1. Examine the River Community Hospitals statements of cash flows. What information do the statements provide regarding the hospitals sources and uses of cash over the past two years?

2. List five or more financial strengths of the hospital? (Hint: Do not provide a list of ratios. Make a statement and then justify it with information from the financial statements and ratios.)

3. List five or more financial weaknesses of the hospital? (Hint: Do not provide a list of ratios. Make a statement and then justify it with information from the financial statements and ratios.)

4. The board chair has asked management to develop some strategies to improve profitability and estimate the impact of the strategies on the hospitals ROE. By how much would the 2017 ROE change from each of these strategies? a. Vacant land issold, and total assets decrease by $2.0 million. Net income would not be affected, and the board wants to maintain the 2017 debt ratio. b. Debt issubstituted for equity, and the debtratio increasesto 48 percent. Total assets would not be affected. Interest expense would increase but better cost controls would offset the higher interest expense, and thus net income would notchange. c. Leanmanagementisimplemented, and total expenses decrease by $0.5 million. Total revenue, total assets, and total liabilities and net assets would notchange. d. Whatever strategy Melissa chooses,she is under pressure from the board to increase ROE to at least 10 percent. Whattotal margin would be needed to achieve the 10% ROE, holding everything else constant?

5. What additional financial information would be useful in the analysis?

6. Select five financial and five operating KPIs to be presented at future boardmeetings.

7. Sound financial analysis involves more than just calculating numbers. The American Association of Individual Investors suggests that investors consider qualitative factors (as seen in the following questions) when evaluating a company. Answer the following questions for the hospital.When there is insufficient information in the case to answer a question, briefly speculate about why the question might be relevant to the hospital. Are the companys revenues tied to one key customer? To what extent are the companys revenues tied to one key product? To what extent does the company rely on a single supplier? (Hint: Physicians and nursesare key suppliers of labor to a hospital.) What about the competition? What are the companys future prospects? How does the legal and regulatory environment affect the company?

