Operating Margins

Community Hospital Operating Margins

1.Operating margins in your hospital have been consistently below national norms for the past 3 years. Discuss the factors that might have created this situation and the ways in which you might determine specific causes.

2.Your firm reported net income of $5,000,000, but the change in equity was only $3,000,000. What could account for this difference?

3.Determine the amount of incremental profit that would be realized with a 10% across-the-board rate increase at Thunderbird Hospital. Thunderbird’s present payment composition is 80% fixed fee and 20% charges or discounted charges. Present operating income is defined below: Gross patient revenue$100,000,000less Contractual allowances40,000,000Net patient revenue$60,000,000less Expenses59,000,000Operating income$1,000,000

4. You have been reviewing documentation in your medical records department for the last week and have discovered a potential issue with respect to documentation for MS-DRG 193 (Simple Pneumonia and Pleurisy w MCC) and MS-DRG 194 (Simple Pneumonia and Pleurisy w CC). You have discovered 20 cases that were coded as MS-DRG 194 when in fact these patients did have diagnosis to support the major comorbidity and complication assignment. If the hospital’s base payment rate for a case weight of 1.000 is $5,000, determine the incremental payment the hospital would have received. Assume the case weight for is 1.000 for MS-DRG 194 and 1.4378 for MS-DRG 193.

5. Your firm’s investment portfolio was valued at $100,000,000 at the beginning of the year. Approximately 60% of the portfolio was invested in fixed income securities, primarily U.S. government bonds. The remaining 40% was invested in mutual funds selected by your firm’s portfolio manager. During the year U.S. government bonds yielded 6.0%, and the change in the Standard and Poor’s 500 index was 10.0%. Reported investment income during the year was $6,000,000, including realized gains. The firm also reported an unrealized loss of $1,000,000. Total yield on the portfolio was thus $5,000,000. What value would you have expected given the facts above?

6. Your present length of stay on Medicare patients is 6.3 days for 2,000 Medicare admissions. This value is unadjusted for case-mix effects. You have discovered that a normal length of stay should have been 5.0 days. If this level had been realized, you would have had 2,600 fewer days of care for Medicare patients. You are trying to determine the amount of actual savings that would be realized if the shorter length of stay could be affected. You have been told that a shorter length of stay would affect only direct costs of nursing. Your present direct cost of nursing per day is $300. Some of this cost is considered fixed and would not be changed. If 60% of the nursing cost were considered variable, how much saving would be realized through the length-of-stay reduction?

7. Charles S. Lewis has just been named the CEO of Community Hospital, a 230-bed hospital located in an agricultural community of approximately 150,000. There is one other similar-size hospital in the community. C.S. Lewis has been told by his CFO, J.R.R. Tolkien, that the hospital is in excellent financial condition, but Mr. Lewis is not convinced. He has requested and received summary financial statements presented in Table 11–5.

Table 11-5Summary Financial Information, Community Hospital,* 20X3–20X7 (data in thousands)

	20X3	20X4	20X5	20X6	20X7
Balance sheet accounts
Cash and cash equivalents	$ 34,402	$ 30,444	$ 45,848	$ 46,010	$ 73,711
Patient accounts receivable	39,506	38,878	35,444	38,853	35,647
Inventory	2,133	2,318	2,398	3,197	3,279
Gross fixed assets	187,278	221,548	240,988	256,652	276,458
Accumulated depreciation	73,227	79,523	89,324	101,007	113,851
Net fixed assets	114,051	142,025	151,664	155,645	162,607
Unrestricted capital funds	10,720	13,625	20,160	25,615	17,716
Total assets	$ 238,365	$ 265,784	$ 276,965	$ 287,193	$ 311,140
Current maturities of long-term debt	111	1,794	1,431	2,211	1,143
Current liabilities	$ 37,426	$ 38,492	$ 33,240	$ 31,699	$ 35,862
Long-term debt	2,032	12,821	11,720	9,578	9,570
Net assets	$ 188,743	$ 204,262	$ 222,606	$ 237,022	$ 251,241
Income statement accounts
Net patient revenue	$208,861	$ 225,950	$ 244,976	$ 257,784	$ 282,461
Other revenue	1,569	1,756	1,929	2,170	1,757
Total operating revenue	$ 210,430	$ 227,706	$ 246,905	$ 259,954	$ 284,218
Total operating expenses	$ 203,043	$ 219,768	$ 233,867	$ 254,382	$ 278,629
Operating income	7,387	7,938	13,038	5,572	5,589
plus nonoperating revenue	6,806	7,579	8,971	8,430	8,696
Excess of revenue over expenses	$ 14,193	$ 15,517	$ 22,009	$ 14,002	$ 14,285
Depreciation	$ 10,588	$ 11,161	$ 11,659	$ 12,184	$ 12,524
Interest	115	611	471	419	392

*Note that not all asset and liability items are shown. The totals therefore do not foot to the individual account values.