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COMMONWEALTH 2 HEALTH PLANS ASSESSING HMO PERFORMANCE COMMONWEALTH HEALTH PLANS is one of Virginia's largest man- aged care organizations (MCOS). In fact, it is the largest of the state's not- for-profit MCOs. It offers prepaid health coverage to more than 500,000 members in 17 counties, including the following major cities: Rich- mond, Norfolk, Virginia Beach, Arlington, Alexandria, and Roanoke. Commonwealth's various products include commercial health maintenance organizations (HMOS), Medicare HMOS (Medicare Advantage plans), preferred provider organizations (PPOS), and point- of-service (POS) plans. These plans are all designed to meet the needs of a wide segment of Virginia's population of approximately 8 million. The revenue breakdown of plan types is as follows: Plan Type Percent of Revenue Commercial HM0 48 Medicare HMO 39 PPO 10 POS Commonwealth was the first managed care organization in Virginia to seek and receive accreditation from the National Committee for Quality Assurance (NCQA), and each of its component plans has been rated as excellent, the highest accreditation level. The NCOA judges a 13 HAP, 2014. Reproduction without permission is prohibited. 14 Cases in Healthcare Finance health plan on its performance in three areas: clinical performance (based on HEDIS Healthcare Effectiveness Data and Information Set] results), member satisfaction (based on CAHPS [Consumer Assess- ment of Healthcare Providers and Systems] results), and a review of key structures and processes. HEDIS and CAHPS scores together account for about 40 percent of the assessment for HMOS, with performance against structure and process standards accounting for the remaining 60 percent. All three areas are accurate overall assessment of the quality of a health plan. (For more information on the NCQA, visit its website at www.ncqa.org.) A summary of Commonwealth's 2012 and 2013 HMO plan finan- cial data (including both commercial and Medicare) is presented in Exhibit 2.1, while Exhibit 2.2 contains a summary of operating and enrollment data. To help in analyzing Commonwealth's performance its managers have classified the following four Virginia HMOs as "pri- mary competitors." important, and together they give an Number of 2013 Total 2013 Total HMO Counties Served Enrollment Assets (000s) WellLife 23 516,858 $408,707 Signet Healthcare 15 360.252 178,662 Proxima 15 247109 144,982 Sparta 28 205,296 103.504 These plans have the geographic coverage and financial resources to be prominent players in the Virginia managed care industry. Fur- thermore, the primary competitors are operating in the same service areas and have a similar product mix as Commonwealth and hence are potential threats to its future success. In addition to comparisons with national data, all internal analyses that use benchmarking compare Commonwealth's performance with the state average as well as with the primary competitor list. Note, however, that not all relevant perfor- mance measures have a complete set of comparative data available Exhibit 2.3 contains selected financial and operating ratios for Com- monwealth's primary competitors as well as the means and medians for all Virginia HMOS. Exhibit 2.4 contains selected national data, in which all comparative data are for HMO plans only. Exhibit 2.5 contains selected ratio definitions. (For a better understanding of the .. Case 2: Commonwealth Health Plans 15 types of comparative data available for managed care plans, see the HealthLeaders-InterStudy website at www.hl-isy.com.) Assume that you have just started an administrative residency at Commonwealth Health Plans. On your first day at the organization, Robert Osborne, the chief executive officer, stated that the best way to get to know the financial and operating condition of any business is to do a brief financial statement and operating indicator analysis; thus, he assigned you the