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HealthFinanceCase-2021.pdf
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HCA 545 Financial Analysis Case
A case based on the work of
Louis Gapenski, PhD
Series B
Grandview Medical Center is a 210-bed, not-for-profit, acute care hospital with a long-
standing reputation for providing quality healthcare services to a growing service area.
Grandview Medical Center competes with three other hospitals in its metropolitan statistical area
(MSA) – two not-for-profit and one for-profit. It is the smallest of the four but has traditionally
been ranked highest in-patient satisfaction polls.
Hospitals are accredited by The Joint Commission, and independent, not-for-profit
organization whose mission is to improve the safety and quality of healthcare provided to the
public through accreditation and related services. Although accreditation is optional for
hospitals, it is generally required to qualify for governmental (Medicare and Medicaid)
reimbursement, and hence the vast majority of hospitals apply for accreditation. Grandview
Medical Center passed its latest Joint Commission survey with “flying colors,” receiving the
Gold Seal of Approval from that accrediting body.
In recent years, competition among the four hospitals in Grandview’s service area has
been keen but friendly. However, a large for-profit chain recently purchased the for-profit
hospital, which has resulted in some anxiety among the managers of the other three hospitals
because of the chain’s reputation for aggressively increasing market share in the markets they
serve.
Relevant financial and operating data for Grandview Medical Center are contained in
Exhibits 1.1 through 1.5, and selected industry data are contained in Exhibits 1.6 and 1.7. In
addition to the data in the exhibits, the following information was extracted from the notes
section of Grandview’s 2018 Annual Report.
1: A significant portion of the hospital’s net patient service revenue was generated by patients
who are covered by Medicare, Medicaid, or other government programs or by various private
plans, including managed care plans, that have contracts with the hospital that specify
discounts from charges. In general, the proportional amount of deductions is similar between
inpatients and outpatients. The gross and net patient service revenue and operating expenses
breakdown for both inpatient and outpatient services is given in Exhibit 1.4.
2: Grandview has a contributory money accumulation (defined contribution) pension plan that
covers substantially all of its employees. Participants can contribute up to 20 percent of earning
to the pension plan. The hospital matches, on a dollar-for-dollar basis, employee contributions
of up to 2 percent of wages and pays 50 cents on the dollar for contribution over 2 percent and
up to 4 percent. Because the plan is defined contribution plan (as opposed to a defined benefit
plan), Grandview has no unfunded pension liabilities. Pension expense was approximately
$0.543 million in 2015 and $0.588 million in 2018.
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3: The hospital 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). Grandview is self-insured for amounts above $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. The hospital is
currently involved in eight suits involving claims of various amounts that could ultimately be
tried before juries. Although it is impossible to determine the exact potential liability in these
claims, management does not believe that the settlement of these cases would have a material
effect on the hospital’s financial position.
Assume that your management consulting group has been hired by Grandview Medical
Center to perform a detailed analysis on the facility and then present your findings to the
hospital board and the organization(when presenting to the entire organization, it cannot be
assumed that everyone is financially savvy as your consulting group and the C-Level executives,
so clear explanations and examples are needed). As your consulting group prepares for the
presentation, several relevant factors come to light. First, in reviewing the policy decisions made
by Grandview’s board of trustees over the past few years, in 2016 it was noted that the board
made the decision to significantly expand the hospital’s outpatient setting, and if Grandview
Medical Center did not offer such services it would lose the patients to other providers.
Second, the board chair has great concern about the decline in profitability over the past
few years and has not been assuaged by the recent modest upturn. Perhaps because she is a CEO
of a local company, the chair focuses on return on equity (ROE) as the key measure of
profitability. She has requested that management develop some strategies to improve profitability
and estimate the impact of the strategies on the hospital’s ROE.
Third, the hospital CEO meet with your group to inquire about also performing an
economic value-added analysis (EVA) on the hospital. The CEO stated that the overall cost of
capital is 4 percent and requested that your group also discuss your findings, implications, and
applicability of the EVA analysis to the hospital with the board and the entire organization.
