Riverview community hospital
Riverview Community Hospital (RCH) is a hospital that of for non profit. It operates in an area that it competes with three other main hospitals. The present financial standing of the hospital and benefits of being fully accredited by the joint commission are not adequate enough to conquer the economic challenge. It ought to improve its stability in finances so as to remain efficiently operational. It should offer a varied services to those who it serves.
Riverview Community Hospital has been struggling to maintain costs, increase the volume of patient and produce elevated returns. In addition it has recognized the dangers threatening its survival. Though Riverview Community hospital has remained the leading provider of high quality of care, it has also been facing tough competition that depletes the volume of its patients as well as the general profitability. Following a keen analysis of operational, financial and the patient characteristic indicators, Riverview Community Hospital will be able to go on flourishing in the urban statistical locality it provides service to.
Table of contents
Executive summary. 1
Table of contents. 2
Overview OF Riverview Community Hospital 4
Riverview Community Hospital Analysis. 6
Financial indicators analysis. 6
Operating indicators analysis. 12
Findings summary. 13
Strengths. 14
Weaknesses. 15
Recommendations. 16
Profitability. 16
Volume of patients. 17
Accounts receivable. 18
Other recommendations. 19
Evaluation. 19
Financial KPIs. 19
Operating KPIs. 21
Appendix: Tables. 23
References. 26
Overview OF Riverview Community Hospital
The Riverview Community Hospital is a not for profit hospital. The hospital is an acute care hospital that serves the metropolitan urban statistical area. The hospital has a has a bed capacity of two hundred and ten. The hospital is known for its provision of quality care as well as surveys conducted for high satisfaction of patients. The hospital has also received a complete accreditation from the joint commission. This is the highest category of accreditation that qualifies a hospital for get funding from the government.
Though Riverview has been improving its patients’ health, it has been struggling to triumph over the fiscal pressures from its competitors along with the economy. Riverview Community Hospital has recognized the essence of retaining financial stability so as to operate effectively and offer its patients the best quality of care. There are various factors for decreasing the costs, increasing profit and generating revenue from the many services offered by the hospital. In addressing the faced challenges, there should be an assessment and analysis of the concerns along with the main indicators.
Riverview Community Hospital has both identified external and internal issues that affect the general success of the hospital. The external issues come as a result of other competitors mainly hospitals, decline in the economy and the regulatory changes. An additional challenge is that the Riverview Community Hospital is the smallest hospital amongst the competitors. This can act as a major hindrance for the hospital in the realization of equivalent level of economies of scale as compared to the large institutions. The hospitals which operate for profit appear to be the biggest threat since they have higher reputation. This has aggressively increased the market share in the service areas. Unlike the for profit which can opt not to offer unprofitable services, Riverview Community Hospital ought to offer a minimum package of services so as to qualify for a status of not-for-profit.
The internal challenges are mainly attributed to the annual net income. Maintenance of the volume of patients is essential to produce adequate revenue for covering all the expenses. This comprises of both inpatient and outpatient visits. It is not easy to establish the paramount means of reducing costs and expenses while still offering high quality care and being able to get employees in full time basis. This is very tricky since there are other not for profit hospitals and a large for profit hospital within the same locality. Since these hospitals compete for similar patients, it decreases the chances of Riverview Community Hospital to maintain higher level of profitability.
The matter is further complicated by reason that 2009 was marked by the introduction of various changes to the form of IRS 990. This is the form that all for profit organizations ought to fill so as justify exemptions from tax. Lastly, the financial turmoil from during the period of 2008 -2009 mostly probably affects the financial stability of Riverview Community Hospital. Additionally it has effect to the capital access, the ability to pay by the patient population it serves.
Increase in unemployment level resulting from recession may cause many of the patients of Riverview Community Hospital to lose insurance that is sponsored by their sponsor. Despite the fact that COBRA has been extending insurance for eighteen months following termination, majority of individuals who are not employed chose to forego insurance altogether since the insurance are very expensive without the subsidies by the employers. As a result, the RCH may be having a high expense of bad debt for patients who are not able to pay. In addition, the patients who fail to pay may take longer in paying of their medical bills.