task. Although you agree that this is a great way to learn more about Commonwealth and its competitors' HMO plans, you wonder whether he has any hidden motives. Perhaps the company is having financial problems with these plans and he thinks that you can spot them, or perhaps he just wants to test your analytical skills In any event, he has already scheduled a financial and operating performance analysis presentation for the next executive committee meeting as a way for you to demonstrate your skills to Common- wealth's senior managers. In preparing for the meeting, you called Amity Wallace, the previous administrative resident, to get some hints on how to prepare for your presentation to the executive committee. Amity just left Commonwealth for a great job with Humana. Her advice was to do a standard financial statement analysis, including statement of cash flows analysis, Du Pont analysis, and ratio and oper- ating indicator analyses. Your first impression was that this task should be a "piece of cake," as you had performed a similar analysis for a hospital during your intern- ship. However, as you began the task, it became apparent that the ratios used and their interpretations differ across industries; that is, the ratios that are critical to identifying the financial condition of a hos- pital are not necessarily the same ratios that are critical to a managed care plan. In addition, many of the ratios that are relevant to both hos- pitals and managed care plans have values that differ substantially To ilustrate, consider the medical loss ratio (defined as medical expenses divided by premium revenue), which measures the propor- tion of premium revenue that is spent on providing member health- care services. Clearly, this ratio is not applicable to providers such as hospitals. Interestingly, healthcare reform (the Affordable Care Act) mandates that large group insurance plans spend at least 85 percent of premiums on medical services. If they fail to meet this requirement, insurers must pay a rebate to customers. (Does Commonwealth meet this requirement? Also, what do think of the choice of termin the medical loss ratio?) de gy for Cases in Healthcare Finance 16 To help the executive committee interpret your presentation, you plan to point out key differences between your analysis for a health plan and that for a hospital as they emerge. In addition, you know that it is more important to identify key areas of concern and to recommend courses of action than it is to merely go over the numbers Case 2: Commonwealth Health Plans 17 EXHIBIT 2.1 2012 2013 Commonwealth Health Plans: HMO Plan Statements of Operations Financial Data Premium revenue $313.7 $357,6 (millions of dollars) Interest income 2.4 3.5 Total revenues $316.1 $361.1 Operating expenses: Medical costs $263.0 $291.8 Selling and administrative 36,8 43.6 Depreciation 4.7 5.0 Total operating expenses $304.5 $340.4 $11.6 $ 20.7 Net income Balance Sheets $ 27.2 Cash 37.2 Marketable securities 42.7 60.9 Premiums receivable 3.7 7.4 $ 83.6 Total current assets 95.5 Net fixed assets 30.0 31.7 $113.6 Total assets $127.2 Medical costs payable 44.8 48.7 Accounts payable/accruals 15.4 17.3 $ 66.0 Total current liabilities 60.2 Long-term debt 17.1 4.2 Net assets (equity) 36.3 57.0 Total liabilities and net assets $113.6 $127.2 Other Data Medical loss ratio 83.8% 81.6% Administrative cost ratio 13.2% 13.6% $170.9 $205.6 Total commercial premium revenue Total Medicare revenue $142.8 $152.0 Total physician services expense $125.6 $127.1 80.8 Total inpatient expense 90.1 $ 56.6 $ 74.6 Total other medical expense Cases in Healthcare Finance 18 EXHIBIT 2.2 2013 2012 Commonwealth Health Plans: HMO $12790 Commercial premium revenue PMPM $12782 Plan Operating and $449,37 $43723 Medicare revenue PMPM Enrollment Data Commercial patient days per 1,000 enrollees 302.9 266.4 (millions of dollars) 1,418.1 Medicare patient days per 1,000 enrollees 1,622.4 Commercial