SMH IntroductionSakasegawa 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. 2007 revenue expense dataRevenueSourceAmountNet Patient revenue non-Medicare$260,183,000.00]Capitation Revenue$36,829,320.00Patient Revenue - Medicare Medicaid$188,408,800.00three items match line 1 Part 1Unrelated business revenueCapitation RevOther rev - sale of asset$5,492,700.00Rent revenue$450,000.00dividends$3,800,000.00Investment Income$1,892,925.00Other rev - other$5,290,000.00Note - see detailContributions$7,722,580.00Net assets released from restrictionsTtl Unrestricted Rev$510,069,325.00ExpensesSourceTotalClinical Servicesmanagement & GeneralFundraisingSalariesSalaries Officers25a Part II$5,008,242.00$540,392.00$4,135,300.00$332,550.00Other Salaries26 Part II$176,481,232.00$158,833,127.00$16,765,700.00$882,405.00Pension27 Part II$17,942,172.00$16,147,964.00$1,704,508.00$89,700.00Fringe Benefits28 Part II$23,783,424.00$21,406,424.00$2,259,000.00$118,000.00Payroll Taxes29 Part II$13,336,000.00$12,002,000.00$1,266,000.00$68,000.00Total Salaries & Benefitstotal$236,551,070.00$208,929,907.00$26,130,508.00$1,490,655.00Fundraising fees30 Part II$0.00Accounting Fees31 Part II$340,900.00$340,900.00Legal fees32 Part II$1,345,300.00$1,211,300.00$134,000.00Supplies & Other33 Part II$226,106,126.00$225,600,500.00$500,210.00$5,416.00Telephone34 Part II$1,049,247.00$944,400.00$99,600.00$5,247.00Postage and shipping35 part II$339,584.00$305,626.00$32,260.00$1,698.00Occupancy36 Part II$0.00Equipment rental and maintenance37 Part II$8,967,852.00$8,071,152.00$896,700.00Printing and publications38 Part II$177,000.00$159,200.00$16,800.00$1,000.00Conference conventions and meetings40 Part II$78,500.00$70,000.00$8,000.00$500.00Interest exp (net)41 Part II$9,601,800.00$8,551,800.00$1,000,000.00$50,000.00Depreciation42 Part II$31,083,552.00$27,975,052.00$3,108,500.00Provision for Bad debt43a *$1,005,000.00$1,0.

1. SMH IntroductionSakasegawa 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.
2007 revenue expense dataRevenueSourceAmountNet Patient
revenue non-Medicare$260,183,000.00]Capitation
Revenue$36,829,320.00Patient Revenue - Medicare
Medicaid$188,408,800.00three items match line 1 Part
1Unrelated business revenueCapitation RevOther rev - sale of
asset$5,492,700.00Rent
revenue$450,000.00dividends$3,800,000.00Investment
Income$1,892,925.00Other rev - other$5,290,000.00Note - see
detailContributions$7,722,580.00Net assets released from
restrictionsTtl Unrestricted

2. Rev$510,069,325.00ExpensesSourceTotalClinical
Servicesmanagement & GeneralFundraisingSalariesSalaries
Officers25a Part
II$5,008,242.00$540,392.00$4,135,300.00$332,550.00Other
Salaries26 Part
II$176,481,232.00$158,833,127.00$16,765,700.00$882,405.00P
ension27 Part
II$17,942,172.00$16,147,964.00$1,704,508.00$89,700.00Fringe
Benefits28 Part
II$23,783,424.00$21,406,424.00$2,259,000.00$118,000.00Payr
oll Taxes29 Part
II$13,336,000.00$12,002,000.00$1,266,000.00$68,000.00Total
Salaries &
Benefitstotal$236,551,070.00$208,929,907.00$26,130,508.00$1
,490,655.00Fundraising fees30 Part II$0.00Accounting Fees31
Part II$340,900.00$340,900.00Legal fees32 Part
II$1,345,300.00$1,211,300.00$134,000.00Supplies & Other33
Part
II$226,106,126.00$225,600,500.00$500,210.00$5,416.00Teleph
one34 Part
II$1,049,247.00$944,400.00$99,600.00$5,247.00Postage and
shipping35 part
II$339,584.00$305,626.00$32,260.00$1,698.00Occupancy36
Part II$0.00Equipment rental and maintenance37 Part
II$8,967,852.00$8,071,152.00$896,700.00Printing and
publications38 Part
II$177,000.00$159,200.00$16,800.00$1,000.00Conference
conventions and meetings40 Part
II$78,500.00$70,000.00$8,000.00$500.00Interest exp (net)41
Part
II$9,601,800.00$8,551,800.00$1,000,000.00$50,000.00Deprecia
tion42 Part
II$31,083,552.00$27,975,052.00$3,108,500.00Provision for Bad
debt43a *$1,005,000.00$1,005,000.00Other expenses43b-*Ttl
exp$516,645,931.00$482,823,937.00$32,267,478.00$1,554,516.
00Excess of rev over exp($6,576,606.00)