Riverview Community Hospital Analysis
Financial indicators analysis
DuPont
The DuPont analysis offers a guide for comprehending the return on equity (ROE) for the hospital. By use of this analysis one can understand the return on equity of Riverview Community Hospital by analysis of the inferior or superior source of return. ROE calculation is essential for the board of trustee communication as well as to the key administrators regarding the effective use of capital supply. The equation of DuPont categorizes Return on equity into three categories: i) financial leverage measured by the equity multiplier, ii) operating efficiency measured by the equity multiplier; and iii) Profitability measured by total margin. In the DuPont equation, financial leverage implies the use of debt for acquiring extra assets (Minnis, 2010).
First, the determiner for profit margin is the ratio of income to the total revenue expenses. From this ratio one can better understand, the total revenues percentage, both operating and non-operating, converted into net income. In the presence financial year, the profit margin is seen as 6.75%. This value is more than the 3 to 5 percent national average. However, it is essential for the Riverview Community Hospital to identify the conspicuously sharp decreasing trend exhibited by the profit margin all though the five year period.
Starting with 2005, there is a 11.38% of profit margin; nonetheless, currently there is a 6.75% profit margin. This shows a decrease of 4.63%. There is also a notably observable decrease from 2006 to 2007 as well as from 2007 to 2008. First in the period between 2006 and 2007, the hospital was faced with a decrease of 2.53% in profit margin, that is, from 11.28 to 8.75%). Additionally it saw a decrease of 2.27% decrease in the profit margin, that is, from 8.75 to 6.48%.
Evaluation of the component of profitability of return on equity shows that the hospital has faced an increase in the total revenue every year. The operating revenue is also following a similar trend. The non operating revenue shows fluctuations, despite the fact that the non operating budget has shown an increase from 1.305 to 1.834 million over the period of five years. However, it is seen that the net income has decreased from 3.070 million to 2.458 million with a sharper decreases been seen in 2006 to 2007 and 2007 to 2008. This observation may be because of increase in some expenses in the stated years. For instance, from 2006 to 2007, Riverview Community Hospital experienced an increase in the expenses of wages and salary. On the other hand from 2007 to 2008, Riverview Community Hospital experienced a considerable increase in the expenses of interests and fringe benefit.
Second, analysis of the operating efficiency allowed the use of allowed the use of total asset turnover ratio for the determination of the way Riverview Community Hospital uses its assets in the production of revenue. In particular, the total asset turnover, determines the revenue amount earned per dollar invested in the total assets. Typically, the hospitals’ standard rate is one dollar earned per dollar invested. Currently, the hospital stands at earning 0.68 cents for every invested dollar. This value is below the standards of the industry.
The total asset turnover ratio shows fluctuations all through the period of five years. It experienced a sharp decrease of 2.15% in the period between 2005 and 2006. It went on decreasing steadily from 2006 to 2007, again it decreased from 2007 to 2008; the value was 4.43%. Lastly, Riverview Community Hospital saw a dramatic rise in the period between 2008 and 2009, with an increase of 5.87%. As earlier indicated, there is an increase in the total revenues together with total assets increase. However, further analysis shows that we ought to consider growth rate for total revenues and the total assets.
To improve the total asset turnover, the total revenues ought to outpace the acquisition of assets. This can be seen in 2009 when the growth rate for the total assets and the total revenue each has an approximate of 2 million annually. However, there was also an increase of 4million with a similar trend of a 2 million net asset increase. This revenue increase produced more total asset turnover ratio (Merican, 2012).
