River Community Hospital Case Solution

QUESTION

 

Applying Financial Analysis to Nonprofits

Final discussion on River Case and takeaways.

  • Identify the Nonprofit is a challenging case where students will use financial analysis and apply it to match an entity’s financial information with its operations.

 

ANSWER

 

Cash Flow Statement

The cash flow statement of the hospital is clearly saying one thing that the hospital is investing in its fixed assets over the past two years. But from the cash flow statement only it is hard to conclude that, this investment is regular replacement of fixed assets or expansion plans by the hospital. But this can be concluded by looking into the balance sheet as the hospital has invested almost 25% of the gross value of assets in past two, therefore it could be said that the hospital is on the expansion path. The expansion in 2012 was financed by both the profits and additional long term debt but the expansion in 2013 was financed by the profits and retained cash. In 2013 the hospital even looked to repay its debt. There was no use of further equity to finance the expansion which was in line of the company plan to increase the debt of the company.

Financial Strengths

  1. Less Reliant on Debt

The hospital is less reliant on debt which is visible from the debt ratios as all the debt ratios are less than the industry average. Even though the company has decided to take more debt burden, it would be still less than the industry average given it chance to earn better EPS.

  1. Strong Working Capital Management

In an industry like this where a lot has to be invested in the working capital, the hospital is manging its current assets and liabilities efficiently which is evident from its current ratio.

  1. Young Hospital

The average age of the plant is 5.39 years which is relatively younger than its competitors.

  1. Occupancy Rate

These industry works on the occupancy basis and having a better occupancy is advantageous to the hospital.

  1. Controlled Expenses

The Expenses ratio of the hospital are far better than that of its competitors, which clearly means that the hospital has been able to maintain its expenses, which ultimately will push the profitability up

Financial Weakness

  1. Turnover Issues

The hospital has not been able to generate sufficient turnover on the basis of fixed assets and total assets employed by the hospital as compared to its competitors. This is a clear situation of not efficiently utilizing the assets.

  1. Outpatient Visit Loss

The hospital is making loss per outpatient visit. Even though it has improved in past three years the hospital is in loss in that particular division.

  1. Bad Debt and Charity

It is more of a controversial issue as given more in charity improves the image of the hospital but speaking purely from the financial point of view the hospital is spending a lot on charity as compared to its competitors.

  1. Revenue per Discharge

The hospital is earning approximately equal to lower quartile of its competitor when it comes to revenue per discharge. This means hospital is getting more patient but not enough revenue from such patients

  1. Coverage Ratio

The interest coverage ratio is almost equal to its competitors, but cash flow coverage is less and if the hospital is planning to increase debt than it has to keep in mind the coverage ratios.

Return on Equity

  1. Sale of Vacant Land

Depends on how much profit the land is sold as given the same debt equity ratio higher the profit on the sale of land will result in higher return on equity. If the land was sold for no profit than it wont change the return on equity.

 

  1. Debt is Substituted for Equity

Again, the change in RoE is totally dependent on the interest rate. If the interest rates are less than the previous Return on Equity, this substitution will result in increased return on equity. But if the interest rates are more than the previous Return on Equity than this substitution will result in decreased RoE.

 

  1. Lean Management

If the expenses are reduced than the profit will increase and thus return on equity will also increase. The result of decrease in 0.5 million of expenses will increase the return on equity to 9.22%.

 

  1. Increase in Total Margin

The total margin required to achieve 10% ROE would be $ 3.208 million and increase of $ .75 million over the current total margin.

Other Financial Information

There are lot of financial information required to determine the performance of the hospital such as

  • Interest rates on the older debt as compared to the interest rates on the newer debts. This is important because the hospital has decided to increase the debt burden.
  • Revenue generated from the customers of a particular insurance company as this would show us the dependence of hospital on a particular insurance company
  • Revenue generated by different departments of the hospital such as neurology, urology, gynaecology etcetera. There are few departments in hospital which will generate better profits as compared to others
  • Number of patients taking benefit of the healthcare scheme of the government and if the number is less than which hospital are they visiting and the reason for the same

Financial KPI’s

The most important financial KPI’s to be kept in mind for the future board meeting purpose would be

  • Debt to Equity ratio because of the increase in debt
  • Interest and Cash Coverage ratio again because of the increase in debt burden of the hospital
  • Return on Assets ratio because of hospital investing in fixed assets
  • Profit per outpatient visit as the hospital is making loss in that particular segment
  • Bad Debts and Charity as these expenses are pretty high right now

Operational KPI’s

The most important operational KPI’s to be kept in mind for the future board meeting purpose would be

  • Average age of the plant as it is relatively younger but with time the management has to keep an eye on this factor also
  • Percentage of people availing the government healthcare plans
  • No. of beds and average occupancy during a particular day
  • In patient versus outpatient
  • The performance of various departments involved

Qualitative Factor

  1. The revenue of the hospital cannot be tied to one particular customer as many customers visit the hospital for various medical reasons and once, they are better in terms of health there is a less probability of them returning. But the revenues of a hospital can be tied to customers insured from a particular insurance company. This will make it necessary for the hospital to keep good relations with that particular insurance company.
  2. Again, there is a less probability of hospital’s revenue being tied to one key product as there are multiple services provided by the hospital. Here departmental revenue can play a role. Generally, in a hospital the dermatology department is most profitable of the departments thus profitable hospitals tends to focus on them.
  3. The hospital is extremely reliant on the doctors and nurses but more specifically a doctor. A famous doctor when joins the hospital automatically brings the fame to the hospital. If the hospital has good quality of doctors they will tend to attract more patients and thus higher revenues.
  4. River Hospital is doing better in most of the areas as compared to its competitors. But the biggest thing that has to be kept in mind is that this hospital is not for profit but most of its competitor hospital are for profit therefore while making comparison these things have to kept in mind.
  5. The future prospects of the hospital looks goods as from the cash flow statement we have seen that the hospital is investing in fixed assets which means that the hospital is on the expansion path.
  6. The medical industry is a highly regulated industry and faces different legal trouble always. The hospital’s revenues are directly dependent on the governments Medicare budget for the people.

Recommendation

  1. The biggest recommendation that I would like to give management is not to increase the debt burden as debt is increased to increase the EPS but in this case it is a not for profit therefore EPS is not even considered.
  2. To increase the profit from the outpatient visit as that is on of the key areas in which the hospital is lagging behind.
  3. To start preparing the financial statement on the basis of various departments in a hospital and start evaluating each and every department based on their performance. As this result in healthy competition among various departments.

Learning Points

There were lot of learning points in this case but the major of them were

  1. About hospital industry, as this is the industry in which giving the best service to your patient means that patient won’t be returning to avail your service again.
  2. About how to analyse a not for profit organisation, because unlike other organization these organization are not analysed on the basis of the profits made by them.
  3. The impact of various government policy on this particular sector and how this sector is heavily reliant on the government policy of increased healthcare budget for the people.

 

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