CASE 3: Charitable Contributions and Debt: A Comparison of St. Jude Childrens Research Hospital/ALSAC and Universal Health Services

CASE TOPICS OUTLINE

1. St. Jude Childrens Research Hospital/ALSAC

A. Primary Objective

B. Sources of Capital

C. Reporting Practices

2. Universal Health Services

A. Investor-Owned Hospital

B. Debt Including Leases

3. Comparison

Hospitals are an industry in which both not-for-profits and investor-owned facilities operate. The sources of capital available to the not-for-profits include charitable contributions and debt offeringsunless they are governmental, in which case, higher taxes are also an alternative. Debt availability is always, in part, a function of performance, and just as failures have arisen in both sectors, about one-third of the investor-owned hospitals have been described as losing money. Of interest is how can one effectively evaluate such an industry, with this type of diversity in organizational forms and capital availability? A necessary prerequisite to such an evaluation is to have a firm understanding of how charitable contributions are presented.

St. Jude Childrens Research Hospital/ALSAC has the mission of finding cures for children with catastrophic diseases through research and treatment. For the fiscal year 1999, this entity reported total assets of $221,664,232 and income of $177,071,890. A Web site at http://www.stjude.org, as well as Guidestars listing, references a Form 990 (Return of Organization Exempt from Income Tax) filing, availability of audited financial statements upon request, and information that the hospital has 2,100 employees and 350 volunteers. Founded in 1962, the organization seeks funds from contributions and grants for unrestricted operating expenses, specific projects, buildings, and endowments. More than 4,000 patients are seen annually, with a hospital maintaining 56 beds. The Form 990, Part III states that the hospital provided 15,231 inpatient days of care during the fiscal year and patients made 40,982 clinic visits. ALSAC is the American Lebanese Syrian Associated Charities, Inc., the fund-raising arm of St. Jude Childrens Research Hospital. It reported 1999 total assets of $1,007,699,320 and income of $274,123,399. This organization reports the number of employees as 565 and the number of volunteers as 800,000. With its sole focus on the hospital, ALSACs self-description explains that no child has ever been turned away due to an inability to pay for treatment and explains key accomplishments in the research area achieved by St. Judes research and treatment of children with catastrophic diseases. What is borne out by the example of St. Jude is the fact that a review of the Form 990 filed for the fiscal year ending 6/30/99 indicates in Part VI the names of related organizations: ALSAC and St. Jude Hospital Foundation, both of which are tax exempt. To gain a sense of capital availability to a not-for-profit entity, affiliated entities must be considered. In addition, the role of volunteers is a source of human capital not effectively captured within the framework of financial statements for not-for-profits, as reflected in the Form 990 for the fiscal year ending 6/30/99 for ALSAC, which states in Part VI:

Unpaid volunteers have made significant contributions of their time, principally in fund-raising activities. The value of these services is not recognized in the financial statements since it is not susceptible to an objective measurement or valuation and because the activities of these volunteers are not subject to the operating supervision and control present in an employer/employee relationship.

Hence, as one evaluates capital sources and uses by not-for-profits, care is needed to consider affiliated organizations role, total contributions, and the effect of volunteerism on the comparability between not-for-profit and investor-owned operations.

Universal Health Services, Inc. filed its 10-K on March 28, 2001, for the calendar year 2000, which includes comparative information for 1999. Analysts have described the company as the most aggressive company in the industry over the 19992001 time frame in making acquisitions, particularly of not-for-profit operations and investor-owned operations experiencing losses. The company is praised for it high operating leverage, the relatively small number of shareholders relative to the magnitude of total revenue, and stock price as a multiple of earnings. The company operates 59 hospitals and, as of 1999, had an average number of licensed beds of 4,806 at acute care hospitals and 1,976 at behavioral health centers, with patient days of 963,842 and 444,632, respectively. Of interest is a commentary on the competition found in the companys filing:

Competition

In all geographical areas in which the Company operates, there are other hospitals which provide services comparable to those offered by the Companys hospitals, some of which are owned by governmental agencies and supported by tax revenues, and others of which are owned by nonprofit corporations and may be supported to a large extent by endowments and charitable contributions. Such support is not available to the Companys hospitals. Certain of the Companys competitors have greater financial resources, are better equipped and offer a broader range of services than the Company. Outpatient treatment and diagnostic facilities, outpatient surgical centers and freestanding ambulatory surgical centers also impact the healthcare marketplace. In recent years, competition among healthcare providers for patients has intensified as hospital occupancy rates in the United States have declined due to, among other things, regulatory and technological changes, increasing use of managed care payment systems, cost containment pressures, a shift toward outpatient treatment and an increasing supply of physicians. The Companys strategies are designed, and management believes that its facilities are positioned, to be competitive under these changing circumstances. (Source: 10-K filed 3/28/2001)

Financial information is provided in Tables 5.3-1 and 5.3-2 for both the not-for-profit and the investor-owned hospitals.