The equity multiplier and financial leverage show how much debt that can be used for acquiring of extra assets. This ratio can be determined one by the equity financing ratio that is, net assets divided by the total assets. Just like the total asset turnover ratio, the is also a fluctuation in the equity multiplier. The equity multiplier of Riverview Community Hospital reduces from 2005 to 2007; it then increases from 2007 to 2008; and then again decreases from 2008 to 2009. This decrease can be accounted for by a higher equity financial ratio, and an increase is basically due to a smaller-equity financing ratio. In general, Riverview Community Hospital is faced with an equity financing ratio that is more than the standard set in the health industry. Nonetheless, it is important to know that the largest equity multiplier years are seen in the years where there were the lowest equity financing ratios.
Finally, determining the product of the product margin, the total asset turnover, and the equity multiplier leads to a return on equity. Despite there been fluctuations in the rate of asset turnover and the equity multiplier, Riverview Community Hospital has experienced a general decrease in all the components of the equation of rate of return. Therefore, obviously, there is a decrease in every year, apart from 2009 in the return on equity. The increase observed in 2009 is due to an increase in the total asset turnover and profit margin from 2008. From this analysis, it can be concluded that if the financial condition of RCH was to be improved, the profitability and the operating efficiency must also be improved. There should be a favorable return in the dollar for every dollar invested in the assets.
Profitability
Being familiar with the organization’s profitability allows the institution to know the ability of the hospital to generate income. Together with the profit margin, as shown in the DuPont analysis, it is also viable to consider the return on assets. Through such an indicator, one can see the earned net income for every dollar invested in assets. For instance, in 2005 7.75% return on assets, basically equated to $0.775 in the profits resulting form every dollar invested in total assets. As the return on equity increases, it can be assumed that the assets are being used productively. Unluckily, there was a decrease in the return on assets throughout the period of five years.
The return on assets decreases results from the decrease in net income and the increase in the total assets. An in-depth analysis using net income, it should be known that the decrease results from both revenues and expenses that increases at high rates. Riverview Community Hospital’s revenues have been increasing in a similar trend from 5 percent in 2005 to 12 percent in 2009. Considering the changes in percentage of both revenues and expenses, Riverview Community Hospital ought to at least control the expenses remarkable growth. There is an observable progress in the mitigation of the growth of expenses from 2008 to 2009 since the growth in expenses was controlled to 1 percent growth change that is from 11 percent in 2008 to 12 percent in 2009 (Irina, & Inta, 2012).
Liquidity
The cash on for the day indicates the number of days Riverview Community Hospital continues to pay off its fiscal obligations without a supplementary cash inflow. The comparable hospitals average is between 30 and 45 days. The hospital has surpassed the range up to the most recent years. Nonetheless, during the period of 2009 it is low and it has 32 days of cash at hand. This shows that the liquidity of Riverview Community Hospital has reduced with time. It is also seen that the resources for covering its expenses have reduced with time.
Among the reasons for this could be due to the fact that the days in accounts receivable is very high, in comparison to the national average of 45 to 55 days. This implies that on average it takes about two months to collect receivables after the provision of services. From the period between 2005 and 2007, one sees a considerable decrease that approaches the national average. However, for the past two years, it has been seen to flow again. Interestingly, there is an inverse association amid the days’ cash on hand and days in accounts receivable after comparing the two graphs. This could be attributed to long length of time taken in converting the receivables into cash (Cohen, Thiraios & Kandilorou, 2008).
Activity
The fixed asset turnover (FAT), which is calculated by dividing of the total revenue by the net assets, measures the efficiency of hospital in its investment of the fixed assets. Specifically, it measures the amount of revenue each dollar generates of the net fixed assets. In Comparison of the average of two dollars for every dollar spent on the net fixed assets, Riverview Community is performing poorly because its ratio is below 1 for the past five years.
Considering the cash flow statement, Riverview Community Hospital has bought fixed assets of worthy $4 to $7 million annually since 2005. This has helped in explaining the low fixed asset turnover in two ways. First, depreciation is subtracted from gross fixed assets as to get the fixed assets. Second, any increase in the net fixed assets decreases the overall fixed asset turnover because the denominator is also getting larger. Since the equipment purchased recently has less depreciation, one would then expect relatively high net fixed assets. Therefore, it is essential to consider the average property, plant or equipment age so as to put in perspective the fixed asset turnover. The average equipment, plant and property age are ten years for the majority of hospitals. The average equipment, plant and property age for Riverview Community Hospital have been relatively five to six years for the past five years.