member-months 1,607036 1,337036 594,381 622.749 Commercial physician encounters Commercial inpatient days 43,661 39,763 347643 Medicare member-months 317,778 149.622 185.283 Medicare physician encounters PMPM: per member per month EXHIBIT 2.3 2013 2012 Selected State HMO Industry Financial and Operating Data (millions of dollars) Total Margin 4.8% 5.8% WellLife 3.0 3.2 Signet Healthcare 9.1 (0.7) Proxima 10.5 9.1 Sparta 3.8 (3.9) State average State median 4.8 4,7 Percent Administrative Expense 11.5% 12.1% WellLife 12.2 13.4 Signet Healthcare 16,4 13.6 Proxima 23.9 26.8 Sparta 17.4 15.5 State average 14.8 15.7 State median Percent Inpatient Expense 32.2% 30.3% WellLife 22,8 22.4 Signet Healthcare 21.2 23.0 Proxima 18.8 18.2 Sparta 25.2 23.3 State average 24.3 23.6 State median Case 2: Commonwealth Health Plans 19 EXHIBIT 2.3 2012 2013 (continued) Percent Physician Expense Selected State HMO Industry Financial and Operating Data (millions of dollars WellLife 54.1% 56.9% Signet Healthcare 31.3 30.3 Proxima 22.7 24.9 Snarta 12.8 18.6 eds average 28.8 31.3 State median 31.1 31.6 Percent Other Medical Expense WellLife 0.1% 0.1% Signet Healthcare Proxima 8.9 78 30.2 27.5 Sparta State average 45.7 35.0 14.6 12.5 State median 10.2 8,9 Commercial Premium Revenue PMPM WellLife $108.68 $110.19 Signet Heaithcare 39.86 2750 Proxima 120.68 124.27 Sparta 88.41 95.06 State average 101.17 102.53 State median 108.32 108.95 Medicare Revenue PMPM WellLife $406.57 $421.57 Signet Healthcare N/A N/A Proxima N/A N/A Sparta N/A N/A State average 365.12 376.04 430.57 State median 426.18 Commercial Inpatient Days per 1,000 Enrollees 245.4 246,0 WellLife Signet Healthcare 258.4 248.8 251.8 259.2 Proxima 198.2 248.9 Sparta State average 278.0 2370 248.8 State median 279.1 20 Cases in Healthcare Finance EXHIBIT 2.3 2013 2012 (continued) Selected State HMO Medicare Inpatient Days per 1,000 Enrollees Industry Financial and WellLife 1,388.4 1,323.8 Operating Data (millions of dollars) 1,188.7 Signet Healthcare 1,165.2 Proxima 1.382.2 1,518.8 Sparta State average 1,623.8 1.566.9 1,375.5 1,432. State median 1.350.6 1,380.5 Commercial Physician Encounters per Member 3.6 WellLife 2 2 Signet Healthcare 1.5 1.4 2.6 Proxima 2 7 Sparta 3.5 3.6 3.8 State average 3.8 3 7 3.9 State median Medicare Physician Encounters per Member WelLife 9.8 9.6 6.6 6.9 Signet Healthcare 10 10,0 Proxima 113 Sparta 11.2 9. 9.1 State average 8.6 8.9 State median Note: The Virgin the HMO for illustrative purposes only, These data should not be used to conduct actual financial analyses Case 2: Commonwealth Health Plans EXHIBIT 2,4 Selected 2013 National HMO Industry Financial and Operating Data Average copay per office visit Average copay per hospitalization 36 Average copay per pharmacy prescription Medical Loss Ratio Upper quartile 89.0% Median 84.9 Lower quartile 80.0 Administrative Cost Ratio Upper quartile 14.4% Median 12.0 Lower quartile 9.0 Operating Margin Upper quartile 5.0% Median 2.5 Lower quartile 1.1 Total Margin Upper quartile 5.5% Median 2.9 1.5 Lower quartile Return on Assets (ROA) Upper quartile 16.5% Median 11.3 Lower quartile 4,8 Return on Equity (ROE) Upper quartile 50.2% Median 31.4 Lower quartile 18.2 Current Ratio Upper quartile 1,29 Median 0.95 Lower quartile 0.49 Days Cash on Hand Upper quartile 32.7 Median 10.3 Lower quartile 0.8 27 Cases in Healthcare Finance EXHIBIT 2,4 Current Asset Turnover (continued) Selected 2013 National HMO Industry Financial and Operating Data Upper quartile 14.1 Median 6.4 Lower quartile 3.7 Total Asset Turnover Upper quartile 4.1 Median 3.1 Lower quartile 2.2 Days Premiums Receivable Upper quartile 14.0 Median 8.9 Lower quartile 7.0 Debt Ratio Upper quartile 81.3% Median 68 4 Lower quartile 59.7 Note: The netional data for the HMO industry contained in this exhibit are for illustrative purposes only. These data should not be used to corduct actual financiai analvses Case 2: Commonwealth Health