HCA 545 Financial Analysis CaseA case based on the work of Louis Gapenski, PhDSeries C |
Grandview Medical Center is a 210-bed, not-for-profit, acute care hospital with a long- standing reputation for providing quality healthcare services to a growing service area.
Grandview Medical Center competes with three other hospitals in its metropolitan statistical area (MSA) – two not-for-profit and one for-profit. It is the smallest of the four but has traditionally been ranked highest in-patient satisfaction polls.
Hospitals are accredited by The Joint Commission, and independent, not-for-profit organization whose mission is to improve the safety and quality of healthcare provided to the public through accreditation and related services. Although accreditation is optional for hospitals, it is generally required to qualify for governmental (Medicare and Medicaid) reimbursement, and hence most hospitals apply for accreditation. Grandview Medical Center passed its latest Joint Commission survey with “flying colors,” receiving the Gold Seal of Approval from that accrediting body.
In recent years, competition among the four hospitals in Grandview’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.
Relevant financial and operating data for Grandview Medical Center are contained in Exhibits 1.1 through 1.5, and selected industry data are contained in Exhibits 1.6 and 1.7. In addition to the data in the exhibits, the following information was extracted from the notes section of Grandview’s 2018 Annual Report.
1: A significant portion of the hospital’s net patient service revenue was generated by patients who are covered by Medicare, Medicaid, or other government programs or by various private plans, including managed care plans, that have contracts with the hospital that specify discounts from charges. In general, the proportional amount of deductions is similar between inpatients and outpatients. The gross and net patient service revenue and operating expenses breakdown for both inpatient and outpatient services is given in Exhibit 1.4.
2: Grandview has a contributory money accumulation (defined contribution) pension plan that covers substantially all of its employees. Participants can contribute up to 20 percent of earning to the pension plan. The hospital matches, on a dollar-for-dollar basis, employee contributions of up to 2 percent of wages and pays 50 cents on the dollar for contribution over 2 percent and up to 4 percent. Because the plan is defined contribution plan (as opposed to a defined benefit plan), Grandview has no unfunded pension liabilities. Pension expense was approximately
$0.543 million in 2016 and $0.588 million in 2018.
3: The hospital is a member of the State Hospital Trust Fund, under which it purchases professional liability insurance coverage for individual claims up to $1 million (subject to a deductible of $100,000 per claim). Grandview is self-insured for amounts above $1 million but less than $5 million. Any liability award in excess of $5 million is covered by a commercial liability policy; for example, the policy pays $2 million on a $7 million award. 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.
Assume that your management consulting group has been hired by Grandview Medical Center to perform a detailed analysis on the facility and then present your findings to the hospital board and the organization(when presenting to the entire organization, it cannot be assumed that everyone is financially savvy as your consulting group and the C-Level executives, so clear explanations and examples are needed). As your consulting group prepares for the presentation, several relevant factors come to light. First, in reviewing the policy decisions made by Grandview’s board of trustees over the past few years, in 2016 it was noted that the board
made the decision to significantly expand the hospital’s outpatient setting, and if Grandview Medical Center did not offer such services it would lose the patients to other providers.
Second, the board chair has great concern about the decline in profitability over the past few years and has not been assuaged by the recent modest upturn. Perhaps because she is a CEO of a local company, the chair focuses on return on equity (ROE) as the key measure of profitability. She has requested that management develop some strategies to improve profitability and estimate the impact of the strategies on the hospital’s ROE.
Third, the hospital CEO meet with your group to inquire about also performing an economic value-added analysis (EVA) on the hospital. The CEO stated that the overall cost of capital is 4 percent and requested that your group also discuss your findings, implications, and applicability of the EVA analysis to the hospital with the board and the entire organization.