Capital structure
In supplementing the capital structure understanding, the time interest earned ratio (TIE) should be looked into. It is the proportion of earnings available for paying every dollar of expense for interest. For the majority of hospitals, the expense of interest is met by the current accounting income by a 2 to 3 multiple. The turning point for the Riverview Community Hospital was 2007 in this regard. For the past two years, Riverview Community Hospital has moved from being with an above-average TIE to falling closer to the spectrum’s lower end.
The debt coverage service of Riverview Community Hospital, that is, the pre-interest cash flow divided by total debt obligation has been having a similar trajectory for the past five years. From 2007 to 2008, this has been going from above average to just past the smallest standard. This likeness is expected because the calculations are the same. Nonetheless, the debt coverage service is differing in two significant ways. First includes both the principal payment and interest expense. Second, it acknowledges that cash flow and not the accounting income pays for expenses (Duric, et al, 2011).
Operating indicators analysis
Patient characteristics
After observing the patients of Riverview Community Hospital keenly, the case mix is roughly close to the averages of the industry. This indicates that RCH possesses inpatient services of average complexity. The inpatient revenue constitutes a majority of the gross patient revenue; nonetheless, having more visits by outpatients should not be disregarded. While this has gone down over the years, 73.6% of revenue resulted from inpatient charges as of 2009. This value is somewhat more than the average of the industry set at 60%. The rate of reimbursement of Medicare by RCH is as lower than the average amount of Medicare payments, with close to 30% of Medicare patients annually as compared to the average of 40 to 45% percent nationally. As a result, RCH possesses a lower governmental reimbursement.
Volume
When observing the operating indicators of volume, it is found that over time, the amount of inpatient volume, the inpatient days, and the average daily census has gone down since 2005. This change in volume can be attributed to competition increase in the community. It can also be attributed to increase in the services of outpatient since the sum of outpatient visits, since 2005, has gone up. This reflects the decision by the board in 2004, to increase the services of outpatients to evade losing patients to other healthcare facilities, who had started providing traditional inpatient procedures in an outpatient setting.
Despite the change in the volume of inpatients, the rate of occupancy and the average length of stay have not changed though there are minor fluctuations for the past five years. The average length of stay has remained under the average of industry that shows excellence in clinical management and utilization as resources are being used effectively. In addition the patient risk has gone down with the decrease in the average length of stay.
Price cost and profitability
Additional analysis of operating indicators of RCH comprises of price, cost and profitability of the facility. With the increased healthcare cost, it is not surprising to see that the inpatient cost of admission and the visit by outpatient are on an increase. Together with these changes, there is an increase in the price of both visits by inpatient and outpatient admission. Luckily, RCH has been able to get increased profit because of low contractual adjustments. The current contractual allowance of RCH is 16.65.
Regardless of this increase over time, RCH has remained notably lower than the industry average of about 50%. This shows that RCH loses a limited patient revenue amount due to discounts and allowances. Riverview Community Hospital is in the real sense losing more cash per visit by outpatient over time, although profitability per inpatient discharge has continued to increase. The overall changes in these indicators can be ascribed to several external and internal factors like charge in payer mix, increase in expenses, and decrease in volume of patients (Cassar, 2011).
Findings summary
After analysis of various operating and financial indicators, one can determine the strengths and weaknesses of RCH. Despite flourishing in various areas like inpatient profitability and clinical expertise, there is room for improvement in maintaining of the general fiscal stability.
