Complete problem 13 on ratio analysis on page 188 of your Financial Management of Health Care Organizations

NURSING AND HEALTHCARE

Ratio Analysis

Part One
Complete problem 13 on ratio analysis on page 188 of your Financial Management of Health Care Organizations text by Zelman, McCue, Glick, and Thomas. Using an Excel spreadsheet, calculate all of the ratios listed in the problem (13 ratios for each year or 26 total for 2 years).
Part Two
Use your answers from part one to complete the following:
• Conduct a strategic assessment based on the health care data presented for Longwood Community Hospital.
• Analyze the 26 financial ratios calculated for the hospital to state its financial position.
• Develop a perspective on long-term financial trends for the hospital.
• Assess the potential financial impact on the hospital’s organizational strategy and potential implications on patient care based on the benchmark data provided.
Write a 3–5-page paper based on the above.
Submission Requirements
Your paper should meet the following requirements:
• Written communication: Your document should clearly identify where each grading criteria or part of the assignment is addressed by using APA-formatted headings and subheadings. Your writing needs to communicate professionally, with correct English usage. Your points need to be logical, substantive, and relevant based on the evidence presented. In addition, your communication should be free of errors that detract from the overall message.
• APA formatting: Resources and citations are formatted according to APA sixth edition style and formatting.
• Documents to be submitted: You need to submit the following:
 Spreadsheets.
 Word document: 3–5 pages with APA-formatted headings and subheadings.
• Font and font size: Arial, 10 point.

 

EXHIBIT 4.16a FINANCIAL RATIOS FOR ALL U.S. HOSPITALS BY BED SIZE

aAll ratio values, except for quick, acid test, and salary and benefit expense as a percentage of operating expense ratios, were obtained from Optum Insight, 2013 Almanac of Hospital Financial and Operating Indicators, 2011/2010 median value data. The quick, acid test, and salary and benefit expense as a percentage of operating expense ratios were obtained from 2010 CMS cost report data.

bThese are true up to a certain point. For example, in general the higher the better for the current ratio, but after a certain point, the organization might be better off investing some of the excess cash.

Key Equations

EXHIBIT 4.16b FORMULAS FOR KEY FINANCIAL RATIOS

aAdjusted Discharges = (Total Gross Patient Revenue / Total Gross Inpatient Revenues) X Total Discharges.

bIn for-profit health care organizations, calculated as Net Income / Total Assets.

cCalled return on equity in for-profit health care organizations, and calculated as Net Income / Owners’ Equity.

dCalled long-term debt to equity in for-profit health care organizations, and calculated as Long-Term Debt / Owners’ Equity.

eCalled equity to total assets in for-profit health care organizations, and calculated as Owners’ Equity / Total Assets.

fIn for-profit health care organizations, calculated as (Net Income + Interest Expense) / Interest Expense.

gIn for-profit health care organizations, calculated as (Net Income + Interest Expense + Depreciation and Amortization Expenses) / (Interest Expense + Principal Payments).

KEY TERMS

  1. Financial leverage
  2. Horizontal analysis
  3. Ratio
  4. Trend analysis
  5. Vertical analysis

REVIEW QUESTIONS AND PROBLEMS

  1. Definitions. Define the key terms in the list above.
  2. Horizontal and vertical analyses. Compare horizontal and vertical analyses, including trend analysis. How are they used?
  3. Vertical analysis. Explain common-sized analysis.
  4. Ratio analysis. What is the purpose of ratio analysis? What are the four benchmark categories of ratios?
  5. Medians. Why is it that an industry median may not be an appropriate benchmark with which a particular organization wants to compare itself?
  6. Ratio interpretation. How do the current, quick, and acid test ratios differ from the average payment period ratio? To what categories do these ratios belong?
  7. Ratio interpretation. How do capital structure ratios and liquidity ratios differ in providing insight into an organization’s ability to pay debt obligations? Identify two situations where an organization might have increasing activity ratios but declining profitability.
  8. Ratio interpretation. What is the difference between the operating margin ratio and a return on total assets ratio? What is the difference between operating revenue per adjusted discharge ratio and operating expense per adjusted discharge ratio? To what categories of ratios do these ratios belong?
  9. Ratio interpretation. What capital structure ratio measures the ability to pay debt service payments?
  10. Ratio interpretation. How would you describe the plant and equipment status of a health care provider with an increasing age of plant ratio?
  11. Profitability analysis. Compare the profitability ratios for Hightower Hospital with its industry benchmarks (Exhibit 4.17). Hightower has increased its patient volume, negotiated higher rates for its managed care contracts, and lowered its labor expenses by outsourcing several support services.

EXHIBIT 4.17 SELECTED RATIOS FOR HIGHTOWER HOSPITAL AND THE INDUSTRY BENCHMARKS

  1. Ratio analysis. Compare the capital structure ratios for Avon Hospital against industry benchmarks (Exhibit 4.18). Note that during this time period, Avon has refinanced its fixed rate debt with lower variable rate debt.
  2. Ratio analysis. The statement of operations and balance sheet for Longwood Community Hospital for the years ended 20X0 and 20X1 are shown in Exhibits 4.19a and 4.19b. Compute the following ratios for both years: current, acid test, days in accounts receivable, average payment period, long-term debt to net assets, net assets to total assets, total asset turnover, fixed asset turnover, operating revenue per adjusted discharge, operating expense per adjusted discharge, salary and benefit expense as a percentage of total operating expense, return on total assets, and operating margin. After calculating the ratios, comment on Longwood’s liquidity; efficient use of assets or activity ratios; revenue, expense, and profitability; and capital structure relative to its industry benchmarks for its respective bed size (listed in Exhibit 4.16a). Cite at least two meaningful ratios per category. Assume for this analysis that Longwood is a 350-bed facility and its adjusted discharges were 5,500 for 20X0 and 5,400 for 20X1.

