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Question 1 Conduct a financial and operations analysis using the Harris Memorial Hospital financial statements and information provided in the dashboard for Harris Memorial Hospital

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Question 1 Conduct a financial and operations analysis using the Harris Memorial Hospital financial statements and information provided in the dashboard for Harris Memorial Hospital. You must include information provided regarding its nearest competitor, Eastside Medical Center and U.S. Medians. You must address at least 10 of the following 13 Critical Performance Drivers:

A. Market Factors

B. Pricing

C. Coding

D. Contract Negotiation

E. Overall Cost

F. Labor Costs

G. Departmental Costs

H. Supply and Drug Costs

I. Service Intensity

J. Non-operating Income

K. Investment Efficiency

L. Plant Obsolescence

M. Capital Position

For each Critical Performance Driver that you choose to analyze, do not leave out any of the Data Elements under that performance driver in Table 11-1!

Question 2 Discuss conclusions relating to the above analysis and recommendations to improve the financial performance of the facility.

Analyzing Financial Position Part 1 Reviewing the 13 Critical Drivers of Performance 1 In Developing A Dashboard Reporting System What Needs To Be Done? ? In general, four critical questions must be answered: 1. 2. 3. 4. What is most important to the facility’s success? What are the critical drivers that influence performance attainment? What are the most relevant measures that reflect critical driver relationships? What relevant benchmarking data are available to assess performance? 2 Sustainable Growth ? In the example on the next slide our healthcare organization needs to increase its investment in assets, or resources, by $100 million (to a total of $200 million) over the next seven years to rebuild its mission. ? This level of future investment should be a byproduct of the facility’s strategic plan. ? A strategic plan should provide some information about projected service levels, which in turn should drive expected investment. 3 Sustainable Growth Present Financial Position Debt Growth Rate Equity Total $50 50 $100 Future financial position (7 Years Later) Debt Equity Asset s $200 Total Profitability Target $100 Debt Policy Assets $100 100 $200 4 Sustainable Growth ? The rate of annual asset growth for the example is approximately 10% per year. ? ? This rate equals the average rate of asset growth in many voluntary not-for-profit hospitals during the last five years. Although this growth rate may seem high, remember that this rate incorporates ? ? ? ? ? replacement of assets at higher prices new technology entry into new product lines requiring new equipment and increases in working capital such as accounts receivable. The healthcare organization depicted has chosen a financial mix of 50% equity and 50% debt. ? This means that seven years later, the target financing mix will be $100 million of debt and $100 million of equity to finance the $200 million investment in assets. 5 Growth in Equity ? If your healthcare organization anticipates growth rates in equity of only 5% over the next decade, it is almost certain that your asset growth potential will be no greater than 5%. ? Although the objective is not to add assets or investments for the sake of growth, ? ? ? healthcare organizations that remain viable must add new investments. Healthcare organizations with low rates of growth in equity must likely will experience most of their asset growth in working capital areas such as accounts receivable and supplies. These healthcare organizations will invest very little in innovation and replacement of existing equipment and plant and very little in new capital required for entry into new markets. If they are surrounded by healthcare organizations that are not experiencing low equity growth rates, their market share will decrease as a relative delivery capability deteriorates. 6 If ‘Sustainable Growth’ is the key principle to be a viable organization, then, the healthcare organization must be focused on Equity Growth. Growth rate in equity can be expressed as follows . Change in equity Equity = Net income Equity x Change in equity Net income 7 Health Care Organizations: The Problem with Equity ? Most voluntary not for profit healthcare organizations do not have a source of equity, other than net income. ? ? ? ? This means that no transfers of funds from sources, other than accounts receivables, government or large restricted endowments, exist to increase the healthcare organization’s change in equity from the level of reported net income. • In these situations the term “change in equity/net income” equals (1); Therefore, growth rate in equity can be defined as net income divided by equity, or Return On Equity (ROE). ROE is therefore the primary financial criteria that should be used to evaluate and target financial performance for voluntary not for profit healthcare organizations, when transfers of new equity are not likely. ROE is also the primary financial criterion that should be used to evaluate and target financial performance for taxable for private firms. 