This group presentation contains information on Chesepeake Hospital and the different financial issues they face. It compares the differences in analysis for the organization as they occur, describing and explaining relevant health, economic, and financial problems by creating a financial statement analysis. Created with: Kassandra Abreu, Phylicia Dacanay, Nicole Medina, & Elizabeth Sumida

1. CASE 2 GROUP STUDY:
THE CHESAPEAKE HEALTH
PLAN
By Group 2: Kassandra
Abreu, Phylicia Dacanay,
Nicole Medina, Amanda
Romano-Kwan, &
Elizabeth Sumida

2. HISTORICAL BACKGROUND
 Chesapeake is one of Virginia’s largest managed
care plan organizations.
 It is the state’s largest not-for profit
organization.
 Chesapeake offers prepaid healthcare coverage
for 400,000 members in 15 counties, including
major cities such as Richmond, Norfolk, Virginia
beach, Arlington, Alexandria, and Roanoke.
 Chesapeake was the first HMO in Virginia to
receive accreditation from the national committee
of quality assurance.

3. HEALTH ISSUES AT CHESAPEAKE
 Big healthcare organizations such as Chesapeake
have to deal with problems like competing with
other big corporations, ensuring that they are
providing quality care, making good financial
decisions by utilizing the resources they have, and
maximizing the efficiency of the corporation.
 Chesapeake has four competitors that have
similar financial resources and who operate in the
same area with similar services. These competitors
are a threat to the success of our organization.

4. UNDERLYING ISSUES
 We want to ensure that we are utilizing all of our
resources efficiently and that we are operating at a
competitive level.
 We will be comparing the differences in analysis
for the organization as they occur, describing and
explaining relevant health, economic, and financial
problems.
 To do so, we will create a financial statement
analysis for the company to ensure that there are
no financial problems within the organization.

5. STATEMENT OF CASH FLOWS
 The cash flow statement is one of the most important statements
we analyze. It identifies the cash that flows in and out of the company
from the operating, investing, and financing activities our
organization during an accounting period.
 If a company is consistently generating more cash than it is using,
the company will be able to increase its dividend, buy back some of
its stock, reduce debt, or acquire another company. All of these are
perceived to be good for stockholder value.
 The cash from operating activities is compared to the company's
net income. If the cash from operating activities is consistently
greater than the net income, the company's net income or earnings
are said to be of a "high quality". If the cash from operating activities
is less than net income, a red flag is raised as to why the reported net
income is not turning into cash.

6. THE 3 TYPES OF CASH FLOWS
1) Cash Flow from Operating Activities: This section includes cash
flows from the principal revenue generation activities such as sale
and purchase of goods and services.
2) Cash Flow from Investing Activities: These are cash in-flows and
out-flows related to activities that are intended to generate income
and cash flows in future. This includes cash in-flows and out-flows
from sale and purchase of long term assets.
3) Cash Flows from Financing Activities: These are the cash flows
related to transactions with stockholders and creditors such as
issuance of share capital, purchase of treasury stock, dividend
payments etc.

7. STATEMENT OF CASH FLOWS
Cash Flow from Operating
Activities
2008 2009
Premium Revenue (Net
Income)
313.7 357.6
Interest Income 2.4 3.5
Medical Expenses
(Adjustments)
(263) (291.8)
Selling and Administration (36.8) (43.6)
Depreciation (4.7) (5)
Net Cash Flow from
Operating Activities
11.6 20.7

8. CASH FLOW ANALYSIS
 Insight into the HMO’s cash operation in 2009 shows
that Chesapeake generated a positive cash flow from
their operations.
 Our suggestion is to pay off long-term debt and
invest in marketable securities.

9. DU PONT ANALYSIS
 We decomposed our return on equity into three parts and multiplied
them to get our average:
Profit Margin: a part of a category of probability ratios calculated as net
income divided by revenue. Net income or net profit can be determined
by subtracting all the company’s expenses (operating costs, material
costs, and tax costs, from the total revenue).
Total Asset Turnover: a financial ratio that measures the efficiency of a
company’s use of it’s assets in generating sales revenue. Net sales are
operating revenues earned by a company for selling its products or
rendering its services. Companies with low profit margins, have high
asset turnover. Companies with high profit margin, have low asset
turnover.
Equity Multiplier: a measurement of a company’s financial leverage.
Companies finance the purchase of assets either through equity or debt,
so a high equity multiplier indicates that a larger portion of asset
financing is being done through debt.