3. rwmayer:
See detail - Hospital costs
2007 asset liab dataBeginning of yearEnd of
YearASSETSSource20052006Cashline 45 Part
IV$6,787,000.00$2,210,000.00Cash investmentsline 46 Part
IV$19,850,000.00$32,808,000.00Accounts ReceivableLine 47a
Part IV$117,500,000.00Less AllowanceLine 47b Part
IV$47,948,000.00Net Accounts ReceivableLine 47 Part
IV$63,330,160.00$69,552,000.00Pledges ReceivableLine 48a
Part IV$4,700,900.00Less AllowanceLine 48b Part
IV$576,000.00Net Pledges ReceivableLine 48 Part
IV$6,123,000.00$4,124,900.00Other Note receivablesLine
451cPart IV$13,378,061.00$22,606,100.00InventoryLine 52
Part IV$8,443,379.00$10,362,000.00Prepaid expensesline 53
Part IV$9,917,000.00$7,705,000.00Investments (FMV)line 54a
Part IV$74,180,000.00$78,800,000.00Landline 57a Part
IV$617,314,000.00Accoumulated Depreciationline 57b Part
IV$328,568,000.00Net Landline 57c Part
IV$290,824,900.00$288,746,000.00Other Assetsline 58 Part
IV$81,000,000.00$74,500,000.00Total
Assets$573,833,500.00$591,414,000.00LiabilitiesAccounts
Payableline 60 Part IV$83,829,885.00$87,118,742.00Tax
exempt bondline64a part
IV$139,233,400.00$136,451,800.00Mortgage and Note
Payableline 64b Part IV$17,210,000.00$17,900,000.00Other
Liabilitiesline 65 Part IV$122,683,500.00$133,556,958.00Total
Liabilbites$362,956,785.00$375,027,500.00Fund
BalancesUnrestrictedline 67 Part
IV$155,132,000.00$158,866,000.00Temporarily restrictedline
68 Part IV$38,523,000.00$40,208,000.00Permanently
restrictedline 69 Part IV$17,221,715.00$17,312,500.00Fund
balance$210,876,715.00$216,386,500.00Liabilities and Net
Assets$573,833,500.00$591,414,000.00
Detailed revenuePart III Form 990Patient
daysInpatient164,972Ambulatory service
visitsoutpatient148,617Patient days distribution%

4. distributiontotal
daysColumn1Cardiology6%9,145Orthopedic10%15,959Medicin
e72%119,246Other services13%20,622distribution of patient
daysMedicareMedicaidManaged care/InsurancePrivate
payColumn1totalCardiology365845744815499145Orthopedic59
05160909779815959Medicine417369540667781192119246Othe
r
services922349610401502206226052210653907563041164972
% distribution37%6%55%2%100%Revenue
DistributionPayerColumn2Total RevenueInpatient
RevenueOutpatient RevenueMedicare
Revenue$179,567,920.00$154,045,694.40$25,522,225.60Medica
id
Revenue$16,840,880.00$14,956,792.00$1,884,088.00Managed
Care$274,162,320.00$226,729,856.00$47,432,464.00Private
Pay$14,850,000.00$12,177,000.00$2,673,000.00$485,421,120.0
0$407,909,342.40$77,511,777.60Inpatient Revenue
DistributionCardiologyOrthopedicMedicineOtherTotalsInpatient
Revenue$39,612,365.72$41,460,795.08$284,847,513.80$41,988
,667.80$407,909,342.40
Roger Mayer:
use this allocation basis to allocate expenses between payers in
Module 3 assignment 2.
Detailed costsTable IPersonnel and othertotalsInpatient
allocated expensesAllocation basisOfficers Salaries&
Fringe$708,424.15$566,739.32patient daysClinical Salaries &
Fringes$208,221,482.85$197,810,408.70hours of
service41.6779152919Other clinical
expenses$20,318,478$16,254,782patient
daysDepreciation$27,975,052$22,380,042square feetPhysician
Fees$14,850,673.89$11,880,539.11patient daysOther
supplies$9,433,511.95$7,546,809.56patient
daysUtilities$17,289,172.12$13,831,337.69square feetTotal
Personnel and other$298,796,794.96$270,270,658.39Table
IIDirect Patient Care ExpensestotalsInpatient allocated
expensesAllocation