8 Improving ROE ?A healthcare organization can improve its ROE in a variety of ways. ? ? ? ? First, it can improve its Operating Margins . Second, it can increase its Non-Operating Gain Ratio. Third, it can increase its Total Asset Turnover. Fourth, it can reduce its Equity Financing Ratio. Operating Margins: Income derived from patient care operations only. Non-Operating Gain Ratio: Profit realized from the activities that are not directly related to direct patient care, such as from the sale of an asset, i.e., real estate. Total Asset Turnover: Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset Equity Financing Ratio: Is a debt to equity ratio - basically how much you owe (your liabilities) vs. how much you have (your equity) 9 In the Case of our Dashboard Report, We will Identify 13 Critical Performance Driver Categories: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Market Factors Pricing Coding Contract Negotiation Overall Cost Labor Costs Departmental Costs Supply And Drug Costs Service Intensity Non-operating Income Investment Efficiency Plant Obsolescence Capital Position 10 11 12 13 Case Example: For the remainder of this lesson we illustrate the use of financial analysis techniques using the Harris Memorial Hospital and Harris Community Foundation (HCF) 14 Dashboard: Overall Performance 1. Return On Equity (ROE) 2. Financials Strength Index: (FSI) 3. Total Margin (TM) 15 Return on Equity (ROE) ?Harris’s value for ROE is 9.0%, which indicates that the firm has a positive bottom line. ? A review of the data in the Combined Financial Statements shows that Harris has reported sizable balances of both Operating and Nonoperating Income in 20X7 and 20X6. 16 Total Margin ?Total Margin measures the return on revenue from both operating and nonoperating sources. ? Harris is realizing positive returns on both areas, but nonoperating returns in 20X7 were lower than those in 20X6. 17 Financial Strength Index ? The final overall measure is a Financial Strength Index. ? This index attempts to measure the four areas of financial position that collectively determine a firm's financial strength: • • • • Profits – measured by total margin (non-normalized average target: 4%) Liquidity – measured by days cash on hand (normalized average target: 120 days) Debt Expense – measured by debt financing percent (normalized average target: 50%) Age of Physical Facilities – measured by average age of plant (normalized average target: nine years) 18 Financial Strength Index ? Simply stated, firms that have high profits, lots of cash, little debt, and new plants have great financial strength. ? Firms with losses, little cash, lots of debt, and old physical facilities will not be in business long. ? ? ? Each of the four measures is normalized around a predefined average for the measure. This permits us to add the four measures to create a composite indicator of total financial strength. Harris has a very strong overall financial strength index due primarily to its favorable total margin position and strong cash position. • Harris’s strong cash position is also a factor that impacts total margin. • In 20X7 nearly 50% of Harris's total net income was derived from investment income. • Debt levels at Harris are also below normative values, which further enhances its overall financial strength. 19 The Future for Harris ?A critical objective for Harris in coming years will be to maintain its current financial position. ? We now focus our attention on reviewing the 13 Critical Drivers of Performance listed earlier to identify possible areas of opportunity for Harris. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Market Factors Pricing Coding Contract Negotiation Overall Cost Labor Costs Departmental Costs Supply and Drug Costs Service Intensity Non-operating Income Investment Efficiency Plant Obsolescence Capital Position 20 20X7 Memorial Hospital and Harris Community Foundation Combined Balance Sheet (in thousands) December 31, 20x7 December 31, 20X6 Assets Current Assets $82,815 $59,696 Cash and Cash Equivalents Assets Limited as to Use, Current Position Accounts Receivable 5,327 5,088 70,025 Patients, Less Allowance for Doubtful Accounts ($25,302 In 20x7 and $23,014 in 20X6) Other 59,939 Supplies 28,990 7,078 194,235 24,995 6,663 156,381 Total Current Assets Assets Limited as to Use 84,440 67,826 382,835 378,4 13 For Donor Restricted Purposes Board Designated for Specific Purposes Held by Trustees Under Bond Agreements 51,038 25,937 Less Current Portion 518,313 5,327 512,986 563,349 34,476 $1,305,046 472,176 5,088 467,088 458,829 34,302 $1,116,600 Property and Equipment, Net Other Assets Total Assets Liabilities and Net Assets Current Liabilities $32,572 $24,631 58,878 53,725 Accounts Payable Accrued Expenses and Other Liabilities Due to Third-Party Payers Current Maturities of Long-term Debt 7380 12,633 4,692 5,908 Total Current Liabilities 103,522 96,897 439,597 332,354 33,260 48,487 Long-Term Debt, Less Current Maturities Contingent Professional Liabilities Due to Broker Other Liabilities Post-Retirement Benefit Obligation, Other Than Pensions Total Liabilities 15,128 20,713 19,608 5298 8,207 7,694 620,427 510,338 Net Assets Unrestricted Temporarily Restricted Permanently Restricted 600,179 55,213 29,227 684,619 538,436 40,393 27,433 606,262 Total Net Assets Total Liabilities and Net Assets $1,305,046 $1,116,600 December 31, 20X6 Harris Memorial Hospital Combined Statements of Operations (in thousands) December 31, 20X7 Unrestricted Revenues and Other Support Net Patient Service Revenue $829,005 Other Operating Revenue 27,055 Total Operating Revenue 856,060 $774,662 29,334 803,996 Operating Expenses Salaries and Wages Employee Benefits Supplies and Purchased Services Advertising Staff Enrichment Occupancy Cost Depreciation Interest Provision for Bad Debts $371,429 81,532 228,244 3,072 10,767 14,346 44,392 10,974 55,851 820,627 $329,668 77,231 225,497 2,376 8,591 13,442 41,627 6,145 57,975 762,552 Operating Expenses Excess of Revenue Over Expenses 35,433 41,444 Non-Operating Gains (Losses) 3,189 1,318 14,070 14,574 Contributions, Gifts, And Bequests Net Assets Released from Restrictions for Research Expenditures Research, Education and Other Non- Operating Expenses Change in Interest Rate Swap Value and Put Agreements Investment Income (22,980) (24,773) 1,578 9,397 30,453 26,310 18,402 18,818 Excess of Revenues and Gains Over Expenses and Losses $61,743 $60,262