Problem 17.4 Consider the following financial statements for BestCare HMO, a not-for-profit managed care plan: BestCare HMO Statement of Operations and Change in Net Assets Year Ended June 30, 2011 (in thousands) Revenue: Premiums earned $26,682 Co-insurance 1,689 Interest and other income 242 Total revenue $28,613 Expenses: Salaries and benefits $15,154 Medical supplies and drugs 7,507 Insurance 3,963 Provision for bad debts 19 Depreciation 367 Interest 385 Total expenses $27,395 Net income $1,218 Net assets, beginning of year $900 Net assets, end of year $2,118 BestCare HMO Balance Sheet June 30, 2011 (in thousands) Assets Cash and cash equivalents $ 2,737 Net premiums receivable 821 Supplies 387 Total current assets $3,945 Net property and equipment $5,924 Total assets $9,869 Liabilities and Net Assets Accounts payable–medical services $2,145 Accrued expenses 929 Notes payable 141 Current portion of long-term debt 241 Total current liabilities $3,456 Long-term debt $4,295 Total liabilities $7,751 Net assets (equity) .

1. Problem 17.4
Consider the following financial statements for BestCare HMO,
a not-for-profit managed care
plan:
BestCare HMO
Statement of Operations and Change in Net Assets
Year Ended June 30, 2011
(in thousands)
Revenue:
Premiums earned
$26,682
Co-insurance
1,689
Interest and other income
242
Total revenue
$28,613
Expenses:
Salaries and benefits
$15,154
Medical supplies and drugs
7,507
Insurance
3,963
Provision for bad debts
19
Depreciation
367
Interest
385
Total expenses
$27,395
Net income
$1,218

2. Net assets, beginning of year
$900
Net assets, end of year
$2,118
BestCare HMO
Balance Sheet
June 30, 2011
(in thousands)
Assets
Cash and cash equivalents $
2,737
Net premiums receivable 821
Supplies
387
Total current assets
$3,945
Net property and equipment
$5,924
Total assets
$9,869
Liabilities and Net Assets
Accounts payable–medical services
$2,145
Accrued expenses
929
Notes payable
141
Current portion of long-term debt
241
Total current liabilities
$3,456
Long-term debt $4,295
Total liabilities
$7,751

3. Net assets (equity)
$2,118
Total liabilities and net assets
$9,869
A. Perform a Du Pont analysis on BestCare. Assume that the
industry average ratios are as
follows:
a. Total margin 3.8%
b. Total asset turnover 2.1
c. Equity multiplier 3.2
d. Return on equity (ROE) 25.5%
Response:
Du Pont equitation:
ROE = Total margin × Total asset turnover × Equity multiplier
ROE – Return on equity
Net income/Total equity=Net income/Total revenue × Total
revenue/Total assets × Total
assets/Total equity
a. Total Margin (Profit Margin) = Net Income/ Total
Revenues
Total Margin = ?
b. Total Asset Turnover = Total revenues / Total assets
Total Asset Turnover = ?
c. ROE = ROA x Equity Multiplier
ROE = ?
d. Equity Multiplier = Total assets / Total Equity
Equity Multiplier = ?
Discuss your results:
II: Problem 17.4
B. Calculate and interpret the following ratios for BestCare:
Industry Average
a. Return on assets (ROA) 8.0%
b. Current ratio 1.3

4. c. Days cash on hand
41days
d. Average collection period 7days
e. Debt ratio 69%
f. Debt-to-equity ratio 2.2
g. Times interest earned (TIE) ratio 2.8
h. Fixed asset turnover ratio 5.2
Response:
a. Return on assets = Net Income / Total Assets
Return on assets = ?
b. Current Ratio = Current Assets /Current Liabilities
Current Ratio = ?
c. Days Cash on Hand = (Cash + Marketable Securities) /
(Expenses – Depreciation – Provision of
uncollectible) / 365
Days Cash on Hand = ?
d. Average collection period = Net Patients Account
Receivables / Net Patient Service Revenue/365
Average collection period = ?
e. Debt Ratio=Total Debt / Total Assets
Debt Ratio= ?
f. Debt-to-Equity ratio = Total Debt / Total Equity
Debt-to-Equity ratio = ?
g. Times interest earned (TIE) ratio = Earnings before interest
and taxes (EBIT) / Interest expense
For nonprofit business EBIT = Net Income + Interest expense
TIE ratio = (Net Income + Interest expense)/ Interest expense
TIE ratio = ?
h. Fixed Asset Turnover Ratio = Total Revenues / Net Fixed
Assets
Fixed Asset Turnover Ratio = ?
Abstract
TranslateAbstract
"We're begging the feds to sue us," said Sen. Frank Antenori, a

