reveal how much of a debt burden the

$270+ million is on the organization. Comparing year to year it will also reveal if fresh debt is being added to the overall debt. The liquidity ratios are presented in Table 3.

Table 3. Liquidity Ratios for SMH

 

2006

2005

 

 

0.63

Total Assets

 

 

Leverage
Capitalization Ratio	Long-term Debt	0.56	0.55
Long-term Debt + Net Assets
Debt Ratio	Total Liability		0.63
Debt Equity Ratio	Total Liability Fund Net Assets	1.73	1.72

Initially it appears that no new debt has been obtained in the two years covering the data. However long term debt is for a long term and this situation may be years old as would be the debt. The capitalization ratio is .56 meaning that long-term debt is 56% of the debt plus assets. The debt ratio which is a ratio of liability to assets is .63, and the debt equity ratio is 1.73. Taken together these numbers seem high. The idea that the debt is equal to more than half the assets is alarming because that means the debt of that magnitude is going to be around for years. Carrying a capitalization ratio of 56% means that of all the liabilities owed by the organization 56% are long term. If the hospital can keep the amount of debt fixed or decreasing, then a large long term debt means that the hospital can delay paying it down. Depending on the interest rate, extending the length of time to repay debt can be an effective strategy. If debt is rising on the other hand if new debt is being laid on it is better to service it than let it grow. At some point the organization will not be able to get out from under and will perpetually be servicing and paying interest with revenue.

From the liability, performance and leverage ratios, SMH appears to have large expenses that could be getting out of hand. The bright spot is that no new debt has been obtained. This means however that the large debt is more than two years old and may be here to stay. Looking at costs means allocating cost over the departments to see which ones are really profitable while carrying the G&A burden. Cost allocation also means revealing potential areas where costs are lurking undiscovered. Activities that are unable to put up a profit against their allocation of cost may be harboring some wasteful or costly practices. The four departments at SMH are Cardiology, Orthopedics, Medicine, & Other which is a catchall for many other smaller functions. Table 4, depicts the revenue captured by each activity and the percentage. Table 4b, shows the costs allocations for each activity.

Table 4a. Revenue by Department

With the exception of Medicine each department accounts for approximately 10% of total inpatient revenue. The Medicine department accounts for the majority of revenue at nearly 70% of total inpatient revenue. These differences may be able to explain part of the cost structure of the hospital. Medicine is a general area and perhaps should be broken down into sub-specialties.

Table 4b. Cost allocations for each department.

The line items italicized are direct patient expenses.

Table 4b (Continued)

The continuation of Table 4b shows the summary data of the cost allocations. Here it is revealed that gross margin by activity for SMH is just barely profitable for Cardiology, and Orthopedics, while other is down by 150%. The only truly healthy activity is Medicine. However Medicine is a large department and should be further refined to determine which activities within Medicine are working well and which are not. The same holds true for the catchall other. This department isn’t really a department. It is a miscellaneous collection of activities that may not fit in broad terms. Within other there may be some sub activities that are doing better than others. If that is so, then there are some departments within other that are doing worse than a 150% deficit. These must be found and dealt with.

Now that it is obvious that Medicine is carrying the whole hospital it is time to consider that they are doing something that the rest of the hospital could emulate. Specifically observe that the percent of direct and indirect expenses for Medicine is 80% and 20% respectively. This is in direct contrast to the other departments. Orthopedics has direct/indirect percentages of 56%/44%, meaning nearly half of their expenses have nothing to do with patient care. Falling in the middle range are Cardiology, and Other who both are approximately, 70%/30%. While not a perfectly arranged relationship the profitability of a department has something to do with the percentage of direct and indirect costs. In any department if the indirect costs are more than 25% of total costs then that department should be subject to an audit that focuses on cost. Looking into the cost structure of SMH, the next step is to find break-even points for each department. Table 5 shows the fixed and variable costs allocations, by department.

Table 5. Cost allocations by departments, for fixed and variable costs.

The break-even analysis shows that for Cardiology 9050 patient days are needed for break-even given the current costs structure. Cardiology has 9145 patient days in a year and they need just about the whole year to reach the break-even point. In the case of Medicine the break-even point is 38,897 patient days. Given that Medicine has a total of 119,246 patient days in the year it seems Medicine has a third of a year to break-even. That is a telling difference. The other departments have a similar tale, too many days to reach break-even, reasonably. In the case of other services there is such a hole of expenses that break-even, is never reached.

In comparison to SMH, it is not possible to make a direct comparison with DMH or HCA in terms of costs of departments or allocations. However the relative health of those institutions is presented in the income statements, balance sheets and ratio analyses in the appendices.

DMH is presented in Appendix A. The ratio analysis shown in Appendix A3 can be summarized in the following way; liquidity of DMH shows a worsening vulnerability to short-term liabilities, the ratios only show a small percentage of assets over liabilities and not enough for contingencies. Operating performance is negative since there is a net loss of operating capital. Trends for operating performance are getting worse. The most troubling factor is the leverage. There is evidence of a recent increase in long term debt which is going to stretch the hospital’s resources by the end of the year; unless a fresh infusion of cash arrives that is not encumbered by interest rates or restrictions.

