Complete Case Study #1 River Community Hospital Assessing Hospital Performance in the Cases in Healthcare Finance book. Use the data in the case study below:

1. Examine the hospitals statement of cash flows. What information do they provide regarding the hospitals sources and uses of cash over the past two years?

2. 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 is sold and total assets decreases by $2.0 million. Net income would not be affected and the Board wants to maintain the 2017 debt ratio.

b) Debt is substituted for equity and the debt ratio increases to 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 not change.

c) LEAN management is implemented and total expenses decrease by $0.5 million. Total revenue, total assets, and total liabilities & net assets would not change.

d) Whatever strategy Melissa chooses, she is under pressure from the Board to increase return on equity to at least 10 percent. What total margin would be needed to achieve the 10% ROE, holding everything else constant?

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

4. Select five financial and five operating KPIs to be presented at future board meetings.

5. 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.

a) Are the companys revenues tied to one key customer?

b) To what extent are the companys revenues tied to one key product?

c) To what extent does the company rely on a single supplier? (Hint: Physicians and nurses are key suppliers of labor to a hospital.)

d) What about the competition?

e) What are the companys future prospects?

f) How does the legal and regulatory environment affect the company?

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

Data Tables:

162 Cases in Healthcare Finance 2015 2016 2017 EXHIBIT 24.1 River Community Hospital Statements of Operations (in Millions of Dollars) Revenues Net patient service revenue Other revenue Total revenues $28.796 _1.237 $30.033 $30.576 1.853 $32.429 $34.582 1.834 $36.416 Expenses Salaries and wages Fringe benefits Interest expense Depreciation Medical supplies and drugs Professional liability Other Total expenses $12.245 1.830 1.181 2.350 0.622 0.140 9.036 $27.404 $12.468 2.408 1.598 2.658 0.655 0.201 10.339 $30.327 $13.994 2.568 1.776 2.778 0.776 0.218 11.848 $33.958 Net Income $ 2.629 $ 2.102 $ 2458 Case 24: River Community Hospital (A) 163 2015 2016 2017 EXHIBIT 24.2 River Community Hospital: Balance Sheets (in Millions of Dollars) Assets Cash and investments Accounts receivable (net) Inventories Other current assets Total current assets Gross plant and equipment Accumulated depreciation Net plant and equipment Total assets $ 4.673 4.359 0.432 0.308 $ 9.772 $47.786 11.820 $35.966 $45.738 $ 5.069 5.674 0.523 0.703 $11.969 $55.333 14.338 $40.995 $52.964 $ 2.795 7.413 0.601 0.923 $11.732 $59.552 17.009 $42.543 $54.275 Liabilities and Net Assets Accounts payable Accrued expenses Current portion of long-term debt Total current liabilities Long-term debt Net assets Total liabilities and net assets $ 0.928 1.460 0.110 $ 2.498 15.673 27.567 $45.738 $ 1.253 1.503 1.341 $ 4.097 19.222 29.645 $ 1.760 1.176 1.465 $ 4.401 17.795 32.079 $54.275 $52.964 164 Cases in Healthcare Finance 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) 10.078) (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 Case 24: River Community Hospital (A) 165 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 $32.65 $29.148 9.130 $38.278 $33.216 11.912 $45 128 Contractual allowances Bad debt and charity care Total revenue deductions $ 1.729 _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 Operating Expenses Inpatient service Outpatient service Total operating expenses $20.573 6.831 $27.404 $22.229 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 2,860 8,318 32,878 210 210 Medicare discharges Total discharges Outpatient visits Licensed beds Staffed beds Patient days All-payer case mix index Full-time equivalents 2,741 8,576 36,796 210 178 40,062 1.3161 619.3 197 193 44.085 1.2869 610.8 42,434 1.2993 625.8 156 Cases in Healthcale Finance +Quartile Median -Quartile EXHIBIT 24.6 J17 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 Cash flow coverage 62.90% 127.00% 4.29 5.32 48.40% 64.70% 2.23 3.22 35.20% 26.90% 1.14 1.76 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 turnover 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 "Deductions/Gross patient service revenue "Total revenues/Current assets Current liabilities/Total expenses - Depreciation expensel/365) Nores 1 The industry data shown here are for illustrative purposes only and hence should not be used outside this case. 2. The upper quartile is based on the higher numerical value for the ratio and the lower quartile on the lower numerical value, regardless of whether a high value is good or bad. The interpretation is left to the analyst. Case 24: River Community Hospital (A) 167 +Quartile 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 visita Medicare revenue percentage Sad 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 census 67.12% 173.23 58.10% 14473 47,84% 114.39 Length-of-Stay Indicators Average length of stay Idays) Adjusted length of stay 5.41 6.80 6.48 6.07 5.36 4,52 Intensity-of-Service Indicators Expense per discharge Adjusted expense per discharge" Expense per visit All-payer case mix index $ 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 bede Laborhours per visit 4.59 4.68 4.15 5.84 3.77 8.66 Unit Cost Indicators Salary per FTES Employee benefits percentaget Liability expense per discharge $24,447 19.58% $ 80.94 $22,517 17,04% $ 42.05 $20,347 15.18% $ 18.31 *Net inpatient revenue - Inpatient expenses/Total discharges PiNet outpatient revenue - Outpatient expenses/Total visits Net inpatient revenue/Total discharges continued Cases in Healthcare Finance In addition to the data in the exhibits, the following information was extracted from the notes section of River's 2017 Annual Report. 