5. Tucson Republican and author of a bill that would make
Arizona-manufactured light bulbs free from federal regulation.
"It was the 13 colonies that came together to form the federal
government, and the federal government is not our master, yet
they are becoming by fiat our master. And we are pushing back
and saying 'no'," [Chuck Gray] said.
The goal of today's movement is "not to preserve states' rights
for its own sake, but to preserve individual liberty," he said.
Full Text
· TranslateFull text
·
Arizona lawmakers displayed a lot of anger and frustration with
the federal government this year, and now, after passing new
laws meant to defy the feds on several fronts, the state is
bracing for court battles that will define the limits of state
authority.
Republican lawmakers said they were trying to put an end to
federal intrusion by passing laws that assert the state's rights to
regulate weapons, to control the level of government health
care, to regulate carbon emissions and, oddly, to manufacture
any kind of light bulbs the state chooses.
Now, it's up to the federal government to retaliate and go to
court, which some Republican lawmakers said was the whole
point from the start.
"We're begging the feds to sue us," said Sen. Frank Antenori, a
Tucson Republican and author of a bill that would make
Arizona-manufactured light bulbs free from federal regulation.
Arizona's defiance is part of a larger movement across the
nation by states unhappy with what they see is the federal
government's broadside attacks on their rights.
Critics, however, argued that these measures are frivolous and
reflect a backward mindset. They said the federal government is
taking the country in the right direction by creating new energy
policies, extending health care to people who otherwise would
go without it, and regulating the sale and manufacturing of
guns.

6. Taking on the government over things such as light bulbs makes
the state look ridiculous, said Sen. Paula Aboud, a Democrat
from Tucson.
"Arizona looks like it is 1800s-stupid," she said.
The movement by states to push back against federal power is
not unique in the country's history. But the size and scope of
this movement, and the fierceness of the resistance to federal
actions, are relatively new, according to Michael Boldin,
founder of the California-based Tenth Amendment Center,
which advocates for nullification of several federal laws by
states.
Arizona illustrates exactly what Boldin was talking about. The
state has always been among the first to assert a buck-the-feds
attitude. But that noise was amplified this year by the sheer
number of states' rights measures and resolutions demanding
that Washington, D.C. stop enacting certain laws.
At least two measures were filed in the Legislature this year
that are meant to challenge the feds on the U.S. Constitution's
interstate commerce clause, which the feds have used in the past
to justify laws that some thought did not really deal with
interstate matters.
Gov. Jan Brewer has already signed one of them, H2307, which
exempts from federal regulation firearms that have been
manufactured in Arizona and have remained within the state's
boundaries.
"The idea behind it -- and firearms are only the vehicle -- (is
that) many of us believe the federal government has taken a too
broad of a look at the commerce clause," said Rep. Nancy
McLain, a Republican from Bullhead City.
The other bill, Antenori's H2337, says that light bulbs
manufactured in Arizona and not exported to other states are not
part of interstate commerce and therefore not subject to federal
regulations. By a vote of 18-12, the Senate sent it to the
governor on April 28.
That's not all.
In March, the Legislature gave the governor the power to sue

