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 Revenue$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 .
3Running Head Course Project Final SubmissionChanasha Owens.docx
1. 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.
2. Net Patient revenue non-Medicare$260,183,000.00
Capitation Revenue$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
3. 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
4. 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
5. 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.
Inpatient Cardiology
Cardiology total
Revenue
$39,612,365.72
Expenses
Variable
Clinical Salaries & Fringes
$324,648
6. 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
$12,506,205.80
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
7. 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
Solution
8. s. 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/zel
man7524c04-fig-0011.
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
9. 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
10. 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
Liquidity
12. 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.
13. Table 2. Operating Performance Measures for SMH
Operating Performance
2006
2005
Return on Assets
Net Income
-0.05
NA
Total Assets
Return on Equity
Net Income
-0.14
NA
Net Assets
14. Operating Profit Margin
EBIT
-0.06
NA
Revenue
Return on Capital Employed (ROCE)
EBIT
Debt + Net Assets
-0.05
NA
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
15. 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
Leverage
2006
2005
Capitalization Ratio
Long-term Debt
0.56
0.55
Long-term Debt + Net Assets
17. 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
18. 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
19. 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,
20. 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
21. 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
22. 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
23. Appendix B2. Hospital Corporation of America Balance Sheet
Appendix B. Hospital Corporation of America Ratios.