1. A significant portion of River's net patient service revenue ens 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 24.4. River bas 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 $0.543 million in 2016 and 50.588 million in 2017. 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. 3. 162 Cases in Healthcare Finance 2015 2016 2017 EXHIBIT 24.1 River Community Hospital Statements of Operations (in Millions of Dollars) Revenues Net patient service revenue Other revenue Total revenues $28.796 _1.237 $30.033 $30.576 1.853 $32.429 $34.582 1.834 $36.416 Expenses Salaries and wages Fringe benefits Interest expense Depreciation Medical supplies and drugs Professional liability Other Total expenses $12.245 1.830 1.181 2.350 0.622 0.140 9.036 $27.404 $12.468 2.408 1.598 2.658 0.655 0.201 10.339 $30.327 $13.994 2.568 1.776 2.778 0.776 0.218 11.848 $33.958 Net Income $ 2.629 $ 2.102 $ 2458 Case 24: River Community Hospital (A) 163 2015 2016 2017 EXHIBIT 24.2 River Community Hospital: Balance Sheets (in Millions of Dollars) Assets Cash and investments Accounts receivable (net) Inventories Other current assets Total current assets Gross plant and equipment Accumulated depreciation Net plant and equipment Total assets $ 4.673 4.359 0.432 0.308 $ 9.772 $47.786 11.820 $35.966 $45.738 $ 5.069 5.674 0.523 0.703 $11.969 $55.333 14.338 $40.995 $52.964 $ 2.795 7.413 0.601 0.923 $11.732 $59.552 17.009 $42.543 $54.275 Liabilities and Net Assets Accounts payable Accrued expenses Current portion of long-term debt Total current liabilities Long-term debt Net assets Total liabilities and net assets $ 0.928 1.460 0.110 $ 2.498 15.673 27.567 $45.738 $ 1.253 1.503 1.341 $ 4.097 19.222 29.645 $ 1.760 1.176 1.465 $ 4.401 17.795 32.079 $54.275 $52.964 164 Cases in Healthcare Finance 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) 10.078) (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 Case 24: River Community Hospital (A) 165 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 $32.65 $29.148 9.130 $38.278 $33.216 11.912 $45 128 Contractual allowances Bad debt and charity care Total revenue deductions $ 1.729 _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 Operating Expenses Inpatient service Outpatient service Total operating expenses $20.573 6.831 $27.404 $22.229 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 2,860 8,318 32,878 210 210 Medicare discharges Total discharges Outpatient visits Licensed beds Staffed beds Patient days All-payer case mix index Full-time equivalents 2,741 8,576 36,796 210 178 40,062 1.3161 619.3 197 193 44.085 1.2869 610.8 42,434 1.2993 625.8 156 Cases in Healthcale Finance +Quartile Median -Quartile EXHIBIT 24.6 J17 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 Cash flow coverage 62.90% 127.00% 4.29 5.32 48.40% 64.70% 2.23 3.22 35.20% 26.90% 1.14 1.76 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 turnover 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 "Deductions/Gross patient service revenue "Total revenues/Current assets Current liabilities/Total expenses - Depreciation expensel/365) Nores 1 The industry data shown here are for illustrative purposes only and hence should not be used outside this case. 2. The upper quartile is based on the higher numerical value for the ratio and the lower quartile on the lower numerical value, regardless of whether a high value is good or bad. The interpretation is left to the analyst. Case 24: River Community Hospital (A) 167 +Quartile 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 visita Medicare revenue percentage Sad 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 census 67.12% 173.23 58.10% 14473 47,84% 114.39 Length-of-Stay Indicators Average length of stay Idays) Adjusted length of stay 5.41 6.80 6.48 6.07 5.36 4,52 Intensity-of-Service Indicators Expense per discharge Adjusted expense per discharge" Expense per visit All-payer case mix index $ 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 bede Laborhours per visit 4.59 4.68 4.15 5.84 3.77 8.66 Unit Cost Indicators Salary per FTES Employee benefits percentaget Liability expense per discharge $24,447 19.58% $ 80.94 $22,517 17,04% $ 42.05 $20,347 15.18% $ 18.31 *Net inpatient revenue - Inpatient expenses/Total discharges PiNet outpatient revenue - Outpatient expenses/Total visits Net inpatient revenue/Total discharges continued Cases in Healthcare Finance In addition to the data in the exhibits, the following information was extracted from the notes section of River's 2017 Annual Report. 1. A significant portion of River's net patient service revenue ens 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 24.4. River bas 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 $0.543 million in 2016 and 50.588 million in 2017. 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. 3