7. the federal government over the recently enacted health care
legislation.
And last year, the Legislature also sent to the ballot a proposal
to amend the Arizona Constitution to say no law shall compel
anybody to participate in any health care system, a direct
response to the federal health care legislation, which was
eventually passed this year.
Arizonans will vote on that ballot measure this November.
The Legislature's decision to enact S1070 -- regarded as the
nation's strictest state-level immigration law -- and its efforts to
try to nullify the federal health care law are simply the popular
expressions of an effort that began a few years ago, Boldin said.
Arizona joined other states two years ago against the Real ID
Act of 2005, which created new standards for driver's licenses
in an effort to bolster security at airports and federal facilities.
"It's far bigger than that," Boldin told the Arizona Capitol
Times.
Political observers like Boldin traced the growth of this
movement to the George W. Bush administration.
"The biggest reactions to federal power came from responses to
heavy-handed actions from the Bush administration, and now
we see a lot of the Bush policies continuing under Obama," he
said.
Boldin cited the Patriot Act, No Child Left Behind and Real ID
as among laws that tend to encroach on states' rights and tend to
concentrate power in the hands of the federal government.
Others pointed to the Wall Street bailout in 2008, when people,
bewildered at what the federal government did, started asking
whether it had the authority to spend hundreds of billions of
dollars to save private financial institutions.
Arizona Senate Majority Leader Chuck Gray, who sponsored
several 10th Amendment-type measures and resolutions this
year, said the frustration with the feds has been building up
even under Republican presidents.
Gray's litany of complaints is long, and it includes what he
views to be burdensome regulations being imposed by the U.S.

8. Environmental Protection Agency on states.
"But I think that it has come to a head more so on this particular
administration," he said.
For Gray, the most egregious federal intrusion is the health care
law, which requires everyone to have health insurance under the
threat of a penalty.
"It was the 13 colonies that came together to form the federal
government, and the federal government is not our master, yet
they are becoming by fiat our master. And we are pushing back
and saying 'no'," Gray said.
The argument fueling the movement is mostly rooted in the 10th
Amendment, which says powers not delegated to the federal
government by the U.S. Constitution are reserved to the states
or to the people.
States' rights advocates also say the movement is nonpartisan.
They say they oppose any overreaching federal policies no
matter which party is in power in Washington D.C.
They also sought to dissociate the current movement from its
racist version in Jim Crow's South.
Nick Dranias, a constitutional lawyer for the conservative think
tank Goldwater Institute, said the states' rights movement in the
1950s and 1960s was largely bound up with racism, which he
said was despicable because it allowed states to abuse minority
groups.
Dranias said people have abandoned much of the racism that
marked that era and have started to explore the real purpose of
state sovereignty, which is to check and balance the feds.
The goal of today's movement is "not to preserve states' rights
for its own sake, but to preserve individual liberty," he said.
That's the core of the argument that the Goldwater Institute used
when it filed an opinion in a lawsuit initiated by a Montana gun
sports association last year.
Montana in 2009 was the first state to enact a law that exempts
from federal regulation guns made and sold within that state.
The federal government subsequently sent out a letter saying
despite the Montana law, gun companies must continue to

9. comply with federal rules. The feds' message was unequivocal:
Federal laws supersede state laws.
The Montana Shooting Sports Association sued, arguing that the
U.S. Constitution doesn't confer powers on Congress to regulate
activities contemplated by the Montana law. The case is pending
in Federal District Court.
In its brief, the Goldwater Institute argued that the case "does
not involve a mere clash between state and federal law. It
involves the federal government's effort to quash an exercise of
state sovereignty that directly serves the structural purpose of
federalism in our compound republic -- the protection of
individual liberty guaranteed by the Bill of Rights."
Indeed, states across the country have enacted laws this year
seeking to assert their rights. South Dakota and Wyoming also
passed gun-manufacturing laws that would be free from federal
regulation. Utah passed a measure saying the federal
government could not carry out health care reform in the state
without legislative approval. And several other states are
considering bills that would give state control over National
Guard troops.
Senate Minority Leader Jorge Garcia, a Democrat from Tucson,
said Arizona's decision to invite lawsuits with the federal
government was a bad move, no matter the outcome of the
Montana case or the ones that are brewing in Arizona.
"For folks who hate frivolous lawsuits -- this to me is more
frivolous than anything else," he said.