Plans 23 EXHIBIT 2.5 Medical Loss Ratio Selected Ratio Medical expenses. Definitions Premium revenue Administrative Cost Ratio Selling and administrative expenses Depreciation Premium revenue Operating Margin Net income-Interest income Premium revenue Percent Administrative Expense Selling and administrative expense Total operating expenses Percent Inpatient Expense Inpatient expense Total operating expenses Percent Physician Expense Physician services expense Total operating expenses Percent Other Medical Expense Other medical expense Total operating expenses Case #2: COMMONWEALTH HEALTH PLANS Assessing HMO Performance 1. Create and interpret Commonwealth's statement of cash flows for 2013. What information does it provide regarding the HMO's Sources and uses of cash over the past year? 2. Use the Du Pont equation to obtain a rough feel for Commonwealth's financial condition as compared to national averages. What are your conclusions? 3. Conduct a financial statement and operating indicator analysis and interpret the resulting data. Use both national and state competitor data set of comparative data.) the analysis. (Note that all ratios do not have a complete 4. Give some examples of ratios that have great significance when conducting a hospital financial performance analysis, yet have limited (or no) significance for Commonwealth, and vice versa. 5. List Commonwealth's financial and operating strengths and weaknesses as identified by your analyses Questions 2 and 3. 6. On the basis of the limited amount of information provided in the case, what are your recommendations to the board to correct any weaknesses noted? 7. What additional information would be useful in the 8. This analysis focused on Du Pont and ratio analysis. What are some other techniques that can be used financial statement analysis? . What are the major problems that one encounters in performing financial and operating indicator analyses? 10. In your opinion, what are three key learning points from this case? COMMONWEALTH 2 HEALTH PLANS ASSESSING HMO PERFORMANCE COMMONWEALTH HEALTH PLANS is one of Virginia's largest man- aged care organizations (MCOS). In fact, it is the largest of the state's not- for-profit MCOs. It offers prepaid health coverage to more than 500,000 members in 17 counties, including the following major cities: Rich- mond, Norfolk, Virginia Beach, Arlington, Alexandria, and Roanoke. Commonwealth's various products include commercial health maintenance organizations (HMOS), Medicare HMOS (Medicare Advantage plans), preferred provider organizations (PPOS), and point- of-service (POS) plans. These plans are all designed to meet the needs of a wide segment of Virginia's population of approximately 8 million. The revenue breakdown of plan types is as follows: Plan Type Percent of Revenue Commercial HM0 48 Medicare HMO 39 PPO 10 POS Commonwealth was the first managed care organization in Virginia to seek and receive accreditation from the National Committee for Quality Assurance (NCQA), and each of its component plans has been rated as excellent, the highest accreditation level. The NCOA judges a 13 HAP, 2014. Reproduction without permission is prohibited. 14 Cases in Healthcare Finance health plan on its performance in three areas: clinical performance (based on HEDIS Healthcare Effectiveness Data and Information Set] results), member satisfaction (based on CAHPS [Consumer Assess- ment of Healthcare Providers and Systems] results), and a review of key structures and processes. HEDIS and CAHPS scores together account for about 40 percent of the assessment for HMOS, with performance against structure and process standards accounting for the remaining 60 percent. All three areas are accurate overall assessment of the quality of a health plan. (For more information on the NCQA, visit its website at www.ncqa.org.) A summary of Commonwealth's 2012 and 2013 HMO plan finan- cial data (including both commercial and