HCA is a huge for-profit hospital system operating at a small profit (see Appendix B1). Ratios for HCA presented in Appendix B3, reveal a system with inadequate liquidity trending slightly worse year over year (for the reported years). The acid test shows only 8% more liquid assets over current liabilities. Operating performance is slightly better since there was a small profit reported, however the year over year trend is also negative. Leverage spells problems for the future. HCA has a debt ratio of 1.30 which means they have 30% more debt than they have means to service right now.

This quick review indicates that SMH while facing some difficulties in the short-term has a chance to struggle out, given certain actions are taken. First, increase efforts in fundraising, and investing, more revenue from places other than patient care is needed. Second attack the cost and expenses accumulating in the departments. In particular dissect the expense situation in other services to find the bloated expenses. Also dissect the costs in Medicine to locate the best and worst activities with respect to costs. Third, evaluate the portion of facilities devoted to each department. The current lay outs may not reflect the revenue and expenses efficiently.

References

Argosy Online (2013). Sakeseagawa Memorial Hospital Excel Spreadsheet.

Doctors Memorial Hospital (DMH). Retrieved March 23, 2013 from

http://www.smartmoney

.com/tools

Hospital Corporation of America (HCA). Retrieved March 9, 2013 from

http://www.smartmoney.com/tools

,

www.goodsamsanjose.com

Sakasegawa Memorial Hospital (SMH). Retrieved March 7, 2013

Appendix A1. Doctors Memorial Hospital Income Statement

Appendix A2. Doctors Memorial Hospital Balance Sheet

Appendix A3. Doctors Memorial Hospital Ratios

Appendix B1. Hospital Corporation of America Income Statement

Appendix B2. Hospital Corporation of America Balance Sheet

Appendix B. Hospital Corporation of America Ratios.

3

Running Head: Course Project Final Submission

Chanasha Owens

Accounting & Finance for Healthcare Managers B6501

Argosy University-Sarasota

April 13, 2013

NYU Hospital center is an 879 bed not-for-profit (NFP) hospital in a major city. The hospital competes with other hospitals for its patient base. A world-class, patient-centered, integrated, academic medical center is one of the nation’s premier centers for excellence in clinical care, biomedical research and medical education. Located in the heart of Manhattan, NYU Langone is composed of four hospitals: Tisch Hospital, its flagship acute care facility; the Hospital for Joint Diseases, one of only five hospitals in the nation dedicated to orthopedics and rheumatology; Hassenfeld Pediatric Center, a comprehensive pediatric hospital supporting a full array of children’s health services; and the Rusk Institute of Rehabilitation Medicine, the world’s first university-affiliated facility devoted entirely to rehabilitation medicine–plus NYU School of Medicine, which since 1841 has trained thousands of physicians and scientists who have helped to shape the course of medical history. The medical center’s tri-fold mission to serve, teach and discover is achieved 365 days a year through the seamless integration of a culture devoted to excellence in patient care, education and research.

Net Patient revenue non-Medicare$260,183,000.00

Capitation Rev

enue$36,829,320.00

Patient Revenue – Medicare Medicaid$188,408,800.00

Unrelated business revenue

Capitation Rev

Other rev – sale of asset$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

Contributions$7,722,580.00

Net assets released from restrictions

Ttl Unrestricted Rev$510,069,325.00

The current ratio of NYU ending 2010 was 1.56 and beginning 2011 was 1.49. There was a slight decrease in the ratio which shows that there were resources they may not have been quite controlled and budgeted.

Revenue Source Amount

Net Patient revenue non-Medicare93a Part VII$1,866,400.00

Patient Revenue – Medicare Medicaid93f Part VII160,500,00

Unrelated business revnue93b Part VII$891,284.00

Capitation Rev

Other rev – sale of asset8d Part 1$984,469.00

Rent revenue97 Part VII$169,820.00

Investment Income4 Part 1$1,522,530.00

Other rev – other11 Part 1$1,601,545.00

Contributions13 Part 1$7,200,000.00

Net assets released from restrictions

Ttl Unrestricted Rev$14,236,048.00

HealthSouth is the nation’s largest owner and operator of inpatient rehabilitation hospitals in terms of patients treated and discharged revenues and number of hospitals. Operating in 27 states across the country and in Puerto Rico, HealthSouth serves patients through its network of inpatient rehabilitation hospitals, outpatient rehabilitation satellite clinics and home health agencies. HealthSouth’s hospitals provide a higher level of rehabilitative care to patients who are recovering from conditions such as stroke and other neurological disorders, orthopedic, cardiac and pulmonary conditions, brain and spinal cord injuries, and amputations.

The current ratio of Health South ending in 2010 was 4.47 and in the beginning of 2011 it was 3.85. Health South is a more solid foundation with more resources for their organization which shows in their ratios which are higher than NYU and SMH. Although it seems there was a struggle to meet financial obligations as their current ratio decreased.