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EXHIBIT 1.1
Grandview Hospital: Statements of Operations (millions of dollars)
2016 2017 2018
Revenues
Net patient service revenue $30.57 $28.56 $42.65
Other revenue $1.24 $2.87 $3.56
Total revenues $31.81 $31.44 $46.21
Expenses
Salaries and wages
$12.25
$12.47
$35.00
Fringe benefits $1.83 $2.41 $2.57
Interest expense $1.18 $1.60 $1.78
Depreciation $2.35 $2.66 $6.78
Medical supplies and drugs $0.62 $0.66 $0.78
Professional liability $0.14 $0.20 $0.22
Other $9.04 $10.34 $11.85
Total Expenses $27.40 $30.33 $58.96
Net Income 4.401 1.111 -12.754
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EXHIBIT 1.2
Grandview Hospital: Balance Sheets (millions of dollars)
2016 2017 2018
Assets
Cash and investments $4.67 $5.07 $2.80
Accounts receivable (net) 4.359 5.674 12.413
Inventories 0.432 0.523 0.601
Other current assets 0.308 0.703 0.923
Total current
assets $9.77 $11.97 $16.73
Gross plant and equipment $47.79 $55.33 $70.55
Accumulated depreciation -11.82 -14.338 -17.009
Net plant and equipment $35.97 $41.00 $53.54
Total assets $45.74 $52.96 $70.28
Liabilities and Net Assets
Accounts
payable $0.93 $1.25 $3.76
Accrued expenses 1.46 1.503 4.176
Current portion of LT debt 0.11 1.341 1.465
Total current liabilities $2.50 $4.10 $9.40
Long-term debt 15.673 19.222 29.39
Net assets 27.567 29.645 31.51
Total liabilities and net assets $45.74 $52.96 $70.30
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EXHIBIT 1.3
Grandview Hospital: Statements of Cash Flows (millions of dollars)
Cash Flows from Operating Activities 2017 2018
Net income $1.1 ($12.75)
Depreciation and noncash expenses 2.633 2.756
Change in accounts
receivable -1.315 4.739
Change in inventories -0.091 0.178
Change in other current
assets -0.395 -0.22
Change in accounts
payable 0.325 0.507
Change in accrued
expenses 0.043 -0.327
Net cash flow from operations $2.31 ($5.12)
Cash Flows from Investing Activities
Investment in plant and equipment ($7.69) ($15.33)
Cash Flows from Financing Activities
Change in long-term debt $3.55 $19.43
Change in current portion of long-
term debt $1.23 $2.12
Net cash flow from financing $4.78 $21.55
Net increase (decrease) in cash ($0.60) $1.10
Beginning cash $4.67 $5.07
Ending cash $4.08 $6.17
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EXHIBIT 1.4
Grandview Hospital: Revenue and Expenses Allocation (millions of dollars)
2016 2017 2018
Operating Revenue
Gross inpatient service $26.117 $29.148 $33.216
Gross outpatient service $6.535 $9.130 $11.912
Gross patient service revenue $32.652 $38.278 $45.128
Contractual allowances $1.729 $5.196 $7.516
Bad debt and charity care $2.127 $2.506 $3.030
Total revenue deductions $3.856 $7.702 $10.546
Net patient service revenue $28.796 $30.576 $34.582
Operating Expenses
Inpatient service $20.573 $22.229 $24.771
Outpatient service $6.831 $8.098 $9.187
Total operating expenses $27.404 $30.327 $33.958
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EXHIBIT 1.5 2016 2017 2018
Grandview Hospital:
Selected Operating Data
Medicare discharges 2,721 2,860 3,741
Total discharges 8,784 8,318 8,576
Outpatient visits 32,285 32,878 36,796
Licensed beds 210 210 210
Staffed beds 193 197 178
Patient days 44,085 42,434 40,062
All-payer case mix
index 1.2869 1.2993 1.3161
Full-time equivalents 610.8 625.8 819.3
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EXHIBIT 1.6 +Quartile Median -Quartile