Medicare) is presented in Exhibit 2.1, while Exhibit 2.2 contains a summary of operating and enrollment data. To help in analyzing Commonwealth's performance its managers have classified the following four Virginia HMOs as "pri- mary competitors." important, and together they give an Number of 2013 Total 2013 Total HMO Counties Served Enrollment Assets (000s) WellLife 23 516,858 $408,707 Signet Healthcare 15 360.252 178,662 Proxima 15 247109 144,982 Sparta 28 205,296 103.504 These plans have the geographic coverage and financial resources to be prominent players in the Virginia managed care industry. Fur- thermore, the primary competitors are operating in the same service areas and have a similar product mix as Commonwealth and hence are potential threats to its future success. In addition to comparisons with national data, all internal analyses that use benchmarking compare Commonwealth's performance with the state average as well as with the primary competitor list. Note, however, that not all relevant perfor- mance measures have a complete set of comparative data available Exhibit 2.3 contains selected financial and operating ratios for Com- monwealth's primary competitors as well as the means and medians for all Virginia HMOS. Exhibit 2.4 contains selected national data, in which all comparative data are for HMO plans only. Exhibit 2.5 contains selected ratio definitions. (For a better understanding of the .. Case 2: Commonwealth Health Plans 15 types of comparative data available for managed care plans, see the HealthLeaders-InterStudy website at www.hl-isy.com.) Assume that you have just started an administrative residency at Commonwealth Health Plans. On your first day at the organization, Robert Osborne, the chief executive officer, stated that the best way to get to know the financial and operating condition of any business is to do a brief financial statement and operating indicator analysis; thus, he assigned you the task. Although you agree that this is a great way to learn more about Commonwealth and its competitors' HMO plans, you wonder whether he has any hidden motives. Perhaps the company is having financial problems with these plans and he thinks that you can spot them, or perhaps he just wants to test your analytical skills In any event, he has already scheduled a financial and operating performance analysis presentation for the next executive committee meeting as a way for you to demonstrate your skills to Common- wealth's senior managers. In preparing for the meeting, you called Amity Wallace, the previous administrative resident, to get some hints on how to prepare for your presentation to the executive committee. Amity just left Commonwealth for a great job with Humana. Her advice was to do a standard financial statement analysis, including statement of cash flows analysis, Du Pont analysis, and ratio and oper- ating indicator analyses. Your first impression was that this task should be a "piece of cake," as you had performed a similar analysis for a hospital during your intern- ship. However, as you began the task, it became apparent that the ratios used and their interpretations differ across industries; that is, the ratios that are critical to identifying the financial condition of a hos- pital are not necessarily the same ratios that are critical to a managed care plan. In addition, many of the ratios that are relevant to both hos- pitals and managed care plans have values that differ substantially To ilustrate, consider the medical loss ratio (defined as medical expenses divided by premium revenue), which measures the propor- tion of premium revenue that is spent on providing member health- care services. Clearly, this ratio is not applicable to providers such as hospitals. Interestingly, healthcare reform (the Affordable Care Act) mandates that large group insurance plans spend at least 85 percent of premiums on medical services. If they fail to meet this requirement, insurers