Table 5.3-1: Financial Comparisons of the Not-for-Profit Entities

Fiscal Year Ended 1999	St. Jude Childrens Research Hospital Form 990*	American Lebanese Syrian Associated Charities, Inc. (ALSAC) Form 990*
Contributions, gifts, grants and similar amounts received: Direct public support	$91,978,426	$231,793,748
Indirect public support		2,906,934
Government contributions (grants)	31,469,447
Program service revenue, including government fees and contracts (i.e., health insurance revenue)	46,034,710
Accounts receivable	24,217,029	4,230,764
Pledges receivable		23,604,748
Allowance for doubtful accounts	9,363,328
Program service expenses		99,282,906
Program service expenses: Research	87,225,830
Program service expenses: Education and training	5,471,186
Program service expenses: Medical Services	93,735,602
Reconciliation of revenue, gains, and other support to audited numbers: net unrealized gains on investments	4,023,815	65,891,269
Deferred grant revenue	1,857,628 (Statement 5)
Support from American Lebanese Syrian Associated Charities, Inc.	91,978,426 (Statement 7)	91,978,426 (paid per Statements 4, 6)
Excluded contributions		2,746,295 (Statement 1)
Excess or (deficit) for the year	10,933,191	120,521,982
Net assets or fund balances at end of year	199,707,440	994,501,910
Temporarily restricted		15,715,890
Permanently restricted	14,000,000	247,147,826
Total liabilities	21,956,792	7,017,192
Schedule of deferred debits & credits by contract (FAS 116 adjustment noted to result in this deferred revenue)	157,628

* The GuideStar.org Web site (http://www.guidestar.org) provides access to Forms 990 in .PDF format.

Table 5.3-2: Universal Health Services, Inc.s Financial Excerpts*

Income Statements (in thousands)	Reported 1999 Calendar Year
Net revenues	$2,042,380
Operating charges	1,913,346
Components:
Salaries, wages, and benefits	793,529
Provision for doubtful accounts	166,139
Lease and rental expense	49,029
Interest expense, net	26,872
Net income	77,775
Total assets	1,497,973
Total liabilities	856,362
Total retained earnings	482,960
Capital stock	306
Paid-in capital in excess of par	158,345

* The 10-K filing as of 3/28/2001 at EDGAR (http://www.sec.gov/edgar.shtml) provides financial statement information for 2000 and 1999.

Requirement A: Recording Revenue

1. What is meant by the reference in Table 5.3-1 to an FAS 116 adjustment?

2. How are contributions recorded? Is there a distinction between pledges receivable and accounts receivable?

3. Are there circumstances when financial statements can quantify volunteers services?

4. Can financial statement users of not-for-profit hospitals financial statements expect to be fully informed regarding affiliated parties, such as the linkages between St. Jude Childrens Research Hospital, ALSAC, and the foundation cited? Explain.

Requirement B: Revenue Mix (Strategy-Related Considerations)

The 10-K filing of Universal Health Services, Inc. describes the mix of revenue sources, as depicted in Table 5.3-3.

Table 5.3-3: Patient Revenue Mix

	PERCENTAGE OF NET PATIENT REVENUES
	2000	1999	1998	1997	1996
N/A-Not available (Source: 10-K filed 3/28/2001)
Third Party Payors
Medicare	32.3%	33.5%	34.3%	35.6%	35.6%
Medicaid	11.5%	12.6%	11.3%	14.5%	15.3%
Managed Care (HMOs and PPOs)	34.5%	31.5%	27.2%	19.1%	N/A
Other Sources	21.7%	22.4%	27.2%	30.8%	49.1%
Total	100%	100%	100%	100%	100%

1. How does this revenue mix compare with the revenue blend of the not-for-profit entity, St. Jude Childrens Research Hospital (ALSAC)? Access the latest SEC filing and compare the reported revenue mix; has it changed?

2. What does that imply as to the strategies of investor-owned hospitals in managing risk and ensuring adequate capital relative to not-for-profit entities? An opportunity exists to explore the greater social and political questions that are frequently debated about the compatibility of profit-oriented entities and quality of health care, relative to not-for-profit entities. As background, identify what the latest SEC filings report concerning charity care.

How would your answers to Requirements A and B differ if the government owned and operated the hospital?