Strengths
Riverview Community Hospital gets satisfaction in maintenance of high quality of patient care as well as level of client satisfaction. It offers a wide range of outpatient services that gives forth adequate revenue for covering its expenses. It also provides charity care without affecting its stability. The full accreditation of RCH by the joint commission enables them to get governmental reimbursement from Medicare and Medicaid. This constitutes a majority of its payer mix. The hospitals’ short average length of stay for the past five years has been consistently below the average. This could be ascribed to effective resources use and utilization of clinical management. Less average length of stay is beneficial to both the patient and the hospital since it is risk and less costly for them. It also opens up hospital resources for other uses. In general, it provides a competitive edge for RCH; this makes it accommodate high volumes and also in improving satisfaction of patients with efficient care delivery.
In accordance to high equity financial ratio, RCH is in an appropriate position of borrowing money if indispensable. The general capital cost is 10%, which indicates that RCH can borrow funds at a 10% rate of interest. Having a higher equity financing ratio also positively affects the bond rating because RCH is not highly leveraged.
On the side of operations, there are various strengths that can be determined by an analysis of operating indicators. These strengths include performance of high quality. As stated previously, RCH has a relatively low average length of stay and consistently below the average length of stay of 5.4 days. Short average length of stay is a key indicator of clinical management since it is predictive of patient risk. In addition, it has been reported that RCH has a complete accreditation certificate from the joint commission hence it maintains a high score of patient satisfaction (Nissim & Penman, 2001).
Weaknesses
From the operational and financial indicators analysis, there are various observable weaknesses in RCH. The main weakness for RCH is the payer mix; it features heavily in government programs. Between 2007 and 2008, majority of the fiscal indicators like the days in accounts receivable, days cash on hand and debt service storage that all went from trends that are commonly favorable to negative ones. This could result to Medicaid, Medicare and SCHIP Extension Act of 2007; whereby most patients were had government sponsored insurance. This is shown in the contractual allowances severe increase from $1.728 to 5.197 million in the period between 2007 and 2008. These indicate considerable deductions in revenue.
One of the weaknesses in cash flow in RCH is that it has a low day’s cash on hand and high days in accounts receivable. The general investments and cash decreased considerably from 2008 to 2009; it fell from $5 million to less than $2.9 million. This was due to both internal and external factors. Internally, RCH made considerable loan repayments which was totaling to $1.428. This led to low liquidity with less resources for the hospital to cover its expenses. On the external factors, the financial crisis affected their investments, which had $4.327 million net cash out flow.
Another weakness of RCH is the decrease in the volume of inpatients. As stated previously, the value of inpatient ought to be maintained since there are higher economies of scale and fixed costs are spread for high patient number. The volume of inpatient is essential to profitability. With inpatient services earning more than 80% of the patients’ gross revenue, the amount has been decreasing most likely because of decrease in the volume of inpatient. This decreased in the average daily census and admissions of inpatient can be ascribed to the compensation within the region, along with the shift of certain procedures from a setting of inpatient to outpatient.
It can be noted that an extra weakness of RCH is the outpatient services. While there was an increase in outpatient services in RCH to remain competitive and meet the demands, these services have not been very profitable. As a matter of fact, after considering the operating indicators, RCH lose some funds for every service of outpatient. This revenue loss has remained high over the past years. For RCH to increase its profitability, it ought to consider modifying some of its weakest links. This will specifically be the outpatient services (Sundararajan et al 2002).
Recommendations
Riverview Community Hospital ought to capitalize on its strengths and work so as to improve the weak points. Below is an outline of recommendations that can be implemented by senior management to see organizational success on both operational and financial levels.
Profitability
Of the RCH’s weakness that has been identified is the low level of profit. There are various steps that to be taken by administrators to help increase profits for patient revenue. This can be attained if there is a specific focus on the services of outpatient.
The initial step for improving profitability is decreasing costs. With decreasing admissions in inpatient volume and the decrease in the visits of unprofitable outpatients, RCH can try to increase profit level by reducing expenses. This can be done in various ways which include services reduction and encourage more effective use of resources. Resources can be used more effectively by employees; they should be keen on overuse of under use of medical supplies and equipment. In addition, use of process improvement methods like Lean six sigma can help in decreasing waste and a general decrease in operational cost. Through analysis of services and expenses for every aspect, RCH may as well consider reducing some of the services of outpatient offered to patients.