EXHIBIT 1.1
Grandview Hospital: Statements of Operations (millions of dollars)
2016 | 2017 | 2018 | |
Revenues | |||
Net patient service revenue | $30.57 | $28.56 | $42.65 |
Other revenue | $1.24 | $2.87 | $3.56 |
Total revenues | $31.81 | $31.44 | $46.21 |
Expenses | |||
Salaries and wages | $12.25 | $12.47 | $35.00 |
Fringe benefits | $1.83 | $2.41 | $2.57 |
Interest expense | $1.18 | $1.60 | $1.78 |
Depreciation | $2.35 | $2.66 | $6.78 |
Medical supplies and drugs | $0.62 | $0.66 | $0.78 |
Professional liability | $0.14 | $0.20 | $0.22 |
Other | $9.04 | $10.34 | $11.85 |
Total Expenses | $27.40 | $30.33 | $58.96 |
Net Income | 4.401 | 1.111 | -12.754 |
EXHIBIT 1.2
Grandview Hospital: Balance Sheets (millions of dollars)
2016 | 2017 | 2018 | |
Assets | |||
Cash and investments | $4.67 | $5.07 | $2.80 |
Accounts receivable (net) | 4.359 | 5.674 | 12.413 |
Inventories | 0.432 | 0.523 | 0.601 |
Other current assets | 0.308 | 0.703 | 0.923 |
Total current assets | $9.77 | $11.97 | $16.73 |
Gross plant and equipment | $47.79 | $55.33 | $70.55 |
Accumulated depreciation | -11.82 | -14.338 | -17.009 |
Net plant and equipment | $35.97 | $41.00 | $53.54 |
Total assets | $45.74 | $52.96 | $70.28 |
Liabilities and Net Assets | |||
Accounts payable | $0.93 | $1.25 | $3.76 |
Accrued expenses | 1.46 | 1.503 | 4.176 |
Current portion of LT debt | 0.11 | 1.341 | 1.465 |
Total current liabilities | $2.50 | $4.10 | $9.40 |
Long-term debt | 15.673 | 19.222 | 29.39 |
Net assets | 27.567 | 29.645 | 31.51 |
Total liabilities and net assets | $45.74 | $52.96 | $70.30 |
EXHIBIT 1.3
Grandview Hospital: Statements of Cash Flows (millions of dollars)
Cash Flows from Operating Activities | 2017 | 2018 |
Net income | $1.1 | ($12.75) |
Depreciation and noncash expenses | 2.633 | 2.756 |
Change in accounts receivable | -1.315 | 4.739 |
Change in inventories | -0.091 | 0.178 |
Change in other current assets | -0.395 | -0.22 |
Change in accounts payable | 0.325 | 0.507 |
Change in accrued expenses | 0.043 | -0.327 |
Net cash flow from operations | $2.31 | ($5.12) |
Cash Flows from Investing Activities | ||
Investment in plant and equipment | ($7.69) | ($15.33) |
Cash Flows from Financing Activities | ||
Change in long-term debt | $3.55 | $19.43 |
Change in current portion of long- term debt | $1.23 | $2.12 |
Net cash flow from financing | $4.78 | $21.55 |
Net increase (decrease) in cash | ($0.60) | $1.10 |
Beginning cash | $4.67 | $5.07 |
Ending cash | $4.08 | $6.17 |
EXHIBIT 1.4
Grandview Hospital: Revenue and Expenses Allocation (millions of dollars)
2016 | 2017 | 2018 | |
Operating Revenue | |||
Gross inpatient service | $26.117 | $29.148 | $33.216 |
Gross outpatient service | $6.535 | $9.130 | $11.912 |
Gross patient service revenue | $32.652 | $38.278 | $45.128 |
Contractual allowances | $1.729 | $5.196 | $7.516 |
Bad debt and charity care | $2.127 | $2.506 | $3.030 |
Total revenue deductions | $3.856 | $7.702 | $10.546 |
Net patient service revenue | $28.796 | $30.576 | $34.582 |
Operating Expenses | |||
Inpatient service | $20.573 | $22.229 | $24.771 |
Outpatient service | $6.831 | $8.098 | $9.187 |
Total operating expenses | $27.404 | $30.327 | $33.958 |
EXHIBIT 1.5 | 2016 | 2017 | 2018 | |
Grandview Hospital: Selected Operating Data | Medicare discharges | 2,721 | 2,860 | 3,741 |
Total discharges | 8,784 | 8,318 | 8,576 | |
Outpatient visits | 32,285 | 32,878 | 36,796 | |
Licensed beds | 210 | 210 | 210 | |
Staffed beds | 193 | 197 | 178 | |
Patient days | 44,085 | 42,434 | 40,062 | |
All-payer case mix index | 1.2869 | 1.2993 | 1.3161 | |
Full-time equivalents | 610.8 | 625.8 | 819.3 |
EXHIBIT 1.6 +Quartile Median -Quartile 2018
Selected Industry Financial Ratios (200-
299 beds)
Profitability Ratios
Total margin 5.58% 3.48% 0.53% Return on assets 5.80% 3.10% 0.40% Return on equity 15.66% 6.01% 0.62% Deductible ratio 0.34 0.26 0.18 |
a
Liquidity Ratios
Current Ratio | 2.53 | 1.99 | 1.48 |
Days cash on hand | 32.35 | 15.89 | 6.24 |
Debt Management Ratios
Debt ratio | 62.90% | 48.40% | 35.20% |
Debt to equity ratio | 127.00% | 64.70% | 26.90% |
Times interest earned | 4.29 | 2.23 | 1.14 |
Cash flow coverage | 5.32 | 3.22 | 1.76 |
Fixed asset turnover 2.20 1.76 1.49 Total asset turnover 1.04 0.89 0.75 Days in patient accounts receivables 87.53 75.67 63.33 Current asset turnover 3.94 3.38 2.88 Average payment period (days) 71.24 56.52 45.84 |
Asset Management Ratios
b c
Other
Average age of plant (year) 8.86 7.39 6.14
a Deduction/Gross patient service revenue
b Total revenues/Current assets
c Current liabilities/[(Total expenses – Depreciation expense)/365]
Notes:
1 The upper quartile is based on the higher numerical value, regardless of whether a high value is good or bad. The interpretation is left to the analyst.
