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1HCA 545 Financial Analysis Case A case based on the work of Louis Gapenski, PhD Series 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 $28.79 6 $30.57 6 $34.58 2 Operating Expenses Inpatient service $20.573 $22.229 $24.771 Outpatient service $6.831 $8.098 $9.187 Total operating expenses $27.40 4 $30.32 7 $33.95 8 EXHIBIT 1.5 2016 2017 2018 Grandvie w 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 ??? Median -Quartile 2018 Selected Industry Financial Ratios (200- 299 beds) Profitability Ratios 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 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.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 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 ??? Median -Quartile EXHIBIT 1.7 2018 Selected Industry Operating Ratios (200-299 beds) Profit Indicator a b Net Revenue Indicators c d e f g h Volume Indicators i j Length-of-Stay Indicators k l Intensity-of-Service Indicators m n o p Efficiency Indicators q r Unit Cost Indicators s t u 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 Profit per discharge $89.04 ($21.30) ($120.08) Profit per visit $6.22 $0.66 ($7.01) Net revenue per discharge $4,091 $3,411 $2,815 Net revenue per visit $201 $139 $98 Medicare revenue percentage 43.47%36.6’% 31.25% Bad debt/charity care percentage 7.89% 4.76’% 2.97% Contractual allowance percentage 25.27% 20.02% 12.12% Outpatient revenue percentage 25.26% 21.03% 17.44%Occupancy rate 67.12% 58.10% 47.84% Average daily census 173.23% 144.73% 114.39% Average length of stay (days) 6.80 6.07 5.41 Adjusted length of stay 6.48 5.36 4.52 Expense per discharge $3,937 $3,392 $2,972 Adjusted expense per discharge $3,417 $2,924 $2,572 Expense per visit $202.23 $141.97 $111.53 All-payer case mix index 1.2795 1.1756 1.0259 FTEs per occupied bed 4.59 4.15 3.77 Labor-hours per visit 4.68 5.84 8.66 Salary per FTE $24,447 $22,517 $20,347 Employee benefits percentage 19.58% 17.04% 15.18% Liability expense per discharge $80.94 $42.05 $18.31 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. Answer the Following Questions: 1. Please perform a detailed summary by providing and discussing at least 10 important events mentioned in the case. Please also discuss which five events you believe are the most influential. Please number your events E1 -E10 and ensure that the five most influential events are easily identified. 2. Interpret the information from the hospital s financial statements: income statement, balance sheet, and statement of cash flows. Please list, briefly define, and explain 10 indicators. In your explanation, ensure to discuss any trends or causes for concern. Please number your indicators and use actual numbers in your submission field to support your argument. 3. Using the financial ratios, perform a detailed financial analysis of Grandview Medical Center. Please do the following: use at least two ratios per category, discuss why the calculated ratios were selected, and discuss any trends, causes for concern, or acknowledgments, which could be identified over the three-year period (2016-2018). Include and organize response according to the following subtitles: Profitability, Liquidity, Debt, and Asset Management. 4. Using the Du Pont equation, please analyze and explain the hospital’s financial position. Please support your results with information from the financial statements. Please ensure to include actual numbers in the submission field to support your argument. 5. Using the operating ratios given in the lecture packet, please analyze the operational factors that help explain the hospitals current financial condition. Please list, briefly define, and explain five indicators. In your explanation, ensure to discuss any trends, causes for concern, or acknowledgments. Please ensure to include actual numbers in the submission field to support your argument. 6. Based on your evaluation of questions 1-6, provide an evaluation summary of the hospitals financial condition. Please ensure to present your views on the potential underlying economic and managerial factors that might have caused any problems that surfaced in the financial and operating analysis. Please identify and explain at least 5 factors. Please ensure to number your factors. 7. Grandview s cost of capital is 4 percent, please calculate and explain the results of the economic value analysis (EVA). Please also discuss the applicability of the EVA analysis to organizations such as Grandview hospital. Please ensure to include actual numbers in the submission field to support your argument. 8. Given all of the information in the case (background information, financial analysis, operating analysis, and EVA analysis), perform a SWOT (strengths, weaknesses, opportunities, threats) analysis on Grandview Medical Center. Please list and explain at least two examples for each category in the analysis. Please ensure that the information used in the SWOT analysis is derived from the case. Please ensure to use the SWOT headings in your response. 9. Please explain and rank (from most likely to implement to least likely to implement) at least five recommendations the hospital should follow to ensure financial soundness. Please ensure that the recommendations are based upon the data in the case. Please number your recommendations (1= most likely; 5 = least likely).

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