5. basisCardiology$12,506,205.80$10,004,964.64100% to
cardiologyOrthopedic$12,339,125.41$9,871,300.33100% to
Orthopedicpharmaceuticals$23,391,254.11$18,713,003.29Patien
t days$69,545,157.89Ancillary (lab x-
ray)$63,540,193.25$50,832,154.60Patient
daysTotal$111,776,778.57$89,421,422.85Table IIIIndirect
Patient Care expensesTotalsInpatient Allocated
expensesAllocation basisCardiology medical
supplies$2,659,459.72$2,127,567.78100% to
cardiologyOrthopedic medical
supplies$2,393,513.75$1,914,811.00100% to
Orthopedicpharmaceuticals$5,318,919.44$4,255,135.55Patient
days$31,913,516.65general medical
supplies$21,275,677.77$17,020,542.21Patient daysancillary
expenses$13,297,298.60$10,637,838.88Patient
daysTotal$44,944,869.28$35,955,895.43Table
IVMalpracticeTotalsInpatient Allocated ExpensesAllocation
basisCardiology$5,263,709.72$4,210,967.78100% to
cardiologyOrthopedic$6,908,619.01$5,526,895.21100% to
OrthopedicMedicine$14,804,183.60$11,843,346.88100%
medicineOther services$328,981.86$263,185.49Patient
daysTotal$27,305,494.19$21,844,395.35Table VClinical
Salaries & Fringes - Inpatient
AllocationtotalCardiology324,648Orthopedic478,770Medicine3,
458,134Other services484,6174,746,169average rate per hour -
$41.68Table VISquare feet allocation - Inpatient
servicesCardiology21%Orthopedic26%Medicine49%Other
services4%total100%
Module 3 Asgn 1 InstructionsThe 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 detailTabs 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

6. income sources and indirect expenses.1Create a table that shows
gross profit (patient revenue - direct expenses) for inpatient and
outpatient services.See example:Inpatient
Revenue$407,909,342.40Outpatient RevenueTotal
RevenueInpatient direct expenses$417,492,372.01Outpatient
direct expensesTotal ExpensesIP Gross Profit($9,583,029.61)OP
Gross ProfitTotal Gross Profit2Calculate Gross Profit (GP)
margin for both services.3Calculate GP per patient day and per
operating theater (OT) procedure.4Compare your expenses to
your benchmark data. (Because some of the comparative data
doesnot have sufficient detail this may be a high-level
review.)5Comment on the services from the perspective of
expense and revenue distribution and explain whythere are
differences between gross profit margins6Complete a table that
includes other expenses and other revenue. The table should
clearlydistinguish between direct and indirect
expenses7Comment 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 orderto increase income?
Module 3 Assgn 2 InstructionsYou will use the information
from M3: Assignment 1, develop a gross profit analysis for
managed care payersto develop a strategic plan for a managed
care contract negotiation.Assignment detailTabs to
reference:"Detailed Revenue" allocates revenue by inpatient and
outpatient"Detailed Expenses" allocated direct expenses by
inpatient and outpatient1Calculate inpatient gross profit for the
major payers at the hospital.Inpatient analysis% for
allocation25%25%25%25%100%Medicare RevenueMedicaid
RevenueManaged CarePrivate PayTotalsPatient
Revenue$154,045,694.40$14,956,792.00$226,729,856.00$12,17
7,000.00$ 407,909,342.40ExpensesPersonnel and other$
67,567,664.60$ 67,567,664.60$ 67,567,664.60$
67,567,664.60$270,270,658.39Direct Patient Care Expenses$
22,355,355.71$ 22,355,355.71$ 22,355,355.71$
22,355,355.71$89,421,422.85Indirect Patient Care expenses$

