Healthcare Financial Management

Guidance for Performing Financial Analysis

This project has been designed to allow students to learn how to analyze the financial condition of a nonprofit hospital by conducting a financial condition analysis. In order to evaluate your understanding of the use financial statements in decision-making, you are asked to research and analyze a nonprofit hospital. Try to think of your analysis as a form of storytelling. You are going to tell the story of what your hospital has been doing for the past five years and where you think it will be going in the future.

Financial condition analysis focuses on providing a framework for using financial data in a variety of business analysis and valuation contexts. The effective analysis of a set of financial statements requires an understanding of the economic characteristics and current conditions of the healthcare industry, the particular strategy the hospital selects to employ to successfully compete, and the accounting principles and procedures underlying the hospital's financial statements

Before you begin to create your written outline and undertake the analysis of your hospital's financial statements, you will need to compile the relevant information. The lists presented in this document are intended to serve as guides to help you accumulate useful information and to organize that information effectively. Not every item listed will be relevant to your hospital. Further, based on your outside resources, you many wish in include additional facts or opinions not covered in the document. Be sure to cite any outside resources used were necessary.

Remember that your audience is donors who what to know whether they should contribute to your organization and creditors who are making lending decisions. While gathering information for this project, you should perform an ethical audit of the hospital examining any ethical issues resulting from the nature of the hospital's services, policies, operations, governance structure, or competitive environment.

Materials: IRS Form 990 and audited financial statement for a nonprofit hospital, available at www.guidestar.org, showing the balance sheet, income statement, and cash flow information for a minimum of five prior years. Each student must select a hospital that has not previously been chosen by another. The organization must be approved by the course professor.

Required Submissions: Each student will submit a portfolio containing the following items: (1) an EXCEL spreadsheet containing the hospital's financial statements and financial ratio computations using cell formulas and (2) a WORD document addressing the required elements/analysis.

Format: The report should be well written, highlighting significant information. References must be appropriately cited using APA style. Double-spaced, one-inch margins, using a 12-point Times New Roman font.

PART 1 - INDUSTRY OVERVIEW

Analysis of the healthcare industry, both federal and state. Provide an over view of the federal healthcare landscape in regards to those aspects that affect the financial position of your facility. What specific state legislation impacts your facility? If you were the CFO (Chief Financial Officer) of this hospital, what would be your future expectations for this industry? Are there any circumstances that threaten growth or future sustainability?

PART 2 - TELL ME ABOUT YOUR HOSPITAL

The part of this analysis will focus on your hospital's background information. The following basic facts should be covered in a narrative. Most of this information can be found on the hospital's web site or IRS Form 990.

Basic information:

1. Legal name of the hospital

2. URL of hospital Web site

3. Type of hospital and main services offered

4. Year of formation

5. Hospital's fiscal year-end (month and day)

6. The mission statement of the hospital

7. Number of beds

8. Charity care policy

9. Overview of company's key financial data, such as total revenues and expenses, total assets and liabilities, amount of charity care, payer mix, etc.

Governance information:

1. Leadership. Who are key members of the C-Suite? Has there been a recent change in leadership? Is the composition of the leadership team balanced and appropriate?

2. Hospital's independent auditor. Who is the auditor? Does the same auditor prepare the IRS 990 and the audited financial statements? Has there has been a recent change in auditor?

3. Composite of the hospital Board of Directors (i.e., age, gender, ties to the company, etc.)

4. Names of major officers and the president of the Board of Directors. Is the composition balanced and appropriate?

5. Interesting information/insights regarding the leadership/governance of the hospital.

In the News:

Select at least two significant news items from recent business periodicals that may affect the hospital's financial results. Has there been any negative news articles involving your company, its officers and Board or its delivery of care?

Executive compensation:

For your organization's highest paid executive, list total the dollar amounts paid for salaries and bonuses that were received in each of the last five years.

1. How does this amount compare to the market?

2. Does the trend in performance match the trend in compensation being paid to the organization's top executive?

PART 3 - COMMUNITY ASSESSMENT

Health care is local. What are the socio-economic, demographic, and healthcare needs of the community your facility serves? What and how much community benefit is provided? What is the hospital's financial assistance policy?

