CHAPTER 2 DISCUSSION QUESTIONS

Financial Statements

1. Create an operating statement for a not-for-pro?t hospital given the following list of its revenues and expenses. What would this statement be called for a for-pro?t hospital?

• $1,500,000 received as support services and contributions.
• $10,000,000 earned for patient services.
• $4,000,000 received from capitated contracts with health maintenance organizations (HMOs).
• $2,500,000 given in contractual discounts to Medicare and Medicaid patients.
• $1,000,000 in uncollected debts.
• $1,000,000 in depreciation and amortization of assets.
• $4,500,000 in salaries, insurance paid, and utilities.
• $500,000 in supplies.
• $2,000,000 in other expenses.

2. Where would each of the following be listed on a balance sheet?

a. Cash

b. Parking garage

c. Accounts payable

d. Accounts receivable

e. Bonds payable in four years

f. Prepaid expenses

3. Create a statement of cash ?ows for Hospital XYZ, an investor-owned for-pro?t Hospital with 5,000 outstanding shares of stock, for the year 2010 given the following list of activities.

? Began 2010 with $150,000 in cash and cash equivalents.

? Paid dividends of $10 per share.

? Increase in accounts receivable of $10,000.

? Increase in accounts payable of $5,000.

? Sale of neighboring lot for $2,000,000.

? Expansion project costing $1,500,000.

? Issuance of 10-year bonds totaling $5,000,000.

? Purchase of new equipment totaling $4,000,000.

Ratios

4. Hospital XYZ has annual revenues of $100,000,000 and its current accounts receivable is $7,500,000. What is its days in patient accounts receivable, and what does this ?gure mean?

5. Compute the ratios and metrics given the following information on Hospital XYZ:

? Current assets: $40,000,000

? Total assets: $100,000,000

? Current liabilities: $12,000,000

? Total liabilities: $45,000,000

? Annual revenue: $435,000,000

? Total expenses: $425,000,000

? Operating income: $10,000,000

? Inventories: $5,000,000

? Depreciation: $2,000,000

a. Current ratio

b. Working capital

c. Days of working capital

d. Quick ratio

e. Average pay period

f. Return on assets

g. Return on equity

6. Given the following ?gures, compute the adjusted discharges for Hospital XYZ.

? Total inpatient discharges: 11,250

? Gross outpatient revenue: $1,000,000

? Inpatient gross revenue per discharge: $14,000

Time Value of Money

7. Hospital XYZ currently has a contract with an HMO that agrees to pay it $5,000,000 at the end of each of the next ?ve years. The hospital has the ability to opt out now to renegotiate, and the new deal has a predicted present value of $21,500,000. Assuming the hospital has a discount rate of 7 percent and the deals di?er only in payment structure, what is the present value of the current contract, and which contract should Hospital XYZ choose?

8. Dr. Sanders has just performed a back surgery on his uninsured patient, John, and has billed John for $10,000. They have agreed to set up a ?nancing plan with John paying $2,000 up front and the rest in two years. John will be paying 10 percent annual interest on the unpaid portion of his bill. What amount will be due at the end of the second year?

9. In employment contract negotiations between Dr. Sanders and Hospital XYZ, Dr. Sanders has requested a college fund for his son worth $150,000 12 years from now. The hospital prefers to pay him a discounted value now as a signing bonus for this. Ignoring taxes and assuming Dr. Sanders is con?dent he can invest at an interest rate of 6.5 percent annually, what would the signing bonus need to be to satisfy Dr. Sanders?

Break-Even/Crossover Analysis

10. What is the marginal cost for a surgeon seeing 250 patients annually with ?xed costs of $30,000 per year and total costs of $115,000 per year?

11. Assuming Hospital XYZ has an annual ?xed cost of $750,000 and each patient day costs $150 while bringing in $275 in revenue, how may patient days does the hospital need to break even each year?

12. Hospital XYZ is in the market for a new MRI machine and is considering two di?erent products. Machine A costs $20,000 up front and $200 per use. Machine B costs $14,500 up front and $265 per use. At what point do these two machines cross over? Which machine should they choose if their estimated number of uses is 15 over this point? Which machine should they choose if their estimate is 4 under?