8. Guided by the limited information provided in the case, what are your top three or four recommendations to the board?

9. In your opinion, what are three key learning points from this case?

2015 2016 2017 EXHIBIT 24.1 River Community Hospital: Statements of Operations (in Millions of Dollars) $30.576 $34.582 Revenues Net patient service revenue Other revenue Total revenues $28.796 1.237 $30.033 1.853 1.834 $32.429 $36.416 $12.468 $12.245 1.830 $13.994 2.568 2.408 1.598 1.776 Expenses Salaries and wages Fringe benefits Interest expense Depreciation Medical supplies and drugs Professional liability Other Total expenses 1.181 2.350 0.622 2.778 2.658 0.655 0.776 0.201 0.140 9.036 $27.404 10.339 $30.327 0.218 11.848 $33.958 Net Income $ 2.629 $ 2.102 $ 2.458 2015 2016 2017 EXHIBIT 24.2 River Community Hospital: Balance Sheets (in Millions of Dollars) $ 4.673 Assets Cash and investments Accounts receivable (net) Inventories $ 5.069 5.674 $ 2.795 7.413 4.359 0.432 0.523 0.703 $11.969 $55.333 Other current assets Total current assets Gross plant and equipment Accumulated depreciation Net plant and equipment Total assets 0.308 $ 9.772 $47.786 11.820 $35.966 $45.738 0.601 0.923 $11.732 $59.552 17.009 $42.543 $54.275 14.338 $40.995 $52.964 $ 1.253 Liabilities and Net Assets Accounts payable Accrued expenses Current portion of long-term debt Total current liabilities Long-term debt Net assets $ 0.928 1.460 0.110 1.503 1.341 $ 4.097 $ 2.498 $ 1.760 1.176 1.465 $ 4.401 17.795 32.079 $54.275 15.673 27.567 $45.738 19.222 29.645 Total liabilities and net assets $52.964 2016 2017 EXHIBIT 24.3 River Community Hospital: Statements of Cash Flows (in Millions of Dollars) Cash Flows from Operating Activities Net income Depreciation and noncash expenses Change in accounts receivable Change in inventories Change in other current assets Change in accounts payable Change in accrued expenses Net cash flow from operations $2.102 2.633 (1.315) (0.091) (0.395) 0.325 0.043 $3.302 $2.458 2.756 (1.739) (0.078) (0.220) 0.507 (0.327) $3.357 Cash Flows from Investing Activities Investment in plant and equipment ($7.686) ($4.328) $3.549 ($1.427) Cash Flows from Financing Activities Change in long-term debt Change in current portion of long-term debt Net cash flow from financing $1.231 $4.780 $0.124 ($1.303) Net increase (decrease) in cash $0.396 ($2.274) Beginning cash $4.673 $5.069 Ending cash $5.069 $2.795 Note: "Depreciation and noncash expenses" and "Investment in plant and equipment" data in the statements of cash flows are somewhat different than they would be if calculated directly from the other financial statements because of asset revaluations. 2015 2016 2017 Operating Revenue Gross inpatient service Gross outpatient service Gross patient service revenue EXHIBIT 24.4 River Community Hospital: Revenue and Expense Allocation (in Millions of Dollars) $26.117 6.535 $32.652 $29.148 9.130 $38.278 $33.216 11.912 $45.128 $ 1.729 Contractual allowances Bad debt and charity care Total revenue deductions 2.127 $ 3.856 $ 5.196 2.506 $7.702 $ 7.516 3.030 $10.546 Net patient service revenue $28.796 $30.576 $34.582 $22.229 Operating Expenses Inpatient service Outpatient service Total operating expenses $20.573 6.831 $27.404 8.098 $30.327 $24.771 9.187 $33.958 2015 2016 2017 EXHIBIT 24.5 River Community Hospital: Selected Operating Data 2,721 8,784 32,285 210 Medicare discharges Total discharges Outpatient visits Licensed beds Staffed beds Patient days All-payer case mix index Full-time equivalents 2,860 8,318 32,878 210 197 42,434 1.2993 625.8 2,741 8,576 36,796 210 178 40,062 1.3161 619.3 193 44,085 1.2869 610.8 +Quartile Median -Quartile EXHIBIT 24.6 2017 Selected Industry Financial Ratios (200-299 Beds) Profitability Ratios Total margin Return on assets Return on equity Deductible ratio 5.58% 5.80% 15.66% 0.34 3.48% 3.10% 6.01% 0.26 0.53% 0.40% 0.62% 0.18 Liquidity Ratios Current ratio Days cash on hand 2.53 32.35 1.99 15.89 1.48 6.24 Debt Management Ratios Debt ratio Debt-to-equity ratio Times interest earned 62.90% 127.00% 4.29 5.32 48.40% 64.70% 2.23 3.22 35.20% 26.90% 1.14 1.76 Cash flow coverage 2.20 1.04 1.76 0.89 1.49 0.75 Asset Management Ratios Fixed asset turnover Total asset turnover Days in patient accounts receivable Current asset turnoverb Average payment period (days) 87.53 3.94 71.24 75.67 3.38 56.52 63.33 2.88 45.84 Other Ratios Average age of plant (years) 8.86 7.39 6.14 +Quartie Median -Quartile EXHIBIT 24.7 2017 Selected Industry Operating Ratios (200-299 Beds) Profit Indicators Profit per discharge Profit per visit $89.04 $ 6.22 ($21.30) $ 0.66 ($120.08) ($ 7.01) Net Revenue Indicators Net revenue per discharge Net revenue per visitd Medicare revenue percentage Bad debt/charity care percentage Contractual allowance percentage Outpatient revenue percentage $4,091 $ 201 43.47% 7.89% 25.27% 25.26% $3,411 $ 139 36.60% 4.76% 20.02% 21.03% $2,815 $ 98 31.25% 297% 12.12% 17.44% Volume Indicators Occupancy rate Average daily censusi 67.12% 58.10% 144.73 47.84% 114.39 173.23 Length-of-Stay Indicators Average length of stay (days) Adjusted length of stay! 6.07 6.80 6.48 5.41 4.52 5.36 Intensity-of-Service Indicators Expense per dischargem Adjusted expense per discharge Expense per visit All payer case mix indexp $ 3,937 $ 3,417 $202.23 1.2795 $ 3,392 $ 2,924 $141.97 1.1756 $ 2,972 $ 2,572 $111.53 1.0259 Efficiency Indicators FTES per occupied bed Labor-hours per visit 3.77 4.59 4.68 4.15 5.84 8.66 Unit Cost Indicators Salary per FTE Employee benefits percentaget Liability expense per dischargeu $24,447 19.58% $ 80.94 $22,517 17.04% $ 42.05 $20,347 15.18% $ 18.31