10. DU PONT ANALYSIS
 ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
 ROE = (Net Income/Revenues) x (Revenues/Total Asset)
x (Total Asset/Shareholders’ Equity)
 2008
ROE = 3.67 x 2.78 x 3.13 = 31.96%
 2009
ROE = 5.73 x 2.84 x 2.23 = 36.32%
 Industry Average = 28.41%

11. DU PONT ANALYSIS
 Through ROE, we were able to calculate that there was
improvement on the amount of revenue being generated into
the organization during the next year. This shows us that
Chesapeake has a higher profit margin and better control
over expenses.
 In comparing the data to the National HMO industry
average in 2009, we can compare our 36.32% to their
28.41%, meaning their financial condition is not as great, and
that Chesapeake is earning more money on less investment.
 Though Equity multiplier is below the industry average, it’s
a good sign because it tells us they’re relying less on debt to
finance its asset base.

12. RATIO & OPERATING INDICATOR
ANALYSIS
 We performed an operating indicator analysis
and ratio analysis to better explain the condition of
our company.
 A ratio analysis combines data to create single
numbers that are easy to comprehend.

13. RATIO & OPERATING INDICATOR
ANALYSIS
2008 2009 Industry Average
Total Margin 3.7% 5.7% 2.9%
Debt Ratio 68.04% 55.2% 68.4%
ROA 10.2% 16.2% 11.30%
ROE 31.9% 36.3% 31.4%
Current Ratio 1.38 1.44 0.95
Current Asset
Turnover
3.8 3.8 6.4
Days Cash on
Hand
45.3 29.6 10.3

14. OPERATING INDICATOR ANALYSIS
 Total Margin = Net Income/Total Revenue
Our total margin represents the company’s net income divided by all of
our revenues, including our operating revenues and non-operating income.
 Debt Ratio = Total Debt/Total Assets
This measures the total debt to total assets and the percentage of total
capital provided by creditors.
 ROA = Net Income/Total Assets
Return on Assets is our company’s net income divided by the total assets.
It measures the number of earnings per dollar of book asset investment and
measures the amount of revenue being collected from each dollar.
 ROE = Net Income/Total Equity
Each dollar of equity generates a certain amount in net income (profit). For
a not-for-profit business, the ROE tells its board of trustees and managers
how well, in financial terms, its community-supplied capitals (equity) is

15.  Current Ratio = Current Assets/Current Liabilities
This measures the number of dollars of current assets available to pay
each dollar of current liabilities.
 Current Asset Turnover = Total Revenue/Current Assets
The total revenues to current assets measures the ability of fixed assets to
generate revenues.
 Days Cash on Hand = [Cash + Marketable Securities]/[Cash Expenses/365]
This refers to how much it costs to run your organization, how long it
would last with the cash it has, and the cash and securities in order to make
those payments

16. OPERATING INDICATOR ANALYSIS
 For Total Margins, Chesapeake is above the Median Quartile in both 2008 and
2009 compared to the Industry Average and their competitors.
 According to the data under Current Ratios, Chesapeake is in the Upper
Quartile for both years.
 Chesapeake's Days Cash on Hand shows that they are in the Upper Quartile
during 2008 with 45.3, but fell back down toward the Median in 2009 with a
score of 29.6.
 Our Debt Ratio is particularly low. In 2008 Chesapeake only had 68%, just
below the Median Quartile. In 2009, however, they only had 55.2%, putting us
below the Lower Quartile.
 Chesapeake's Current Asset Turnover did not change from 2008 to 2009 and
still falls below the Median, 6.4.
 This analysis shows that we have low administrative costs but higher medical
costs.
 Either Chesapeake is providing high quality health care services, or the

17. INTERPRETATION & OVERVIEW
 Chesapeake is generating a sufficient amount of profits.
 The ratios show us that Chesapeake is producing enough cash to meet
its financial obligations, and the low debt ratios show that we are able to
produce enough revenue to control its debt.
 The Operating Indicator Analysis shows us that we have a low
administrative cost compared to the industry average and its
competitors, but higher premiums.
 Expenses are higher than average than most of our competitors.
 Total asset turnover is lower than the average, which means a low
utilization of assets.
 Chesapeake has high utilization rates and medical costs. The rates are
higher than their competitors, leading to higher expenses and premiums.

18. SUGGESTIONS FOR IMPROVEMENT
 Our recommendation is to lower medical costs.
 To reduce the utilization rate, Chesapeake can:
1) Offer incentives to patients to stay within a certain
number of visits.
2) Emphasize preventive care.
3) Start health education programs to help patients
better identify medical problems.
4) Use Telemedicine for online medical consultations
with patients to eliminate unnecessary visits to the
ER or physicians offices.

19. QUESTIONS? ???