2018
Selected Industry
Financial Ratios (200-
299 beds)
Profitability Ratios
Total margin 5.58% 3.48% 0.53%
Return on assets 5.80% 3.10% 0.40%
Return on equity 15.66% 6.01% 0.62%
a
Deductible ratio 0.34 0.26 0.18
Liquidity Ratios
Current Ratio 2.53 1.99 1.48
Days cash on hand 32.35 15.89 6.24
Debt Management Ratios
Debt ratio 62.90% 48.40% 35.20%
Debt to equity ratio 127.00% 64.70% 26.90%
Times interest earned 4.29 2.23 1.14
Cash flow coverage 5.32 3.22 1.76
Asset Management Ratios
Fixed asset turnover 2.20 1.76 1.49
Total asset turnover 1.04 0.89 0.75
Days in patient accounts
receivables 87.53 75.67 63.33
b
Current asset turnover 3.94 3.38 2.88
c
Average payment period (days) 71.24 56.52 45.84
Other
Average age of plant (year) 8.86 7.39 6.14
a
Deduction/Gross patient service revenue
b
Total revenues/Current assets
c
Current liabilities/[(Total expenses - Depreciation expense)/365]
Notes:
1 The upper quartile is based on the higher numerical value, regardless of whether a
high value is good or bad. The interpretation is left to the analyst.
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EXHIBIT 1.7 +Quartile Median -Quartile
2018 Selected
Industry Operating Ratios
(200-299 beds)
Profit Indicator
a
Profit per discharge $89.04 ($21.30) ($120.08)
b
Profit per visit $6.22 $0.66 ($7.01)
Net Revenue Indicators
c
Net revenue per discharge $4,091 $3,411 $2,815
d
Net revenue per visit $201 $139 $98
e
Medicare revenue percentage 43.47% 36.6'% 31.25%
f
Bad debt/charity care percentage 7.89% 4.76'% 2.97%
g
Contractual allowance percentage 25.27% 20.02% 12.12%
h
Outpatient revenue percentage 25.26% 21.03% 17.44%
Volume Indicators
i
Occupancy rate 67.12% 58.10% 47.84%
j
Average daily census 173.23% 144.73% 114.39%
Length-of-Stay Indicators
k
Average length of stay (days) 6.80 6.07 5.41
l
Adjusted length of stay 6.48 5.36 4.52
Intensity-of-Service Indicators
m
Expense per discharge $3,937 $3,392 $2,972
n
Adjusted expense per discharge $3,417 $2,924 $2,572
o
Expense per visit $202.23 $141.97 $111.53
p
All-payer case mix index 1.2795 1.1756 1.0259
Efficiency Indicators
q
FTEs per occupied bed 4.59 4.15 3.77
r
Labor-hours per visit 4.68 5.84 8.66
Unit Cost Indicators
s
Salary per FTE $24,447 $22,517 $20,347
t
Employee benefits percentage 19.58% 17.04% 15.18%
u
Liability expense per discharge $80.94 $42.05 $18.31
a
(Net inpatient revenue - Inpatient expenses)/Total discharges
b
(Net outpatient revenue - Outpatient expenses)/Total visits
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c Net inpatient revenue/Total discharges
d
Net outpatient revenue/Total visits
e
Medicare net patient revenue/Total net patient revenue
f
(Bed debt + Charity care)/Gross patient revenue
g
Contractual allowances/Gross patient revenue
h
Net outpatient revenue/Total net patient revenue
i
Patient days/(Staffed beds X 365)
j
Patient days/365
k
Patient days/Total discharges
l Average length of stay/Case mix
index
m
Inpatient expenses/Total discharges
n Expense per discharge/Case mix index
o
Outpatient expenses/Total visits
p Sum of DRG weights/Total
discharges
q
Inpatient FTEs/Average daily census
r (Outpatient FTEs X 2,080)/Total visits
s
Total salaries/Total FTEs
t
Fringe benefit expense/Total salaries
u
Inpatient professional liability expense/Total discharges
DRG: Diagnosis-related group; FTE: full-time equivalent
Notes:
1 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.