Sakasegawa Memorial Hospital (SMH) is a 650-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 75 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 Medicaid payments and a number of people in the community losing their insurance coverage.

Net Patient revenue non-Medicare93a Part VII$1,504,484.00

Patient Revenue – Medicare Medicaid93f Part VII$39,719,087.00

Unrelated business revnue93b Part VII$891,284.00
Capitation Rev
Other rev – sale of asset8d Part 1$984,469.00
Rent revenue97 Part VII$169,820.00
Investment Income4 Part 1$1,522,530.00
Other rev – other11 Part 1$1,601,545.00

Contributions13 Part 1$1,142,663.00

Net assets released from restrictions

Ttl Unrestricted Rev$47,535,882.00

The liquidity ratio of SMH was 0.9 beginning of 2005 and 1.0 ending 2006. I believe that this ratio shows improvement of SMH with their current assets, showing resources are reasonable.

Compared to peers SMH has a negative return on assets. According to Zelman, there is a loss of every dollar spend on assets when there is a negative value on return on assets. SMH and NYU are nonprofit organizations. According to Gamble, the non-profit hospitals profit margin in the 3rd quartile was 0.15% and in the 4th quartile 7.04%. NYU and Health South operating profits were above the benchmarks in the 3rd quartile but well below in the 4th. According to Lister, Losing money is not good for a company’s long-term viability. A negative net income can cause shareholders and investors to pull remaining finances from the business in the hopes of mitigating losses. This can cause the company’s public stock price to plummet, which shrinks the total value of the business. A business with diminishing capital has a difficult time securing new loans to sustain operations and develop new avenues for organizations having growth.

The return on equity for SMH is also negative. This can be a sign that SMH is not generating profit for investors and shareholder. Compared to peers NYU and Health South are generally generating profits for investors and shareholder. This is an important concept on the business considering negative returns on equity makes investors and shareholders very unsure and less willing to invest. According to Lister, ROE shows the financial healthiness of the organization which is very strong.

Currently, SMH has a deficit of $6.6 million. SMH should definitely consider contract negotiates with payers to increase profitability of the organization. The contract negotiations should include the current position the organization is in and where it is going. The percentage the payer represents currently and what you want to change is a negotiating position. Determining what percentage payers should represent is the most important part in the negotiating of the contracts with payers. A break-even analysis is of value as well because if the break-even point is below average than the plan should not be adhered to unless for purposes such as top physicians pay to keep them happy. Just in services such as cardiology that SMH has the costs can be renegotiated.

$12,506,205.80

Inpatient Cardiology	Cardiology total
Revenue	$39,612,365.72
Expenses
Variable
Clinical Salaries & Fringes	$324,648
Other clinical expenses	$39,271
Physician Fees	$1,126,350.41
Other supplies	$823,243.88
Direct Patient Care Expenses		$12,506,205.80
Indirect Patient Care expenses	$2,659,459.72
Total Variable Expenses	$17,479,179
Fixed
Officers Salaries& Fringe
Depreciation	$5,874,761
Utilities	$3,630,726.14
Malpractice	$5,263,709.72
Total Fixed Expenses	$27,275,402.59
Total Direct Expenses	$45,277,525.92
Gross profit for Inpatient Cardiology	($5,665,160.20)

For all three organizations NP and NFP operating budgets are necessary. Developing an operating budget is used as a tool for planning and control of an organization. It can be used as a guide in conducting actual operation and used as a part of the performance evaluation process. The planning of the budgets is important and can be a success depending on how well the planning was done. During the process actual costs are compared to what costs should have been, which is also considered as flexible budgets. Flexible budgets give the opportunity to adjust comparisons to actual and used costs made.

An activity-based costing system (ABC) is a costing method designed to help managers make decisions that affect strategic capacity, fixed and variable costs, while also providing managers with cost information (Garrison, 2012). The system is being able to identify cost of activities and identify the cost drivers that control costs. Thoroughly measuring actual costs and cost drivers can implement improvements by departments, which can eliminate confusion when budgets have been attained. The ABC system would also improve management ability to report variance analysis.

Overall, from the above diagrams for each organization Health South is the bigger organization and in position to continue to be profitable. NYC is would follow Health South and SMH is in a financial crisis and needs to renegotiate contracts, incorporate cost systems, and improve operating budgets.

References

Gamble, Molly. (2010). 40 Hospital Benchmarks. Retrieved from

http://www.beckershospitalreview.com/hospital-management-administration/40-hospital-benchmarks.html

Garrison, R. (2012). Managerial Accounting (14th ed). McGraw-Hill Learning Solutions. Retrieved from

http://digitalbookshelf.argosy.edu/books/0077588002/11/5

Lister, Jonathan. (n.d). Can You Calculate the Return on Equity if You Have a Negative Net Income. Retrieved from

http://smallbusiness.chron.com/can-calculate-return-equity-negative-net-income-35030.html

Zelman, W. (2009). Financial Management Health Care 3e (3rd ed). Jossey-Bass. Retrieved from

http://digitalbookshelf.argosy.edu/books/9780470909287/id/zelman7524c04-fig-0011

.