7. 8,988,973.86$ 8,988,973.86$ 8,988,973.86$
8,988,973.86$35,955,895.43Malpractice$ 5,461,098.84$
5,461,098.84$ 5,461,098.84$
5,461,098.84$21,844,395.35Total Direct Expenses$
104,373,093.01$ 104,373,093.01$ 104,373,093.01$
104,373,093.01$417,492,372.03Gross profit by
Payer$49,672,601.39($89,416,301.01)$122,356,762.99($92,196,
093.01)($9,583,029.63)($9,583,029.63)2Calculate gross profit
and gross profit percentage by payer.Note: As it was stated in
question 4 that patient from each payer incurred cost at the
same rate therefore, I have taken 25% for each payer% for
allocation25%25%25%25%100%Medicare RevenueMedicaid
RevenueManaged CarePrivate PayTotalsPatient
Revenue$179,567,920.00$16,840,880.00$274,162,320.00$14,85
0,000.00$ 485,421,120.00ExpensesPersonnel and other$
74,699,198.74$ 74,699,198.74$ 74,699,198.74$
74,699,198.74$298,796,794.96Direct Patient Care Expenses$
27,944,194.64$ 27,944,194.64$ 27,944,194.64$
27,944,194.64$111,776,778.57Indirect Patient Care expenses$
11,236,217.32$ 11,236,217.32$ 11,236,217.32$
11,236,217.32$44,944,869.28Malpractice$ 6,826,373.55$
6,826,373.55$ 6,826,373.55$
6,826,373.55$27,305,494.19Total Direct Expenses$
120,705,984.25$ 120,705,984.25$ 120,705,984.25$
120,705,984.25$482,823,937.00Gross profit by
Payer$58,861,935.75($103,865,104.25)$153,456,335.75($105,8
55,984.25)$2,597,183.00$2,597,183.00Gross profit percentage
by Payer32.78%-616.74%55.97%-712.83%0.54%3Comment on
the results of your GP calculations.Gross profit for managed
care and medicare is quite good. Medicare gross profit is almost
half time its cost and managed care gross profit is almost 1.3
times its cost. However, medicaid and private pay have gross
losses equal to almost 6 and 7 times of their revenues
respectively.4In 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

8. Hospital attempt to obtain?The assumption taken about each
payer incurred cost at the same rate cannot be correct as
different level of services and goods are required for each
payer. The hospital should try identify following details in
order to get accurate cost allocation for each payer.- Time spent
by different personnel for particular payers- Quantity of goods
used for each payer- Area of hospital required/available to each
payer- Any other services spent5Based 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.6Based upon your analysis of the other
organizations are you in a better or worse position when it
comes for contract negotiations?7Payers always want to move
procedures from the Inpatient setting to an Outpatient
setting.How does this affect the hospital strategy?
Roger Mayer:
use revenue distribution table
Roger Mayer:
Allocate expenses based upon patient day distribution %.
Roger Mayer:
use revenue distribution table
Roger Mayer:
Allocate expenses based upon patient day distribution %.
Module 4 Assgn 1 InstructionsYou 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 modeland a model that
analyzes costs by product line. In this case we have for product
lines including Cardiology, Orthopedic Medicine, and
Other.Assignment detailTabs to reference:"Detailed Revenue"
allocates revenue by inpatient and outpatient"Detailed
Expenses" allocated direct expenses by inpatient and
outpatient1Calculate inpatient gross profit for each product line.