EXHIBIT 1.7 | +Quartile | Median | -Quartile | ||
2018 Selected Industry Operating Ratios (200-299 beds) | Profit Indicator | ||||
a | Profit per discharge | $89.04 | ($21.30) | ($120.08) | |
b | Profit per visit | $6.22 | $0.66 | ($7.01) | |
Net Revenue Indicators | |||||
c | Net revenue per discharge | $4,091 | $3,411 | $2,815 | |
d | Net revenue per visit | $201 | $139 | $98 | |
e | Medicare revenue percentage | 43.47% | 36.6’% | 31.25% | |
f | Bad debt/charity care percentage | 7.89% | 4.76’% | 2.97% | |
g | Contractual allowance percentage | 25.27% | 20.02% | 12.12% | |
h | Outpatient revenue percentage | 25.26% | 21.03% | 17.44% | |
Volume Indicators | |||||
i | Occupancy rate | 67.12% | 58.10% | 47.84% | |
j | Average daily census | 173.23% | 144.73% | 114.39% | |
Length-of-Stay Indicators | |||||
k | Average length of stay (days) | 6.80 | 6.07 | 5.41 | |
l | Adjusted length of stay | 6.48 | 5.36 | 4.52 | |
Intensity-of-Service Indicators | |||||
m | Expense per discharge | $3,937 | $3,392 | $2,972 | |
n | Adjusted expense per discharge | $3,417 | $2,924 | $2,572 | |
o | Expense per visit | $202.23 | $141.97 | $111.53 | |
p | All-payer case mix index | 1.2795 | 1.1756 | 1.0259 | |
Efficiency Indicators | |||||
q | FTEs per occupied bed | 4.59 | 4.15 | 3.77 | |
r | Labor-hours per visit | 4.68 | 5.84 | 8.66 | |
Unit Cost Indicators | |||||
s | Salary per FTE | $24,447 | $22,517 | $20,347 | |
t | Employee benefits percentage | 19.58% | 17.04% | 15.18% | |
u | Liability expense per discharge | $80.94 | $42.05 | $18.31 | |
a | (Net inpatient revenue – Inpatient expenses)/Total discharges | ||||
b | (Net outpatient revenue – Outpatient expenses)/Total visits |
c | Net inpatient revenue/Total discharges | |
d | Net outpatient revenue/Total visits | |
e | Medicare net patient revenue/Total net patient revenue | |
f | (Bed debt + Charity care)/Gross patient revenue | |
g | Contractual allowances/Gross patient revenue | |
h | Net outpatient revenue/Total net patient revenue | |
i | Patient days/(Staffed beds X 365) | |
j | Patient days/365 | |
k | Patient days/Total discharges | |
l | Average length of stay/Case mix index | |
m | Inpatient expenses/Total discharges | |
n | Expense per discharge/Case mix index | |
o | Outpatient expenses/Total visits | |
p | Sum of DRG weights/Total discharges | |
q | Inpatient FTEs/Average daily census | |
r | (Outpatient FTEs X 2,080)/Total visits | |
s | Total salaries/Total FTEs | |
t | Fringe benefit expense/Total salaries | |
u | Inpatient professional liability expense/Total discharges | |
DRG: Diagnosis-related group; FTE: full-time equivalent | ||
Notes: | ||
1 | The upper quartile is based on the higher numerical value for the ratio and the lower quartile on the lower numerical value, regardless of whether a high value is good or bad. The interpretation is left to the analyst. |