CHAPTER 2 DISCUSSION QUESTIONS Financial Statements 1. Create an operating statement for a not-for-prot hospital given the following list of its revenues and expenses. What would this statement be called for a for-prot hospital? $1,500,000 received as support services and contributions. $10,000,000 earned for patient services. $4,000,000 received from capitated contracts with health maintenance organizations (HMOs). $2,500,000 given in contractual discounts to Medicare and Medicaid patients. $1,000,000 in uncollected debts. $1,000,000 in depreciation and amortization of assets. $4,500,000 in salaries, insurance paid, and utilities. $500,000 in supplies. $2,000,000 in other expenses. 2. Where would each of the following be listed on a balance sheet? a. Cash b. Parking garage c. Accounts payable d. Accounts receivable e. Bonds payable in four years f. Prepaid expenses 3. Create a statement of cash ows for Hospital XYZ, an investor-owned for-prot Hospital with 5,000 outstanding shares of stock, for the year 2010 given the following list of activities. Began 2010 with $150,000 in cash and cash equivalents. Paid dividends of $10 per share. Increase in accounts receivable of $10,000. Increase in accounts payable of $5,000. Sale of neighboring lot for $2,000,000. Expansion project costing $1,500,000. Issuance of 10-year bonds totaling $5,000,000. Purchase of new equipment totaling $4,000,000. Ratios 4. Hospital XYZ has annual revenues of $100,000,000 and its current accounts receivable is $7,500,000. What is its days in patient accounts receivable, and what does this gure mean? 5. Compute the ratios and metrics given the following information on Hospital XYZ: Current assets: $40,000,000 Total assets: $100,000,000 Current liabilities: $12,000,000 Total liabilities: $45,000,000 Annual revenue: $435,000,000 Total expenses: $425,000,000 Operating income: $10,000,000 Inventories: $5,000,000 Depreciation: $2,000,000 a. Current ratio b. Working capital c. Days of working capital d. Quick ratio e. Average pay period f. Return on assets g. Return on equity 6. Given the following gures, compute the adjusted discharges for Hospital XYZ. Total inpatient discharges: 11,250 Gross outpatient revenue: $1,000,000 Inpatient gross revenue per discharge: $14,000 Time Value of Money 7. Hospital XYZ currently has a contract with an HMO that agrees to pay it $5,000,000 at the end of each of the next ve years. The hospital has the ability to opt out now to renegotiate, and the new deal has a predicted present value of $21,500,000. Assuming the hospital has a discount rate of 7 percent and the deals dier only in payment structure, what is the present value of the current contract, and which contract should Hospital XYZ choose? 8. Dr. Sanders has just performed a back surgery on his uninsured patient, John, and has billed John for $10,000. They have agreed to set up a nancing plan with John paying $2,000 up front and the rest in two years. John will be paying 10 percent annual interest on the unpaid portion of his bill. What amount will be due at the end of the second year? 9. In employment contract negotiations between Dr. Sanders and Hospital XYZ, Dr. Sanders has requested a college fund for his son worth $150,000 12 years from now. The hospital prefers to pay him a discounted value now as a signing bonus for this. Ignoring taxes and assuming Dr. Sanders is condent he can invest at an interest rate of 6.5 percent annually, what would the signing bonus need to be to satisfy Dr. Sanders? Break-Even/Crossover Analysis 10. What is the marginal cost for a surgeon seeing 250 patients annually with xed costs of $30,000 per year and total costs of $115,000 per year? 11. Assuming Hospital XYZ has an annual xed cost of $750,000 and each patient day costs $150 while bringing in $275 in revenue, how may patient days does the hospital need to break even each year? 12. Hospital XYZ is in the market for a new MRI machine and is considering two dierent products. Machine A costs $20,000 up front and $200 per use. Machine B costs $14,500 up front and $265 per use. At what point do these two machines cross over? Which machine should they choose if their estimated number of uses is 15 over this point? Which machine should they choose if their estimate is 4 under