ASSESSING HOSPITAL PERFORMANCE

RIVER COMMUNITY HOSPITAL 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. River competes with three other hospitals in its metropolitan statistical area$-$two not$-$for$-$profits 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, an 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. $($For more information on The Joint Commission, visit its website at www$.$ jointcommission.org.$)$ 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. River passed its latest Joint Commission survey, receiving its Gold Seal of Approval.

In recent years, competition among the four hospitals in River's service area has been keen but friendly. However, a large for$-$profit chain recently purchased the for$-$profit hospital, resulting 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.

$1.$ A significant portion of River's net patient service revenue was generated by patients who are covered either by Medicare, Medicaid, or other government programs or by various private plans, including managed care plans, that have contracts with River and specify discounts from charges. In general, the proportional amount of deductions is similar between inpatients and outpatients. A breakdown of the gross and net patient service revenues and operating expenses for both inpatient and outpatient services is given in exhibit $24\mathrm{.}4.$

$2.$ River has a contributory money accumulation $($defined contribution$)$ pension plan that covers substantially all of its employees. Participants can contribute up to $20$ percent of earnings to the pension plan. River matches, on a dollar$-$for$-$dollar basis, employee contributions of up to $2$ percent of wages and pays $50$ cents on the dollar for contributions of more than $2$ percent and up to $4$ percent. Because the plan is a defined contribution plan $($as opposed to a defined benefit plan$),$ River has no unfunded pension liabilities. Pension expense was approximately $$0\mathrm{.}543$ million in $2016$ and $$0\mathrm{.}588$ million in $2017.$

$3.$ River 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$).$ River is self$-$insured for amounts of more than $$1$ million but less than $$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. River is currently involved in eight suits involving claims of various amounts that could ultimately be tried before a jury. Determining the exact potential liability in these claims is impossible, but management does not believe that the settlement of these cases would have a material effect on River's financial position.

You have just joined the River staff as a special assistant to the CEO. On your first day on the job, the CEO, Melissa Randolph, stated that the best way to get to know the financial and operating conditions of the hospital is to conduct thorough financial statement and operating indicator analyses; thus, she assigned you the task. Although you agree that such analyses is a good way to get started, you wonder whether Melissa has any ulterior motives. Perhaps the hospital is having problems and she thinks that you can spot them, or perhaps she wants to test your analytical skills. Melissa is from the "old school" of hospital management and has been looking for someone to bring modern management methods to the hospital.

As you prepare for the analyses, several relevant factors come to light. First, in reviewing the policy decisions made by River's board of trustees over the past decade, you note that in $2012$ the board made the decision to significantly expand River's outpatient services. The rationale was that many procedures historically done on an inpatient basis were now being done in an outpatient setting, and if River did not offer such services it would lose the patients to other providers.

Second, the board chair has great concerns about the decline in profit$-$ ability between $2015$ and $2016$ and has not been assuaged by the recent modest upturn. Perhaps because she is CEO of a local company, the chair focuses on return on equity $($ROE$)$ as the key measure of profitability. She has requested management to develop some strategies to improve profit$-$ ability and estimate the impact of the strategies on River's ROE.

Third, board members were complaini