must pay a rebate to customers. (Does Commonwealth meet this requirement? Also, what do think of the choice of termin the medical loss ratio?) de gy for Cases in Healthcare Finance 16 To help the executive committee interpret your presentation, you plan to point out key differences between your analysis for a health plan and that for a hospital as they emerge. In addition, you know that it is more important to identify key areas of concern and to recommend courses of action than it is to merely go over the numbers Case 2: Commonwealth Health Plans 17 EXHIBIT 2.1 2012 2013 Commonwealth Health Plans: HMO Plan Statements of Operations Financial Data Premium revenue $313.7 $357,6 (millions of dollars) Interest income 2.4 3.5 Total revenues $316.1 $361.1 Operating expenses: Medical costs $263.0 $291.8 Selling and administrative 36,8 43.6 Depreciation 4.7 5.0 Total operating expenses $304.5 $340.4 $11.6 $ 20.7 Net income Balance Sheets $ 27.2 Cash 37.2 Marketable securities 42.7 60.9 Premiums receivable 3.7 7.4 $ 83.6 Total current assets 95.5 Net fixed assets 30.0 31.7 $113.6 Total assets $127.2 Medical costs payable 44.8 48.7 Accounts payable/accruals 15.4 17.3 $ 66.0 Total current liabilities 60.2 Long-term debt 17.1 4.2 Net assets (equity) 36.3 57.0 Total liabilities and net assets $113.6 $127.2 Other Data Medical loss ratio 83.8% 81.6% Administrative cost ratio 13.2% 13.6% $170.9 $205.6 Total commercial premium revenue Total Medicare revenue $142.8 $152.0 Total physician services expense $125.6 $127.1 80.8 Total inpatient expense 90.1 $ 56.6 $ 74.6 Total other medical expense Cases in Healthcare Finance 18 EXHIBIT 2.2 2013 2012 Commonwealth Health Plans: HMO $12790 Commercial premium revenue PMPM $12782 Plan Operating and $449,37 $43723 Medicare revenue PMPM Enrollment Data Commercial patient days per 1,000 enrollees 302.9 266.4 (millions of dollars) 1,418.1 Medicare patient days per 1,000 enrollees 1,622.4 Commercial member-months 1,607036 1,337036 594,381 622.749 Commercial physician encounters Commercial inpatient days 43,661 39,763 347643 Medicare member-months 317,778 149.622 185.283 Medicare physician encounters PMPM: per member per month EXHIBIT 2.3 2013 2012 Selected State HMO Industry Financial and Operating Data (millions of dollars) Total Margin 4.8% 5.8% WellLife 3.0 3.2 Signet Healthcare 9.1 (0.7) Proxima 10.5 9.1 Sparta 3.8 (3.9) State average State median 4.8 4,7 Percent Administrative Expense 11.5% 12.1% WellLife 12.2 13.4 Signet Healthcare 16,4 13.6 Proxima 23.9 26.8 Sparta 17.4 15.5 State average 14.8 15.7 State median Percent Inpatient Expense 32.2% 30.3% WellLife 22,8 22.4 Signet Healthcare 21.2 23.0 Proxima 18.8 18.2 Sparta 25.2 23.3 State average 24.3 23.6 State median Case 2: Commonwealth Health Plans 19 EXHIBIT 2.3 2012 2013 (continued) Percent Physician Expense Selected State HMO Industry Financial and Operating Data (millions of dollars WellLife 54.1% 56.9% Signet Healthcare 31.3 30.3 Proxima 22.7 24.9 Snarta 12.8 18.6 eds average 28.8 31.3 State median 31.1 31.6 Percent Other Medical Expense WellLife 0.1% 0.1% Signet Healthcare Proxima 8.9 78 30.2 27.5 Sparta State average 45.7 35.0 14.6 12.5 State median 10.2 8,9 Commercial Premium Revenue PMPM WellLife $108.68 $110.19 Signet Heaithcare 39.86 2750 Proxima 120.68 124.27 Sparta 88.41 95.06 State average 101.17 102.53 State median 108.32 108.95 Medicare Revenue PMPM WellLife $406.57 $421.57 Signet Healthcare N/A N/A Proxima N/A N/A Sparta N/A N/A State average 365.12 376.04 430.57 State median 426.18 Commercial Inpatient Days per 1,000 Enrollees 245.4 246,0 WellLife Signet Healthcare 258.4 248.8 251.8 259.2 Proxima 198.2 248.9 Sparta State average 278.0 2370 248.8 State median 279.1 20 Cases in Healthcare Finance EXHIBIT 2.3 2013 2012 (continued) Selected State HMO Medicare Inpatient Days per 1,000 Enrollees Industry Financial and WellLife 1,388.4 1,323.8 Operating Data (millions of dollars) 1,188.7 Signet Healthcare 1,165.2 Proxima 1.382.2 1,518.8 Sparta State average 1,623.8 1.566.9 1,375.5 1,432. State median 1.350.6 1,380.5 Commercial Physician Encounters per Member 3.6 WellLife 2 2 Signet Healthcare 1.5 1.4 2.6 Proxima 2 7 Sparta 3.5 3.6 3.8 State average 3.8 3 7 3.9 State median Medicare Physician Encounters per Member WelLife 9.8 9.6 6.6 6.9 Signet Healthcare 10 10,0 Proxima 113 Sparta 11.2 9. 