9. The template that students can use is as follows:Note: Allocate
revenue based upon patient day distribution between product
linesCardiologyOrthopedicMedicineOtherTotalsInpatient
RevenueExpensesOfficers Salaries& FringeClinical Salaries &
FringesOther clinical expensesDepreciationPhysician FeesOther
suppliesUtilitiesDirect Patient Care ExpensesIndirect Patient
Care expensesMalpracticeTotal Direct ExpensesGross profit by
Product Line2Comment on the results of your inpatient GP
calculations. What product line is most profitable by dollar
amounts and gross profit percentage?3Is 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 InstructionsIn 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 lineStudents will develop a Cost-Volume-Profit
template to help measure costs and changes to variable and
indirect costs using SMH data.Assignment detailTabs to
reference:"Detailed Revenue" allocates revenue by inpatient and
outpatient"Detailed Expenses" allocated direct expenses by
inpatient and outpatient"Module 4 Assgn 1 Instructions" for
baseline cost information1Develop a template of costs.You
should separate expenses between variable and fixed
expenses.To assist, the template provides some
guidance:Inpatient CardiologyCardiology totalPatient daysPer
patient dayRevenueExpensesVariableClinical Salaries &
FringesOther clinical expensesPhysician FeesOther
suppliesDirect Patient Care ExpensesIndirect Patient Care
expensesTotal Variable ExpensesFixedOfficers Salaries&
FringeDepreciationUtilitiesMalpracticeTotal Fixed
ExpensesTotal Direct ExpensesGross profit for Inpatient
Cardiology2Calculate the break even point in patient daysNote:
Break even pointTotal Fixed cost / (per patient day revenue -
per patient day variable expenses)3Calculate the break even
point assuming a 5 percent increase in clinical salaries and a 4

10. percent increase in officer salaries.4A 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?5The hospital is considering hiring a
physician. This will increase annual costs by $250,000.
However, with the addition of thisphysician it is anticipated that
patient days will increase by 6 percent. Is this a good move for
the Hospital?6Many 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 additionalinformation would help you analyze
the data?
Roger Mayer:
do not calculate fixed costs on a per patient day basis.
Module 3 Assignment 1
Solution
Actively contributed to the discussion by providing points of
view with rationale, challenging points of the discussion, or
drawing relationships between points of the discussion. 7Total
20.5Inpatient Revenue$407,909,342.40Outpatient
Revenue$77,511,777.60Total Revenue$485,421,120.00Inpatient
Direct Expenses$417,492,372.01Outpatient Direct
Expenses$65,331,564.97Total Expenses$482,823,936.98IP
Gross Profit($9,583,029.61)OP Gross
Profit$12,180,212.63Total Gross Profit$2,597,183.02IP GP
Margin-2.35%OP GP Margin15.71%Total GP Margin0.54%-

11. 0.0234930378Inpatient theatersRevenues/pt dayDirect
Expenses/pt dayIndirect Expenses/pt dayGP Direct expenses/pt
dayTotal GP/pt dayGP
MarginCardiology$4,331.59$1,515.34$3,417.21$2,816.25($600.
97)-
13.87%Orthopedic$2,597.96$1,039.93$2,719.66$1,558.02($1,16
1.64)-
44.71%Medicine$2,388.74$421.54$1,870.00$1,967.20$97.204.0
7%Other
services$2,036.11$421.55$1,464.48$1,614.56$150.087.37%Tota
l$11,354.39$3,398.36$9,471.35$7,956.03($1,515.32)-
13.35%`Revenues/pt dayDirect Expenses/pt dayIndirect
Expenses/pt dayGP Direct expenses/pt dayTotal GP/pt dayGP
MarginCardiology$521.58$420.80$346.99$100.78($246.21)-
47.21%Orthopedic$521.56$288.71$315.69$232.85($82.84)-
15.88%Medicine$521.56$116.99$282.28$404.57$122.2923.45%
Other
services$521.56$116.99$282.38$404.57$122.1923.43%Total$2,
086.25$943.49$1,227.34$1,142.77($84.57)-4.05%Other
RevenuesIndirect Patient Care ExpensesOther rev - sale of
asset$5,492,700.00Fundraising fees$0.00Rent
revenue$450,000.00Accounting
Fees$340,900.00dividends$3,800,000.00Legal
fees$1,345,300.00Investment
Income$1,892,925.00Telephone$1,049,247.00Other rev -

12. other$5,290,000.00Postage and
shipping$339,584.00Contributions$7,722,580.00Printing and
publications$177,000.00Total$24,648,205.00Conference
conventions/meetings$78,500.00Interest exp
(net)$9,601,800.00Depreciation$31,083,552.00Provision for
Bad debt$1,005,000.00Total$45,020,883.00