Another means for increasing profitability of RCH is the increase of revenue. This may be a more grueling duty for the administrators due to external factors may be limiting to the advancement, for instance, competition between health facilities. A suggestion to increase revenue is by the increase of volume of patients, specifically for inpatients that have shown to be more profitable. Another option that is even more risky for the increase of revenue is the price increase. Due to market competition, RCH may be a price taker, which may not be an appropriate alternative (Prieto, 2006).
Volume of patients
As stated previously, it is essential to increase the volume of patients so as to finance everyday operations adequately. This is because the volume of patients has a great effect on income. The hospital should increase the volume of patients so as to strategically market and promote high satisfaction of patients together with clinical quality. The hospital can increase the market share in the area that has a cautiously devised strategic plan that will attract patients. Because RCH possesses a low average length of stay as compared to the industry standards, the hospital can increase admissions. A higher rate of occupancy will generate revenue from many offered services.
Accounts receivable
Some other weakness that was identified is the cash flow within the Riverview Community Hospital. To increase the liquid assets and improve the cash flow of the hospital, it is suggested that the hospital restructure its department of billing. Billing payers or patients early enough and discounting quicker payments, the hospital can have more cash on hand, which decreases its days on net accounts receivable. In addition, the hospital can try to attract larger amounts of patients from private payers because reimbursements from government are usually received at a low rate.
Looking keenly at the revenue cycle, proper documentation can reduce error chances in the diagnostic coding and medical bills. These errors affect the cycle of revenue, which create an effect of snowball. This not only affects the department of finance, but also other departments of patient service. For instance, it will be taking longer than the 30 days average for Medicare to fund the hospital if there are verifications and adjustments to be done. The average days in accounts receivable will also be affected. A committee or team can be put in place for monitoring the advancement and effectiveness of suitable documentation. This will help in ensuring that the standards set at the moment are not compromised (Prieto, 2006).
These modifications will enable the Riverview Community Hospital to reduce days on account and receivable and increase the amount of liquid assets. The Hospital can as well cover all of its expenses and liabilities, which will reduce the chances of writing off accounts receivable as bad debt. With more cash on hand enables the hospital to pay off liabilities on a sales discount that in turn reduce the payment owed if paid in a specified period of time.
Other recommendations
Adding on to suggestions made previously, there are various minor modifications that can be recommended that will generally help the organization’s success. One of the suggestions is soliciting more donations by promotion of tax advantage to donors. Increasing the level of donations will assist in covering expenses and generally help in increasing the bottom line. As stated earlier, improving the payer mix may as well help the hospital. Without only considering the structures of reimbursement and payers, the hospital can promote the utilization of services if need be (Nissim & Penman, 2001).
Evaluation
After the implementation of the suggested recommendations, RCH ought to ensure the modifications are upheld all though the hospital. In addition, the top management ought to evaluate the organization in accordance to various key performance indicators to establish the recommendations effectiveness and ensure the intended results have been attained.
Financial KPIs
Days cash on hand
The days cash on hand usually measure the days the organization was able to fulfill the obligations of daily cash without new cash resources been availed. This is a great key performance indicator because it demonstrates the buffer in cash that can assist the hospital to remain liquid even in economic conditions that are tough. In a tough economic condition, as it is the situation currently, this measure is remarkable to the creditors, top management as well as the board of directors. High values of day’s cash indicate a higher liquidity and by creditors perceived them positively. Therefore, trying hard to have high days on cash value could be necessary to a hospital that borrows more, if need be, at a rate that is favorable during this time of economy. The industry ranges from about 30 to 45; however, due to its value there is a need to increase days in cash on hand to a portion that is high (Nissim & Penman, 2001).
Days in accounts receivable
The days in accounts receivable is an essential indicator for monitoring since it indicates the amount of time taken for bill collection. Preferably, it ought to be low so that RCH can use the money for paying back loans for reduction of interest expense or invest it. The hospital may also probably benefit from sales discount if they have the capacity of paying back suppliers within a specified period. Therefore, there is an opportunity cost for having the assets tied up in accounts receivable for a long time periods. This amount should meet the averages of the industry and reduce to between 40 and 55 days.
