CASE STUDY: COMMUNITY GENERAL HOSPITAL Dr. Noland Wright, newly appointed manager of Community General Hospital, sighed as he reviewed the hospital's financial records. He had been given the responsibility of leading the hospital's next steps, but was perplexed by the financial condition highlighted in the financial statements before him. His training was in medicine, not business, and he had recently taken early retirement. He had been talked into taking Community's reins by some old friends who lived a few miles away from the facility. Community General Hospital had initially begun in 1914 as Whittaker Memorial Hospital, a community-run hospital serving the black population of Newport News, Virginia. To meet the needs of an economic expansion of the community largely due to increased commercial activity during World War II, the hospital increased its census and gained accreditation by the American College of Surgeons. In the 1950's and 60's the hospital enjoyed a bustling business in the segregated health care industry. With the advent of the desegregation movement in the 1960's, the hospital experienced several threats as black physicians gained the ability to admit patients to the large and better equipped traditionally 'white' hospitals in the area. The civic organization that governed the hospital began to be concerned for the hospital's survival. It was experiencing a falling census, a deteriorating reputation concerning the quality of its health care, and picked up the reputation of being a 'public' hospital (which is was not). While the City of Newport News was willing to help, it was unwilling to acquire full responsibility for the costs of a public hospital. During the 1970's, the hospital drew on an emergency fund set up by the city. Throughout the 1970's, the hospital suffered from losses and bad debts. By 1982 the civic board that guided the hospital became inactive. The following year, the last of the segregation practices ended by court order at the large surrounding hospitals. Few patients desired to be admitted to the small, modestly equipped hospital, preferring the large, modern hospitals they now had access to. The hospital ended 1983 with a $402,000 budget deficit. Suppliers began demanding cash payments for purchases. Employee layoffs, tightening of admission criteria, and refusal of non-paying patients were some of the steps taken to alleviate the dire financial situation. It was hoped that a new facility, new location and a future change of name to Community General Hospital would help the hospital to survive. A $15 million bond issue and $1.5 million in community pledges allowed the hospital to continue to operate. At the end of 1984 the fund deficit was $749,000. Private healthcare management firms were solicited for help, but these efforts were short- lived. In July 1985, Community General Hospital was dedicated, with a new facility and equipment, and a higher occupancy rate. Between 1979 and 1985, seven different administrators had been in charge of the hospital. Continued losses after 1985. and continued difficulty in retaining continuous management. convinced the survival. I was experiencing a falling census, a deterioraung reputation concerning the quality of its health care, and picked up the reputation of being a public' hospital (which is was not). While the City of Newport News was willing to help, it was unwilling to acquire full responsibility for the costs of a public hospital. During the 1970's, the hospital drew on an emergency fund set up by the city. Throughout the 1970's, the hospital suffered from losses and bad debts. By 1982 the civic board that guided the hospital became inactive. The following year, the last of the segregation practices ended by court order at the large surrounding hospitals. Few patients desired to be admitted to the small, modestly equipped hospital, preferring the large, modern hospitals they now had access to. The hospital ended 1983 with a $402,000 budget deficit. Suppliers began demanding cash payments for purchases. Employee layoffs, tightening of admission criteria, and refusal of non-paying patients were some of the steps taken to alleviate the dire financial situation. It was hoped that a new facility, new location and a future change of name to Community General Hospital would help the hospital to survive. A $15 million bond issue and $1.5 million in community pledges allowed the hospital to continue to operate. At the end of 1984 the fund deficit was $749,000. Private healthcare management firms were solicited for help, but these efforts were short- lived. In July 1985, Community General Hospital was dedicated, with a new facility and equipment, and a higher occupancy rate. Between 1979 and 1985, seven different administrators had been in charge of the hospital. Continued losses after 1985, and continued difficulty in retaining continuous management, convinced the hospital's supporters to seek some solution to the ongoing problems. Political avenues were tried with some success, but did not last. The sale of the hospital to a doctors' investment group was considered, but the hospital's supporters ultimately rejected the deal. By 