EXHIBIT 4.18 SELECTED RATIOS FOR AVON HOSPITAL AND THE INDUSTRY BENCHMARKS

EXHIBIT 4.19a        STATEMENT OF OPERATIONS FOR LONGWOOD COMMUNITY HOSPITAL

EXHIBIT 4.19b        BALANCE SHEET FOR LONGWOOD COMMUNITY HOSPITAL

(Zelman 185-192)

Zelman, William N., Michael McCue, Noah Glick, Marci Thomas. Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications,  4th Edition. Jossey-Bass, 2013-12-30. VitalBook file.

 

 

13. Ratio analysis. The statement of operations and balance sheet for Longwood Community Hospital for the years ended 20X0 and 20X1 are shown in Exhibits 4.19a and 4.19b. Compute the following ratios for both years: current, acid test, days in accounts receivable, average payment period, long-term debt to net assets, net assets to total assets, total asset turnover, fixed asset turnover, operating revenue per adjusted discharge, operating expense per adjusted discharge, salary and benefit expense as a percentage of total operating expense, return on total assets, and operating margin. After calculating the ratios, comment on Longwood’s liquidity; efficient use of assets or activity ratios; revenue, expense, and profitability; and capital structure relative to its industry benchmarks for its respective bed size (listed in Exhibit 4.16a). Cite at least two meaningful ratios per category. Assume for this analysis that Longwood is a 350-bed facility and its adjusted discharges were 5,500 for 20X0 and 5,400 for 20X1. (Zelman 190-192) Zelman, William N., Michael McCue, Noah Glick, Marci Thomas. Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications, 4th Edition. Jossey-Bass, 2013-12-30. VitalBook file

 

 

 

 

 

Exhibit 4.19a

 

 

Complete problem 13 on ratio analysis on page 188 of your Financial Management of Health Care Organizations

 

 

Exhibit 4.19b

 

 

 

Exhibit 4.16a

 

 

**Part One: Calculation of Ratios**

 

  1. Current Ratio

\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \]

 

  1. Acid Test Ratio

\[ \text{Acid Test Ratio} = \frac{\text{Current Assets – Inventory}}{\text{Current Liabilities}} \]

 

  1. Days in Accounts Receivable

\[ \text{Days in Accounts Receivable} = \frac{\text{Accounts Receivable}}{\text{Average Daily Revenue}} \]

 

  1. Average Payment Period

\[ \text{Average Payment Period} = \frac{\text{Accounts Payable}}{\text{Average Daily Purchases}} \]

 

  1. Long-Term Debt to Net Assets

\[ \text{Long-Term Debt to Net Assets} = \frac{\text{Long-Term Debt}}{\text{Net Assets}} \]

 

  1. Net Assets to Total Assets

\[ \text{Net Assets to Total Assets} = \frac{\text{Net Assets}}{\text{Total Assets}} \]

 

  1. Total Asset Turnover

\[ \text{Total Asset Turnover} = \frac{\text{Total Revenue}}{\text{Total Assets}} \]

 

  1. Fixed Asset Turnover

\[ \text{Fixed Asset Turnover} = \frac{\text{Total Revenue}}{\text{Fixed Assets}} \]

 

  1. Operating Revenue per Adjusted Discharge

\[ \text{Operating Revenue per Adjusted Discharge} = \frac{\text{Operating Revenue}}{\text{Adjusted Discharges}} \]

 

  1. Operating Expense per Adjusted Discharge

\[ \text{Operating Expense per Adjusted Discharge} = \frac{\text{Operating Expense}}{\text{Adjusted Discharges}} \]

 

  1. Salary and Benefit Expense as a Percentage of Total Operating Expense

\[ \text{Salary and Benefit Expense \%} = \frac{\text{Salary and Benefit Expense}}{\text{Total Operating Expense}} \times 100 \]

 

  1. Return on Total Assets

\[ \text{Return on Total Assets} = \frac{\text{Net Income}}{\text{Total Assets}} \]

 

  1. Operating Margin

\[ \text{Operating Margin} = \frac{\text{Operating Income}}{\text{Operating Revenue}} \times 100 \]

 

Once you have calculated these ratios for both years (20X0 and 20X1), you can proceed to analyze Longwood Community Hospital’s financial position.

 

**Part Two: Analysis of Financial Ratios**

 

To assess Longwood’s financial position, consider the following aspects:

 

  1. Liquidity: Evaluate the current ratio and acid test ratio to determine if Longwood has sufficient short-term assets to cover its short-term liabilities.

 

  1. Asset Utilization: Analyze total asset turnover and fixed asset turnover ratios to assess how effectively Longwood is using its assets to generate revenue.

 

  1. Revenue, Expense, and Profitability: Examine operating revenue per adjusted discharge, operating expense per adjusted discharge, return on total assets, and operating margin to evaluate Longwood’s revenue generation, cost management, and profitability.

 

  1. Capital Structure: Review long-term debt to net assets and net assets to total assets ratios to understand Longwood’s capital structure and financial leverage.

 

Finally, compare Longwood’s ratios to industry benchmarks for hospitals of similar bed sizes to identify areas of strength and areas for improvement.

 

If you have any questions or need further assistance with the calculations or analysis, feel free to ask!

Complete problem 13 on ratio analysis on page 188 of your Financial Management of Health Care Organizations