Equity financing ratio
The debt service ratio usually measures the ability of RCH to repay its loans. Traditionally, the hospital has been on creditworthiness upper bound. However, since 2007 this has been on a decrease. Though this is not alarming, since the hospital possess a good equity financing ratio, it ought to be monitored to guarantee the solvency of the hospital.
Return on equity
The return on equity ratio enables RCH to determine the amount of net income generated in relation to the net assets of the hospital. This is a strong indicator for it comprises an activity indicator (total asset turnover), profitability indicator (total margin), and capital structure (equity financing ratio). Considering all these factors, the ROE will enable main stakeholders to establish the profitability of the hospital. Determining the profitability via this indicator well could give the hospital a competitive edge as ROE shows whether the hospital earns profit with the hospital’s present equity. This value is expected to be greater than the industry average of roughly 8% (Sundararajan et al 2002).
Operating KPIs
Profit per patient visit
Among the notable weakness of RCH, is the lack of outpatient services profitability. Though the hospital is expanding and maintaining their services to maintain competitiveness, the outpatient services have been costing RCH a lot of money annually. By 2009, the hospital was losing about 200.00 per visit. Among the goals for RCH to be maintained is the reduction of loss by increasing revenue or decreasing expenses and the general intend of providing service that is profitable and that which does not lead to any loss.
Occupancy rate
One of the benchmark KPI is the occupancy rate. Just like the average daily service, the RCH would like the value to be very high. Higher rate of occupancy is better as a high number of inpatient services the revenue will also be high. The increase experienced between 2008 and 2009 can be ascribed to reduction in the number of stuffed beds, but not volume increase. The hospital can resort to using their present resources more effectively or augment the volume. At present, the occupancy rate of the hospital is in the mid to upper quartile of the size of the hospital; hence the hospital should increase the rate of occupancy and move into the upper quartile.
Contractual percentage
Another hospital’s goal to aim at is decreasing of the contractual allowance percentage. This usually measures the lost revenue amount due to allowance and discounts. This amount has decreased in the recent years. To capitalize on profits and revenues RCH ought to try to reduce the percentage of contractual allowance by probably improving contracts payer mix or renegotiating them. At present the percentage of contractual allowance is 16.56%, this value is in the lower to mid-quartile. The hospital can try to move into the lower quartile and decrease this value to less than 12% (Swamy, 2009).
Appendix: Tables
| Table 1. List of relevant financial indicators | ||||||
| Year |
2005 |
2006 |
2007 |
2008 |
2009 |
Industry Average |
|
DuPont analysis |
||||||
| ROE |
14.10% |
12.88% |
9.54% |
7.09% |
8% |
|
| 1/EFR |
1.82 |
1.73 |
1.66 |
1.79 |
1.69 |
|
| TAT |
68.05% |
65.66% |
65.66% |
61.23% |
67.10% |
1.00% |
| Profit margin |
11.38% |
11.28% |
8.75% |
6.48% |
6.75% |
3%-5% |
|
Profitability |
||||||
| Non-operating gain |