1990 the debt was in excess of $20 million. The 'board' of supporters agreed to file for bankruptcy. The Guarantor of the mortgage, the U.S. Department of Housing and Urban Development, took over the mortgage debt. The hospital continued to operate as the board sought affiliations with other area hospitals. The quality ratings for the hospital continued to suffer. In 1993 the hospital was granted its bankruptcy petition. HUD settled for $4 million, and other creditors were held at bay. Political solutions for Community General's future were sought, but ultimately, did not help the hospital's condition. Administrators were hired, but their tenures were short-lived. By mid 1996 the hospital was again running a large fund deficit and was seeking direction in what appeared to be a rather hopeless situation. The financial statements for Community General Hospital appear in Exhibits 1- 3 Required 1. By observing Community General Hospital's financial statements, what can one conclude concerning a profitability (nonprofit viability), solvency, and cash flow? Use ratios to support your answers. 10 marks Exhibit 1. Income Statement for the years ending ended June 30, 1994 and June 30, 1995 1994 1995 OPERATING REVENUE Net Patient Revenue Other TOTAL OPERATING EXPENSES $8,528,383 386,285 $8,914,668 $9,858,446 253,563 $10,112,009 Payroll Taxes Physician Fees Contracted Services Medical Supplies General Supplies Utilities Insurance Legal 3,355,391 1,026,076 807,431 1,581,970 738,677 165,038 319,613 128,486 52,458 3,540,940 1,274,260 787,895 1,564,821 782,988 171,957 279,288 163,558 66,508 Rental Other Bad Debt 142,229 197,854 278,389 119,594 170,065 544,602 $8,793,612 $9,466,476 TOTAL OPERATING EXP. INCOME (LOSS) BEFORE INTEREST AND DEPRECIATION $121,056 $645,533 NONOPERATING LOSSES Interest Depreciation Reorganization Cost 33,554 802,490 72,458 105,325 771,492 0 $908,502 $876,817 TOTAL NONOPERATING LOSSES INCOME OR LOSS BEFORE NONRECURRING BAD-DEBT WRITEOFF -$787,446 -$231,284 NONRECURRING BAD-DEBT WRITEOFF $0 $439,720 EXPENSES AND LOSSES IN EXCESS OF REVENUES AND GAINS -$787,446 -$671,004 1995 Exhibit 2. Balance Sheet. June 30, 1994, and June 30, 1995 1994 ASSETS CURRENT ASSETS Cash $791,893 Trade Receivables 1,539,390 Other Receivables 7,847 Supplies Inventory 271,997 Prepaid Expenses 85,265 TOTAL CURRENT ASSETS $2,696,392 $577,461 2,062,142 46,449 277,191 102,066 $3.065,309 PROPERTY AND EQUIPMENT Land Buildings Equipment and Fixtures TOTAL 276,865 8,772,782 5,243.738 $14,293,385 276,865 8.772,782 5.354.421 $14.404,067 Accumulated Depreciation NET PROPERTY AND EQUIPMENT 6.999.531 $7,293,385 7,535,929 $6,868,138 OTHER ASSETS Deposits Unamortized Debt Expense TOTAL OTHER ASSETS 87,113 522.850 $609,963 87,113 522.850 $609,963 TOTAL ASSETS $10,600,209 $10.543,410 LIABILITIES CURRENT LIABILITIES Accounts Payable Notes Payable Due to 3 Party Payors Accrued Payroll Accrued Vacation Other Accrued Expenses TOTAL CURRENT LIABILITIES $802,184 0 2,924,863 59,569 192,881 498,133 $4,477.630 $1,036,151 40,000 2,840,027 58.926 251.500 312.049 $4,538,653 LONG TERM LIABILITIES Capital Lease LIABILITIES SUBJECT TO COMPROMISE 0 21,972,071 29,317 21,972,071 TOTAL LIABILITIES 26,449,701 26.540,041 FUND DEFICIT - 15,849,492 -15,996,631 TOTAL LIABILITIES + FUND DEFICIT $10,600,209 $10.543,410 Exhibit 3. Statement of Cash Flows for the years ended June 30, 1994, and June 30, 1995 , 1994 1995 CASH FLOWS FROM OPERATING ACTIVITIES, GAINS, AND LOSSES: Expenses and Losses in excess of Revenues and Gains $787,436 -$671,004 Adjustments: Operating Activities: Depreciation and Amortization 802,490 771,492 Increase in Accounts Receivable -579, 126 -561,354 Increase in Inventories 8,819 -5,194 Increase in Prepaid Expenses 23,016 -16,801 Increase in Other Assets - 10,000 0 Increase in Accounts Payable 414,591 233.967 Decrease in Third Party Payable 1,041,761 -84,836 Decrease in Accrued Expenses - 161,185 -128,108 $1,540,366 $209,166 Exhibit 3. Statement of Cash Flows for the years ended June 30, 1994, and June 30, 1995 1994 1995 CASH FLOWS FROM OPERATING ACTIVITIES, GAINS, AND LOSSES: Expenses and Losses in excess of Revenues and Gains -$787,436 -$671,004 Adjustments: Operating Activities: Depreciation and Amortization 802,490 771,492 Increase in Accounts Receivable -579.126 -561,354 Increase in Inventories 8,819 -5,194 Increase in Prepaid Expenses 23,016 - 16,801 Increase in Other Assets - 10,000 0 Increase in Accounts Payable 414,591 233,967 Decrease in Third Party Payable 1,041,761 -84,836 Decrease in Accrued Expenses - 161.185 -128,108 $1,540,366 $209.166 NET CASH PROVIDED FROM OPERATING ACTIVITIES, GAINS AND LOSSES $752,930 -$461,838 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Property and Equipment NET CASH USED: INVESTING ACTIVITIES -154,944 -$154,944 -55,258 $55,258 CASH FLOWS FROM FINANCING ACTIVITIES: Principal Payments on Capital Lease Net Borrowing on Line of Credit NET CASH USED: FINANCING ACTIVITIES 0 0 $0 -26,107 40.000 $13,893 $597,986 -$503,203 NET INCREASE: CASH AND EQUIVALENTS PRIOR PERIOD ADJUSTMENT $0 $288.771 CASH AND EQUIVALENT AT BEGINNING OF YEAR $193,907 $791,893 CASH AND CASH EQUIVALENTS AT END OF YEAR $791,893 $577,461