9.1 State average 8.6 8.9 State median Note: The Virgin the HMO for illustrative purposes only, These data should not be used to conduct actual financial analyses Case 2: Commonwealth Health Plans EXHIBIT 2,4 Selected 2013 National HMO Industry Financial and Operating Data Average copay per office visit Average copay per hospitalization 36 Average copay per pharmacy prescription Medical Loss Ratio Upper quartile 89.0% Median 84.9 Lower quartile 80.0 Administrative Cost Ratio Upper quartile 14.4% Median 12.0 Lower quartile 9.0 Operating Margin Upper quartile 5.0% Median 2.5 Lower quartile 1.1 Total Margin Upper quartile 5.5% Median 2.9 1.5 Lower quartile Return on Assets (ROA) Upper quartile 16.5% Median 11.3 Lower quartile 4,8 Return on Equity (ROE) Upper quartile 50.2% Median 31.4 Lower quartile 18.2 Current Ratio Upper quartile 1,29 Median 0.95 Lower quartile 0.49 Days Cash on Hand Upper quartile 32.7 Median 10.3 Lower quartile 0.8 27 Cases in Healthcare Finance EXHIBIT 2,4 Current Asset Turnover (continued) Selected 2013 National HMO Industry Financial and Operating Data Upper quartile 14.1 Median 6.4 Lower quartile 3.7 Total Asset Turnover Upper quartile 4.1 Median 3.1 Lower quartile 2.2 Days Premiums Receivable Upper quartile 14.0 Median 8.9 Lower quartile 7.0 Debt Ratio Upper quartile 81.3% Median 68 4 Lower quartile 59.7 Note: The netional data for the HMO industry contained in this exhibit are for illustrative purposes only. These data should not be used to corduct actual financiai analvses Case 2: Commonwealth Health Plans 23 EXHIBIT 2.5 Medical Loss Ratio Selected Ratio Medical expenses. Definitions Premium revenue Administrative Cost Ratio Selling and administrative expenses Depreciation Premium revenue Operating Margin Net income-Interest income Premium revenue Percent Administrative Expense Selling and administrative expense Total operating expenses Percent Inpatient Expense Inpatient expense Total operating expenses Percent Physician Expense Physician services expense Total operating expenses Percent Other Medical Expense Other medical expense Total operating expenses Case #2: COMMONWEALTH HEALTH PLANS Assessing HMO Performance 1. Create and interpret Commonwealth's statement of cash flows for 2013. What information does it provide regarding the HMO's Sources and uses of cash over the past year? 2. Use the Du Pont equation to obtain a rough feel for Commonwealth's financial condition as compared to national averages. What are your conclusions? 3. Conduct a financial statement and operating indicator analysis and interpret the resulting data. Use both national and state competitor data set of comparative data.) the analysis. (Note that all ratios do not have a complete 4. Give some examples of ratios that have great significance when conducting a hospital financial performance analysis, yet have limited (or no) significance for Commonwealth, and vice versa. 5. List Commonwealth's financial and operating strengths and weaknesses as identified by your analyses Questions 2 and 3. 6. On the basis of the limited amount of information provided in the case, what are your recommendations to the board to correct any weaknesses noted? 7. What additional information would be useful in the 8. This analysis focused on Du Pont and ratio analysis. What are some other techniques that can be used financial statement analysis? . What are the major problems that one encounters in performing financial and operating indicator analyses? 10. In your opinion, what are three key learning points from this case