1.78% |
1.55% |
1.72% |
2.91% |
2.20% |
5.00% |
| Operating Margin |
4.18% |
3.96% |
3.65% |
3.30% |
2.94% |
1%-3% |
|
Capital structure |
||||||
| Debt service coverage |
4.14 |
4.07 |
4.77 |
2.16 |
2.16 |
2 to 4 |
| Times interest earned |
3.29 |
3.46 |
3.23 |
2.32 |
2.38 |
2 to 3 |
| Equity financing ratio |
54.94% |
57.73% |
60.27% |
55.97% |
59.10% |
40%-50% |
|
Activity |
||||||
| Average age plant |
5.17 |
5.1 |
5.03 |
5.39 |
6.12 |
10 |
| Fixed age of plant |
0.92 |
0.89 |
0.84 |
0.79 |
0.86 |
2 |
|
Liquidity |
||||||
| Days in a/r |
84.13 |
64.76 |
55.25 |
67.73 |
78.24 |
45-55 |
| Days cash on hand |
57.79 |
90.82 |
68.08 |
66.87 |
32.72 |
30-45 |
| Table 2 percentage change of revenue and expenses | |||||
| Year |
2005 |
2006 |
2007 |
2008 |
2009 |
| Revenue |
26.966 |
28.497 |
30.033 |
32.429 |
36.416 |
| Percent Change |
6% |
5% |
8% |
12% |
|
|
2005 |
2006 |
2007 |
2008 |
2009 |
|
| Expenses |
23.898 |
25.283 |
27.404 |
30.327 |
33.958 |
| Percent Change |
6% |
8% |
11% |
12% |
|
| Table 3. Common size net patient revenue | ||||||||||
|
2005 |
2006 |
2007 |
2008 |
2009 |
||||||
| GPR | ||||||||||
| Outpatient |
0.16 |
0.19 |
0.2 |
0.24 |
0.26 |
|||||
| Inpatient |
0.84 |
0.81 |
0.8 |
0.76 |
0.74 |
|||||
| Gross patient revenue |
1 |
1 |
1 |
1 |
1 |
|||||
| Revenue deduction | ||||||||||
| Charity care |
0.06 |
0.06 |
0.07 |
0.07 |
0.07 |
|||||
| contractual allowances |
0.08 |
0.07 |
0.05 |
0.14 |
0.17 |
|||||
| Total deductions |
0.14 |
0.13 |
0.12 |
0.21 |
0.24 |
|||||
| Net patient service revenue |
0.86 |
0.87 |
0.88 |
0.8 |
0.77
|
|||||
| Table 4: Common size statement of operations | ||||||||||
| Revenues | ||||||||||
| Net patient service revenue |
95.2% |
95.6% |
95.9% |
94.3% |
95.0% |
|||||
| Other revenue |
4.8% |
4.4% |
4.1% |
5.7% |
5.0% |
|||||
|
100% |
100% |
100% |
100% |
100% |
||||||
| Expenses | ||||||||||
| Professional liability |
0.4% |
0.6% |
0.5% |
0.6% |
0.6% |
|||||
| Provision for bad debts |
2.0% |
2.1% |
2.1% |
2.0% |
2.1% |
|||||
| Depreciation |
6.3% |
6.9% |
7.8% |
8.2% |
7.6% |
|||||
| Interest expense |
5.0% |
4.6% |
3.9% |
4.9% |
4.9% |
|||||
| Salaries and wages |
40.2% |
39.1% |
40.8% |
38.4% |
38.4% |
|||||
| Fringe benefits |
5.5% |
6.1% |
6.1% |
7.4% |
7.1% |
|||||
| Other |
29.2% |
29.4% |
30.1% |
31.9% |
32.5% |
|||||
| Total expenses |
88.6% |
88.7% |
91.2% |
93.5% |
93.3% |
|||||
| Excess of revenues over expenses |
11.4% |
11.3% |
8.8% |
6.5% |
6.7% |
|||||
References
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Cohen, S., Thiraios D., Kandilorou, M. (2008) Performance parameters interrelations from a balanced scorecard perspective: An analysis of Greek companies. Managerial auditing journal Vol. 23 Iss. 5 p485-503 Retrieved from http://dx.doi.org/10.1108/02686900810810875307
Duric, D. et al (2011) Implementation and restraints of ratio analysis of financial reports in financial decision making, Management Issue 61 p-24-31
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Minnis, C. M. (2010) The value of financial statement verification in debt financing: Evidence from private U.S. firms, Journal of accounting research, Vol. 49 Issue 2. p457-506
Prieto, I.M (2006) Learning capability and business performance: a non-financial organization, Vol. 13 Iss. 2 p166-165 Retrieved from: http://dx.doi.org/10.1108/09696470610645494
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