PART 4 -- ACCOUNTING ANALYSIS AND FINANCIAL HIGHLIGHTS

For this level of analysis, you want to present financial highlights. You should also examine your hospital's financial statements in order to determine the degree to which the organizations' accounting captures their underlying business reality. As part of this analysis, you will want to evaluate key accounting policies and the quality of the disclosures. You should also look for any potential red flags or indications of accounting distortions. Some suggested items to be included in this section:

1. You should track changes in the following items over the prior three to five years:

a. Total assets, total liabilities, and net asset
b. Short-term debt and long-term debt
c. Revenues, expenses, and net income

2. Your hospital's major strengths, weaknesses, opportunities, and challenges that promote or impede its growth and profitability.

Using the financial ratios, you are required to analyze your firms' profitability, liquidity, solvency, and operating efficiency. The information discussed above should provide support for your conclusions based on ratios. You should compare your hospital's ratios across at least five years. Which ratios you choose to discuss will depend on which issue are critical to your conclusions. At a minimum your presentation should cover the following:

1. Trends in Horizontal and Vertical (Common Size) Analyses

2. Liquidity Ratios:
Current (Working Capital) Ratio
Current Assets / Current Liabilities
(Part X: Lines 1 through 9; Column B) / (Part X: Lines 17 through 19)
Quick Ratio (Acid Test)
(Cash + Marketable Securities + Net Account Receivables) / Current Liabilities
(Part X: Lines 1 through 4; Column B) / (Part X: Lines 17 through 19)
Accounts-Receivable Turnover
Net patient service revenue / Average accounts receivable
(Part XIII: Line 2(g)(A) / [(Part X: Line 4 Column A + Column B) / 2]

Days Cash on Hand
(Cash + Marketable Securities) / [(Operating Expenses - Depreciation Expense) / 365]
(Part X: Lines 1 and 2; Column B) / [(Part IX: Line 25(A) - Part IX: Line 22(A)) / 365]

3. Profitability Ratios:
Total Margin
Excess of Revenues over Expenses / Total Revenues
(Part VIII: Line 12(A) - Part IX: Line 25(A)) / Part VIII: Line 12(A)
Operating Margin
Operating Income / Operating Revenues
(Part VIII: Line 12(B) - Part IX: Line 25(B)) / Part VIII: Line 12(B)
Return on Assets (ROA)
Excess of Revenues over Expenses / Total Assets
(Part VIII: Line 12(A) - Part IX: Line 25(A)) / Part X: Line 16(B)
Return on Net Assets (RONA)
Excess of Revenues over Expenses / Net Assets
(Part VIII: Line 12(A) - Part IX: Line 25(A)) / Part X: Line 33(B)

4. Debt Management Ratios:
Debt Ratio
Total Debt / Total Assets
Part X: Line 26(B) / Part X: Line 16(B)
Debt to Capitation Ratio
Long Term Debt / Long Term Debt + Net Assets
(Part X: Lines 20(B) through 25(B) / [(Part X: Lines 20(B) through 25(B) + Part X: Line 33(B)]
Times Interest Earned Ratio
EBIT / Interest Expense
[(Part VIII: Line 12(A) - Part IX: Line 25(A)) + (Part IX: Line 20(A))] / (Part IX: Line 20(A))

5. Asset Management Ratios:
Fixed Asset Turnover
Total Revenue / Net Fixed Assets
Part VIII: Line 12(A) / Part X: Line 10c(B)
Total Asset Turnover
Total Revenue / Total Assets
Part VIII: Line 12(A) / Part X: Line 16(B)
Days in Accounts Receivable
Net patient accounts receivable / Net patient service revenue
Part X: Line 4(B) / [Part XIII: Line 2(g) / 365]

6. Other Ratios:
Average Age of Plant
Accumulated Depreciation / Depreciation Expense
Part X Line 10b / Part IX: Line 22(A)
NOTE: We did not capture Accumulated Depreciation when we did our data input. Therefore, you must go back in to the 990s to get this number.

Operating Indicators

Research and find at least four other ratios that so not involve financial data, but rather operational data as provided in the PA Hospital Utilization Database found on Moodle. Calculate these ratios for all years.

PART 5 - CONCLUSION

Based upon your research and analysis of this hospital's financial information what recommendation would you make to donors and creditors.

We dont need to calculate the ratios but do the analysis, calculation has been provided

Length: 6 double spaced pages

Attachment:- Hospital_analyses.xlsx